Non-Disclosure Agreements

A recent opinion from the U.S. District Court for the Northern District of Illinois has stirred up a hornets’ nest of commentary because it appears to recognize the viability of the inevitable disclosure doctrine under the Defend Trade Secrets Act (DTSA).  Those familiar with the DTSA will recall that the inevitable disclosure doctrine was supposed to be prohibited under the DTSA because of California Senator Diane Feinstein’s concern that the doctrine might be enforced against California residents.  Now, in what appears to be the first federal appellate court opinion construing the DTSA, the U.S. Court of Appeals for the Third Circuit may have further muddied the waters about the inevitable disclosure doctrine in Fres-co Systems USA, Inc. v. Hawkins, Case No. 16-3591, ___ Fed. Appx. __ (3rd Cir. 2017), 2017 WL 2376568 (June 1, 2017) (a link to the opinion can found here). Continue Reading Fres-co Systems v. Hawkins: Did The Third Circuit Just Create More Confusion Around The DTSA’s Ban On The Inevitable Disclosure Doctrine?

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.

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.

A recent trade secrets decision out of New Jersey against The Weather Channel illustrates some interesting trade secret issues that arise in licensing agreements — namely, to what extent can a licensee extract itself from a licensing agreement when it concludes that it can gather the subject matter of the license from other publicly available places (or come up with the information more cheaply).  

In Events Media Network, Inc. v. The Weather Channel, 2013 U.S. Dist. LEXIS 97514 (July 12, 2013), U.S. District Court Judge Robert P. Kugler denied a motion to dismiss filed by The Weather Channel, finding that the plaintiff Events Media Network, Inc. (EMNI) had presented sufficient allegations of trade secret theft to move the case forward.  EMNI contends that The Weather Channel took proprietary information that was supplied under their license agreement and improperly used it after the license expired.

The case involves one of the thorniest issues that arise in trade secret litigation — whether a compilation of publicly available information can qualify as a trade secret. In its Amended Complaint (attached as a PDF below), EMNI described its business as collecting, reviewing and distributing information for various local and national events and attractions.  While it conceded that none of the individual bits of data gathered together was confidential, EMNI argued that once that information was gathered together from the various sources using a custom built database, it qualified as a trade secret.

Applying Georgia’s Uniform Trade Secret Act, Judge Kugler agreed, at least at this early stage of the litigation, that EMNI had identified sufficient evidence that the information it supplied to The Weather Channel, organized in the fashion that it was, constituted a trade secret.  In this respect, his decision rests on solid ground and is consistent with the pleading standards that benefit a trade secrets plaintiff at this early juncture of the case. Todd Sullivan notes that The Weather Channel does not appear to contest that it used the information and predicts the case will be mediated or settled soon.

I Agreed to What?!!!  The case raises another interesting trade secret issue that has been in the news lately — whether the terms of a written contract can trump trade secret law.  According to the Amended Complaint, EMNI and The Weather Channel contractually agreed that the information supplied by EMNI under the license agreement was proprietary.  As a result, EMNI argued that provision should estop The Weather Channel from claiming otherwise.

A recent case out of the U.S. Court of Appeals for the Federal Circuit, Convolve and MIT v. Compaq and Seagate, held that the contract between the parties may be controlling on the question of whether information qualifies as a trade secret and that the parties can decide between themselves what needs to be done to ensure trade secret status.  In that case, the Federal Circuit found that the plaintiff’s failure to designate information as “confidential” — as was required under a non-disclosure agreement — doomed the plaintiff’s trade secret claim (for more on the case see Dennis Crouch’s post in Patently O Blog as well as Jason Stiehl’s post for Seyfarth Shaw’s Trading Secrets Blog).

Here, EMNI used the language of the contract to its advantage and argued that The Weather Channel had conceded the proprietary nature of the information under the license.  The lesson?  In written agreements negotiated between sophisticated commercial parties, courts will frequently defer to the language of the agreement.

Quick Takeaway for Licensees: Do your due diligence and if you have skepticism over the value of what you are going to be licensing, it may be best to say “no thanks” to the deal.

Quick Takeaway for Licensors: The language of your agreement may prove critical so make sure that your licensee concedes that the information that you are supplying is protected and proprietary. More often than not, the court will apply the language agreed to by the parties.

EMNI Amended Complaint.pdf (1.56 mb)

01042013Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:

Trade Secret and Non-Compete Cases. Posts and Articles:

  • The reaction from the trade secret community to the recently-released Obama IP Strategy Report has been one of disappointment. Expectations soared after the Obama administration announced its trade secrets initiative in February but the recent Report barely mentions trade secrets.  In a post for Orrick’s Trade Secrets Watch, Michael Spillner notes the strategy’s need for a civil cause of action.  Likewise, Misty Blair of Seyfarth Shaw’s Trading Secrets Blog observes the Report’s failure to address trade secret protection more comprehensively as “a bit of a surprise.” 
  • “Illinois Appellate Court Requires Two Years of Employment for Postemployment Restrictive Covenants” reports Stacey Smiricky and Trina Taylor of Faegre Baker & Daniels for Lexology. Epstein Becker’s Trade Secrets & Noncompete Blog and Seyfarth Shaw’s Trading Secrets Blog also have posts on the decision.  And Kenneth Vanko unloads on the decision in his Legal Developments in Non-Competition Agreements Blog.
  • In “Contractual Override of Trade Secret Law,” Dennis Crouch details a recent Federal Circuit decision in his Patently-O Blog affirming a New York federal court’s holding that a non-disclosure agreement’s requirement that confidential information be specifically designated trumped state trade secret law holding otherwise. As a result of the plaintiff’s failure to designate the information as “confidential” under the NDA, the court applied California law and held the information could not qualify as a trade secret.  Lesson?  Don’t include this language in your NDA, because in my experience, parties rarely have the time (or inclination) to designate each and every piece of information as “confidential.”
  • “Are An Employer’s Business Plans Discoverable In Non-Compete Litigation?” asks Jason Cornell of Fox Rothschild about a case in Ohio for Mondaq.
  • “New Jersey Federal Court Allows Non-Party to Employment/Non-Compete Agreement to Invoke Arbitration Clause,” advises David Walsh for Jackson Lewis’ Non-Compete & Trade Secret Report Blog.
  • “China Worries Improve Prospects Of Trade Secrets Bill” reports Ryan Davis for Law360.
  • “Chemical, oil companies fear potential EPA rule will expose trade secrets” advises Julian Hattem for The Hill.
  • “Face It: Judges Sometimes Hate Competition Cases” delivers Kenneth Vanko in a bit of hard of truth in his Legal Developments in Non-Competition Agreements Blog.
  • “Answers To Your Questions On Noncompete Agreements” provides Donna Ballman for her Screw You Guys, I’m Going Home Blog.
  • “Detecting Insider Threats to Trade Secrets” advises Catherine Dunn for Corporate Counsel.
  • If you don’t have a non-compete with a Chinese employee, don’t expect to restrain him or her advises the China Bridge IP Law Commentary Blog. In “Why China Supreme Court Agreed with Resigned Employees Establishing Competing Businesses?,” Luo Yanjie details a recent high court ruling explaining Chinese law on this issue.
  • For The Wall Street Journal’s take on the recent indictment of Chinese turbine manufacturer Sinovel, see “U.S. Looks to Blunt Corporate Espionage by Chinese Firms.”
  • “Best Practices For Enforcing Restrictive Covenants” advises Susan Trench of Arnstein & Lehr for Law360.

Cybersecurity Posts and Articles:

  • “Beware the Internet and the danger of cyberattacks,” warns Robert Samuelson for The Washington Post.
  • “NSA revelations throw wrench into lawmakers’ cybersecurity push” advises Brendan Sasso for The Hill.
  • “5 Ways to Boost Your Company’s Cybersecurity Strategy” recommends Catherine Dunn for Corporate Counsel.

Computer Fraud & Abuse Act Articles, Cases and Posts:

  • “You May Not Like Weev, But Your Online Freedom Depends on His Appeal” advises Wired on the appeal of Andrew Aurnheimer of his CFAA conviction.
  • “There Is Now a Split Within the District of Massachusetts over the Proper Interpretation of the Computer Fraud and Abuse Act” announces Brian Bialas for Foley & Hoag’s Massachusetts Noncompete Law Blog.

Have a happy and safe Fourth of July!

05022013Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:

Trade Secret and Non-Compete Posts and Articles:

  • “Can Business Relationships Be Trade Secrets? VA Federal Court Says No” advises Eric Ostroff in his Protecting Trade Secrets Blog. In Cablecom Tax Services v. Shenandoah Telecomms. Co., U.S. District Court Judge Michael Urbanski dismissed a tax consultant’s trade secrets claim against its telecommunications customers, reasoning that the consultant’s alleged relationships with tax authorities, a  tax-law “accounting system,” and its ability to negotiate property tax discounts did not qualify as protectable trade secrets under Virginia’s Uniform Trade Secrets Act. Scott A. Schaefers also has a post on this case for Seyfarth Shaw’s Trading Secrets Blog.
  • And while we are on the topic of trade secrets cases in Virginia, are you looking for a primer on the epic DuPont v. Kolon case? Then check out the superb post analyzing DuPont’s case by Eulonda Skyles and Michael Spillner for Orrick’s Trade Secrets Watch Blog.
  • Speaking of DuPont and Kolon, “Kolon Succeeds in Getting Its Trade Secret Theft Arraignment Postponed,” advises Todd Sullivan in Sullivan’s Trade Secrets Blog.
  • “Ex-Advanced Micro Workers Can’t Shake Trade Secrets Suit,” reports Law360 and Bloomberg. For more on the AMD trade secrets dispute, see my post from last month on the recent preliminary injunction restraining those same employees from misappropriating AMD’s trade secrets.
  • “Newscaster tripped up by Non-Compete,” reports Dan Frith for Frith & Ellerman’s Virginia Non-Compete Law Blog.
  • “It’s Not Just for Patents Anymore: Using the ITC to Combat Theft of Trade Secrets,” recommends Mark Memelstein and Misasha C. Suzuki for Orrick’s Trade Secrets Watch Blog.
  • “Hey, I Thought We Had An Agreement: California Appellate Court Allows Party To Seek Attorney’s Fees In Trade Secret Case,” exclaims Paul Henson in a guest post for Seyfarth Shaw’s Trading Secrets Blog.
  • Jason Cornell of Fox Rothschild has another post comparing different state’s non-compete laws, this time “A Comparison Of Illinois And Florida Law Governing Non-Compete Agreements,” for Mondaq.
  • “UK Supreme Court Rules on Case Involving Misuse of Trade Secrets by Former Employee,” reports Ezra Steinhardt for Covington’s Inside TechMedia Blog.
  • Jay Yurkiw of Porter Wright continues to churn out fine posts on e-discovery issues relevant to trade secret and non-compete disputes. For his latest, see “Court Relies on Proportionality to Deny Inspection of Defendant’s Computers, Cell Phones and Email Accounts” for Porter Wright’s Technology Law Source Blog.
  • “Deter Cyber Theft Act Would Augment Federal Policy Against Industrial Espionage,” advises Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • Interested in the interplay between “Liquidated Damages and Non-Competes”? Then check out Devin C. Dolive’s post for Burr & Forman’s Non-Compete Trade Secrets Law Blog. 

Cybersecurity Posts and Articles:

  • “Outside Law Firm Cybersecurity Under Scrutiny,” advises Catherine Dunn for Corporate Counsel.
  • “China’s Cyber Stonewall: Beijing won’t stop until it pays a price for its Internet thievery,” thunders The Wall Street Journal.
  • “How Vulnerable is Your Company to a Cyber Breach?” ask Clark Schweers and Jeffrey Hall for Corporate Counsel.
  • “What If China Hacks the NSA’s Massive Data Trove?” ponders Conor Freidersdorf for The Atlantic.
  • “Could Overreaction to Cybersecurity Threats Hurt Transparency at Home?” worries David S. Levine for Slate.

Computer Fraud and Abuse Act Posts and Cases:

  • In an initial skirmish that will inevitably lead to a lawsuit against the prosecutors in the Aaron Swartz CFAA case, “Judge Rejects Aaron Swartz’s Estate’s Request to Release Names of Individuals Involved in his Prosecution,” reports Hayes Hunt in the From the Sidebar Blog.

In an important decision issued on Wednesday, a Massachusetts federal court has found that the absence of proof of actual use of the trade secrets was not fatal to claims brought by Advanced Micro Devices, Inc. (AMD) against four of its former employees.  In AMD, Inc. v. Feldstein, Judge Timothy S. Hillman found that evidence that several of the employees downloaded and transferred significant data, coupled with other facts, was sufficient circumstantial evidence of misappropriation to justify an injunction.  (A PDF of the court’s decision can be found below).

This decision cuts against other recent cases holding that a trade secret claimant must come forward with evidence of actual misappropriation to make its claim.  I have detailed the forensic analysis below, because it was critical in making the circumstantial case that trade secrets were taken and likely being used, and rendered the versions presented by the employees implausible.

Background:  AMD brought this case in January 2013 against former employees Robert Feldstein, Manoo Desai, Nicolas Kociuk and Richard Hagan, each of whom had each left AMD to join a competitor, Nvidia.  AMD secured a temporary restraining on the strength of non-disclosure and non-solicitation clauses in the employees’ Business Protection Agreements that they had signed as a condition of employment with AMD and had moved for a preliminary injunction formalizing that TRO.

Feldstein, the most senior of the employees, was the first to leave and just before resigning in July 2012, he took a sabbatical during which time 8,148 files were copied from AMD’s intranet via Feldstein’s AMD-issued laptop.  The files included a Gmail contacts file, a Microsoft Outlook inbox file and several business-strategy-related documents.  He also downloaded a Technology Licensing Overview PowerPoint presentation that he later conceded was “problematic.”

Desai, a Senior Manager, joined Nvidia in December 2012 and forensic analysis showed that 7,899 documents were transferred from her AMD-issued laptop to a folder located on the external hard drive.  The night before she left AMD, her husband downloaded all of these files at her request because she wanted to preserve “her personal files, including family photos, personal emails and tax information” and she claimed that she “instructed him not to take any confidential AMD information.”  Desai accessed this information on her Nvidia-issued laptop later, but claimed she was searching for personal information.  She obviously never returned the information.

Kociuk reported to Desai and was part of her integration team.  Forensic analysis revealed that his user account was used to assist Desai in copying or transferring very large file systems for subsequent use (he said this was done only to help her erase her personal data from AMD).  He admitted he used a utility application, Robocopy, to create duplicate images of the entire file structure of his two AMD-issued computers.  More than — wait, let me lift my pinkie to my lips — one million files were copied onto a pair of external hard drives.  Kociuk claimed that he did this to preserve copies of personal information and data.  He left to join Nvidia on January 11, 2012, the event that triggered the lawsuit and TRO.  After downloading the files, Kociuk signed an acknowledgement that he was not retaining any of AMD’s confidential information.

In addition, AMD presented evidence of some solicitation of then-current AMD employees by Feldstein, Desai and Hagan.  None would admit that the conversations were actual solicitations but it appeared from emails and text messages that some informal solicitation may have taken place.

The District Court’s Reasoning:  Judge Hillman addressed the split in authority in Massachusetts over whether acquisition of trade secrets by improper means is sufficient to establish misappropriation or whether, alternatively, a plaintiff is required to prove actual use above and beyond acquisition by improper means.  He did not address the pros and cons of each line of cases, but instead, he simply elected to go with the line of cases permitting acquisition by improper means. 

Judge Hillman recounted the forensic evidence outlined above and found that it was “compelling.”  He noted that all of the former employees made copies of confidential information of AMD, retained that information, and immediately began working for significant competitor.  He noted that Feldstein in particular had access to extremely sensitive business strategy and licensing agreement information which he acknowledged was “problematic.”

This circumstantial evidence, in the court’s view, destroyed the credibility of the alternative explanations offered by the employees as well as their other testimony that they did not intend to misappropriate the trade secrets or that they could not possibly use that knowledge to benefit Nvidia in their current position.

The Takeaways:  From the employee side, what were these people thinking?  Kociuk’s decision to copy one million files destroyed the believability of the employees’ protestations of misappropriation.  The strength of the forensic evidence also spilled over into the issue of whether improper solicitations occurred, because the ambiguous signals and communications at issue there suddenly took on more sinister overtones against the backdrop of the massive downloading of these and other files.

On the employer’s side, forensic evidence saved the day here and was used to build a compelling story.  Although there was no evidence of actual use of the trade secrets, the sheer amount of data transferred, the suspicious timing of the downloading and the timing of the employees’ departures to the same competitor led the court to conclude that these employees were likely already using or likely to use these trade secrets in the future. 

As I noted at the outset, several courts have recently required parties to come forward with actual proof of misappropriation (a decision out of Georgia imposing this standard can be found here).  This new standard, in my view, is incorrect and difficult, if not impossible, to meet.  Evidence of the proverbial “smoking gun” rarely exists and it is unrealistic to expect a tortfeasor to fall to his or her knees and admit “I did it!”  To the contrary, in the crucible of litigation, one can reasonably expect the tortfeasor’s story to harden now that he or she is confronted with tne consequences of his/her actions.  Trade secret claims, like claims for fraud or unfair competition, are inherently based upon some degree of deceit and as a result, by their very nature, often can only be proven by circumstantial evidence.

Judge Hillman did not identify the particulars of the injunctive relief he was going to enter in the case, so I will keep you updated when he ultimately does issue that injunction.

AMD v Feldstein et al _Opinion .pdf (135.06 kb)

Anheuser-Busch InBev’s lawsuit against a former operations director turned lawyer turned whistle blower illustrates many of the special challenges in a whistle blower trade secret case.  The former employee, James Clark, claims that AB InBev has watered down its beer and he has garnered generally favorable media treatment this week by filing a motion to dismiss the case against him under California’s whistle blower statute.  (Full disclosure:  I represented Anheuser-Busch in a litigation about 10 years ago).
 
According to Bloomberg, AB InBev sued Clark, a former director of operations support, one week after the company was accused of overstating the alcohol content in several of its beers. Clark worked at Anheuser-Busch from 1998 until June, when he resigned to become (gasp) a lawyer.  Clark held several quality-assurance positions before rising to director of operations support.

Consumers have filed at least eight lawsuits accusing AB InBev of adding water to beers including Bud Ice, Budweiser, Busch Ice and Michelob.  AB InBev asserts Clark has improperly divulged or misrepresented confidential information to the lawyers for those plaintiffs.  In February, Clark apparently refused AB InBev’s demand that he testify under oath about whether he had divulged any confidential information in connection with those lawsuits.

The Streisand Effect:  Clark has not hesitated to seize the bully pulpit.  In moving to dismiss the case because he believes California law bars using strategic lawsuits against public participation (SLAPP) as a means of intimidation, Clark argues that the lawsuit is intended to silence and punish him for standing up for consumers.  (PDF copies of the Complaint and Motion to Strike can be found below). 

AB InBev’s lawsuit did not generate much publicity when it was filed on March 1, 2013.  In contrast, Clark’s claims and motion have generated a fair amount of media coverage since their filing on March 29, 2013.  In this respect, AB InBev’s case, like many cases against self-styled whistle blowers, may have led to the dreaded Streisand Effect — that in attempting to fight unwanted or unfavorable publicity, a company ends up unintentionally creating even more media attention.

The Collision Between The First Amendment and Trade Secret Law:  I have written before about the special challenges of prosecuting a trade secrets case against the whistle blower.  There is a long tradition in our country generally supportive of whistle blowers.  Think Ida Tarbell and Standard Oil, Upton Sinclair and the meat packing industry, Ralph Nader and the Corvair, Daniel Ellsberg and the Pentagon Papers — the list goes on and on.  Courts are not immune to the romance of the narrative of the heroic employee trying to protect the public and reveal the alleged misdeeds of his former employer.

Not surprisingly, former employees making these claims can effectively cloak themselves within the protections of the First Amendment and federal courts in particular have been receptive to that defense, especially in areas of public health and safety.  While states such as California and Ohio may allow trade secret protection to trump First Amendment concerns in certain situations, federal courts have generally found that such efforts to squelch this speech qualify as a forbidden prior restraint.   (For more on this issue, see my earlier post on the Julius Baer v. WikiLeaks case).

The Takeaway:  Suing a whistle blower is always a high-wire act.  Unfavorable media attention and the thicket presented by the First Amendment are frequently a part of the fabric of these disputes.  A trade secret claimant needs to tread carefully and have a thick skin. 

I will continue to monitor the case and provide an update when the court rules on Clark’s Motion to Strike.

AB Complaint (2).pdf (720.10 kb)

Clark Motion to Dismiss.pdf (1.21 mb)

01102013Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:

Computer Fraud and Abuse Act Posts and Cases:

The commentary criticizing the prosecution of technology activist Aaron Swartz continues to mount. (For those who have not been following it, Swartz committed suicide after plea negotiations with the U.S. Attorney for the District of Massachusetts broke down; he had been charged with violations of the Computer Fraud & Abuse Act for allegedly hacking into an academic database affiliated with MIT). I am hoping to get a post with my perspective on this important case out this weekend. In the meantime, those interested in more on this case should see the following articles:

  • Professor Orin Kerr has written two posts for The Volokh Conspiracy, the first evaluating whether the prosecutors abused their discretion (he concludes that they were not out of bounds under normal prosecutorial standards) and the second proposing changes to the CFAA.
  • And in The Public Domain, James Boyle voices his disagreement in “The Prosecution of Aaron: A Response to Orin Kerr.”
  • The Wall Street Journal had an editorial last Friday, “Cyber Crime and Punishment,” which expressed concern over the proportionality of the penalties sought by U.S. Attorney Carmen Ortiz.
  • The New York Times had an op-ed piece by Lincoln Caplan entitled “Aaron Swartz and Prosecutorial Discretion” and also ran an article detailing MIT’s role in the case, “How M.I.T. Ensnared a Hacker, Bucking a Freewheeling Culture.”
  • In Harper’s Magazine, Scott Horton is critical of the prosecution in ‘”Carmen Ortiz Strikes Out.”
  • For those interested in finding out more about some of the statistics behind recent CFAA prosecutions, Professor Kyle Graham has a fine summary in his post entitled “Some Thoughts on the Computer Fraud and Abuse Act” for the noncuratlex.com blog.

Trade Secret and Non-Compete Posts and Cases:

  • Could the National Labor Relations Board find an employer’s confidentiality provisions to be overbroad? An interesting post by Epstein Becker’s Trade Secrets & Noncompete Blog notes a recent decision in which a NLRB administrative law judge that  found confidentiality and non-disparagement provisions contained in a mortgage banker’s employment agreement were violative of the NLRA. 
  • “Judge Strips Richtek Claims In UPI Trade Secrets Case,” reports Law360.
  • “Analyzing the Non-Competition Covenant as a Category of Intellectual Property Regulation,” from the Hastings Science & Technology Law Journal (a hit tip to Jonathan Pollard for tweeting this article).
  • “Federal Court Finds Choice of Law that Permits Blue Penciling Does Not Violate Virginia Public Policy,” reports Paul Kennedy for Littler’s Unfair Competition & Trade Secrets Counsel Blog.
  • “California Appellate Decision Clarifies Standard for Injunctive Relief Carve-Outs Within California Arbitration Agreements,” reports Robert Milligan for Seyfarth Shaw’s Trading Secrets Blog.
  • If you are in the aerospace industry, you need to be particularly careful with your Chinese partners and suppliers, advises Todd Sullivan in his Trade Secrets & Employee Defections Blog. Todd cites a recent article from The New York Times, which addresses security and trade secret concerns for that industry in China.
  • “US Manufacturer Accuses Chinese Agent Of Stealing IP,” notes Law360.
  • “The China NDA (Non-Disclosure Agreement). Shut the Barn Door BEFORE the Horse Bolts,” warns Dan Harris in his China Law Blog.

Cybersecurity Articles and Posts:

  • “The BYOD Thicket: Some Tips Basis Steps to Take for Businesses,” advises Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • And if you are interested in how law firms should balance BYOD and security, check out Sean Martin’s article, “Top Mobile Use Cases in Law Firms,” for Law Technology News.
  • “Protecting Companies’ Intellectual Property From Cyber Crime,” advise Ernest Badway and Daniel Schnapp for Law Technology News.

 

01042013Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:
 
Trade Secret and Non-Compete Posts and Cases: 
  • Two amendments to the Economic Espionage Act (EEA) have or will become law this week or next week. As expected, President Obama signed the Theft of Trade Secrets Clarification Act, which had unanimously passed the Senate and made its way through the House after a 388-4 vote. The Trade Secret Clarification Act has effectively reversed the narrow construction of the EEA by the U.S. Court of Appeals for the Second Circuit in U.S. v. Aleynikov. In that heavily-criticized decision, the Second Circuit had limited the application of the EEA’s §1832(a) to products that were sold or intended to be sold into interstate commerce. In addition to now ensuring that trade secrets related to internal products such as software are covered under §1832(a) of the EEA, the Act has also broadened that part of the statute to cover trade secrets for services. Finally, President Obama is expected to sign an amendment enhancing the penalties’ sections of the EEA, increasing, among other things, the potential financial penalty from $500,000 to $5,000,000 for stealing trade secrets for the benefit of a foreign power under §1831(a) and increasing penalties from at least $10,000,000 to perhaps 3 times the value of trade secrets for violations of §1832. For more on the amendments and their potential impact on prosecutions, see Ryan Davis’ article for Law360, “Trade Secrets Cases May Spike After US Strengthens Law.” 
  • Amazon has lost its effort to enjoin a former employee from working on any cloud computing project for Google, reports Jonathan Pollard in the non-compete blog. According to Jonathan, the Washington state court rejected Amazon ‘s broad injunctive request to bar Daniel Powers from working from Google in a thorough and well-reasoned opinion. The opinion emphasized, among other things, the fact that Powers did not take any documents or files with him, that Amazon had failed to identify its trade secrets with the requisite specificity, and that the request would have amounted to worldwide ban that was not warranted on the facts before the court. For more on the case, see my post about the filing of the complaint here. 
  • How important is it to have a provision requiring the return of confidential information? Pretty damned important, advises Epstein Becker’s Trade Secrets & Noncompete Blog which details a recent decision, Lincoln Chemical Corp. v. Dubois Chemicals Group, from the Northern District of Indiana that relied on such a provision for an injunction in that trade secrets dispute. 
  • “United Health Services Wins $6.9 Million Verdict in Non-Compete Claim Against Acadia Healthcarereports John Paul Nefflen for Burr & Forman’s Non-Compete Trade Secrets Law Blog
  • For those interested in the take of other bloggers on major cases and developments in trade secret and non-compete law in 2012, check out Robert Milligan’s analysis of “Top 10 Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2012” for Seyfarth Shaw’s Trading Secrets Blog as well as Kenneth Vanko’s thoughts on “2012: Year-End Review and Top 10 List” for his Legal Developments in Non-Competition Agreements Blog
  • Kenneth also has a post on a recent opinion out of the Second Circuit construing Connecticut’s version of the Uniform Trade Secrets Act. According to Kenneth, the decision in McDermid, Inc. v. Dieter may prove to be a boon for plaintiffs seeking to protect trade secrets overseas. 
  • “The Four Keys To China Trade Secret Protection” advises Dan Harris in The China Law Blog
  • Samsung Loses Bid To Seal Sales Data In Apple IP Dispute” reports Law360 
Cybersecurity Articles and Posts: 
  • “The White House is Finalizing an Executive Order on Cybersecurityreport Dennis Olle and Padro Pavon of Carlton Fields for JDSupra
  • “Tackling Intellectual Property Issues in the Cloud” advises the bizcloud
  • Looking for tips for “Cyber Security for Smart Phone”? Then check out Peter S. Vogel’s post in his Internet, Information Technology & e-Discovery Blog
  • Cyberlaw Predictions: Crucial Time at the Federal Trade Commission,” notes Thomas O’Toole for Bloomberg’s e-Commerce and Tech Blog.
News You Can Use: 
  • Looking for the discipline to keep those New Year’s resolutions? Then consider “How to Train Your Brain to Stay Focused” as advocated by Nadia Goodman for Entrepreneur.