August 29, 2013
Fair Competition News, Noncompetes, Restrictive Covenants, Unfair Competition Basics 50 state survey, confidential information, Massachusetts, Massachusetts noncompete law, restrictive covenants, trade secret Leave a comment
June 22, 2013
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.
January 5, 2013
Fair Competition News, Noncompetes, Restrictive Covenants, Trade Secrets confidential information, inevitable disclosure, noncompete, nonsolicitation, restrictive covenants, trade secret, unfair competition, Washington Leave a comment
I have at least had a chance to read the December 27, 2012 decision of the United States District Court for the Western District of Washington in Amazon.com v. Powers, granting in part and denying in part Amazon’s request for a preliminary injunction against one of its former executives, Daniel Powers.
The case involves a high level former Amazon employee, Mr. Powers, subject to the typical restrictive covenants (nondisclosure, no-raid, nonsolicitation, noncompete, and invention assignment). Mr. Powers was responsible for sales of Amazon cloud computing services. Mr. Powers was terminated from Amazon and, importantly, took nothing. (This is always best practice for a departing employee.) Nor did he have plans to work elsewhere at the time that he was terminated.
Three months later, Mr. Powers joined Google. Google and Mr. Powers agreed that Mr. Powers would not: refer to cloud computing in his title until the end of 2012 (i.e., about 6 months after his termination); be involved with cloud computing for 6 months (i.e., for 9 months after his termination); use or disclose Amazon’s confidential information; work with Amazon’s customers for 6 months (i.e., for 9 months after his termination); and be involved with the hiring of Amazon’s employees for 12 months from his termination.
Google’s and Powers’ voluntary restrictions were insufficient for Amazon. Amazon sued in Washington state court. Mr. Powers removed the case to the Western District.
First, the Court, somewhat surprisingly, denied Amazon’s request for a preliminary injunction to protect its confidential information.
The Court’s decision in this regard was based on the following factors: (1) Amazon was unable to definitively identify what specific knowledge is “still” in Mr. Power’s memory without discovery, which Amazon declined to do before the preliminary injunction hearing, and (2) Mr. Powers and his new employer (Google) agreed to “virtually every restriction Amazon seeks in its injunction . . . .” The defendants’ voluntary commitment to protect the information was seen by the Court as establishing that Amazon was unlikely to prove that Mr. Powers would use confidential information (even if Amazon had been able to prove that Mr. Powers still remembered confidential information). Factual scenarios like this are quite common and frequently come out the other way, with the Court granting an injunction protecting confidential information.
Second, the Court’s analysis of the lack of proof of trade secrets provides a cautionary tale. Specifically, with regard to the issue of the existence of protectable trade secrets, the Court stated as follows:
Amazon did not ask to file any evidence under seal, suggesting that it believes the court will divine what information is a trade secret from [a] public declaration [of one of its employees]. Having scoured that declaration, the court is unable to do so. The court acknowledges that it is likely that Mr. Powers learned information that would qualify as a trade secret while he was at Amazon. See RCW § 19.108.010(4) (defining trade secret as a information that derives “independent economic value” from being neither known nor readily ascertainable and that is subject to reasonable efforts to maintain its secrecy). But if there is trade secret information that Mr. Powers could still be expected to know, Amazon has not identified it.
The takeaway from that paragraph is to take heed of the seemingly increasing trend of courts (not just in the 9th Circuit) to require early particularization of trade secrets (and, of course, a corresponding willingness to accept the alleged secrets under seal).
Third, the Court deftly avoided deciding whether Washington has or has not recognized the inevitable disclosure doctrine – an area of the law receiving significant attention in many recent decisions. Despite the Court’s avoidance of the issue, it nevertheless made the following cautionary observation (for others to take note of in the future):
Were inevitable disclosure as easy to establish as Amazon suggests in its motion, then a nondisclosure agreement would become a noncompetition agreement of infinite duration. . . . Washington law does not permit that result.
Fourth, the Court’s analysis of the nonsolicitation (of customers) restriction was quite thorough and informative. Specifically, the Court first observed that Washington courts are more apt to enforce a nonsolicitation agreement than a noncompete agreement, because the nature of the restriction on the employee is less severe. However, in shorting to nine months the 18-month stated duration of the restriction, the Court’s analysis was as follows:
This is not a case where Mr. Powers seeks to leap from Amazon immediately to Google with his former customers in tow. He stopped working with Amazon customers more than six months ago. There is no evidence he has had contact with any of them since then. There is no direct evidence that he intends to pursue business with any of them. The only indirect evidence that he has interest in contacting his former customers is that he has chosen to fight Amazon’s efforts to enforce the Agreement. Although the personal aspects of his relationships with his former customers might be expected to endure for more than six months, they might just as well extend even beyond the 18-months that the Agreement provides. Amazon has not explained why it selected an 18-month period, nor has it disputed Mr. Powers’ suggestion that the Agreement he signed is a “form” agreement that Amazon requires virtually every employee to sign. Because Amazon makes no effort to tailor the duration of its competitive restrictions to individual employees, the court is not inclined to defer to its one-size-fits-all contractual choices. Amazon has not convinced the court that the aspects of Mr. Powers’ relationships with customers that depend on confidential Amazon information are still viable today.
The influence that each of those facts (the six month period before Mr. Powers joined Google; his lack of communication; the “evidence” of his interest in contacting the clients; the potential longevity of the client relationships; the “form” nature of the agreement; and the absence of confidential information) had on the Court’s decision should be instructive to those of us facing these issues in Washington (and elsewhere). Each raises all sorts of questions.
Focusing, for example, on the longevity of the relationship as compared with the duration of the restriction. That issue exists not just with customer relationships, but with confidential information and trade secrets protectable through noncompetes. In fact, one of the criticisms of noncompetes is that they are not coterminous with the life of the trade secrets. Good luck to Coca-Cola enforcing a noncompete until the secret formula to Coke is revealed. It won’t happen. Nor, I suspect, would a court refuse to enforce Coca-Cola’s secret formula based noncompete simply because the secret formula would outlive the restriction.
Well, then, why should a nonsolicitation agreement be circumscribed because the goodwill may extend longer than the restriction? While it’s easy to understand modifying (i.e., shortening) the duration when the restriction would outlive its utility, it’s hard to understand shortening it because the restriction isn’t long enough. Does this suggest that the Court would be receptive to a defense in the context of a noncompete on the ground that the trade secrets protected by the noncompete will outlast the restriction, so the restriction is unnecessary? Unclear.
And, fifth, similar to Ken’s point, the Court’s analysis of the noncompete is instructive. The Court reasoned as follows:
Its ban on working with former customers serves to protect the goodwill it has built up with specific businesses. A general ban on Mr. Powers’ competing against Amazon for other cloud computing customers is not a ban on unfair competition, it is a ban on competition generally. Amazon cannot eliminate skilled employees from future competition by the simple expedient of hiring them. To rule otherwise would give Amazon far greater power than necessary to protect its legitimate business interest. No Washington court has enforced a restriction that would effectively eliminate a former employee from a particular business sector. This court will not be the first, particularly where Amazon has not provided enough detail about the nature of AWS’s cloud computing business to convince it that an employee like Mr. Powers can only compete with AWS by competing unfairly.
The two aspects of the decision that seem atypical are that: (1) the Court used the nonsolicitation covenant to undermine the noncompete; and (2) the Court refused – under the particular facts presented – to bar Mr. Powers from a particular business sector. While both can be seen as a mere failing of the sufficiency of Amazon’s evidence, they seem to be more; they seem to suggest an overall reluctance by the Court to enforce noncompete agreements – especially where Washington is a reformation state (meaning that the courts can essentially rewrite a restriction to make it reasonable).
Stay tuned to see how the law develops in Washington (and elsewhere). It should be interesting!
January 10, 2012
There have been lots of legislative changes in the offing. One of them was New Jersey’s adoption of the Uniform Trade Secrets Act. Well, it is now official. Governor Christie has signed it. That leaves just Massachusetts, New York, and Texas as the only non-UTSA states.
For a nice summary of the new law, see Scutari’s ‘New Jersey Trade Secrets Act’ Now Law.
December 29, 2011
This year saw not one, but two cases involving allegations of trade secret misappropriation and breach of noncompete agreements by companies typically known for things other than their trade secrets.
The first was at the end of September 2011, when Hooters – yes, Hooters – sued a competitor (though not the departing employee, curiously enough) for, among other things, misappropriation of trade secrets, violation of the Computer Fraud and Abuse Act, and tortious interference. The complaint is here, and a nice summary by Michael Greco is here.
The second was in December, when an espresso bar, Foxy Lady (in Washington state), sued a former barista and her new employer, Knotty Bodies, for misappropriation of trade secrets, breach of a noncompete agreement, and tortious interference. The amended complaint is here, and a summary is here.
December 3, 2011
There has been much uncertainty in Massachusetts about whether and under what circumstances a claim under G.L. c. 93A (for those not from Massachusetts, that’s our unfair competition statute, which provides for the recovery of multiple damages and attorneys’ fees) exists against an employee who takes his former employer’s trade secrets to a new venture and uses them there. A recent decision from the Massachusetts Appeals Court seems to open the door to such claims. (Unless you are a lawyer, you will probably want to stop here.)
The problem started in 1983 with a case from our highest court (the Supreme Judicial Court, or “SJC”) called Manning v. Zuckerman. In that case – which was not a trade secrets case – the SJC made it clear that 93A does not apply to disputes arising out of an employment relationship. That seemed clear enough.
But, the very next year, the Appeals Court decided Peggy Lawton Kitchens, Inc. v. Hogan. Hogan, an employee of the plaintiff, had taken the plaintiff’s secret recipe for cookies and left to start a competing business using the plaintiff’s recipe. From the moment you start reading the decision, you know exactly how the case is going to come out; the decision starts, “Nothing is sacred.” Of course, the court holds that the plaintiff’s 93A claims against its former employee (and his new company) are proper.
The court’s decision is important in two respects: First, as to the defendant company (which the former employee had started with the intent of competing with the plaintiff), the court concluded that, because the company was never an employee of the plaintiff, Manning v. Zuckerman did not apply and the claim under 93A could therefore proceed. Second, as to Hogan, the court says, “Hogan’s use of Kitchens’ trade secret was made when he was no longer an employee of Kitchens. Hogan’s argument crumbles.”
The distinction (that 93A could be applied to conduct that took place after employment ended) lasted about 12 years.
In 1996, the Appeals Court decided Informix, Inc. v. Rennell. There, the court held that it did not matter whether the conduct occurred during or after employment. In this regard, the court stated, “Manning held simply that any claim arising from the employment relationship was not actionable under c. 93A; it imposed no limitation that the employment relationship be ongoing.” Further, the Informix court distinguished Peggy Lawton Kitchens on the basis that the claim in Informix was based on a nondisclosure agreement, whereas there was no such agreement in Peggy Lawton Kitchens, and therefore the claim in Peggy Lawton Kitchens was independent of the employer/employee relationship.
One might wonder at this point why the Appeals Court in Informix did not simply deny the 93A claim based on the nondisclosure agreement, but then allow a claim based on the common law and statutory obligations of all persons (not just employees) not to misappropriate trade secrets – but it did not. Presumably, the court’s rationale was based on the procedural posture of the case and the fact that the claim was based “solely” on the parties’ contract.
Since then, trial courts have been wrestling with these two decisions and trying to square them.
For example, in Professional Staffing Group, Inc. v. Champigny (in 2004), the Superior Court reasoned as follows:
Informix conflicts with the decision of Peggy Lawton Kitchen’s, Inc. v. Hogan. The panel reasoned that no express confidentiality or noncompetition agreement existed between Peggy Lawton Kitchen’s, Inc. and Hogan. However no doubt arises from the Peggy Lawton Kitchens decision that the wrongful misappropriation of trade secret information arose from the employment relationship. . . . Moreover the absence of an explicit employment contract is not essential to impose duties of loyalty upon a former trusted employee. The Massachusetts common law implies a covenant or promise of the trusted employee not to divulge trade secret or proprietary information. See Jet Spray Cooler v. Crampton, 361 Mass. 835, 839 (1972), and cases cited.
Having disposed of the notion that the existence or absence of a contract is controlling, the court then came back to the temporal distinction:
The other ground of distinction [from Peggy Lawton Kitchens] asserted by the Informix panel is that the theft of trade secrets constitutes a wrong independently of an employment relationship and will be separately actionable under 93A. Nothing in the Peggy Lawton decision suggests such a special rule. Rather the Peggy Lawton panel concluded that the exemption from 93A for wrongdoing arising from an employment relationship was inapplicable for temporal reasons. “Moreover, Hogan’s use of Kitchens’ trade secret was made when he was no longer an employee of Kitchen’s.” Id. at 940 (emphasis added).
It is on that temporal basis that the Superior Court in Professional Staffing Group found that 93A can apply to an employee’s misappropriation of trade secrets: “[H]ere, we are addressing conduct occurring long after the termination of the employment relationship between the contesting parties.” The court then went on to conclude that “Informix is a mechanical overextension of Manning” and “appears to drift away from the anchoring principle of c. 93A . . . .” In the end, however, after offering a few public policy reasons for applying 93A to this type of claim, the court observed that, following trial, there will be a complete record so that the issue can be reviewed on appeal. However, no appellate decision followed.
Another oft-cited case addressing this issue is TalentBurst, Inc. v. Collabera, Inc. That case relies on yet another case (Intertek Testing Servs. NA, Inc. v Curtis-Strauss LLC from Judge Gants while in the Superior Court, now on the SJC) and concludes that the Professional Staffing Group decision was distinguishable on the ground that it involved a counterclaim by the employee (rather than a claim by the former employer).
Such was the state of affairs until recently.
Enter Specialized Technology Resources, Inc. v. JPS Elastomerics Corp. (November 23, 2011), an Appeals Court decision, perhaps shedding some additional light on its two prior rulings (Informix and Peggy Lawton Kitchens). The sum total of the court’s discussion of those cases and 93A is as follows:
Applicability of c. 93A. The defendants separately assert that c. 93A is inapplicable to [plaintiff's] claim in the present case, as it arises out of an employer-employee relationship between [plaintiff] and [defendant] Galica. See Manning v. Zuckerman, 388 Mass. 8, 12-15 (1983); Informix, Inc. v. Rennell, 41 Mass. App. Ct. 161, 163 (1996). However, [defendant company] was never an employee of [plaintiff]. See Augat, Inc. v. Aegis, Inc. 409 Mass. 165, 172 (1991); S.C., 417 Mass. 484 (1994); Peggy Lawton Kitchens, Inc. v. Hogan, 18 Mass. App. Ct. 937, 940 (1984). More to the point, though Galica obtained the trade secret during his employment with [plaintiff] and was bound by a confidentiality agreement as part of his employment contract, his misappropriation of the trade secret was actionable independent of his contractual obligations and accordingly may support a claim under c. 93A. See Peggy Lawton Kitchens, Inc. v. Hogan, supra; Informix, Inc. v. Rennell, supra at 163 n.2. The former employer-employee relationship between [plaintiff] and Galica does not stand as a bar to [plaintiff's] c. 93A claim against either Galica or [his new employer].
In short, it appears that the court’s rationale is that, while the misappropriation of trade secrets may constitute a breach of an employee nondisclosure agreement, which cannot serve as a predicate to a 93A claim, the same conduct can also constitute a separate and independent wrong (presumably because it violates trade secret laws – as opposed to the fiduciary duty of loyalty referenced in Professional Staffing Group) that is actionable under 93A.
It bears mention that the decision is also very interesting insofar as it holds that a judge may ignore a jury’s findings when deciding a 93A claim and allows two different injunctive remedies for the defendants’ misappropriation of trade secrets.
November 25, 2011
About two years ago, my partner Steve Riden and I wrote a blog post on my old blog (the Trade Secrets / Noncompete Blog) entitled, Back to the Basics… The Computer Fraud and Abuse Act. The post was a brief summary of the Computer Fraud and Abuse Act (18 U.S.C. § 1030), which was really designed to protect against computer hackers (a la War Games), but which has begun to be used with more frequency in trade secret cases.
About the same time, one of my former colleagues, Jeff Kopp, discussed a split among federal courts concerning the scope of the Computer Fraud and Abuse Act, specifically, whether it applies to employees who exceed the scope of their authorization to use their employer’s (or former employer’s) computers. See Federal Courts Split on Computer Fraud and Abuse Act. Others have raised concerns that the statute could make it illegal for someone surfing the Internet to exceed the terms of service of websites they visit.
On September 15, 2011, the Senate Judiciary Committee considered a bill that would limit the scope of the Computer Fraud and Abuse Act so that it would not apply to exceeding the scope of website terms of service. See Bill Tweaked in Senate: Terms of Service no Longer Terms of Felony.
On November 15, 2011, Richard Downing, Deputy Chief of the Computer Crime and Intellectual Property Section, Criminal Division, provided testimony before the House Committee on Judiciary, Subcommittee on Crime, Terrorism, and National Security. His testimony is reflected in “Cybersecurity: Protecting America’s New Frontier” and advocates expanding (or at least not curtailing) the scope of the statute and is very similar to that provided by James A. Baker, Associate Deputy Attorney General, presented on September 7: here.
In short, Deputy Chief Downing suggested several specific ways to clarify to the statute (which, as noted in my prior blog post, is not the picture of clarity) and enhance the protections afforded by the statute. While his suggestions largely focused on the criminal side of the statute, he did also advocate for a broad civil interpretation of the bill, i.e., having it reach employees who exceed their authorized use of their employer’s computers and as well as Internet users who exceed the scope of the terms of service of websites they visit.
Time will tell whether, and if so how, the statute will be amended. I am predicting that it will be amended and that – at least on the criminal side – it will not be limited.