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.

BRR’s 50 State Noncompete Chart UPDATED

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BRR 50 State Noncompete Chart 20130814The BRR 50 State Noncompete Chart has been updated to reflect various changes in statutory or case law, as well as clarifications of existing laws. Click here to get the latest version.

Wall Street Journal on Noncompetes

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The Wall Street Journal

It’s not every day that you get quoted in the WSJ – but today was one of those days (so, I can’t resist mentioning it). Here are the details:

The article, “Companies Loosen the Handcuffs on Non-Competes,” by The Wall Street Journal’s Management News editor, Joann S. Lublin, appears in the August 12, 2013, online edition of The Wall Street Journal and focuses on current trends in the use and enforcement of noncompete agreements. The article has some very interesting information and is definitely worth reading.

As to my comments, they are as follows:

The article explains a move by some companies to accept shorter limitations on noncompetition agreements and quotes me as follows:

For one, sensitive information “has a shorter shelf life than in the past,” says Russell Beck, a partner at Beck Reed Riden LLP in Boston.

The article also cites a study by my firm concerning the rise of noncompete lawsuits:

The number of published U.S. court decisions involving non-compete agreements has risen 61% since 2002 to 760 last year, concludes research conducted for The Wall Street Journal by Beck Reed Riden LLP in Boston. The increase largely reflects the increased usage of non-compete arrangements among lower-level staffers – along with employees’ greater mobility and access to sensitive information.

Finally, it discusses the negotiation of noncompete agreements by executives:

Executives have the most leverage to alter a non-compete before accepting a job offer, legal specialists say. If the company wants a new management hire badly enough, it will make concessions, Russell Beck, a Beck Reed partner, has found.

The lawyer recently represented a Massachusetts executive wooed by a health-care concern to be its vice president of professional services. Mr. Beck persuaded the company to halve a two-year non-compete requirement. “The benefit of having the executive outweighed the risk of harm caused by the executive’s competition after the first year,” he recollects.

Massachusetts Noncompete Bill – Hearing Date

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cropped-cimg27721.jpgLast night, we had our 5th Annual Symposium on Employee Non-Compete Agreements, Trade Secrets and Job Creation. Following that discussion, I spoke with Representative Lori Ehrlich about the status of the current version of her and Senator Will Brownsberger’s noncompete bill (described below). Representative Ehrlich told me that the Joint Committee on Labor & Workforce Development (of which Rep. Ehrlich is the co-chair) will be conducting the hearing on the noncomepte bill on September 10, 2013. (Given my involvement with the bill, I will be testifying at the hearing and will report the details afterward.)

In the meantime, to the extent that you would like a refresher on the details, the current version of the bill – called the “Noncompete Agreement Duration Act” – leaves most noncompete law in tact, and, as its name suggests, focuses on the duration of noncompetes (in the employer/employee context). As before, the bill does not affect the law of trade secrets, nondisclosure agreements, nonsolicitation agreements, no raid/no hire agreements, noncompetes in connection with the sale of business (if the restricted person owns at least a 10 percent interest and received substantial consideration) or outside the employment context, forfeiture agreements, or agreements not to reapply for a job.

The bill starts with, and is premised on, the following two findings:

  • “[T]he Commonwealth of Massachusetts has a significant interest in its economic competitiveness and the protection of its employers, and a strong public policy favoring the mobility of its workforce” and
  • “[T]he Commonwealth of Massachusetts has determined that an employee noncompetition agreement restricting an employee’s mobility for longer than six months is a restraint on trade and harms the economy.”

The bill then creates a presumption that a noncompete that lasts up to six months is presumed reasonable in duration. The bill also creates the opposite presumption: a noncompete that lasts more than six months is presumed unreasonable in duration. The presumptions are not absolute; they can be overcome. If a court determines that the duration is unreasonable, however, the noncompete will be unenforceable in its entirety (i.e., the court will apply a “red pencil” approach).

There are three instances in which a noncompete that is unreasonable in duration can still be enforced (though the court will shorten the duration to the length of time determined to be appropriate). Those three instances are as follows:

  1. “the employee has breached his or her fiduciary duty to the employer”;
  2. “the employee unlawfully taken, physically or electronically, property belonging to the employer”; or
  3. “the employee has, at any time, received annualized taxable compensation from the employer of $250,000 or more.”
We are continuing to seek input and comment, and would be extremely interested in hearing from you.

Connecticut Noncompete Law is Not Undergoing Legislative Changes

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UPDATE/CORRECTION (7/17/2013): It turns out that I had been mistaken about this. The various reports that the governor had signed the bill were incorrect. The bill had only made its way to the governor, but he had not signed it. And, he has in fact now vetoed it. So, for the moment at least, Connecticut’s law concerning noncompetes will not be changing any time soon. My apologies for any confusion! 

Happy 4th of July! (I hope you’re not reading this today – it can wait until Monday!)

Starting October 1, 2013, Connecticut noncompete law would have changed in one very important respect: In the context of corporate mergers and acquisitions, employers will be required to jump through a procedural hoop before they will be able to enforce certain noncompetes. (The text of the new law is reproduced below and available here.; the legislative history is available here.)

The bill is a bit unclear about exactly which noncompetes come within the purview of the new law. Specifically, it seems to apply to noncompetes that are “presented . . . as a condition of continued employment . . . .” See Section 1(b)(2). However, immediately after, it talks about “such noncompete” not just “entered into,” but “renewed or extended . . . .” Id.

This raises a few serious questions, not the least of which is how can a noncompete be renewed or extended (which suggests that it already exists) when it also needs to be “presented” (which suggests a new agreement with the new company)? Similarly, is it to say that once a company is merged with – note, not “into” – another, all employees of the two merged entities are now within the scope of the law?

Does it mean that from the time of the merger or acquisition forward, the company will need to comply with this statute, regardless of how long ago the acquisition or merger was?

Does “noncompete” mean just traditional noncompetes, or does it include garden leave clauses, nonsolicitation agreements, nondisclosure agreements, and other restrictive covenants? (This was a similar issue raised by New Hampshire’s recent noncompete statute, which I discussed at the time here.)

Does it apply to an employment agreement where only one portion contains the noncompete (as is often the case)?

I’m sure that these issues would have all be the subject of litigation at some point.

On the positive side (though admittedly not ideal for employers), the ambiguities could have been largely avoided by following the procedural requirement of providing a reasonable period (what’s is “reasonable,” you ask?) for the employee to consider the agreement before signing it.

Note that at a minimum, the period must be one week. Will that always be considered reasonable? Unclear. (I, for one, would want to consider the attendant circumstances before concluding that one week is sufficient.)

And, finally, the consequence of failing to comply is important: The agreement would have been void. That’s a big deal. As with much of the bill, however, that too is unclear. Would the entire agreement be void, or just the noncompete portion?

The full text is as follows:

AN ACT CONCERNING EMPLOYER USE OF NONCOMPETE AGREEMENTS.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective October 1, 2013) (a) As used in this section:

(1) “Employee” means any person engaged in service to an employer in the business of the employer; and

(2) “Employer” means a person engaged in business who has employees, including the state and any political subdivision thereof.

(b) If (1) an employer is acquired by, or merged with, another employer, and (2) as a result of such merger or acquisition an employee of the employer is presented with a noncompete agreement as a condition of continued employment with the employer; any such noncompete agreement entered into, renewed or extended on or after October 1, 2013, between the employer and employee shall be void, unless prior to entering into the agreement, the employer provides the employee with a written copy of the agreement and a reasonable period of time, of not less than seven calendar days, to consider the merits of entering into the agreement.

(c) Nothing in this section shall be construed to limit or deny any rights an employee may have at law or in equity. An employee may waive the right provided under subsection (b) of this section if such waiver is reduced to a separate writing, sets forth the right being waived and is signed by the employee prior to entering into the agreement.

By the way, were you wondering about the image? It is nutmeg; it’s there because Connecticut is the Nutmeg State. 

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.

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