Trade Secrets & Noncompete Blog

Trade Secrets & Noncompete Blog

News & Updates On Developments in the Law of Restrictive Covenants, Unfair Competition & Trade Secrets

Scope of Uniform Trade Secrets Act Trimmed By Arizona Supreme Court

LinkedIn Tweet Like Email Comment

A recent Opinion issued by the Arizona Supreme Court highlights a noteworthy dichotomy in the way various states interpret the pre-emptive effect of their respective Uniform Trade Secrets Acts (“UTSA”). Forty-eight states have enacted some form of the UTSA, which aims to codify and harmonize standards and remedies regarding misappropriation of trade secrets that had emerged in common law and which differed from state to state. Only New York and Massachusetts have not enacted some form of the UTSA.

One important feature of the UTSA is its pre-emptive effect upon state common law causes of action involving trade secrets, including misappropriation and unfair competition. Whether this “displacement” provision of the UTSA applies to claims that involve “confidential information” that does not rise to the level of being a trade secret is the point of departure for the split of authority among the states.

The recent Arizona Opinion in Orca Communications Unlimited, LLC v. Noder, No. CV-13-0351-PR (November 19, 2014), involved Ann Noder, who served as president of Orca Communications Unlimited, LLC between 2002 and 2009. The complaint alleges that in 2009 Noder set up a competing company, Pitch Public Relations, LLC and urged Orca’s customers to do business with her new company. The claim at issue before the Arizona Supreme Court alleged that Noder engaged in unfair competition by intending to steal and exploit “confidential and trade secret information about Orca.” Ruling on a motion to dismiss, the Court held that, to the extent the unfair competition claim pertained to confidential information that falls outside of the Arizona UTSA’s definition of trade secret, it was not pre-empted by that statute.

The Court went on to recognize the split of authority among states on whether the UTSA displaces all common law tort claims based on misappropriation of confidential information, noting by example that such claims are pre-empted in Hawaii and New Hampshire, but are not pre-empted in Virginia and Wisconsin.

For employers in UTSA states, it pays to be aware of how the UTSA’s displacement provision is interpreted. Depending on the state’s law, if pursuing litigation against an employee who has resigned and taken merely confidential information which does not amount to a trade secret, the employer may not be limited to the remedies set forth in the UTSA.

Complimentary Webinar – A Year in Review: What’s New in the World of Trade Secrets and Non-Competes

LinkedIn Tweet Like Email Comment

To register for this webinar, please click here.

Join Epstein Becker Green Attorneys David J. Clark, Robert D. Goldstein, and Peter A. Steinmeyer on Tuesday, December 16, 2014 at 1:00 p.m. EST for a 60-minute webinar.

This webinar will discuss recent developments and what to expect in the evolving legal landscape of trade secrets and non-competition agreements. With some businesses progressively feeling that their trade secrets are at risk for attack by competitors – and perhaps, by their own employees – this session will focus on how to navigate this developing area and effectively protect client relationships and proprietary information.

Topics will include:

  • Recent decisions regarding what constitutes adequate consideration for a non-compete
  • The trend toward criminal prosecution of trade secret theft, especially in the international context
  • Interesting decisions determining choice-of-law issues
  • New and pending state and federal legislation

Registration is complimentary. To register for this webinar, please click here.

A New Bill is Proposed in Massachusetts Legislature to Adopt the Uniform Trade Secrets Act

LinkedIn Tweet Like Email Comment

A new Uniform Trade Secrets Act bill has been proposed by the Massachusetts Board of Commissioners on Uniform State Laws for the Massachusetts Legislature to consider in its 2015 legislative session. The proposed bill represents another effort to bring Massachusetts law protecting trade secrets in line with that of the vast majority of other states. As discussed here last August, previous efforts to reform Massachusetts law on trade secrets and non-compete agreements have failed, including Governor Patrick’s efforts in the last legislative session to make non-compete agreements unenforceable in Massachusetts.

The current proposal tracks quite closely the 1985 Uniform Trade Secrets Act (“UTSA”), key provisions of which have been enacted by 48 states (other than Massachusetts and New York). The definitions of “misappropriation” and “person” are essentially the same, while the Massachusetts proposal expands the definitions of “improper means” and “trade secret,” which are expanded only slightly to reflect some additional explanation and newer technology. Like the UTSA, the Massachusetts proposal provides for injunctive relief, treble damages if willful and malicious misappropriation can be proved, and attorneys’ fees to either plaintiff or defendant if the opposing party acts in bad faith in seeking or defending a misappropriation claim. The statute of limitations in both the UTSA and the proposed bill is 3 years from the date the misappropriation is discovered, or by exercise of reasonable diligence should have been discovered. If this bill passes, the Massachusetts Uniform Trade Secrets Act would be scheduled to take effect July 1, 2016. We will watch to see whether this attempt at reform passes.

Connecticut State Court Rejects Trade Secrets Theft Complaint

LinkedIn Tweet Like Email Comment

After a bench trial, a Connecticut state court rejected a violation of trade secret complaint by an employer against a former employee in BTS USA v. Executive Perspectives, Superior Court, Waterbury, Docket No. X10-CV-116010685 (Oct. 16, 2014). The plaintiff, BTU USA, provides training and consulting services to corporate clients using learning maps, computer simulations and board games. The defendant, Executive Perspectives (“EP”), offers essentially the same services and products.

Marshall Bergmann, a former BTS Senior Director who had access to much of BTS’ proprietary information, had signed a non-compete clause stating, among other things, that when he left, he would not solicit current BTS customers, or any client BTS had, during the last two years of his employment. BTS claimed that after Bergmann left his employment, he violated the non-compete provision by contacting and soliciting BTS clients through LinkedIn, and he stole some of the technology and products, such as packaging, the name of the packaging vendor and client lists, in violation of the Connecticut Uniform Trade Secrets Act. Other claims included Connecticut Unfair Trade Practices Act Violation, tortious interference with business relationships and breach of contract.

The Court found that there was little evidence that BTS made an effort to conceal the claimed product trade secrets, because the products were widely distributed to clients and prospective clients. Also, a third party – a former BTS Australia employee who was not bound by any restrictive covenant agreement that banned sharing of information – had already shown EP photographs of the products at issue. EP had the products in place before Bergmann was hired by EP. Therefore, the product and vendor names were not misappropriated through improper means. Moreover, BTS failed to prove that it lost business to EP, and actual loss or harm is a prerequisite to monetary recovery. Therefore, BTS failed to carry its burden of proof.

In addition, BTS claimed Bergmann breached his employment contract by the way he used the LinkedIn page he had while he was employed at BTS. He did not change his BTS-related LinkedIn connections when he joined EP, and he announced his new job on LinkedIn. In response, Bergmann claimed that BTS had no policy barring what he did.

The Court ruled that absent an explicit provision in an employment contract, which governs, restricts or addresses an employee’s use of social media, the Court would not read such restrictions into an employment agreement since social media “has become embedded in our social fabric.”

BTS USA v. Executive Perspectives is another example that an employer must actively maintain the confidentiality of trade secrets in order to seek trade secret protection. In addition, the case demonstrates that employment contracts, company policies and procedures should include explicit provisions regarding an employee’s use of social media during and after employment with the employer, and the employer should require ex-employees to delete clients or customers from LinkedIn accounts on termination of employment, if that is what the employer expects.

Criminal Conviction Affirmed By Ninth Circuit For Trade Secret Theft

LinkedIn Tweet Like Email Comment

Co-authored by Ted A. Gehring.

On November 5, 2014, the United States Court of Appeals for the Ninth Circuit, in an unpublished disposition, issued its opinion in U.S. v. Suibin Zhang. There, the Ninth Circuit upheld the criminal conviction of Suibin Zhang under 18 U.S.C. Section 1832 for the theft of Marvell Semiconductor Inc.’s trade secrets. According to an FBI release, Zhang was an employee of Netgear, Inc., and through that employment had access to Marvell’s secure extranet. According to the release:

Evidence at trial showed that Zhang, 44, of Belmont, California, was employed as a Project Engineer at Netgear Inc., of San Jose, which gave him access to Marvell’s secure database (“Extranet”). On March 8, 2005, Zhang accepted a position at Broadcom Corporation (Broadcom), which is also Marvell’s chief competitor. Beginning the very next day, March 9, 2005, and continuing on two other days before he left Netgear, Zhang used his Netgear account to download and steal trade secret information found in dozens of documents, datasheets, hardware specifications, design guides, functional specifications, application notes, board designs, and other confidential and proprietary items from Marvell. On April 27, 2005, Zhang loaded the Marvell trade secrets onto a laptop issued by Broadcom, where they continued to reside on June 24, 2005, when the FBI served search warrants at Zhang’s home and at Broadcom and took possession of his laptop.

After a bench trial, Zhang was found guilty and sentenced to three months in prison followed by three months of supervised release, 200 hours of community service, and $75,000 in restitution.

Zhang appealed the verdict, challenging the sufficiency of the evidence, challenging an evidentiary ruling of the district court and contending that his Sixth Amendment right to a public trial was violated.

On appeal, the Ninth Circuit held that there was sufficient evidence, beyond a reasonable doubt, that Marvell took “reasonable measures” to protect its trade secrets. It advised users of the existence of trade secrets and limited access on a need to know basis and controlled access through passwords. The Ninth Circuit found these measures “reasonable” though some were delegated to Marvell’s partner. The Court also held that, although Zhang did not personally sign the Marvell non-disclosure agreement, he accepted a limited license agreement that incorporated its terms. And he had signed a non-disclosure agreement with Netgear. Zhang was advised in the terms of use of Marvell’s extranet of the confidentiality of information on the extranet and the terms of use. The Court also held that sufficient evidence established that Zhang stole the information. Zhang had claimed that information downloaded by him was relevant to a new project. But the Court found the timing of the downloads suspicious. And there was no evidence that Zhang had ever worked on the new project. Zhang had also transferred files to a Broadcom laptop. The Court further held that even though Zhang never sold the documents or sent around economically valuable secrets, sufficient evidence established that he intended to reap an economic reward. The Court held this same evidence established an intent to injure Marvell.

Finally, the Ninth Circuit held that the lower court had adequately supported its decision to close the courtroom for the testimony of one witness whose testimony went to the contents of documents that the government alleged contained trade secrets. The Court held that the lower court had properly heard the concerns of all parties, including the objections of Zhang to closure and the arguments of Marvell that testimony could not be parsed question by question and held that Zhang’s Sixth Amendment rights were not violated.

Zhang is a reminder that not only can the misappropriation of trade secrets constitute a crime, but also that the intent to reap an economic benefit is sufficient to sustain a conviction under 18 USC Section 1832.

Indiana Appellate Court Reverses Non-Compete Injunction Bond Of Only $100

LinkedIn Tweet Like Email Comment

The size of an injunction bond is not a common topic in appellate cases. Accordingly, a recent decision by the Indiana Appellate Court reversing the trial court’s setting of an injunction bond at only $100 in a non-compete case is noteworthy.

In Donald Moss v. Progressive Design Apparel, Inc., the Indiana Appellate Court affirmed a preliminary injunction which restricted a salesman’s ability to call upon customers of his former employer or disclose confidential information. As part of the trial court’s order granting injunctive relief, the trial court found that the enjoined salesman’s foreseeable loss in commissions due to the injunction “might be $60,000, less what he would have in the way of earnings from the extra ten to fifteen hours a week he would have by not selling” to one of his former employer’s customers. Nevertheless, the trial court only required the former employer to post a $100 injunction bond, which the Appellate Court held was insufficient.

In reaching this conclusion, the Appellate Court pointed to the applicable Indiana rule of civil procedure, which provides that “[n]o restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.” (emphasis added). (Note: Federal Rule of Civil Procedure 65(c) similarly provides that “[t]he court may issue a preliminary injunction or a temporary restraining order only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.” In contrast, in some states, such as Illinois, bond is not mandatory.)

The Appellate Court explained that while the setting of an injunction bond “is a discretionary function of the trial court and is reversible only for an abuse of that discretion,” setting bond at only $100 when the estimated damages (should the injunction later be found to have been wrongfully issued) were so much higher, was an abuse of discretion. Accordingly, the Appellate Court reversed the trial court on that issue and remanded the case to the trial court for “determination of a proper bond.”

Amidst the furious activity that generally accompanies non-compete litigation, the size of an injunction bond is frequently given little or no thought until the issue arises at the end of an injunction hearing. Nevertheless, as the Appellate Court noted in the Progressive Design Apparel case, in many litigation forums, the setting of an appropriate bond is a procedural requirement that cannot be ignored. Both sides should therefore be prepared to address the issue and any strategic significance it may have.


Illinois Appellate Court Draws Distinction Between Officers And Non-Officers When Determining What Is An Impermissible Solicitation

LinkedIn Tweet Like Email Comment

In determining what is an impermissible “solicitation” by a current employee, the Illinois Appellate Court recently drew a distinction between officers and non-officers. See Xylem Dewatering Solutions, Inc., d/b/a Godwin Pumps of America et al. v. Szablewski et al., Case No. 5-14-0080 (Ill. App. 5th  Dist. 2014).

In Xylem Dewatering Solutions, the defendants were accused by their former employer of wrongfully soliciting customers and suppliers on behalf of a competitive business that they were planning to launch. According to the Appellate Court’s decision, while still employed by their former employer, the defendants “asked customers and suppliers what they ‘thought’ about” the defendants’ formation of a new, competitive business. However, the defendants never “actually solicited any business or sold goods and services” to their then-employer’s customers on behalf of their new business until they had resigned and started the new business.

Although the defendants “agreed that those conversations were intended to persuade” customers and suppliers “to eventually do business with” their new business, the Appellate Court held that it was not an abuse of discretion for the trial court to conclude that these conversations were merely “preliminary actions” that did “not rise to the level of a breach of an ordinary employee’s duty of loyalty.” (emphasis added).

In reaching this conclusion, the Appellate Court drew a distinction between the duty of loyalty owed by ordinary employees (who are permitted “to plan and outfit a competing corporation so long as they do not commence competition”) and the “heightened duty of loyalty owed by corporate officers” (who are prohibited from “actively exploit[ing] their positions within a corporation for their own personal benefit” or “hinder[ing] the ability of a corporation to continue the business for which it was developed”).

Given the nature of these communications and their admitted purpose, their legality was not a foregone conclusion. Indeed, the Appellate Court may have reached a different conclusion if it was reviewing the trial court’s determination de novo, rather than merely reviewing it to determine if it was an abuse of discretion.

That being said, the Appellate Court’s decision makes clear that while all Illinois employees owe a duty of loyalty to their employer, corporate officers owe a heightened duty. Both they, and their employers and prospective employers, should be very aware of this distinction.

It should be noted that an employee’s duty of loyalty is governed by state common law. Accordingly, what passes muster in one state may not in another, and employers and employees should be aware of what is and is not permissible conduct in their own state.

Law Professors Object to New Trade Secrets Acts Proposed in Congress

LinkedIn Tweet Like Email Comment

As we have previously noted, Congress this year is actively considering two bills that would create a federal private right of action for trade secret theft: The Trade Secrets Protection Act (H.R. 5233) and the Defend Trade Secrets Act (S. 2267). These bills have been spurred in large part by increased foreign cyber-espionage affecting American companies.

Although the bills have enjoyed bipartisan support in Congress and in the business community, including from the National Association of Manufacturers, last month a group of dozens of law professors in the intellectual property and trade secret fields sounded a note of caution by publishing a Letter in opposition to the two bills. While acknowledging that the United States needs to increase protection against cyber-espionage, the professors argue that the bills should be rejected for several reasons, including:

1) existing state law is sufficiently uniform and effective;

2) if enacted, the bills will create parallel, redundant and damaging law; and

3) the bills as drafted could lead to unintended consequences such as anti-competitive results, increased risk of accidental disclosure of trade secrets, and damage to collaboration among businesses and mobility of labor.

The Professors’ Letter and continued engagement in the future on these issues may well affect the passage and/or shape of the two pending bills. We will continue to monitor and report upon these proposed federal trade secrets bills.

Court of Appeal Reinstates Malicious Prosecution Case Against Latham & Watkins

LinkedIn Tweet Like Email Comment

Co-authored by Ted A. Gehring.

On April 17th, 2012, we blogged about a malicious prosecution claim brought against Latham & Watkins in Los Angeles Superior Court. The suit alleged that the Plaintiffs, William Parrish and Timothy Fitzgibbons, were former officers and shareholders of Indigo Systems Corporation, which was purchased by FLIR Systems, Inc. in 2004. From 2004 to 2006 the Plaintiffs worked for FLIR, leaving in 2006 to start their own business. FLIR retained Latham and sued them for, among other things, misappropriation of trade secrets. The trial court denied FLIR’s request for a permanent injunction, found FLIR brought the trade secrets action in bad faith, and awarded attorney’s fees and costs of $1,641,216.78. The trial court’s decision was affirmed on appeal. FLIR Systems, Inc. v. William Parrish, et al., 174 Cal.App.4th 1270 (2009).

In our blog post, we noted that:

The malicious prosecution complaint against Latham alleges that there is a related malicious prosecution action against FLIR and that Plaintiffs did not discover the basis for the malicious prosecution action against Latham until May 2010, when FLIR indicated at a court conference in the related malicious prosecution action that they might by invoking the advice of counsel defense. So it appears there will be a statute of limitations defense to be litigated.

We will follow the progress of this case, and it will be interesting to see if Latham files a motion pursuant to California’s anti-SLAPP law (a strategic lawsuit against public participation – California Code of Civil Procedure 425.16).

Latham & Watkins did file an anti- SLAPP motion contending, in part, that the Plaintiffs’ claims were barred by the statute of limitations. The motion was granted by the trial court, which held that a one-year statute of limitations period applied to the Plaintiffs’ claims. On August 27, 2014, the Court of Appeal issued its opinion reversing the trial court.

Latham’s anti- SLAPP motion argued that the Plaintiffs would be unable to establish a reasonable probability of prevailing on their action, contending that (1) a one-year statute of limitations applied to Plaintiff’s claims, and that the claim was untimely under that limitations period and that (2) the trial court’s denial of summary judgment for the Plaintiffs on the claims brought against them by FLIR established that the underlying action was brought with probable cause as a matter of law. The trial court granted Latham’s motion on statute of limitations grounds, and did not expressly address Latham’s argument that the claims against them were without probable cause.

The Court of Appeal held first that the applicable state of limitations for malicious prosecution claims was not the one-year period set forth in Cal. Code Civ. Proc. Section 340.6, but rather the two-year limitations period set forth in Cal. Code Civ. Proc. Section 335.1. Under that limitations period, all parties agreed the action was timely. The Court of Appeal then considered Latham’s argument that the Plaintiffs did not have a probability of prevailing on their malicious prosecution complaint. Specifically, Latham contended that the Plaintiffs could not establish, as a necessary element of their malicious prosecution claim, that the underlying claim against the Plaintiffs had been brought without probable cause. Key to Latham’s argument was the fact that the Plaintiffs had moved for summary judgment in the underlying case, and that motion had been denied. Latham argued that the “interim adverse judgment rule” applied. Under that rule, claims that have succeeded at a hearing on the merits, unless such ruling is obtained by fraud or perjury, are deemed not so lacking in potential merit to serve as the basis for a malicious prosecution claim, even if the judgment is later reversed on appeal. Courts had applied the interim adverse judgment rule to bar claims for malicious prosecution where there had been a denial of a defendant’s motion for summary judgment in the underlying action.

The Court of Appeal noted that the interim adverse judgment rule would not apply in cases where there had been perjury or fraud, or where the motion for summary judgment had been denied on technical or procedural grounds. Further, the Court of Appeal noted that the rule does not apply where there is an ultimate ruling in the underlying action that the underlying action was, in fact, brought in bad faith. In the underlying case against the Plaintiffs, the trial court had found, after denying the Plaintiffs’ motion for summary judgment, but after a trial on the merits, that the case against them had been brought in bad faith.

The Court of Appeal held that the trial court’s finding that the underlying action had been pursued in bad faith was some evidence that probable cause did exist for the malicious prosecution claim. The Court of Appeal further held that, even without considering that finding, the Plaintiffs had established that the claims against them had been brought without probable cause. The Court of Appeal noted that the Plaintiffs had evidence that: (1) Latham filed a complaint alleging actual misappropriation of a business plan, disregarding a claim that the Plaintiffs had created the business plan prior to their employment with FLIR, (2) that, when Plaintiffs presented that evidence to Latham, Latham changed the theory of the case to pursue a claim that the Plaintiffs could not effectuate the business plan without using FLIR’s intellectual property, (3) that Latham knew that inevitable disclosure is not a viable legal theory in California, and therefore knew that this theory lacked legal basis, (4) that the factual basis for Latham’s theory was expert testimony that considered only publicly available technology when Latham knew that the Plaintiffs’ business plan would be using non-public technology obtained lawfully from third parties and (5) that FLIR’s President testified that he had no factual basis to assert that the Plaintiffs would use FLIR’s intellectual property, strongly implying that the claim against them was a pre-emptive strike. Critically, the Court of Appeal found that Latham had “sought an obviously anti-competitive injunction based on the speculative possibility that the [Plaintiffs’] product might violate its client’s trade secrets . . . .” The Court of Appeal held the relief sought and the basis therefore supported the conclusion that “no reasonable attorney would have believed [the] case had merit.”

The Court of Appeal held that the Plaintiffs had established a reasonable probability of prevailing on the element of lack of probable cause and reversed the trial court’s order granting Latham’s anti-SLAPP motion.

This opinion is a must read for trade secret litigators and establishes—at least in California—that there is a thin line separating hard ball litigation tactics from litigation that is deemed anti-competitive and which creates substantial risk for both plaintiff and plaintiff’s attorneys.


Restrictive Covenants: Better To Ask And Disclose

LinkedIn Tweet Like Email Comment

When recruiting an executive, or when being recruited, it is best practice for the future employer, the employee and any executive recruiting firm involved in the placement to address head-on the existence of any restrictive covenant limiting the future activities of the employee. The New York State Supreme Court – First Department Appellate Division – yesterday upheld a claim that by not clearly disclosing the existence of a non-solicitation restriction in an executive recruit’s employment agreement, the head hunter involved in the placement could potentially be held liable to the new employer for negligent and/or fraudulent misrepresentation. See Amsterdam Hospitality Group v. Marshall-Alan Associates, Index Number 113685/11 (1st Dep’t Aug. 28, 2014).

Knowing what restrictions are in a recruit’s agreement and obtaining sound legal advice about the enforceability thereof enables all the parties involved in the recruiting process to assess, mitigate and avoid the risks attendant to hiring individuals subject to non-compete or other restrictive covenant provisions. Failing to ask or disclose, on the other hand, can potentially expose everyone involved to claims of breach of contract, tortious interference or worse yet, fraud. “Don’t ask, don’t tell” can be a dangerous policy when recruiting executives with employment agreements containing restrictive covenants.