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

The New Jersey Legislature was overwhelmingly in favor of a measure that would have barred employers from obtaining social media IDs and other social media related information from employees and applicants. Click here for A2878 as passed.  But Governor Chris Christie vetoed A-2878 because it would frustrate a business’s ability “to safeguard its business assets and proprietary information” and potentially conflict with regulatory requirements on businesses in regulated industries such as finance and healthcare. Click here for the Governor's Veto Statement. While the Governor thought the bill well-intentioned, he conditionally vetoed it for painting “with too broad a brush,” citing the trade secrets/proprietary information concern as a primary motivation: “In view of the over-breadth of this well-intentioned bill, I return it with my recommendations that it be more properly balanced between protecting the privacy of employees and job candidates, while ensuring that employers may appropriately screen job candidates, manage their personnel, and protect their business assets and proprietary information.”

The Governor specifically recommended the bill be revised to:

• Create an exception to allow investigation of work place misconduct or unauthorized transfer of confidential or proprietary data to a personal account;
• Add language confirming that an employer may view, access, or utilize information about a current or prospective employee that can be obtained in the public domain;
• Carve out of the definition of “personal account” any account, service or profile created, maintained, used or accessed by a current or prospective employee for business purposes of the employer or to engage in business related communications;
• Eliminate provisions that would create a civil cause of action for affected employees or applicants;
• Add a proviso stating that nothing in the act shall prevent an employer from implementing and enforcing a policy pertaining to the use of an employer issued electronic communications device or any accounts or services provided by the employer or that the employee uses for business purposes; and
• Add a proviso stating that nothing in the act should be construed to prevent an employer from complying with the requirements of State or federal statutes, rules or regulations, case law or rules of self-regulatory organizations.

Click here for the bill as revised after the Governor's veto statement.

These last two provisos are important ones, especially for the financial services industry and the healthcare industry. They are important because FINRA, for example, has laid out certain monitoring and record keeping requirements concerning social media used to communicate with clients and prospective clients concerning potential financial transactions. See, e.g., FINRA Guidance here.

There are likewise data security requirements emerging out of HIPAA and other bodies of law that may require security and monitoring of social media. Click here for a discussion of such issues by Dan Goldman (@danielg280), legal counsel at Mayo Clinic and Advisory Board member to the Mayo Clinic Center for Social Media. In an age of BYOD (Bring Your Own Device) and the consolidation of business and personal activity to a single mobile device, failure to include such exceptions would force employers into hard choices between required monitoring and desired seamlessness of the business/personal transition.

While many states have in the last year adopted such statutes, the interplay between the Governor and the Legislature in New Jersey plays out the competing interests nicely, and hopefully starts a trend toward a more measured approach to such questions. Accommodating these competing interests is not only a legislative challenge, but is one faced by employers and businesses every day.

On May 2, 2013, the Texas Uniform Trade Secrets Act (UTSA) was signed into law by Governor Rick Perry. The new law becomes effective on September 1, 2013. Nearly every state in the United States now has adopted some variation of the model Uniform Trade Secrets Act; only New York, Massachusetts and North Carolina have not.

The UTSA includes statutory definitions for terms such as trade secrets, misappropriation, and wrongful means, and provides several potential remedies for wrongs committed under the act, including injunctive relief, damages and attorneys’ fees.

Until now, claims of misappropriation of trade secrets in Texas were governed by Texas common law, which in large part is similar to the UTSA. Texas’ UTSA even varies from the model UTSA definition of trade secrets by including customer lists in the new statutory definition, as certain kinds of customer lists and other compilations are recognized as trade secrets under Texas common law.

One area in which Texas trade secret law will change come September 1 is in the possibility of recovering attorneys’ fees on a misappropriation claim, an element of relief that did not exist under Texas common law. Also, while Texas courts in the past have not expressly or consistently adopted the inevitable disclosure doctrine, plaintiffs asserting that doctrine in Texas will find some comfort in the UTSA’s prohibitions on “threatened,” as well as “actual” misappropriation.

Once enacted, the UTSA should serve to provide greater predictability for companies or individuals that are considering asserting claims in Texas courts for misappropriation of trade secrets. Texas’ adoption of the UTSA leaves New York as the only state which relies upon purely common law precedent with regard to trade secret claims. (Both Massachusetts and North Carolina have their own “Trade Secret Protection Acts.”)

So which state will be the next to adopt the UTSA? Massachusetts has a head start: on January 2, 2013, Bill H. 27 was introduced in the state legislature to enact the UTSA in Massachusetts, and that bill remains pending in the legislature.
 

Failure to protect corporate trade secrets had dire consequences for AGC, Inc., a Connecticut aviation component manufacturer forced to file a Chapter 11 bankruptcy on April 16, 2013. AGC blamed its circumstances in substantial part on the theft of its trade secrets by one of its former key executives who joined a rival competitor where he used the valuable proprietary information. AGC obtained little judicial sympathy because it failed to keep its trade secrets secret in the fashion required to be awarded injunctive relief.

Former AGC Vice President David J. Baillargeon was laid off in July 2009, due to a downturn in AGC’s business; and on his departure, he told the AGC President that he would regret terminating his employment. Baillargeon left the company with about one thousand pages of documents stored on a computer memory stick, including presentations, strategic plans, personnel information and pricing information, along with a three-ring binder containing AGC blueprints. He brought the information to his next job at an AGC competitor, Twin Manufacturing Co., and he used it to compete against AGC, resulting in AGC’s loss of approximately $2 million in annual revenue in addition to the expenses of a costly and largely unsuccessful trade secrets litigation against Baillargeon and Twin.

AGC sued Baillargeon and Twin in Connecticut state court in May 2010, alleging causes of action for violation of the Connecticut Uniform Trade Secrets Act (CUTSA), the Connecticut Unfair Trade Practices Act (CUTPA), breach of fiduciary duty and tortious interference with business and contractual relations. Unfortunately, AGC’s failure to protect its trade secrets and keep them confidential was a textbook example of what not to do if a company needs injunctive relief.

The particular trade secret at issue was AGC’s rubber injection molding work on aircraft engines by which rubber of appropriate shape and thickness is attached to various parts within the aircraft engine. Although AGC policies prohibited employees from disclosing confidential company information, AGC did not enter into a noncompete agreement with Baillargeon, and it failed to take the steps courts require for trade secret protection to be awarded. For example, AGC made a trade show PowerPoint presentation to showcase its capabilities to thousands of attendees, which included many competitors. There were no indications that any of the presentation was confidential or secret. No one attending the trade show was required to sign any confidentiality agreement. Color photographs of the rubber injection molding parts and devices were clearly visible during the presentation and customers were given the same presentation on a memory stick with no restrictions on its use. Also, AGC offered facility tours to customers, potential customers and competitors, who visited nearly every room in the facility, including the injection molding department, as well as a viewing of the injection apparatus and the mold that was used for it, while the visitors stood within mere feet of the apparatus. The mold designs were on public display for marketing purposes. Documents and drawings in plain view were not stamped “Confidential Trade Secrets”. No one was told that anything visible on the tour was confidential or secret. There was no controlled or limited disclosure during the tour, no legends of confidentiality on documents, no shielding of processes from plain view, and no segregation of proprietary information.

Consequently, in a March 2011 decision, the state court ruled that AGC failed to preserve the secrecy of its manufacturing processes or pricing and denied any relief under CUTSA. The court granted limited injunctive relief under CUTPA against Baillargeon for unfair or deceptive trade practices based on his theft and misuse of AGC’s property, which the court found had given Twin a minor head start in setting up its rubber injection molding business because it saved time in Twin’s creation of its drawings. There was insufficient evidence to hold Twin in violation of CUTPA. To prevent continuing violations of AGC’s property rights, Baillargeon was enjoined from using or disclosing AGC’s property and confidential and proprietary information, and he was ordered to return to AGC any property that he had taken when he was terminated.

AGC's litigation and bankruptcy confirm how essential it is for a company to take proactive and diligent steps to protect its confidential and proprietary trade secrets by keeping them secret, designating the information as “Confidential” and securing the trade secrets from plain view at the risk of great financial peril or even the company’s survival for failure to do so.
 

A United States Magistrate Judge recently held that a plaintiff had a duty to preserve his Facebook account and that his deletion of it warranted an “adverse inference” jury instruction for failing to preserve it.

In Gatto v. United Air Lines, Inc. and Allied Aviation Services, Inc., the defendants sought discovery related to the plaintiff’s social activities, and made a document request for “documents and information related to social media accounts maintained by Plaintiff.” The parties also discussed the plaintiff’s Facebook account during a settlement conference. Accordingly, when the plaintiff subsequently deactivated his Facebook account, causing it to be permanently deleted by Facebook 14 days later, it led the defendants to request sanctions.

The Court approached the sanctions motion as it would any other involving alleged spoliation of evidence, ultimately holding that: “Plaintiff’s Facebook account was clearly within his control”; it “was relevant to the litigation”; “it is beyond dispute that Plaintiff had a duty to preserve his Facebook account at the time it was deactivated and deleted”; “[e]ven if Plaintiff did not intend to permanently deprive the defendants of the information associated with his Facebook account, there is no dispute that Plaintiff intentionally deactivated the account”; and that the defendants were “prejudiced because they have lost access to evidence that is potentially relevant to Plaintiff’s damages and credibility.” Accordingly, the Court granted the defendants’ request for an “adverse inference” jury instruction due to the plaintiff’s failure to preserve his Facebook account.

With the exponential growth of social media use by employees, employment disputes will increasingly involve social media. This particular case illustrates not only that well-established principles of evidence preservation apply to social media, but that counsel should specifically include social media in discovery requests.
 

On February 20, 2013, the White House published an “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets.” While the Strategy takes a macroeconomic view of, and approach to, the problems of trade secret theft, readers of this blog should consider the possibility that they may have practical experience in the future with one of the Strategy’s particular action items: promoting voluntary best practices by private industry to protect trade secrets.

In the Strategy, while couching its recommendations in the context of protecting the innovation that drives the American economy and supports jobs in the United States, the Obama Administration undertakes to pursue five action items: (1) focus diplomatic efforts to protect trade secrets overseas, (2) promote voluntary best practices by private industry, (3) enhance domestic law enforcement operations, (4) improve domestic legislation, and (5) public awareness and stakeholder outreach.

The second of these action items encourages and promises Administration support for efforts by companies and industry associations to “examine internal operations and policies to determine if current approaches are mitigating the risks and factors associated with trade secret misappropriation committed by corporate and state sponsors.” It also proposes areas that private industries could consider for voluntary best practices, including:

• research and development compartmentalization,
• information security policies,
• physical security policies, and
• human resources policies.

The Strategy notes that the development and adoption of voluntary best practices should be consistent with anti-trust laws, and would be intended only to offer suggestions to assist businesses in safeguarding information, not to establish some sort of minimum standard of protection.

While companies of course will set their own policies and practices with regard to trade secret protection, there may be benefits to participating, for example, in an association’s effort to develop an industry’s best practices. Companies should be on the lookout for such initiatives and consider whether it makes business sense to participate.
 

At the firm’s October 2012 client briefing we discussed the new attitude of the National Labor Relations Board (“NLRB”) and the fact that non-unionized employers were not immune from the provisions of the National Labor Relations Act (“NLRA”). The NLRA has been increasingly applied in non-union workplaces and to handbook policies relating to areas not previously traditionally considered ripe for NLRB consideration, such as at-will employment, social media, intellectual property, confidentiality, contact with the media, and privacy policies. It may then come as little surprise that the NLRB will examine similar provisions to the extent that they are contained in private employment agreements. Most recently, in a NLRB administrative law judge’s decision, provisions contained in a mortgage banker’s employment agreement were found violative of the NLRA. The provisions at issue are fairly typical in employment agreements – confidentiality and proprietary information and non-disparagement. These are the types of provisions commonly used to protect a company’s valuable assets and its reputation.

Not only does this decision, which is discussed in depth in our Advisory, send a message to employers to promptly review and assess their employment agreements and similar contracts containing confidentiality and non-disparagement provisions, it also should lead employers to be extra sensitive to this issue before threatening or filing a lawsuit against former employees. The recent ALJ decision was based on a NLRB charge filed by an employee who had recently been sued by her former employer for violating the no-solicitation/no-contact provisions of her employment agreement. Filing such charges may become yet another tool in the arsenal of defensive litigation tactics considered by former employees. Employers must consider the likelihood of such claims before pulling the trigger on a claim.
 

Trade secret misappropriation cases turn on details. Accordingly, it is always interesting to see the particular details which tilt a court’s decision one way or the other.

In Lincoln Chemical Corp. and Dole v. Dubois Chemicals, Inc. and Galaxy Associates, Inc., Judge Miller of the Northern District of Indiana was faced with a motion for a preliminary injunction in a case involving, among other things, an alleged misappropriation of trade secrets by a former employee, Edward Dole. According to Judge Miller’s decision, when Dole switched employers, he “retained on his personal computer considerable proprietary information” of his former employer. Dole stated that he “retained it simply because [his former employer] never asked for its return or destruction,” and this raised an issue of whether Dole’s continued possession of this information was sufficient to support a misappropriation claim.

On this question, Judge Miller noted that Dole’s employment agreement contained a clause requiring him “to turn over all confidential information (including trade secrets) to his employer when his employment ended.” Because he did not do so, irrespective of whether the former employer ever specifically asked for the information’s return or destruction, Judge Miller held that Dole “misappropriated the information because he possesses it through improper means.”

Judge Miller’s ruling on this issue illustrates that when drafting an employment agreement or assessing the viability of a misappropriation claim, contractual clauses requiring the return of all company property and confidential information at termination should be given serious consideration.
 

A federal judge in Chicago recently wrestled with two issues that we frequently blog about: what constitutes misappropriation of confidential information, and to what extent can a current employee prepare to compete with his employer without breaching his fiduciary duty?

In Chicagoland Aviation, LLC v. Richard R. Todd, et al., flight instructor Richard Todd left his job and started a rival business. Shortly thereafter, Chicagoland Aviation sued him for, among other things, breaching his fiduciary duty by allegedly misappropriating confidential information and starting a competing business while still employed by Chicagoland Aviation. Chicagoland Aviation eventually requested a preliminary injunction, which the court denied.

The court began its analysis of Chicagoland Aviation’s breach of fiduciary duty claim by summarizing the background legal principles: “[g]enerally, employees have a duty not to improperly compete with their employer, solicit the employer’s customers, entice co-workers away from the employer, divert business opportunities, engage in self-dealing, and/or otherwise misappropriate the employer’s property or funds.”

Regarding the purported theft of confidential information, the court concluded that the information at issue was either not confidential or not misappropriated.

First, Chicagoland Aviation alleged that Todd took information about its pricing structure, and based its allegation on Todd’s testimony about a spreadsheet that he created on the date that he terminated his employment with Chicagoland Aviation. However, in light of Todd’s testimony that “he either guessed or looked at websites on the internet” to come up with the numbers on the spreadsheet, the court found the creation of the spreadsheet would not support a misappropriation claim.

Second, Chicagoland Aviation alleged that Todd misappropriated its sales strategy, and as evidence thereof pointed to an e-mail describing Chicagoland Aviation’s sales strategy which Todd received from Chicagoland Aviation’s owner. However, the court held that mere receipt of this e-mail did not indicate actual misappropriation of the sales strategy.

Finally, regarding alleged theft of customer information, Chicagoland Aviation pointed to a list of flying club members that Todd purportedly took. However, the court found that this list was not confidential because the flying club “had public meetings, posted certain members’ photos on [Chicagoland Aviation’s] Facebook page, and its members would exchange contact information.”

As for the premature competition claim, the court likewise concluded that Chicagoland Aviation failed to show a likelihood of success on the merits.

Turning to the specific evidence on this claim, the court held that when Todd discussed the formation of his new business with a co-worker and told him that a “spot [was] available for [him] on [Todd’s] staff at the flight school,” this was not actual competition and therefore was not a breach of fiduciary duty.

Similarly, the court held that Todd’s statement that he was “going to” start a flight school using specific individual’s planes was not evidence that Todd had actually solicited away these individuals as customers.

Here, as in all cases of this sort, the court’s decision was driven by specific facts and circumstances. Nevertheless, the court’s assessment of particular pieces of evidence is noteworthy.

Last week, American Airlines and one of its former employees, Gailen David, entered in to an agreed permanent injunction which prohibits David from disseminating certain confidential, proprietary or trade secret information through any medium.

The agreed injunction stems from a lawsuit filed by American against David in Texas state court. In an amended complaint filed last June, American accused David of various misdeeds on websites run by him, including publishing confidential passenger travel information about certain individuals.

American’s amended complaint included claims against David for Trade Infringement, Conspiracy, and Misappropriation of Trade Secrets. It also included claims against defendants “John Does 1-10” for Breach of the Duty of Loyalty and Breach of Fiduciary Duty for improperly disclosing certain confidential, proprietary and/or internal business information to third parties, including David.

Although the agreed injunction does not include any admission of wrongdoing or liability, it illustrates the types of issues with which employers are grappling in the Internet age, and it highlights the need for updated confidentiality and social media policies.
 

Yesterday, U.S. District Judge Ruben Castillo sentenced a former Motorola software engineer, Hanjuan Jin, to four years in prison for stealing Motorola trade secrets related to proprietary technology. The sentencing brought to a close a series of events worthy of a John Le Carré spy novel, including a random stop of Jin by U.S. Customs and Border officials at Chicago O'Hare International Airport as she attempted to board a flight to China with a one-way ticket. That stop resulted in the discovery that Jin was carrying, among other things, a variety of electronic storage devices, Motorola documents marked as "confidential and proprietary information," and $31,252 in cash.

Ultimately, Jin was charged with three counts of theft of trade secrets and three counts of economic espionage in violation of the Economic Espionage Act, 18 U.S.C. § 1831 et seq. In a 77-page Memorandum Opinion and Order issued on February 8, 2012 following a bench trial, Judge Castillo convicted Jin of three counts of theft of trade secrets, finding, among other things, that she had engaged in a "concerted effort . . .to obtain information she believed would help her in her future job" with Sun Kaisens, a telecommunications company in China that develops telecommunications technology and products for the Chinese military. Judge Castillo acquitted her, however, of the economic espionage counts, holding "that the evidence failed to establish beyond a reasonable doubt that Jin intended or knew that her conduct would benefit the [Peoples Republic of China]."

In a press release issued yesterday, the Acting U.S. Attorney for the Northern District of Illinois stated, "This sentence reinforces the message that federal courts view the theft of trade secrets as a serious crime that warrants significant punishment." He also stated, "We will do everything we can to guard our economic and national security from the theft of American trade secrets, and this case shows that we can work with victim corporations to protect the trade secrets involved."
 

The Georgia Court of Appeals recently ruled that a company failed to present sufficient evidence that its former employee had misappropriated its trade secrets, where the former employee's denials conflicted with circumstantial evidence of misconduct. In this case, Contract Furniture Refinishing & Maintenance Corp. of Georgia d/b/a The Refinishing Touch v. Remanufacturing & Design Group, The Refinishing Touch ("TRT") alleged, among other things, that its former employee Scott Deutsch and his new firm Remanufacturing & Design Group ("RDG") used “several thousand pages” of market and sales recap reports provided to Deutsch during his employment to secure jobs that TRT had previously bid on.

The trial court granted summary judgment in Deutsch’s favor on the trade secret misappropriation claim. On appeal, the court explained that the recap reports consisted of customer and prospect information, along with TRT’s quote amounts. The court stopped short of analyzing whether this information constituted trade secrets, however, and instead determined that TRT had not presented evidence to create a genuine issue of material fact with regard to the misappropriation element of its claim. The court found that TRT only presented circumstantial evidence, which consisted of the timing of when the recap reports were provided to Deutsch compared to when Deutsch and RDG made competitive bids to two customer leads listed in those recap reports, as well as the fact that a flash drive had been connected to Deutsch’s personal and work laptops that were later missing data. Conversely, Deutsch testified unequivocally that he did not use or disclose any trade secrets provided to him by TRT, and presented evidence showing how his new firm could have independently bid on the jobs, which included presenting an email from one of the customer leads to RDG that included a copy of TRT’s preceding quote.

The court stated that “a finding of fact that may be inferred from, but is not demanded by, circumstantial evidence has no probative value against positive and uncontradicted evidence that no such fact exists, provided that the circumstantial evidence may be construed consistently with direct evidence.” The court then ruled that while TRT produced strong circumstantial evidence that Deutsch may have misappropriated or disclosed its alleged trade secrets, the “evidence is also consistent with the direct evidence that Deutsch did not in fact do so. The circumstantial evidence therefore has no probative value, and TRT cannot demonstrate a genuine issue of fact with regard to its misappropriation of trade secrets claim.”
 

The commencement and continued prosecution of a misappropriation of trade secrets action without objective evidence of actual misappropriation can result in the imposition of attorneys’ fees against the plaintiff if it does not prevail on that cause of action.  On April 17, 2012, we blogged about this issue in connection with a malicious prosecution action that was filed against Latham & Watkins after the unsuccessful prosecution of a trade secrets action on behalf of a client.

On July 11, 2012, in SASCO v. Rosendin Electric, Inc., 2012 WL 2826955 (Cal.App. 4 Dist.), the California Court of Appeal, Fourth Appellate District, provided more clarity on this issue and affirmed the trial court’s order awarding defendants almost $485,000 in attorneys’ fees and costs pursuant to California Civil Code § 3426.4 (the Uniform Trade Secrets Act). SASCO sued Rosendin Electric, Inc, another licensed electrical contractor and three individual defendants for misappropriation of trade secrets, among other things. SASCO identified a proprietary computer program to be one of its trade secrets. SASCO also alleged that the individual defendants contacted a third-party that had put out a competitive bid and encouraged it to ignore SASCO’s bid and to award the job to Rosendin. After the parties engaged in what the court described as “fierce discovery battles,” defendants filed a motion for summary judgment and after obtaining a continuance of the hearing to conduct additional discovery, SASCO voluntarily dismissed the action without opposing the motion for summary judgment. Defendants moved for attorneys’ fees.

The trial court accepted for the sake of argument that SASCO’s computer program was a trade secret. The court concluded, however, there was no evidence of misappropriation and that SASCO had sued defendants based on the suspicion that they must have misappropriated trade secrets because the individual defendants went to work for a competitor, which subsequently secured a contract for which both companies were competing. The trial court concluded that plaintiff engaged in bad faith pursuant to Civil Code § 3426.4, which consisted of both objective speciousness and subjective bad faith.

The appellate court affirmed and agreed that the claim was objectively specious because there was no evidence to support the claim. The plaintiff argued it should not be required to show actual evidence of misappropriation because the case was dismissed before trial and defendants allegedly withheld discovery. The plaintiff argued that the trial court should have looked to Code of Civil Procedure section 128.7 (which is comparable to Fed. R. Civ. P. Rule 11) which would preclude a finding of objective speciousness if the factual contentions were “likely to have evidentiary support, or …are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.” The appellate court refused to apply a standard that applied to a general pleading statute.

The appellate court also agreed with the trial court that continuing to prosecute the action without evidence of actual misappropriation constituted subjective bad faith.

Based on this decision, an employer has to be very careful before it commences a misappropriation of trade secrets action -- even if the departing employee was entrusted with trade secrets and that employee went to work for a competitor. If the employer is presented with evidence that no misappropriation occurred and continues to prosecute the case and loses or dismisses the case, the defendant’s application for attorney’s fees may be granted.
 

Co-authored by Matthew H. Sorenson.

One of the most elusive forms of damage that a company may suffer when its trade secrets are misappropriated or its former employees breach their post-employment restrictive covenants is the loss of goodwill. Given its intangible nature, quantifying the dollar amount of the loss of a company’s goodwill can present significant difficulties. Nevertheless, such damages are often very real and very significant. When seeking money damages for lost goodwill, it is essential for businesses to carefully select their supporting evidence and legal arguments. One information technology service provider recently found out the hard way when the Virginia Supreme Court slashed its $14 million verdict by over $11 million based on the company’s failure to present sufficient evidence of the value of its lost goodwill.

The case, 21st Century Systems, Inc. v. Perot Systems Government Services, Inc., Record No. 110114 (June 7, 2012), involved a number of tort and contractual claims brought by Perot Systems Government Services, Inc. (“Perot Systems”) against 21st Century Systems, Inc. (“21SCI”), a competing information technology company, and a group of former Perot Systems employees for allegedly conspiring to steal its trade secrets and millions of dollars of business. Among the damages sought by Perot Systems was the value of its lost goodwill. In attempting to prove the value of its lost goodwill, Perot Systems did not rely on data regarding the value of the business goodwill of comparable businesses that had been sold to other entities – a method approved by the Virginia Supreme Court. Instead, it relied solely on evidence from its recent purchase by Dell, Inc. (“Dell”). This ultimately proved to be a costly mistake.

Before trial, Perot Systems and its publicly traded parent entity, Perot Systems Corp. (“PSC”), were sold to Dell for $3.878 billion. In a publicly filed Form 10-K that discussed the transaction, Dell assigned approximately $1.6 billion in goodwill to Perot Systems. At trial, Perot Systems’ used this $1.6 billion valuation and Perot Systems’ reported annual revenues to show that for each dollar of revenue that Perot Systems received it had $2.57 of goodwill. Using this 1 to 2.57 ratio of revenue to goodwill and evidence that the defendants had succeeded in diverting $1.45 million in revenue from Perot Systems, the valuation expert calculated Perot Systems’ total lost goodwill to be $3,742,843. The jury and trial court accepted this calculation and awarded the full amount to Perot Systems at the close of trial. This damage award was trebled to $11,228,529 under the Virginia Business Conspiracy Statute.

On appeal, the Virginia Supreme Court overturned the jury’s award of lost goodwill damages on the grounds that it was not supported by the evidence. Specifically, the Court held that because Perot Systems’ valuation expert had relied solely on data regarding the actual sale of the company to Dell and had not used any data regarding the sales of comparable businesses, Perot Systems had to demonstrate that its actual sales price reflected a loss of goodwill that had been caused by its former employees and 21SCI. The Virginia Supreme Court concluded that Perot Systems did not meet this burden because it had not presented evidence of a diminution in its fair market value or identifiable assets before it was purchased by Dell or that its sales price to Dell had been adversely affected by the actions of its former employees and 21SCI. To the contrary, the evidence showed that Dell had paid a significant premium to purchase Perot Systems and its parent entity, PSC. Accordingly, the Court found that Perot Systems’ evidence was insufficient as a matter of law to sustain its award of damages for lost business goodwill. However, the Court sustained the trial court’s award of several other categories of damages, including an award of $371,002 in computer forensics damages, which was trebled under the Virginia Business Conspiracy Statute to $1,113,006.

The decision in 21st Century Systems, Inc. demonstrates the importance of using comparable sales data in establishing lost business goodwill. Although a business can attempt to prove lost goodwill by showing a decrease in its fair market value, identifiable assets, or its actual sales price that is attributable to an employee’s breach of a post-employment restrictive covenant or the theft of its confidential information, such evidence can be difficult to come by. Indeed, given the variety of factors that can affect a company’s fair market value, assets and sales price, showing that such changes are attributable to an employee or competitor’s conduct can present a significant evidentiary challenge. Furthermore, even where such evidence is available, it may not reflect the full value of the goodwill that has been lost. Accordingly, when presenting expert testimony on the value of lost business goodwill, companies would be best served by incorporating data regarding the value of business goodwill drawn from sales of comparable companies.
 

In an important recent decision, the Supreme Court of the State of New York, New York County, required plaintiffs asserting a cause of action for misappropriation of trade secrets to identify the trade secrets with particularity before being able to proceed with discovery.

The plaintiffs -- MSCI Inc., Financial Engineering Associates, Inc., RiskMetrics Group, Inc., and RiskMetrics Solutions, Inc. -- offer sophisticated computer software to clients who participate in the global financial market. Plaintiffs’ allegations against their former worker Philip Jacob and his new employer Axioma, Inc. center upon computer source codes and their components and sequencing.

As discovery began, defendants served interrogatories seeking clarification as to what portions of plaintiffs’ source codes are alleged to be stolen trade secrets. At a discovery conference, the Court first allowed plaintiffs to answer such interrogatories by specifying what portions of its source code are not claimed to be trade secrets by providing a list of source code components that (1) are covered by third party licenses, (2) are in the public domain, or (3) otherwise are not claimed by plaintiffs to be trade secrets.

Defendants subsequently argued and persuaded the court that this was insufficient, and that the law requires that a plaintiff identify trade secrets with reasonable particularity early in the case. The court held that only “by distinguishing between the general knowledge in their field and their trade secrets, will the court be capable of setting the parameters of discovery and will defendants be able to prepare their defense.” The court further stated that it would be unfair to allow the plaintiffs to discover the defendants’ trade secrets prior to revealing their own, as this could allow the plaintiffs to tailor their theory of misappropriation to Axioma’s work, or even to misappropriate Axioma’s trade secrets!

Accordingly, the court ordered that the plaintiffs were precluded from seeking further discovery until they supplemented their responses to defendants’ interrogatories.

This decision appears to be the first of its kind in New York state court, but is in line with a trend seen in numerous other states.

The decision also calls to mind the inherent tension in asserting a claim for misappropriation of trade secrets in a publicly filed complaint without actually disclosing the secret information, a tension that often requires very careful drafting by practitioners. Going forward in New York, it appears that even if a trade secret plaintiff need not reveal the secret information in its complaint, it will need to identify such information with specificity shortly afterward (although perhaps not publicly) in order to proceed with discovery.
 

Co-authored by Matthew H. Sorensen.

Social media has become an increasingly important tool for businesses to market their products and services. As the use of social media in business continues to grow, companies will face new challenges with respect to the protection of their confidential information and business goodwill, as several recent federal district court decisions demonstrate.

Christou v. Beatport, LLC (D. Colo. 2012), Ardis Health, LLC v. Nankivell (S.D.N.Y. 2011), and PhoneDog v. Kravitz (N.D. Cal. 2011) each involved former employees who took the login credentials for their employers’ business social media accounts when they left their employment. In each case, the companies alleged that the removal of the login credentials for their social media accounts by their former employees had significant negative consequences on their ability to effectively compete and market their products and services.

Earlier this year, the U.S. District Court for the District of Colorado addressed whether a nightclub owner’s MySpace page and its connections could constitute a protectable trade secret. In Christou v. Beatport, LLC, Bradley Roulier, a former partner in a business that ran two Denver nightclubs kept the login credentials for the clubs’ MySpace pages when he left the partnership to start his own competing nightclub. According to the complaint, the nightclubs’ MySpace pages each had over 10,000 “friends.” After leaving to start his own competing club, Mr. Roulier used the login credentials that he had taken to post updates to his former partner’s MySpace pages promoting his new night club. His former partner then sued him for misappropriation of its trade secrets – namely the login credentials for its MySpace pages and the “friend” connections for those pages. On Mr. Roulier’s motion to dismiss, the court found that the MySpace login credentials and the “friend” connections could constitute protectable trade secrets. The court concluded that the MySpace pages were password protected, that the “friend” connections for the clubs’ MySpace pages were more than just lists of potential customers, they also provided personal information about the “friends” and their preferences, and the clubs’ lists of “friends” could not be duplicated without a substantial amount of effort and expense.

In a similar case, Ardis Health, a former employee effectively froze her former employer out of its business social media websites by taking the login credentials for the accounts and refusing to return them to the former employer. The employee had formerly been responsible for creating and updating the company’s social media websites and was in sole possession of the login credentials for those websites at the time her employment was terminated. Accordingly, when she refused to return the login credentials after her termination, the employer could no longer access or update its websites. The employer was ultimately able to obtain a preliminary injunction requiring the former employee to return the login credentials for its social media websites based on the theory that the former employee’s unauthorized retention of that information constituted conversion. In finding that the company owned the rights to the login credentials for its social media sites, the court noted that the former employee had entered an agreement in which she had agreed that any work she created or developed during her employment would be the property of the company.

Finally, in PhoneDog, a former employee who had been responsible for establishing and operating a Twitter account for his employer that was designed to increase traffic to his employer’s website kept the login credentials for the account after he terminated his employment with the company, renamed the account, and kept its Twitter following. PhoneDog alleged its Twitter following was the equivalent of a proprietary customer list. PhoneDog also alleged that, by taking the account, the employee effectively decreased the number of visitors to the company’s website and thereby reduced the number of advertisers who were willing to purchase space on its website. On the former employee’s motion to dismiss, the U.S. District Court for the Northern District of California held that the Twitter account, its login credentials, and its followers could potentially constitute protectable trade secrets and that the unauthorized taking of the account and its login credentials constituted misappropriation.

It should be noted that the courts in both PhoneDog and Christou did not find that the plaintiffs had established that their social media accounts were trade secrets. Rather, the courts simply held that they had alleged sufficient facts to state a claim that those accounts were trade secrets. The question of whether the employers will be able to prove the facts necessary to prevail on their claims was left open and both plaintiffs may very well encounter difficulties in proving the facts necessary to prevail on their trade secrets claims later in their respective cases.

These cases demonstrate the importance of careful planning to protect a company’s social media presence and its business connections. Employers should ensure that they maintain a log of their social media account login credentials and that the log is appropriately updated. Further, companies are well advised to require employees who establish and maintain such accounts on behalf of the company to enter agreements that provide that the accounts and their login credentials are the sole property of the company. Departing employees should also be interviewed in connection with their exit to ensure that all company social media login credentials to which they had access have been returned. Finally, in the event that an employee takes the login credentials for the employer’s social media accounts when he or she leaves the company, it is essential for the employer to take prompt action to recover the information. Delay can result in the loss of legal protections for the accounts and any connections that they hold
 

Co-authored by Ted Gehring.

On April 6, 2012, Latham & Watkins was sued for malicious prosecution in Los Angeles Superior Court. The suit alleges 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, which was less than the $2,399,650.55 in attorney’s fees that were requested. The trial court’s decision was affirmed on appeal. FLIR Systems, Inc. v. William Parrish, et al., 174 Cal.App.4th 1270 (2009).

The trial court and appellate court decisions (both of which are attached to the Complaint) make fascinating reading for trade secret practitioners – particularly those who practice in California.

The trial court based its bad faith finding on, in part, its conclusion that the lawsuit was pursued based on an “inevitable disclosure” theory and that doctrine is not recognized in California. FLIR argued that it was not proceeding on an inevitable disclosure theory; rather, it contended it was alleging “threatened misappropriation” under the Uniform Trade Secrets Act (California Civil Code § 3426.2(a)). The trial court rejected this argument, concluding threatened misappropriation is not a substitute for an inevitable disclosure theory, and that since FLIR had no evidence that indicated imminent trade secret misuse, there was no threatened misappropriation.

In finding that FLIR filed and prosecuted the action in bad faith, the court pointed out, among other things, that a third party ended business negotiations with Parrish and Fitzgibbons because the lawsuit had been filed, that they did not start their new business venture, and that at the time of trail had no plans to do so because that deal with the third party fell through. The court concluded that continuing the lawsuit for 18 months through trial effectively disrupted Parrish and Fitzgibbons’ plans to start a new company.

The appellate court also agreed with the trial court that FLIR engaged in bad faith settlement tactics by imposing unnecessary settlement conditions. In particular, FLIR responded to one settlement offer by demanding $75,000.00, a non-competition agreement, and an agreement that Parrish and Fitzgibbons would not hire FLIR’s employees or challenge certain patent applications. The court found that the settlement condition that Parrish and Fitzgibbons not work with certain third parties was an unlawful trade restraint, and that the condition that they not hire appellant’s employees likewise violated public policy, as did the demand that Parrish not communicate relevant information to the federal government about the patent application.

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).

In California, malicious prosecution actions are often “SLAPPed” early in the case. The SLAPP statute is designed to prevent lawsuits brought primarily to chill a valid exercise of constitutional rights of freedom of speech and petition, and FLIR’s original lawsuit is such a right. If Latham files a SLAPP motion, Parrish and Fitzgibbons would have to establish that there is a probability that they will prevail on the claim, and if Latham prevails, it would be entitled to its attorneys’ fees.

The initiation of a trade secret/unfair competition action against a start-up business can crush that business even if the action lacks merit. Here, it appears as if FLIR’s lawsuit was successful in preventing Parrish and Fitzgibbons from establishing their new business venture even though FLIR ultimately lost the case. In view of the two malicious prosecution actions and the strong language in trial court and appellate court decisions regarding FLIR’s motives and tactics, it remains to be seen whether FLIR’s prosecution of the underlying action was a good or bad business decision.
 

The Supreme Court of Connecticut has ruled that a public agency, the University of Connecticut, can create and maintain trade secrets that are exempt from disclosure under the state’s Freedom of Information Act (“FOIA”). The trade secrets are databases of customer lists identifying the persons who paid to attend, donated to, inquired about, or participated in educational, cultural or athletic activities at the University, such as season ticket holders, donors and program subscribers.

In University of Connecticut v. Freedom of Information Commission, 303 Conn. 724, __A. 3d__ (Feb. 21, 2012), the Court rejected the State Freedom of Information Commission’s decision that the University’s databases could not be “trade secrets” under the FOIA disclosure exemption, based on the Commission’s conclusion that the University was a public entity that did not engage in “trade.” The Court ruled that a public agency that creates and maintains trade secret information is entitled to the same protection that would constitute a protected trade secret if the information was created by a private entity. The Court examined the nature of the information in the databases, the purposes for which the information was used, potential competitors and the economic benefit that the information might confer on competitors.

The Court concluded that the University is a public agency under the FOIA and required under the act to disclose public records, with certain exceptions, such as for trade secrets, including customer lists, that: (i) derive independent economic value, actual or potential, from not being generally known to and not readily ascertainable by proper means by other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain secrecy.

The Court reasoned that the FOIA definition focuses exclusively on the nature and accessibility of the information, not the status or characteristics of the entity creating and maintaining that information. Also, the definition of a “person” protected by the Connecticut Uniform Trade Secrets Act includes “government, governmental subdivision or agency or any other legal or commercial entity.” There is no requirement that the entity must be engaged in a “trade.” The Court found that the University spends considerable resources of the state, on its own or in partnership with others, for research and development of intellectual property and takes appropriate steps to maintain its secrecy. The Court concluded that the state’s ability to recoup costs or reap the financial benefits for those efforts would be undermined if anyone could obtain the information by a simple FOIA request. Therefore, the information met the statutory criteria for a trade secret exempt from the FOIA request.

Consequently, the Court’s decision allows a public agency, such as a public university, the same rights as a private person or entity to profit from research, investment and development of trade secrets that otherwise meet the requirements of the Connecticut Uniform Trade Secrets Act.
 

Complimentary Briefing/Webinar - Protect Trade Secrets and Confidential Information in a Social Media Workplace

April 18, 2012 – EpsteinBeckerGreen Washington, DC Office
9:00 AM - 10:30 AM EDT - Briefing and Q&A
(Webinar to start at 9:00 AM EDT)

In a world where employers must store confidential business-sensitive data in multiple locations and the number of devices through which such information can be copied and transferred is ever increasing, it is vital for companies to take appropriate steps to safeguard their confidential information from misappropriation. This is particularly important in the current economic climate, where employees have become increasingly mobile. Additionally, the prevalence of the use of social media by current and former employees has increased the risks that valuable confidential business information may lose its protected status or fall into the hands of a competitor through improper disclosure.

Click here to learn more about the event and to register.

In a decision recently issued by the Utah Court of Appeals, CDC Restoration & Construction, LC v. Tradesmen Contractors, LLC et al., the court broadly interpreted the preemption clause in the Uniform Trade Secrets Act (“UTSA”) to hold that it “preempts claims based on the unauthorized use of information, irrespective of whether that information meets the statutory definition of a trade secret.”

With various modifications, the UTSA has been adopted by all but a handful of states. One of its provisions expressly preempts conflicting tort and other common law or statutory civil causes of action “for misappropriation of a trade secret.” (The preemption provision does not, however, preempt contractual or criminal remedies, regardless of whether they are based upon misappropriation of a trade secret, or other civil remedies not based upon misappropriation of a trade secret.)

Some courts have interpreted the UTSA’s preemption clause narrowly, holding that it only preempts claims based on information that meets the statutory definition of a trade secret. Their rationale is that if the UTSA was held to preempt claims based on theft of information that is not a statutory trade secret, a wronged plaintiff might be left without any remedy.

Other courts (a majority that have addressed the issue, according to the opinion in CDC Restoration & Construction) take a broader view of the UTSA’s preemption clause, and hold that it preempts any claim based on the unauthorized use of information – regardless of whether that information meets the statutory definition of a trade secret, and regardless of whether such a broad reading might deprive a plaintiff of a remedy for the misappropriation of information which does not constitute a statutory trade secret. As explained in CDC Restoration & Construction, “[a] contrary approach would render the statutory preemption provision effectively meaningless, leaving prior law untouched and converting an exclusive remedy into just another basis for recovery” (internal quotations omitted).

Employers should draw two lessons from this case. First, when prosecuting or defending misappropriation of trade secrets claims, employers need to be aware of the different interpretations of the UTSA’s preemption provision in different states; a valid claim in one state may be preempted in another. Second, employers should protect themselves against broad UTSA preemption by having employees sign contractual provisions protecting their confidential information – regardless of whether such information constitutes a “trade secret” for purposes of the UTSA. After all, the UTSA does not preempt contractual remedies.
 

It’s no secret that restrictive covenant and trade secrets claims are sometimes used as leverage in business disputes. However, the recent case of Sean Morrison Entertainment v. Thompson, et al. (pending in Chicago federal court as Case No. 11-cv-2462) serves as a reminder that the need for leverage does not obviate the need for a good faith basis for any claim that is filed.

Apparently, the dispute in that case began when a TV production company called Sean Morrison Entertainment (“SME”) hired a number of mixed martial arts fighters to participate in a reality TV show. After the show was filmed, the fighters sued SME in Wisconsin claiming that they had not been paid for their work. SME responded by filing a separate suit in Chicago federal court against both the fighters and the lawyers that represented them in the Wisconsin case, accusing them of stealing SME’s trade secrets.

The fighters recently filed a motion asking the Chicago federal court to sanction SME under Rule 11 for filing frivolous claims in a jurisdiction with no connection to the dispute. The Motion argued that SME’s claims made no sense because “[t]he defendants are all professional MMA fighters; they are not owners or producers of reality based shows … Thus, defendants would have neither any reason, nor would they realize any benefit [from using] this … show in their business as professional fighters.” Additionally, the Motion argued that – irrespective of the bases of the underlying claims – the Court has no jurisdiction over this case because the defendants have zero connection to the state of Illinois: “Any competent first year law student who has taken Civil Procedure would be familiar with the case of International Shoe v. Washington … which mandates that … a defendant must have sufficient minimum contacts with a forum state to justify the imposition of personal jurisdiction against him. Either plaintiff’s counsel lacks the knowledge of a first-year law student, or more likely, its Illinois attorney chose to ignore the law and decided to file in Illinois anyways, because as an Illinois based LLC, this jurisdiction would be most convenient for plaintiff and its attorney. In either event, plaintiff’s counsel certainly made no effort to ascertain whether there was any legitimate basis to sustain personal jurisdiction here, and should be sanctioned accordingly.”

No one wants to be the recipient of a Rule 11 letter or motion. As a result, this case serves as a cautionary tale. Even in situations involving restrictive covenants or trade secrets where emotions often run high, lawyers and companies must critically evaluate the bases for their claims so that they can justify those claims to the Court.

On Monday, January 9, 2012, Governor Chris Christie signed into the law the New Jersey Trade Secrets Act (NJTSA, http://www.njleg.state.nj.us/2010/Bills/S2500/2456_R1.HTM), the Garden State’s version of the Uniform Trade Secrets Act (UTSA). New Jersey, thus, becomes the forty-seventh state to adopt some form of UTSA. While the New Jersey Act will promote some level of uniformity in the approach to trade secrets issues, New Jersey specific changes to the uniform act promise that this statute will build upon, rather than depart from, New Jersey’s common law tradition of protection of trade secrets and other valuable business information.

Some New Jersey specific points in the legislation:

• The definition of “trade secret” under NJTSA is broader than under UTSA, as NJTSA incorporates the broader protections of New Jersey common law principles;

• NJTSA supplements, rather than displaces, New Jersey common law, as the statute states that the rights, remedies, and prohibitions under NJTSA “are in addition to and cumulative of any other rights, remedies, or prohibitions provided under common law or statutory law of this State”;

• NJTSA prohibits acquisitions of the trade secrets of another by “improper means,” and contains definitions of that term and “proper means” not found in UTSA;

• NJTSA makes mere or threatened acquisition by improper means of another’s trade secret actionable, and enjoinable, even if there is no concomitant likelihood of disclosure to or use by third party.

These NJTSA-specific provisions combine with UTSA’s allowing for recovery of attorneys’ fees and punitive damages to provide the holders of trade secrets a powerful new tool in New Jersey. Those who helped frame, over a multi-year time period, the bill as adopted in New Jersey included its sponsors, employer groups, and the New Jersey Law Revision Commission and its legal advisors, including the author of this post.
 

Co-authored by Viktoria Lovei.

The U.S. Court of Appeals for the Eighth Circuit recently held that compilations containing only minimal secret information nevertheless qualified for trade secret protection because the substantial investment involved in preparing them gave their owner a competitive advantage and because the owner undertook reasonable efforts to maintain their secrecy by labeling them with a proprietary legend and only distributing them to parties which signed a confidentiality agreement. AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corporation, Case No. 10-3444 (8th Cir. Dec. 13, 2011).

The case concerned FAA approved procedures developed by Rolls-Royce for the overhaul and repair of its helicopter engines. The procedures, including techniques and material specifications, were included in Distributor Overhaul Information Letters (“DOILs”) which, starting in 1994, were provided by Rolls-Royce exclusively to its Authorized Maintenance Centers (“AMCs”). While access to pre-1994 DOILs was not tightly controlled, later versions were issued subject to confidentiality agreements with AMCs and contained a proprietary rights legend. AvidAir, a company in the overhaul business, was not an AMC but nonetheless obtained updated DOILs which it was not authorized to receive.

The parties filed separate lawsuits against each other which were eventually consolidated. Among the issues raised were whether the DOILs are trade secrets and whether Rolls-Royce’s efforts to protect the DOILs constituted a “sham lawsuit” in violation of antitrust law and tortious interference.

The Eighth Circuit, applying the Uniform Trade Secrets Acts of Indiana and Missouri, held that AvidAir had misappropriated Rolls-Royce’s trade secrets. The Court rejected AvidAir’s argument that the revised DOILs did not qualify for trade secret protection because they contained no engineering advances and only a trivial amount of information that was not readily ascertainable from prior public versions. The Court explained that compilations are valuable if they afford a “competitive advantage” and are “not readily ascertainable,” even if “some or even most of the information [is] publicly available.” “Unlike patent law, which predicates protection on novelty and nonobviousness, trade secret laws are meant to govern commercial ethics” and prevent valuable information “from being misappropriated despite reasonable efforts to keep it secret.”

The Eighth Circuit found that the DOILs were trade secrets because they had value that resulted from Rolls-Royce’s “own research and testing” which allowed Avid Air to avoid the “burdensome expense of reverse engineering the updated specifications.” The Court further noted that AvidAir’s repeated attempts to obtain the information “without Rolls-Royce’s approval belies its claim that the information in the documents was readily ascertainable or not independently valuable.” In addition, the Court held that the documents qualified for trade secret protection because Rolls-Royce had undertaken reasonable efforts, which do not need to be “overly extravagant,” to maintain their secrecy by labeling them with a proprietary legend and only distributing them to parties which had signed a confidentiality agreement. The Court concluded that AvidAir’s unauthorized use of the documents constituted misappropriation and affirmed an award of damages and injunctive relief.

Having found in favor of Rolls-Royce on the issue of whether the DOILs were trade secrets, the Court held that AvidAir had no claim for tortious interference or violation of anti-trust law stemming from Rolls-Royce’s efforts to protect the confidentiality of the DOILs.
 

In Sybase, Inc. v. Superior Court of Alameda County, No. A132541, 2011 WL 5117117 (2011), the Court of Appeal of the State of California First Appellate District found, in an unpublished opinion, that the trial court abused its discretion when it ordered the production of a trade secret source code. The court found that the real party in interest did not meet the evidentiary burden imposed by the California Supreme Court in Bridgestone/Firestone, Inc. v. Superior Court, 7 Cal.App. 4th 1384 (1992) (“Bridgestone”) which set forth the standards governing whether a trade secret must be disclosed in litigation.

Plaintiff in the underlying action, Sybase, Inc. (“Sybase”), a developer of data management software, sued ANTs Software, Inc. (“ANTs”) for, among other things, breach of a written contract and unfair competition arising out of the alleged breach of an employee non-solicit provision.

Sybase sought damages based, in part, on the reduced functionality of its product due to the departure of the key engineer (Mathew) who was solicited. Sybase claimed that because of the engineer’s departure it would never be able to release the product it originally intended to develop and, therefore, it developed a different product (code named “Aries”), which it asserted was much less functional and drew less customer interest.

ANTs sought disclosure of the Aries source code, which the parties agreed was a trade secret, Sybase objected and ANTs moved to compel, claiming that it needed the Aries source code to defend against Sybase’s claims. ANTs supported its motion with, among other things, excerpts from the deposition transcripts of two Sybase engineers, which testimony indicated that certain integration issues were unrelated to Mathew’s departure. Sybase argued, in part, that it needed to examine the source code to determine whether the integration failure issues had anything to do with Mathew’s departure. The trial court issued an order compelling the production of the Aries source code, finding that ANTs could not adequately defend the case without access to the source code. The court subsequently entered a protective order, which set forth specific procedures to protect the source code.

Sybase filed a petition for writ of mandate with the Court of Appeal, which found that ANTs had not met the particularized showing required by Bridgestone. The court noted that in Bridgestone expert testimony showed a review of the trade secret formulas at issue would be “helpful” to the defense of the action, but the expert did not describe with precision how and why the formulas were a “predicate” to his ability to reach conclusions and disclosure was ultimately denied. The Court of Appeal found that ANTs likewise failed to establish with sufficient particularity that the disclosure of the trade secret was necessary for a fair resolution of the action.

 ANTs contended the source code was necessary to determine why its product was not integrated. The court rejected this argument because ANTs failed to demonstrate the source code for Aries would in fact provide the information it sought and because ANTs’ own evidence showed it would be able to obtain deposition testimony that addressed this issue.

The court also found that ANTs did not present sufficient evidence to show that the Aries source code would reflect the extent to which it incorporates or was influenced by another software product, and suggested that that expert testimony could have been submitted to establish that threshold question.

Finally, the court rejected ANTs’ theory that it needed to examine the Aries source code to refute or evaluate Sybase’s claim that the product it had ultimately brought to the market lacked the robust features and was less functional than an integrated product would have been. The court found that ANTs did not have to examine the product’s source code in order to defend against the allegation that the product itself was less functional and that an expert could reach any necessary conclusions about the product’s functionality by examining the product instead of the source code.

Importantly, the court declined ANTs’ request to remand to the trial court with directions, which would have allowed it to present specific expert declaration evidence to establish why the source code was necessary to its defense. The court stated that existing law reasonably identified the applicable standards and it would not grant “a second bite at the apple.”

The take away here is that before a litigant moves to compel trade secret information which it deems critical to its prosecution or defense of a claim, it must fully develop the trial court record and present particularized evidence to establish why the information is relevant and necessary. If it does not, it may not get a second opportunity to do so.
 

Co-authored by Viktoria Lovei.

The Supreme Court of Kansas recently issued an opinion in Wolfe Electric, Inc. v. Duckworth and Global Cooking Systems, LLC, No. 99,536 (Ka. Oct. 21, 2011), a trade secret misappropriation and restrictive covenant case brought by a manufacturer of conveyor pizza ovens, Wolfe Electric, against its former president, Duckworth, and his new conveyor pizza oven company, Global Cooking Systems. At trial, the jury had found in favor of Wolfe Electric on all causes of action, including breach of contract and misappropriation of trade secrets in violation of the Kansas Uniform Trade Secrets Act (“KUTSA”), and awarded it damages in a variety of categories. The defendants appealed the jury verdict on numerous grounds and the Supreme Court reversed the jury verdict and remanded the case back to the trial court. While there were numerous issues before the Supreme Court, the court’s reversal was based on its finding that multiple jury instructions were erroneous. In particular, the Supreme Court held that the jury instructions did not properly conform to KUTSA by allowing defendants to be held liable for misappropriating confidential information when KUTSA only prohibits the misappropriation of trade secrets. The court found that the trial court also erred by providing various instructions which allowed the jury to find defendants liable for actions (e.g., merely forming a competitive business) which were not prohibited by the narrow restrictive covenants in Duckworth’s employment contract. In that regard, the Supreme Court also held that because the interpretation of a contract is a question of law for the court to decide, the trial court erred by allowing the jury to interpret Duckworth’s employment contract.

While not presenting any new substantive trade secret or non-compete issues, the decision reaffirms that erroneous jury instructions are ripe grounds for appeal and potentially reversal and should therefore be scrutinized closely to ensure that they accurately state the law.

Co-authored by Viktoria Lovei.

Following up on a recent post, U.S. v. Pu presents another instance of a trade secret theft case with an international component that the federal authorities have decided to prosecute. Yihao Pu, a former quantitative financial engineer for Citadel LLC, was arrested last Wednesday for allegedly stealing proprietary information related to the Chicago-based company’s trading system as part of a plan to launch his own hedge fund in China. After filing its own civil suit against Pu on August 29, 2011 and obtaining a temporary restraining order, Citadel brought the matter to the federal authorities. In this instance, the company chose both to take rapid action on its own to protect its trade secrets as well as to refer the matter to federal law enforcement authorities. The civil case is Citadel LLC v. Yihao Ben Pu, 11CH30493, Cook County, Illinois and the federal case is U.S. v. Pu in the Northern District of Illinois.

* Co-authored by Viktoria Lovei.

As we have noted in prior blog posts, alleged thefts of trade secrets are generally handled through the civil court system, and rarely result in criminal prosecution. Nevertheless, where there is an international component to the case or where the magnitude of the alleged theft is particularly significant, the prosecuting authorities will step in, as recently happened in Chicago.

Last week, Chunlai Yang, a former senior software engineer for Chicago-based CME Group, Inc., was indicted in federal court in Chicago and charged with two counts of theft of trade secrets. In the indictment, the government alleges that Yang stole the global exchange operator’s proprietary source code while pursuing, and in furtherance of, business plans to improve a chemical electronic trading exchange in China. Each count against Yang carries a maximum penalty of 10 years in prison and a $250,000 fine. The government also seeks forfeiture of computers and equipment allegedly used by Yang as well as any property or proceeds derived from his alleged criminal actions. Yang pled not guilty earlier this week.

In a press release, U.S. Attorney Patrick J. Fitzgerald stated: “This case is an excellent example of how law enforcement and corporations can work together to protect trade secrets. CME Group brought this matter to the attention of federal authorities and fully cooperated with the investigation. Economic espionage is a crime that effects [sic] both the interests of corporations and our national interest in protecting intellectual property. We will continue to working [sic] collaboratively with the private sector to investigate and prosecute trade secret theft.”

Notwithstanding the government’s willingness to step in to protect trade secrets in appropriate cases, private companies face a dilemma when deciding whether to bring in the government. On the one hand, government prosecution is much cheaper than civil litigation and such prosecutions send a strong message. On the other hand, the company loses control of the case when the government takes over. With that loss of control, the company also loses control over the information and the true trade secret nature of it comes under heightened scrutiny -- and not necessarily in a closed courtroom.

The national law firm of EpsteinBeckerGreen, in conjunction with the Practical Law Company, recently wrote and published a statewide guide on the trade secrets laws of Connecticut.

“Trade Secret Laws: Connecticut” is written by David S. Poppick of EpsteinBeckerGreen in a “question and answer” format, addressing trade secret and confidentiality laws affecting employers and employees. The focus is on the legal requirements related to protecting trade secrets and confidential information.

“Trade Secret Laws: Connecticut” is the latest in a line of similar guides which EpsteinBeckerGreen and the Practical Law Company have published, regarding non-compete laws of Illinois, Massachusetts, New Jersey and Connecticut, and trade secrets laws of the District of Columbia, Illinois, Massachusetts, and New Jersey. See our prior posts here and here regarding those guides.
 

Vienna Beef, the official hot dog of the Chicago Cubs, recently struck out in its effort to obtain a temporary restraining order against hot dog rival Red Hot Chicago, Inc. and the grandson of one of the founders of Vienna Beef, Scott D. Ladany.

Among other beefs in its federal court lawsuit, Vienna Beef accused the defendants of misappropriating trade secrets by using Vienna Beef recipes. As evidence of misappropriation, Vienna Beef pointed to Red Hot Chicago advertising material which made reference to using “family recipes” – that is, recipes now owned by Vienna Beef, rather than the defendants.

In response to Vienna Beef’s motion for a temporary restraining order to halt such alleged trade secret misappropriation, Ladany submitted an affidavit stating that Red Hot Chicago does not use the Vienna Beef recipe developed by his grandfather and that Red Hot Chicago’s recipe was in fact independently developed.

Based on this affidavit, the court held that, notwithstanding Red Hot Chicago’s advertising, “Vienna Beef has shown no evidence that the recipes were used in [Red Hot Chicago’s] business and therefore cannot show that it is likely to succeed on the merits of this claim.” Accordingly, injunctive relief was not appropriate on this claim.

The court’s ruling does not mean that Vienna Beef lacks a valid trade secrets claim or that it won’t be able to eventually prove it. Rather, it merely illustrates the challenge of obtaining injunctive relief with a limited evidentiary record, particularly where there are disputed issues of fact.
 

Last year, the Gonzaga Law Review published an exhaustive study of federal court trade secret litigation. This week, it published a companion study of state appellate court decisions involving trade secrets during the period between 1995 and 2009.

Among the state study’s more interesting findings are these:

• “In the vast majority of trade secret cases, the alleged misappropriator was someone the trade secret owner knew. Specifically, the alleged misappropriator was an employee or a business partner 93% of the time in this state study.”
   
• “both the state and federal studies confirm that confidentiality agreements with employees and business partners are the most important factors” when courts decide whether a trade secret owner took reasonable measures to protect the purported trade secrets.
   
• “Of the varied subject matter that can qualify as a trade secret, two categories comprise the vast majority (94%) of trade secrets litigated in state courts: internal business trade secrets (i.e., customer lists and internal business information) and technical trade secrets (i.e., formulas, technical information, and software or computer programs). Internal business trade secrets were litigated in 70% of state cases, and technical trade secrets were litigated in 36%.”
   
• “About half of all state appellate cases are heard in only five states: California (16%), Texas (11%), Ohio (10%), New York (6%), and Georgia (6%).” 
   
• “State courts appear to be a tougher venue for trade secret owners who are suing business partners than for those suing employees – trade secret owners won 42% of the time on appeal when the owner sued an employee, but only 34% when the owner sued a business partner.”

The study is well worth reading for anyone who follows this area of the law.
 

Please join me and other attorneys from my firm, EpsteinBeckerGreen, as we present a full-day program covering labor and employment law topics that have increasingly impacted employers over the past two years. In addition, we will offer an outlook of what we should expect in the coming two years. Our keynote speaker is Darrel Thompson, Senior Advisor to Senate Majority Harry Reid, who will offer comments concerning the agenda of the 112th Congress. We are particularly pleased that Norah O'Donnell, MSNBC Chief Washington Correspondent, is attending the event as our guest luncheon speaker.

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Last September, we wrote about David Yen Lee, a former Technical Director for a painting and coating company who pled guilty to downloading trade secrets from a secure computer system and transferring them to external thumb drives with the intention of using the trade secrets for the benefit of another.

Proving once again that crime does not pay, last week Lee was sentenced to 15 months in federal prison to be followed by three years of supervised release. As a condition of his supervised release, he is also barred from working in the paint industry.
 

The Iowa Court of Appeals recently affirmed a jury’s conclusion that detailed information about insurance policy holders was a protected trade secret. Monona County Mutual Insurance Association v. The Hoffman Agency, Inc., Case No. 0-640/10-0136 (Iowa Ct. App. Nov. 24, 2010). The customer information at issue, which was kept in a vault to which access was very limited and which was not shared with the public, included customer names, the type of insurance coverage held by each customer, policy expiration dates and the premiums paid for such policies. This information is used by insurance agents to contact customers before their policies have expired “to see if the customer’s needs have changed and to ensure the customer’s continued business.” An expert witness testified that this information “went to the heart of a business” and that if a competitor received such information, “business would essentially be handed to the competitor on a plate.” Although the defendant claimed that this information “was readily available to it” and therefore not a trade secret, the Court rejected that argument, explaining that it was unclear how the defendant “would know who to contact and when, without the information contained on the list.”

While this decision does not break new legal ground, it nevertheless illustrates the significance of customer information in the insurance industry and the need to take appropriate steps to maintain its secrecy.
 

* Co-Authored by Christie O. Tate.

When drafting employee confidentiality agreements, there is a tendency to think that no restriction can be too tight. However, a recent decision by the Illinois Appellate Court, The Town of Cicero v. Wayne A. Johnson, held that a confidentiality provision in a separation agreement was so onerous that the entire provision was unenforceable.

Wayne A. Johnson served as the Inspector General and Superintendent of Police for the Town of Cicero, Illinois from February 2003 to April 2005. On April 12, 2005, Johnson and Cicero entered into a “Confidential Severance Agreement and General Release,” which was drafted by a Cicero attorney. Under the confidentiality provision of that agreement, Johnson agreed that, in addition to keeping the terms of the agreement confidential, “neither he nor his agents will disclose anything relating to his employment” to Cicero’s “remaining employees, former or prospective employees, people doing business with [Cicero], and to the media” (emphasis added).

After Johnson later made public statements to the media regarding his employment with Cicero, Cicero sued him for breaching the confidentiality provision of the agreement. Johnson defended himself by asserting that the agreement was so overbroad as to be unenforceable.

The court sided with Johnson, holding that while Cicero was free to enjoin Johnson from disclosing the terms of the agreement, Cicero could not prevent Johnson from disclosing “anything relating to his employment.” According to the court, such a broad prohibition was harmful to the public, which is entitled to hear from a public official who was charged with investigating allegations of corruption within Cicero’s police community during his tenure with Cicero. But even if Johnson was not a public official, the court found that the provision would cause him undue hardship during his future job-seeking efforts since he would have to be sure none of his conversations about his former position with Cicero included any former Cicero employees, prospective Cicero employees, “people doing business with” Cicero, or any members of the media.

Moreover, the court also found that Cicero had imposed a greater-than-necessary restriction to protect its legitimate interests. It would have been sufficient to require Johnson to keep the terms of the agreement confidential.

Thus, Cicero’s failure to narrowly tailor the confidentiality clause was fatal, as the court found it was overbroad and therefore unenforceable in all respects.
 

Co-authored by Christie O. Tate.

In the latest example of a significant international trade secret theft resulting in a federal criminal prosecution, chemist David Yen Lee recently pleaded guilty in federal court in Chicago to “knowingly and without authorization” possessing one or more trade secrets of his former employer Valspar Corporation (“Valspar”) with intent to convert them “to the economic benefit of someone other than the owner.” Valspar is an international company with offices in Illinois and elsewhere that manufactures and sells paint and coating products in the United States and internationally. Lee worked for Valspar as a Technical Director from approximately 2006 until March 2009, when he departed for Nippon Paint (“Nippon”), a Valspar competitor.

According to his plea agreement, beginning in September 2008 and continuing through February 2009, Lee discussed possible employment with Nippon. On February 27, 2009, Lee accepted an employment offer from Nippon to serve as the Vice-President of Technology and administrator of research and development in Nippon’s Shanghai, PRC offices. Lee resigned from Valspar on March 16, 2009, and prepared to relocate to Shanghai.

As a Technical Director at Valspar, Lee had access to Valspar’s secured internal computer network, including access to trade secrets in the form of proprietary chemical formulas, paint properties calculations, and emerging research and development information. According to his plea agreement, during the period from November 2008 through March 2009, Lee downloaded trade secrets from Valspar’s secured computer system and transferred electronic files to external thumb drives with the intention of using the trade secrets for the benefit of another. In the plea agreement, the parties stipulated that the misappropriated trade secrets were worth between $7 million and $20 million.

Lee now faces up to 10 years in prison.

While an old rule of thumb in the trade secrets arena was that trade secret misappropriation was a civil matter in which prosecuting authorities did not want to become involved, this case is the latest of several high profile criminal prosecutions resulting from trade secrets misappropriation. Although each case is different, common factors which seem to draw prosecutorial attention are the value of the trade secrets at issue and whether there is an international aspect to the misappropriation.
 

A July 27, 2010 decision by the United States Court of Appeals for the Third Circuit, in Bimbo Bakeries USA, Inc. v. Botticella, No. 10-1510, upheld an injunction preventing a senior executive from commencing employment at Hostess Brands, Inc., a bakery rival to the plaintiff Bimbo. The decision is notable in that the Court enjoined Mr. Botticella’s employment, in the absence of any non-competition agreement, on the basis that there was a “substantial likelihood,” but not an “inevitability,” that Mr. Botticella would disclose or use Bimbo’s trade secrets in the course of his planned employment at Hostess.

Mr. Botticella was employed at Bimbo from 2001 through January 13, 2010 as its Vice President of Operations for California, and he signed a “Confidentiality, Non-Solicitation and Invention Assignment Agreement” with Bimbo on March 13, 2009. As one of Bimbo’s senior executives, Mr. Botticella had access to a broad range of confidential information about Bimbo’s products and business strategy. Notably, Mr. Botticella was one of only seven people to possess all of the knowledge necessary to replicate independently Bimbo’s popular line of Thomas’ English Muffins.

The Third Circuit affirmed the District Court’s holding that Bimbo was likely to prevail on the merits of its claim of misappropriation of trade secrets under Pennsylvania’s Uniform Trade Secrets Act (“PUTSA”). The Circuit Court made it clear that it was basing its opinion not upon a theory of “inevitable disclosure,” but rather upon the PUTSA’s proscription of threatened misappropriation. The Circuit Court rejected Mr. Botticella’s argument that an injunction should only issue if Bimbo could show that it would be “virtually impossible” for him to perform his new job at Hostess without disclosing Bimbo trade secrets.

The Court found that the District Court’s injunction was amply supported by evidence adduced at the preliminary injunction hearing; in short, Mr. Botticella was not a “good leaver” when resigning from Bimbo. Mr. Botticella accepted the Hostess position on October 15, 2009, but agreed to begin work in January 2010. During the intervening time, he remained fully engaged in his work (with its attendant exposure to confidential information) at Bimbo, and did not inform Bimbo of his intention to resign until January 4, 2010. The District Court found that Mr. Botticella had accessed highly sensitive Bimbo information via his computer in his last days at Bimbo and had likely copied such information onto external storage devices, and that his explanation at his deposition of such conduct was “confusing at best” and “not credible.”

The Third Circuit also noted that the District Court was entitled to make an adverse inference against Botticella because he did not testify at the preliminary injunction hearing.
 

In a recent decision issued by the Supreme Court of the State of New York, New York County, a lawsuit brought by Marsh USA Inc. against two former employees and a competitor was sustained in the face of the defendants’ challenge to the complaint on grounds of forum non conveniens and failure to state a cause of action.  The decision is notable for its application of New York non-competition law to California residents, and Marsh’s inclusion of forum selection clauses and choice of law provisions in its agreements with the individual defendants appears to have enabled it to avoid the draconian effect of California law upon those individual’s non-compete agreements.

The decision denying defendants’ motion to dismiss, by Justice Bernard J. Fried, was entered on July 23, 2010 in the matter of Marsh USA Inc. v. Hamby, Index No. 600636/10.

The individual defendants, John A. Hamby and Lida Davidians, both reside in California and worked over five years in Marsh’s Entertainment Practice, in which they were senior employees.  The complaint alleges that Hamby and Davidians each breached several non-compete agreements, misappropriated confidential information, and unfairly competed when they went to work for DeWitt Stern Group, Inc. in late January 2010.  After their resignations, in short order, numerous clients terminated their relationship with Marsh and appointed DeWitt as their new insurance broker, and 8 of 20 employees of Marsh’s Los Angeles Entertainment Practice abruptly defected to DeWitt.

The defendants moved to dismiss the complaint first on the ground that the New York court is an inconvenient form.  The Court refused to dismiss on this ground, because both Hamby and Davidians had signed multiple agreements containing forum selection clauses and choice of law provisions that obligated the parties to litigate in New York, applying New York law.  Defendants’ arguments that connections to California outweighed connections to New York, and that California’s public policy would render the non-compete agreements void under California law, did not convince the New York court to dismiss.  The New York court noted, among other things, that a lawsuit commenced by defendants against Marsh in the Superior Court of the State of California, No. BC 430457, seeking a determination that the agreements were unenforceable under California Business and Professions Code Section 16600, was stayed upon Marsh’s motion, allowing the dispute to be heard in the New York court.

Defendants’ second motion to dismiss, for failure to state a cause of action, focused on Marsh’s allegations of misappropriation of trade secrets, which defendants argued were conclusory and did not identify what trade secrets had been stolen.  The New York court found that the defection of numerous Marsh employees and clients quickly following Hamby and Davidians’ resignations raised a strong enough inference of misappropriation of trade secrets, that the complaint would therefore survive the motion to dismiss.

When hiring new employees, you can minimize the risk of inadvertently becoming embroiled in trade secret litigation by taking a few simple steps. First, new hires should be verbally instructed to be “good leavers” -- meaning that they should take absolutely nothing with them when heading out the door from their old job, and should return all property of their former employer at termination, including laptops, cell phones, Blackberries, thumb drives, and any property kept at home. Similarly, no e-mails or electronically stored documents or information should be retained on personal computers, thumb drives, etc. Second, because offer letters can become litigation exhibits, they should instruct new hires not to bring, distribute, or use any confidential information, trade secrets, or any other property of a former employer. Third, offer letters should require new hires to confirm in writing that the new hire has reviewed the duties and responsibilities of the new position and can perform them without using or disclosing confidential or proprietary information of another entity and without violating the terms of any applicable agreement. Finally, employee handbooks and/or confidentiality agreements/policies also should contain similar language prohibiting the use or distribution of confidential information or trade secrets of former employers. While such actions are no guarantee against trade secret litigation stemming from the hiring of a new employee, they will certainly lower the risks.

While many employers worry that some court decisions will add "insult to injury," New Jersey employers must now be aware of Stengart v. Loving Care Agency Inc., et al., --- A.2d ----, ---N.J. -- (N.J. 2010), decided March 30, 2010, which presages adding "injury to injury." That is because it first injures employers' interests by stating that an employer cannot write an enforceable policy that “banned all personal computer use and provided unambiguous notice that an employer could retrieve and read” all emails that an employer wrote through a personal email account using an employer’s computer and that an employee’s communications with personal counsel concerning matters adverse to the company may occur during work time using the employer's resources. And if that were not injury enough to the employer's interests, in having employees actually work on company business while at the office using the company's resources, the Stengart Court then goes on to add another possible injury—on remand, the trial court should consider disqualifying the company's counsel for not immediately returning to the departed employee (or her counsel) all copies of such communications. The Stengart decision demands that employers, especially in New Jersey, not only revisit their written policies, but also that they consider how such policies are actually being applied and enforced. Decisions like Stengart can also directly impact on steps that have become part of best practices responses in trade secret and restrictive covenant cases involving departing employees.

Background

Plaintiff Marine Stengart was the Executive Director of Loving Care, Inc., a home care services agency, who resigned and then sued Loving Care for constructive discharge under the New Jersey Law Against Discrimination. Stengart was issued a company laptop computer. Despite some factual discrepancies between the parties as to the content and dissemination of certain policies, the Court also assumed for its analysis that the company had a well-publicized electronic communications policy that made all aware that the employer's computer and system (including those allowing for internet access) were all company property, to be used for company business, and that the company believed that there was no reasonable expectation of privacy in any communications that an employee had through such equipment or system because the communications were, as announced in the policy, subject to monitoring, were considered the property of the company, and were embedded within the company's physical property. Stengart, nonetheless, used her company computer to communicate with her personal counsel through her Yahoo account. Such communications were discovered by her former employer on that computer after her termination. Loving Care's counsel did not immediately disclose the existence of such communications to Stengart or her counsel, and instead referenced and included those of relevance to a response to a later discovery request.

The Court's Analysis

The Court’s analysis is driven by two basic factors, one case specific, one more general, on the issue of whether a privilege ever existed or was waived.

Of specific concern to the Court was Loving Care's written policy, which clearly stated that E-mail and voice mail messages, internet use and communication and computer files are considered part of the company's business and client records, that "such communications are not to be considered private or personal to any individual employee, that the company reserved the right to review, audit, intercept, access and disclose “all matters on the company’s media systems and services at any time." But the policy also stated that "occasional personal use is permitted." The Court, assuming the policy was in effect, and despite language in the policy that specifically applied to "internet use and communication" in addition to e-mail, found that an objective reader might not conclude that the policy applied to using a work computer to access a personal, password-protected Yahoo account. Moreover, the Court held that the company's reasonable statement that "occasional personal use" of the company email would be tolerated somehow further frustrated the company's effort to thwart the creation of any reasonable expectation of privacy.

But, more generally, the Stengart Court found that the interests protected by the attorney-client privilege outweighed employers' interests in enforcing electronic communications policies. In doing so, the Court seemed to ignore the fact that privileged communications require an expectation of confidentiality, and none should have arisen on the facts of this case. The Court's analysis suggests strongly the policy's provision allowing for occasional "personal" use somehow created an expectation of privacy, ignoring the distinction between "private" and "personal." In Stengart, the terms were used interchangeably, even though the words do not necessarily carry the same connotation.

The holdings of the Stengart Court go beyond the earlier Appellate Division decision in the case, which had only implied that a policy cannot be written that would have led the Court to have found any claim of privilege inert or waived. Indeed, the Supreme Court expressly stated that, and also noted that “a zero-tolerance policy [on personal use of computers]” is “unworkable and unwelcome in today’s dynamic and mobile workforce…” That reading is certainly furthered by the Court's remand to consider whether the employer's counsel should be disqualified under RPC 4.4(b) for having kept and reviewed the communications.

Takeaways and Next Steps

The decision leaves employers with several questions that we will try to help you answer, and they are questions that can have particular impact in the area of trade secret and restrictive covenant litigation:

1. Do you, as an employer, want a policy that reaches otherwise privileged or private communications? You do. Though the Stengart Court says that no legitimate business interest is furthered by transforming all private communications into company property, the Court misses the important point that many legitimate business interests are furthered by stemming private communications during work, the most basic being the employer's interest in having work being done at work. Indeed, the very examples earlier used by the Appellate Division as to what is accessible instantly "with the touch of a keyboard or a click of a mouse" (e.g., medical records, bank accounts, phone records, and tax returns) illustrate full well that these are the very sort of personal items that an employer has a great interest in keeping from being disclosed in or to the workplace. In warning employees that what is personal and private will be neither if brought into the workplace, employers are protecting themselves and their employees, and also assuring that they are not paying employees to come to work to work on personal medical, financial or other matters between lunch breaks and coffee breaks.
 

2. Does Stengart allow for the creation of such a policy? It may. But drafting and then upholding that policy against legal challenge will take great care. We know this because a close reading of Stengart leaves the careful room to operate—as the Supreme Court says, “Our conclusion…does not mean that employers cannot monitor or regulate the use of workplace computers.” For instance, Stengart says that a policy requiring that one work at work and not spend valuable time on personal communications is appropriate, “[b]ut employers have no need or basis to read the specific contents of personal, privileged, attorney-client communications in order to enforce corporate policy." Of course, overlooked by the Court is that one cannot define the communicative activity as one outside the employer's business interests without knowing the content that would show that. Thus, the Stengart Court's distinction between communicative conduct and communicative content probably fails analytically, which is implicitly acknowledged by the Court's noting that an employer may have an interest in certain types of personal content as reflected in previously decided cases. Nevertheless, one can enforce such a policy by blocking access to Internet-based email accounts from employee computers, or through other mechanisms and policies that focus on the time devoted to such communications as opposed to their content.

3. With or without a new policy, what do you do if you find attorney-client communications on a departed employee's computer? The first thing that one must do is collect, segregate and preserve such communications. Once that has been done, whether by one's internal IT staff or outside IT consultants, the existence of such documents should be made known to outside counsel. Then things get a little more complicated. If the employer is already in litigation, it would appear that Stengart compels one to either then turn over all copies to the plaintiff and his/her counsel or present them to the court for in camera review as to whether or not they are privileged or if privilege has been waived. Because fully reviewing the documents at issue after becoming aware that they are arguably privileged raises the possibility of later disqualification under RPC 4.4(b), an employer may even consider retaining special counsel separate from regular employment counsel to handle the application to the court, and to advise the client concerning the issues that have arisen without running the risk of having primary defense counsel disqualified from the matter. An even more sensitive, nuanced analysis will be required if that matter is not yet in litigation, and there is no already designated third party decision maker available. At that point, the employer, along with employment counsel and possibly special counsel, must carefully weigh a number of practical, legal, ethical and business factors before determining how to approach the relevant issues.

Having both employment counsel and possibly special counsel familiar with those issues and the new landscape defined by Stengart will be essential to avoiding damaging one’s position concerning claims that the departed employees are expected to file. This is especially true as it relates to departing employees in the trade secret or restrictive covenant context, where one often seeks to document through forensic computer analysis what communications occurred in preparation for a departure and what confidential information may have been transmitted. The last thing one wants when operating with a need for speed is some ancillary disqualification issue to arise for one’s outside counsel. That is why segmenting roles and responsibilities is important, and it may be that special counsel can turn the tables on a departing employee and his/her counsel by demonstrating that the pre-departure communications were actually advice as to how and under what circumstances information could be taken. This would have the potential to render the communications unprivileged ones in furtherance of a “crime or fraud,” which exception has been construed in New Jersey and elsewhere to apply to civil wrongs of a wide variety, and could possibly lead to the ex-employee’s counsel becoming a witness in the matter, which could have its own potentially disqualifying or limiting implications.
 

A new study of federal court trade secret litigation confirms that the number of lawsuits involving alleged trade secret misappropriation continues to grow exponentially. According to the study, which was published in the Gonzaga Law Review on March 17, 2010, the number of federal court “trade secret cases doubled in the seven years from 1988 to 1995, and doubled again in the nine years from 1995 to 2004.”

Other interesting findings in the study include the following:

• “In over 85% of trade secret cases, the alleged misappropriator was someone the trade secret owner knew – either an employee or a business partner.”

• The usage of confidentiality agreements significantly increases the likelihood that a court will find that a trade secret owner took reasonable measures to protect the purported trade secrets.

• The Northern District of Illinois (i.e., Chicago) handles the largest number of trade secret lawsuits, and “Courts applied the laws of Illinois, California, or New York in almost 30% of trade secret cases.”

• When seeking injunctive relief, owners of trade secrets had a much higher rate of success against employees (about whom extensive pre-filing investigations can be done) than against a business partner (with respect to which the trade secret owner may have only limited information).

• Similarly, trade secret litigation against employees is “much more likely to conclude early in the litigation” than is trade secret litigation against a business partner.

For anyone interested in this area of the law, the study is well worth reading.
 

A former engineer and salesman for DuPont, Michael Mitchell, was recently sentenced to 18 months in prison after pleading guilty to stealing trade secrets and providing them to a Korean rival of DuPont.

According to the parties’ agreed statement of facts, during his final years at DuPont, Mitchell had become disgruntled, and he was eventually terminated for poor performance. Upon his termination, DuPont did all of the right things: it reminded Mitchell of the nondisclosure provisions of his employment contract; it demanded that he return any proprietary DuPont information; and it had him sign an employment termination statement affirming that he had done so.

Mitchell, in contrast, did all of the wrong things: he kept numerous DuPont computer files containing sensitive and proprietary information; he entered in to a consulting agreement with the rival Korean company and provided DuPont trade secrets to it; and, in what ultimately led to his downfall, he contacted current and retired DuPont employees to seek still other information desired by the Korean company, and some of them reported him to DuPont management. The end result was a federal search warrant, a forensic examination of Mitchell’s computers, Mitchell’s agreement to become a cooperating undercover witness and, now, his time behind bars.

While the moral of this story is that stealing trade secrets is a crime that does not pay, a secondary moral is that when the heist is big enough, call the FBI.
 

A recent Alabama Court of Appeals case, Jones v. Hamilton, Case No. 2081077 (January 22, 2010), illustrates how a failure to take reasonable steps to maintain the confidentiality of documents and information will result in the loss of trade secret status.

In Jones, the parties' trade secret dispute centered on the alleged misappropriation of confidential and sensitive documents that were left in an unmarked cardboard box for at least a week in the backseat of a company-owned car to which various company employees had access. The documents were not marked "confidential," and the keys to the vehicle were either kept "on a peg" or in the front of an office where they were widely accessible. Even though there was no evidence that anyone other than the defendant accessed the vehicle or the documents without authorization, "[t]he documents were left vulnerable to whomever chose to enter or to drive the vehicle."

Based on this vulnerability, the Court held that the documents were not "trade secrets" within the meaning of Alabama's version of the Uniform Trade Secrets Act and that the defendant therefore was not guilty of trade secret misappropriation. In reaching its conclusion, the Court did not focus on the sensitivity of the documents; rather, by itself, the company's failure to take reasonable steps to ensure the security of the documents precluded them from qualifying as trade secrets.

Hence, this case illustrates the importance of taking reasonable steps to protect the secrecy of alleged trade secrets. Although what is "reasonable" will vary depending on the circumstances, the bottom line is that if a company hopes to protect documents or information as a "secret," they need to be treated as such.

The importance of corporate security and vigilance with regard to trade secrets was demonstrated by recent events in Syracuse, New York. On February 3, 2010, the FBI and the U.S. Attorney’s Office in Syracuse announced the arrest of 29 year-old Shalin Jhaveri. Jhaveri is charged in a complaint with stealing trade secrets, in violation of 18 U.S.C. §1832, from his employer Bristol-Myers-Squibb, where he worked from November 2007 through February 2, 2010.

It is alleged that Jhaveri planned to establish a pharmaceutical firm in India which could compete with Bristol-Myers-Squibb in various markets around the world. Reportedly, some of the confidential information stolen included Bristol’s procedures in development to produce a multi-million dollar drug to treat malignant melanoma, a deadly form of cancer. Jhaveri allegedly downloaded over 45 gigabytes of information from Bristol. Bristol began tracking Jhaveri’s actions after finding suspicious documents on his work laptop, including an application to the government of India to start his own biopharmaceutical company.

It is critical in order to pursue claims against a disloyal employee that a Company maintain a strong confidentiality and trade secrets program. Proper policies and agreements should be in place for all employees, consultants and contractors. A routine "due diligence" trade secrets check-up should also be conducted in order to ensure safeguarding of Company information. Absent such steps, proprietary information will be in jeopardy.
 

A recent New York case, Edelman v. Starwood Capital Group, LLC, 2009 NY Slip Op. 09309 (1st Dep’t December 15, 2009), relates to the issue of maintaining the confidentiality of proprietary materials. The case involved an unsuccessful attempt by an investor, Asher B. Edelman, to acquire a French company Société du Louvre (SDL) in 1999. Edelman claimed that pursuant to his attempt to acquire SDL in 1999, he conducted and compiled significant research to identify SDL as a valuable acquisition. Among other things, Edelman claimed that he researched and analyzed the finances, ownership structure and business operations of SDL. In conjunction with his desire to acquire SDL, Edelman retained a French company to arrange for the financing and to help him obtain a business partner which could help run the hotel operations of SDL that Edelman wanted to continue. This company solicited Starwood Capital Group, LLC ("Starwood") as a potential business partner. Starwood was provided with Edelman's business plans and information, which were all marked confidential, pursuant to the oral agreement between Edelman and the third party company to maintain confidentiality. Starwood declined the deal.

In 2005, pursuant to an auction, Starwood acquired SDL. Its post-acquisition plan allegedly matched the business plans which Edelman had put together and had shown to Starwood years earlier. Edelman claimed that Starwood improperly took and profited from the information he compiled. Edelman alleged claims of unfair competition, improper use of proprietary information and unjust enrichment.

The First Department found that Edelman's claim for the misappropriation of proprietary information failed because the allegations did not sufficiently allege that he took "sufficient precautionary measures to insure that the information remained secret..." Among other things, the Court pointed out that Edelman had failed to obtain a confidentiality agreement with Starwood, as the Court noted would have normally been expected. The Court also stated that the fact that the documents had a "confidential" stamp was, on its own, inadequate to protect them, especially for six years.

The case is another reminder that companies should take appropriate precautionary steps when dealing with confidential information.
 

An article recently published in the New Jersey Law Journal reviews potential sources of information to be searched and procedures that can be followed by employers faced with a departing employee who may have misappropriated the the employer's information, client lists and know-how.

*Co-authored with Kathryn T. McGuigan.

The recent case of Perlan Therapeutics v. Superior Court (California Ct App 11/04/2009) serves as a reminder that when litigating, the definition of the trade secrets at issue is important.

Perlan Therapeutics brought an action against two former employees claiming the employees had misappropriated its trade secrets. California discovery statutes require that a plaintiff bringing an action for misappropriation of trade secrets file a trade secret statement before commencing discovery related to the trade secrets. The statement must identify with "reasonable particularity" the purported trade secrets which allegedly have been misappropriated.” The trial court found that Perlan’s statement lacked the necessary particularity, and granted the defendant employees an order precluding discovery until Perlan provided sufficient identification of its claimed trade secrets. The Court of Appeal affirmed.

The appellate court pointed out that Perlan's trade secret statement lacked clarity, did not segregate its alleged trade secrets, did not clearly explain how its secrets differed from publicly available knowledge, included a large amount of "surplusage," such as legal objections, factual allegations, and reservations of rights, and referenced hundreds of pages of extra documents. While the court noted that some trial courts have requested too much particularity, it emphasized that trial courts have broad discretion under the California discovery statutes. In this case, the court did not abuse its discretion in requiring Perlan to produce a clear, non-evasive trade secret statement.

You will certainly want to protect your trade secret information when in litigation. This can be accomplished with a protective order, which was in place in Perlan. As the Perlan court noted, there has been much protracted litigation regarding the initial trade secrets statement. Consider drafting this all important statement prior to filing your complaint.
 

On October 22, 2009, in a case entitled Astro-Med, Inc. v. Nihon Kohden America, Inc. and Kevin Plant, on appeal from the U.S. District Court for the District of Rhode Island, the First Circuit Court of Appeals affirmed a jury verdict granting Astro-Med, Inc. ("Astro-Med") damages of more than $1 million against Nihon Kohden America, Inc. ("Nihon") and employee Kevin Plant ("Plant") for violating non-compete and non-disclosure clauses which Plant signed when he was first employed by Astro-Med in 2002.

Astro-Med and Nihon were competitors in the life sciences equipment market. In 2002, Astro-Med hired Plant as a Product Specialist at its Rhode Island facility. Upon his hire, he signed an Employment Agreement which contained a non-competition clause and a trade secrets clause. The Agreement was governed by the laws of Rhode Island.

After significant training from Astro-Med, Plant transferred to a Sales Representative position at Astro-Med's Florida facility. In 2006, Nihon, a California corporation, hired Plant as a Sales Representative in Florida. Shortly thereafter, Astro-Med sued Plant in federal court in Rhode Island for breach of contract, misappropriation of trade secrets and unfair competition. Astro-Med later added Nihon as a defendant, alleging claims including misappropriation of trade secrets. After losing before the jury, both Nihon and Plant appealed to the First Circuit Court of Appeals.

On appeal, Nihon and Plant alleged nine separate claims of legal error, each of which was rejected by the First Circuit. The Non-Competition clause and the Trade Secrets clause stated that Rhode Island law applied. On appeal, Nihon argued that as a California business, it should not be subjected to the jurisdiction of Rhode Island concerning its hiring of a Florida resident to sell its product in Florida. The Appeals Court disagreed, finding that Rhode Island had jurisdiction. It also found that Astro-Med and Plant entered into the agreement in Rhode Island and that Nihon hired away Plant with full knowledge of the agreement. Because Astro-Med was headquartered in Rhode Island, that was one of the places where the harm occurred.

Specifically with respect to the Non-Competition and the Trades Secrets provisions, defendants raised numerous arguments. The two most interesting are discussed below:

First, Nihon argued that the Non-Competition clause that Plant signed when he was first hired at Astro-Med was unenforceable because after Plant signed it, his duties materially changed. It is true that Plant's job changed at Astro-Med when he transferred to the salesperson job in Florida. Nihon relied on a Massachusetts case (AFC Cable Sys. Inc. v Clisham, 62 F. Supp. 2d 167 (D. Mass. 1999), for the proposition that a change in an employee's job can void a non-competition clause. Massachusetts case law provides that "each time an employee's employment relationship with the employer changes materially such that they have entered into a new employment relationship a restrictive covenant must be signed." Lycos, Inc. v. Jackson, No. 2004-3009, 2004 Mass. Super. LEXIS 348 (Mass. Super. Ct. Aug. 24, 2004). After a substantial discussion of the genesis and intent of the Massachusetts decision which turns on the parties' intent to abandon the non-competition agreement upon the change in duties, the First Circuit held that even if Rhode Island adopted the Massachusetts approach, the facts in the instant case did not support a finding that the parties intended mutual abandonment and rescission of the non-competition provision.

Second, with respect to the Trade Secret Misappropriation claim, relying on Massachusetts common law, Nihon argued that since no evidence was established at trial that either Plant or Nihon ever used any of Astro-Med's confidential information, there can be no violation. However, the First Circuit, which also hears appeals from Massachusetts, said Nihon's reliance on Massachusetts law was misplaced. Rhode Island law applied and the Rhode Island Uniform Trade Secrets Act, R.I. Gen. Laws Sect. 6-4-1, et seq. defines "misappropriation" as including disclosure of a trade secret by one who acquired it while under a duty to maintain its secrecy and the acquisition of a trade secret by one who knew it was obtained from someone who had a duty to keep it secret. Under Rhode Island law, it is not necessary to show that either Plant or Nihon used Astro-Med's trade secrets. The First Circuit noted that disclosure or acquisition is sufficient to prove a misappropriation, subjecting defendants to liability for actual loss and unjust enrichment caused by the misappropriation.

This case illustrates that it is important to check the applicable state law to determine if an individual has violated a restrictive covenant like the Non-Competition or Trades Secrets clauses discussed in this summary. Appellants Nihon and Plant relied on principles from Massachusetts which were different than the applicable law of Rhode Island. The growing Massachusetts case law regarding material changes in employment and the Massachusetts doctrine that misappropriated trade secrets must be used before they can be the subject of an actionable claim, have not been adopted by other states and did not help Nihon and Plant.
 

EpsteinBeckerGreen’s 28th Annual Labor and Employment Law Client Briefing Conference, entitled “Employers Under Siege: Managing Your Workforce in Unprecedented Times,” will be held this year on Thursday, September 24th at the Millennium Broadway Hotel in New York City.

The program will include a specific workshop entitled “Trade Secrets, Technology, A Down Economy & Employees on the Move: Managing This Dangerous Mix,” which may be of particular interest to readers of this blog. The workshop will involve a panel discussion of six real life scenarios in this area of the law.

For further details on the conference and registration information, please click here.
 

In Valentine Capital Asset Management, Inc. v. Agahi, 174 Cal. App. 4th 606, the California Court of Appeals, First District, recently looked at the issue of whether an associated person of a FINRA member could be compelled to arbitrate his company’s trade secret and unfair competition claims against former employees who were also associated persons of a FINRA member.  The court held that although John Valentine, the President and Founder of Valentine Capital Asset Management, Inc., was a person associated with a FINRA member, arbitration could not be compelled because his company was not a FINRA member, the new competing company created by his former employees was not a FINRA member, and the business activities in question were not activities that any of the parties took as persons associated with FINRA members. The mere fact that parties happened to have been FINRA associated persons was not sufficient to support mandatory arbitration.

Non-FINRA member companies should keep this case in mind in considering whether to enter into arbitration agreements with their employees.  It should not be assumed that an employee’s association with a FINRA member will be sufficient to compel arbitration in the event of a trade secret dispute.
 

Although issues involving misappropriation of trade secrets are frequently litigated, they rarely result in criminal charges. However, according to recent stories in The Chicago Tribune, Reuters.com, and other media outlets, a former employee of Goldman Sachs was recently arrested by the FBI for allegedly stealing trade secrets (software code regarding a proprietary trading system) worth millions of dollars.

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.

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).

A recent decision from the United States Court for the District of New Jersey demonstrates how a corporation’s tenacity in seeking electronically stored information despite the intransigence and apparent spoliation of evidence by a former employee and his new company led to positive results for the corporation.

In Telquest International Corp. v. Dedicated Business Systems, Inc., No. 06-5259 (PGS), 2009 U.S. Dist. LEXIS 19546 (D.N.J. March 11, 2009), the plaintiff Telquest International Corp. (“Telquest”) sued its former employee Jason Hines and his new corporation, Dedicated Business Systems, Inc. (“DBSI”), asserting claims of fraud, misappropriation of confidential and proprietary information, breach of fiduciary duties, and breach of a non-compete provision in Hines’ employment contract. Telquest alleged that Hines stole confidential company information from Telquest computers and used such information in direct competition with Telquest.

As part of its discovery requests, Telquest sought documents and emails evidencing communications between Hines and Telquest customers and vendors, as well as communications between Hines and Telquest employees. When DBSI’s production of paper documents was incomplete, Telquest sought access to DBSI computers in order to have a forensic copy of the hard drive made and analyzed. Because of defendants’ incomplete production, Telquest was able to procure a court order, dated March 27, 2008, directing Hines to produce the computers by March 31, 2008.

Defendants continued to stonewall, refusing to produce the computers. In a conference call with the Magistrate Judge on June 17, 2008, the Court again ordered defendants to produce the computers. This time, Hines delivered a computer to Telquest’s forensic consultant, on June 19, 2008. The consultant discovered that on June 17, 2008 (the date of the conference call), a “defrag” program, which overwrites deleted data and undermines its recovery, had been run on the computer, and on June 19, 2008 (the date the computer was turned over), “Secure Clean,” a program that wipes data from the hard drive so that it may not be recovered using conventional forensic tools, had been run on the computer.

Additionally, it was revealed in a deposition that even after Telquest’s lawsuit was filed, Hines routinely deleted business emails and other records, which plainly should have been preserved.
The result of these actions by defendants was a motion for sanctions by Telquest. The Court granted the motion for sanctions, granting Telquest’s request for a spoliation inference (but declining to strike defendants’ answer), and assessing attorneys’ fees and costs, in amounts to be determined, against defendants.
 

The New York State Supreme Court recently shot down a request to enjoin two former salesmen and their new employer from tortiously interfering with a real estate investment firm’s business, from interfering or contacting its customers or using or exploiting its trade secrets. See Koenigsberg v. Silber Investment Properties Ltd., Index No. 20127/08 (Nassau County March 17, 2009). The two former salesmen claimed that they were not actual employees of the real estate investment firm, but independent contractors, that they did not sign non-compete contracts and that the alleged client lists were their personal property. The plaintiff sought to enjoin the former sales representatives' solicitation of clients based on its contention they misappropriated trade secrets (i.e., the client lists). In disagreeing with the plaintiff, the Court referred to plaintiff's prior course of conduct with other former sales representatives. Specifically, the Court pointed out that there was no indication that the plaintiff had prohibited other sales representatives from soliciting clients after they left, had required other sales representatives to sign non-solicitation agreements, or had prevented other sales representatives from keeping their own lists of customers. The Court stated "[i]f AIP did not require that its salespeople guard the secrecy of the customer list during their service with AIP or attempt to prevent the AIP salesmen from using the information in the list once they left AIP's service, this is an indication that the customer list was not a 'trade secret.'" The Court further reasoned that the plaintiff failed to set forth "what 'considerable efforts' were expended in developing the purported secrets." Nor did the plaintiff establish how the client list was created.

The case serves as a reminder to employers to take appropriate and reasonable steps to protect their confidential information and trade secrets. Such steps may include limiting access to the confidential information, requiring persons with access to such information to execute written confidentiality and/or non-solicitation agreements, and requiring departing employees to return company property and documents.

Many New York attorneys, when seeking a preliminary injunction against a party that has misappropriated their clients’ trade secrets, will argue that a presumption of irreparable harm to their clients automatically arises upon the determination that a trade secret has been misappropriated, citing Ivy Mar Co. v. C.R. Seasons, Ltd., 907 F. Supp. 2d 547, 567 (E.D.N.Y. 1995). A recent decision of the U.S. Court of Appeals for the Second Circuit, however, holds that misappropriation of trade secrets does not automatically lead to irreparable harm. The aggrieved party only faces irreparable harm if the misappropriator will disseminate the secrets to a wider audience or otherwise irreparably impair the value of the secrets.

In Faiveley Transport Malmo AB v. Wabtec Corporation, __ F.3d __, 2009 WL 636020 (2d Cir. March 9, 2009), Wabtec had manufactured subway brakes under a contract with Faiveley and its predecessor from 1993 through 2005. Faiveley alleges that after expiration of the contract, Wabtec impermissibly continued to use Faiveley’s proprietary information (including various technical specifications, designs, plans, and patents) to produce subway brakes for the New York City Transit Authority. The District Court granted an preliminary injunction enjoining Wabtec from disclosing Faiveley’s proprietary information to the Transit Authority.

On appeal, the Second Circuit vacated the injunction because Faiveley had not demonstrated that it faced irreparable injury. Although the Second Circuit agreed that Wabtec had misappropriated trade secrets, it held that misappropriation alone does not give rise to a presumption of irreparable harm, noting:

Where a misappropriator seeks only to use those secrets - without further dissemination or irreparable impairment of value - in pursuit of profit, no such presumption is warranted because an award of damages will often provide a complete remedy for such an injury. Indeed, once a trade secret is misappropriated, the misappropriator will often have the same incentive as the originator to maintain the confidentiality of the secret in order to profit from the proprietary knowledge.

The Court went on to note in dicta that even where irreparable injury has been shown, only a narrowly drawn preliminary injunction that protects the trade secret from further disclosure or use may be appropriate, and admonished courts in all cases to strive to avoid unnecessary burdens on lawful commercial activity.
 

A study released by Ponemon Institute LLC on February 23, 2009 confirms a human resources truism: departing employees frequently steal company data while heading out the door. According to the study (a copy of which can be obtained at http://www.vontu.com/downloads/ponemon_09.asp), 59% of departing employees admit that they stole company data; 92% of departing employees admit that they took CDs/DVDs; and 73% admit taking USB memory sticks.

The study contains a wealth of other interesting statistics about employee data thefts.

While none of the study’s findings should be a surprise to those who regularly address these issues, it is interesting to see a study which quantifies the scope of the problem.
 

In a decision, dated January 26, 2009, in the matter Epiq Systems, Inc. v. Hartie, Index No. 111950/08, the Supreme Court of the State of New York, New York County, by Judicial Hearing Officer (and retired Justice) Ira Gammerman, denied a preliminary injunction in aid of arbitration sought by plaintiffs Epiq Systems, Inc. and related companies (collectively, “Epiq”). Epiq claimed that it faced inevitable disclosure of its trade secrets by three individual defendants formerly employed at Epiq and their new employer Kurtzman Carson Consultants LLC (“KCC”) with respect to three computer programs, including one web-based system, developed and used by Epiq to solicit ballots and tabulate ballot results in Chapter 11 bankruptcy proceedings, and in analogous foreign proceedings, involving widely-held public securities.

Epiq sought to enforce restrictive covenants in its employment agreements, which barred the individual defendants from disclosing Epiq’s confidential, proprietary or trade secret information, competing against Epiq or soliciting Epiq’s customers for one year after termination, and soliciting Epiq’s employees during employment and for one year after termination. After a two-day hearing in September 2008, the Court entered a temporary restraining order specifically limiting, although not prohibiting, the individuals’ employment with KCC.

Although the Court held that any arbitration award to which Epiq might ultimately be entitled apparently would be rendered ineffectual absent preliminary relief, it declined to issue a preliminary injunction against defendants, finding that Epiq had not satisfied any of the elements of the traditional tripartite test for injunctive relief: likelihood of success on the merits, showing of irreparable harm, and balance of equities favoring the movant.

Key findings for the Court were that the individual defendants did not know any part of the source code or the underlying algorithms of Epiq’s programs, even though they had worked at length with Epiq’s programmers, and so they could not disclose such information to KCC. In addition, KCC already had its own software program that allowed KCC to perform bankruptcy-related solicitation and tabulating projects in-house. Moreover, the Court held that even if the defendants would seek to improve KCC’s software, their knowledge brought to bear on such a project would not constitute a trade secret under the definition of trade secret under section 757, comment b, of the Restatement of Torts, which applies under New York law. In finding a lack of irreparable harm, the Court also noted that it had been presented with no real evidence that defendants had committed or were about to commit commercial piracy.

Epiq filed a notice of appeal on February 11, 2009.
 

One little noticed provision in the proposed federal "Paycheck Fairness Act" would affect standard language in many confidentiality agreements and policies. Specifically, the Paycheck Fairness Act, which is intended to fight discriminatory pay practices, contains a provision that bars an employer from taking adverse action against an employee who “has inquired about, discussed or disclosed the wages of the employee or another employee . . ."

Although there is an exception for employees who have “access to the wage information of other employees as a part of such employee's essential job functions" (e.g., managers who set compensation or HR employees), this provision would effectively bar employers from restricting most employees’ ability to discuss or disclose their own compensation or that of their co-workers.

Many employers have confidentiality agreements and/or confidentiality policies that expressly bar employees from discussing or revealing wage information. Although such provisions would not be rendered unlawful by the Paycheck Fairness Act, in most instances, they would be unenforceable.

Accordingly, if, as expected, the Paycheck Fairness Act becomes law (it was passed by the U.S. House in January 2009 and is currently pending in the Senate), employers may want to review provisions in confidentiality agreements and policies that expressly bar the disclosure of wage information.