Continuing our annual tradition, we have compiled our top developments and headlines for  2018-2019 in trade secret, non-compete, and computer fraud law.

1. Government Agencies Increasing Scrutiny of Restrictive Covenants

In mid-2018, the Attorneys General of ten states investigated several franchisors for their alleged use of “no poach” provisions in their franchise agreements. In a July 9, 2018, letter, the Attorneys General for New Jersey, Massachusetts, California, Washington, D.C., Illinois, Maryland, Minnesota, New York, Oregon, Pennsylvania, and Rhode Island requested information from several franchisors about their alleged use of such provisions. Less than twenty-four hours later, some franchisors (mostly different ones than those who received the information demands) entered into agreements with the Washington State Attorney General’s Office to remove such clauses from their franchise agreements. The recent focus by state law enforcement on franchisors is a new twist, given that restrictive covenant agreements in the franchise industry are typically given more leeway than in the employment context. Continue Reading Top 10 Developments and Headlines in Trade Secret, Non-Compete, and Computer Fraud Law in 2018/2019

A Ninth Circuit panel consisting of Judges A. Wallace Tashima, Johnnie B. Rawlinson, and Paul J. Watford recently heard oral argument in Anheuser-Busch Companies v. Clark, 17-15591, concerning the denial of a former employee’s anti-SLAPP motion in a trade secret misappropriation and breach of contract case. This is the second time the case has made its way up to the Ninth Circuit. We previously reported on this case in March 2017. The panel has not yet issued its decision but the Ninth Circuit’s decision could have far reaching implications for trade secret and data theft cases involving purported whistleblowing activities. Continue Reading Hold My Beer: Ninth Circuit Hears Oral Argument in Trade Secret/Anti-SLAPP Row for a Second Time

A recent California Court of Appeal decision held that the receipt, retention and dissemination of confidential information by a whistleblower’s attorney is protected by the state’s anti-SLAPP statute. MMM Holdings, Inc. v. Reich, 21 Cal. App. 5th 167 (2018).

Factual Background

In 2010, Jose “Josh” Valdez was promoted to president of MSO of Puerto Rico, Inc. (“MSO”), a wholly-owned subsidiary of MMM Holdings, Inc. (“MMM”). MMM offers Medicare advantage health insurance plans in Puerto Rico and contracted with the U.S. Centers for Medicare and Medicaid Services, part of the U.S. Department of Health and Human Services. Continue Reading California Court of Appeal Holds That Disclosure of Confidential Information Protected by Anti-SLAPP Statute

In what appears to be a first under the Defend Trade Secrets Act (“DTSA”), a United States District Judge has thrown out claims against an alleged trade secret thief on the basis of the DTSA’s immunity for confidential disclosures to attorneys in the course of investigating a suspected violation of the law. Christian v. Lannett Co., Inc., No. 16-cv-00963-CDJ, 2018 WL 1532849 (E.D. Pa. Mar. 29, 2018).

Certain Trade Secret Disclosures to Attorneys or the Government Are Protected

The DTSA exempts from both criminal and civil liability any trade secret disclosure made in confidence to a federal, state, or local official or to an attorney if the disclosure is made “solely for the purpose of reporting or investigating a suspected violation of law.” 18 U.S.C. § 1833(b)(1). Continue Reading Defend Trade Secrets Act First: Claim Tossed Based on Whistleblower Immunity

Robert B. Milligan, Partner and Co-Chair of Seyfarth’s National Trade Secret, Computer Fraud, and Non-Compete practice group, just finished co-editing and co-authoring a prominent new California trade secret treatise.

This Supplement to the Third Edition practice guide addresses the Defend Trade Secrets Act (DTSA ), which was enacted in 2016.  This Supplement includes additional practical tips and strategies related to the DTSA. This is one of the first books on the new law.

This supplement addresses:

  • A general overview of the DTSA, including its history and impact.
  • The DTSA’s scope and remedies afforded by it.
  • Analysis of recent case law discussing the DTSA’s whistleblower immunity provision and employer compliance with the DTSA’s whistleblower immunity notice provision.
  • A comparison of the DTSA to the California Uniform Trade Secrets Act (CUTSA or the CUTSA), the Economic Espionage Act (EEA), the Computer Fraud and Abuse Act (CFAA), and Section 337 of the Federal Tariff Act of 1930 (Section 337).

The treatise can be purchased by State Bar IP Section Members for $25 and by Non-Members for $30.

For more information, click here.

shutterstock_526002034This blog originally appeared in ALM Intellectual Property Strategist.

One year after its enactment, the Defend Trade Secrets Act (DTSA) continues to be one of the most significant and closely followed developments in trade secret law. The statute provides for a federal civil cause of action for trade secret theft, protections for whistleblowers, and new remedies (e.g., ex parte seizure of property), that were not previously available under state trade secret laws. The less than 70 reported DTSA cases to date provide an early glimpse into how courts may interpret the statute going forward and what early concerns about the statute may have been exaggerated.

Overstated Ex Parte Seizure Concerns

The ex parte seizure provision of the DTSA was one of the most controversial provisions of the statute during its drafting. The provision allows a trade secret holder to request, without notice to the alleged wrongdoer, that a district judge order federal law enforcement officials to seize property to prevent the propagation or dissemination of trade secrets. Opponents of the DTSA argued that the ex parte seizure provision would open the door to abuse by purported “trade secret litigation trolls” and increase litigation costs. The cases to date involving the seizure provision suggest that those early concerns may not materialize. Continue Reading Emerging Issues In the Defend Trade Secrets Act’s Second Year

shutterstock_287601008A California federal district court has recently given employers a small victory against former employees who misappropriate trade secrets and assert whistleblower immunity or the litigation privilege as after-the-fact defenses. The federal district court for the Eastern District of California recently rejected, for a second time, a defendant’s anti-SLAPP motion to strike a trade secret lawsuit brought against him by his former employer. Notably, the court rejected the defendant former employee’s whistleblower and litigation privilege defenses as inapplicable, thereby allowing the beer company’s trade secret action to proceed.

On March 1, 2013, the beer company sued the former employee for, among other things, trade secret misappropriation and breach of nondisclosure agreements. The former employee subsequently filed a motion to dismiss and strike the Complaint under California’s anti-SLAPP statute. Specifically, the former employee argued that the Complaint was an attempt to punish him for purportedly exercising his constitutional rights of petition and free speech in connection with a consumer class action litigation that he filed against the company exactly one week before.

The federal district court denied the former employee’s anti-SLAPP motion and concluded that the company’s claims did not arise out of the former employees protected litigation activity. The former employee appealed.

The Court of Appeals for the Ninth Circuit reversed the district court and remanded back so the district court could consider the next prong of the anti-SLAPP analysis, the plaintiff’s probability of prevailing on its claims.

Upon its second review of the former employee’s anti-SLAPP motion, the federal district court concluded that the company had demonstrated a likelihood of prevailing on its trade secret misappropriation and breach of contract claims. The court then turned to and rejected the former employee’s substantive legal defenses of public policy, whistleblower immunity, and the litigation privilege.

First, the court rejected the former employee’s argument that confidentiality agreements are unenforceable as a matter of public policy. The court refused to adopt such a sweeping rule that would render confidentiality agreements unenforceable that would allow former employees to disclose trade secret or confidential information.

Second, the court acknowledged that California provides protection to whistleblowers but only when the employee discloses reasonably based suspicious of illegal activity to a governmental agency. The court concluded that such protections did not apply to employees who disclose information to their attorneys in order to further a class action against an employer.

Lastly, the court rejected the former employee’s argument that the misappropriation of documents in furtherance of anticipated litigation was protected under the litigation privilege. The court reasoned that the litigation privilege does not protect against illegal activity that causes damage and to protect such threats is inconsistent with the purposes of the anti-SLAPP statute.

It would be interesting to see the court’s analysis and decision, however, had the alleged misappropriation occurred after the enactment of the new Defendant Trade Secrets Act (“DTSA”), which appears to provide broader whistleblower protections. The court in this case highlighted that California’s whistleblower statute protected only disclosures to government agencies and not a defendant’s attorneys. The DTSA, however, protects individuals from criminal and civil liability under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding. (For additional information on the DTSA and its implications regarding whistleblowers, please see our DTSA Guide.)

Nonetheless, this case confirms that employees do not have an unfettered right to surreptitiously take documents from the workplace for their own use in litigation or otherwise. Indeed, the Ninth Circuit has rejected the concept of “blanket” protection for whistleblowers for violation of confidentiality agreements and misappropriation of confidential documents. See Cafasso v. General Dynamics C4 Systems, Inc., 637 F.3d 1047 (9th Cir. 2011).

With the likely broader whistleblower protections under the recently enacted DTSA, however, employers that utilize agreements and policies to protect trade secrets and other confidential information should ensure such documents have been updated to comply with the DTSA and its important employee and whistleblower notification provisions

 

shutterstock_532304278This past Spring, we reported on the recently enacted Defend Trade Secrets Act (“DTSA”), which provides a new federal civil cause of action to trade secret owners seeking to pursue claims of trade secret misappropriation.  Last week, the U.S. District Court in Massachusetts addressed the whistleblower immunity provision of the DTSA, which protects anyone who discloses a trade secret in confidence to a government official or an attorney “solely for the purpose of reporting or investigating a suspected violation of law.”  In denying an employee’s motion to dismiss his employer’s DTSA claim, the district court held that a defendant must present evidence to justify the immunity.  The case is Unum Group v. Loftus, No. 16-cv-40154-TSH (D. Mass. December 6, 2016). Continue Reading Federal Court Rejects Defend Trade Secrets Act Whistleblower Immunity Defense on a Motion to Dismiss and Orders Employee to Return Stolen Trade Secrets

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By Robert T. Szyba and Jade Wallace

In a pivotal decision with broad implications for aspiring New Jersey whistleblowers, yesterday the New Jersey Supreme Court affirmed the Appellate Division’s finding that no qualified privilege exists to protect an employee from criminal prosecution for taking confidential documents from her employer under the guise of gathering evidence for an employment lawsuit.

In State v. Saavedra, A-68-13 (June 23, 2015), a former public employee, Ivonne Saavedra, was criminally indicted on charges of second-degree official misconduct and third-degree theft of public documents after taking hundreds of highly confidential original and photocopied documents from her former employer, the North Bergen Board of Education.  These documents, which contained sensitive personal information, such as individual financial and medical information regarding individual minor students, were taken by Saavedra in support of her whistleblower retaliation and discrimination claims against the Board.  Saavedra alleged that she was a victim of gender, ethnic, and sex discrimination, as well as hostile work environment and retaliatory discharge.

Saavedra moved to dismiss the indictment, arguing that, in Quinlan v. Curtis-Wright Corp., 204 N.J. 239 (2010), the New Jersey Supreme Court “establishe[d] an absolute right for employees with employment discrimination lawsuits to take potentially incriminating documents from their employers.”  In Quinlan, the plaintiff’s employment was terminated after her employer discovered that the plaintiff copied about 1,800 pages of confidential information without authorization, and gave them to her attorney to use in the lawsuit. The plaintiff added a claim of retaliation to her lawsuit and was awarded a multimillion dollar verdict. The New Jersey Supreme Court upheld the jury verdict, finding that the plaintiff had engaged in protected activity that could not lawfully serve as a grounds for termination.

Analyzing Saavedra’s argument, the Appellate Division found that Quinlan did not apply in criminal cases, and instead of a bright-line prohibition against taking company documents, established a totality-of-the-circumstances test for use in civil litigation.

The New Jersey Supreme Court agreed.  It confirmed that the “decision in Quinlan did not endorse self-help as an alternative to the legal process in employment discrimination litigation. Nor did Quinlan bar prosecutions arising from an employee’s removal of documents from an employer’s files for use in a discrimination case, or otherwise address any issue of criminal law.” On the contrary, the Court explained that the Quinlan decision stands for the proposition that an employer’s interest must be balanced against an employee’s right to be free from unlawful discrimination when assessing whether an employee’s conduct in taking documents from his or her employer constitutes a protected activity.  The Court pointed to the discovery procedures available to litigants that would have provided Saavedra access the same documents that she took, but would have allowed the trial court the opportunity to balance her interests with the Board’s interests, including any concerns about the privacy of minor students and their parents.

Despite the fact that the Court declined to provide an automatic shield from prosecution under Quinlan, the Court pointed out that in such circumstances, the employee will nevertheless be able to assert a claim of right defense or a justification.  Thus, the employee will still be able to assert that his or her taking of the employer’s documents was justified.  And there, the Court suggested, Quinlan’s guidance may assist the trial court in analyzing the particular facts and circumstances to determine whether the employee can assert this defense.

The New Jersey Supreme Court has thus clarified that although self-help tactics may be justifiable in certain circumstances, Quinlan did not establish or endorse an unfettered right of employees to surreptitiously take documents from the workplace for their own use in litigation or otherwise.  New Jersey employers, especially those who may be concerned with customer identity theft and data breaches, have won an important victory to assist in guarding against the unauthorized, and often covert, taking of confidential documents and information.

Robert T. Szyba and Jade Wallace are associates in the firm’s New York office. If you would like further information, please contact a member of the Whistleblower Team, your Seyfarth Shaw LLP attorney, Robert T. Szyba at rszyba@seyfarth.com, or Jade Wallace at jwallace@seyfarth.com.

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Employers, although contractually free to terminate the employment of at-will employees for any reason, at any time, cannot dismiss an employee in violation of public policy. A prime California public policy is that employers cannot retaliate against whistleblowers—individuals who have reported suspected unlawful employer conduct. In January 2014, the Legislature expanded the general whistleblowing statute, Labor Code section 1102.5, to prevent employers from taking retaliatory action in a belief that “the employee disclosed or may disclose” relevant information.

On November 21, 2014, in Diego v. Pilgrim United Church of Christ, the California Court of Appeal clarified that Section 1102.5, even in its pre-amended version, forbids employers to terminate “perceived whistleblowers,” even if that belief is mistaken.

The Facts

Cecilia Diego worked as an assistant director of Pilgrim United’s preschool. Diego claimed that a coworker had contacted the Licensing Division of the California Department of Social Services to report a foul odor in a classroom and inadequate sand beneath the playground equipment. The Licensing Division then conducted an unannounced inspection, but found no violations and issued no citations. Diego claimed that her supervisor then asked Diego why she had made the reports. Diego understood that her supervisor believed that she had been the source of the anonymous complaints to the Licensing Division, even though this was not the case.

Shortly after the inspection, Diego failed to appear at a meeting her supervisor had scheduled for her. Pilgrim United then discharged Diego for insubordination.

When Diego sued Pilgrim United, claiming that her termination was retaliatory and in violation of California public policy, the trial court granted summary judgment against her claim. The trial court found that Diego had failed to identify a significantly important public policy that was implicated by constitutional or statutory authority: Diego had failed to cite “any case holding that an employer’s mistaken belief that the employee reported a violation can support a claim for wrongful termination in violation of public policy.”

The Appellate Court Decision

The Court of Appeal reversed the trial court. It held that California’s public policy “applies to preclude retaliation by an employer not only against employees who actually notify the agency of suspected violations but also against employees whom the employer suspects of such notifications.” The Court of Appeal reasoned that the policy embodied by former Labor Code section 1102.5 (which did not expressly address an employer’s belief about whistleblowing) was not limited to employees who actually reported violations, because such a limitation would discourage employees from reporting violations in the first instance.

In addition, the Court of Appeal found that the alleged “insubordination” was not so well established, for purposes of summary judgment, to withstand Diego’s proof that the employer’s assertion of insubordination was a mere pretext for unlawful retaliation in the belief that Diego had been a whistleblower.

What Pilgrim United Means For Employers

California Labor Code section 1102.6 already provides that if an employee proves that the employee’s protected activity was “a contributing factor in the alleged prohibited action,” then the employer must show by “clear and convincing evidence that the alleged action would have occurred for legitimate, independent reasons even if the employee had not engaged in [protected] activities.” Pilgrim United reinforces the point that employers should document performance issues and disciplinary decisions to help support later decisions to discipline an employee.