As the first year anniversary of the Defend Trade Secrets Act (DTSA) has just passed, it is worth taking a step back and taking stock of how courts have treated key provisions.  This will be the first of several posts covering developments under the DTSA and analyzing how it has been used since its enactment.

One of the most-discussed features of the DTSA was its creation of a “whistleblower” immunity that allows employees to share evidence of an employer’s alleged misconduct with government authorities or present that evidence in support of a retaliation claim under seal in court and avoid a claim that the employee misappropriated trade secrets when they disclosed that information. This provision, 18 U.S.C. §1833, is the only provision of the DTSA that preempts state law, so it affords protection to an employee against an employer’s claims under the Uniform Trade Secrets Act or common law as well.

As readers may recall, the DTSA requires employers who want to take advantage of the DTSA’s full protections to amend their contracts, employee agreements, and policies to provide notice of that whistleblower defense to its employees, which has been broadly defined to include independent contractors.  If a company fails to include that notice in its agreements or policies, it is foreclosed from seeking claims for attorney’s fees and exemplary damages under the DTSA.  The DTSA broadly defines an employee to include “any individual performing work as a contractor or consultant for an employer” so both 1099 and W-2 employees are covered under this provision.whistle 2

Not surprisingly, when the DTSA was enacted, many employers were concerned about what, if any notice, needed to be supplied to its employees about this immunity and to what extent they needed to amend their employment agreements and policies.  Section 1833(b)(3)(B) makes clear that an employer can comply with this notice provision if its employment agreement simply cross-references a policy document that more fully describes the employer’s reporting policy for a suspected violation of the law.  However, the DTSA does not define what kind of notice or language must be provided, so it remains an open question of whether a specific citation to the DTSA would be sufficient or whether the relevant language of the DTSA’s whistleblower provision needs to be included.

To date, there is only one case involving the DTSA’s whistleblower provision.  This should not come as too much of a surprise since the whistleblower provision’s primary consequences — a challenge to an award of attorneys’ fees or exemplary damages under the DTSA for failure to provide notice of that immunity  or the viability of the immunity itself– will generally require that a case have been fully litigated, something that has not happened with many DTSA cases.

The single case involving the whistleblower provision, Unum Group v. Loftus, 2016 WL 7115967 (D. Mass.  Dec. 6, 2016), concerned an effort by an employee to affirmatively use that immunity to oppose a preliminary injunction request under the DTSA.  In that case, the former employee, Timothy Loftus, was interviewed for an internal investigation into chis employer Unum Group’s claims practices.  After the interview, Loftus was captured on surveillance cameras on the following Sunday emerging from his office with two boxes and a briefcase; two days later, he was seen on video exiting the business with a shopping bag of documents.  Loftus refused to respond to questions and was seen leaving the office with his laptop and another shopping bag of documents.  Although Loftus returned the laptop, he later declined to return the documents.

Fearing that Loftus would improperly use or disclose those documents, Unum Group filed a request for an injunction against Loftus, seeking the return of the documents.  Loftus opposed the motion, arguing that he was a whistleblower entitled to immunity under the DTSA and he also moved to dismiss the complaint.  The district court denied the motion to dismiss, reasoning that the record lacked facts to support or reject his whistleblower affirmative defense and finding that Unum Group had presented a plausible claim for misappropriation of trade secrets under the DTSA.

Turning to the preliminary injunction, the court declined to rule under the DTSA, and instead kept its analysis simple, confining it to the question of whether Loftus had “converted” the documents under Massachusetts common law.  The court was forceful in its ruling, holding that there “is no question regarding the potential for irreparable harm if the injunction is denied” since “the documents contain an unknown number of trade secrets and potentially unquantified amounts of private health information that could cause irreparable damage to Unum’s business if released.”  Emphasizing the privacy issues implicated by the documents, the court reasoned that “[c]onfidential health information should not be held hostage to an unfiled lawsuit, and Unum’s customers who are not yet on notice that their health information could have been compromised will be well served by Unum’s efforts to contain this information breach.”  As a result, the court ordered Loftus and his counsel to return the documents back to Unum, destroy any copies and make an image of his computer laptop and flash drive for further review.

Takeaways:  While this provision triggered a fair amount of commentary when the DTSA was released, there have not been many legal developments.  If an employer wants to preserve its ability to seek attorneys’ fees or exemplary damages against an employee, it needs to provide notice of the immunity in its agreement or its policies.  However, if an employer is not terribly concerned about recovering fees or exemplary damages from its employees (who may be judgment-proof), and it wants to avoid stirring up a hornet’s nest over this provision, it may decide not to include the notice.  Its employees of course will still be entitled to the immunity, so long as they follow the strictures of §1833(b).

At some point, a court will have the opportunity to more fully consider the contours of the whistleblower immunity, but the immunity has not been around long enough for that analysis.

 

 

waymo_largeThere have been two significant developments in the Waymo lawsuit against Uber, which is unquestionably the highest profile trade secrets case of the year.  In the first ruling, U.S. District Court William Alsup referred the record of the case to the U.S. Attorney’s office for investigation of possible theft of trade secrets.  In the second, Judge Alsup released a copy of his opinion yesterday explaining the injunction that he entered against Uber last week.  Significantly, Judge Alsup declined Waymo’s primary request to shut down Uber’s driverless car business.

Instead, he ordered that Uber continue to quarantine former Waymo engineer Anthony Levandowski from its development of Uber’s Lidar technology, the technology that was the subject of the trade secrets he was alleged to have stolen.  Judge Alsup declined to shutdown of Uber’s driverless program because Waymo could not establish that Uber had used the trade secrets that Levandowski allegedly took with him.

Referring the record for a pending civil case to the local federal prosecutor is highly unusual (in fact, I can’t remember it being done) and appears to be directed at Levandowski and his other former Waymo colleagues who joined him at Uber.  However, the injunction looks like a victory for Uber, at least at this early stage in the proceeding.

Background:  The case arises out of Waymo’s claims that Levandowski stole trade secrets for its driverless technology and used them to help jumpstart Uber’s driverless program.  Levendowski left Waymo in January 2016, and started his own company Otto Trucking, which Uber acquired several months later for $680 million.  After several other Waymo employees left to join Levandowski at Uber, Waymo began to suspect that Levandowski might be using its confidential information; Waymo conducted a forensic review of his work computer and discovered that Levandowski had taken over 14,000 confidential files, including trade secrets for its proprietary LiDAR technology.  LiDAR centers around the laser sensors that are apparently critical to detecting objects surrounding the driverless vehicle.

The dispute took a serious turn when a vendor of Uber inadvertently sent an email to Waymo in December 2016 that included drawings that appeared to incorporate Waymo’s LiDAR technology.  As a result, Waymo filed its lawsuit in February 2017 and followed up with a request for an injunction to shutdown Uber’s driverless car business in March.  The parties have been battling over discovery since that time; while many of the key documents, evidence and allegations are under seal because they may contain confidential or trade secret information, it appears that Uber’s primary defense was that its technology was very different from that of Waymo, that it had not used Waymo’s LiDAR technology, and that it had independently developed its own version of LiDAR.

Why Didn’t Judge Alsup Shut Down Uber’s Driverless Car Business?  At the end of the day, despite extensive expedited discovery, Waymo could not prove that Uber was using the trade secrets that Levandowski took with him.  Uber’s belated decision to recuse Levandowski from the development of its version of LiDAR (which took place after the lawsuit and injunction request were filed) also seems to have been influential in Judge Alsup’s decision.

In addition, Judge Alsup expressed some concern over the scope and breadth of the information that Waymo claimed was a trade secret.  In a footnote, Judge Alsup described “Waymo’s overreaching attempt to sweep into the ambit of trade secret protection general approaches and principles far broader than its actual [LiDAR] design” and he said he would factor that into the relief that he actually granted.  In other words, he wasn’t convinced that the underlying trade secrets justified such a broad injunction.

However, Judge Alsup held that “the evidence indicates that, during the acquisition, Uber likely knew or at least should have known that Levandowski had taken and retained possession of Waymo’s confidential files.”  He noted that while Uber had entered into agreements or acknowledgements with other former Waymo employees that they would safeguard Waymo’s trade secrets, such agreements were absent in the hiring and supervision of Levandowski.  For these reasons and the fact that Levandowski was now “radioactive” due to the 14,000 files, Judge Alsup ordered that Levandowski be removed from any role or responsibility relating to LiDAR and that Uber was to take all steps in its power to prevent him from having any communications with anyone else at Uber.

In addition to formalizing the quarantine of Levandowski, Judge Alsup ordered additional expedited discovery, including a broad order allowing Waymo’s counsel and its expert to “inspect any and all aspects of defendants’ ongoing work involving LiDAR.”  Judge Alsup also has required Uber to conduct a thorough investigation and provide an accounting to the court of what was downloaded and who may have seen or heard about the Waymo LiDAR.  Consequently, if the report and accounting differ from the version of events provided by Uber, Judge Alsup retains the ability to modify or expand his order, perhaps event to then shutdown Uber’s driverless operations.

What Does the Criminal Referral Mean?  As I noted above, this move is highly unusual in trade secret cases.  Don’t underestimate the impact of Levendowski’s Fifth Amendment invocation, a development that is also highly unusual.  In most trade secret cases, the defendant testifies about what he or she did and challenges the bona fides of the trade secrets at issue.  For example, they frequently dispute that the information was a trade secret, or that it was adequately protected; they will frequently claim it was publicly available or that is well known in the industry, or that they had some ownership interest in the confidential information.

However, the circumstances of Levandowski’s alleged theft and the volume of the information (14,000 files) means that at least some of the information may have been highly valuable and proprietary and that these types of defenses may have been very difficult to make as to all of the files and information.  In his order denying Uber’s motion to compel arbitration, Judge Alsup hinted at the significance of Levandowski’s Fifth Amendment invocation, noting how it had frustrated both parties’ ability to provide a full record of what happened so that he could effectively rule on the injunction requested by Waymo.

As for Uber, it seems unlikely that the criminal referral puts it at risk, again at least at the moment.  Judge Alsup took pains to note the absence of a smoking gun at the last public hearing, a statement that suggests that there was no evidence Uber was involved in the underlying misappropriation.  However, other former employees from Uber may find themselves at risk since they did send documents to their personal email accounts (although they contend that they did it in furtherance of their duties at Waymo).

Takeaways?  Uber is not out of the woods yet but if the record supports what it has told the Court, it should be able to avoid a shutdown of its development of the LiDAR technology.  Injunctions of this nature are very difficult to secure, and are generally only issued when the new employer is extensively involved in orchestrating the theft of trade secrets or where there is clearly a pattern of circumstantial evidence that suggests that they were (or should have been) aware that multiple employees were using their former employer’s trade secrets.   Based on the present record, it does not appear that Uber was involved to that degree.

However, the Court was clearly troubled by the transfer of the 14,000 files and Levandowski’s invocation of his Fifth Amendment privilege against self-incrimination.  As a practical matter, Levandowski is likely finished as an engineer or supervisor at Uber as the Court’s criminal referral was directed at him.

The next big date is June 23, 2017, when Uber will be required to provide its detailed accounting under oath setting forth who has seen or heard any part of the downloaded materials.

As readers of this blog know, I’ve been invited in the past to speak on trade secret issues for the Ohio State Bar Association.  For those in Ohio who may be interested in attending, I will be providing an update on the Defend Trade Secrets Act this Friday, May 12, 2017 as part of the OSBA’s Business Law Conference.  The Conference will be held in Columbus and broadcast live to locations in Akron, Cleveland, Dayton, Fairfield and Perrysburg, Ohio.

I will be covering a number of important issues involving the DTSA, including a brief backdrop that led to its enactment, the legislative history of the DTSA, the DTSA’s key provisions, and recent cases interpreting the standards for the DTSA’s ex parte seizure order, Whistleblower provision and other noteworthy issues.   TOhioBarLinkhe Conference will also address issues such as Cybersecurity for Business Law Attorneys and Employment Law Issues under the Trump Administration.

Registration for the Business Law Conference can be found here.  Hope you can join us for what should be a very interesting seminar.

AT_YOUR_OWN_RISKWhen moving to enforce a non-compete, the last thing a litigator wants to do is to stumble out of the gates and struggle over a profound legal issue that could delay consideration of that normally urgent request.   A new and little-talked-about section of the Defend Trade Secrets Act (DTSA), however, has the potential to trip up employers seeking to enforce non-competes if they are not prepared to address this new entanglement.

There has been a significant amount of commentary about the DTSA and its new amendments since President Obama signed the DTSA into law on May 11, 2016. The “whistle-blower” immunity and ex parte seizure order, for example, have generated the most discussion to this point.  However, the section of the DTSA that may have the greatest future impact on litigation under the DTSA is 18 U.S.C. §1839(3)(A)(i)(1)(I), which prohibits injunctions that “prevent a person from entering into an employment relationship.”

That new provision, which I will refer to as the “No-Ban-on-Employment” provision, was intended to curb, if not eliminate, the use of the inevitable disclosure doctrine under the DTSA.  However, it may have a significant unintended consequence–namely, it may complicate employers’ efforts to enforce non-competes through temporary restraining orders (TRO), the key legal mechanism for non-compete disputes.  For the reasons below, employers may want to reconsider invoking the DTSA when they want to enforce their non-competes because of the potential complications of this section’s language and instead opt to file them in state court, at least in the short-term.  As the DTSA is likely to overtake the Uniform Trade Secret Act (UTSA) as the dominant statutory regime for trade secret law, this DTSA provision may well set another blow in motion to the viability of the non-compete as an effective tool to protect trade secrets.

Continue Reading Does the Defend Trade Secrets Act Contain a Potential Roadblock for Non-Competes? Why the DTSA’s Limitations on the Inevitable Disclosure Doctrine May Complicate Enforcing Non-Competes

To the excitement of many in the trade secret law community, this past Thursday, May 11, 2016, President Obama signed a new federal trade secret act into law that will give employers and businesses a new federal right to file trade secret claims in federal court. That legislation, the Defend Trade Secrets Act (DTSA), moved swiftly through Congress as the Senate voted 87-0 in favor of the legislation on April 4, 2016 and the House of Representatives passed the bill by a 410 to 2 vote on April 30, 2016.  A link to the new statute can be found here.

As readers of this blog know, I have supported a federal trade secret bill and worked with others to advance it’s passage.  The DTSA has been recently described by The Wall Street Journal as “the most significant expansion” of federal intellectual property law in 70 years.  I believe it will transform trade secrets law in the United States and worldwide, which will I detail in future posts.  Today, I am going to provide a high level history and summary of this important new federal remedy.

What will the DTSA’s passage mean to employers and the business community in the short term?  First, the DTSA will now provide them with the ability to present their trade secret claims in federal court in a new federal cause of action.

Second, the DTSA will provide a new and unique procedural remedy, the ex parte seizure order, that is designed to prevent the dissemination of trade secrets in extraordinary situations.

Third, the DTSA has created an immunity for whistleblowers that may require employers to amend their policies and agreements if they want to take full advantage of the DTSA.

Finally, for companies that believe that their trade secrets have been stolen overseas, the DTSA will provide a powerful federal remedy for them here in the U.S. Continue Reading The Defend Trade Secrets Act: A Primer on Its Key Provisions and Immediate Impact for U.S. Companies

Michigan-2Legislative efforts to ban non-competes in Massachusetts and Minnesota have garnered lots of media attention over the past year or so, and now, a Michigan legislator has introduced a bill seeking a similar ban for Michigan’s companies and residents. Michigan House Bill 4198, introduced just over two weeks ago by State Representative Peter Lucido (R – Washington Township) seeks to ban non-competes in all employment situations. (A shout-out to Bernie Fuhs of Buzel & Long for announcing the bill’s introduction.)

House Bill 4198 limits restrictive covenants to agreements for the sale of a business (the bill also outlines conditions for the enforceability of those covenants), and to make clear those are the only restrictive covenants that will survive, the bill expressly states that, “any term in an agreement an employer obtains from an employee, contract laborer, or other individual that prohibits or limits the individual from engaging in employment is void.”

The ban proposed by Representative Lucido’s bill is very broad; too broad, in my view. By carving out the existing Michigan statute providing for the enforceability of non-competes that protect a reasonable business interest (Section 4a of MCL 445.774a), and replacing it with the new language above, the new bill would also effectively ban narrowly-tailored non-solicitation clauses, and potentially even confidentiality agreements. Under the new bill, an employee could legitimately take the position that in abiding by a confidentiality agreement, he or she is limited from engaging in employment with a competitor and have the agreement declared void, freeing the employee from any restriction on using, disclosing or sharing a former employer’s trade secrets. Consequently, if enacted, the bill could be extraordinarily disruptive to efforts by employers to protect trade secrets in Michigan, in addition to banning outright all restrictive covenants in the employment context.

According to Butzel & Long, the bill has been referred to the Michigan House’s Commerce and Trade Committee. Representative Lucido apparently has indicated that he is interested in moving the bill through committee as soon as possible.

While I certainly think reform for some categories of non-competes is in order (a discussion for another day), banning all restrictive covenants is akin to burning down the house to make toast. By making the bill so broad, Representative Lucido is throwing down the gauntlet to Michigan’s business community. In fact, bills seeking non-compete bans introduced in other states have failed due to similar overreaches because they better enabled the business community to generate grass roots opposition, due to their breadth.

The Trade Secret Litigator will monitor the bill’s progress closely and keep you posted.

General MacArthurU.S. General Douglas MacArthur famously proclaimed “I shall return” when forced to leave the Philippines in 1942, and, sure enough, he returned in 1945 to great public adulation. Although the Trade Secret Litigator made no such bold promise, some of his readers did ask if he would ever return, and, like his swaggering idol, he is delighted to announce that he is back to once again share his opinions over the blawgosphere. (Whether the impact of his return rivals that of the General’s remains to be seen).

In all seriousness, I am delighted to announce that I am resuming my blog and partnering with LexBlog in this reboot. I wish I had as good of an excuse as MacArthur for my extended leave, but I was not off serving as Supreme Commander of the Southwest Pacific. Rather, my sabbatical over the past year was attributable to a host of more mundane reasons — a really busy year, too much travel, some technical issues that bedeviled our team here at Hahn Loeser, and finally, that old noonday devil, procrastination. But I really am excited about launching into this year with all of the developments that are now going on — a likely federal trade secret statute, states wrestling with limitations on non-competes, developments in cybersecurity, the apparent erosion of patent protection and ascendancy of trade secrets, and the many other issues about which to blog. While I was never awarded the Medal of Honor for my previous efforts, the positive feedback of my readers is just as valuable to me, and makes returning that much more exciting.

There will be a few changes. First, I won’t be able to keep up the torrid pace of 2 to 3 posts a week as before, and will instead aspire to putting up 1 to 2 posts a week. Second, rather than doing a “Weekly Wrap-Up,” I will be doing a more comprehensive “Monthly Wrap-Up,” hitting the high points of trade secret, non-compete and cybersecurity law for the preceding month. Third, while I will continue to cover key cases and legislation, I want to focus more on some of the developments and social undertows that are shaping the law in this area, as well as engage in more debate with commentators who may see things differently. As anyone reading this blog knows, this area of the law has grown exponentially over the past decade, and will continue to do so. The law has lagged, however, and so there may be opportunities to shape those forces that will, in turn, shape the law and policy in this area. I hope to be able to contribute here as well.

Glad to be back, and I hope you will continue to follow me in the coming year!

The Trade Secret Litigator

As employers continue to sort out the legal implications of social media in the context of restrictive covenants, a Massachusetts court has recently held that the mere posting of a former employee’s new position on a LinkedIn profile does not qualify as a solicitation under her agreement with her former employer. The former employer, KNF&T Staffing Resources, had complained that the change in her profile resulted in a solicitation that was sent to her more than 500 contacts, including customers. (A hat tip to Sheri Qualters who has a fine summary of the case for The National Law Journal).

In KNF&T Inc. v. Muller, KNF&T filed an action in Suffolk Superior Court against its former vice president Charlotte Muller and her new employer, claiming Muller violated her one-year non-compete agreement in various ways. On October 24, 2013, Associate Justice Thomas P. Billings denied KNF&T’s bid for a preliminary injunction, finding that she was not directly competing with her former employer in her new position and that evidence of any violation was “between weak and non-existent.” 

As for KNF&T’s claim regarding the LinkedIn profile, Justice Billings found that Muller’s update about her new job was full of generic terms like “Staffing Services” and “Recruiting.” “So long as Muller has not and does not, prior to April 12, 2014, solicit or accept business in the Fields of Placement for herself or others (including her new employer), she will not have violated the covenant not to compete,” Billings wrote. (A PDF of the opinion can be found below).

The Takeaway: First, Justice Billings’ holding is consistent with other recent social media rulings that require some overt act that is directed or targeted to particular customers. A mere update in a profile that reflects a change in employment, with generic terms describing that employment, that is sent to all contacts in LinkedIn (which would likely include former classmates, competitors as well as customers) is simply not enough. 

On the other hand, targeted communications or emails to particular customers through LinkedIn could qualify as a solicitation. Whether a communication qualifies as a solicitation generally depends on the context and circumstances of the communication, as Ken Vanko’s excellent discussion of the recent opinion out of the U.S. Court of Appeals Court of Appeals, Corporate Technologies v. Hartnett, illustrates.

Second, the opinion reinforces the importance of employment agreements that address the ownership of social media and profiles or contacts that might be found in LinkedIn. If these are indeed important to an employer, they should be addressed in the employment agreement.

KNF&T v Muller – Order.pdf (4.49 mb)

Today’s post wraps up the Trade Secret Litigator’s Five Golden Rules for on-boarding a new employee and, fittingly, falls on Halloween. Today’s remaining Golden Rules primarily address the steps an employer needs to take in managing the employee who has been hired, and, as the case law reveals, may prevent various tricks (and rarely treats) to the new employer.

Golden Rule No. 3. The Visentin Rule: Protect the Legitimate Business Interests of the Former Employer. Having taken the steps to avoid or minimize risk during the hiring process, an employer still has to properly manage the employee once he/she joins the company, especially if that employee has a non-compete or non-solicitation agreement with his/her former employer. Fortunately, one of the leading cases on managing an employee with a covenant not to compete provides a textbook example of how to handle this situation. That case, IBM v. Visentin, came out of the U.S. District Court for the Southern District of New York and was affirmed by the U.S. Court of Appeals for the Second Circuit in 2012. In Visentin, the new employer, Hewlett-Packard undertook a number of affirmative steps to ensure that IBM’s trade secrets were protected and agreed that the new employee would not solicit his former customers for the remainder of the term of the non-compete.

The Southern District and Second Circuit approved of these efforts and refused to enjoin the employee – a mid-level manager – from working at HP. In the absence of any proof of misconduct by the employee, those courts found that this was a proper way to protect IBM’s trade secret and customer relationship interests while balancing the former employee’s right to find proper gainful employment.

The Visentin approach was also applied effectively by Google earlier this year in a high-profile dispute over its hiring of a cloud computing services manager who had worked previously for Amazon.com and was subject to a non-compete. As in Visentin, the Washington district court found that in the absence of evidence of misconduct by the former employee, Amazon.com’s interests were adequately protected by the safeguards put in place by Google to protect its trade secrets.

Of course, this approach is not foolproof, as the holding in a recent Massachusetts case, Aspect Software v. Barnett, unfortunately demonstrates. In that case, despite similar good faith efforts by the new employer and former employee, the court still enforced the non-compete at issue, although it commended the new employer and former employee for their efforts.

At the end of the day, an employer will increase its odds of avoiding litigation or minimizing its risk in that litigation by taking affirmative steps to prevent the use or disclosure of the competitor’s trade secrets and minimize intrusion into legitimately protected customer relationships. I have found that these steps are particularly effective in the “cease and desist” letter stage because they serve to put the former employer on notice that it may not have a basis for a lawsuit and can effectively give that employer pause before initiating litigation.

Golden Rule No. 4: If Litigation is Possible, Preserve, Preserve, Preserve. Given the reality of BYOD and the overlap between work and personal time, it is practically inevitable that some confidential information will make its way onto an employee’s personal computer or devices. This sometimes puts an employee between the proverbial rock and a hard place: if the employee deletes the information, there may be a claim of spoliation of evidence or a claim of some nefarious purpose behind the deletion. Alternatively, if the employee does not remove or delete the confidential information, he or she will almost certainly be accused of having improperly used or taken it.

As a result, if there is a chance of litigation, it is critical to preserve what was on the devices before deleting it. This means that forensic computer consultant will need to be engaged and likely image all devices before the information is removed and the devices sanitized under the guidance of counsel and that consultant. The images will then need to be kept by outside counsel so that they can be produced in litigation, if necessary.

Golden Rule No. 5: Keep a Close Eye on Mass Hirings. As readers of this blog know, cases involving the hiring of a team of people from a competitor (especially a sales team) generate the greatest waves and present the greatest risk of trade secret litigation by a former employer. The group dynamics in these situations also seem to foster greater opportunities for mischief — i.e., more pressure on business units and new hires to perform, the fact that the team may have been hired for a specific product, client or opportunity, etc. This means that in-house counsel and HR administrators need to monitor, follow up on, and continue to train these teams on the importance of preserving the confidentiality of the legitimate trade secrets of their former employer.

Last year’s Allergan v. Merz case out of the U.S. District Court for the Central District of California illustrates the special dangers associated with hiring teams of people. In that case, a federal judge issued a permanent injunction enjoining the rollout of the cosmetic drug Xeomin for 10 months because he found that a sales team hired from Allergan had improperly used confidential marketing and customer information for Botox in connection with the prospective launch of Xeomin. Based on statements made at an early hearing, the outside and in-house counsel did not know about communications between the new sales team and its managers disseminating that confidential information and argued that Merz had no intention of using Allergan’s trade secrets. However, a year after defeating a TRO, Merz’s counsel produced documents that were contrary to those representations.

How can in-house counsel and outside counsel avoid this disaster? It starts with a culture of security and responsibility. Both in-house and outside counsel need to know that their business people have their back and that a culture respecting the rules outlined above will be enforced. In the Allergan v. Merz case, the disconnect between what was apparently going on at the Merz business level and what the lawyers understood was going on is striking. This suggests, at least to me, that the appropriate follow up was not done to ensure that counsel’s representations about not using Allergan’s trade secrets would be followed.

The best way to ensure new teams are following the rules of their new employer includes: (1) an emphatic initial face-to-face meeting communicating the importance of leaving the prior employer’s trade secrets behind, preferably chaired by the head of the business group, (2) periodic follow up, certifications and acknowledgements that no trade secrets or confidential information are being used or retained, and (3) training to reinforce those principles. However, all of the follow up in the world will be ineffective if managers and supervisors have not bought into these principles and do not enforce them among their team.

In sum, as these cases illustrate, courts will generally reward the employer who imposes safeguards and acts responsibly; conversely, the failure to on-board properly can be catastrophic.

When hiring an employee away from a competitor, one of the last things a company wants is to be embroiled in litigation with that competitor over accusations that it hired the employee for the purpose of stealing that competitor’s trade secrets. Consequently, the process of “on-boarding” a new employee — taking steps to make sure that the employee is properly and lawfully brought aboard a company to minimize risk of litigation by the former employer — is proving to be an increasingly important one and needs to be part of every trade secret lawyer, in-house lawyer and HR administrator’s trade secrets toolkit.

On-boarding is becoming a bigger and bigger issue, and was a topic of much discussion at the recent AIPLA Trade Secret Summit, as both in-house counsel and outside counsel noted that on-boarding was increasing as a part of their practice (I have noticed an uptick in this area as well in my practice this year). There have also been a number of recent articles on the topic of on-boarding (Seyfarth Shaw has two entertaining YouTube videos on best and worst on-boarding practices and Karin McGinnis wrote a fine post last month for Corporate Counsel).

Why this increase in concern over on-boarding? One reason is an improving economy that is in turn causing companies to increase their hiring from the ranks of their competitors. Another factor is the increase in non-compete and trade secret litigation generally, and companies’ growing awareness of the risks of that litigation if they do not manage their hiring process correctly.

The process of on-boarding can be a challenging and delicate one. There are potential conflicts for the unwary, as the interests of the new employee and the new employer may not always be aligned and separate counsel may be required. In addition, those challenges are compounded by the prevalence of ESI, BYOD and other workplace technologies that serve to complicate the transition process. In short, in any important employee transition, in-house counsel, and frequently outside counsel, now need to be involved.

Despite these potential complexities, I believe there are five basic Golden Rules to remember. I will cover the first two Golden Rules today and wrap up with the remaining three rules tomorrow:

Rule No. 1: Ask for and Review All Employment Agreements. This the first and most important of the Golden Rules, because without it, you are almost certainly flying blind in the hiring process. Courts will no longer tolerate an employer turning a blind eye to an agreement and will hold it accountable if there is any trade secret misappropriation or improper breach of a restrictive covenant. Courts expect a new employer to conduct some analysis of the agreement and to have taken steps to protect the legitimate business interests of the former employer (to be addressed in tomorrow’s post). You can’t protect those interests if you don’t know what the former employer and new employee agreed to during their relationship.

Don’t confine your analysis to the most recent employment agreement as there may be previous ones that come into play if the last one is defective or unenforceable for some reason. And if you are concerned about confidentiality, arrange for counsel for the employee who can at least review it and advise the employee (be mindful of conflicts though). A prospective employee’s claim that he does not remember any agreement or does not have a copy should be a red flag and, and perhaps even grounds for not hiring him/her.

Once you have and review the employee’s agreement, your company may decide that the employee is still worth pursuing because the non-compete is too broad or unfair, or because you conclude that you can hire the person and still manage to protect the legitimate interests of a competitor (tomorrow’s post). Given the increasing judicial ambivalence to restrictive covenants, that may be a risk worth taking. However, you cannot take any reasoned approach until you know what issues are presented under that agreement.

Rule No. 2: Leave All Former Employer’s Trade Secrets Behind. It would be nice if you had a special hermetically-sealed chamber through which you could direct the new employee so that he/she could emerge on the first day of work completely sanitized of all his/her previous employer’s trade secrets. Until that technology is available, however, a new employer has to clearly and emphatically prohibit the prospective employee from using or bringing his previous employer’s trade secrets with him/her. This means copies of all customer lists, contact information, marketing and business strategies and other potentially proprietary information of the previous employer need to be returned to the former employer before the employee transitions.

Of course, it is not that simple anymore in the era of BYOD and the 24/7 work cycle. The reality is that we all work at home and that frequently digital or paper copies of confidential information sometimes make their way into personal devices or inadvertently find their way into a home office desk drawer. Consequently, not only should an employer instruct the new employee to leave everything behind but it should remind him/her to double-check personal devices and their desks and files at home. Finally, an employer needs to reinforce the consequences that might ensue (suspension, termination, etc.) should the employee bring or attempt to use his or her employer’s trade secrets. All of this should be in writing and preferably a term in the new employee’s agreement. This agreement will not only protect an employer but will also provide cover to the new employee in any subsequent litigation because it will be proof of the steps taken to protect the trade secrets of the former employer.

I remember an in-house speaker emphasizing that one of his former bosses used to send a polite but direct letter to each new employee that told them to leave everything behind because the confidential information of the competitor would no longer be needed. I thought this approach, a simple letter that only concerned this subject, was a very effective way of reinforcing the importance of a culture of integrity and responsibility in the trade secrets context. This approach may be particularly useful when hiring researchers, coders or others who might be involved in the development of products for a competitor.

Of course, the new employer and former employee may face a claim of inevitable disclosure — i.e., that the employee simply cannot be trusted to not use or disclose those trade secrets in a competitive setting. However, as I have written before, courts have increasingly viewed this doctrine with disfavor and are requiring some evidence of misconduct before they are willing to enjoin an otherwise proper hire from going forward.

Stay tuned for tomorrow’s post which will cover Golden Rules 3, 4 and 5.