Trade Secrets and Confidential Information

In an order dated April 20, 2017, New York’s Court of Appeals agreed to hear Sergey Aleynikov’s appeal of his conviction under an arcane New York criminal statute.

Aleynikov is a former Goldman Sachs computer programmer, arrested in July 2009 and accused of stealing computer source code from the bank.  Originally, a federal jury found him guilty of violating both the National Stolen Property Act and the Economic Espionage Act, but that verdict was overturned by the Second Circuit in April 2012 (after Aleynikov had been incarcerated for over a year).

More recently, Aleynikov also has been prosecuted at the state level, as the Manhattan District Attorney secured a jury verdict convicting him of N.Y. Penal Law §165.07 (unlawful use of secret scientific material), which was overturned by the trial judge in 2015.  Earlier this year, New York’s Appellate Division, First Department, reinstated the jury’s conviction of Aleynikov.

Given the prevalence and dangers of trade secret theft, Aleynikov’s case has drawn extensive media scrutiny over the years, and his appeal to New York’s highest court will be watched closely.

Insurance coverage is not something which comes to mind when thinking about trade secret misappropriation. In fact, since this blog was started in 2009, I cannot recall a single post about an insurance coverage issue.

That being said, one of the first things prudent defense counsel will do when a client is sued for alleged trade secret misappropriation is to instruct their client to notify their insurance carrier and inquire as to whether there is coverage for some or all of the claims. Sometimes there is; sometimes there isn’t.  However, the prudent course of action is always to play it safe and ask.

In a recent decision issued by Judge Dow in the U.S. District Court for the Northern District of Illinois, Sentinel Insurance Company, LTD v. Yorktown Industries, Inc., the defendant in what seems to have been a garden variety trade secrets misappropriation case  – Yorktown — demanded that its insurance carrier defend and indemnify it under its insurance policies.  The carrier denied coverage and denied having any duty to defend, and then brought a declaratory  judgment action seeking vindication for its position.

In the underlying lawsuit for which coverage and a defense was requested, Yorktown was sued for violation of the Uniform Trade Secrets Act, intentional interference with contractual relations, intentional interference with prospective business advantage, unfair competition, and civil conspiracy (i.e., claims commonly seen in these types of cases).

Yorktown requested indemnification under an insurance policy which provided coverage for claims for, among other things, “personal and advertising injury.” Yorktown’s argument was premised on the fact that it had been accused of stealing another’s “advertising idea.”

Judge Dow made short work of this claim, holding that Yorktown had merely been accused of stealing a customer list and sales information and wrongly using that information, and that this alleged misconduct did not amount to an allegation that Yorktown copied an “advertising idea” or copied trade secrets in an advertisement. Additionally, among other things, Judge Dow noted that the policy contained an express exclusion for claims predicated on the alleged misappropriation of a trade secret.

In these types of disputes, a common instance in which there may be coverage is where a breach of fiduciary duty is alleged, or where there is a claim against a director or officer and a “D & O” policy is implicated. Here, there was no mention of such claims.

While Yorktown came up short before Judge Dow, the prudent course of action in every trade secrets case is to notify the carrier and inquire about coverage.   Because insurance policies (and lawsuits) come in all sizes and shapes, sometimes there is coverage; sometimes there isn’t.

Two recent decisions by the Fifth Circuit Court of Appeals clarify the intersection between federal copyright law and state trade secret shapiro law. In GlobeRanger Corp. v. Software AG United States of America, Inc., 836 F.3d 477 (5th Cir. Sep. 7, 2016), the Fifth Circuit rejected an appeal in which the defendant argued that a plaintiff’s trade secret misappropriation claim was preempted by federal copyright law. Just four months later, in Ultraflo Corp. v. Pelican Tank Parts, Inc., No. 15-20084, 2017 U.S. App. LEXIS 509 (5th Cir. Jan. 11, 2017), the Fifth Circuit upheld a district court’s dismissal of a plaintiff’s state law claim of unfair competition by misappropriation, holding that the state law claim was preempted by federal copyright law.   What accounts for these seemingly inconsistent conclusions over two strikingly similar state law claims? The difference lies in the elements needed to establish each state law claim.

In its September 2016 GlobeRanger decision, the Fifth Circuit heard an appeal after a jury awarded plaintiff GlobeRanger a $15 million jury verdict following a trial in the United States District Court for the Northern District of Texas on its state trade secret misappropriation claim. The central allegation in that case was that competitor Software AG misappropriated GlobeRanger’s radio frequency identification (RFID) technology – most commonly used in electronic readers in tollbooths, like EZ-Pass – after it had taken over Software AG’s subcontract with the U.S. Navy to implement the technology.  Following the verdict, Software AG appealed, contending that federal copyright law preempted GlobeRanger’s state trade secret claim.

The Fifth Circuit explained in GlobeRanger that the different spheres of intellectual property can sometimes overlap and, as the software code at issue illustrates, the same intellectual property can be protectable under copyright laws or subject to trade secret protection.  If the creator of the IP seeks copyright protection, it obtains the exclusive right to make copies of the work for decades but must publicly register the work before enforcing that right through a lawsuit.  The supremacy of federal copyright law means, however, that state protection of copyrightable subject matter must sometimes defer to its federal counterpart.  As the Fifth Circuit explained, two conditions must be met in order for the Copyright Act to preempt a state law claim. First, “the work in which the right is asserted must come within the subject matter of copyright.” Second, “the right that the author seeks to protect . . . [is] equivalent to any of the exclusive rights within the general scope of copyright.”  This inquiry asks whether the state law is protecting the same rights that the Copyright Act seeks to vindicate or against other types of interference. “If state law offers the same protection, then the state law claim is preempted and must be dismissed.”

Applying this articulated two-part test to the facts in GlobeRanger, the Fifth Circuit found that the first condition was satisfied (because Software AG conceded its software code was copyrightable) but the second condition was not.  This is because while federal copyright law and Texas trade secret misappropriation both involve copying, trade secret misappropriation involves an extra element:  the state law prevents any improper acquisition through a breach of a confidential relationship or improper means.  Accordingly, the Fifth Circuit ruled that GlobeRanger’s trade secret claim was not preempted because it was required to establish an “extra element” in order to establish a copyright violation:  that its “protected information was taken via improper means or breach of a confidential relationship.”  Significantly, the Fifth Circuit noted, ten other circuit courts that have considered this issue agreed that trade secret misappropriation claims are not preempted by the Copyright Act for this same reason.

Revisiting the issue of preemption just four months later in Ultraflo, the Fifth Circuit reached the opposite result when faced with a different state law cause of action.  In this case, Ultraflo asserted an unfair competition by misappropriation claim under Texas law alleging that competitor Pelican stole its drawings showing how to design butterfly valves used in the transportation industry and then used them to make duplicate valves.  The United States District Court for the Southern District of Texas dismissed Ultraflo’s Texas state law claim, finding that the general scope of federal copyright law preempts the claim.  Ultraflo appealed, challenging the ruling.  As it did in GlobeRanger, the Fifth Circuit utilized the two-part test to determine whether the Copyright Act preempted the state law cause of action. First, it found that Ultraflo’s design drawings were “undoubtedly” within the scope of federal copyright, as were the valve designs themselves even though they were not actually protectable under the Copyright Act. Second, unlike in GlobeRanger, the Fifth Circuit found that the second condition was met because Texas’s unfair competition by misappropriation cause of action does not afford protection materially different from federal copyright law.  The elements of Texas’s unfair competition by misappropriation claim are: (1) the creation by a plaintiff of a product through extensive time, labor, skill, and money; (2) the use of that product by defendant in competition with plaintiff; and (3) commercial damage to the plaintiff. In other words, unlike the traditional trade secret misappropriation claim asserted in GlobeRanger, the unfair competition by misappropriation claim asserted in Ultraflo lacks the “extra element” necessary to bring it out of the general scope of copyright.  Therefore, the claim was preempted.

These two Fifth Circuit decisions demonstrate that parties should pay attention to the possible application of copyright preemption to claims involving alleged theft of information or unfair competition. While most such claims will not be preempted, Ultraflo illustrates that some will be.

The year-end episode of Employment Law This Week  looks back at the biggest employment, workforce, and management issues in 2016.

Our colleague Jonathan Shapiro discusses the impact of the Defend Trade Secrets Act (DTSA)—which opened federal courts to trade secrets claims, regardless of the dollar value—and the White House’s call to action encouraging states to ban non-compete agreements in some circumstances.

Watch the segment below and read Epstein Becker Green’s recent Take 5 newsletter, “Top Five Employment, Labor & Workforce Management Issues of 2016.”

LightsWhether you are a young child missing teeth, or a grown-up taking account of her life, or Santa Claus himself checking up on everyone else’s life, many of us make lists at holiday time.  They can be lists of gifts we want, or those we need to get, or people we wish to see or write to, or things we need or want to do before the end of the year.  Sometimes they are just lists of things that happened this year or that we want to happen next year.  Certainly there are lots of “Top Ten” holiday lists.  This one may be neither an exception nor exceptional, but here is a “Top Ten List of Holiday-Related Trade Secret/Non-Compete Cases”:

  1. “It may be better to be naughty than nice”—In Ivy Mar Co., Inc. v. CR Seasons Ltd., 907 F. Supp. 547 (EDNY 1995), the Court denied plaintiff a preliminary injunction in a non-compete/trade secret case in large part because of plaintiff’s months-long delay in bringing the action. This occurred notwithstanding plaintiff’s claim that it only delayed filing the action so as not to ruin Christmas—“they delayed bringing this motion because they feared defendant Jetmax would not ship goods to its customers during the Christmas season,” or so they claimed.
  2. “Or maybe not.”—In Agero Inc. v. Rubin et al., an appellate court in Massachusetts affirmed dismissal of plaintiff’s claims, holding that Agero failed to establish that two of the defendants, Timothy Schneider and Matthew Capozzi, owed Agero a duty of loyalty.  Though the Court when on at some length as to the reasons it had for affirming the result against Agero, what was perhaps most telling was the Court’s taking the time to express a reason that it was not relying on:
    • We need not comment on the defendants’ suggestion that Agero brought this complaint against them, despite Agero’s size and apparent lack of interest in pursuing ViewPoint, to send a message to other Agero employees who might entertain thoughts of leaving and lawfully competing. That Agero reportedly sued Schneider on Christmas Eve, when Schneider’s oldest child was five years old, might lend credence to the charge. However, we do reiterate that noncompetition agreements would be the better practice to achieve that goal. Based on the record before us, Agero’s claims were properly dismissed.
  3. “Check your list twice”—If you think departing employees had accomplices or other help, don’t just add a bunch of John Does to your complaint without defining and describing who those co-conspirators are.  Otherwise you run the risk of having those claims dismissed and those avenues of discovery shut down in your non-compete or trade secret case just as happens in other types of cases, such as Southwest Materials Handling Co. v. Nissan Motor Co., 2000 U.S. Dist. LEXIS 16275 (N.D. Tex. 2000), where the court said, with respect to civil conspiracy allegations against John Doe defendants, that “[t]his Court is not in the position of channeling or divining potential co-conspirators who are presently as tangible as Santa Claus, the Easter [B]unny or the Tooth Fairy.”  I guess the court did not find the testimony of Frank Church credible.
  4. “What is the secret to making a good snowman?”—Though there is now a patent on for an apparatus for facilitating the construction of a snow man/woman out of snow, making snowman holiday decorations has also spawned litigation like the case of  Gemmy Industries Corporation v. Chrisha Creations Limited, Dist. Court, SD New York 2004. In Gemmy, plaintiff claimed that defendant’s marketing of an inflatable snow man, among other causes of action, violated plaintiff’s trade secrets, especially after defendant hired plaintiff’s former sales representative.  But the court concluded that even plaintiff did not treat the snowman and its marketing as involving trade secrets since plaintiff “did not request and [the sales representative] did not execute any non-disclosure agreement, non-compete agreement or confidentiality agreement prior to acting as a sales representative for [plaintiff].”
  5. “‘It was always said of him, that he knew how to keep Christmas well, if any man alive possessed the knowledge.’”—Dickens’ closing words in A Christmas Carol were a celebration of the Christmas spirit, and sharing but not everyone wants to share the knowledge they have about Christmas traditions.  While some have asked, we think tongue in cheek, whether Christmas may be patented, it does appear that at least some aspects of our Christmas traditions can be protected as trade secrets.  In the case of IPI, INC. v. Monaghan, 2008 Ohio 975 (Court of Appeals, 6th Appellate Dist. 2008), an Ohio Court found that plaintiff had stated a claim for relief, and could proceed to trial, on a claim that plaintiff’s unique methods of “‘event’ photography” such as involved in its “Santa Claus programs” could involve protectable trade secrets under the Ohio Trade Secrets Act, where plaintiff had alleged that “it developed, inter alia, ‘confidential and specialized techniques for event photography, a business marketing plan for its franchisees, a training program, and proprietary and confidential software that it makes available to its franchise systems’” and that “appellees/cross-appellants misappropriated these systems, techniques, etc., that is, its alleged trade secrets. If it is shown that these are truly trade secrets and that appellees/cross-appellants misappropriated the same, IPI would be directly injured by that misappropriation.”
    • Not all courts, however, are willing to give litigants credit for the alleged uniqueness of their holiday-related ideas. This can be seen in Oxenhandler v. Dime Sav. Bank of Brooklyn, 33 Misc. 2d 626 (NY Supreme Court 1962), where plaintiff was denied relief in his trade secret/business information claims against the financial institution to which he had suggested “a ‘Chanukah Savings Plan’ which could be made available to [the bank’s] Jewish depositors in the same manner that a Christmas Club had been available to the general public.”  In fact, the Court concluded that “plaintiff’s idea was neither new, novel, original nor concrete,” and that the Court “cannot perceive how plaintiff on any theory in law can succeed in this action.”  New settings for Christmas Savings Clubs faired no better as alleged trade secrets or protectable ideas either, as seen in Moore v. Ford Motor Co., 43 F. 2d 685 (2nd Cir. 1930). There, plaintiff Moore sought to protect the idea of Christmas Club accounts as a way to save for down payments on automobiles.  The Court concluded that there was nothing secret or unique about such a plan, and that “idea was old in Christmas Savings clubs” for some time.
  6. Beware the office Christmas party.”—Normally this is a phrase you see in HR guides, but it can also hold true in the non-compete area of the law as seen in Plastic Surgery Associates Of Kingsport Inc. v. Pastrick, a 2015 decision of the Tennessee Court Of Appeals 2015. In this case, the court held that the defendant was indeed an employee and an owner of the plaintiff medical practice, and subject to the express terms of his employment agreement (including its non-compete provisions) and liable as an owner for a portion of the practice’s debts.  The court rested its conclusions of ownership on three key facts, one of which was that defendant “hosted a Christmas party at his home that was billed to the company.”  Unless that party was epic, it probably would have been cheaper to pay for the punch and appetizers out of his own pocket.  It would have eliminated that troublesome fact and helped him avoid the necessity of disgorging $246,633.00.
  7. Christmas cards, why bother?”—In Vizant Technologies, LLC v. Whitchurch, 97 F. Supp. 3d 618 (ED Pa. 2015), plaintiff brought a ten-count complaint against defendant alleging misappropriation of trade secrets in violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) as well as two violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), breach of contract, defamation, tortious interference with existing and prospective relationships, abuse of process, conversion, fraud, and civil conspiracy. Finding that defendant was using confidential information and otherwise acting tortiously in contacting plaintiff’s (i.e. her former employer’s) employees, officers, and directors, and with their family members, and in interfering with plaintiff’s business with customers.  This resulted in Whitchurch’s being enjoined from carrying through on her stated “intention to send a ‘Christmas card direct mail piece’” out further criticizing Vizant and its principals to that same audience.
  8. New Year’s resolutions should be thought out.”—Many times, employees will decide to leave for new employment after the upcoming holidays pass.  So it was in Alexander & Alexander v. Wohlman, 578 P. 2d 530 (Wash: Court of Appeals, 1st Div. 1978), where “[b]etween Christmas 1975 and New Year’s Day 1976, the defendants decided to leave the employment of A&A.”   The problem was not their resolve to leave, but the things that they did before they left:
    • On Friday afternoon, January 16, 1976, after Mr. Maier, the manager of the Seattle office, had left for the weekend, they submitted their letters of resignation and took with them personal possessions and certain schedule books for use as forms in the conduct of their business. Between January 12 and 16, 1976, each of the defendants personally contacted clients of theirs to inform them of their decision to leave A&A and the formation of the new firm, Wohlman & Sargent, Inc. On January 17 and 19 defendants sent letters to clients requesting broker-of-record letters.
    • The appeals court found that such conduct did violate their legal obligations to A&A, and found them liable for damages.
  9. Sometimes you get coal in your stocking.”—Courts often work through the holidays, despite the general impression to the contrary. For instance, in Direx Israel, Ltd. v. Breakthrough Medical Corp., 952 F. 2d 802 (4th Cir. 1991), plaintiff obtained a preliminary injunction from the District Court against the defendant who, when he was discharged, illegally appropriated and exploited the plaintiffs’ trade secrets, and were using such trade secrets to manufacture, with intent to market, a machine competitive with the plaintiffs’ product.  The 4th Circuit reversed the grant of the preliminary injunction, but did so “without prejudice to the right of the plaintiffs to renew such motion on the basis of any new or additional facts that may have occurred since the grant under review.”  The appellate court’s decision issued on December 24th.  Likewise, in Viad Corp. v. Cordial, 299 F. Supp. 2d 466 (WD Pa. 2003), the Court issued a Christmas Eve denial of a preliminary injunction request in case in which Defendants Cordial and Hellberg were alleged to have violated their employment contracts, which prohibited them from competing with plaintiff directly or indirectly, or aiding its competitors, for a period of one year following the termination of their employment, though in the holiday spirit the Court pointed out that plaintiff and defendants had been “represented by counsel who tried the matter skillfully and efficiently.”
  10. Sometimes, though, you get what you asked for.”—In Devos Ltd. v. Record, Dist. Court, ED New York 2015, on the other hand, the court issued on Christmas Eve a wide ranging injunction against defendants in a trade secret misappropriation and unfair competition case even though the plaintiff had been indicted and had been placed on a federal exclusion list that meant that no federal agency can do business with plaintiff and that any pharmaceutical distributor who receives federal funding, including Medicare and Medicaid (which includes almost every distributor of pharmaceuticals), also cannot do business with plaintiff. Concluding that an indictment was just an accusation of being naughty rather than a finding of same, the court issued the injunction.  There was no mention of where Santa had come out when double checking Devos’ placement on his list.

Happy holidays.

It is rare that a trade secret / restrictive covenant lawsuit makes it all the way to trial, much less a jury verdict. The passage of time, accumulating legal expenses, bad facts, and/or the risk of losing at trial all can conspire to sap litigants of the desire to take their cases to the finish line.  Settlements and withdrawals of claims abound.  Sometimes, however, the parties dig in and roll the dice in court, as recently occurred in a case in the Southern District of New York.

On November 29, 2016, after more than 10 days of trial, a jury delivered a verdict in favor of the plaintiff Tesla Wall Systems LLC (“Tesla Wall,” an architecture and construction company) against its former president Michael Budd, and awarded $14.5 million in damages.  Budd had been president of Tesla Wall for less than two years when he resigned in 2014.  He was subject to contractual provisions prohibiting him post-employment from interfering with any of Tesla Wall’s actual or potential business relationships for six months and from soliciting any Tesla Wall employee for nine months.

Tesla Wall alleged that while president of Tesla Wall and thereafter, Budd secretly organized a competing curtain wall company (based on Tesla Wall’s business plan for future operations); negotiated the purchase of land in Pennsylvania, various investments and tax credits for the new company’s manufacturing facility; and hired all of Tesla Wall’s employees to work for the new venture. Pursuing claims of breach of contract, breach of fiduciary duty, and violation of the Delaware Uniform Trade Secrets Act, among others, Tesla Wall was awarded $14.5 million in damages against Budd.

Although the publicly available record does not reveal the calculations which underlie this award, the jury’s verdict is a reminder of what can be achieved by an aggrieved employer in the trade secrets/restrictive covenants arena, when the facts are favorable and the employer sees the lawsuit to its conclusion.

Many businesses progressively fear that their trade secrets and valued business relationships are at risk of attack by competitors – and even by their own employees. Do you know what it takes to protect those critical assets in the ever-changing world of trade secret and non-compete law?

Join Epstein Becker Green attorneys Anthony J. Laura,  Robert D. Goldstein, and Peter A. Steinmeyer on Wednesday, November 30, 2016 at 1:00 p.m. EST for a complimentary, 75-minute webinar hosted by Practical Law.  This webinar offers insights into recent developments and expected trends in the evolving legal landscape of trade secrets and non-competition agreements. This webinar will focus on how to navigate this developing area and effectively protect client relationships and proprietary information. Topics will include:

  • The Defend Trade Secrets (DTSA), including the new federal remedies available to employers and the steps they need to take to fully benefit from them.
  • Newly passed state statutes addressing restrictive covenants, including who can enter into them, industry restrictions, and temporal restrictions.
  • Recent decisions regarding what constitutes adequate consideration for a non-compete.
  • Interesting developments determining choice of law issues, including a new California statute restricting choice of law provisions.
  • Administrative agency developments, including agency enforcement actions cracking down on non-competes.

A short Q&A session will follow.

To register for this webinar, click here.

Moderator: Barbara J. Harris, Senior Legal Editor, Practical Law Labor & Employment

CLE credit is available in multiple states. Please submit inquires to: webinars.practicallaw@thomsonreuters.com.

Employers Under the Microscope: Is Change on the Horizon?

When: Tuesday, October 18, 2016 8:00 a.m. – 4:00 p.m.

Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Latest Developments from the NLRB
  • Attracting and Retaining a Diverse Workforce
  • ADA Website Compliance
  • Trade Secrets and Non-Competes
  • Managing and Administering Leave Policies
  • New Overtime Rules
  • Workplace Violence and Active-Shooter Situations
  • Recordings in the Workplace
  • Instilling Corporate Ethics

This year, we welcome Marc Freedman and Jim Plunkett from the U.S. Chamber of Commerce. Marc and Jim will speak at the first plenary session on the latest developments in Washington, D.C., that impact employers nationwide.

We are also excited to have Dr. David Weil, Administrator of the U.S. Department of Labor’s Wage and Hour Division, serve as the guest speaker at the second plenary session. David will discuss the areas on which the Wage and Hour Division is focusing, including the new overtime rules.

In addition to workshop sessions led by attorneys at Epstein Becker Green – including some contributors to this blog! – we are also looking forward to hearing from our keynote speaker, Former New York City Police Commissioner William J. Bratton.

View the full briefing agenda here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions. Seating is limited.

In a question of first impression, the Illinois Appellate Court recently addressed what constitutes “bad faith” for purposes of awarding attorneys’ fees to the prevailing party under §5 of the Illinois Trade Secret Act (ITSA). That section provides, in pertinent part, that if “a claim of [trade secret] misappropriation is made in bad faith” or “a motion to terminate an injunction is made or resisted in bad faith,” “the court may award reasonable attorney’s fees to the prevailing party.” The Illinois Appellate Court delivered a split decision on the legal standards for assessing whether a “bad faith” fee award is warranted under the statute.

Specifically at issue before the court in Conxall Corp. v. ICONN Systems, LLC, et al., 2016 IL App (1st) 10158 (Sep. 2, 2016), was “whether the trial court had applied the correct legal standard in determining whether Conxall’s claims were brought in ‘bad faith,’ as that term is used and understood in the Act.”  The sharply divided court proposed divergent standards for analyzing this question, despite reaching the same conclusion that the issue should be remanded to the lower court for consideration anew.

One of the three Justices adopted the California Court of Appeal’s approach, which found that “bad faith” under California’s version of the Uniform Trade Secrets Act consists of two components: “(1) objective speciousness and (2) subjective bad faith.” Attentive to the goal of deterring such “bad faith” claims, the resultant standard embraces “speciousness [as a] looser standard” which accomplishes that goal, paired with a finding of “subjective bad faith.”

The other two Justices criticized this two-pronged test (which they noted appears to have taken hold among a number of federal courts), and instead held that the guidepost for an award of attorneys’ fees under ITSA should be “the preexisting definition of ‘bad faith’ in this state.”  While no Illinois court has had the opportunity to define “bad faith” specifically in the context of ITSA prior to ICONN, a “bad faith” test had already been articulated by the Illinois Supreme Court in Kratsack v. Anderson, 223 Ill. 2d 541 (2006) in the context of Illinois’ Consumer Fraud and Deceptive Business Practices Act.  Construing the Kratsack opinion, the ICONN majority held that Illinois state courts should resolve the “bad faith” issue by asking “whether the pleadings, motions and other papers which were filed by the party violated Illinois Court Rule 137” or if “the party’s other conduct during the course of the litigation ran afoul of the underlying purpose of Rule 137, which is to prevent abuse of the judicial process.” Rule 137, Illinois’ frivolous pleading rule, allows for attorneys’ fees when a party interposes its pleading or motion with “any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.” Kratsack, 223 Ill. 2d at 561-62.

There are several take-aways from the ICONN Court’s debate and ultimate finding.

Ask: Has your jurisdiction already made a decision to follow California and the federal court approach to determining “bad faith” under your state’s trade secrets act? If not, has your jurisdiction defined “bad faith” under any other statute?

Whatever the answer to these questions – and regardless of picking the “fed/Cal” or “state” side of the debate as to which legal standard should apply – any such motion for “bad faith” attorneys’ fees under your trade secrets act needs to clearly articulate the applicable standard for “bad faith” and consider the facts of the case in light of that standard.

James P. Flynn
James P. Flynn

In the recent case of United States v. Nosal, the United States Court of Appeals for the Ninth Circuit confirmed the applicability of both the Computer Fraud and Abuse Act and the Economic Espionage Act as safeguards against theft of trade secrets by departed former employees.  Importantly, Nosal applied such laws to convict a former employee in a case involving domestic businesses and personnel without any alleged overseas connections.  Because of civil enforcement provisions in the CFAA itself and the recently enacted Defend Trade Secrets Act, Nosal represents a possible guide to employers seeking to protect their trade secrets through civil or criminal mechanisms, or both.

In assessing the implication of Nosal, one may consider three framing questions:

  1. How does this case take the trend of criminalization and federalization of trade secret law a step further?

The Nosal case is a great example of three trends coming together to give corporate employer and trade secret owners access to new avenues for relief.

First, Nosal pushes forward the trend that began in 2013 when the Department of Justice announced that trade secret prosecutions would become an area of emphasis.  Since then, DOJ has been much more receptive to business crime claims.

Second, it is the next step in the law’s evolution—the majority decision construed both the Consumer Fraud & Abuse Act and Economic Espionage Act in a complementary manner consistent with their plain language and applied them to common sense circumstances that seemed like theft. The CFAA is written in language beyond that of  a technical anti-hacking statute, and it is important that a federal appeals court has recognized that scope.

Third, and most importantly, Nosal is a step in the right direction on protecting trade secrets whether or not there are later criminal prosecutions on similar theories.  That is because the CFAA and now, since April, the Defend Trade Secrets Act also allow for civil remedies. Nosal’s common sense result was that one is acting without authorization when one uses another’s password because the actor’s password  has been revoked—that holding is not only a tool for prosecutors, but is one that civil litigants could use as well.

2. Why have there been more criminal convictions in trade secrets cases in the past few years?

Changes in in policy, changes in politics, and changes in perceptions.

First, the Obama administration formally issued a written policy in February 2013 announcing ADMINISTRATION STRATEGY ON MITIGATING THE THEFT OF U.S. TRADE SECRETS.  So one is seeing more prosecutions, and convictions, in some sense because DOJ has pursued that policy.

Second, there is a growing sense that these crimes not only hurt individual companies economically, but hurt the United States and its citizens more generally. That is why so many of the higher profile trade secret prosecutions have involved defendants who were foreign nationals or were assisting foreign companies.  Public and political support for pursuing such cases cannot be underestimated.

Finally, in light of the announced policy and the evolving political reality, companies are simply more likely to report such crimes. In the past, victimized companies hesitated to draw attention to their own losses or injuries and thought doing so also required them to give up control of recovery efforts to prosecutors.  Those perceptions have changed, and Nosal and cases like it are examples of such changes.

3. What were the key takeaways from the dissent in Nosal that might gain traction as other circuits address these issues?

The dissent had three main criticisms of the majority opinion.

The first criticism was that, in the dissent’s view, the 9th Circuit improperly expanded the CFAA beyond its anti-hacking roots to apply it to what the dissent described as mere password sharing.

Second, the dissenting judge contended that the decision effectively turns employers’ computer use policies into non-public criminal codes of which defendants have inadequate notice.

Third, and what likely in some ways probably motivates the dissent’s first two points, the dissent observed that this decision potentially empowers corporate employers to have undue influence in criminal prosecutions.

These statutes and the criminal prosecution of trade secret theft continue to be areas of interest that trade secret owners and their counsel should follow, and should consider in enforcing their own rights in these matters.