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.

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.

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