Delaware, where more than half of U.S. public companies are incorporated, has done much to drive the development of corporate governance. As a result, “Delaware’s courts have led the way, which is not surprising given the crucial role the state’s judiciary plays under what Chief Justice Leo Strine has described as the ‘Delaware Model’ of corporation law.” Look no further than the Delaware Court of Chancery’s own website which says it is “widely recognized as the nation’s preeminent forum for the determination of disputes involving the internal affairs of the thousands upon thousands of Delaware corporations and other business entities through which a vast amount of the world’s commercial affairs is conducted.” Consequently, rulings by the Delaware Chancery Court are highly influential and may impact the reasoning of other state and federal courts. Three recent noncompete decisions by the Chancery Court potentially signal a significant shift against noncompetes involving sophisticated commercial parties.Continue Reading Are Three Decisions a Trend? The Delaware Chancery Court’s Turn Against Noncompetes
Join me for the OSBA’s CLE Webinar, “The Changing Shape of Trade Secret Trials: The Increasing Shift to Juries”
On Tuesday, March 21, 2023, at 1 p.m. ET, I will be speaking with Nicole Galli of ND Galli Law LLC, Benesch’s Scott Humphrey, and DecisionQuest’s Michael Biek, Ph.D. for the Ohio State Bar Association’s CLE Live Interactive Webinar, “The Changing Shape of Trade Secret Trials: The Increasing Shift to Juries.”
Last year, juries awarded $2 billion to Appian Corp., $65 million against Goodyear Tire & Rubber and $105 million against Ford Motor Company in high profile trade secret cases. These big verdicts signal a potentially significant shift away from how trade secret cases have been traditionally litigated, as employers have previously relied on injunctions to prevent employees and others from taking their trade secrets. This webinar will address this potential paradigm shift in trade secret litigation and help trade secret owners and their lawyers better understand the forces contributing to this important development and what clients and lawyers should be doing to adapt to these changes.
You can register for this CLE here. Hope you can join me.
Monthly Wrap Up (March 12, 2023): Noteworthy Trade Secret and Restrictive Covenant Cases, Developments and Posts
Here are the noteworthy cases, articles and posts from last month, along with several DTSA cases from January that didn’t make it into last month’s update:
Notable Defend Trade Secrets Act and Federal Trade Secret Developments, Opinions and Posts:
- For those interested in shaping an important trade secrets resource for the federal bench, Berkeley Professor Peter Menell is looking for comments to the Trade Secret Case Management Judicial Guide (TSJCMG), which is intended as a “go-to” resource for judges in these cases. In a post for Patently-O, Peter describes how the TSCMJG came into existence. He also discusses the unique qualities of trade secret cases that prompted the TSCMJG, including (1) the challenges of trade secret identification; (2) the highly emotional nature of trade secret cases, and (3) the interplay between criminal and civil proceedings in these cases. A number of trade secret luminaries (Vicki Cundiff, Jim Pooley, Peter Toren, Elizabeth Rowe, Rebecca Wexler and Professor Menell) have already contributed to its drafting, and for those interested in providing comments, please reach out to Peter at email@example.com (please note he is working on a tight timeline).
- Disputes over inventorship are not confined to patent cases and often arise in trade secrets cases too. However, that question does not guarantee federal subject matter jurisdiction, as the defendants learned in a decision remanding an ownership dispute removed to federal court back to state court. In Calvary Indus., Inc. v. Winters, U.S. District Court for the Southern District of Ohio Judge Timothy Black rejected arguments that a state court declaratory relief action over the ownership of several disputed patent applications involved federal patent or trade secret claims and ruled that it belonged in state court. In particular, Judge Black found that declaratory relief for a correction of ownership under 35 U.S.C. § 256 was premature because no patents had yet issued.
- Can a pleading citing “information and belief” for its allegations of misappropriation survive a motion to dismiss under Rule 12(b)(6)? If the information is solely within the possession of the defendant and the inference is otherwise plausible, the answer is “yes,” according to the U.S. Court of Appeals for the Eighth Circuit. In Ahern Rentals, Inc. v. EquipmentShare.com, Inc., the Eighth Circuit joined six other federal circuits that found this form of pleading to be sufficient. For more on the decision, check out Scott Lauck’s post on the case for Missouri Lawyers Media.
- The U.S. District Court for the Southern District of New York recently rejected a motion by Amazon to dismiss a complaint accusing Amazon of improperly reverse engineering the artificial intelligence (AI) trade secrets of a vendor. In GateGuard, Inc. v. Amazon.com Inc., No. 21-cv-9321, 2023 WL 2051739 (S.D.N.Y. Feb. 16, 2023), the vendor GateGuard alleged that Amazon was misappropriating GateGuard’s “proprietary security technology that acts as an ‘AI Doorman’ for multifamily residential properties, allowing authorized users to unlock entrances remotely and to monitor activity.” Judge John Koeltl’s sixty-three page opinion focused on, among other things, Gateguard’s terms of service agreement which specifically forbid reverse engineering. For more on the case, check out McGuire Wood’s Trade Secrets Tidbits post by Sarah Holub, Meghaan Madriz, Yasser Madriz and Miles Indest.
- Staying on the topic of Rule 12(b)(6) motions, during the course of my review of these cases each month, I am seeing a trend by federal courts denying these motions on the trade secret claims but sometimes dismissing other tort claims. This trend is supported by the decisions above, as well as other decisions this past month by the U.S. District Court for the District of Columbia in Aristotle Int’l, Inc. v. Acuant, Inc. (a case involving data scraping), the U.S. District Court for the Eastern District of New York in Hardwire, LLC v. Freyssinet Int’l Et Cie, et al. (dismissing Sherman Act claims), and the U.S. District Court for the Southern District of Ohio in Sunjoy Indus. Group, Ltd., v. Permasteel, Inc. (dismissing trade dress claims).
- Looking for ideas for your motion in limine to exclude improper evidence at your next trade secret trial? Then look no further than HP Tuners, LLC v. Cannata, where the U.S. District Court of Nevada ruled on a host of different requests to exclude evidence, including requests under Daubert and other expert challenges, Rule 408 settlement discussions and evidence of the parties’ respective wealth.
- Never underestimate the power of an accelerated development timetable to create an inference of misappropriation when seeking an injunction. In Palltronics, Inc. v. Paliot Solutions, Inc., Judge Page Hood of the U.S. District Court for the Eastern District of Michigan was persuaded by the fact that the former employees’ brand-new company “managed to accomplish in one year, what it took Lightning [the former employer] over five years and $25 million in research and development to achieve” and she ruled “[i]t can be inferred that such dramatic progress was possible because Defendant relied on Lightning’s former employees’ knowledge of the trade secrets, processes and other information they gained from working at Lightning to set up its business.”
Two Ideas to Improve and Balance the Defend Trade Secrets Act: A Safe Harbor Rule and Early Trade Secret Identification
Since its enactment in 2016, the Defend Trade Secrets Act (DTSA) has become the most important trade secrets statute in the world. Here’s the proof. DTSA filings have steadily increased, doubling from 2016’s 476 filings to 2020’s 1,008 filings. According to Lex Machina’s 2021 Trade Secret Litigation Report, 72.9% of all trade secret cases in 2020 and 72.5% in 2019 included a claim under the DTSA. And as other nations recognize the importance of trade secrets and develop their own trade secret laws (see the EU’s Trade Secret Directive and China’s recent amendments to its trade secret law), those nations will likely look to the DTSA for inspiration. When you throw in the increasing reliance on trade secret law and perceived erosion of patent protection, it’s hard to dispute the DTSA’s growing importance.
But the DTSA is far from perfect. Like the Uniform Trade Secrets Act on which it was based, the DTSA can be improved as trade secret law evolves. To that end, I would humbly propose the following two amendments to the DTSA: (1) a “safe harbor” provision for penitent defendants who have agreed to an injunction and are cooperating in a litigation; and (2) a trade secret identification requirement similar to the Model Local Rule suggested by the Sedona Conference’s Trade Secrets Working Group (described below).Continue Reading Two Ideas to Improve and Balance the Defend Trade Secrets Act: A Safe Harbor Rule and Early Trade Secret Identification
Monthly Wrap Up (February 18, 2023): Noteworthy Trade Secret and Restrictive Covenant Posts, Cases and Developments
Apologies for the lateness of this month’s post (another trial) but it contains some important developments from the past week. The potential impact of the FTC’s proposed ban on noncompetes continues to reverberate through the legal and business communities and bipartisan federal legislation has been introduced in Congress so I am emphasizing developments there, rather than leading with the past month’s DTSA decisions (I will supplement next month’s post with any decisions/posts I missed):
Latest on the FTC’s Proposed Ban on Noncompetes and Overly Broad NDAs:
- Let’s start with the most recent news on the FTC’s proposed ban on noncompetes and overly broad NDAs. On Thursday, the FTC held a public forum to discuss its proposed rule. Russell Beck was there and his most recent blog post reports on the discussions and comments at what appears to have been a highly political forum. While the speakers/comments were balanced in number, many of the speakers who advocated for the FTC’s proposed ban were former employees who condemned their noncompetes; their comments were naturally anecdotal and emphasized specific abuses by their former employers. In contrast, Russell says the speakers/commenters opposing the ban were more policy-oriented and spoke to the rationales and interests that noncompetes may legitimately protect.
- The other big news last week was the so-called “noisy exit” of FTC Commissioner Christine Wilson from the FTC, an exit punctuated by a pointed op-ed piece in The Wall Street Journal asserting that FTC Chair Lina Khan has disregarded the rule of law and due process in her management of the FTC. As you will recall, Commissioner Wilson, the lone Republican appointee to the FTC, dissented from the FTC’s proposed ban last month. Her dissent provided a roadmap of the potential legal and administrative infirmities of the proposed rule that will likely be used by employers and other stakeholders opposing the ban. Kate Perrelli and Dan Hart provide their take on her resignation in a recent post for Seyfarth’s Trading Secrets Blog and Erik Weibust provides his take as well for Epstein Becker’s Trade Secrets & Employee Mobility Blog.
- The FTC’s proposed rule has now been published in the Federal Register, so interested parties have until March 20, 2023 to provide comments. However, it is generally believed that the FTC will extend that deadline as multiple stakeholders have asked for more time. Russell Beck and Scott Humphrey have both said over 12,000 comments have been submitted already.
- In yet another op-ed for The Wall Street Journal, which is becoming the preferred forum for challenges to the FTC, the U.S. Chamber of Commerce’s lawyer makes the interesting observation that the FTC has never issued a rule before. If true, this would further support the argument that the FTC is engaging an administrative overreach.
Join me at the ABA’s 2023 Corporate Counsel CLE Seminar, “Tips from the Trenches: Hot Issues and Best Practices in Trying a Trade Secrets Claim under the DTSA”
On Saturday, February 18, 2023, I will be speaking at the American Bar Association’s Corporate Counsel CLE Seminar in Orlando on “Tips from the Trenches: Hot Issues and Best Practices in Trying a Trade Secrets Claim under the Defend Trade Secrets Act (DTSA)” with Nicole Galli of ND Galli Law LLC, Benesch’s Scott Humphrey, and DecisionQuest’s Ann Greeley, Ph.D.
This presentation will cover the changing paradigm of trade secret litigation, which is increasingly becoming more damages-oriented and therefore, more likely to be tried to a jury. We will focus on the forces causing this change and what outside counsel and in-house counsel need to do when deciding whether they want to go proceed with bench trial or jury trial. For more on this trend in trade secret trials, see my recent posts (here and here) from last December.
I’m delighted for the opportunity to speak at this Corporate Counsel CLE Seminar. For over 30 years, in-house and outside counsel have come together each winter to learn, network, and share expertise about the unique challenges they face in representing corporations of all types. Designed by and for general counsel and their outside law firms, this innovative seminar takes place over three days. The Seminar offers a mix of CLEs by industry thought leaders, business meetings, luncheons, dinners, receptions, and the opportunity to connect with some of the best in-house lawyers, outside litigation counsel, and judges in the country.
You can register for this CLE here. Hope you can join me.
Guest Professor Evan Starr Discusses the Research behind the FTC’s Proposed Noncompete Ban (Fairly Competing, Episode 21)
The FTC’s proposed ban on noncompete agreements (and other “de facto” noncompetes such as overly broad nondisclosure agreements) relies in large part on the research done by University of Maryland’s Robert H. Smith School of Business Professor Evan Starr — one of the leading scholars in the field.
Join Ben, Russell and me as we talk with Professor Starr about the strengths and weakness of his research, any key insights that he has into other research in the field, and an important working paper of HEC Paris Professor Jessica Jeffers, The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship.
So, come join us on Spotify or Apple Podcasts. Or, if you’re just looking for the feed, it’s here: Fairly Competing RSS feed.
Fairly Competing, Episode 21: Exploring the Research Behind the FTC’s Proposed Noncompete Ban with Professor Evan Starr
The FTC’s Proposed Ban on Noncompetes: Everything you need to know but were afraid to ask (Fairly Competing, Episode 20)
As many of you know from my post last week, the Federal Trade Commission (FTC) just proposed a ban on noncompetes with virtually no exceptions. And, the FTC has also placed nondisclosure agreements (NDAs) in its crosshairs.
No one knows this area better than Russell, and I mean no one, so please join Ben and me as we get Russell’s insights and take a look at the FTC’s proposed ban, the lead up to its announcement, what the proposed ban would do and when, the potential practical and legal problems with the proposed ban, the opportunity to provide comments to the FTC about it, what employers should do in the interim to protect their trade secrets and customer goodwill, and predictions on where this all goes.
So, come join us on Spotify or Apple Podcasts. Or, if you’re just looking for the feed, it’s here: Fairly Competing RSS feed.
Monthly Wrap Up (January 9, 2023): Noteworthy Trade Secret and Restrictive Covenant Posts, Cases and Developments
December was unusually busy and 2023 started with a bang courtesy of the Federal Trade Commission’s (FTC) proposed rule banning noncompetes. Here are the noteworthy cases and posts from last month, with several notable posts regarding the FTC’s big announcement on Thursday, for good measure:
Noteworthy Defend Trade Secrets Act Cases, Federal Trade Secrets Opinions and Related Commentary:
- Courts continue to scrutinize claims of irreparable injury in trade secret cases, and no court runs a tighter ship than the U.S. District Court for the Southern District of New York. In Tomgal LLC v. Castano, District Court Judge John Koeltl of the U.S. District Court for the Southern District of New York denied an injunction request, reasoning that irreparable injury did not exist because any injury arising from the misappropriated trade secrets could be easily calculated. Judge Koeltl found “every unit of inventory that [defendant] Fashion Code sells to a Robin Ruth distributor is a sale that Robin Ruth did not make,” i.e., profits from the sale of the products containing the misappropriated trade secrets could be easily monetized. Judge Koeltl also rapped the plaintiff’s knuckles on laches grounds, finding that a 7-month delay was substantial and unreasonable.
- If you don’t identify your trade secrets with particularity, you are not going to get an injunction. That is the simple message that many federal courts are sending to trade secret owners, and a recent decision by District Court Judge Nugent of the U.S. District Court for the Northern District of Ohio is the latest. To date, most of the discussion regarding trade secret identification has been at the discovery stage but now courts are reinforcing that message by denying early requests for an injunction. In Collar Jobs, LLC v. Slocum, Judge Nugent denied the request for an injunction against a former joint venture partner, expressing concern that “it is not entirely clear what Collar Jobs’ ‘trade secret’ is.” He also questioned the novelty of the alleged “platform” trade secret before him, which appeared to be a combination trade secret of customer and prospect data.
- So Judge Nugent’s opinion begs the following question: should the DTSA be amended to include a requirement that trade secret identification is provided early in a case? In an article for Law360, Willenken LLP’s Amelia Sargent details recent rulings by the U.S. Courts of Appeal for the Seventh Circuit and Ninth Circuit recognizing the need for identification and advocates for that amendment. It’s a good read and Amelia’s points are reasonable and sound.
- A recent decision out of Massachusetts cuts against the trend of decisions broadly interpreting the extraterritorial reach of the DTSA. In Sysco Machinery Corp. v. Cymtek Solutions, Inc., District Court Judge Leo Sorokin of the U.S. District Court for Massachusetts ruled the sale of products in the U.S. that were made using the alleged trade secrets, without more, did not qualify as “an act in furtherance” of misappropriation under the DTSA. According to Judge Sorokin, the defendant Cymtek used the misappropriated trade secrets improperly to make competing machines in Taiwan, but all of that conduct occurred in Taiwan or outside the United States; as a result, on this record, he found that there was neither “misappropriation” in the United States nor an “act in furtherance of the offense . . . committed in the United States” as required under §1837(2) of the DTSA. Contrast this ruling to the decisions described in my September 2021 post. Tough to reconcile in my judgment.
Continue Reading Monthly Wrap Up (January 9, 2023): Noteworthy Trade Secret and Restrictive Covenant Posts, Cases and Developments
It’s Official: The Federal Trade Commission Seeks to Ban Noncompetes and Overly “Broad” NDAs
Earlier today, the Federal Trade Commission announced it has issued a proposed rule banning noncompetes. This development should come as no surprise since President Biden issued an executive order in July 2021 authorizing the FTC and other agencies to investigate the unfair use of noncompetes and other restrictive covenants and curtail their use. I expect that most of the commentary will focus on noncompetes and the ability of the FTC to effectively legislate over a body of law reserved for the states for over a hundred years. However, what should be of particular concern to the trade secret community is that the proposed FTC rule also potentially targets nondisclosure agreements (NDAs) that are “written so broadly” as to amount to “de facto noncompetes.” In other words, employers in California, Oklahoma and North Dakota–states that forbid noncompetes–may find that their employee NDAs could qualify as de facto noncompetes under the FTC’s new rule. As explained below, this post briefly describes how we got here, what the proposed rule addresses, and suggests some actions employers can take to protect themselves in the meantime.Continue Reading It’s Official: The Federal Trade Commission Seeks to Ban Noncompetes and Overly “Broad” NDAs