Trade Secrets and Confidential Information

California is one of the 47 states to have adopted the Uniform Trade Secrets Act. Among other things, “CUTSA,” as it is sometimes referred to in the Golden State, brought greater clarity to what qualifies as a “trade secret” and “misappropriation” of a trade secret, and it established an enforcement scheme that provides for an award of attorneys’ fees to a prevailing party and for potential award of a “royalty” in cases where the aggrieved party cannot prove actual damages.

By the plain language of the statute, CUTSA was intended to take the place of most business tort causes of action that were historically used to address trade secret misappropriation. The term “preemption” is often used to address this concept, but that is technically incorrect because preemption involves the trumping of state law by federal law. More accurately, some courts have used the term “supersession,” or “displacement” of state law. Whatever term is used, the question is whether a victim of trade secret misappropriation pursuing a CUTSA claim may also pursue other business torts such as breach of the duty of loyalty or conversion against the wrongdoer. The California Court of Appeal recently addressed this issue in Angelica Textile Services v. Park to find that CUTSA did not displace a state law claim for conversion of trade secrets, but the court reached that conclusion in a novel manner.

Angelica Textiles, a large-scale laundry business catering to hospitals and other medical facilities, sued one of its former managers, Jaye Park, on a variety of causes of action, including CUTSA, after he left the company to form a competing business. The evidence in the case indicated that Mr. Park had been actively engaged in preparation to open his competing business while still employed by Angelica, and he had criticized the company’s business practices when speaking with customers while still on the company’s payroll. Angelica also contended that Park had improperly taken a variety of proprietary documents at the time of his departure.

The trial court entered summary judgment on Angelica’s claims against Park and his competing business for breach of fiduciary duty, unfair competition, interference with business relations, and breach of contract. The court ruled that these business tort claims were “preempted” by CUTSA because they were based on the same facts and circumstances as the CUTSA claim. The CUTSA claim proceeded to a jury trial, but the jury rendered a defense verdict on the grounds that the documents that Park had allegedly stolen did not meet the statutory definition of a “trade secret.” Angelica appealed the entry of summary judgment on the tort claims but did not attempt to challenge the validity of the jury’s verdict.

The California Court of Appeal reversed the entry of summary judgment. The court noted that the language of CUTSA is quite clear that breach of contract claims based on a misappropriation of trade secrets are never supplanted by the statute, even if those claims are based on the same facts underlying the CUTSA claim. Other business tort claims are displaced by CUTSA only if they depend upon the same facts as the CUTSA claim without other supporting allegations. For example, the Court of Appeal found that Angelica’s claim against Park for breach of fiduciary duty was based on alleged misconduct wholly apart from his alleged misappropriation of trade secrets, including his disparagement of Angelica to its customers while still employed. Therefore, that claim was not preempted.

The Court of Appeal’s rationale for its conclusion that Angelica’s claim for conversion was not displaced by CUTSA is the most interesting aspect of the decision. The jury had concluded that the documents that Park had allegedly purloined on his way out the door did not qualify as “trade secrets.” The Court of Appeal noted that if these documents were not trade secrets then Angelica could not have a claim under CUTSA and, therefore, CUTSA did not displace its common law claim for conversion. The court noted that nothing in the record indicated that these documents, which apparently did not have any actual competitive value, had ever been returned. Thus, the outcome of the ruling was that Angelica technically or theoretically had available a cause of action based on Park’s alleged misappropriation of the documents, but the company had no damages, no right to recover attorneys’ fees, no right to a statutory royalty, and even injunctive relief would be of no value.

This case illustrates once again how important precise pleading can be in a trade secret misappropriation claim, and that great care must be taken to plead all facts that might support a business tort claim outside the scope of CUTSA.
 

Thirteen months ago, we blogged about Hanjuan Jin, a former Motorola software engineer who was sentenced in the United States District Court for the Northern Division of Illinois to four years in prison for stealing Motorola trade secrets related to its proprietary cellular telecommunications technology. Jin was first arrested after she attempted to board a flight at Chicago-O’Hare International Airport on a one-way ticket to China while carrying a variety of electronic storage devices, Motorola documents marked as “confidential and proprietary information,” and more than $31,000 in cash.

Jin was prosecuted on theft of trade secrets and economic espionage charges under the Economic Espionage Act, 18 U.S.C. sec. 1831, 1832, and was convicted of theft of trade secrets. She appealed both her conviction and the length of her four-year sentence.

In a September 26, 2013 decision, a three judge panel that included Circuit Judge Richard A. Posner affirmed Ms. Jin’s conviction and sentence, underscoring that, where warranted, federal courts can and will view theft of trade secrets as a serious crime that warrants significant punishment.
 

Courts in the Seventh Circuit don’t like to permit parties to file documents under seal. That philosophy is evident in many places, including Seventh Circuit precedent and the local rules for the United States District Court for the Northern District of Illinois. A new decision from the United States District Court for the Eastern District of Wisconsin reaffirms that the Circuit’s attitude against sealing is alive and well these days.

The case of Marine Travelift, Inc. v. Marine Lift Systems, Inc. (Case No. 10 C 1046) is ongoing and involves a claim of misappropriation of confidential information and trade secrets in the marine lift industry. As in many cases involving purportedly confidential information and trade secrets, the plaintiff filed a number of motions asking the court for permission to file certain documents under seal. The court, however, apparently grew tired of the plaintiff’s requests. In an order issued on August 13, the Court explained that the plaintiff was requesting to seal documents containing pricing information and two-year old marketing forecasts on the grounds that disclosure of that information would negatively impact its ability to compete in the marketplace. In rejecting those arguments, the Court explained that the pricing information was not confidential because it was disclosed to customers and there was no evidence that those customers were required to keep those prices confidential. Additionally, the Court explained that marketing forecasts from two years ago were stale and the plaintiff failed to demonstrate how it would be damaged by the disclosure of stale information. The Court reiterated the Seventh Circuit’s standard that a party seeking to seal a document must explain how disclosure would cause harm and why that harm warrants secrecy. Absent a thorough and convincing explanation, the Court explained that motions to seal “divert the attention of both the court and the parties from the merits of the case.”

As a result, when asking a Court in the Seventh Circuit to seal a document, best to have and articulate a good reason for that request.

The Uniform Trade Secrets Act, which has been adopted in some form in every state except New York, Massachusetts, and North Carolina, provides that if “a claim of misappropriation is made in bad faith . . . the court may award reasonable attorney’s fees to the prevailing party.” Uniform Trade Secrets Act, § 4 (emphasis added). One question under this provision is whether it only applies to lawsuits filed in bad faith, or whether it also applies to lawsuits that are maintained in bad faith (i.e., lawsuits that continue to be prosecuted – even after it becomes clear that there was no trade secret misappropriation).

Although no Illinois state court has addressed this issue under the Illinois version of the Uniform Trade Secrets Act, the U.S. Court of Appeals for the Seventh Circuit recently did so in Tradesman International, Inc. v. John Black, et al., holding that “common sense” supports interpreting this provision as applying to trade secret misappropriation lawsuits that are filed and/or maintained in bad faith. As the Seventh Circuit wrote, “[r]egardless of her intention at the time of filing, surely a plaintiff makes a claim in bad faith if she continues to pursue a lawsuit – even after it becomes clear that she has no chance to win the lawsuit – in order to cause harm to the defendant.”

By necessity, trade secret misappropriation cases are frequently crafted amidst great time constraints and factual uncertainties. While such filings are contemplated by the Uniform Trade Secrets Act – which expressly authorizes injunctive relief against mere threatened misappropriation – Tradesman and other cases about which we have recently blogged emphasize the need to re-evaluate the continued prosecution of trade secret misappropriation cases as the facts unfold in discovery.
 

Co-authored by Ted A. Gehring.

California Courts have discretion to award attorneys’ fees to a prevailing defendant in a trade secrets action where the commencement or continued prosecution of a trade secrets action is in bad faith. We have blogged about this issue twice previously. First, 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. Second, in connection with SASCO v. Rosendin Electric, Inc., 2012 WL 2826955 (Cal.App. 4 Dist.), where the California Court of Appeal, Fourth Appellate District, affirmed the award of a $485,000 attorneys’ fees award issued after voluntary dismissal of trade secret claims prior to a hearing on a motion to summarily adjudicate the claims against the plaintiff.

On August 14, 2013, in an unpublished opinion, the California Court of Appeal, Fourth Appellate District in All American Semiconductor, LLC v. APX Technology Corp. (Case No. G046605, Cal. App. 4 Dist. 2013), affirmed a $202,291.50 attorneys’ fees award against a plaintiff for a bad faith prosecution of a trade secret claim.

In All American, the plaintiff, All American Semiconductor, LLC, was an investment group formed to purchase in bankruptcy and assume the name and all assets of All American Semiconductor, Inc. Among the assets acquired in bankruptcy was All American Semiconductor, Inc.’ s subsidiary, A.V.E.D., Inc., which included the Aved Memory Products business unit. The plaintiff believed that Aved’s intellectual property included ownership of memory modules designed by Aved and manufactured by third parties, including the defendant, APX Technology Corp. After acquiring All American Semiconductor, Inc., however, plaintiff was unable to locate designs for memory modules. The Plaintiff surmised that the designs were taken by Aved’s former general manager, Richard McCauley. McCauley left Aved shortly before All American Semiconductor, Inc.’s bankruptcy to form a new company manufacturing memory modules in conjunction with APX. The Plaintiff sued McCauley and APX, alleging claims for trademark infringement, unfair competition, conversion and misappropriation of trade secrets under the California Uniform Trade Secrets Act (“CUTSA), Cal. Civ. Code Section 3426.

APX moved for summary adjudication of the plaintiff’s trade secret claim, contending that Aved did not design memory modules and that all memory modules manufactured by APX were designed by APX. The plaintiff opposed summary adjudication based on statements in the bankruptcy bid materials that Aved designed memory modules. The plaintiff was unable, however, to set forth any evidence of specific memory module designs it believed had been misappropriated. The trial court granted APX’s motion for summary adjudication, concluding that there was no evidence of any specific design misappropriated by APX.

Trial proceeded on the remaining causes of action. Plaintiff prevailed on its trademark claim against McCauley, but the jury rejected the plaintiff’s conversion claims. On a post trial motion, the trial court awarded APX more than $200,000 in attorneys’ fees because the plaintiff continued to pursue its trade secret claim against APX without any evidence to support the claim.

On appeal, the Fourth District affirmed the trial court’s granting of summary adjudication to APX on the misappropriation claim and the award of attorneys’ fees under CUTSA, finding that the plaintiff’s misappropriation claim had been made in bad faith. The Court of Appeal noted that while CUTSA does not define bad faith, California courts have interpreted the term to include objective speciousness and subjective bad faith in bringing or maintaining the claim. The Court notes that subjective misconduct could be inferred from the objective speciousness of the plaintiff’s claim and the plaintiff’s conduct during the litigation. Critical to the Court’s analysis was the plaintiff’s inability to identify the trade secrets at issue. The Court noted that plaintiff’s separate statements of fact opposing APX’s motion for summary adjudication failed to set forth evidence of what constituted plaintiff’s actual trade secret. The plaintiff initially opposed summary adjudication claiming—without foundation—that it created and furnished memory module designs to APX. When APX replied pointing out that the evidentiary record did not support that claim, the plaintiff filed a supplemental opposition claiming it purchased memory module designs, but never actually identifying them. The Court of Appeal rejected the plaintiff’s claim that the trial court improperly struck the conclusory declaration of the plaintiff’s president that the claims had not been filed in bad faith.

Based on this decision, a plaintiff pursuing a trade secret claim must be careful that it can actually identify with some particularity what trade secrets have been misappropriated. General allegations of the existence of a trade secret and a belief they have been misappropriated will be insufficient to withstand summary adjudication, and may expose the plaintiff to liability for attorneys’ fees for pursuing a claim in bad faith.
 

Our Epstein Becker Green colleague Angel Gomez, a Member of the Firm in the Labor and Employment and Litigation practices, based in Los Angeles, wrote an article for Law360 titled "In Light of Snowden: How to Use Independent Contractors." (Read the full version – subscription required.)

Following is an excerpt:

Recent events connected with Edward Snowden have captured the world’s attention. Snowden, an admitted leaker of national security secrets, was, at the time of the leaks, an employee of the well-known consulting firm Booz Allen Hamilton — Booz Allen Hamilton was a contractor to the National Security Agency, the federal agency which was collecting the leaked information.

Snowden’s actions draw attention to a little-discussed area of importance to employers — trade secrets and independent contractors (ICs). ICs have become an important part of the American business landscape. While ICs have long been used for special projects, employers increasingly use ICs (instead of employees) to maintain flexibility regarding the size of their workforce or use ICs to seek to reduce tax or labor-cost exposure.

Sophisticated employers follow recommended "best practices" and include express trade secret provisions in their IC agreements — that is, language expressly stating that all trade secrets learned or developed by the IC during the engagement remain the property of the employer and that the IC is prohibited from making unauthorized use of the trade secrets during or after the engagement.

Many employers in the high-technology and other high-security fields have implemented elaborate procedures to limit IC access to and use of trade secrets, including security badges, passwords and daily log-in procedures. These facts represent the "gold standard" that can be introduced in later litigation against the IC who is improperly using trade secret information.

A California legislator recently introduced two bills in Congress which, if passed, could have profound effects for companies seeking to pursue claims relating to trade secrets and confidential information – one bill would create a new private right of action under federal law for trade secret theft, while the other bill would appear to limit plaintiffs’ abilities to pursue existing remedies for computer fraud and abuse.

In its current form, the Economic Espionage Act allows only federal prosecutors to bring criminal trade secrets charges against persons who have stolen trade secrets. On June 20, 2013, however, Representative Zoe Lofgren (a California Democrat representing a district that includes San Jose and Silicon Valley) introduced a bill titled the “Private Right of Action Against Theft of Trade Secrets Act of 2013” (H.R. 2466) which would amend the Economic Espionage Act to add a civil remedy, by adding two new subsections to 18 U.S.C. §1832:

(c) Any person who suffers injury by reason of violation of this section may maintain a civil action against the violator to obtain appropriate compensatory damages and injunctive relief or other equitable relief. No action may be brought under this subsection unless such action is begun within 2 years of the date of the act complained of or the date of the discovery of the damage.

(d) For purposes of this section, the term ‘without authorization’ shall not mean independent derivation or working backwards from a lawfully obtained known product or service to divine the process which aided its development or manufacture.

If passed, this proposed amendment could result in a dramatic uptick of trade secrets lawsuits filed in federal courts. Currently, companies pursuing trade secret misappropriation claims are largely limited to state law remedies, and as a result often find themselves limited to state court.

While the Private Right of Action Against Theft of Trade Secrets Act of 2013 would provide additional ammunition against persons who steal trade secrets, a companion bill that seeks to clarify a controversial provision in the Computer Fraud and Abuse Act (“CFAA”) could restrict companies’ ability to pursue claims under the CFAA.

On the same day as the above-discussed amendment to the Economic Espionage Act was introduced, Representative Lofgren co-sponsored a bill (“Aaron’s Law Act of 2013,” H.R. 2454) that would narrow the scope of the CFAA. As stated on Rep. Lofgren’s website, this bill, among other things:

Establishes that mere breach of terms of service, employment agreements, or contracts are not automatic violations of the CFAA. By using legislative language based closely on recent important 9th and 4th Circuit Court opinions, the bill would instead define ‘access without authorization’ under the CFAA as gaining unauthorized access to information by circumventing technological or physical controls – such as password requirements, encryption, or locked office doors. Hack attacks such as phishing, injection of malware or keystroke loggers, denial-of-service attacks, and viruses would continue to be fully prosecutable under strong CFAA provisions this bill does not modify.

As we have blogged about previously here, here and here, when companies sue their former employees under the CFAA, the employees frequently argue that the CFAA prohibits unauthorized access to protected computers, not unauthorized use of those computers and the confidential information thereon. This issue — the application of the CFAA to alleged employee computer abuse — is the subject of numerous court decisions across the country, some of which interpret the CFAA’s “without authorization” language broadly, and some of which interpret it narrowly, as former employees commonly urge. The recently introduced H.R. 2454 bill, if passed, would enact as law the narrow, pro-employee view of the CFAA.

While these bills were only recently introduced and have a long way to go before they might become law, their potential consequences for employers and attorneys make them important ones to follow.
 

In February 2013, the Justice Department announced a federal trade secret enforcement initiative that rested in large part on encouraging American businesses to adopt best practices in the area and diligent pursuit of civil remedies, and on parallel criminal law enforcement. As noted in the initiative outline, "The Department of Justice has made the investigation and prosecution of corporate and state sponsored trade secret theft a top priority."

Over the last ten days, events unfolded in New Jersey that showed this new policy initiative to be one involving real action. Those events began with a timely filed civil action by Epstein Becker Green ("EBG") on behalf of Becton, Dickinson & Company ("BD") that led to a May 31, 2013, restraining order against Ketankumar Maniar, a former BD employee planning to leave the country in days with BD trade secrets in his possession. The facts developed by BD and EBG, along with the civil court filings, were provided to federal law enforcement officials.

Realizing that the material Maniar had taken amounted to a "tool kit" for manufacturing a soon-to-be-released disposable pre-filled pen injector in which BD had invested substantial time and money, federal agents opened a investigation. They later executed a search warrant to retrieve from Maniar a number of storage devices and, on June 5, 2013, arrested him for criminal violation of 18 USC section 1832. The arrest was widely reported locally, nationally, and internationally after it was announced by the US Attorney for District of New Jersey and the FBI.

Such publicity is itself consistent with the initiative, which makes public awareness of the effort a foundational concept: "Highlighting [such cases and issues] can help mitigate the theft of trade secrets by encouraging all stakeholders, including the general public, to be aware of the detrimental effects of misappropriation on trade secret owners and the U.S. economy in general."

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.