Before the Defend Trade Secrets Act (“DTSA”) became federal law in the spring of 2016, Supreme Court watchers would likely care little about prospective justices’ approach to trade secrets matters.  Such matters were the province of state law, and the phrase “trade secret” might be avoided, even in passing, in the opinions of the Supreme Court for entire terms or more.  But with DTSA cases being reported with increasing regularity, differences in interpretation are beginning to emerge.  Supreme Court attention may follow.

Because DTSA says that “misappropriation of a trade secret” can involve unlawful acquisition of a trade secret, or improper disclosure of a trade secret, or unauthorized use of a trade secret, the impact of the statute’s May 11, 2016 “effective date” has been the subject of some debate.  For instance, should the act apply to a trade secret unlawfully acquired on May 10, 2016 but improperly used or disclosed on May 12, 2016 or thereafter?  Likewise, what if a trade secret unlawfully acquired and used before May 10, 2016 is used again after May 11, 2016?  These issues have come up in cases in March and January 2017 in the Northern District of California, in March 2017 in the Eastern District of Pennsylvania, and earlier in the Middle District of Florida.  The answers and analysis found in these opinions is not always entirely consistent, which suggests that this issue under DTSA  as well as others will continue to be litigated.

Should differences arise between circuits, the Supreme Court might be called upon to interpret the reach of DTSA. In that vein, one might wish to look at the Court’s newest member, Neil Gorsuch, and his opinions while a 10th Circuit judge in Storagecraft Technology Corp. v. Kirby, 744 F. 3d 1183 (10th Circuit 2014), and in Russo v. Ballard Medical Products, 550 F. 3d 1004 (10th Circuit 2008). Each reveal interesting elements of Judge — now Justice — Gorsuch’s approach to trade secrets matters.

Storagecraft proves interesting opinion on several levels.  That case involved the Utah trade secrets act in a case coming to the 10th Circuit after being brought in the federal district court as a matter of diversity jurisdiction.  In addressing one of the appealing defendant’s arguments, the Gorsuch opinion rejected the notion that one need show that a defendant facilitated another’s commercial gain to recover under the statute:

Continue Reading Court’s Newest Member Has Trade Secret Protecting Track Record

shapiroAs we have written about and discussed extensively on this blog over the past year, the Defend Trade Secrets Act (“DTSA”) – enacted on May 11, 2016 – provides the first private federal cause of action for trade secret misappropriation, allowing parties to sue in federal court for trade secret misappropriation regardless of the dollar value of the trade secrets at issue.  Given that the law is less than a year old, federal courts seeing DTSA cases for the first time are still parsing through its language and clarifying its scope.  Although it is still a developing issue, two recent decisions reveal a limitation and viable defense to DTSA claims:  a plaintiff asserting a DTSA claim must allege facts showing that acts of misappropriation occurred after DTSA came into effect.

The first case is a September 27, 2016 decision from the Middle District of Florida, Tampa Division: Adams Arms, LLC v. Unified Weapons Sys., No. 16-cv-01503, 2016 U.S. Dist. LEXIS 132201 (M.D. Fla. Sep. 27, 2016).  Plaintiff Adams Arms, LLC, a manufacturer of military rifles, sued defendant Unified Weapons (and other affiliates and individuals) in federal court – asserting a misappropriation claim under DTSA – for allegedly using Adams Arms’ own trade secrets to enter into an agreement to supply rifles to a foreign country’s military after the companies had agreed to work together to supply the rifles.  The defendants moved to dismiss the DTSA claim relying solely on DTSA’s statute-of-limitations provision, which provides that:

A civil action under [18 U.S.C. § 1836(b)] may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered. For purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation.

18 U.S.C. § 1836(d) (emphasis added). The defendants argued that because some of the alleged conduct at issue occurred before the effective date of DTSA, there was a single continuing misappropriation and therefore, none of the conduct was actionable.  The Florida court was not persuaded, noting that the sub-section addresses only when a claim accrues for statute of limitations purposes, but does not address the critical question:  whether an owner may recover under DTSA when the misappropriation occurs both before and after the effective date, assuming the entire misappropriation is within the 3-year limitations period.  The court looked to Section 2(e) of DTSA, which applies to “any misappropriation . . . for which any act occurs” after the effective date.  Pub. L. No. 114-153, § 2(e).  According to the court, this language suggests that when an “act” occurs after the effective date, a partial recovery is available on a misappropriation claim.  Based on that reading of Section 2(e) of the DTSA, the court found that a plaintiff may state a plausible claim for relief so long as it sufficiently alleges a prohibited “act” that occurred after May 11, 2016.  Because Adams Arms’ complaint alleged that Unified Weapons disclosed Adams Arms’ trade secrets to the Peruvian military in or about late May or early June of 2016, the court held that Adams Arms articulated a viable misappropriation claim premised on a disclosure theory.  However, the court held that the complaint failed to state a viable claim based on an acquisition theory after the effective date of DTSA because the alleged facts indicated that Unified Weapons acquired all of Adams Arms’ trade secret information well prior to May 2016.  Accordingly, the court denied Unified Weapons’ motion to dismiss the DTSA claim, but limited the DTSA claim to a disclosure theory and held that Adams Arms could not proceed under an acquisition theory.

The second case comes from the Northern District of California and was decided on January 31, 2017: Avago Techs. United States Inc. v. NanoPrecision Products, No. 16-cv-03737, 2017 U.S. Dist. LEXIS 13484 (N.D. Cal. Jan. 31, 2017). In this decision, the California court considered Avago’s motion to dismiss a DTSA counterclaim asserted by nanoPrecision Products, Inc. (“nPP”) contending that Avago  had misappropriated its trade secrets by acquiring its confidential business information and disclosing it in three U.S. patent applications and subsequent prosecution of those applications.  Avago argued that the counterclaim should be dismissed because all of the actionable conduct occurred before the DTSA came into effect.  The court agreed.

nPP did not dispute that the original wrongful acquisition of its confidential information (i.e., Avago’s receipt of nPP’s confidential information in the course of the parties’ business discussions that ended in 2012) occurred before the DTSA came into effect. But nPP nevertheless argued that Avago’s continued use of its confidential information in the prosecution of the three patent applications allowed it to seek a partial recovery for misappropriation from the date the DTSA came into effect.  nPP specifically did not suggest that any new information was disclosed in the course of the patent prosecutions that had not been disclosed prior to DTSA’s effective date.

Significantly, nPP relied on the Adams Arms decision in support of its position, but to no avail.  Noting that the Adam Arms court had found that DTSA’s statute of limitations provision applies only to determinations of the timeliness of a DTSA claim and does not preclude a DTSA claim based on acts that occurred after the effective date of the statute, the California court distinguished Adams Arms, stating that the situation in Avago was “entirely different.”  Whereas in Adams Arms there were allegations that specific information had been disclosed after DTSA’s effective date,  the confidential information at issue in Avago was disclosed when the three patent applications were published before the DTSA came into effect.  The court therefore held that nPP’s DTSA counterclaim failed on the pleadings because nPP had failed to allege any facts showing acts of misappropriation that occurred after DTSA came into effect.

From these two decisions emerges a temporal limitation on the reach of the DTSA. While this issue is still open for further judicial interpretation, Adams Arms and Avago Techs. indicate that a plaintiff may be precluded from bringing a claim under DTSA if it only alleges facts that show acts of misappropriation occurring prior to May 11, 2016.  Defendants facing such DTSA claims should carefully analyze the alleged facts and consider raising this as a defense.

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

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

Happy holidays.

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

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

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

A short Q&A session will follow.

To register for this webinar, click here.

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

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

A former California State judge in an arbitration awarded nearly $1.7 million to an employer against its former employee based primarily on his acts taken going out the door.  His joking email with a co-worker after recruiting three others, characterizing their resignations as “Three bullets to the back of the head” of his employer, was clearly shooting himself in the foot in the eyes of the arbitrator.  The Award is interesting for many reasons – – the interplay between fiduciary duties and non-solicitation of employees provisions, the allowable damages when such a fiduciary duty is breached by co-worker solicitation, and the overriding difference of treatment of bad leavers versus good leavers.

Michael Valentine, a corporate vice president of Fortinet, Inc., a California based network security company, left for a competitor, Sophos, in the end of 2013.  The arbitrator found that due to his recruiting of several subordinates, both before and after he resigned, he had breached his fiduciary duty as an officer of Fortinet and his contractual obligations not to solicit employees for one year after his employment ended.  Despite Valentine’s affirmative defense that the clause was barred by California’s public policy [see California Business & Professions Code 16-600, et seq. and Edwards v. Arthur Anderson LLP, cf. Loral Corp. v. Moyes], the arbitrator awarded significant damages for his recruitment activity based upon the breach of his fiduciary duties.

While it appears from the Award that much of the evidence of pre-resignation solicitation was purely inferential, the arbitrator viewed the efforts to cover up such evidence, and the sentiment expressed in the email as being a “despicable” act, such that it caused him to find liability for the recruitment of the three subordinates and to award punitive damages on top of both actual damages and general damages.

The arbitrator awarded actual damages, the amount expended to replace the employees based on the time spent by the executive who recruited the replacements, at his hourly equivalent salary rate, or $39,560.  The arbitrator found general damages of $150,000 based on the “intentional tortious breach of fiduciary duty” and attributed that to his sense of a reasonable amount of the loss of valuable employees causing harm to the employer for likely lost business caused by delays in performance and the start-up time for new employees.  Finally, based on Valentine’s willful and intentional breach of his fiduciary obligations causing direct harm to Fortinet, the arbitrator awarded $250,000 in punitive damages and attorneys’ fees pursuant to contract of $1.2 million plus costs, rendering the total Award to be in excess of $1.75 million.

Had Mr. Valentine not spoken with his co-workers about joining him before he resigned, had he not taken steps to cover up such evidence of solicitation, and, most importantly, had he not callously joked about his egregious breach of duty in such a vivid and morbid email, he may have gotten the benefit of California’s public policy disfavoring employee non-solicit agreements.  But when you are a bad leaver, judges and arbitrators are definitely more likely to find breaches of duties and contractual obligations and enforce such provisions to the fullest extent.

Latham & Watkins isn’t off the hook yet.

On April 17, 2012 and September 3, 2014, we blogged about a malicious prosecution claim brought against Latham & Watkins in the Los Angeles Superior Court.  The suit alleged 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 & Watkins and sued Plaintiffs for, among other things, misappropriation of trade secrets.  The trial court denied the former employees’ motion for summary judgment.  At trial, however, it found FLIR brought the trade secrets action in bad faith, entered judgment in favor of the former employees, and awarded them attorney’s fees and costs of $1,641,216.78.  The trial court’s decision was affirmed on appeal.  FLIR Systems, Inc. v. William Parrish, et al., 174 Cal.App.4th 1270 (2009).

The former employees brought a malicious prosecution action against Latham & Watkins.  Latham  filed a motion pursuant to California’s anti-SLAPP law (a strategic lawsuit against public participation – California Code of Civil Procedure Section 425.16) contending, in part, (1) Plaintiffs’ claims were barred by the statute of limitations; and (2) the trial court’s denial of the former employees’ motion for summary judgment  established that the underlying action was brought with probable cause as a matter of law pursuant to the “interim adverse judgment rule.”  The trial court granted Latham’s SLAPP motion on the statute of limitations grounds and did not expressly address the other arguments.

The Court of Appeal in the first go around held the applicable statute of limitations for malicious prosecution claims was not the one-year period set forth in Cal. Code Civ. Proc. Section 340.6, but rather the two-year limitations period set forth in the Cal. Code Civ. Proc. Section 335.1 and held that, as such, the claim was not barred.  The court also addressed the issue on the merits and concluded the interim adverse judgment rule would not apply because, in part, Latham had “sought an obviously anti-competitive injunction based on the speculative possibility that the [Plaintiffs’] product might violate its client’s trade secrets….” and that when Plaintiffs presented evidence to Latham that there was no actual misappropriation of the business plan at issue, Latham changed the theory of the case to pursue a claim that the Plaintiffs could not effectuate the business plan without using FLIR’s intellectual property.   The Court of Appeal initially held that the Plaintiffs had established a reasonable probability of prevailing on the element of lack of probable cause and reversed the trial court’s order granting Latham’s SLAPP motion.

Latham filed a petition for re-hearing which was denied on September 19, 2014 and then, on the court’s own motion, was granted on September 25, 2014.  On June 26, 2015, the Court of Appeal issued its decision, affirming the trial court’s order granting Latham’s anti-SLAPP motion on the ground that the “interim adverse judgment rule” established Latham had probable cause to bring the action.  The court held that exceptions to the interim adverse judgment rule did not apply in this case because (1) the summary judgment motion was not denied on procedural or technical grounds and (2) the summary judgment motion was not obtained by fraud or perjury.  Parrish v. Latham & Watkins, 238 Cal.App.4th 81, 97 (2015).

The Plaintiffs argued that the trial court’s statement in the underlying action that the “former employees failed to sustain their burden of proof on the motion” established the motion was denied on “technical grounds” which would not trigger the interim adverse judgment rule.  The Court of Appeal disagreed because the party moving for summary judgment bears the ultimate burden of persuasion to establish there is no triable issue of material fact.

The Plaintiffs further argued the trial courts’ award of Uniform Trade Secret Act attorney’s fees based on a finding of bad faith negated the interim summary judgment rule.  Again, the court disagreed finding that simply because a trial court or jury later rejects a party’s claim, after weighing the competent evidence, does not negate other evidence which, standing alone establishes the existence of probable cause.

The California Supreme Court will now resolve this issue and hopefully clarify the law in this area.

The California Supreme Court’s opinion on this subject will be a must read for California trade secret litigators (and all litigators) and hopefully will articulate the standards that separate hardball litigation tactics from litigation that is deemed anti-competitive, which can create a substantial risk for both Plaintiff and Plaintiff’s attorneys.

California Business & Professions Code § 16600 contains a strong public policy against non-competition agreements.  To address this prohibition, some employers have included choice of forum provisions in their employment contracts to give them the option of initiating an action in a more non-compete friendly jurisdiction and obtain leverage in the litigation.  Some federal district courts have enforced those forum selection clauses.  Marcelo v. Ivy Ventures, LLC, No. C 10-04609, 2010 U.S. Dist. LEXIS 134333 (N.D. Cal. Dec. 9, 2010); Google, Inc. v. Microsoft Corp., 415 F. Supp. 2d 1018 (N.D. Cal. 2005); Hartstein v. Rembrandt IP Solutions, 2012 U.S. Dist. LEXIS 105984 (N.D. Cal. July 30, 2012); see also Hegwer v. American Hearing and Assocs., 2012 U.S. Dist. LEXIS 24313 (N.D. Cal. Feb. 27, 2012); Swenson v. T-Mobile USA, Inc., 415 F. Supp. 2d 1101 (S.D. Cal. 2006) (in case filed by employee in California after former employer had commenced enforcement action in Washington, California court dismissed and held that “[e]nforcement of the [Washington] forum selection clause itself here does not contravene a strong public policy of California).

The California court of appeals holding in Verdugo v. Alliantgroup, L.P., (Cal. Ct. App., 4th App. Dist. 2015) may undermine that strategy.

Ordinarily, the party opposing the enforcement of a forum selection clause has the burden to show the enforcement of the clause would be unreasonable or unfair.  In Verdugo, the court held that the burden is reversed when the underlying claims are based on statutory rights that the California Legislature has deemed unwaivable.

In Verdugo, the plaintiff employee Rachel Verdugo sued her employer, Alliantgroup, in a class action asserting eight causes of action: (1) unpaid overtime wages under Cal. Labor Code § 1194; (2) failure to provide accurate itemized wage statements under Cal. Labor Code § 226; (3) failure to provide meal breaks under Cal. Labor Code § 226.7; (4) failure to pay all wages due at time of termination under Cal. Labor Code § 203; (5) failure to pay commissions under Cal. Labor Code §§ 200 to 204; (6) failure to pay vacation pay under Cal. Labor Code § 227.3; (7) unfair and unlawful business practices under Cal. Bus. & Prof. Code § 17200, et seq. and (8) civil penalties under the Cal. Labor Code Private Attorneys General Action of 2004.  Alliantgroup moved to stay or dismiss the action based on a forum section clause in an Employment Agreement signed by Verdugo.

Verdugo began her employment with Alliantgroup in 2007 in its Irvine, California office as an “Associate Director”.  Alliantgroup is headquartered in Texas, with offices in 11 states, including California.  Verdugo’s Employment Agreement included a combined forum selection and choice of law clause:

Choice of Law/Jurisdiction/Venue: This Agreement shall be governed in all respects, including, but not limited to, validity, interpretation, effect and performance by the laws of the State of Texas. The parties agree that proper subject matter and personal jurisdiction shall be had solely in [the] State of Texas. The sole venue for disputes arising hereunder shall be in Harris County, Texas.” (Italics, underscoring, and bold typeface omitted.)

The trial court granted Alliantgroup’s motion.  Verdugo appealed.

The Verdugo court began its analysis by noting the general standard that California favors enforcement of forum selection clauses, provided they are entered into freely and voluntarily, and provided their enforcement would not be unreasonable.  A mandatory forum selection clause—one that requires that a matter be litigated in a particular forum as opposed to merely permitting it—is given effect unless the enforcement would be unreasonable or unfair.  The Verdugo court pointed out that, despite this, California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates California public policy.

Alliantgroup argued that it was Verdugo’s burden to demonstrate that the forum selection clause should not be enforced.  The Verdugo court disagreed.  Citing Wimsatt v. Beverly Hills Weight etc. Internat., Inc., 32 Cal.App.4th 1511 (1995)(dealing with claims under California’s Franchise Investment Law) and America Online, Inc. v. Superior Court, 90 Cal.App.4th 1 (2001)(dealing with claims under California’s Consumer Legal Remedies Act), the Verdugo court held that where the claims at issue in the litigation are based on unwaivable statutory rights, the burden  shifts to the party seeking to enforce the forum selection clause to show that the forum selected will not diminish in any way the substantive rights afforded under California law.

Alliantgroup attempted to distinguish Wimsatt and America Online, arguing that, in each case, the statute at issue specifically stated that attempts to waive the protections of the law are void.  The Verdugo court dismissed this argument, noting that California Labor Code §§ 219 and 1194 include non-waiver language and further noting that case law recognized the protections of the Labor Code at issue were unwaivable.  Alliantgroup then tried to argue that Verdugo had not waived her rights, but merely agreed to litigate her claims in Texas.  The Verdugo court also dismissed this argument, holding that the forum selection clause had the potential to operate as a waiver, and it was Alliantgroup’s burden to show it would not.

Having held that Alliantgroup bore the burden of establishing that the selection of Texas as a forum would not diminish in any way the substantive rights afforded under California law to Verdugo, the Verdugo court proceeded to address whether Alliantgroup had met that burden.  The court first addressed whether it was necessary to conduct a comparative analysis of each state’s law to determine whether they offered materially different protections.  Citing America Online, the Verdugo court noted that there the court had found such an analysis unnecessary—enforcing the clause would deny a California resident the specific protections the California Legislature enacted and made unwaivable.  Nonetheless, noting that the America Online court had proceeded to conduct just such an analysis, the Verdugo court held such an analysis was necessary to determine whether enforcement of the forum selection and choice of law clauses would violate California’s public policy.  The Verdugo court held that the defendant could meet its burden only by showing that the foreign forum provides the same or greater rights than California, or that the foreign forum will apply California law.

Alliantgroup contended that a Texas court would, under Texas choice of law, most likely apply California law.  The Verdugo court found this unpersuasive, noting that Alliantgroup could have omitted any uncertainty by stipulating to the application of California law.  Instead, Alliantgroup “carefully preserved its ability to argue to a Texas court that it should apply Texas law. . . .”  Holding that Alliantgroup had failed to identify or compare Texas and California law on any of the relevant statutory claims, the Verdugo court held Alliantgroup had not met its burden.

Alliantgroup argued against a full reversal of the lower court’s ruling, arguing that the stay should be left in place on forum non conveniens grounds, with the right to resume litigation if the Texas court refused to apply California law and was thus, “unsuitable.”  The Verdugo court held that a California trial court lacked the power to simply stay the action on forum non conveniens grounds.  The Verdugo court held that the issue was not whether Texas was suitable for purposes of forum non conveniens—an analysis limited to whether the court lacks jurisdiction or the action is barred on statute of limitations grounds.  A Texas court’s decision to apply Texas law would not make Texas an unsuitable forum.  And the California trial court would not necessarily have a basis to resume proceedings.

Out of state employers seeking to enforce forum and choice of law clauses against California employees should be mindful that the clauses cannot be used to undercut the unwaivable protections of the California labor code.  An out of state employer that wishes to enforce a forum selection clause should be prepared to stipulate to application of California law as to the unwaivable protections of the California Labor Code on claims at issue if it wishes to have its choice of forum outside California enforced by a California court.

It remains to be seen to what extent this ruling may be used by employees to escape the effect of forum selection clauses in cases involving non-competition agreements.  Although Cal. Business & Professions § 16600 does not specifically use the term “waive,” it states that:  “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  Case law does not permit employers to use choice of law provisions to avoid the impact of Cal. Business & Professions § 16600 (Application Group, Inc. v. Hunter Group, Inc., 61 Cal.App.4th 881, 901-905 (1998)), but employers have used choice of forum clauses to enforce non-competition agreements.  Employers may anticipate that employees with non-competition agreements facing forum selection clauses that may result in enforcement of the terms will argue that the provisions of §16600 are not waivable and, pursuant to Verdugo, may not be litigated in foreign forums that would enforce them.

In another decision expansively interpreting California Business & Professions Code § 16600 and which could have a significant effect on employment litigation settlements, the Ninth Circuit Court of Appeals reversed the district court’s enforcement of a settlement agreement and remanded the case to the district court to determine whether a no employment provision in the agreement is a “restraint of substantial character” to the Plaintiff’s medical practice.  Golden v. California Emergency Physicians Medical Group; Med America; Mark Alderdice; Robert Buscho, United States Court of Appeals for the Ninth Circuit (No. 12-16514) (April 8, 2015).

The case has an interesting procedural history.  Dr. Golden is an emergency-room doctor who sued California Emergency Physicians Medical Group (“CEP”), among others, regarding his loss of staff membership at a medical facility.  His lawsuit was based on various state and federal causes of action, including racial discrimination.  The parties orally agreed in open court to settle the case and the settlement terms included “a substantial monetary amount,”  dismissal of the action, a release of CEP and a waiver of any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future (the “no-employment provision”).  Dr. Golden refused to sign the written agreement and attempted to have it set aside.  His attorney moved the court to withdraw as counsel, moved the court to intervene and further moved the court to enforce the settlement agreement so he could collect his contingency fee. In further proceedings a magistrate judge ordered Dr. Golden to sign an amended agreement, which recommendation was adopted by the district court judge who concluded the settlement agreement was not within the ambit of § 16600.  Dr. Golden refused to sign the agreement and filed a notice of appeal.

The court concluded the case was ripe for review because (1) Dr. Golden argued the agreement was currently void because the no-employment term was a material term and (2) Dr. Golden’s argument that the no-employment provision was void was in response to his former attorney’s motion to enforce the agreement.  The court concluded the issue before it concerned the present enforcement of the settlement agreement rather than the future interaction between the no-employment provision and his emergency medicine practice.

Dr. Golden argued because of CEP’s emergency medicine dominance in California and its aggressive plans to expand, the agreement would substantially limit his employment opportunities because CEP not only could refuse to employ him, it could terminate him without any liability if it subsequently acquired an interest in a facility where he would be working.

The court pointed out that § 16600’s scope is not limited to covenants not to compete between employees and their employers.  Rather, the court held, the text of § 16600 voids “every contract” that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.”  The court relied on the California Supreme Court decision in Chamberlain v. Augustine, 156 P2nd 479 (Cal. 1916) and concluded the issue is “not whether the contract constituted a covenant not to compete, but rather whether it imposes ‘a restraint of substantial character.'”  The court concluded that the § 16600 prohibition extends to any restraint of a substantial character no matter its form or scope and remanded the case to the district court to determine in the first instance whether the no-employment provision constitutes a restraint of substantial character to Dr. Golden’s medical practice.

Judge Kozinski dissented because the only limitation imposed by the agreement on Dr. Golden’s ability to practice his profession “at this time” (emphasis in original) was that he could not work for CEP.  Since his employment with CEP was the subject of the controversy in his lawsuit, it could not possibly violate § 16600 and it would mean few employment disputes could ever be settled.  Judge Kozinski opined the only real limitation on Dr. Golden’s ability to practice would be if, in the future, CEP acquired a facility at which he worked.  He concluded if that scenario occurred, Dr. Golden would have the ability to raise § 16600 as a defense to his dismissal and a court could adjudicate that issue based on the concrete circumstances which existed at that time.

We will be very interested to learn how the district court resolves this issue.  This case has important implications for employment law litigation in California because most settlement agreements contain a no future employment provision.  The district court’s decision following remand and any potential appeal should further clarify the issue.  However, employment attorneys will have to be very careful in including no employment provisions in settlement agreements.  Absent a provision providing  that any unenforceable terms may be severed from the agreement, attorneys must be careful in deciding whether  no employment provisions should be included in that, based on the Golden case, it might invalidate the settlement agreement if a court concludes the prohibition is a restraint of substantial character.

Co-authored by Ted A. Gehring.

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

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

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

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

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

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

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

Co-authored by Ted A. Gehring.

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

In our blog post, we noted that:

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

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

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

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

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

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

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

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

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