What to do if noncompetes are eliminated in Massachusetts

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cropped-cimg27721.jpgAs you likely have seen (here for example), the Patrick Administration has spent a great deal of time putting together comprehensive proposed legislation designed to promote growth and opportunity in Massachusetts. Of particular note has been the Administration’s proposal of the adoption of a version of the Uniform Trade Secrets Act (the “UTSA”) coupled with a California-like ban of employee noncompetes.

A copy of the entire bill is available here. (Section 53, the relevant section, is here.)

If it passes, noncompetes will be banned in Massachusetts, while Massachusetts simultaneously becomes the 49th state to adopt some version of the Uniform Trade Secrets Act, leaving just New York as the last remaining holdout.

The upshot is that noncompetes will be banned, but other restrictive covenants – e.g., nonsolicitation agreements, nondisclosure agreements, no-raid/anti-piracy agreements, no hire agreements, and others - will remain intact. Also, while the change to the UTSA will have minimal practical implications, it will permit the recovery of attorneys’ fees, which current law does not (unless the claim falls within the Massachusetts unfair competition statute, G.L. c. 93A).

In the interest of full disclosure, I pause here to note that I have been working with, and continue to work with, the Administration (in particular, Jennifer Lawrence, in the Executive Office of Housing and Development, who is spearheading the Administration’s effort), on the language of Section 53. There are a number of differences between the Patrick Administration’s bill on the one hand and the UTSA and California’s statute on the other hand, but more on that in a later post.

As regular readers of this blog know, I view my role as only advisor on the drafting to accomplish the particular policy and the likely impact of the changes – not on what the policy should be. It is in that capacity that I have been advising not only the Patrick Administration, but key legislators (including Senator Will Brownsberger and Representative Lori Ehrlich) on each of the several other approaches under consideration at this time. This is a complex area of law, involving many competing policies and potential implications.

To be clear, while I take no position on whether the benefits of eliminating noncompetes outweigh the detriments, I do believe that it is important to be cognizant of the potential practical consequences (at least from a litigation standpoint).

Specifically, while the result will likely be less overall litigation and more employee mobility, the risk to trade secrets will increase and litigation that is commenced to protect them will tend to be more costly and last longer. Litigators will shift from a focus on noncompete enforcement to cases involving the enforcement of other restrictive covenants and the even-more-costly trade secrets litigation. Noncompete litigation generally involves a several-week process in which the parties spar over the appropriateness of an injunction to prevent the employee from working for a particular competitor. In contrast, trade secrets litigation generally involves a more involved, several-month discovery process on top of the injunction motions.

Given this, the obvious question is: What should companies do to protect their legitimate business interests if the bill becomes law (which can be anytime up to July 31 – mark your calendars)?

There are a number of steps that should be taken – many of which companies have been taking all along, though perhaps not as vigilantly as they will need to going forward. Here are the top five key steps.

First and foremost is to review all existing restrictive covenant, employee, and independent contractor agreements. If the bill is adopted in its current form, the language says that it will apply to existing agreements – and not just agreements with employees, but with independent contractors as well.

That means that existing agreements are not immune and may need to be changed. If they include well-drafted nonsoliciation (of customers), no-raid (of employees), and confidentiality provisions, it may be that they can be left in tact, recognizing that the noncompete provision will simply be unenforceable.

However, if those other protections are missing, too limited, or simply not well-drafted, they will need to be revised.

If they need to be revised, you will need to consider the best timing and method to go about doing so to avoid running afoul of arguments concerning notice, equity/fairness, and consideration (the exchange of something of value).

Second and equally important, proper safeguards must be in place to protect company trade secrets (which will include what we traditionally considered “confidential information” in Massachusetts, and can include anything from the secret formula to Coke to customer lists) from the risk of misappropriation in the first place.

Accordingly, a trade secrets protection plan (sometimes called a “trade secrets audit“) will be even more important now than ever before. Key elements are steps to lock down information and education of your employees and others with access to trade secrets.

This does not mean that your information will never be misappropriated or that you cannot still sue if it is. It will and you can. (75 percent of employees admit to taking company information. See also here (59 percent in 2009 Ponemon study).) But, a proper trade secrets protection plan should help to limit the number of times you need to resort to litigation, while simultaneously increasing your likelihood of obtaining injunctive relief through litigation.

Note that trade secrets litigation is more costly than noncompete litigation, because there is not a bright line to rely on for purposes of getting quick injunctive relief. With noncompete litigation (assuming the agreement is enforceable), you know whether the obligation has been breached or not – either the employee is at the competitor or he is not. With trade secrets litigation, the odds are much greater that you will need discovery to know whether your information is in fact being used and how.

Third, like the prophylactic protections for trade secrets, safeguards should also be put in place to protect your company’s customer goodwill from the risk of misappropriation. The most obvious is nonsolicitation agreements. But other steps should be taken as well. Those include (among other steps) having multiple points of contact with each customer when feasible, plans for securing the relationships upon an employee’s departure, and proper mechanisms for managing social media accounts and contacts.

Fourth, the protections available for retaining talent should not be forgotten. If you want to limit departing employees from poaching the remaining employees, you must have proper no-raid/anti-piracy (or no-hire) agreements (sometimes called nonsolicitation agreements or no-poach agreements) in place. In addition, you should take steps to give employees reason to stay – and, separately, not to leave. Forfeiture agreements (agreements that require the forfeiture of certain benefits or payments if the employee leaves) are one tool that should be considered in this regard.

Fifth, if litigation is necessary, move quickly. Delay can be the biggest problem for companies in these cases. And, without the protections of noncompete agreements, delay can create even greater risks of loss of trade secrets, relationships, or employees.

New Trade Secrets Study by PwC and CREATEe.org

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Screen Shot 2014-02-26 at 6.40.59 AMFor those interested in the economics and policies behind trade secrets, PricewaterhouseCoopers and The Center for Responsible Enterprise & Trade (CREATe.org) have issued a detailed report on the economic impact of trade secret theft, including a suggested approach to protecting trade secrets (i.e., a trade secret audit).

The report, as explained by PwC, “focuses on four issues that are critical to understanding trade secret theft and how to improve companies’ ability to protect their most valuable information.” PwC identifies those four issues as follows:

  • an estimate of trade secret theft across advanced industrial economies;
  • a threat assessment focusing on what threat actors are most active in targeting trade secrets;
  • an original framework for companies to assess the value of their own trade secrets; and
  • a look forward 10-15 years in the future to consider what forces and drivers may make trade secrets more or less secure.

Noting that “current and former employees [are] one of the greatest cyber security threats” to trade secrets, the report provides a sense of the magnitude of the problem: “Estimates of trade secret theft range from one to three percent of the Gross Domestic Product (‘GDP’) of the United States and other advanced industrial economies.” That estimate equates to an impact of $171 billion to $513 billion in just the United States. 

The report adds to the increasingly-alarming body of reports and studies highlighting the need for improved measures and vigilance in the protection of trade secrets.

Trade Secrets and Noncompetes – Year in Review 2013

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Document8This past week, the Boston Bar Association held its 14th annual Intellectual Property Year in Review. I covered trade secrets (including related restrictive covenants). Below is a summary of those developments. (If you would like a complete copy of my materials, click here.)

Obama Administration Focuses on Trade Secrets

In February 2013, the Obama Administration issued “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets.” Part of its strategy included the Administration’s solicitation of public comment.  Thirteen entities and individuals (including John Marsh (submission), Dean Pelletier (submission), Peter Toren (submission), and me (submission)) submitted comments.

At the rollout of the strategy, Attorney General Eric Holder warned,

[T]here are only ‘two categories’ of companies affected by trade secret theft –“[T]hose that know they’ve been compromised and those that don’t know yet.”

. . .  A hacker in China can acquire source code from a software company in Virginia without leaving his or her desk.  With a few keystrokes, a terminated or simply unhappy employee of a defense contractor can misappropriate designs, processes, and formulas worth billions of dollars.

Approximately four months later, on June 20, 2013, the Obama Administration issued its “2013 Strategic Plan for Intellectual Property Enforcement.” As explained by U.S. Intellectual Property Enforcement Coordinator Victoria Espinel, the Strategic Plan “builds on our efforts to protect intellectual property to date, and provides a roadmap for our work over the next three years.”

The focus seems to be on pushing trading partners to increase their trade secrets enforcement efforts, working with the private sector for them to take the lead, and beefing up trade secrets-related legislation.

Economic Espionage Act Getting Beefed Up

The Economic Espionage Act of 1996 (the “EEA”), 18 U.S.C. §§ 1831-1839, was enacted in 1996 to criminalize the misappropriation of trade secrets. It has two operative parts:  Section 1831(a) covering “economic espionage” (i.e., theft of trade to benefit a foreign power) and section 1832(a), covering “theft of trade secrets” (i.e., the theft of trade secrets to benefit someone other than the owner of the secrets). 2013 saw a focus on the EEA.

On December 28, 2012 (so, technically 2012, not 2013), the Theft of Trade Secrets Clarification Act of 2012 amended the EEA in response to US v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). Specifically, it expanded the reach of the EEA by deleting the old language that cover only trade secrets “related to or included in a product that is produced for or placed in interstate or foreign commerce” and replacing it with language covering trade secrets “related to a product or serviced used in or intended for use in interstate or foreign commerce.” (Of course, by deleting “included in,” the act may have created its own ambiguity as to its scope.)

On January 14, 2013, President Obama signed the Foreign and Economic Espionage Penalty Enhancement Act of 2012. In addition to requiring a review of sentencing guidelines, the Act increased fines for foreign espionage under section 1831. 

Later in 2013, Representative Zoe Lufgren (D-CA) introduced an abbreviated bill known as the “Private Right of Action Against Theft of Trade Secrets Act of 2013.” That bill provides for the addition of the following language to be added to section 1832 of the EEA:

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

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

Computer Fraud and Abuse Act: The Saga Continues

The spotlight on the appropriate scope of the Computer Fraud and Abuse Act (the “CFAA”) continued this year. For example, in Facebook, Inc. v. Power Ventures, Inc., 2013 WL 5372341 (C.D. Calif., Sept. 25, 2013) (denying a motion to reconsider), a website that aggregated data from social media sites like Facebook was found to have violated the CFAA. Of particular note, in the summary judgment decision that was being reconsidered, the court had observed that while using a website such a Facebook.com in violation of its terms of use is not a violation of the CFAA, “access[ing] the network in a manner that circumvents technical or code-based barriers in place to restrict or bar a user’s access” can be a violation. 844 F.Supp.2d 1025, 1036, 1040 (N.D. Calif. Feb. 16, 2012) (noting that California’s penal code’s requirement of “permission” (which is what the court first interpreted) is the equivalent of the CFAA’s requirement of “authorization”). In a similar vein, the Northern District of California denied a motion to dismiss the CFFA claim where the defendant (a competitor of Craigslist) “scraped” the plaintiff’s website after its authorization to do so had been revoked. Craigslist, Inc. v. 3Taps, Inc., 2013 WL 1819999, *3 (N.D. Cal. April 30, 2013).

Closer to home (for me, at least), Massachusetts saw several cases struggle to discern the proper interpretation. In Advanced Micro Devices, Inc. v. Feldstein, 2013 WL 2666746, *3 (D. Mass. June 10, 2013), Judge Hillman, adopted the narrow interpretation, noting that the “narrow interpretation reflects a technological model of authorization, whereby the scope of authorized access is defined by the technologically implemented barriers that circumscribe that access,” and the “broader interpretation defines access in terms of agency or use.” In so doing, Judge Hillman disagreed with Judge Gorton’s interpretation of EF Cultural Travel BV v. Explorica, Inc., 274 F. 3d 577 (1st Cir. 2001), as favoring a broad interpretation. Most recently, in Enargy Power Co. Ltd v. Xiaolong Wang, 2013 WL 6234625 (D. Mass. Dec. 3, 2013), Judge Casper took a more nuanced approach, finding that Wang was not specifically provided access, and therefore defendants’ access exceeded what was authorized. (See also Moca Systems, Inc. v. Bernier, 2013 WL 6017295, *3 (D. Mass. Nov. 12, 2013), in which Chief Magistrate Judge Sorokin described the different interpretations, but noted that he did not need to reach a decision as to which was the proper interpretation). )

On the criminal side, not only was David Nosal (the subject of the 9th Circuit’s high-profile decision (U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012 (en banc)) narrowly interpreting the CFAA) convicted by a jury, but a firestorm was set off when activist Aaron Swartz, who was being prosecuted under the CFAA for accessing and downloading millions of documents from the online archive (JSTOR), committed suicide. Swartz’s suicide resulted in a bill (“Aaron’s Law Act of 2013”) introduced by Representatives Zoe Lofgren (D-CA), James Sensenbrenner (R-WI), Mike Doyle (D-PA), Yvette Clarke (D-NY), and Jared Polis (D-CO) to narrow the reach of the CFAA.

Aaron’s Law has received significant attention and if passed in one form or another, could have profound implications for the scope of the CFAA. 

State Legislative Developments Are Mixed

Effective September 1, 2013, Texas became the 48th state to adopt some version of the Uniform Trade Secrets Act, leaving Massachusetts and New York as the only two hold-outs. 

Massachusetts continued to pursue adoption of its own version of the Uniform Trade Secrets Act (H.27 and H. 1225) and continued considering changes to its noncompete laws. The two most significant were H.1225, which appended a California model (i.e., a ban on most employee noncompetes) endorsed by Governor Deval Patrick, and the Noncompete Agreement Duration Act” (H. 1715/S. 846), which was the culmination of earlier efforts of Representative Lori Ehrlich and Senator William Brownsberger to overhaul Massachusetts noncompete law and leaves most existing Massachusetts noncompete law in tact, and, as its name suggests, focuses on the duration of noncompetes (creating a presumption that noncompetes longer than 6 months are unreasonable and 6 months or less are reasonable).

Other states have similarly considered laws to modify their own noncompete laws. For example, Connecticut considered (but the Governor vetoed) a bill (Substitute H.B. No. 6658) that would have imposed certain requirements on the assignability of noncompete agreements in the context of mergers and acquisitions; Minnesota considered a bill (H.F. No. 506) to ban employee noncompetes; Illinois considered a bill (HB 2782) that, while stating it permits noncompetes, would permit only nonsnolicitation and no raid agreements (subject to various requirements) and imposing legal fees in favor of the prevailing party in any litigation; Maryland considered a bill (S.B. 51, which received an unfavorable report from the Finance Committee) to render noncompetes unenforceable against terminated employees who were eligible for unemployment benefits; and the New Jersey Assembly introduced a bill (A3970) that would render not just noncompetes unenforceable against terminated employees who were eligible for unemployment benefits, but agreements not to solicit and nondisclosure agreements.

Bad Faith Claims: A Matter of “Common Sense”

Section 4 of the Uniform Trade Secret Act provides that “[i]f . . . a claim of misappropriation is made in bad faith, . . . the court may award reasonable attorney’s fees to the prevailing party.” Each year, more and more are cases doing precisely that.

But what about whether Section 4 applies to a trade secret misappropriation claim maintained in bad faith? According to the Seventh Circuit, it is a matter of “common sense” – it does apply.

The case is Tradesman International, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2013). There, following a favorable summary judgment decision, the defendants sought attorneys’ fees under Section 4 of Illinois’ version of the UTSA. Id. at 1016.  Recognizing that the absence of Illinois precedent on the issue of whether Section 4 applies to actions maintained in bad fait (as opposed to actions filed in bad faith), the Court of Appeals turned to California precedent. Id. Adopting California’s interpretation, the court held,

[W]e we conclude that “made in bad faith” is correctly interpreted as either bringing or maintaining a suit in bad faith.  In addition to the California case law, common sense supports such an interpretation. Regardless of her intentions at the time of filing, surely a plaintiff makes a claim in bad faith if she continues to pursue a lawsuit—even after it becomes clear that she has no chance to win the lawsuit—in order to cause harm to the defendant.

Consequently, we find that the district court erred in determining that a claim “made in bad faith” must be “initiated in bad faith.” A claim is made in bad faith when it is initiated in bad faith, maintained in bad faith, or both.

Id.

While neither Massachusetts nor New York has adopted the Uniform Trade Secrets Act, the Seventh Circuit’s decision will likely have broad persuasive authority in the rest of the country.

Personal Jurisdiction Expanded

Trade secrets litigation often involves interstate disputes. Sometimes there is an applicable contract that includes a forum selection clause and sometimes there is not. And, oftentimes, even when there is a contract with such a provision, there is a question about its enforceability. This year, there were two cases of particular note: An eye-opening decision from the United States District Court for the Southern District of California where there was no contract and a decision from the United States Supreme Court where there was a contract. Both, at least as a preliminary matter, found jurisdiction. 

In Integrated Practice Solutions, Inc. v. Wilson, 2013 WL 3946061 (S.D. Cal. July 31, 2013), the plaintiff, Integrated Practice Solutions, Inc. (“IPS”) provides practice management computer software for healthcare professionals. Id. at * 1. Defendant Wilson worked for IPS until August 20, 2012, as a sales representative and Vice President of Sales. Id. Later, he went to work for IPS competitor, Future Health Acquisition, Inc. (“Future Health”). IPS claimed that Wilson misappropriated its customer list and provided the information to Future Health. Id. 

The only contacts that Future Health, a South Dakota corporation, had with California were “a lone salesman . . . and the occasional trade show,” which the court held were insufficient to establish personal jurisdiction. Id. at *2. However, the court allowed discovery to proceed on the issue of specific jurisdiction, noting that, “that hinges on Future Health’s involvement, or lack thereof, with the alleged actions of Defendant Wilson in misappropriating IPS’s customer list.” Id

As the court explained, “Misappropriation of trade secrets is an intentional tort,” and, as such, “the defendant must be alleged to have (1) committed an intentional act, (2) expressly aimed at the forum state, (3) causing harm that the defendant knows is likely to be suffered in the forum state. Id. (citing Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984)). Thus, the court reasoned, “if Defendant Wilson did misappropriate the customer list and Future Health did somehow take advantage of that, then Future Health would have purposely availed itself of doing activities in or directed towards California.” Id. at *3. Accordingly, the court retained jurisdiction over Future Health and permitted IPS to take discovery concerning facts relevant to jurisdiction – including, therefore, facts concerning Future Health’s involvement in the alleged misappropriation (which effectively opens the door to extensive discovery). 

Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas, 134 S.Ct. 568 (2013), although a case involving a contractor’s alleged failure to pay its subcontractor may appear at first blush to be irrelevant to trade secrets litigation, it is in fact quite significant insofar as it makes forum selection clauses (which are or should be included in most restrictive covenants) much more enforceable. In particular, the Court stated the following:

 First, the plaintiff’s choice of forum merits no weight. . . .

* * *

Second, a court evaluating a defendant’s § 1404(a) motion to transfer based on a forum-selection clause should not consider arguments about the parties’ private interests. . . .

* * * 

Third, when a party bound by a forum-selection clause flouts its contractual obligation and files suit in a different forum, a § 1404(a) transfer of venue will not carry with it the original venue’s choice-of-law rules—a factor that in some circumstances may affect public-interest considerations. 

The impact of the decision on cases involving the attempted enforcement of forum selection clauses in noncompetition agreements arising from an employer-employee relationship will likely be seen in the not-to-distant future.

Consideration for Employee Noncompetes: Not In Illinois

Noncompetition agreements, like all contracts, require consideration. It is generally accepted that when an employment agreement is signed in connection with the commencement of employment, the new job provides the consideration necessary to support the noncompete.

The Appellate Court of Illinois for the First District, First Division, has, however, challenged that view in a decision that the Illinois Supreme Court refused to accept on appeal:  Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013). Specifically, the court held that, if a new job (i.e., employment) is the purported consideration for a restrictive covenant, then the employment must last at least two years to suffice – even if the employee terminates the employment.

Accordingly, companies hiring in Illinois will, in light of this decision, be well-advised to consider providing additional consideration to employees upon their hiring. What additional consideration will suffice remains to be seen.

Nonsolicitation Does Not Always Require “Solicitation”

It is rare for restrictive covenant cases – especially nonsoliciation cases – to proceed beyond the preliminary injunction stage. And, it’s even more rare for them to make it to an appellate court – especially a federal court of appeals. But, that is precisely what happened in Corporate Technologies, Inc. v. Harnett, 731 F.3d 6 (1st Cir. 2013).

The case involved the question of what constitutes solicitation, an issue that has resulted in many varying decisions over the years.

The First Circuit began its opinion with the following paragraph:

 Businesses commonly try to protect their good will by asking key employees to sign agreements that prohibit them from soliciting existing customers for a reasonable period of time after joining a rival firm. When a valid non-solicitation covenant is in place and an employee departs for greener pastures, the employer ordinarily has the right to enforce the covenant according to its tenor. That right cannot be thwarted by easy evasions, such as piquing customers’ curiosity and inciting them to make the initial contact with the employee’s new firm.  As we shall explain, this is such a case.

Id. at 8.

As the court explained, “[t]he dispute . . . turns on the distinction between actively soliciting and merely accepting business—a distinction that the Massachusetts Appeals Court aptly termed ‘metaphysical.’ Alexander & Alexander, Inc. v. Danahy, 21 Mass.App.Ct. 488, 488 N.E.2d 22, 30 (1986).” Id. at 10. Rejecting the defendant’s argument that the solicitation can only happen if the restricted party initiates the initial contact with the customer, the court stated, “This argument is simply a linguistic trick: creative relabeling, without more, is insufficient to transform what is manifestly a question of fact into a question of law. See Fed. Refin. Co. v. Klock, 352 F.3d 16, 27 (1st Cir.2003).”

The First Circuit’s decision is a significant addition to the body of case law interpreting what constitutes solicitation in the context of nonsolicitation agreements.

What to Watch For in 2014

  • LightLab Imaging, Inc. v. Axsun Technologies, Inc., SJC-11374, is awaiting decision by the SJC. The key issue (disputed by the parties) is whether a court can permanently enjoin the use of trade secrets where the defendant has not used them (and is not likely to use them in future).
  • Hydraulic fracking has been unavoidable in the news.  From a trade secrets standpoint, the tension is the oil companies’ desire to keep their processes secret and conservation and environmental groups’ (among others’) desire to know what is being put into the water supply.  Litigation has recently started over whether the fracking fluids are trade secrets.
  • Continued evolution of the material change doctrine.  It has long been established that a change in position within a company may constitute “a new relationship” necessitating the renewal or replacement of any restrictive covenants entered into in connection with a prior position. The watershed case on this issue is F.A. Bartlett Tree Expert v. Barrington, 353 Mass. 585, 587 (1968).  However, there has been a recent spate of cases involving the doctrine reaching results that are sometimes hard to reconcile. See, e.g., A.R.S. Servs. v. Morse, 2013 WL 2152181 (Mass. Super. Ct. April 5, 2013) (Leibensperger, J.); AthenaHealth, Inc. v. Cady, 2013 WL 4008198 (Mass. Super. Ct. May 2, 2013); Intepros Inc. v. Athy, 2013 WL 2181650 (Mass. Super. Ct. May 5, 2013) (Curran, J.); Akibia, Inc. v. Hood, 2012 WL 10094508 (Mass. Super. Ct. Oct. 9, 2012) (Locke, J.). Perhaps most interesting among them is Interpros, which held that terminating an employee voided the noncompetition agreement (based on the material change doctrine).

Trade Secret and Noncompete Survey – National Case Graph 2014 [Preliminary Data]

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Trade Secret Cases Survey Graph 20140105A few years ago, I became curious to see how many reported trade secret / noncompete decisions were issued each year in all federal and state courts around the country. So, I did a “back of the envelope” calculation. I have performed similar calculations several times since.

Over the years, I have varied the graph, typically showing two things: (1) either just reported noncompete decisions or just reported trade secret decisions and (2)  how whichever category I had picked (noncompete decisions or trade secret decisions) compared with all reported decisions involving either or both trade secrets and noncompetes. This year, I did all three again.

So, the blue bars reflect all reported noncompete decisions, the red bars are all reported trade secrets decisions, and the yellow are all decisions involving noncompetes, trade secrets, or both.

I should note that  each time I’ve run the queries, the results for each year have varied slightly (inching up over time), which I attribute to Westlaw’s addition of cases over time. Consistent with that, the older the data, the less it moves. Indeed, the oldest data didn’t change at all.

The other thing worth noting is that every time I’ve run this inquiry at the beginning of the year (as is the case this time), the most recent year has been way underreported. I suspect that it has something to do with how Westlaw updates its database. I will very likely run my search again later in the year, and, if history is any predictor, the 2013 numbers will be significantly higher – almost certainly exceeding the prior years in every category. We will see!

Perhaps most telling is that the trade secrets cases have grown virtually every year, though all of the numbers in the last four years have leveled out a bit (again, recognizing that the 2013 numbers are likely to rise significantly).

If you’d like to take a closer look at the numbers, you can click the image above.

Discovery, Protective Orders, and Spoliation in Trade Secrets Litigation

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Magnifying glassI recently (October 23) spoke on a panel at the American Intellectual Property Law Association (AIPLA) Annual Meeting (Washington, D.C.) entitled, “Terra Terror and Traveling Tricks – Developments in Cybersecurity, US and International Trade Secret Law.” My topic was discovery in trade secrets litigation.

I prepared a 32 page (single-spaced) paper covering discovery – basically an overview of how discovery issues arise and are handled around the country. The paper covered five discovery-related topics. I thought it might be helpful to provide a summary of the substance many of the key points. See below. (I know this is a long post, but the paper is much longer!)

1.     Overview of the standards applicable to discovery in trade secrets cases nationally, including the use and substance of protective orders.

Discovery in the federal courts is governed by Rule 26 of the Federal Rules of Civil Procedure, which “generally permits liberal discovery of relevant information.” Baker v. Liggett Grp., Inc., 132 F.R.D. 123, 125 (D. Mass. 1990) (citing Anderson v. Cryovac, Inc., 805 F.2d 1, 6-7 (1st Cir. 1986)). Rule 26 does “not distinguish between public and private information. Nor [does it] apply only to parties to the litigation, as relevant information in the hands of third parties may be subject to discovery.” Seattle Times Co. v. Rhinehart, 467 U.S. 20, 30 (1984).

Nevertheless, trade secrets enjoy a qualified privilege and are therefore entitled to some protection. Fed. Open Mkt Comm. of Fed. Reserve Sys. v. Merrill, 443 U.S. 340, 355, 362 (1979) (quoting Advisory Committee’s Notes on Fed. R. Civ. P. 26, 28 U.S.C. App. p. 444; 4 J. Moore, Federal Practice ¶ 26.76, pp. 26-540 to 26-543 (1970); 8 J. Wigmore, Evidence § 2212, pp. 156-157 (McNaughton rev. 1961)). Specifically, to be discoverable, the requested trade secrets “must be not only relevant, but also necessary.” Dow Corning Corp. v. Jie Xiao, 283 F.R.D. 353, 357 (E.D. Mich. 2012) (quoting R.C. Olmstead, Inc. v. CU Interface, LLC, 606 F.3d 262, 269 (6th Cir. 2010); citing Laborers Pension Trust Fund-Detroit v. CRS Poured Concrete Walls, Inc., WL 3804912, at *2 (E.D. Mich. Dec. 22, 2006); Fed. R. Civ. P. 26(c)(1)(G)); Fed. Open Mkt. Comm. of Fed. Reserve Sys., 443 U.S. at 362 (Courts “weigh the[] claim to privacy against the need for disclosure.”); Laffitte v. Bridgestone Corp., 381 S.C. 460 (2009) (“In determining whether trade secret information is subject to a protective order under Rule 26(c)(7), federal and state courts typically apply a balancing test that incorporates a ‘relevant and necessary’ standard for the party seeking to discover the trade secret information.” (citing 8 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and Procedure § 2043 (2d ed.1994); James J. Watson, Annotation, Discovery of Trade Secret in State Court Action, 75 A.L.R.4th 1009, 1028-30 (1990)).

However, even under this somewhat elevated standard, “courts routinely require disclosure of relevant and material information, even though asserted to be a trade secret and even though the parties are direct competitors . . . .” 3 Milgrim, Trade Secrets, § 14.02 (Mathew Bender & Company, Inc. 2013). Accordingly, “a party who asserts a claim or defense based upon trade secret or confidential information must be prepared to disclose the information so that the other party can prosecute its claim or prepare its defense.” Edward H. Pappas & Daniel D. Quick, Trade Secrets: Protection and Remedies, § C1 (BNA 3d ed. 2007).

Counsel to the trade secrets owner must take steps to insulate the trade secrets from disclosure beyond what is absolutely necessary for the case. This is typically achieved through the use of (and careful compliance with) a protective order issued under 26(c) of the Federal Rules of Civil Procedure, which provides a counterbalance to the broad scope of Rule 26(b). Rule 26(c) must also be read in light of Section 5 of the Uniform Trade Secrets Act (“UTSA”). See, e.g., Pappas v. Frank Azar & Assocs., P.C., 2007 WL 1549037, *4 (D. Colo. May 25, 2007) (“[B]oth [Section 5 of the UTSA] and [Rule 26(c)] contemplate that [trade secrets] may be discoverable, particularly when accompanied by collateral orders designed to preserve [their] confidentiality and limit [their] dissemination.”); Republic Servs., Inc. v. Liberty Mut. Ins. Cos., 2006 WL 1635655, *3 (E.D. Ky. June 9, 2006); Laffitte v. Bridgestone Corp., 381 S.C. 460, 674 S.E.2d 154 (2009) (Section 5 of “[t]he Trade Secrets Act . . . does not supplant, but rather complements, Rule 26(c) . . . .”); Brostron v. Warmann, 190 Ill. App. 3d 87, 90, 546 N.E.2d 3, 5 (1989); see also Vibromatic Co., Inc. v. Expert Automation Sys. Corp., 540 N.E.2d 659, *662 (Ind. Ct. App. 1989) (“To the extent that there may be a procedural conflict between [section 5 of the Uniform Trade Secrets Act] and . . . Rule 26(c), [Rule 26(c)] is controlling.”).

2.     The need to identify, and the timing of identifying, trade secrets in trade secrets litigation, and the range of governing standards nationally.

While a plaintiff will not typically need to identify its trade secrets in the complaint, the time will quickly come when the plaintiff must particularize its alleged trade secrets. See, e.g., Medtech Prods. v. Ranir, 596 F. Supp.2d 778, 789-90 & n.7 (S.D.N.Y. Sept. 30, 2008) (requiring identification of trade secrets after preliminary discovery); Cal. Code Civ. Pro. § 2019.210 (requiring identification of trade secrets before discovery); 3 Milgrim, Trade Secrets § 14.02.

Although different jurisdictions vary as to the timing and specificity of the required disclosure, “[s]everal courts have held that a party alleging a claim for misappropriation of trade secrets is required to identify its alleged trade secrets with reasonable particularity before it will be allowed to compel discovery of its adversary’s trade secrets.” Switch Communications Group v. Ballard, 2012 WL 2342929, *4 (D. Nev. June 19, 2012) (citing Engelhard Corp. v. Savin Corp., 505 A.2d 30, 12 Del. J. Corp. L 249 (Del. 1986), citing Xerox Corp. v. International Business Machines Corp., 64 F.R.D. 367, 371–72 (S.D.N.Y. 1974); DeRubeis v. Witten Technologies, Inc., 244 F.R.D. 676, 680–81 (N.D. Ga. 2007); Automed Techs., Inc. v. Eller, 160 F .Supp.2d 915, 925 (N.D. Ill. 2001); Dura Global Technologies, Inc. v. Magna Donnelly, Corp., 2007 WL 4303294 (E.D. Mich. 2007); Del Monte Fresh Produce Co. v. Dole Food Co., Inc., 148 F. Supp.2d 1322 (S.D. Fla. 2001); and Ikon Office Solutions v. Konica Minolta Business Solutions, 2009 WL 4429156, *4-5 (W.D. N.C. 2009)).

3.     Expedited discovery (the procedure).

Discovery can proceed in myriad ways. It is not uncommon in trade secrets disputes for discovery to proceed on an expedited course (usually limited in support of a preliminary injunction motion, though sometimes full-blow in anticipation of a quick trial). While the “normal” discovery process is set forth in Rule 26 of the Federal Rules of Civil Procedure, expedited discovery must be cobbled together from several rules. See Fed. R. Civ. P. 26(d)(1) (limiting the timing of discovery in certain contexts, except “when authorized . . . by court order”); Fed. R. Civ. P. 30(a) (permitting depositions at any time with a court order); Fed. R. Civ. P. 34(b)(2)(A) (“[a] shorter or longer time may . . . be ordered by the court”); Fed. R. Civ. P. 36(a)(3) (same).

     Although the Federal Rules do not provide a standard for the court to use in exercising its authority to order expedited discovery, it is generally accepted that courts use one of the following two standards to determine whether a party is entitled to conduct such discovery: (1) the preliminary-injunction-style analysis set out in Notaro v. Koch, 95 F.R.D. 403 (S.D.N.Y. 1982); or (2) the “good cause” standard. See Edgenet, Inc. v. Home Depot U.S.A., Inc., 259 F.R.D. 385, 386 (E.D. Wis. 2009); see also MOORE’S FEDERAL PRACTICE § 26.121.

St. Louis Group, Inc. v. Metals and Additives Corp., Inc., 275 F.R.D. 236, 239 (S.D. Tex. 2011); Wilcox Industries Corp. v. Hansen, 279 F.R.D. 64, 67 (D. N.H. 2012). While “the preliminary-injunction-style analysis . . . is the more rigid standard,” the “good cause” standard has become the majority approach. St. Louis Group, 275 F.R.D. at 239.

4.     Forensic evidence, including hard drives, electronic storage devices, and social media.

Rule 34 of the Federal Rules of Civil Procedure “permits a party to seek ‘to inspect, copy, test, or sample,’ among other things, ‘data or data compilations . . . stored in any medium.’” Cefalu v. Holder, 2013 WL 4102160, *1 (N. D. Cal. Aug. 12, 2013). “Electronic documents are no less subject to disclosure than paper records.” General Elec. Co. v. Wilkins, 2012 WL 570048, *4 (E.D. Cal. Feb. 12, 2012) (quoting Rowe Entm’t, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 428 (S.D.N.Y. 2002)); see also, e.g., Antioch Co. v. Scrapbook Borders, Inc., 210 F.R.D. 645, 652 (D. Minn. 2002) and cited cases. Nevertheless, Rule 34 “is not meant to create a routine right of direct access to a party’s electronic information system, although such access might be justified in some circumstances.” Cefalu, 2013 WL 4102160, *1 (quoting Advisory Committee notes). Rather, the Federal Rules of Evidence “take[] a categorical approach: [they] invite[] the classification of electronically stored information (‘ESI’) as either ‘accessible’ or ‘not reasonably accessible.’” Chen-Oster v. Goldman, Sachs & Co., 285 F.R.D. 294, 301 (S.D.N.Y. 2012).

Specifically, Rule 26(b)(2)(B) provides as follows:

A party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost. On motion to compel discovery or for a protective order, the party from whom discovery is sought must show that the information is not reasonably accessible because of undue burden or cost. If that showing is made, the court may nonetheless order discovery from such sources if the requesting party shows good cause, considering the limitations of Rule 26(b)(2)(C). The court may specify conditions for the discovery.

The Southern District of New York explained this burden-shifting test (adopted in 2006) as follows:

While cost and burden are critical elements in determining accessibility, a showing of undue burden is not sufficient by itself to trigger a finding of inaccessibility. For example, the sheer volume of data may make its production expensive, but that alone does not bring it within the scope of Rule 26(b)(2)(B). Rather, the cost or burden must be associated with some technological feature that inhibits accessibility. . . .

[The Rules Advisory Committee incorporated] the concept that cost and burden are related to the source of the ESI. Thus, the committee notes state that “some sources of electronically stored information can be accessed only with substantial burden and cost. In a particular case, these burdens and costs may make the information on such sources not reasonably accessible.” Fed. R. Civ. P. 26 advisory committee’s note (2006 Amendment) (emphases added). The committee further observed that “[i]t is not possible to define in a rule the different types of technological features that may affect the burdens of costs of accessing electronically stored information.” Id. Thus, decisions subsequent to the enactment of Rule 26(b)(2)(B) address accessibility by analyzing the interplay between any alleged technological impediment and the resulting cost and burden. For instance in W.E. Aubuchon Co. v. BeneFirst, LLC, 245 F.R.D. 38 (D.Mass.2007), the court found data to be inaccessible because, although it was stored on a server, the method of storage and lack of indexing rendered it extremely costly to search. Id. at 42–43; see also General Electric Co. v. Wilkins, No. 1:10–cv–674, 2012 WL 570048, at *5 (E.D. Cal. Feb. 21, 2012) (holding that accessibility generally turns on format in which ESI is stored); General Steel Domestic Sales, LLC v. Chumley, No. 10–cv–1398, 2011 WL 2415715, at *2 (D. Colo. June 15, 2011) (finding ESI inaccessible because of inability to search it except manually); Johnson v. Neiman, No. 4:09CV00689, 2010 WL 4065368, at *1 (E.D. Mo. Oct. 18, 2010) (holding that accessibility depends largely on nature of media); Helmert v. Butterball, LLC, No. 4:08CV00342, 2010 WL 2179180, at *1, *8 (E.D. Ark. May 27, 2010) (same); Capitol Records, 261 F.R.D. at 51 (same); Semsroth v. City of Wichita, 239 F.R.D. 630, 637 (D. Kan. 2006) (same).

Chen-Oster, 285 F.R.D. at 301-02 (citing The Sedona Conference, The Sedona Principles, Second Edition: Best Practices Recommendations & Principles for Addressing Electronic Document Production, Comment 2.c. at 42 (2007 Annotated Version)).

While discovery of social media is a relatively new phenomenon, the portions of social networking sites kept from public view have generally been treated like any other discovery. See, e.g., Johnson v. PPI Technology Services, L.P., C.A. No. 11-2773, 2013 WL 4508128, *1 (E.D. La. Aug. 22, 2013) (content of social network sites is not privileged or insulated from discovery due to privacy laws, but there is no “generalized right to rummage at will through information that [the responding party] has limited from public view”) (citations and internal quotation marks omitted); Jewell v. Aaron’s, Inc., 1:12-cv-0563, 2013 WL 3770837, (N.D. Ga. July 19, 2013) (same); Gatto v. United Air Lines, Inc., 10-cv-1090, 2013 WL 1285285, *3 (D. N.J. Mar. 25, 2013) (granting defendant’s counsel access to plaintiff’s Facebook account); Reid v. Ingerman Smith LLP, C.A. No. 2012-0307, 2012 WL 6720752, *2 (E.D.N.Y. Dec. 27, 2012) (Just like traditional discovery (of personal diaries, for example), “consideration [of privacy concerns] is more germane to the question of whether requested discovery is burdensome or oppressive and whether it has been sought for a proper purpose rather than to affording a basis for shielding those communications from discovery.” (citation omitted)); Tompkins v. Detroit Metropolitan Airport, 278 F.R.D. 387, 388 (E.D. Mich. 2012) (“private” social media pages are subject to traditional discovery principals, and generally enjoy no privilege, nor are they protected by privacy laws24); E.E.O.C. v. Simply Storage Management, LLC, 270 F.R.D. 430, 434 (S.D. Ind. 2010) (“Discovery of SNS requires the application of basic discovery principles in a novel context. . . . [T]he challenge is to define appropriately broad limits – but limits nevertheless – on the discoverability of social communications in light of [the cause of action] . . . and to do so in a way that provides meaningful direction to the parties.”).

“Nevertheless, [s]ome courts have held that the private section of a Facebook account is only discoverable if the party seeking the information can make a threshold evidentiary showing that the plaintiff’s public Facebook profile contains information that undermines the plaintiff’s claims.” Giacchetto v. Patchogue-Medford Union Free School Dist., __ F.R.D. __, 2013 WL 2897054, *2 n.1 (E.D.N.Y. May 6, 2013).

5.     Spoliation of Evidence.

“‘Spoliation’ has been defined as ‘the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.’” Cache La Poudre Feeds, LLC v. Land O’Lakes, Inc., 244 F.R.D. 614, 620 (D. Colo. 2007); see also Silvestri v. General Motors Corp., 271 F. 3d 583, 590 (4th Cir. 2001); Micron Technology, Inc. v. Rambus Inc., 645 F.3d 1311, 1320 (Fed. Cir. 2011).

In 2003 and 2004, Judge Scheindlin of the Southern District of New York issued a series of decisions that established the most influential, and likely strictest, standard for a party’s duties to preserve electronic (and traditional) evidence and the consequences for a failure to do so. The cases are known as the “Zubulake” cases. See Zubulake v. UBS Warburg LLC, 217 F.R.D. 309 (S.D.N.Y. 2003) (“Zubulake I”); Zubulake v. UBS Warburg LLC, No. 02 Civ. 1243,2003 WL 21087136 (S.D.N.Y. May 13,2003) (“Zubulake II”); Zubulake v. UBS Warburg LLC, 216 F.R.D. 280 (S.D.N.Y. 2003) (“Zubulake III”); Zubulake v. UBS Warburg LLC, 220 F.RD. 212 (S.D.N.Y. 2003) (“Zubulake IV”); Zubulake v. UBS Warburg LLC, 229 F.RD. 422 (S.D.N.Y. 2004) (“Zubulake V”). These cases were a wake-up call for lawyers, ushering in an era of sanctions – including awards of attorneys’ fees and adverse inferences – for failing not only to take appropriate steps to preserve electronic (and other) evidence, but for failing to do so early.

“Litigants owe an ‘uncompromising duty to preserve’ what they know or reasonably should know will be relevant evidence in a pending lawsuit even though no formal discovery requests have been made and no order to preserve evidence has been entered.” United Factory Furniture Corp. v. Alterwitz, 2:12-cv-00059, 2012 WL 1155741, *3 (D. Nev. April 6, 2012) (quoting Kronisch v. United States, 150 F.3d 1 12, 130 (2nd Cir.1998)). “Spoliation occurs where evidence is destroyed or significantly altered, or where a party fails to ‘preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.’” Gatto v. United Air Lines, Inc., 10-cv-1090, 2013 WL 1285285, *3 (D. N.J. Mar. 25, 2013) (quoting Mosaid Technologies v. Samsung Electronics, 348 F. Supp.2d 332, 335 (D. N.J. 2004) (internal citations omitted)). “At its simplest, [the preservation] duty requires a party anticipating litigation to refrain from deleting electronically stored information (‘ESI’) that may be relevant to that litigation.” Sekisui American Corp. v. Hart, ___ F. Supp.2d ___, 2013 WL 2951924, *1 (S.D.N.Y. 2013).

“Identifying the boundaries of the duty to preserve involves two related inquiries: when does the duty to preserve attach, and what evidence must be preserved? Zubulake IV, 220 F.R.D. at 216.

Although some courts hold that the duty to preserve evidence arises when litigation is “imminent,” typically, the requirement starts somewhat earlier: “The duty to preserve evidence begins when litigation is ‘pending or reasonably foreseeable.’” Micron Technology, Inc. v. Rambus Inc., 645 F.3d 1311, 1320 (Fed. Cir. 2011) (quoting Silvestri v. General Motors Corp., 271 F.3d 583, 590 (4th Cir.2001); citing West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999))); Gordon v. DreamWorks Animation SKG, Inc., __ F. Supp.2d __, 2013 WL 1292520, *4 (D. Mass. March 28, 2013) (“The duty to preserve evidence arises when litigation is reasonably anticipated.” (quotation marks omitted); Mosaid Techs. Inc. v. Samsung Elecs. Co., 348 F.Supp.2d 332, 336 (D. N.J. 2004) (the parties are “under a duty to preserve what [they] know[], or reasonably should know, will likely be requested in reasonably foreseeable litigation”).

When litigation is “reasonably foreseeable” is a flexible fact-specific standard that allows a district court to exercise the discretion necessary to confront the myriad factual situations inherent in the spoliation inquiry. Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d Cir.2001). This standard does not trigger the duty to preserve documents from the mere existence of a potential claim or the distant possibility of litigation. See, e.g., Trask–Morton v. Motel 6 Operating L.P., 534 F.3d 672, 681–82 (7th Cir.2008). However, it is not so inflexible as to require that litigation be “imminent, or probable without significant contingencies,” as [defendant] suggests. . . .

Micron Technology, Inc. v. Rambus Inc., 645 F.3d 1311, 1320-21 (Fed. Cir. 2011).

“While a litigant is under no duty to keep or retain every document in its possession . . . it is under a duty to preserve what it knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.”

Zubulake IV, 220 F.R.D. at 217.

With regard to sanctions, the First Circuit recently explained as follows:

Before an inference of spoliation may be drawn, its proponent must show at a bare minimum that the opposing party had notice of a potential claim and of the relevance to that claim of the destroyed evidence. See Blinzler v. Marriott Int’l, Inc., 81 F.3d 1148, 1158-59 (1st Cir. 1996). And there is an even more rudimentary requirement: the party urging that spoliation has occurred must show that there is evidence that has been spoiled (i.e., destroyed or not preserved). Tri– County Motors, Inc. v. Am. Suzuki Motor Corp., 494 F. Supp.2d 161, 177 (E.D.N.Y. 2007).

Gomez v. Stop & Shop Supermarket Co., 670 F.3d 395, 399 (1st Cir. 2012). Different courts have adopted different standards for determining whether the preservation obligation has been violated. The main difference is whether a negligent destruction of evidence can give rise to sanctions.

It bears mention that

“the Standing Committee on Rules of Practice and Procedure of the Judicial Conference of the United States Courts has [recently] published for public comment an amended Rule 37(e) to the Federal Rules of Civil Procedure. . . . [T]he proposed rule would permit sanctions only if the destruction of evidence (1) caused substantial prejudice and was willful or in bad faith or (2) irreparably deprived a party of any meaningful opportunity to present or defend its claims. The Advisory Committee Note to the proposed rule would require the innocent party to prove that “it has been substantially prejudiced by the loss” of relevant information, even where the spoliating party destroyed information willfully or in bad faith. . . . Under the proposed rule, parties who destroy evidence cannot be sanctioned (although they can be subject to “remedial curative measures”) even if they were negligent, grossly negligent, or reckless in doing so.”

Sekisui American Corp. v. Hart, 2013 WL 2951924, *4 n.51.

Each of these topics is obviously more involved than summarized above. Accordingly, I am happy to share the paper upon request. (Just email me.)

Trade Secret Survey – National Case Graph 2013 [Updated]

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Trade Secret Cases Survey Graph 20130825A few years ago, I became curious to see how many reported trade secret / noncompete decisions were issued each year in all federal and state courts around the country. So, I did a “back of the envelope” calculation. I have performed similar calculations several times since.

Over the years, I have varied the graph, typically showing two things: (1) either just reported noncompete decisions or just reported trade secret decisions and (2)  how whichever category I had picked (noncompete decisions or trade secret decisions) compared with all reported decisions involving either or both trade secrets and noncompetes.

Earlier this year, I decided to do all three. (See here.)

Recently, I reran just the trade secrets cases. (I will be rerunning the remaining numbers soon, and will post the chart once I do.)

While additional reported decisions had been added to Westlaw’s database for most years, all increases except 2012 were merely marginal increases. The reported 2012 decisions (as predicted) increased significantly (52 cases). (As I have explained in the past, each time I run the queries, the results have varied slightly (inching up), which I attribute to Westlaw’s addition of cases over time. Consistent with that, the older the data, the less it moves. And, each time I’ve run this inquiry at the beginning of the year (as I did most recently), the most recent year has been way underreported. I suspect that it has something to do with how Westlaw updates its database.)

As in the past, the numbers show a trending up of trade secrets litigation, though that trend reversed this year – though you would not know it from the number of cases in the news. I will reserve judgment on that final conclusion until I’ve run these numbers again in another year or two, to avoid any prejudice from the swing caused by the newness of the data.

If you’d like to take a closer look at the numbers, you can click the image above.

New Computer Fraud and Abuse Act Bill

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Last week (on June 20, 2013), Representatives Zoe Lofgren (D-CA), James Sensenbrenner (R-WI), Mike Doyle (D-PA), Yvette Clarke (D-NY), and Jared Polis (D-CO) introduced a new (bipartisan) version of Rep. Lofgren’s prior bill to modify the Computer Fraud and Abuse Act (“CFAA”). The new bill, “Aaron’s Law Act of 2013,” is named for Aaron Swartz (the computer programmer behind RSS and Internet activist who committed suicide in the midst of being prosecuted for allegedly violating the CFAA).

One of the frequently-litigated issues concerning the CFAA is the scope of activity to which it applies. See CFAA: The Wait for the Supreme Court ContinuesAaron’s Law Act of 2013, if passed, would amend the CFAA to legislatively adopt the narrow interpretation of the law.

To do so, the bill would strike “exceeds authorized access” in section 1030(e)(6) (which is the definitional section) and replace it with “access without authorization,” which would be defined to have a three part test. Specifically, it would be defined to mean:  “(A) to obtain information on a protected computer; (B) that the accesser lacks authorized to obtain; and (C) by knowingly circumventing one or more technological or physical measures that are designed to exclude or prevent unauthorized individuals from obtaining that information.”

The bill would then modify the CFAA throughout to replace “unauthorized access, or exceeding authorized access, to a” with “access without authorization of a protected” and to strike “exceeds authorized access.”

Finally, the bill would  eliminate section 1030(a)(4) as redundant (one might question whether it is in fact redundant) and modify the penalties section, with the main goal of making the criminal penalties proportionate the harm caused by the crime.

Given the Obama’s continuing initiative to combat intellectual property theft (see Obama Administration Issues New Strategic Plan for Intellectual Property Enforcement) and the fact that the CFAA has been used more and more in recent years to target trade secrets misappropriation, it will be interesting to see what happens with bill, as it could be viewed by the Obama Administration as counter to its efforts.

Obama Administration Issues New Strategic Plan for Intellectual Property Enforcement

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In February 2013, the Obama Administration issued Administration Strategy on Mitigating the Theft of U.S. Trade Secrets. Part of that plan included the Administration’s solicitation of public comment. I, like a handful of others (13 of us in total), submitted comments. My  summary comments are available here (the PDF at the bottom (and here) has my full submission); links to all 13 submissions are available here.

On Thursday (June 20, 2013), the Obama Administration issued its 2013 Strategic Plan for Intellectual Property Enforcement. As explained by U.S. Intellectual Property Enforcement Coordinator Victoria Espinel, the Strategic Plan “builds on our efforts to protect intellectual property to date, and provides a roadmap for our work over the next three years.”

Ms. Espinel described in her blog how the new Strategic Plan fits in with prior plans as follows:

Since the first Joint Strategic Plan was released in 2010, the Administration has made tremendous progress in intellectual property enforcement. Coordination and efficiency of the Federal agencies has improved; U.S law enforcement has increased significantly and we have successfully worked with Congress to improve our legislation. We have increased our focus on trade secret theft and economic espionage that give foreign governments and companies an unfair competitive advantage by stealing our technology. We have pressed our trading partners to do more to improve enforcement of all types of intellectual property. We have encouraged the private sector to do more on a voluntary basis to make online infringement less profitable as a business, consistent with due process, free speech, privacy interests of users, competition law and protecting legitimate uses of the Internet.

Of particular relevance to trade secrets lawyers, Ms. Espinel focused on legislation as follows: “We will review our domestic legislation to make sure it is effective and up-to-date.”

As many readers of this blog know, there has already been some activity on that front with respect to the Economic Espionage Act and the Computer Fraud and Abuse Act. See here.

Stay tuned for more.

Trade Secret | Noncompete – Issues and Cases in the News – April 2013 Update

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extras_03True to the unfortunate limit of 24 hours in a day, my posts continue to written during my vacations. This time, given the extended delay between vacations, and therefore posts on issues and cases making trade secrets | noncompete news, I am posting just some highlights of the past few months. Here we go…

Obama Administration: In February 2013, the Obama Administration issued Administration Strategy on Mitigating the Theft of U.S. Trade Secrets. In furtherance of that strategy, on March 19, 2013, the Administration solicited public comment on possible trade secrets “for an Administration legislative review related to economic espionage and trade secret theft.” The notice is available here. Comments are due by April 22, 2013. Peter Toren has commented already; his comments are here: Read My Federal Register Comments on Existing Laws Related to the Enforcement of Trade Secrets.

Second Circuit (personal jurisdiction): The Second Circuit, in a trade secrets misappropriation case, found personal jurisdiction over a former employee of a Connecticut company, who was a citizen of Canada, residing and working in Canada. The former employee was accused of misappropriating the company’s confidential information by emailing it to herself between the time she found out that she had been terminated and her last day of work. The employee’s contacts with Connecticut (and the United States) were extremely limited. However, the Court found significant that the employee’s employment agreement contained notice to the employee that the company’s email servers were located in Connecticut and that the employee could not transfer the company’s information to her personal email. The Court concluded that this language in the employment agreement put the employee on notice that any misconduct using the company’s email would be directed into Connecticut (a factor in the analysis of whether to exercise personal jurisdiction). See MacDermid, Inc. v. Deiter.

Sixth Circuit (BYOD risks): Eric Osteroff wrote a nice post on the Sixth Circuit’s decision in Kendall Holdings, Ltd. v. Eden Cryogenics, LLC concerning the perils of BYOD (bring your own device) policies. BYOD practices can have significant ramifications for trade secrets risks and need to be carefully considered in light of an overall trade secrets policy and approach. See Ken Vanko‘s post, The BYOD Thicket: Some Basic Steps to Take for BusinessesSee also My phone or yours? EEOC official provides best practices for “bring your own device” policies.

Ninth Circuit: The Mattel v. MGA saga continues, with the reversal of MGA’s $170,000,000 trade secret verdict. See Ninth Circuit Takes Away MGA’s $170 Million Trade Secret Award Against Mattel

District of Columbia: Most noncompete and trade secrets litigation starts with the sending of a “cease and desist” letter. One concern is that the sending of such a letter might, if the facts turn out to be wrong, give rise to a defamation counterclaim. However, on March 18, 2013, the United States District Court for the District of Washington rejected just such a claim. Specifically, the court held that the letter was protected by the litigation privilege, and therefore could not give rise to a defamation claim. For a discussion of the case, see Kara Maciel‘s (from my former firm, Epstein Becker & Green) post, Cease and Desist Letters Enjoy An Absolute Privilege From Libel ClaimsAs John Marsh of Hahn Loeser points out, however, the fact that a defamation claim doesn’t lie, does not equate to no risk of a tortious interference claim. Cease and Desist Letters: Defamation May Not Be An Issue But Watch Out for Tortious Interference.

Federal Circuit: The Federal Circuit in Phillip M. Adams & Assoc., LLC v. Dell Computer Corp applied the discovery rule to toll the statute of limitation in a trade secrets case. For more discussion, see Federal Circuit Addresses Uniform Trade Secrets Act Discovery Rule by Eric Ostroff.

Florida: Notwithstanding a confidentiality agreement and nonsolicitation agreement, the United States District Court for the Middle District of Florida (Tampa) permitted a former employee to use her former employer’s customer list to mass email an announcement (sometimes called a “wedding-style announcement”) to her former employer’s customers. See The Variable Annuity Life Insurance Company (VALIC) v. Laeng. For additional reading, see Mass-Mailing To Public Employees Did Not Violate Non-Solicitation Agreement by John Nefflen at Burr Forman.

In another interesting case, Florida’s Fifth District Court of Appeals affirmed an injunction where the employer offered testimony establishing that it secured the noncompete to protect its goodwill, that the defendant had been offering similar services for less money, and that the employer lost business. For more, see Fox Rothchild‘s Jason Cornell‘s post, United States: Enforcing a Non-Compete Agreement in Florida: What Evidence is Relevant?

New York (CFAA): The United State District Court for the Southern District of New York has opted for the more narrow interpretation of the Computer Fraud and Abuse Act in Advanced Aerofoil Technologies, AG v. Todaro. For more, see The Computer Fraud and Abuse Act, and Protecting Employer’s Electronic Data by Kristin Parsons of Burr & Forman and Another Court Construes the CFAA Narrowly and More of My Thoughts on the Statute by Ken Vanko.

New York (jurisdiction/venue): On January 10, 2013, the New York Appellate Division, First Department, in Aon Risk Services v. Cusack, rejected efforts to dismiss a noncompete case in favor of a prior filed action in California. For an in-depth discussion, see Battle Rages On In Epic Restrictive Covenant Dispute by David Clark of Epstein Becker & Green.

North Carolina: The North Carolina Court of Appeals held a noncompete in a staffing case – involving the sale of business – to be unenforceable. The agreement covers a number of legal points, any one of which would be sufficient to invalidate the agreement based on its language.  The court noted the plaintiff’s admission that there were no trade secrets or proprietary information at issue and that the employees were “general laborer[s].” The court then determined that the agreement was overly broad and really directed toward preventing ordinary competition, rather than the protection of goodwill. See Phelps Staffing, LLC v. C. T. Phelps, Inc. Most interesting about the case, however, is that the plaintiff purchased the staffing company from its then-owned, defendant Sheila Phelps. But, Ms. Phelps’s husband, who had been working with her, had started a competing venture shortly before the sale. He was present at the sale, presumably understood the terms, and received substantial benefit from it (the sale was $1.4 million). Oddly, he was not required to sign any documents – although one of the agreements required him not to interfere. Accordingly, even though he was a clear threat, neither the trial court nor the Court of Appeals was willing to restrain him even though he benefited substantially from the sale. Compare that with Zions First National Bank v. Macke, discussed by Amy Dehnel at Berman Fink Van Horn in Can an Employee Use a Spouse to Circumvent Restrictive Covenants? Georgia Court of Appeals Says “No.”

Wyoming: According to RT, “A district judge in Wyoming has shot down a group of environmentalists who tried to gather information about the long-term effects of fracking . . . .” See Fracking chemicals to stay ‘trade secrets.’

Legislation and Bills: A handful of states have recently proposed legislation relating to noncompetes and/or trade secrets. Ken VankoJohn Marsh, and I recorded a FairlyCompeting podcast discussing some of that proposed legislation.Here is some additional information:

Illinois: The Illinois House of Representatives has introduced a bill that, although saying it would allow “noncompetes,” would actually ban noncompetes, though allow  nonsolicitation agreements if they meet certain defined criteria. Although the bill is too long to post its contents, the full text can be found here. Ken Vanko has a nice discussion of the bill in A Brief Commentary on Illinois’ Proposed Noncompete Agreement Act.

Maryland: The Maryland Senate introduced a bill that would render noncompetes enforceable if the employee were terminated and therefore eligible for unemployment benefits. The operative text is as follows:

IF AN INDIVIDUAL WHO IS UNEMPLOYED HAS APPLIED FOR AND IS FOUND ELIGIBLE TO RECEIVE UNEMPLOYMENT INSURANCE BENEFITS AS PROVIDED IN TITLE 8 OF THIS ARTICLE, THE INDIVIDUAL MAY NOT BE BOUND BY A NONCOMPETITION COVENANT ENTERED INTO WITH THE INDIVIDUALS PRIOR EMPLOYER.

The bill would apply only prospectively to noncompetes entered into after October 1, 2013 (the putative effective date of the statute). The bill has, however, been reported unfavorably out of the Finance Committee.

Massachusetts: I previously discussed the proposed, scaled-down noncompete legislation in Massachusetts, limiting the duration of noncompetes, unless one of three exceptions exists. See New Massachusetts Noncompete Bill. The bill has been referred to the Committee on Labor and Workforce Development.

In addition, Massachusetts is again considering adopting the Uniform Trade Secrets Act (HB 27). This time, however, there is a competing UTSA bill (HB 1225) that combines the UTSA with an outright ban of employee noncompetes. The text relating to noncompetes provides:

Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

For the purposes of this section, chapter 149, section 148B shall control the definition of employment.

This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements, including those executed before the effective date of this act.

Both UTSA bills were referred to the Judiciary Committee, and remain there.

Michigan: The Michigan Senate introduced SB 786, which, if passed would, like New Hampshire (see here), require advance notice of noncompetes. The text of the bill is as follows:

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 4a. (1) An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.
THIS SUBSECTION APPLIES to covenants and agreements entered into after March 29, 1985.
(2) AN EMPLOYER SHALL NOT REQUIRE AND A COURT SHALL NOT ENFORCE AN AGREEMENT OR COVENANT UNDER THIS SECTION AS A CONDITION OF EMPLOYMENT IF THE EMPLOYER DID NOT INFORM THE EMPLOYEE OF THE REQUIREMENT AT OR BEFORE THE TIME OF THE INITIAL OFFER OF EMPLOYMENT. THIS SUBSECTION APPLIES TO AN AGREEMENT OR COVENANT ENTERED INTO AFTER THE EFFECTIVE DATE OF THE AMENDATORY ACT THAT ADDED THIS SUBSECTION.
Ken Vanko has an interesting discussion of the bill here.

Minnesota: The Minnesota House of Representatives introduced H. F. No. 506, which contains the following text:

 A bill for an act relating to commerce; regulating employment agreements; voiding certain noncompete agreements; proposing coding for new law in Minnesota Statutes, chapter 325D.

 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

 Section 1. [325D.72] NONCOMPETE AGREEMENTS VOID.

 A contract that prohibits a party to that contract from exercising a lawful profession, trade, or business is void with the following exceptions:

(1) a seller of a business’ goodwill can agree to refrain from carrying on a similar business in a specified county, city, or part of one of them if the buyer carries on a like business in that area;

(2) partners dissolving a partnership can agree that one or more of them will not carry on a similar business in a specified county, city, or part of one of them where the partnership transacted business; and

(3) a member, when dissolving or terminating their interest in a limited liability company, can agree that the member will not carry on a similar business in a specified county, city, or part of one of them where the business has been transacted if another member or someone taking title to the business carries on a like business in that area.

 EFFECTIVE DATE. This section is effective the day following final enactment.

For additional reading, see Minnesota House Bill Threatens to Void Non-Compete Agreements by Faegre Baker Daniels.

New Jersey: The New Jersey Assembly introduced a bill A3970 much like the bill introduced by Maryland (see above). The text is as follows:

BE IT ENACTED by the Senate and General Assembly of the State of New Jersey:

      1.    An unemployed individual found to be eligible to receive benefits pursuant to the “unemployment compensation law,” R.S.43:21-1 et seq., shall not be bound by any covenant, contract, or agreement, entered into with the individual’s most recent employer, not to compete, not to disclose, or not to solicit. This section shall not be construed to apply to any covenant, contract, or agreement in effect on or before the date of enactment of P.L.   , c.  (C.   )(pending before the Legislature as this bill).

      2.    This act shall take effect immediately.

Thank you to both Douglas Neu and Janette Levey Frisch for bringing this to my attention. For some additional reading, see Heated discussion as attorneys debate merits of noncompete bill and New Jersey Joins Wave Of States Considering Limitations on Noncompete Agreements. Thanks to Sue Reisinger for her article, Looking at the Future of Cybersecurity.

Texas: The Texas legislature is considering SB 953, which would effectively adopt the Uniform Trade Secrets Act, making Texas the 48th state to adopt some version, leaving just Massachusetts and New York as the last-remaining holdouts.

Related Items of Interest:

Fairly Competing – A New Podcast

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FairComp LogoI am thrilled to announce that I have been given the opportunity to work with two of my favorite (though far more prolific) bloggers, Ken Vanko and John Marsh, to create a brand new podcast: Fairly Competing, a Competition Law Podcast. It is among the first podcasts devoted to trade secrets, restrictive covenants (noncompetes), and related unfair competition laws.

We have recorded two episodes so far, and will be recording our third soon. We hope to record one every two weeks or so. They will generally last about 20-25 minutes, after the first episode (which was about 40 minutes). The will be available to listen to through the three speakers’ blogs, on iTunes, and on Fairly Competing.

The first episode is an examination of a few of the most significant trade secrets/noncompete/unfair competition developments in 2012 (sort of an abbreviated year in review).

For anyone interested in a more detailed review of the trade secrets developments in 2012, I have provided here my (quite lengthy) materials for the trade secrets portion of this year’s Boston Bar Association’s annual IP Law Year in Review CLE. In addition, both Ken Vanko (here) and John Marsh (starting here) have excellent posts covering similar issues.

The second episode covers the recent prosecution of internet activist and Reddit founder, Aaron Swartz, under the Computer Fraud and Abuse Act (CFAA). We discuss the forces that shaped this tragic case, consider whether changes to the CFAA are needed, and debate whether Silicon Valley Congresswoman Zoe Lofgren’s proposed amendment to the CFAA goes far enough.

The third episode will cover recent and proposed noncompete legislation around the country.

To subscribe to our podcast on iTune, click here.

We hope you will listen and enjoy them as much as we do!

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