Financial analytics firm Novantas, Inc. and two individual defendants closed out 2017 with a victory, securing the dismissal of claims by rival First Manhattan Consulting Group LLC (“First Manhattan Consulting Group”) [1], which accused them of competing unfairly by poaching First Manhattan Consulting Group’s employees in order to steal its trade secrets.  The result demonstrates the need for plaintiffs in such cases to be able to prove with specificity which trade secrets were taken or threatened by the defendants’ conduct.

The Complaint alleged that Novantas engaged in a “pattern and practice of poaching” First Manhattan Consulting Group’s employees, including defendants Peter Gilchrist and Andrew Frisbie in 2014, to gain access to First Manhattan Consulting Group’s confidential information.  These individuals, who were officers of First Manhattan Consulting Group, were subject to contractual confidentiality and employee non-solicitation obligations.  First Manhattan Consulting Group asserted causes of action for breach of contract against the individuals, for tortious interference with contract and unfair competition against Novantas, along with a misappropriation of trade secrets claim against all defendants.

The case went to trial in Supreme Court, New York County. Justice Barry Ostrager declined to submit the misappropriation claim to the jury, because the information presented by First Manhattan Consulting Group at trial did not appear to the Court to be a trade secret, and there was no testimony concerning trade secrets.  In its verdict, the jury unanimously found no liability on any of the other claims.  On December 19, 2017, the Court dismissed First Manhattan Consulting Group’s claims.

For practitioners, this outcome is a useful reminder that trade secret misappropriation claims require in-depth understanding of the client’s business, detailed allegations in pleadings of the legally required elements of a misappropriation claim and, at trial, a full presentation regarding the wrongdoing and what specific information was taken and how the plaintiff has been damaged.

 

[1] First Manhattan Consulting Group is unrelated to First Manhattan Co.

In First Western Capital Management Co. v. Malamed, Case Nos. 16-1434, 16-1465 & 16-1502 (10th Cir. Oct. 30, 2017), the Tenth Circuit Court of Appeals held that a district court erred in issuing a preliminary injunction to a party under federal and state trade secret law where the court presumed that the party would be irreparably harmed absent the injunction.

Ordinarily, in order to obtain a preliminary injunction, a moving party needs to establish, among other things, that it will suffer irreparable harm if the injunction is denied. This requires the party to show that there is a significant risk that it will experience harm that cannot be compensated by money damages.  In First Western Capital Management, however, the district court held that the plaintiff (First Western) was not required to establish irreparable harm because both the Defend Trade Secrets Act (“DTSA”) and the Colorado Uniform Trade Secrets Act (“CUTSA”) provide for injunctive relief to prevent misuse of trade secrets, and the evidence showed that the defendant was misusing or threatening to misuse trade secrets regarding First Western’s clients.  Thus, the district court held that irreparable harm “presumptively exists and need not be separately established.”  Had First Western not been excused from showing irreparable harm, the district court would have denied its request for injunctive relief because evidence was presented that showed that monetary damages could be reasonably quantified and would adequately make First Western whole.

The Tenth Circuit explained that courts may presume irreparable harm only when a party is seeking an injunction under a statute that mandates injunctive relief as a remedy for a violation of the statute.  When Congress or a state legislature passes such a statute, it effectively has withdrawn the court’s discretion to determine whether such relief is appropriate.  By contrast, when a statute merely authorizes injunctive relief, courts may not presume irreparable harm, as doing so is contrary to equitable principles.  Because DTSA and CUTSA only authorize, but do not require, injunctive relief, and because the evidence presented to the district court showed that monetary damages could be quantified in order to compensate First Western, the Tenth Circuit reversed the district court’s grant of the injunction to First Western.  Legal practitioners thus should carefully review the applicable statute to determine whether it mandates or merely permits injunctive relief; where such relief is not required, they should make a fulsome showing that their client will suffer irreparable harm without an injunction.

Epstein Becker Green attorneys Peter A. Steinmeyer, Robert D. Goldstein, and Brian E. Spang are pleased to be presenting 2017 Year in Review: Trade Secrets and Non-Compete Developments webinar on Wednesday, December 6, 2017 from 1:00 p.m. — 2:15 p.m. with Practical Law.

This webinar will provide 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 continually developing area and effectively protect client relationships and proprietary information.

Topics will include:

  • A review of recent developments and litigation trends under the Defend Trade Secrets (DTSA) since its enactment in 2016.
  • Newly passed state statutes addressing restrictive covenants, including who can enter into them, industry restrictions, and temporal restrictions.
  • Increased usage of “garden leave” clauses in lieu of non-competes.
  • Recent decisions regarding restrictive covenants, including whether a LinkedIn “invitation to link” is an improper solicitation.
  • Significant recent trade secret cases, including the level of detail required when pleading the existence of a trade secret.
  • Administrative agency developments regarding confidentiality clauses, including shifting agency trends under the Trump administration.
  • When are employers actually filing suit against former employees?

Click here for more information and to register for the webinar.

Earlier this week, Illinois Attorney General Lisa Madigan sued payday loan company Check Into Cash of Illinois, LLC for allegedly requiring that all of its employees in Illinois, regardless of position or pay, sign a standard non-compete agreement which broadly limits their employment mobility for one year post-termination.

According to the Complaint, Check Into Cash’s standard non-compete agreement effectively precludes employment with any entity that offers any “consumer lending service,” regardless of whether the entity is an actual competitor; it applies within a 15 mile radius of any of Check In To Cash’s more than 1,000 stores – regardless of the location where the employee actually worked; all employees are required to sign it; and employees receive no consideration for signing the agreement, other than the prospect of at-will employment.

The Complaint was brought pursuant to the recently enacted Illinois Freedom to Work Act (which bars non-competes for Illinois employees earning $13/hour or less), Illinois common law, and the Illinois Consumer Fraud and Deceptive Business Practices Act.

Although this lawsuit was filed in Illinois, there is similar political (and judicial) hostility to non-competes for low-wage workers across the country.  Given this climate, employers everywhere should take a moment to review any non-competes for low level or low wage employees and, if needed, take pro-active remedial action.

Plaintiff Art & Cook, Inc., a cookware and kitchenware company, brought suit in New York federal court against a former salesperson, Abraham Haber, when a search of his work computer revealed that he had emailed to his personal email account two categories of documents alleged by Art & Cook to be trade secrets: (i) its customer contact lists and (ii) its designs and branding/marketing strategies. Although the court already had issued a temporary restraining order, in Art & Cook, Inc. v. Haber, No. 17-cv-1634, 2017 U.S. Dist. LEXIS 164366 (E.D.N.Y. Oct 3, 2017), the court denied Art & Cook’s motion for a preliminary injunction brought exclusively under the Defend Trade Secrets Act (“DTSA”) because the company failed to demonstrate a likelihood of success on the merits of a DTSA cause of action.

First addressing the customer lists at issue, the court noted that the Second Circuit has long held that, under certain circumstances, a customer list may be deemed a trade secret – particularly where the customer list contains individual customer preferences or represents the list owner’s work to create a market for a new service or good. Where the list contains little more than publicly available information, even if it takes considerable effort to compile, it is not accorded protection under DTSA. The customer lists at issue in this case fell into the latter category, as they contained nothing more than a compilation of publicly available information including emails and phone numbers. The court said that that the fact that it took the company “tens if not hundreds of hours” of research to compile those lists was insufficient under DTSA.

Turning next to the company’s designs and branding/marketing strategies, the court noted that such material was exactly the kind of business information that DTSA was designed to protect because they derive independent economic value from not being generally known. However, the company failed to show that it took “reasonable measures” to keep the information secret. For example, the company’s president testified that he spoke to Haber many times about confidentiality, but the company did not require him to sign a non-disclosure agreement. In fact, the company asked him to sign a non-disclosure agreement three years into his employment and, when he refused to sign, nevertheless gave him access to what it contended was confidential information. The court found that the company’s other steps to secure its information, such as utilizing a password-protected server and folders, were inadequate given such circumstances.

Given the lack of a likelihood of success on the merits as to the DTSA claim, the court denied Art & Cook’s motion for a preliminary injunction and advised that the claim was susceptible to a motion to dismiss. The court’s decision provides companies with insight into what kinds of information are trade secrets under DTSA and how they should protect their trade secrets.

It is highly likely that the National Association of Insurance Commissioners (“NAIC”) will adopt a model data cyber security law premised largely on the New York State Department of Financial Services (“NYSDFS”) cyber security regulations.  Recently, we discussed the NYSDFS’ proposed extension of its cyber security regulations to credit reporting agencies in the wake of the Equifax breach.  New York Governor Andrew Cuomo has announced, “The Equifax breach was a wakeup call and with this action New York is raising the bar for consumer protections that we hope will be replicated across the nation.”  Upon adoption by the NAIC, the NYSDFS regulations requiring that NYS financial organizations have in place a written and implemented cyber security program will gain further traction toward setting a nationwide standard for cyber security and breach notification.  Indeed, although there are differences, the NAIC drafters emphasized that any Licensee in compliance with the NYSDFS “Cybersecurity Requirements for Financial Services Companies” will also be in compliance with the model law.

The NAIC Working Committee expressed a preference for a uniform nationwide standard: “This new model, the Insurance Data Security Model Law, will establish standards for data security and investigation and notification of a breach of data security that will apply to insurance companies, producers and other persons licensed or required to be licensed under state law. This model, specific to the insurance industry, is intended to supersede state and federal laws of general applicability that address data security and data breach notification. Regulated entities need clarity on what they are expected to do to protect sensitive data and what is expected if there is a data breach.  This can be accomplished by establishing a national standard and uniform application across the nation.”  Other than small licensees, the only exemption is for Licensees certifying that they have in place an information security program that meets the requirements of the Health Insurance Portability and Accountability Act.  According to the Committee, following adoption, it is likely that state legislatures throughout the nation will move to adopt the model law.

The model law is intended to protect against both data loss negatively impacting individual insureds, policy holders and other consumers, as well as loss that would cause a material adverse impact to the business, operations or security of the Licensee (e.g., trade secrets).  Each Licensee is required to develop, implement and maintain a comprehensive written information security program based on a risk assessment and containing administrative, technical and physical safeguards for the protection of non-public information and the Licensee’s information system.  The formalized risk assessment must identify both internal threats from employees and other trusted insiders, as well as external hacking threats.  Significantly, the model law recognizes the increasing trend toward cloud based services by requiring that the program address the security of non-public information held by the Licensee’s third-party service providers.  The model law permits a scalable approach that may include best practices of access controls, encryption, multi-factor authentication, monitoring, penetration testing, employee training and audit trails.

In the event of unauthorized access to, disruption or misuse of the Licensee’s electronic information system or non-public information stored on such system, notice must be provided to the Licensee’s home State within 72 hours.  Other impacted States must be notified where the non-public information involves at least 250 consumers and there is a reasonable likelihood of material harm.  The notice must specifically and transparently describe, among other items, the event date, the description of the information breached, how the event was discovered, the period during which the information system was compromised, and remediation efforts.  Applicable data breach notification laws requiring notice to the affected individuals must also be complied with.

The Florida Supreme Court ruled last week that referral sources in the home healthcare industry can be protected legitimate business interests under the state law governing non-compete agreements, thus finding enforceable such a restriction on a former marketing employee who left for a competitor.

Although the Florida statute in question (542.335) does not specifically list “referral sources” as one of the five categories of business interests subject to protection, the Court notes that those enumerated categories are prefaced by the phrase “including, but not limited to” thereby finding that the list is not meant to be exhaustive and may necessarily include other interests which may justify enforceability of a non-compete agreement.

As is often the case in properly reasoned restrictive covenant decisions, Courts must necessarily engage in fact and industry specific determinations when finding whether the restrictions are necessary to protect a legitimate business interest of the former employee or if they are merely anti-competitive by preventing a former employee from fairly earning a livelihood in their chosen industry.  The Florida Supreme Court went through such analysis here finding that the principal responsibility of marketing representatives of home health service companies was to cultivate relationships with referral sources such as doctors, case managers and referral coordinators in the hope of securing future patient referrals.  Such companies specifically train their representatives to target such referral resources and provide them with access to internal databases of referral source preferences, strategies, and procedures for them to utilize.  This investment in their employees and referral source databases was sufficient to establish a protectable legitimate business interest under the Florida non-compete statute warranting enforcement of the restrictive covenant in question.

When: Thursday, September 14, 2017 8:00 a.m. – 4:30 p.m.

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

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

  • Immigration
  • Global Executive Compensation
  • Artificial Intelligence
  • Internal Cyber Threats
  • Pay Equity
  • People Analytics in Hiring
  • Gig Economy
  • Wage and Hour
  • Paid and Unpaid Leave
  • Trade Secret Misappropriation
  • Ethics

We will start the day with two morning Plenary Sessions. The first session is kicked off with Philip A. Miscimarra, Chairman of the National Labor Relations Board (NLRB).

We are thrilled to welcome back speakers from the U.S. Chamber of Commerce. Marc Freedman and Katie Mahoney will speak on the latest policy developments in Washington, D.C., that impact employers nationwide during the second plenary session.

Morning and afternoon breakout workshop sessions are being led by attorneys at Epstein Becker Green – including some contributors to this blog! Commissioner of the Equal Employment Opportunity Commission, Chai R. Feldblum, will be making remarks in the afternoon before attendees break into their afternoon workshops. We are also looking forward to hearing from our keynote speaker, Bret Baier, Chief Political Anchor of FOX News Channel and Anchor of Special Report with Bret Baier.

View the full briefing agenda and workshop descriptions here.

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