Category Archives: Trade Secrets

Texas Updates Its Uniform Trade Secrets Act

 

800px-Texas_in_United_States.svg.png

Wikimedia Commons, https://en.wikipedia.org/wiki/File:Texas_in_United_States.svg

On May 19, 2017, Texas passed An Act Relating to the Texas Uniform Trade Secrets Act.

The Act defines “clear and convincing” (which is the standard for showing willfulness under the Texas Uniform Trade Secrets Act (UTSA)) and what type of conduct constitutes “willful and malicious misappropriation.” The Act also harmonizes Texas’ UTSA with the Defend Trade Secrets Act (DTSA) language, including adding a definition for who is an “owner” of a trade secret.

Perhaps most significantly as it concerns the DTSA, although modifying the “threatened” misappropriation section, the Act does not track the language of the DTSA that some have argued forecloses the inevitable disclosure doctrine. Rather, the Act merely adds the following underlined language:  “Actual or threatened misappropriation may be enjoined if the order does not prohibit a person from using general knowledge, skill, and experience that person acquired during employment.”

In addition, the Act codifies the presumption of a party’s right to participate in the proceedings, subject to a balancing test designed to balance that right against the right of the trade secret owner to protect the secrecy of the trade secret. The test is as follows:

In an action under this chapter, a presumption exists that a party is allowed to participate and assist counsel in the presentation of the party’s case. At any stage of the action, the court may exclude a party and the party’s representative or limit a party’s access to the alleged trade secret of another party if other countervailing interests overcome the presumption. In making this determination, the court must conduct a balancing test that considers:

(1) the value of an owner’s alleged trade secret;

(2) the degree of competitive harm an owner would suffer from the dissemination of the owner’s alleged trade secret to the other party;

(3) whether the owner is alleging that the other party is already in possession of the alleged trade secret;

(4) whether a party ’s representative acts as a competitive decision maker;

(5) the degree to which a party’s defense would be impaired by limiting that party’s access to the alleged trade secret;

(6) whether a party or a party’s representative possesses specialized expertise that would not be available to a party ’s outside expert; and

(7) the stage of the action.

Thanks to Heath Coffman for his update.

Trade Secret and Noncompete Survey – National Case Graph 2017 (Updated)

Noncompete and Trade Secret Cases Survey Graph 20170421As regular readers of this blog know, several 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 every year since.

The graph shows three things: (1) the blue bars show all reported noncompete decisions; (2) the red bars show all reported trade secrets decisions; and (3) the yellow bars show all decisions involving noncompetes or 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, some of the oldest data didn’t change at all.

The other thing worth noting is that every time I’ve run this inquiry during the first half 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 2015 and 2016 numbers will be significantly higher. We will see!

Perhaps most telling is that while noncompete litigation has been relatively static, trade secrets litigation has increased every year, with the sole exception of (preliminarily) 2015 and 2016 – though that result will likely turn out to be an artifact of the Westlaw database issue. In fact, last year, there was a slight dip in the number of cases in 2012; however, after updating the numbers this year, the dip disappeared.

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

Trade Secrets Laws and the UTSA – A 50 State and Federal Law Survey Chart (revised)

World MapEvery state but Massachusetts and New York has adopted the Uniform Trade Secrets Act (the UTSA) in one form or another – though some may quibble with whether Alabama or North Carolina actually adopted it. (The Uniform Law Commissioners say that Alabama has adopted it, while North Carolina has not; I view the results as largely the opposite.)

For several years, I had been planning to run a redline comparison of each state’s trade secrets laws against the Uniform Trade Secrets Act to see the full scope of the variation. The task was quite substantial, however, and I never quite felt that it would be worth the time.

In the past, there had been plenty of articles discussing the variations in UTSA formulations among the state laws purporting to adopt the Act, including Linda B. Samuels and Bryan K. Johnson‘s, The Uniform Trade Secrets Act: The States’ Response, 24 Creighton Law Rev. 49 (1990), and  Christopher Rebel J. Pace‘s, A Case for a Federal Trade Secrets Act, 8 Harvard Journal of Law & Technology 427 (1995), but no one had done an actual side-by-side comparison of how each state’s law compared to the UTSA.

More recently, Sid Leach wrote another terrific article summarizing the significant variations among state “uniform” trade secrets laws. Sid’s article highlighted for me the need to have – and the continuing interest of others in having – a comparison. It convinced me that it was time for such a chart.

So, I made it. It took well over a hundred hours of combined effort, starting with the yeoman’s work my firm’s then-summer intern, David Haber, and dozens of hours of my time organizing, revising, and problem-solving with David and with with my paralegal, Erika Hahn, who separately spent many hours working on the chart. The chart could not have been completed without their extraordinary contributions.

It is a state-by-state comparison (as close to a redline comparison as made sense) of every state’s trade secrets laws (and the Economic Espionage Act, as amended by the Defend Trade Secrets Act of 2016) to the 1985 version (i.e., the most recent version) of the Uniform Trade Secrets Act.

The chart is viewable here. (It was originally prepared on August 14, 2016, and has been updated; it is current as of today, February 4, 2017.)

It is intended both as a stand-alone resource and a companion to our 50 state survey chart of noncompete laws, which I first prepared almost seven years ago (in the summer of 2010), though I regularly update it to reflect the changing noncompete laws around the country. (It is also current as of today, February 4, 2017.)

In addition, for a comprehensive summary of recent trade secrets and noncompete legislative reforms and efforts at reform around the country, please see the page Changing Trade Secrets | Noncompete Laws. Be sure to check back from time to time, as I regularly update it to reflect new developments.

Trade Secret and Noncompete Survey – National Case Graph 2017

noncompete-and-trade-secret-cases-survey-graph-20170111As regular readers of this blog know, several 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 every year since.

The graph shows three things: (1) the blue bars show all reported noncompete decisions; (2) the red bars show all reported trade secrets decisions; and (3) the yellow bars show all decisions involving noncompetes or 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 2015 and 2016 numbers will be significantly higher. We will see!

Perhaps most telling is that while noncompete litigation has been relatively static, trade secrets litigation has increased every year, with the sole exception of (preliminarily) 2015 and 2016 – though that result will likely turn out to be an artifact of the Westlaw database issue. In fact, last year, there was a slight dip in the number of cases in 2012; however, after updating the numbers this year, the dip disappeared.

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

Massachusetts Noncompete and Trade Secret Reform Returns

IMG_0017After years of trying (8, to be precise – the first bills were filed, virtually simultaneously as it turned out, by Representative Lori Ehrlich and then-Representative (now Senator) Will Brownsberger for the legislative session starting January 2009), a new noncompete bill was filed on Friday, January 20:  An Act relative to the judicial enforcement of noncompetition agreements (Senate Docket No. 1578).

The new bill – covering both noncompetes and the related issue of trade secrets – picks up where the House and Senate left off last legislative session, albeit with a few tweaks and clean-ups. (Please contact me if you would like a redline.)

From a big picture standpoint, the bill:

  • Limits noncompetes (generally) to 12 months.
  • Requires advance notice.
  • Requires consideration beyond continued employment for post-hire noncompetes.
  • Includes express legislative authorization for a springing noncompete.
  • Requires the red pencil approach to an overly-broad noncompete, although it tempers that approach by permitting reformation if the agreement is written to comply with the safe-harbors set out in the statute.
  • In substance, tracks the Uniform Trade Secrets Act, with tweaks previously submitted by Steve Chow on behalf of the Uniform Law Commissioners and a handful of changes that I had made a few years ago as well as for this latest version. Most substantively, this latest version clarifies that the “threatened misappropriation” that can be enjoined “upon principles of equity” is intended to reflect the inevitable disclosure doctrine. (There has been a significant amount of discussion around when the inevitable disclosure doctrine would apply; general consensus is that the doctrine is a very narrow one, intended to prevent wrongful conduct, rather than mere innocent misappropriation.)

Other important aspects of the noncompete section of the bill (in the order they appear in the bill):

  • It applies only to employee noncompetes. It does not apply to other types restrictive covenants, including, most significantly, nonsolicitation agreements, anti-piracy/no-raid agreements, noncompetes made in connection with the sale of business, confidentiality agreements, or noncompetes that are part of a severance agreement provided that the employee “is expressly given 7 business days to remind acceptance . . . .”
  • The agreement must be in writing, signed by both parties.
  • The agreement must “expressly state that the employee has the right to consult with counsel prior to signing.”
  • The advance notice requirement (for noncompetes entered into in connection with the commencement of employment) is “the earlier of a formal written offer of employment or two weeks before the commencement of the employee’s employment; provided, however, that an employee may waive this two-week requirement if the employer and the employee plan for the employee to commence employment in less than two weeks from the date of the formal written offer of employment and the waiver is expressly stated in the noncompetition agreement.”
  • For noncompetes entered into after the commencement of employment, notice must be given at least 10 days before the agreement becomes effective and the noncompete must “be supported by consideration independent from the continuation of employment . . . .”
  • The employer must review the noncompete with the employee at least once every three years.
  • Legitimate business interests are the employer’s: (i) trade secrets; (ii) confidential information; and (iii) goodwill. (This is not a change from existing common law, except insofar as existing law may permit other interests to be protected.)
  • A noncompete “may be presumed necessary where” other restrictive covenants are insufficient, including “because the employee breached” one of those agreements. It may also be presumed necessary where the employee took property of the employer or breached a fiduciary duty to the employer.
  • Noncompetes are limited to (and presumptively reasonable if they are no more than) 12 months – unless the employee has breached his or her fiduciary duties or has taken property, in which case, the term is limited to two years.
  • The noncompete must be reasonable in geographic scope. (This is the same as existing common law.) If the geographic reach is limited to only the “areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence” it will be presumptively reasonable.
  • The agreement must “be reasonable in the scope of proscribed activities in relation to the interests protected. (This is the same as existing common law.) A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable.”
  • The employer has 10 days following the end of the employee’s employment to notify the employee in writing by certified mail that the employer intends to enforce the noncompetition agreement. This requirement does not apply if the employee has unlawfully taken property or already breached the noncompete, a nonsolicit, an anti-piracy/no-raid covenant, a confidentiality agreement, or a fiduciary duty.
  • The agreement must be consonant with public policy. (This is the same as existing common law.)
  • The agreement will not apply to:
    • employees who are not exempt under the Fair Labor Standards Act, 29 U.S.C. sections 201-209;
    • undergraduate or graduate students engaged in short-term employment;
    • employees terminated without cause or laid off;
    • employees who are 18 or under; and
    • non-employees who perform services for less than one year.
  •  An overly-broad noncompete is subject to invalidation under the red pencil approach (which applies only to the noncompete, not the rest of any agreement that may include the noncompete). However, if the agreement is written to comply with the safe-harbors set out in the statute, a court may reform the agreement. (That concept is to force companies to draft noncompetes narrowly, while not imposing the same penalty on a company that attempted to draft narrowly. This modified red-pencil approach was dubbed the “purple pencil” by former Senator Wolf.)
  • The court may impose a noncompete as a remedy for the violation of another restrictive covenant or a statutory or common law duty. (This is called a “springing noncompete” – it was an idea that I created for some clients who preferred to not use noncompetes except when an employee has acted unlawfully; accordingly, it imposes less restrictions on the employee unless and until the employee engages in unlawful behavior, thus demonstrating that the employee cannot be trusted to comply with the less onerous restrictions.)
  • Massachusetts law will apply if the employee is a resident of, or has been working in, Massachusetts for at least 30 days.
  • Jurisdiction lies in the county of the employee’s residence or Suffolk county (if the agreement so provides).

What should you be doing now to prepare? Nothing. Changes are still a long way off. However, you do need to understand the changes when they happen, and will need to be prepared to help you consider changes to your agreements.

 

Aleynikov not-free at last!

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By Rainerzufall1234 (Own Work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)%5D, via Wikimedia Commons

Updated 1/26/2016

After years of legal wrangling, Sergey Aleynikov, the former Goldman Sachs engineer who stole high frequency trading code from Goldman Sachs and took it with him for use at Teza Technologies LLC, was finally “re-“convicted according to Bloomberg (and others).

You may recall that Aleynikov was first convicted under the Economic Espionage Act (the “EEA”), but that that decision was overturned by the Second Circuit in  US v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). (That decision precipitated the adoption on December 28, 2012, of the Theft of Trade Secrets Clarification Act of 2012, which expanded the reach of the EEA. For more, see here.)

Nevertheless, Aleynikov also faced prosecution in state court.

There, the results were the opposite: the trial court found him not guilty, and the New York Supreme Court Appellate Division reversed, observing that “[i]t would be incongruous to allow a defendant to escape criminal liability merely because he made a digital copy of the misappropriated source code instead of printing it onto a piece of paper.”

Update (1/26/2016): If you would like the read the decision (The People of the State of New York v. Sergey Aleynikov, Docket No. 4447/12 (Jan. 24, 2016)), it is available at Brooklyn Law’s Trade Secrets Institute’s website here.

Upcoming Trade Secrets Seminars

Hello all, just a quick note, depending upon where you are located, there are a few upcoming trade secret related presentations that are worth attending. (In the interest of full disclosure: I am involved in all of them – but despite that, the other speakers are all terrific and the content should be great.)

The presentations are:

17th Annual Intellectual Property Year in Review – The Changing IP Landscape, Boston Bar Association in Boston, Massachusetts, on January 26.

The Defend Trade Secrets Act: Following the White House’s Call to Action, CLE International in Denver, Colorado, on February 24.

AIPLA 2017 Trade Secret Law Summit: Emerging Standards During Tumultuous Times, American Intellectual Property Law Association, in Atlanta, Georgia, on March 2-3.

Join us!