Trade Secrets & Noncompete Blog

Trade Secrets & Noncompete Blog

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

Customer Lists And Pricing Information Not Trade Secrets Under Missouri Law

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Judge Ross of the United States District for the Eastern District of Missouri recently declined to issue a preliminary injunction in a trade secret misappropriation case, holding that a transportation company did not offer sufficient evidence to show that its customer lists and pricing information were trade secrets under Missouri law. Towne Air Freight, LLC v. Double M. Carriers, Inc., Case no. 4:14-CV-750-JAR (E.D. MO June 9, 2014).

In so ruling, Judge Ross quoted from an earlier case which held that “[c]ustomer lists are protectable as trade secrets only when they represent a selective accumulation of information based on past selling experience, or when considerable time and effort have gone into compiling it.” “Information that can be compiled from other, generally available sources such as names, phone numbers and contact persons, is not protectable as trade secrets.”

With respect to the pricing information at issue, Judge Ross noted that it “could be obtained from other generally available sources” and therefore did not qualify as a trade secret.

This case illustrates that while the Uniform Trade Secrets Act can be a powerful tool for protecting confidential information, its sweep is not as broad as is sometimes assumed. Employers may want to consider using contractual restrictions such as confidentiality agreements and post-employment restrictive covenants to further protect confidential and proprietary information. In addition to providing stand-alone legal protections, such contractual restrictions can also help to bolster a claim under the Uniform Trade Secrets Act by showing that the employer undertook reasonable measures to protect the information at issue (one factor that a court will consider when determining trade secret status) in addition to showing that the information is so sensitive that the employer also chose to protect it contractually.

 

“Material Change” Defense To Enforcement Of A Non-Compete In Massachusetts Still Alive And Well, But There Remain Unanswered Questions

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For some time, I have been following the evolution of the “material change” defense to enforcement of a non-compete agreement in Massachusetts. Recently, it has been gaining traction, but there are still unanswered questions.

The doctrine was first introduced in F.A. Bartlett Tree Expert Co. v. Barrington by the Massachusetts Supreme Judicial Court in 1968. However, it was not applied with any consistency by Massachusetts courts until very recently when a number of trial level courts and a Massachusetts Federal District Court held that a restrictive covenant is not enforceable if the employee’s job duties, compensation or employment relationship substantially changed between the time the employee signed the initial non-compete agreement and the time the employee left the company. In short, these courts have refused to issue preliminary injunctions to employers of former employees who have been hired by competitors on the grounds that there was not a likelihood of success on the merits (one of the critical requirements that parties seeking preliminary injunctive relief must demonstrate to the court). Although the Eastern District of New York in Iron Mountain Information Management, Inc. v. Taddeo, applying Massachusetts law, adopted the doctrine in 2006, other states have not embraced the “material change” defense.

Recent Illustrative Massachusetts Cases

In Rent-A-PC, Inc., d/b/a SmartSource Computer & Audio Visuals v. March, decided in May 2013, the U.S. District Court for the District Court of Massachusetts refused to issue a preliminary injunction against three former employees of the plaintiff Smartsource and defendant CCR Solutions, the company that hired them. The Court based its decision on the fact that the defendant employees had experienced “material changes” in their employment relationship from the time they entered into the restrictive covenants that SmartSource sought to enforce. One former employee entered into the restrictive covenants with a company that Smartsource later purchased. His job changed a number of times, first in the inventory department and then in the sales department. A second defendant employee’s duties, authority, and compensation changed significantly even though his job title had not changed. The third employee had not signed a non-compete agreement.

In Intepros, Inc. v. Athy, 31 Mass. L. Rep. 144, 2013 Mass. Super. LEXIS 48, 2013 WL 2181650 (May 5, 2013), the Massachusetts Superior Court relied on the fact that since signing the non-compete agreement, the former employee was promoted, his duties and responsibilities had changed, and his salary had increased several times.

Some Takeaways

1. When there has been a “material change” in an employee’s job or a change in ownership of the business, the employee should sign a new non-compete agreement.
2. Even if the employee is not given a new non-compete to sign under these circumstances, it may be prudent, in any event, to include a clause in the original non-compete that it is enforceable in the event that there are material changes in employee’s job, duties, responsibilities, salary or otherwise in the employee’s relationship with the company.

Unanswered Questions Still Remain

These suggested takeaways are given with the caveat that at present, the highest court of Massachusetts has not answered the following questions:

1. Is the “material change” clause noted above which is included in a non-compete agreement enough to defeat a “material change” defense?”
2. What is the definition of “material?” How much of a change is necessary to be considered “material?”

In light of this relative uncertainty, consideration of various options in each of these cases should be undertaken with advice of counsel.

Conclusion

If the bill recently filed by the Governor of Massachusetts to make non-competes unenforceable passes, these issues may become moot. However, pending the outcome of that bill, we suggest that employers who believe that an employee’s relationship with the company has undergone a “material change” should have the employee sign a new agreement or, at least, should consider inserting a “material change” clause into such agreements.
 

A Mere Peppercorn Can Constitute Consideration? Not always.

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Most lawyers learn during their first year in law school that courts won’t inquire into the adequacy of consideration for a contract and that, as a result, a “mere peppercorn” can constitute consideration. It’s important to remember, though, that in many states, restrictive covenants are an exception to that rule.

The recent decision in the Pennsylvania Superior Court case of Socko v. Mid-Atlantic Systems of CPA, Inc. (2014 PA Super 103) illustrates this principle. The case involved a salesman in the basement waterproofing industry. He signed a noncompete agreement during his at-will employment. Continued at-will employment doesn’t constitute consideration for a noncompete signed under those circumstances under Pennsylvania law. However, the company argued that there was sufficient consideration for the salesman’s non-compete because: a) the Pennsylvania Uniform Written Obligations Act, 33 P.S. 6, provides that “[a] written…promise…shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement…that the signer intends to be legally bound”; and b) the salesman’s noncompete stated that the parties “intend[ed] to be bound” by its terms.

The court determined that the Act was designed to apply where the adequacy of consideration is not a factor to be considered in determining a contract’s validity or enforceability. The court then observed that restrictive covenants are different than other contracts because the Pennsylvania Supreme Court has held that it is appropriate to inquire about the adequacy of consideration for restrictive covenants. As a result, the court determined that the Act is inapplicable to restrictive covenants, and that the Act could not rectify the lack of consideration for the salesman’s noncompete. The court reiterated that in Pennsylvania, “when the restrictive covenant is added to an existing employment relationship,…to restrict himself the employee must receive a corresponding benefit or a change in job status.”

Federal District Judges In Chicago Are Now Split Over Whether To Follow The Illinois Appellate Court’s Landmark Fifield Decision

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Federal district judges in Chicago are now split over whether to follow the Illinois appellate court’s landmark non-compete decision, Fifield v. Premier Dealer Services, Inc., 373 Ill. Dec. 379, 993 N.E. 2d 938 (Ill. App. 1st Dist. 2013).

In the summer of 2013, long held beliefs about the required consideration for a restrictive covenant under Illinois law were thrown a curve when the Illinois Appellate Court for the First District (i.e., Cook County) held in Fifield that, absent other consideration, two years of employment is required for a restrictive covenant to be deemed supported by adequate consideration—even where the employee signed the restrictive covenant as a condition to his employment offer and even where the employee voluntarily resigned.

Earlier this year, in Montel Aetnastak, Inc. and Montel Inc. v. Kristine Miessen et al., No 13 C 3801, 2014 U.S. Dist. LEXIS 11889 (N.D. Ill. Jan. 28, 2014), Judge Ruben Castillo, the Chief Judge for the United States District Court for the Northern District of Illinois, declined to follow Fifield, holding that “[g]iven the contradictory holdings of the lower Illinois courts and the lack of a clear direction from the Illinois Supreme Court, this Court does not find it appropriate to apply a bright line rule” regarding what constitutes sufficient consideration for a non-compete. Instead, Judge Castillo chose to employ “the fact-specific approach employed by some Illinois courts.”

Judge Castillo’s immediate predecessor as Chief Judge for the United States District Court for the Northern District of Illinois, James F. Holderman, has now come down exactly the opposite way on this issue, and specifically applied Fifield and specifically rejected Judge Castillo’s holding in Montel. Instant Technology, LLC v. DeFazio et al., No. 12 C 491, 2014 U.S. Dist. LEXIS 61232 (N.D. Ill. May 2, 2014).
We are not aware of any other published federal court decisions or any published Illinois appellate court decisions to address this issue. However, at least two Cook County, Illinois judges have acknowledged and applied Fifield.

We will continue to monitor developments regarding Fifield. In the meantime, Illinois employers hoping to enforce restrictive covenants within two years after the signing date should be prepared to distinguish Fifield factually or legally.
 

California Resident Forced To Litigate Non-Compete And Trade Secrets Case In Illinois

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A threshold tactical decision in virtually every non-compete and trade secret case is where to file the suit. This decision is particularly important when a non-compete dispute has a California angle, because non-compete agreements are generally void as against public policy in California. Not surprisingly, employers seeking to enforce non-compete agreements try to stay away from the Golden State, while those seeking to avoid enforcement find it welcoming.

That scenario was recently faced by a federal judge in Chicago, where a California resident (Jon Thorsell) was sued by his former employer (Brunswick Corporation, which is headquartered in Illinois) for allegedly breaching his fiduciary duty, allegedly breaching his non-compete agreement, and allegedly violating the Illinois Trade Secrets Act.

Thorsell moved to dismiss the case for improper venue, but Judge Charles P. Kocoras denied the motion and in the process provided a primer on venue issues common to this type of litigation.

According to Judge Kocoras’ ruling, Thorsell’s final position with Brunswick was Vice-President of Sales-Western Region for Brunswick’s Life Fitness division. This region included Illinois. At Brunswick, Thorsell maintained an office out of his home in California, but regularly attended meetings in Illinois, participated in phone calls with Brunswick employees in Illinois, and serviced his Illinois sales territory. Because of these interactions with Illinois, Judge Kocoras held that Thorsell’s fiduciary duty of loyalty to Brunswick originated in Illinois. Accordingly, even though Thorsell’s alleged breaches of that duty (i.e., alleged interference with and usurpation of Brunswick’s business opportunities) may have taken place outside of Illinois, because the duty arose in Illinois, venue was proper in Illinois as to that claim.

As to venue with respect to the claim for alleged breach of Thorsell’s non-compete agreement, Judge Kocoras found that “the fact that Brunswick suffered its economic harm in Illinois, together with the other concrete connections that Brunswick provides, convinces this Court that Illinois is the appropriate venue in this case.” Those other “concrete” Illinois connections included the following: Thorsell travelled to Illinois to negotiate his non-compete; in the non-compete itself, Thorsell acknowledged that Brunswick’s headquarters and primary place of business are in Illinois; the non-compete contained an Illinois choice of law provision; and because Illinois was one of Thorsell’s sales territories, the non-compete was to be partially performed in Illinois.

As for the alleged violations of the Illinois Trade Secret Act (e.g., the alleged disclosure of trade secrets to Thorsell’s new employer), Judge Kocoras noted that Thorsell’s laptop was issued by an Illinois corporation and returned to Illinois after Thorsell was terminated, and that Brunswick suffered its economic harm in Illinois. Accordingly, while “recogniz[ing] that some of the alleged activity occurred in California and Hawaii, including the location where Thorsell primarily used his laptop,” Judge Kocoras nevertheless held that “Brunswick has satisfied its burden of demonstrating that venue is proper by setting forth facts which demonstrate a substantial connection to this district.”
 

Non-Solicitation Agreements Are Void in California…or Are They?

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There is certainly no question that an employee owes undivided loyalty to his or her employer while employed. For example, no one questions that an employee is prohibited from working for a competitor during his employment. But the law becomes much more complicated once an employee leaves his or her employment. Under what circumstances may a former employee solicit his former employer’s customers? Can non-solicitation agreements ever be enforceable?

California of course is one of a very few states in which non-compete agreements are void as against public policy. Business and Professions Code section 16600 provides that “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The exceptions to this rule are very limited, and they deal mainly with the sale of a business or dissolution of a partnership. However, through adoption the Uniform Trade Secrets Act, commonly referred to as CUTSA, California also makes it illegal for employees to misappropriate trade secrets from a former employer and to use those trade secrets to solicit customers of the former employer.

Thus, on one hand, there is a long line of California cases that has repeatedly held that a former employee may be barred from soliciting existing customers to redirect their business away from the former employer and to the employee’s new business if the employee is utilizing trade secret information to solicit those customers. But on the other hand, the California Supreme Court has made clear that even narrow restraints on competition – for example, agreements that purport to bar a departing employee only from competing against his former employer – are invalid under section 16600.

While acknowledging California’s protection of trade secrets, the California Supreme Court so far has specifically declined to address whether there is a so-called “trade-secret exception” to section 16600. Several decisions from courts of appeal have suggested that there is no such exception. Specifically, a court may not enforce by way of injunctive relief a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business, but a court may enjoin tortious conduct (under CUTSA and/or the Unfair Competition Law) by banning the former employee from using trade secret information to solicit such customers.

So, it would seem clear that a court cannot simply enjoin a former employee from soliciting current customers of his former employer, except maybe to the extent the former employee is using trade secrets to do so. But that is precisely what Judge James Robertson of the San Francisco Superior Court appears to have done recently in Guardsmark v. Bowman, Case No.CGC-14-537022.

The allegations of the complaint portrayed extreme, but not unheard of, conduct on the part of former employee Bowman. According to the complaint, Guardsmark provides security services to, among other entities, San Francisco’s Department of Human Services (“DHS”). Guardsmark had employed Bowman since 1993, and in 2005 he became the manager in charge of its San Francisco branch. While employed, Bowman signed an agreement which stated that he would refrain from misusing Guardsmark’s confidential information, including “any and all confidential records of Guardsmark, its clients, prospective clients [and] trade secrets.”

The complaint alleged that, unbeknownst to anyone at Guardsmark, Bowman had formed a competing security services company, Teton Security Services, Inc., in 2008. The complaint further alleged that despite Bowman’s responsibility to manage the DHS account for Guardsmark, when that account came up for re-bid in the Fall of 2013, he concealed certain information from Guardsmark about the bid he prepared for Guardsmark and the fact that Teton submitted its own bid for the DHS contract, allegedly using certain of Guardsmark’s confidential information in doing so. Guardsmark also claimed that when Teton eventually won the bid for the DHS contract, Bowman concealed that fact from Guardsmark in an apparent attempt to prevent Guardsmark from administratively challenging DHS’s decision. Guardsmark was the second-place bid, which suggested that DHS would have given the contract to it had Teton not submitted its bid.

The permanent injunction entered by Judge Robertson was apparently the product of a joint request by the parties and was among the terms in a settlement of the lawsuit. Among other things, the injunction prohibits Bowman and Teton from contacting or soliciting any of Guardsmark’s current customers in San Francisco and from taking any action to induce any of Guardsmark’s current customers in San Francisco to discontinue service with Guardsmark. Notably, there is no reference at all to the misused trade secrets relief in the court’s injunction order.

It would seem clear that a contractual agreement containing similar language would be void pursuant to section 16600. At best, it might be enforceable only to the extent it protected trade secrets. However, pursuant to California law, an injunction will be enforced unless a party can establish that the injunction was issued beyond the trial court’s jurisdiction. An injunction is considered to be in excess of a court’s jurisdiction if the court lacks personal or subject matter jurisdiction, or if the injunction on its face violates a constitutional provision or express statutory declaration. Because the injunction in this case would be valid if the information at issue is a trade secret, it is not invalid on its face and it is therefore likely enforceable.

The practical effect of this ruling is that it shows that the parties to an unfair competition lawsuit may stipulate to a non-solicitation agreement as part of an injunction even if that agreement is broader than that which would be allowed by contract. So an agreement between Bowman and Guardsmark that Bowman would not solicit Guardsmark’s customers when he left his employment would be invalid under section 16600, but the exact same agreement would most likely be enforceable when reached as part of a stipulated injunction. Essentially, a former employee sued for unfair competition by his former employer may lose the protections of section 16600 and be broadly prohibited from competing against his former employer by stipulating to such prohibitions in an injunction.
 

Webinar, May 20: Protecting Trade Secrets in the Cloud

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In a complimentary webinar on May 20 (1:00 p.m. ET), our colleagues James A. Goodman and Ian Carleton Schaefer will lead a webinar focusing on how the cloud and employee mobility are impacting trade secret protection strategies.

Join the Technology, Media, and Telecommunications (TMT) strategic industry group and the Non-Competes, Unfair Competition, and Trade Secrets group of Epstein Becker Green’s Labor and Employment practice for a discussion on the following topics: 

  • The Cloud and Its Impact on Employee Mobility and Trade Secrets
  • Trade Secret Law, Disclosure Risks, and Reasonable Efforts to Safeguard Trade Secrets
  • Employment Law and Corporate Strategies to Identify and Mitigate Risks When Operating in the Cloud

Click here to read more about this webinar, or click here to register.

Try, Try Again – Recent Bill Renews Effort to Create Federal Private Right of Action for Trade Secret Theft

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On April 29, 2014, Senators Chris Coons (D-Del.) and Orrin Hatch (R-Utah) introduced a bill which seeks to create a private right of action under federal law for theft of trade secrets. As noted in the press release accompanying the bill, the so-called “Defend Trade Secrets Act would empower companies to protect their trade secrets in federal court.”

The Defend Trade Secrets Act of 2014 echoes and amplifies a similar effort made last year, in which Representative Zoe Lofgren (D-Cal.) introduced a bill entitled the “Private Right of Action Against Theft of Trade Secrets Act of 2013.” We discussed that bill in this space last July.

Like the 2013 bill, the 2014 bill proposes amendments to the Economic Espionage Act, 18 U.S.C. § 1831 et seq. The 2014 bill, however, is more detailed and expansive in scope. The 2013 bill merely sought a two-paragraph amendment of 18 U.S.C. § 1832, adding text providing for a private right of action for compensatory damages and injunctive relief or other equitable relief, with a two-year statute of limitations.

The 2014 bill proposes an extensive amendment of 18 U.S.C. § 1836 which would not only create a private right of action, but also would:

  • Allow for courts to issue civil ex parte orders (a) “for the preservation of evidence,” including by making a copy of an electronic storage medium that contains the trade secret, and (b) providing for the seizure of any property used to commit or facilitate the commission of a violation;
  • Authorize courts to award (a) injunctive relief, (b) damages for actual loss or any unjust enrichment, (c) a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret, (d) exemplary damages (up to treble the amount of compensatory damages); and/or (e) attorneys’ fees;
  • Grant U.S. District Courts original jurisdiction of civil actions brought under the section;
  • Establish a 5 year statute of limitations period; and
  • Include definitions of “misappropriation” and “improper means” that largely track similar language in the model Uniform Trade Secret Act, which has been adopted in various forms in 48 states (with Massachusetts and New York being the two exceptions).

While there is strong support in the business community for the Defend Trade Secrets Act of 2014, only time will tell whether it actually will become the law of the land, and in what form. Nonetheless, for various reasons — including high-profile trade secret thefts and prosecutions in the news, a desire to standardize the law on trade secrets, and a perception that the U.S. economy is vulnerable to trade secret thefts from overseas — momentum does appear to be on the side of these efforts to create the elusive federal private right of action for trade secret theft.
 

Failure To Follow The Court’s Preliminary Injunction In A Trade Secrets Case Results In Default

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In what turned out to be a disastrous result for defendants, a Massachusetts Court issued a default judgment against certain salespeople who left their former company to form the new competing company. The default judgment was based on the defendants’ conduct during the discovery phase of the case, in which they failed to follow the terms of the Court’s Preliminary Injunction, including misrepresenting their compliance to the Court, destroying evidence, and using confidential information to sell products to certain businesses, all of which was specifically barred by the terms of the Court’s Order.

Facts
In Pacific Packaging Products, Inc. v. Barenboim, et al., Middlesex Superior Court, C.A. No. 09-4320, plaintiff, a distributer of packaging products, sued certain individuals who had been salesmen for the company until they resigned to form Packaging Partners, LLC, a competitor. The plaintiff also sued Packaging Partners, LLC claiming that the defendants had misappropriated confidential information and used it to solicit and obtain business from plaintiff’s customers.

Upon filing the lawsuit, the plaintiff obtained an Order for Expedited Discovery and to preserve evidence. After forensic images were taken from company and personal laptops of the individuals, a large number of electronic and hard copy documents and emails were produced by the defendants. When Plaintiff did not receive all the information it demanded, it obtained a Preliminary Injunction which ordered defendants to produce additional documents, in paper or electronic form, and barred defendants from making sales for one year to any of the plaintiff’s customers for which the defendants had taken documents which plaintiff claimed were confidential. Defendants argued that the information they took was not confidential.
Thereafter, the Court held an evidentiary hearing to determine whether the defendants had violated the terms of the Preliminary Injunction. At the hearing, certain individuals testified that they had complied with the mandates included in the Preliminary Injunctions, but one of the individuals, who had earlier submitted an affidavit supporting compliance, testified that the affidavit she had submitted was not true and that she was threatened by another defendant to submit false information and not to be forthcoming in her testimony.

Ruling of the Court
Based largely on this testimony, the Court found that the defendants had violated the terms of the Preliminary Injunction by:

  • selling certain products to a customer of the plaintiff;
  • spoliating evidence which defendants knew or reasonably should have known might be relevant to the claims in this matter;
  • intentionally failing to produce certain documents;
  • deleting emails after being ordered to produce them;
  • failing to image and produce several USB drives which were used by defendants after the litigation commenced; and
  • committing fraud on the Court by falsely claiming that defendants had complied with the Injunction when the facts demonstrated that documents were withheld, electronically-stored data relating to the claims in the complaint were not preserved, emails were deleted on certain defendants’ computers, and personal computers and devices were not turned over, in spite of representations to the contrary by the defendants’ attorney to the Court.

The Court stated that defendants’ acts described above “‘set in motion [an] unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate [this] matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense.’ [citation omitted] The defendants’ actions noted above show a blatant disregard for the judicial process and a disrespect of this Court and its orders.”

Sanctions
Relying on its inherent power to take remedial action in response to the defendants’ deliberate violation, the Court found that sanctions were in order. The Court initially ruled that the appropriate sanctions were: 1) entry of default against the defendant company and certain individual defendants with respect to some of the claims alleged in the Complaint, 2) dismissal of the defendant’s counterclaims, and 3) attorneys’ fees and costs. See Pacific Packaging Products, Inc. v. Barenboim, et al., Middlesex Superior Court, C.A. No. 09-4320 (January 31, 2014). In a subsequent decision, the Court denied the request of the plaintiff to default the defendants on all counts of the Complaint, but issued a default against the defendants as to the plaintiff’s claims that allege that “the defendants took confidential, proprietary information with them when they left Pacific Packaging and that they used that information in seeking to attract customers that had been Pacific customers.” See Pacific Packaging Products, Inc. v. James Berenboim, et al., Middlesex Superior Court, C.A. No 09-4320 (April 1, 2014).

Takeaways
Although defendants’ actions in this case could be considered extraordinary, the decision is a good lesson to companies and their inside and outside attorneys about how seriously courts view their orders, and why employees, company counsel and outside counsel should diligently monitor compliance. This includes taking all reasonable measures to preserve documents and other information, both electronic and hard copies, that reasonably may be relevant to the claims alleged. This means that it is critical that counsel send litigation-hold letters to their clients and follow up to insure that this information is located and preserved properly.

This case also illustrates how judges have become savvy in understanding the technicalities of electronically stored information (ESI), which has become increasingly predominant in litigation in general and in trade secrets and non-compete cases in particular. It provides a good lesson to counsel and employees about how critical it is for companies and their attorneys to take the necessary steps immediately to inventory, analyze and preserve ESI, including taking forensic images of all relevant information that may be on company computers and USB drives, as well as employees’ personal computers.

Such measures are necessary to minimize the risks of receiving the draconian sanctions issued by the Court in this case.
 

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