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

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extras_03Having looked back over the last couple of years, I realized that I have failed to provide enough updates on issues and cases making trade secrets | noncompete news. So, I am going to try to resume those efforts moving forward. Given my earlier IP Year in Review post, this post will be primarily update two of the topics there and provide a few other recent updates  …

The DTSA. The Defend Trade Secrets Act, which would create a federal private right of action for the protection of trade secrets, has – with some amendments – been reported out of the Senate Judiciary Committee. Bloomberg BNA has a terrific summary here: Senate Judiciary Committee OKs Federal Trade Secret Bill. Testimony was taken back in December 2015, and is available here. Persons appearing to testify were: Karen Cochran, Chief Intellectual Property Counsel at E.I. DuPont de Nemours and Company, Tom Beall Vice President and Chief Intellectual Property Counsel at Corning Incorporated, James Pooley, a leading trade secrets expert, and Sharon Sandeen, Professor of Law at Hamline University School of Law. In addition, a letter was submitted in lieu of live testimony by a number of trade secrets practitioners (myself included) around the country. That letter is available here.

EU Trade Secrets Directive. The text of the Directive of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure is now available here.

Washington State Noncompete Bills. The Washington state legislature’s House Labor & Workplace Standards Committee will be conducting public hearings on the noncompete bills pending in Washington. GeekWire has an excellent summary here: New bills target non-compete clauses in Wash. state employment contracts.

Noncompetes with Customers (Texas). A Texas shrimp farm (Global Blue Technologies (“GBT”)) that had a noncompete agreement with a Florida shrimp farm (Shrimp Improvement Systems (“SIS”), which is owned by a Thai company (CP Foods)) is suing SIS to invalidate the noncompete so GBT can use SIS’s broodstock for GBT’s new shrimp farm operation. See Texas shrimp farm challenges CP Foods over non-compete and Antitrust Complaint Against Big Shrimp.

New Federal Trade Secrets Prosecutions. Last week, the Pennsylvania U.S. Attorney’s Office brought charges against two GlaxoSmithKline scientists (Yu Xue and Lucy Xi) who allegedly stole trade secrets and emailed them to a Chinese startup called Renopharma. A summary of the case, as well as the backlash sparked by questions about racial profiling, is available here: U.S. charges drug researchers with sending trade secrets to China, but will case stand up? (The article quotes well-known trade secrets lawyer (and friend) Peter Toren.)

Damages Unfair Competition Case (Georgia). The Georgia Court of Appeals took a page from the Massachusetts Supreme Judicial Court’s decision in LightLab Imaging, Inc. v. Axsun Technologies, Inc., 469 Mass. 181 (2014), in which the SJC opened the door to new theories of damages in trade secrets litigation (in Massachusetts, at least). The Georgia case case is available here: Lyman v. Cellchem Int’l LLC. In addition, a tip of the hat to Chip Collins of Burr & Forman, who provides a nice summary of Lyman here: Recent Georgia Court of Appeals Case Highlights Alternative Theories of Relief in Unfair Competition Case

Discovery in Trade Secrets Cases – and Who to Sue. Companies seeking to protect their trade secrets from theft by wayward former employees frequently wrestle with the question of whether to sue just the employee or the new employer as well. A good reminder of one of the downsides of suing the new employer is demonstrated by a recent California Superior Court decision ordering Jawbone (who sued several former employees for and their new employer, FitBit) to turn over alleged trade secrets to Fitbit. A summary of the decision is here: Court Orders Jawbone to Give Fitbit Access to Confidential Information.

Noncompetes and Independent Contractors (Virginia). Another issue that arises every now and again is whether noncompetes can be used to bind independent contractors (as opposed to employees, franchisees, or other business partners). A recent federal court decision in Virginia answered the question in the affirmative. For a summary, see The Non-Compete Agreements Enforceable Against Independent Contractors

Fiduciary Duties and Trade Secrets (California). Every now and again trade secrets and restrictive covenant cases involve not just conduct occurring around the employee’s departure, but long-term secret competition with the then employer. As also sometimes happens, an employee is laid off for unrelated reasons (sometimes a result of decreased sales caused by the employee’s secret competition, unknown to the employer). In Blackbird Technologies, Inc. v. Joshi, the Northern District of California was faced with just such an issue. In fact, the former employer found out about the secret competition as a consequence of a Youtube video posted by the former employee. For a summary, see The Duty of Loyalty Awakens

Confidential Information vs. Trade Secrets (6th Circuit / Texas law). Different states handle confidential information that does not rise to the level of a trade secret differently. A recent 6th Circuit case, Orthofix, Inc. v. Hunter, 2015 WL 7252996 (6th Cir. Nov. 17, 2015), highlights the need for (and benefits of) a nondisclosure agreement to reach that broader category of information. Although the case is a bit older, Fisher & Phillips recently posted a nice summary here: Confidential Information that isn’t a Trade Secret?

Other noteworthy news…

2015 Trade Secrets and Noncompetes Year in Review

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Newspaper StandsIn anticpation of speaking at the Boston Bar Association’s 16th Annual Intellectual Property Year in Review earlier this month, with some assistance from several of my colleagues (Nicole Daly, Hannah Joseph, and Will Haddad), I prepared a paper discussing a number of the developments in trade secrets law and noncompete law around the country in 2015.

The topics covered in the paper are set forth below. Note that, since speaking on at the Year in Review, there have been a handful of developments on certain of the topics; they will be covered in the next post.

  • Congressional efforts to amend the Economic Espionage Act, most recently through the Defend Trade Secrets Act of 2015.
  • The continuing saga of mixed interpretations of the scope of the Computer Fraud and Abuse Act, focusing (for the paper) on the Obama Administration’s proposal for “modernizing the Computer Fraud and Abuse Act” and the Second Circuit’s decision in the highly-reported “Cannibal Cop” case, United States v. Valle, 807 F.3d 508 (2nd Cir. 2015).
  • The European Commission’s most recent efforts to develop a unified approach to trade secrets law in Europe (the so-called, “Directive of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure”).
  • The recent Trans-Pacific Partnership Agreement (referred to as the “TPP”), which, if adopted in each of the countries, will enhance, among other things, companies’ ability to protect their trade secrets in the signatory Pacific Rim countries.
  • The new amendments to discovery rules 26 and 37(e) of the Federal Rules of Civil Procedure (given the heavily reliance on electronic discovery in trade secrets cases).
  • Recent cases applying Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas, 134 S.Ct. 568 (2013) to the enforcement of forum selection clauses in trade secrets cases – including decisions addressing international implications.
  • Continued Massachsuetts legislative efforts to ban or modify Massachusetts noncompete law and to adopt the Uniform Trade Secrets Act in Massachusetts.
  • Alabama’s new noncompete law (effective January 1, 2016) that retains much of the old law, but establishes a presumption that a two-year duration of a noncompete is reasonable and requires mandatory judicial reformation of overbroad noncompetes.
  • Arkansas’s modification of its noncompete law.
  • Hawaii’s ban on noncompetes and nonsolicitation agreements for workers in a technology business.
  • New Mexico’s ban on noncompetes for dentists, physicians, podiatrists, osteopathic physicians, and certified registered nurses.
  • Oregon’s amendment of its noncompete law to limit the duration to 18 months (from the prior two-year maximum).
  • Bills to ban noncompetes in Michigan, Pennsylvania, and Washington (as well as two other bills in Washington: one to ban the use of noncompetes for low-income employees and persons involuntarily terminated without cause and one that would ban the use of noncompetes for physicians).
  • A bill in New York to “clarify” its existing law.
  • A bill in Wisconsin to make it easier to enforce noncompetes, including by adding presumptions of what is and is not a reasonable duration and by permitting the courts to modify overly broad restrictions (as opposed to having to invalidate them in their entirety).
  • The SEC’s first cease and desist order against a company finding that the company’s confidentiality statement (a confidentiality requirement imposed in connection with internal investigations) interfered with Rule 21F-17 (“Staff communications with individuals reporting possible securities law violations”) promulgated by the SEC as of August 12, 2011, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act. (See In the Matter of KBR, Inc., Administrative Proceeding File No. 3-16466.).
  • A federal bill entitled, the “Mobility and Opportunity for Vulnerable Employees Act” (or the “MOVE Act“), that would prohibit the use of covenants not to compete (defined in the bill) for “low- wage employees,” i.e., employees earning the greater of (subject to inflation) $15 per hour or the applicable state or local minimum wage rate or $31,200 per year, but excluding any salaried employee earning (subject to inflation) more than $5,000/month for 2 consecutive months.

  • A federal bill entitled the “Limiting the Ability to Demand Detrimental Employment Restrictions Act” (the “LADDER Act”), which is virtually identical to the MOVE Act, but broadens somewhat the definition of the employees that are considered low-wage employees and tweaks the inflation adjustment language.

  • A federal bill entitled the “Freedom for Workers to Seek Opportunity Act” (“FWSOA”). Although not having quite as catchy an acronym as the MOVE Act or the LADDER Act, FWSOA does win on creativity in that it seeks to ban the use of noncompetes for grocery store workers (only).

The paper is available here.

Trade Secrets Protection Act of 2014 Reported Out of Committee

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During the past few years, there have been several bipartisan efforts to amend the Economic Espionage Act of 1996 (the “EEA”), 18 U.S.C. §§ 1831-1839.

The most recent action by Congress occurred on December 11.

Background

The EEA had been 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).

In 2012 and 2013, the EEA was amended twice – both times to strengthen the protections afforded under the EEA.

On December 28, 2012, the Theft of Trade Secrets Clarification Act of 2012 (the “TTSCA”) expanded the scope of the EEA in response to US v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012), by deleting the old language that covers 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.”

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.

Following those two amendments, there have been several bipartisan efforts to further amend the EEA to add a private right of action. (The EEA is predominantly a criminal statute, although the Act does permit the Attorney General to bring a civil cause of action.)

Latest Action

On September 17, a bill known as the Trade Secrets Protection Act of 2014 (the “TSPA”), was reported out of committee with several amendments from the version that was submitted to committee. The committee made amendments, which were just released on December 11. A highlighted version of the bill showing the additions is available here. (The original language of section f was deleted and is not reflected.)

If enacted, the TSPA would create a private right of action (very similar to that provided by the Uniform Trade Secrets Act (“UTSA”)); permit the civil ex parte seizure of relevant evidence and of the trade secrets, to prevent their further use or disclosure; permit such actions to be brought under a five-year statute of limitations; and requiring the Attorney General to issue an annual report on the international threat of trade secrets misappropriation. There is apparently a 57% chance of the TSPA being enacted.

Next step, House vote. Stay tuned.

Massachusetts Noncompete Ban and Modified Version of the Uniform Trade Secrets Act Reported Out of Committee

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cropped-cimg27721.jpgOn April 29, the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development favorably reported out a bill (available here) very close to Governor Patrick’s proposed adoption of a version of the Uniform Trade Secrets Act (“UTSA”) coupled with a ban on noncompetes in Massachusetts. Governor Patrick’s bill is available in whole here or relevant part here. (See What to do if noncompetes are eliminated in Massachusetts.)

Putting aside where you come out on the advisability of eliminating noncompetes (a political and economic decision that has staunch advocates on both sides), the proposed Massachusetts Trade Secrets Act (“MUTA”) is intended to enhance available trade secrets protections, given that they will be weakened by the elimination of noncompetes (one of the main tools currently used to protect them). (Note that it expressly leaves unaffected other restrictive covenants, including nonsolicitation agreements, no-raid/anti-piracy agreements, and nondisclosure agreements.)

The MTSA changes the UTSA in several respects, and, contrary to its intended purpose, may in fact create some additional hurdles to protecting trade secrets.

For example, the UTSA requires that reasonable measures to be taken to protect a trade secret; that makes sense given that the sine qua non of a trade secret is secrecy. However, as currently drafted, MTSA section 1(4)(ii) requires that reasonable measures be maintained even after the secret has been stolen. The result – in some cases – is that a person who steals a trade secret can potentially escape liability if the trade secret owner decides that it is no longer worth spending the money to protect a secret that the misappropriator has publicly disclosed (or even just stolen). In short, it potentially encourages very bad behavior and exposes trade secret owners to increased risk of harm.

Similarly, the same section (MTSA section 1(4)(ii)) permits only the “owners” of a trade secret to protect the secret. While that may seem innocuous, it’s not; it arguably means that licensees and other people who have purchased or otherwise acquired rights to use/protect the trade secrets would be left with nothing; it will kill the value of many trade secrets.

Section 5(b) requires that “averments of trade secrets and misappropriation thereof shall be stated with reasonable particularity in light of the circumstances of the case.” That language, like some other changes in the MTSA, is intended to address an issue that courts wrestle with (with increasing frequency) under the existing language of the UTSA, specifically, how clearly and how early someone claiming misappropriation must identify the trade secrets alleged to have been misappropriated. The problem with section 5(b) in particular is that it may be read to elevate the pleading standard to the point of making it impossible for some companies to protect their secrets.

With regard to the language of the noncompete ban (section 11), while section 2(a) (like the UTSA) permits injunctions, the bill leaves unaddressed whether it permits or precludes a court from issuing injunctive relief essentially in the nature of a noncompete as a remedy in the event of a breach of the other restrictive covenants. In other words, may a court issue an injunction prohibiting someone from continuing to work at a competitor when they have demonstrated themselves untrustworthy, by, for example, breaching a nonsolicitation covenant?

The Governor’s version of the bill is in a separate committee and it remains to be seen how that will be handled. Afterward, whatever bills survive will still need to pass the house and the senate before heading to the Governor.

The deadline is July 31. Stay tuned!

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).

New Computer Fraud and Abuse Act Bill

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

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

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

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

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

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

Obama Administration Issues New Strategic Plan for Intellectual Property Enforcement

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

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

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

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

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

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

Stay tuned for more.

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