Trade Secret | Noncompete – Issues and Cases in the News – January/early-February 2012

February 5, 2012

Russell Beck Fair Competition News, Noncompetes, Restrictive Covenants, Trade Secrets Leave a comment

I am a bit behind on the January round-up, so, I’ve included some recent events through today. As with the other roundups, in addition to the brief summaries, you will find links for more in-depth reading on each issue. (These posts cover quite a bit of news, enjoy.) [Updated on February 6, 2012. (Updates are in bold.)]

FINRA: SWBC Investment Services was awarded damages, attorneys’ fees, an injunction requiring destruction and nonuse of SWBC’s information, and an order requiring that respondents retain an outside company to ensure destruction of certain files allegedly taken by a former employee broker. See In the Matter of the FINRA Arbitration Between SWBC Investment Services, LLC, Claimant/Counter-Respondent, vs. Titleist Asset Management, Ltd, Respondent and Greg Thompson, Respondent/Counter-Claimant(FINRA Arbitration 11-02350, January 10, 2012), reported by Forbes in FINRA Arbitrators Enjoin Brokerage Raid And Enforce Non-Compete.

Apple: So much has been written already about Apple’s failed efforts to seal documents in its case against Psystar (maker of unauthorized-Apple clones) that I will simply point you to a recent article, in case you missed all the press. Apple fails to keep “trade secrets” from public in Psystar case.

California: An issue that often arises in litigation is finding the right expert witness. The Southern District of California addressed this issue in Pellerin v. Honeywell International Inc., 2012 WL 112539 (S.D. Ca. Jan. 12, 2012), rejecting a former employee as an expert. It’s worth a read to understand the analysis that the court went through.

California/Pennsylvania: Another recent California decision (Aerotek v. The Johnson Group Staffing Co.) is noteworthy for its award of attorneys’ fees to a defendant in a trade secrets case. (The Trade Secrets & Employee Raiding Blog provides a very good and detailed discussion of the case.) And, the Western District of Pennsylvania – following a California decision – reached a similar decision in Hill v. Best Medical International (consolidated with other cases).

Michigan: The Michigan Court of Appeals, in an unreported decision (Actuator Specialities, Inc. v. Chinavare), relying on Michigan’s version of the Uniform Trade Secrets Act (there was no noncompete) affirmed a three year injunction preventing a former employee from competing based on the threat of misappropriation. For a nice summary, see New Weapon for Michigan Employers Protecting Against Unfair Competition and Trade Secret Theft. And, note below the different result reached in Ohio (partially because of the threshold issue that the information was not a trade secret, but it is still worth a comparison).

Missouri: Noncompetes find their ways to all industries, some more so than others. But, you don’t usually see them used by farmers’ markets. Now, the Greater Springfield Farmers’ Market (of Missouri) implemented a 5 mile noncompete. And, in an interesting twist, it seems that the restriction was implemented through a policy of the market that was to be voted on voted on by the market’s members, but, according to an email we received, was apparently voted on only by the board. See ‘No-compete’ clause rare among farmers markets; Farmers’ Market Non-Compete Angers Some Local Growers. Oddly, that is not the only unusual noncompete news in Missouri this month. Apparently the Missouri School of Journalism imposed a noncompete on student journalists (and, it seems, the factuality supervisors) prohibiting them from working for other publications. Story here.

New York: A question that often arises is the standard applicable to no-raid agreements (sometimes called “nonsolicitation agreements,” though if that term is used, it should be clear that it’s nonsolicitation of employees, rather than a typical nonsolicitation agreement, which prohibits solicitation of customers or clients). That issue was most recently addressed by the Western District of New York (a federal district court) in Renaissance Nutrition, Inc. v. Jarrett,  2012 WL 42171 (January 9, 2012). [Thank you Ken Vanko for pointing out that case; as readers of this blog know, Ken administers an excellent blog on noncompetes called Legal Developments in Non-Competition Agreements.]

Ohio: I give Ken Vanko (see just above) credit for finding this one too: He came across a case in Ohio, Columbus Bookkeeping & Bus. Svcs., Inc. v. Ohio State Bookkeeping, LLC, 2011 WL 6938340 (Ohio Ct. App. December 30, 2011), in which the Ohio Court of Appeals overturned an injunction that was based, essentially, on the lower court’s misapplication of trade secret law. The case is interesting for its analysis of client lists protections in the absence of a noncompete or nondisclosure agreement. The lower court had issued an injunction prohibiting former employees from serving the plaintiff’s customers for about a year. The Court of Appeals overturned the injunction based on its conclusion that the customer list did not qualify as a trade secret. In further analyzing the lower court’s decision, however, the Court of Appeals also observed that limiting the duration of the injunction indicated that the lower court treated the case like a noncompete case with a noncompete remedy, rather than a trade secret case with a trade secret misappropriation remedy (which should last as long as the trade secret remains secret). And, note above the different reached in Michigan (where such an injunction was affirmed on appeal).

Oklahoma: [UPDATE] On February 6, I came across a Q&A on Oklahoma noncompete law, which provides a nice summary for anyone interested. Here is the link.

Virginia: Many states have, in the past few years, been reexamining their noncompete laws (some making it harder to enforce noncompetes, and some making it easier). Virginia is the latest to enter the fray. The legislature has proposed what amounts to a ban on employee noncompetes, which, if passed, would put Virginia in the company of California, Oklahoma (see above), and North Dakota. A draft of the legislation is available here. As summarized in the bill tracking website: “[The bill] [m]akes unlawful any contract that serves to restrict an employee or former employee from engaging in a lawful profession, trade, or business of any kind. Exceptions are created for persons selling a business, former partners in a partnership, and former members in a limited liability company, who agree to refrain from carrying on a similar business within a specified geographic area in which the original entity carries on business.”

Virginia: In what would seem contrary to the legislative initiative, the Supreme Court of Virginia held in Colello v. Graphic Services, Inc. (January 13, 2012) that a plaintiff need not prove competition in order to protect its trade secrets.

Arbitration and Damages: Last November, Seagate obtained a $630 million arbitration award of sanctions (one of the largest such awards ever) against Western Digital. Western Digital is now challenging that award. See here. Stay tuned. And, for other large recent trade secret damage awards read ALM reporter, Jan Wolfe’s post, Rounding Up the 10 Biggest IP Litigation Wins of 2011, and Bloomberg’s article, DuPont Trade-Secret Award Helps Drive 2011 Record Verdict Growth.

Trade Secrets at the Intersection with Public Records: An issue that occasionally comes up is the public’s right of access (under FOIA and state public records acts) to filings that might contain confidential information that businesses were required to file with the government. These issues are not limited to filings in the United States. Case in point: Canada’s Supreme Court has just provided additional clarity around the relationship between right of access to government records and trade secrets filed with the Canadian government. See Top court rules against Merk in trade secrets case.

Trade Secrets on the Internet: As I am behind in writing about the Eagle v. Morgan, Case No. 11-4303 (E.D. Pa., Dec. 22, 2011) case (the latest case to address trade secrets on the Internet), I am referring you to John Marsh’s excellent coverage of the case (in context with the other cases that preceded it): LinkedIn and Twitter: Who Owns the Account, the Employer or Employee?

Criminal Cases:

Related Items of Interest:
  • For those inclined to the more academic side of things, a recent article by Villanova University School of Law Associate Professor Michael Risch, An Empirical Look at Trade Secrets Law’s Shift from Common to Statutory Law, discusses the evolution and status of courts’ reliance on the Restatement of Torts, the Restatement (Third) of Unfair Competition, and the Uniform Trade Secrets Act in deciding trade secrets cases.
  • On the lighter side: Womble Carlyle’s Trade Secret Blog argues that MTV has – well, had – a trade secret in New Jersey Shore actor Nicole “Snooki” Polizzi’s appearance without all the makeup, likening it to when KISS revealed their unmade-up faces. See here.
  • Please note that I occasionally add (and remove) links to on the right side. The links are to blogs and other websites that I think might be of interest to my readers. In that vein, I just added a link to Brooklyn Law School’s Trade Secrets Institute, which I think is outstanding. It’s worth a look for anyone interested in the law of trade secrets.
  • And, if all of this was not enough for you, you can find some additional reading in John Marsh’s excellent “Thursday Wrap-Up” from this past week.

New Jersey Adopts Uniform Trade Secrets Act

January 10, 2012

Russell Beck Fair Competition News, Trade Secrets , , Leave a comment

There have been lots of legislative changes in the offing. One of them was New Jersey’s adoption of the Uniform Trade Secrets Act. Well, it is now official. Governor Christie has signed it. That leaves just Massachusetts, New York, and Texas as the only non-UTSA states.

For a nice summary of the new law, see Scutari’s ‘New Jersey Trade Secrets Act’ Now Law.

Sex Sells – And It’s A Trade Secret

December 29, 2011

Russell Beck Fair Competition News, Restrictive Covenants, Trade Secrets , , Leave a comment

This year saw not one, but two cases involving allegations of trade secret misappropriation and breach of noncompete agreements by companies typically known for things other than their trade secrets.

The first was at the end of September 2011, when Hooters – yes, Hooters – sued a competitor (though not the departing employee, curiously enough) for, among other things, misappropriation of trade secrets, violation of the Computer Fraud and Abuse Act, and tortious interference. The complaint is here, and a nice summary by Michael Greco is here.

The second was in December, when an espresso bar, Foxy Lady (in Washington state), sued a former barista and her new employer, Knotty Bodies, for misappropriation  of trade secrets, breach of a noncompete agreement, and tortious interference. The amended complaint is here, and a summary is here.

Trade Secret | Noncompete – Issues and Cases in the News – December 2011

December 26, 2011

Russell Beck Computer Fraud and Abuse Act, Fair Competition News, Inevitable Disclosure Doctrine, Noncompetes, Restrictive Covenants, Trade Secrets , , , , , , , , , , , , , , Leave a comment

Like a similar post last month, this post provides a summary of noncompete and trade secret issues and cases that have arisen in the past month or so, but that I have not already addressed in recent posts. In addition to my summary, you will find links for more in-depth reading on each issue. (There’s a lot here again, enjoy.)

Eighth Ciruit (Indiana and Missouri):  The 8th Circuit, applying Indiana and Missouri trade secret law, issued a recent decision (AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corporation) addressing a common question: When can publicly-available information be a trade secret? The court focused on the effort to compile the information:

Compilations are specifically contemplated in the UTSA definition of a trade secret, and the fact that some or even most of the information was publicly available is not dispositive of the first factor in the UTSA definition. Compilations of non-secret and secret information can be valuable so long as the combination affords a competitive advantage and is not readily ascertainable. . . . Compilations are valuable, not because of the quantum of secret information, but because the expenditure of time, effort, and expense involved in its compilation gives a business a competitive advantage. . . . This value is not dependent on how much of the information is otherwise unavailable because “the effort of compiling useful information is, of itself, entitled to protection even if the information is otherwise generally known.”

Ninth Circuit (California): On December 15, the 9th Circuit took oral argument  in its en banc (full court) review of the controversial United States v. Nosal decision holding that the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030 applies to “an employee . . . when he or she obtains information from the [employer’s] computer and uses it for a purpose that violates the employer’s restrictions on the use of the information.”

California (as interpreted by an Idaho court): The Idaho Supreme Court issued a decision on November 30, 2011 (T.J.T., Inc. v. Mori) that, under California law, a seller of a business who, upon the sale, becomes an employee of the acquiring company can be bound by a noncompete agreement that he entered into as part of the sale of a business.

Colorado: In an October 12, 2011, the District of Colorado issued a decision (L-3 Communications Corporation v. Jaxon Engineering & Maintenance, Inc.) discussing the level of specificity necessary to satisfy the requirement that trade secrets be identified “with reasonable particularity.” The decision also addresses the use of filing trade secrets under seal as “[i]n order to preserve the secrecy required for such material.”

Delaware: The District of Delaware issued a recent decision (actually, a report and recommendation subject to review by the district court judge) analyzing the standards (under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937 (2009)) required to plead a trade secrets claim under the Delaware Uniform Trade Secrets Act, 6 Del. C. §§ 2001-2009.

Georgia:  Coca-Cola put its secret formula “on display.” Don’t get too excited, the formula held up as one of the most famous trade secrets in the world (whether the legendary security measures are true or not) is not really on view. See here.

Massachusetts: Faithless employee? The Massachusetts Appeals Court, in Specialized Technology Resources, Inc. v. JPS Elastomerics Corp, barred a former employee and his new employer not only from using the stolen trade secrets until such time as they are no longer trade secrets (if that should ever happen), but – for five years – from producing a similar product by any means.

Michigan: No noncompete? No problem. If your employee steals trade secrets, you may still have a remedy. The Michigan Court of Appeals, in Actuator Specialties, Inc. v. Chinavare, is the latest to grant a “head start” injunction against a faithless former employee who stole trade secrets. In Actuator Specialties, the court barred the employee from working for a competitor for three years, seemingly recognizing that that small companies may not take all the steps one would expect of more sophisticated companies (such as requiring employees to agree to relevant restrictive covenants). Another interesting aspect of the case is that the defendant employee took steps that would be barred by the requested injunction in the period between the time that the injunction was sought and when it was issued. This is an issue that comes up often, and the Michigan Court of Appeals was clearly displeased with the employee’s conduct during that window.

Montana: The Montana Supreme Court, in Wrigg v. Junkermier, held that there is no legitimate business interest (a necessary element to enforcement of noncompetes in most states) in enforcing a noncompete against a former employee who was terminated by the company without cause.

Oklahoma: Despite what these recent cases suggest, noncompete decisions from appellate courts are few and far between. In Oklahoma, where true employee noncompetes are not enforceable, they are even fewer and farther between. But, in a recent Oklahoma Supreme Court decision, Howard v. Nitro-Lift Technologies, the court considered whether it should modify a broad noncompete to, essentially, convert it into a permissible nonsoliciation agreement (which has its own limitations in Oklahoma – which must be considered when writing such agreements). The court declined to do so, “because judicial modification cannot be accomplished without rewriting the agreement to cure multiple defects, leaving only a shell of the original agreement, and would require the addition of at least one material term . . . .”

Virginia: Virginia’s genera cap on punitive damages ($350,000) applies to the entire trade secret case – not to each trade secret. E.I. DuPont De Numours & Co. v. Kolon Indus., Inc., 2011 WL 5872895 (Nov. 22, 2011).

International: Theft by foreign nationals continues. See Scientist gets 7-plus years for trade secret theft. But as I recently observed to reporter Jan Wolfe (reported in Don’t Blame China for Trade Secrets Left (on Law.com)), international trade secret theft is a much smaller problem than domestic misappropriation.

Related Items of Interest: A few obscure issues are worth a look. In particular, (1) whether a signature is required for a noncompete to be enforceable (remember the analogous case out of New York a few years ago (IBM v. Johnson), where the employee escaped the agreement because he signed in the wrong place); and (2) what happens when there is a dispute about a “missing” noncompete (I represented an employee in one of these relatively-rare cases this past year, and the validity of the purported noncompete was never resolved). Ken Vanko wrote a nice summary of the key considerations for both of these issues: Are Signatures Required on a Non-Compete Agreement? (U.S. Risk Mgmt. v. Day); and Stealing a Non-Compete Agreement May Not Do You Any Good and It Could Land You In Jail.

Massachusetts Trade Secret Protections Are Given Big Boost

December 3, 2011

Russell Beck Fair Competition News, Trade Secrets , , , , Leave a comment

There has been much uncertainty in Massachusetts about whether and under what circumstances a claim under G.L. c. 93A (for those not from Massachusetts, that’s our unfair competition statute, which provides for the recovery of multiple damages and attorneys’ fees) exists against an employee who takes his former employer’s trade secrets to a new venture and uses them there. A recent decision from the Massachusetts Appeals Court seems to open the door to such claims. (Unless you are a lawyer, you will probably want to stop here.)

The problem started in 1983 with a case from our highest court (the Supreme Judicial Court, or “SJC”) called Manning v. Zuckerman. In that case – which was not a trade secrets case – the SJC made it clear that 93A does not apply to disputes arising out of an employment relationship. That seemed clear enough.

But, the very next year, the Appeals Court decided Peggy Lawton Kitchens, Inc. v. Hogan. Hogan, an employee of the plaintiff, had taken the plaintiff’s secret recipe for cookies and left to start a competing business using the plaintiff’s recipe. From the moment you start reading the decision, you know exactly how the case is going to come out; the decision starts, “Nothing is sacred.” Of course, the court holds that the plaintiff’s 93A claims against its former employee (and his new company) are proper.

The court’s decision is important in two respects: First, as to the defendant company (which the former employee had started with the intent of competing with the plaintiff), the court concluded that, because the company was never an employee of the plaintiff, Manning v. Zuckerman did not apply and the claim under 93A could therefore proceed. Second, as to Hogan, the court says, “Hogan’s use of Kitchens’ trade secret was made when he was no longer an employee of Kitchens. Hogan’s argument crumbles.”

The distinction (that 93A could be applied to conduct that took place after employment ended) lasted about 12 years.

In 1996, the Appeals Court decided Informix, Inc. v. Rennell. There, the court held that it did not matter whether the conduct occurred during or after employment. In this regard, the court stated, “Manning held simply that any claim arising from the employment relationship was not actionable under c. 93A; it imposed no limitation that the employment relationship be ongoing.” Further, the Informix court distinguished Peggy Lawton Kitchens on the basis that the claim in Informix was based on a nondisclosure agreement, whereas there was no such agreement in Peggy Lawton Kitchens, and therefore the claim in Peggy Lawton Kitchens was independent of the employer/employee relationship.

One might wonder at this point why the Appeals Court in Informix did not simply deny the 93A claim based on the nondisclosure agreement, but then allow a claim based on the common law and statutory obligations of all persons (not just employees) not to misappropriate trade secrets – but it did not. Presumably, the court’s rationale was based on the procedural posture of the case and the fact that the claim was based “solely” on the parties’ contract.

Since then, trial courts have been wrestling with these two decisions and trying to square them.

For example, in Professional Staffing Group, Inc. v. Champigny (in 2004), the Superior Court reasoned as follows:

Informix conflicts with the decision of Peggy Lawton Kitchen’s, Inc. v. Hogan. The panel reasoned that no express confidentiality or noncompetition agreement existed between Peggy Lawton Kitchen’s, Inc. and Hogan. However no doubt arises from the Peggy Lawton Kitchens decision that the wrongful misappropriation of trade secret information arose from the employment relationship. . . . Moreover the absence of an explicit employment contract is not essential to impose duties of loyalty upon a former trusted employee. The Massachusetts common law implies a covenant or promise of the trusted employee not to divulge trade secret or proprietary information. See Jet Spray Cooler v. Crampton, 361 Mass. 835, 839 (1972), and cases cited.

Having disposed of the notion that the existence or absence of a contract is controlling, the court then came back to the temporal distinction:

The other ground of distinction [from Peggy Lawton Kitchens] asserted by the Informix panel is that the theft of trade secrets constitutes a wrong independently of an employment relationship and will be separately actionable under 93A. Nothing in the Peggy Lawton decision suggests such a special rule. Rather the Peggy Lawton panel concluded that the exemption from 93A for wrongdoing arising from an employment relationship was inapplicable for temporal reasons. “Moreover, Hogan’s use of Kitchens’ trade secret was made when he was no longer an employee of Kitchen’s.” Id. at 940 (emphasis added).

It is on that temporal basis that the Superior Court in Professional Staffing Group found that 93A can apply to an employee’s misappropriation of trade secrets: “[H]ere, we are addressing conduct occurring long after the termination of the employment relationship between the contesting parties.” The court then went on to conclude that “Informix is a mechanical overextension of Manning” and “appears to drift away from the anchoring principle of c. 93A . . . .” In the end, however, after offering a few public policy reasons for applying 93A to this type of claim, the court observed that, following trial, there will be a complete record so that the issue can be reviewed on appeal. However, no appellate decision followed.

Another oft-cited case addressing this issue is TalentBurst, Inc. v. Collabera, Inc. That case relies on yet another case (Intertek Testing Servs. NA, Inc. v Curtis-Strauss LLC from Judge Gants while in the Superior Court, now on the SJC) and concludes that the Professional Staffing Group decision was distinguishable on the ground that it involved a counterclaim by the employee (rather than a claim by the former employer).

Such was the state of affairs until recently.

Enter Specialized Technology Resources, Inc. v. JPS Elastomerics Corp. (November 23, 2011), an Appeals Court decision, perhaps shedding some additional light on its two prior rulings (Informix and Peggy Lawton Kitchens). The sum total of the court’s discussion of those cases and 93A is as follows:

Applicability of c. 93A. The defendants separately assert that c. 93A is inapplicable to [plaintiff's] claim in the present case, as it arises out of an employer-employee relationship between [plaintiff] and [defendant] Galica. See Manning v. Zuckerman, 388 Mass. 8, 12-15 (1983); Informix, Inc. v. Rennell, 41 Mass. App. Ct. 161, 163 (1996). However, [defendant company] was never an employee of [plaintiff]. See Augat, Inc. v. Aegis, Inc. 409 Mass. 165, 172 (1991); S.C., 417 Mass. 484 (1994); Peggy Lawton Kitchens, Inc. v. Hogan, 18 Mass. App. Ct. 937, 940 (1984). More to the point, though Galica obtained the trade secret during his employment with [plaintiff] and was bound by a confidentiality agreement as part of his employment contract, his misappropriation of the trade secret was actionable independent of his contractual obligations and accordingly may support a claim under c. 93A. See Peggy Lawton Kitchens, Inc. v. Hogan, supra; Informix, Inc. v. Rennell, supra at 163 n.2. The former employer-employee relationship between [plaintiff] and Galica does not stand as a bar to [plaintiff's] c. 93A claim against either Galica or [his new employer].

In short, it appears that the court’s rationale is that, while the misappropriation of trade secrets may constitute a breach of an employee nondisclosure agreement, which cannot serve as a predicate to a 93A claim, the same conduct can also constitute a separate and independent wrong (presumably because it violates trade secret laws – as opposed to the fiduciary duty of loyalty referenced in Professional Staffing Group) that is actionable under 93A.

It bears mention that the decision is also very interesting insofar as it holds that a judge may ignore a jury’s findings when deciding a 93A claim and allows two different injunctive remedies for the defendants’ misappropriation of trade secrets.

Fair Competition News… Illinois Noncompete Law Clarified

December 2, 2011

Russell Beck Fair Competition News, Noncompetes , , , Leave a comment

This is a quick update on a significant decision issued yesterday …

The Illinois Supreme Court has rejected the controversial notion expressed in a 2009 decision from an Illinois appellate court (Sunbelt Rentals, Inc. v. Ehlers) that a court need not consider whether a former employer has a legitimate business interest being protected by the noncompete agreement.

The Supreme Court’s decision is Reliable Fire Equipment Co. v. Arredondo and was decided on December 1, 2011. Most significantly, the Illinois Supreme Court stated, ”Sunbelt overlooked or misapprehended this court’s above-discussed case law that established the three-prong inquiry into the reasonableness of restrictive covenants.”

Our 50 state noncompete survey chart will be updated shortly to reflect this decision.

Mass Lawyers Weekly Advisory Board Supports Noncompete Bill

November 28, 2011

Russell Beck Fair Competition News, Massachusetts Noncompete Bill, Restrictive Covenants , , , , , Leave a comment

Massachusetts Lawyers Weekly‘s Editorial Advisory Board calls the noncompete bill pending in the MA legislature “a step in the right direction.” (As the lead drafter and advisor on the bill, I have covered it extensively throughout this blog and elsewhere; for a summary of the bill, see Massachusetts Noncompete Bill Refiled; for the latest update, see Report on Massachusetts Legislature’s Hearing on Noncompete Bill.)

The editorial noted that “[i]t is notoriously hard to advise both businesses and employees as to the likely enforceability of a non-compete agreement. The same non-compete may be viewed very differently by different judges.” Accordingly, in noting their support for the bill, the Editorial Advisory Board observed that “[a] bill that provides greater specificity on what elements a non-compete should include in order to be enforced helps everyone and could reduce the amount of litigation resulting from the agreements.”

The Editorial Advisory Board did identify “[o]ne aspect of the bill [that they find] troubling . . . .” Specifically, the Board is concerned about mandatory attorneys’ fees for a victorious employee; the editors would prefer to see discretion left to the judge. That very issue is still being considered by Representative Ehrlich and Representative Brownsberger.

To stay up on the latest or to provide your thoughts, please feel free to do any or all of the following:

More Federal Protections For Trade Secrets?

November 25, 2011

Russell Beck Computer Fraud and Abuse Act, Fair Competition News, Trade Secrets , , , Leave a comment

About two years ago, my partner Steve Riden and I wrote a blog post on my old blog (the Trade Secrets / Noncompete Blog) entitled, Back to the Basics… The Computer Fraud and Abuse Act. The post was a brief summary of the Computer Fraud and Abuse Act (18 U.S.C.  § 1030), which was really designed to protect against computer hackers (a la War Games), but which has begun to be used with more frequency in trade secret cases.

About the same time, one of my former colleagues, Jeff Kopp, discussed a split among federal courts concerning the scope of the Computer Fraud and Abuse Act, specifically, whether it applies to employees who exceed the scope of their authorization to use their employer’s (or former employer’s) computers. See Federal Courts Split on Computer Fraud and Abuse Act. Others have raised concerns that the statute could make it illegal for someone surfing the Internet to exceed the terms of service of websites they visit.

Now, Congress is considering amending the bill. (This is separate from congressional efforts to expand the Economic Espionage Act. See Economic Espionage Act Update and A Federal Trade Secret Act?)

On September 15, 2011, the Senate Judiciary Committee considered a bill that would limit the scope of the Computer Fraud and Abuse Act so that it would not apply to exceeding the scope of website terms of service. See Bill Tweaked in Senate: Terms of Service no Longer Terms of Felony.

On November 15, 2011, Richard Downing, Deputy Chief of the Computer Crime and Intellectual Property Section, Criminal Division, provided testimony before the House Committee on Judiciary, Subcommittee on Crime, Terrorism, and National Security. His testimony is reflected in “Cybersecurity: Protecting America’s New Frontier” and advocates expanding (or at least not curtailing) the scope of the statute and is very similar to that provided by James A. Baker, Associate Deputy Attorney General, presented on September 7: here.

In short, Deputy Chief Downing suggested several specific ways to clarify to the statute (which, as noted in my prior blog post, is not the picture of clarity) and enhance the protections afforded by the statute. While his suggestions largely focused on the criminal side of the statute, he did also advocate for a broad civil interpretation of the bill, i.e., having it reach employees who exceed their authorized use of their employer’s computers and as well as Internet users who exceed the scope of the terms of service of websites they visit.

Time will tell whether, and if so how, the statute will be amended. I am predicting that it will be amended and that – at least on the criminal side – it will not be limited.

Trade Secret | Noncompete – Issues and Cases in the News

November 19, 2011

Russell Beck Fair Competition News, Noncompetes, Restrictive Covenants, Social Media, Trade Secrets , , , , , , , Leave a comment

This post provides a summary of noncompete and trade secret issues and cases that have arisen in the past month or so, but that I have not already addressed in recent posts. In addition to my summary, you will find links for more in-depth reading on each issue. (There’s a lot here, enjoy.)

UPDATED November 24; updates in bold.

UPDATED November 27; updates in bold/italic.

Trade Secret Cases and Issues in the News:

  • In an extremely significant decision, the United States Court of Appeals for the Federal Circuit affirmed a decision by the International Trade Commission blocking importation of products from China that were developed using trade secrets that were misappropriated overseas: Tianrui Group Co. v. International Trade Commission. (For a primer on China’s trade secret law, see here; for a brief summary of the focus on misappropriation of trade secrets to China, see here.)
  • The United States Court of Appeals for the Federal Circuit issued a decision relating to the intersection between trade secret law and patent law: Atlantic Research Marketing Systems, Inc. v. Troy. A similar issue arose in Texas, with the court reducing from $68 million to $18 million the exemplary damages portion (separate from the $26 million compensatory damages portion) of a trade secret verdict in favor of Wellogix against Accenture. Story here. (For a brief summary of the intersection of patents and trade secrets, see here.)
  • The Leahy-Smith America Invents Act became was passed on September 16, 2011, and, as part of a sweeping overhaul to US patent law, will expand trade secret defenses to patent infringement actions.  
  • Seagate won a $525,000 trade secret award in an arbitration against Western Digital, which Seagate accused of misappropriating trade secrets through a former Seagate employee. Story here.
  • Motorola Mobility was sued by Lemko for alleged misappropriation of trade secrets relating to the location of emergency callers on a cellular network. Story here and here. The case is related to the federal criminal charges brought against the employee, who was headed to China. Story here. (Note the China connection, and see below.)
  • A blogger accused of trade secret misappropriation can keep his or her identity secret. Story here.
  • Groupon sued employees who left for Google and who allegedly took Groupon’s trade secrets with them. Story here.
  • The Uniform Trade Secrets Act has been adopted in some form or another in all states but Massachusetts, New Jersey, New York, and Texas. Of these states, New Jersey is closest to adopting the UTSA. See New Jersey Poised to Adopt the Uniform Trade Secrets Act. The UTSA does leave open questions about the scope of other common law claims that are still permitted. For some discussion on that issue, see here.

Noncompete Cases and Issues in the News:

  • Two recent noncompete decisions from the 1st Circuit suggest the need for revisions to certain provisions in existing Massachusetts noncompete agreements and similar restrictive covenants.
  • The Eastern District of Pennsylvania finds that the automatic stay in bankruptcy does not apply to injunctive enforcement of a noncompete: In re Stone Resources.
  • H-P loses race to courthouse (Texas vs. California) and Cisco’s GC speaks out (loudly) about H-P’s efforts to enforce its noncompetes. Story here.
  • Illinois federal court analyzes how much consideration is sufficient for a noncompete: LKQ Corp. v. Thrasher.
  • Big things are brewing: Boston Beer (Sam Adams beer maker) sued Anchor Brewing (Anchor Steam beer maker). Story here and Boston.com editors’ reaction here.

Employers May Own Employee’s Social Media Accounts: Twitter, Facebook, LinkedIn, and YouTube

November 13, 2011

Russell Beck Fair Competition News, Social Media, Trade Secrets , , 1 Comment

Your employee markets your company through Twitter, Facebook, LinkedIn, and YouTube. The employee develops – as he or she is asked to do – a substantial network. Later, your employee leaves.

Who owns those accounts?

Two recent decisions discuss these very questions.

For the non-lawyer readers of this blog, here’s the point: (1) the accounts may belong to the employer and (2) most importantly, have a written policy.

Lawyers, read on.

The first case, Ardis Health, LLC v. Nankivell, in the Southern District of New York (decided October 19, 2011), involved an employee who was hired to maintain the plaintiffs’ (a family of companies) social media presence. When the defendant left plaintiffs’ employ, she refused to return (among other things) the passwords to the plaintiffs’ websites, blogs, and social media services (Twitter, etc.). The court granted an injunction requiring her to turn over the passwords and other account information to the plaintiff, finding that lack of access to and control of social media could constitute irreparable harm. Instructively, the court did this not on a trade secret theory, but based on conversion.

Most importantly, however, the takeaway from the case is that the plaintiffs had a social media policy stating that the social media belonged to the company. While it’s unclear how much the court relied on this fact, it did include it in its decision – and it’s in good company. See So, Can Your Employees Sext At Work?

The second, PhoneDog v. Kravitz in the Northern District of California (decided on November 8, 2011), involved an employee who continued using a Twitter account following his departure from the plaintiff company. Rather than “return” the account, the defendant merely changed the Twitter handle.

The case was in federal court on the basis of diversity of citizenship, which (for the non-lawyers who continued reading despite the warning) requires the dispute to involve at least $75,000. Plaintiff met this threshold by claiming that defendant misappropriated its 17,000 followers (on Twitter), each of which (according to industry standards) was worth $2.50, for a total value of $340,000 (17,000 x $2.50).

The two causes of action of consequence were the misappropriation of trade secrets claim and conversion claims.

With regard to the trade secret claim, the plaintiff asserted that both its password and its followers were trade secrets. As for the followers, the plaintiff argued “that the list of followers is akin to a business customer list, in which it has an intangible property interest.” The court ruled that at the early stage in the case (a motion to dismiss), it could not say that the password or followers were not trade secrets.

With regard to conversion, the main issues were right of ownership and intent to convert. The plaintiff company appears to not have had a policy. Accordingly, the company argued “that, even if [defendant] created the [account], he did so at PhoneDog’s request and for its benefit and in the course and scope of his employment with PhoneDog.” With regard to the intent, the plaintiff argued that it requested return of the account, and the defendant refused, instead, changing the Twitter handle. The court accepted these arguments, and refused to dismiss the conversion claim.

For a longer discussion of the PhoneDog case, see Who gets custody of Twitter when an employee quits?

While these two cases are the latest to raise ownership issues in the social media, given that they are both at the very early stages, they leave most of the questions unanswered. Nevertheless, as previously noted in a similar context, these are not really new issues, they’re just a new twists on old concepts. See Social Media, the New World?

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