Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

In recent weeks, we have been following the fascinating case between Massachusetts-based EMC Corp. and Hewlett Packard Co., located in California.  EMC won the first round by stopping a former executive, David Donatelli, who was VP in charge of EMC's Storage Division, from starting his job at HP.  The Massachusetts Court held that to allow Donatelli to work for HP would violate a non-compete agreement he signed at EMC.  The Massachusetts Court enforced the non-compete even though Donatelli had filed an action for declaratory relief in California asking that Court to declare the non-compete unenforceable under California law.  In the Massachusetts action, however, the Judge allowed Donatelli to present additional evidence in a subsequent hearing to demonstrate that his job at HP would have minimal overlap with his former position at EMC.

On May 26, 2009, after hearing additional evidence, the Massachusetts Court modified the preliminary injunction it had issued against Donatelli by allowing him to start working for HP in California.  However, both sides are claiming victory because Donatelli will not be able to take the job he wanted, i.e., Executive VP of StorageWorks, due to the restrictions in the order.  While HP expressed its pleasure with the Court's decision to allow Donatelli to start working at HP as a Senior VP of Enterprise Servers and Networking, EMC stated it was also pleased with the Court's ruling because it upheld "the terms of EMC's key employee agreement."  EMC's statement went on to say that, "The judge entered an order as proposed by EMC that precludes Mr. Donatelli from being engaged in any aspect of HP's business that overlaps or competes with EMC's storage business for a 12-month period."  The case is EMC Corp. v. David A. Donatelli, case number 09-1727-BLS2 in the Suffolk County Superior Court in Massachusetts.

We don't know if the case is over, but for now, it appears that everyone got something of value from the case. The Massachusetts Court issued a narrow order tied to the protectable interest of EMC while at the same time, not depriving Donatelli his opportunity to pursue his livelihood in a competitive business.
 

In this high technology era, where a company’s most valuable assets are frequently its people and information and where the equivalent of thousands of pages of documents can be copied and moved with a few keystrokes, attorneys are increasingly being asked to stop the misappropriation of confidential information and trade secrets by employees and rival businesses. While there is no magic wand that will prevent a theft or stop a thief in his tracks, a company can substantially lower the risk of trade secret misappropriation through proactive policies and procedures. An article that I recently published in the Labor & Employment Law newsletter of the Illinois State Bar Association, which can be accessed by clicking here, explains how employers can do so.

Last week, we wrote briefly about EMC v. Donatelli, a case that is being litigated simultaneously in California and Massachusetts. On May 4, the Superior Court in Massachusetts ruled that EMC, a Massachusetts corporation, could obtain injunctive relief preventing Mr. Donatelli, who had been President of one of EMC’s major divisions, from starting a job at HP in California even though California has a statutory prohibition on covenants not to compete. The Court made some important findings in its decision which are summarized below.

Choice of Law - The court relied on the language of the agreement that Donatelli signed to find that Massachusetts law applied. Rejecting Donatelli’s argument that California’s fundamental policy against enforcement of non-competes made it futile for EMC to proceed in Massachusetts, the Massachusetts Court stated it “did not agree that California’s legislative policy, at least in this case, is somehow more ‘fundamental’ than, and therefore trumps, Massachusetts’ common law.”

Equitable Considerations - Donatelli also argued that Massachusetts should defer to California’s strong policy of protecting its workers. The Massachusetts Court rejected this argument as well, finding that Donatelli was not a California resident, and therefore not one of its workers. He was still a Massachusetts resident.  The Court also took Donatelli to task for “escaping” the obligations of the non-compete where the expectations of the parties were that he would be bound by it.

Enforceability of Covenant Under Massachusetts Law - The Court dealt with two issues that are of particular interest to practitioners in Massachusetts. The first is whether there was adequate consideration for the covenant even though it was signed 15 years after Donatelli started working at EMC. In ruling in favor of EMC, the Court found that even though the law in Massachusetts on this issue is somewhat unclear, under the facts of this case, continued employment constituted adequate consideration. However, regarding the breadth of the covenant, the Court allowed Donatelli to supplement the record to demonstrate that the covenant was broader than necessary to protect EMC’s interests.

The ball is now in the California Court. The Massachusetts Court was clear in ruling that California’s law against enforcement of non-competes did not trump Massachusetts’ common law in enforcing them, at least with respect to Massachusetts residents who move to California to escape the obligations of a Massachusetts non-compete. We will continue to follow this case as it no doubt progresses through the courts.
 

Employers looking to protect their intellectual property and proprietary information, and wondering whether they can punish the departing employees that ignore demands to return laptops and other transportable electronic devices that hold such data, may now have a newly invigorated weapon at their disposal — the Computer Fraud and Abuse Act.  A recent federal district court decision found that an employer establishes the required “loss” and “damage” elements of a CFAA claim against a former employee by showing that such employees “refused to return their computers” when requested, that such employees “deleted information from their computers,” and that the employer “had to perform a forensic investigation to determine what information was deleted from” these laptops. Because the CFAA provides a statutory claim that applies to all electronically stored information (confidential or not), provides for federal court subject matter and allows for the recovery of a variety of damages and costs, including those related to expert fees, employers and intellectual property owners may find it attractive. For further details and analysis of these issues, see, by clicking here, the May 5, 2009 article by Jim Flynn appearing in IP Law 360 and Employment Law 360.

An executive’s resignation and intention to begin work for a competitor of his former employer has resulted in a bicoastal battle of lawsuits over the terms of a noncompete clause in his employment agreement.

On April 27, 2009, David Donatelli resigned his position as president of EMC Corp.’s storage division. That same day, Donatelli filed a lawsuit in California state court asking for a declaratory judgment voiding the noncompete clause in his employment agreement with EMC Corp. Donatelli’s attorneys are no doubt cognizant of California law’s hostility to noncompete clauses and sought to establish jurisdiction where the chances of enforcement of the noncompete are minimal. Donatelli intended to begin working at Hewlett Packard on May 5, 2009.

Placing a close second in the proverbial race to the courthouse, on April 28, 2009, EMC Corp. filed a suit in the Superior Court, Suffolk County, Massachusetts, alleging that Donatelli violated the noncompete in his employment agreement. EMC Corp. quickly moved for preliminary injunctive relief, and on May 4, 2009, Judge Stephen E. Neel issued a temporary injunction preventing Donatelli from starting his new position at Hewlett Packard as planned, pending a full hearing, noting: “Donatelli’s intention to work for HP in California, which has a statutory prohibition on covenants not to compete, does not warrant denial of EMC’s request for injunctive relief.”

It will be interesting to see if the California court renders a decision prior to the hearing in the Massachusetts court, and whether one court will defer to the other.
 

This article originally appeared in the April 27, 2009 Connecticut Law Tribune. 

The Economic Espionage Act ("EEA"), 18 U.S.C. §§ 1831-39, gives companies another tool in the fight against misappropriation of trade secrets to "adopt a national scheme to protect U.S. proprietary economic information" and to combat the rising tide of espionage against and threats to corporate trade secrets. It criminalizes misappropriation of trade secrets.

The EEA creates a crime for the misappropriation of a trade secret to the economic benefit of anyone other than the trade secret owner generally, or specifically a foreign government. For example, in June 2008, a former Chinese national who admitted he tried to sell fighter pilot training software to the Chinese navy was sentenced to two years in prison. See United States v. Meng, No. 04-CR-20216, slip. op. (N.D. Cal. June 18, 2008). The EEA also prohibits "attempts" and "conspiracies" to commit economic espionage.

The standard definitions of trade secrets apply, as do the rules that the owner must have taken measures to keep the information secret, and the information must derive independent economic value from not being known and not being readily ascertainable through proper means.

The penalties that may be imposed under the EEA are severe. An individual convicted of theft of a trade secret under this statute for economic espionage with a foreign government, instrumentality or agent faces a maximum sentence of 15 years in prison and/or a fine up to $500,000. A corporation or other organization held in violation of foreign espionage is subject to a maximum fine of $10 million. In cases of trade secret conversion in interstate or foreign commerce for economic benefit, a person faces a fine and/or 10 years in prison, and a corporation can be fined up to $5 million.

Special Features

The EEA requires the court to enter orders to preserve the confidentiality of the trade secret in any proceeding under the act. Without that, the owner of a trade secret may be reluctant to cooperate in an EEA prosecution for fear of exposing the trade secret to public view.

Additionally, the EEA provides for criminal forfeiture of "any property constituting, or derived from, any proceeds the person obtained, directly or indirectly," from the theft of the trade secret. Additionally, "any of the person's [or organization's] property used . . . to commit or facilitate the commission [of the offense]" may also be forfeited. Although the property is forfeited to the United States, the victim should seek restitution from the proceeds of the forfeiture.

If a party resides in the United States, but commits the act of espionage in a foreign country, that act of espionage is subject to the EEA . Also, if a foreign corporation sells a product containing a trade secret in the United States, it may be prosecuted under the EEA as long as the misappropriation occurred in the United States.

The trade secret owner must weigh the benefits and risks of a prosecution before requesting the government to commence a case. For example, a prosecution shows competitors that the owner of the trade secret is serious about protecting its proprietary and confidential information. Conversely, in an EEA prosecution, the owner of the trade secret loses control of the case to the government, which may not have the same interests. Additionally, the criminal defendant may be entitled to production of the trade secret as part of discovery, subject to a court protective order preserving confidentiality.

Because the trade secret owner relies on the U.S. attorney's office's willingness to prosecute, it is important to consider the questions that the government may ask in deciding whether to commence a case under the EEA. First, what was the adequacy of the security measures? Second, what kind of information was misappropriated? It is likely that the government will be more interested in pursuing a case involving scientific or research information because it may have longer lasting value. (A marketing plan may have no value by the time a case proceeds to trial.)

Third, is there hard evidence of misappropriation, particularly physical evidence or admissions? Fourth, is the trade secret owner willing to cooperate fully with the government? Fifth, does the defendant have a strong defense to the action? Sixth, what is the timing of the referral? In some cases, it may be better to report the theft immediately, while in other instances it may be wise to conduct a full, private investigation before contacting the U.S. attorney's office. Seventh, does the trade secret have value and can it be documented? Finally, does the victim have the resources to pursue a civil remedy?

Defenses

A defendant to an action brought under the EEA has the three traditional defenses used in trade secret actions: (1) independent parallel development of the trade secret; (2) reverse engineering; and (3) general knowledge, skills or experience. See United States v. Hsu, 155 F.3d 189, 196-97 (3d Cir. 1998).

Representative Cases

In United States v. Lange, 312 F.3d 263 (7th Cir. 2002), the defendant's conviction under the EEA was upheld over his denial that the computer data he stole from his former employer and attempted to sell to a competitor met the statutory definition of "trade secret." The court held that the former employer took reasonable measures to keep the computer data secret, including storing all of the data in a room protected by a special lock, alarm system, motion detector; keeping the number of copies and employees' access thereto limited; and dividing its work among several vendors to ensure that no vendor could replicate the product. See also United States v. Four Pillars Enterprise Co., No. 06-3297, 2007 WL 3244034 (6th Cir. Oct. 30, 2007) (The defendant was convicted of attempt and conspiracy to commit theft of trade secrets in violation of the EEA for scheme to obtain confidential and proprietary information from employer).