Trade Secret | Noncompete – Issues and Cases in the News – October-November 2012

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Once again, this installment of “Trade Secret | Noncompete Issues and Cases in the News” is my vacation readings update. There is again a lot here! Enjoy…

Federal/Antitrust: In October 2009, Computerworld published an article of mine entitled, “No-poach agreements: A new generation of restriction.” The article discussed a no-poach agreement used by several large high tech companies (Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar) to refrain from soliciting the other’s employees. As I (here) and many others discussed at the time, this agreement led to an antitrust settlement with the DOJ in 2010. Now, as reported by CBS, the DOJ is at it again: “Justice Department sues eBay over non-compete agreement.” A copy of the DOJ complaint is here.

Federal/CFAA: As expected, there is finally a petition to the United States Supreme Court about the scope of the Computer Fraud and Abuse Act. Following the 4th Circuit’s decision in WEC Carolina Energy Solutions LLC v. Miller, two circuits (the 4th and 9th) have employed a narrow interpretation of the CFAA, while four other circuits (the 1st, 5th, 7th, and 11th) have taken a more broad approach.

Federal/ERISA: Occasionally, ERISA issues pop up in noncompete cases. That is exactly what happened in Pactiv Corp v. Rupert, in which the United States District Court for the Northern District of Illinois held that a noncompete agreement sought to be imposed to receive severance benefits was not required by the ERISA severance plan and therefore the former employee was entitled to the benefits. For more reading, see “ERISA Severance Plans and Non-Compete Agreements Must Work Together,” by Peter Land.

California:

Georgia: The Georgia Court of Appeals granted summary judgment in Contract Furniture Refinishing & Maintenance Corp. v. Remanufacturing & Design Group, LLC, reminding practitioners how difficult it can be to show actual proof of trade secret misappropriation. For more reading, see Burr & Forman’s post, “The Difficulty of Proving Trade Secret Violations.”

Illinois: How far can you go when investigating the conduct of a former employee suspected of breaching his noncompete? That answer just got a bit more complicated in Illinois, which, in Lawlor v. North American Corporation of Illinois (October 18, 2012), has now recognized a claim for intrusion upon seclusion (basically an invasion of privacy claim). Long-time noncompete blogger, Ken Vanko, discusses the case here: “Supreme Court of Illinois Recognizes Intrusion Upon Seclusion Tort in Non-Compete Investigation.”

Massachusetts:

  • About a year and a half ago, I posted about a hairstylist who was enjoined from competing with his former employer-hair salon, Zona Corp. (See “Hairdresser Takes a Haircut”.) Last month, however, a different Massachusetts judge went the other way in Invidia, LLC v. DiFonzo, raising the very question that I (and many others) were asking about the Zona Salon case: Who owns the goodwill in the context of a hairstylist? The Invidia Court determined that the employer failed to show that it was its goodwill. For more, see “Engaging Facebook Friends Doesn’t Violate Non-Solicitation Clause.”

Michigan: What happens when you have the following facts: A nondisclosure agreement; no noncompete; an employee who acts properly upon departure (returning all information, etc.); and a decrease in your business? Nothing.  Well, at least according to a recent decision by the Court of Appeals of Michigan in Michigan One Funding, LLC v. MacLean (September 20, 2012). For more reading, see “Preventing an Employee From Working for a Competitor Unravels without an Enforceable Noncompete Agreement.”

Minnesota: When enforcing restrictive covenants, the difficulty is often obtaining evidence of a true risk of harm before discovery has taken place. In Sempris, LLC. V. Watson (D. Minn. Oct. 22, 2012), the federal District Court denied a temporary restraining order based on the plaintiff’s failure to provide evidence of an imminent threat, as opposed to speculative or remote future harm. For more reading, see Paul Freehling’s post, “Speculative Fears Insufficient for Non-Compete Temporary Restraining Order Against Former Employee.”

Missouri: Choice of law provision selecting Missouri (where plaintiff was located) over Oklahoma (which like California and North Dakota, bars employee noncompetes and where defendants were located and where most of the conduct occurred) was enforced by the United States District Court for the Eastern District of Missouri in TLC Vision (USA) Corp. v. Freeman (E.D. Missouri Nov. 2, 2012). For more reading, see “Non-Compete Cases and Choice of Law: A Recent Case From Missouri,” by Jonathan Pollard.

New York: In perhaps the first 2nd Circuit decision to directly “address[] when enforcement of a covenant restricting competition may irreparably injure a former employee,” the Court held that “[d]ifficulty in obtaining a job is undoubtedly an injury, but it is not an irreparable one” when “monetary damages will compensate [the plaintiff] adequately . . . .”  Hyde v. KLS Professional Advisors Group, LLC (October 12, 2012). Given the 2nd Circuit’s pronouncement that “irreparable harm [is] the ‘single most important prerequisite for the issuance of a preliminary injunction,’” this decision should have significant implications for noncompete cases in the federal courts in New York, Connecticut, and Vermont.

Oklahoma: Rarely do restrictive covenant cases or trade secret cases proceed much beyond the injunction stage. When they do, the fight can be over permanent injunctive relief, damages, or both. Even then, damages are typically lost profits or disgorgement of profits. Sometimes, however, damages can be a reasonable royalty. That was the case in Skycam, LLC v. Bennett. There, the United States District Court for the Northern District of Oklahoma found injunctive relief to be against public policy, given limited competition, and instead ordered royalty payments – an initial payment of $1,000,000 plus $5,000 per use for the 3.5 years it would have taken the defendants to independently create the misappropriated information.

Ohio: As you may recall, in the September 2012 issue of “Trade Secret | Noncompete – Issues and Cases in the News,” I noted that, on July 25, the Ohio Supreme Court issued a decision agreeing to reconsider its May 24 Acordia of Ohio, L.L.C. v. Fishel decision, which took a dim view of assignment of noncompete clauses. Well, the Court did review its decision. And it reversed it! Here is the new (presumably final) view of the Ohio Supreme Court: Acordia II (October 11, 2012), courtesy of my friend and prolific blogger, John Marsh.

South Carolina: In another trade secret trial, judgment entered for over $4.6 million against a former employee who was found to have misappropriated trade secrets and breached his fiduciary duties. See, “Greenville Businessman Ordered to Pay $4.6 Million for Taking Trade Secrets, Breaching Fiduciary Duty.”

Virginia: As the United States District Court for the Eastern District of Virginia recently made clear in JTH Tax, Inc. v. Noor (September 26, 2012), failure to comply with an injunction requiring the return of trade secrets can have significant consequences, including an extension of the injunction. (Thank you to Jim Irving, who posted a link to the case in the LinkedIn Noncompete Lawyers group.)

Wisconsin: What happens to a plaintiff’s claim for misappropriation of trade secrets when the secret becomes publicly known? Nothing – at least according to a decision by the Eastern District of Wisconsin denying a motion to dismiss in Encap v. The Scotts Company. Well, to be clear, “nothing” in the sense that the claim survives a motion to dismiss when the information constituted a trade secret at the time of the misappropriation.  There’s no real surprise here; the cause of action is assessed as of the time the cause accrues; the fact that the circumstances later change does not affect the existence of the cause of action. (Damages may be another issue – assuming, of course, that the misappropriator was not the party that publicly disclosed the information.)

Criminal:

  • It’s always big news when employees of large companies are indicted for trade secret theft, especially when China is somehow involved. But, rarely do people report when those cases fail. So, kudos to The Trade Secrets Vault, Bloomberg, HudsonHubTimes, Alison Grant (writing for Cleveland.com here) and several others, all of whom reported that the former Bridgestone employee (Xiaorong Wang) accused of misappropriating Bridgestone’s secrets for the benefit of a Chinese company has been cleared.
  • John Marsh has an in-depth post on the latest in the Kolon/DuPont trade secrets dispute, the title of which begins, “The Kolonoscopy Continues . . . .” (The title is perfect, as is John’s discussion of the status.)

Related Items of Interest:

Trade Secret | Noncompete – Issues and Cases in the News – September 2012

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It seems that, lately, each installment of Trade Secret | Noncompete Issues and Cases in the News could be called, “What I read over my vacation.” As was inevitably the case, given the time between posts, there is again a lot here! Enjoy…

Please note that there are some things that require action, in particular, in New Hampshire, so, if you read nothing else, please check the jurisdictions in which you do business.

Federal/EEA: Some of the big news on the federal side: There is a renewed effort to bolster the Economic Espionage Act. For the latest, see: US House Passes Tougher IP Theft Bill (discussing the Foreign and Economic Espionage Penalty Enhancement Act of 2012, which would increase penalties for trade secret theft) and Senators Kohl and Coons Announce the Protecting American Trade Secrets and Innovation Act of 2012: Can they Get It Done This Time? (discussing the creation of a federal trade secret private right of action).

4th Circuit/CFAA: The split in the circuits on the issue of the scope of the Computer Fraud and Abuse Act continues to grow as the 4th Circuit adopts the 9th Circuit’s narrow reading of the Act in WEC Carolina Energy Solutions LLC v. Miller. For an excellent discussion, see the Circuit | Splits blog’s post, “4th Circuit Deepens Division Over Scope of Computer Fraud & Abuse Act.” Keep your eyes on this issue for a petition to the Supreme Court (even though, as Brian Bialas notes here, the US Solicitor General did not petition for review of the Nosal case).

Arizona: The 9th Circuit, in Management and Engineering Technologies International, Inc. v. Information Systems Support, Inc., interpreting Arizona’s version of the Uniform Trade Secrets Act, held (based on the facts of the case) that a plaintiff’s roster of employees is not a trade secret. For a discussion of the case, see UnIntellectual Property.

California: As most experienced trade secret / noncompete lawyers know, California has a strong public policy against noncompetes (and nonsolicitation agreements, etc.), with few exceptions. In a recent case, Fillpoint, LLC v. Maas (August 24, 2012), the California Court of Appeals (Fourth Appellate District) provided some recent clarification on the exceptions. For an excellent summary, see California Court Strikes Down Post-Employment Non-Compete Agreement, Raising Questions about the Validity of Employee Non-Solicits.

Georgia: On June 24, the 11th Circuit issued an unpublished decision (Becham v. Crosslink Orthopaedics, LLC) in which the Court made clear that the Georgia Legislature’s initial efforts to change Georgia’s noncompete law effective November 3, 2010 were unconstitutional; the law applies only prospectively, starting May 11, 2011. Accordingly, agreements entered into prior to May 11, 2011, are subject to Georgia’s prior (much more noncompete-unfriendly) law. For an excellent discussion of the case, read Benjamin Fink and Neal Weinrich’s post, An Important Development Regarding Georgia’s New Restrictive Covenants Law, on Georgia Non-Compete and Trade Secret News.

Iowa: In a recent, very fact-driven case involving the intersection of open records laws and trade secrets laws (see “Trade Secrets at the Intersection with Public Records” in a prior “Noncompete – Issues and Cases in the News” post), the Iowa Supreme Court held that trade secret protection was not available to a filmmaker’s budget summaries where the filmmaker was receiving tax credits. See Film Budget Summaries Are Not Trade Secrets.

Massachusetts: A recent decision, U.S. Electrical Services, Inc. v. Schmidt, from Judge Casper of the United States District Court provides a great summary of the distinction between the inevitable disclosure doctrine as a trade secret concept (used to get an injunction in the absence of a noncompete) on the one hand and using the likelihood of “inevitable disclosure” as the standard determining whether the breach of a noncompete is likely to cause irreparable harm to a former employer.  This distinction is often overlooked, and the concepts easily confused, so the case is definitely worth a read. In addition, it’s also interesting in that Judge Casper observes that Massachusetts has not adopted the inevitable disclosure doctrine, and then, nevertheless, analyzes the facts under the doctrine. For more discussion, see “Ex-employees’ work for competitor OK, Inevitable disclosure doctrine inapplicable,” in New England In-House.

Missouri: The latest statement by the Missouri Supreme Court (in Whelan Security Co. v. Kennebrew) on Missouri noncompete law. To hear the oral arguments or read the briefs, click here.

Nevada: The United States District Court for the District of Nevada held in Switch Communications Group v. Ballard that the plaintiff must first identify trade secrets with reasonable particularity before the defendant would be required to respond to discovery.

New Hampshire: There is both a very important statutory noncompete development and an interesting Computer Fraud and Abuse Act decision in New Hampshire recently.

Statutory Development: Those of you who are regular readers of this blog know that I have been assisting Representative Lori Ehrlich and Senator Will Brownsberger on the Massachusetts noncompete bill for the past several years. Well, while Massachusetts has been working on a comprehensive review, clarification, and overhaul of its noncompete laws, New Hampshire took a more streamlined approach and, as of July 14, 2012, will require advance notice of noncompetes and “non-piracy” agreements.

Companies need to comply now; comport your practices to the statute immediately. This affects new hires and existing employees.

The operative text of the law is as follows (and a link to the law in its entirety is available here):

Prior to or concurrent with making an offer of change in job classification or an offer of employment, every employer shall provide a copy of any non-compete or non-piracy agreement that is part of the employment agreement to the employee or potential employee. Any contract that is not in compliance with this section shall be void and unenforceable.

Now for the questions… While the statute was obviously intended to prevent the circumstance where an employee does not learn that he will be bound by restrictive covenants until he commences work (or some time after), by not defining key terms, the statute seems to have created quite a few uncertainties.  For example, does “non-compete” mean just a traditional noncompete or does it include garden leave clauses? Given that people often use the term “noncompete” to mean nonsolicitation agreements as well, as are those included?  What about nondisclosure agreements (which are also sometimes grouped in as “noncompetes”)? What is a non-piracy agreement? (Typically, that is a restriction on raiding employees, although it may be more likely that in New Hampshire it will be interpreted as an agreement not to solicit customers.) What about the meaning of a “change in job classification”? Is it a promotion? Is a change in title sufficient? Is it classification for wage laws? Will a significant raise be enough? If it is only some limited circumstance, what happens if a company legitimately needs to require a noncompete after an employee is working, but there is no “change in job classification,” does that mean no noncompete? What will happen to other (less restrictive) types of restrictive covenants, such as forfeiture agreements, forfeiture for competition agreements, nondisclosure agreements, etc.?

CFAA Decision: The United States District Court for the District of New Hampshire in Wentworth-Douglass Hospital v. Young & Novis Professional Association has, despite First Circuit precedent (in EF Cultural Travel BV v. Explorica, Inc.) seemingly to the contrary, applied a narrow interpretation to the Computer Fraud and Abuse Act.

Ohio: Two recent cases from Ohio are very interesting:

  • As discussed previously here (see Ohio section), the Ohio Supreme Ohio Supreme Court, on May 24, 2012, issued a decision (Acordia of Ohio, L.L.C. v. Fishel) on a significnt issue that is unsettled in many states: The assignability (typically in a corporate merger or acquisition) of an employee noncompete. In short, the Ohio Supreme Court held that to be assignable, noncompetes must say so. However, on July 25, the Ohio Supreme Court issued a decision agreeing to reconsider its decision. Stay tuned!

Invention Assignment Agreements: Invention assignment agreements are agreements where, typically, an employee will assign to his employer all rights to virtually anything he “invents” (or even thinks of in the shower) during the time of his employment, and frequently for a period after. There are very few cases addressing these agreements. However, recently, there were three: one in Wyoming, one in South Carolina, and one in Massachusetts.

I previously covered (with relevant links) the Wyoming case here. For an excellent analysis of the South Carolina case, see Ken Vanko’s post, Supreme Court of South Carolina Address Validity of Invention Assignment Clause.

In the Massachusetts case (Grocela v. The General Hospital Corporation), the Superior Court (Lauriat, J.), considered a physician’s claim that an invention assignment agreement – requiring Grocela to assign to Massachusetts General Hospital any inventions “that arise out of or relate to [his] clinical, research, educational or other activities . . . at [MGH]” – was unenforceable. The Court started from the premise that, “In general, the ‘law looks upon an invention as the property of the one who conceived, developed and perfected it, and establishes, protects and enforces the inventor’s rights in his invention unless he has contracted away those rights.’” The Court did, however, then consider issues of reasonableness, though not going so far as applying (expressly, at least) the standard reasonableness test (time, place, scope, narrowly tailored to protect legitimate business interests) typically applicable to restrictive covenants (which include invention assignment agreements). In the end, the Court found the assignment enforceable.

Criminal:

Related Items of Interest:

Trade Secret | Noncompete – Issues and Cases in the News – April 2012

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It’s time for this month’s Trade Secret | Noncompete Issues and Cases in the News. (This post will be updated over the next week; however, two recent and very important decisions necessitated quick posting.)

CFAA:  The much-awaited decision from the 9th Circuit (en banc) in US v. Nosal has finally issued. In short, the 9th Circuit overturned its 3-judge appellate panel and held that the District Court was correct: the Computer Fraud and Abuse Act does not apply to mere violations of terms of use restrictions. See Court narrows the reach of computer fraud law.

EEA: The other much-awaited decision – this one from the 2nd Circuit – has finally issued. In U.S. v. Aleynikov, the 2nd Circuit refused to extend the Economic Espionage Act to reach software stolen by the former Goldman Sachs programmer. For more on this, see John Marsh’s post, “U.S. v. Aleynikov: Did the Second Circuit Get it Wrong and What are the Repercussions for the Kohl/Coons Amendment to the Economic Espionage Act?” and Peter Toren’s “Second Circuit Issues Opinion in Aleynikov: Limits Scope of the EEA, Urges Congress to Take Action.” (I will be writing more on this shortly as well.)

Social Media Privacy Bills Around the Country

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The Maryland legislature has become the first state legislature to pass a bill forbidding employers from demanding – or even asking for – social media (e.g., Facebook, Twitter, LinkedIn) usernames and passwords from employees or prospective employees. See Maryland To Ban Employers From Asking For Facebook, Twitter PasswordsMaryland Bill Bans Employers From Facebook.

Other states (Massachusetts, California, Illinois, and New Jersey) are not far behind. See Social Media Password Privacy Bills.

In Massachusetts, for example, a similar bill was sponsored by Representative Cheryl A. Coakley-Rivera, with the support of over 18 other State Representatives, including Representative Lori Ehrlich (who is also a co-sponsor of the Massachusetts noncompete bill still pending before the Joint Committee on Labor and Workforce Development).

The operative language of the Massachusetts social media bill (“An Act relative to social networking and employment”) is as follows:

It shall be unlawful for any employer to ask any employee or prospective employee to provide any password or other related account information in order to gain access to the employee’s or prospective employee’s account or profile on a social networking website or electronic mail. No employee or prospective employee shall be required to provide access to an employer for a social networking site.

The bill also makes clear that it does “not apply to any employer who obtains information about a prospective employee or an employee that is in the public domain or obtained in compliance with this section” and does “not limit an employer’s right to promulgate and maintain lawful workplace policies governing the use of the employer’s electronic equipment, including policies regarding internet use, social networking site use, and electronic mail use.”

Whether these bills are passed by the respective legislators and governors remains to be seen. Interestingly, the US Congress has rejected a similar effort. See Congress Decides to Allow Employers to Demand Your Facebook Password. If they do pass, however, they will certainly raise some interesting issues (beyond the obvious) given the trade secrets concerns that have been in the news lately. See Employers May Own Employee’s Social Media Accounts: Twitter, Facebook, LinkedIn, and YouTube.

Trade Secret | Noncompete – Issues and Cases in the News

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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

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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?

Trade Secrets on the Internet

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From Wikimedia Commons

The United States District Court for the District of New Jersey recently issued a decision (Syncsort Incorporated v. Innovative Routines, International, Inc.) providing one more piece in the puzzle of how courts are likely to treat trade secrets that have been published briefly on the Internet. In short, the court adopted a rule of reason, finding that brief postings on obscure websites do not necessarily vitiate trade secret status.

To put this in context, the sine qua non (Latin (and lawyer) for “without not which,” i.e., an essential or defining element) of a trade secret is secrecy. But, contrary to its implication, the secrecy requirement is not absolute. “The rule . . . requires only secrecy sufficient to confer an actual or potential economic advantage on one who possesses the information.” Restatement (Third) of Unfair Competition, § 39, comment f. “Even limited non-confidential disclosure will not necessarily terminate protection if the recipients of the disclosure maintain the secrecy of the information.”  Id.

Some of the early (and still leading) cases on this issue came from the United States District Court for the Northern District of California. Although starting with an initial hardline, absolutist ruling, the court in Religious Technology Center v. NetCom On-Line Communication Services, Inc. later softened its approach, explaining the issue as follows:

[T]he court believes that its statement in its September 22, 1995 order that “posting works to the Internet makes them ‘generally known’ to the relevant people” is an overly broad generalization and needs to be revised. The question of when a posting causes the loss of trade secret status requires a review of the circumstances surrounding the posting and consideration of the interests of the trade secret owner, the policies favoring competition and the interests, including first amendment rights, of innocent third parties who acquire information off the Internet.

A later leading decision on the issue was from the California Court of Appeal in DVD Copy Control Ass’n Inc. v. Bunner. In that case, dvd encryption/decryption information was widely published in an unlawful effort to make it publically available. Although the court took a reasoned approach, the publishers had accomplished their goal, and the information was widely disseminated, thereby eliminating its trade secret status.

The United States District Court of New Jersey took a similar analytical approach in Syncsort Incorporated v. Innovative Routines, International, Inc. Like the Northern District of California and the California Court of Appeal, the District of New Jersey applied a rule of reason, recognizing the realities of publication on the Internet. In particular, adopting the analysis from the DVD Copy Control case, the District of New Jersey viewed the issue as follows:

Information “in the public domain cannot be removed . . . under the guise of trade secret protection.” But, publication on the Internet may not destroy a secret if it is “sufficiently obscure or transient or otherwise limited so that it does not become generally known to the relevant people, i.e., potential competitors or other persons to whom the information would have some economic value.” The guiding “concern is whether the information has retained its value to the creator in spite of the publication.”

In the end, one of the things that makes this case so interesting is that notwithstanding substantial publication, the court found that the information retained its status as a trade secret. For a more in-depth discussion of the court’s decision, see John Marsh’s “The Trade Secret Litigator” blog.

It bears mention that these cases are similar to, but different from, cases like Sasqua Group, Inc. v. Courtney in the Southern District of New York, in which LinkedIn, Facebook, Google, and other Internet sites were used to demonstrate that the information could be easily obtained online. The difference is that, in those other cases, the trade secrets themselves were not posted to the Internet; rather, the information constituting the trade secret could simply be replicated from information available on the Internet. (More on compilations of public information in a later blog post.)

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