While there was minimal legislative actively last month, there were a number of interesting decisions and articles on the trade secret and restrictive covenant front:
Noteworthy Defend Trade Secrets Act Cases, Federal Trade Secrets Opinions and Related Commentary:
- Perhaps the biggest news last month was the $104.65 million verdict against Ford Motor Co. delivered by a Michigan federal jury for the breach of its contract with Versata Software and the misappropriation of Versata’s trade secrets. The dispute arose over a 2004 agreement between Versata and Ford for software that Versata developed to manage how components in Ford vehicles would be configured during assembly. Versata had been a vendor of Ford’s since the 1990’s until 2015 when Ford terminated the relationship. The jury found that after off-ramping Versata, Ford improperly reverse engineered the software for its own use. The jury awarded $22.39 million to Versata for three of the software trade secrets and $82.26 million for Ford’s breach of contract. Ford plans to appeal. Like the Goodyear case that I recently wrote about, this dispute highlights the fact that trade secret cases don’t just involve departing employees.
- Speaking of cases involving employees, Patently O‘s Dennis Crouch did an informal survey of 10 recently filed federal trade secret cases. Dennis noted that all 10 of the cases involved employer/employee disputes and many arose in the sales representative context over customer and sales information. One of the cases, Cartiga, LLC v. Robles, provides a textbook example of how NOT to respond to a cease-and-desist letter from your former employer’s lawyer (the emojis below were attached as an exhibit to the complaint):
- Having prevailed before the U.S. Court of Appeals for the Eleventh Circuit, Boeing successfully secured the dismissal of trade secrets claims asserted against it by arguing that a limitation of liability provision in its nondisclosure agreement (NDA) also applied to the same trade secret claims. Reasoning that because the NDA’s choice of law provision applied to those trade secret claims, the U.S. District Court for the Northern District of Alabama held that the NDA’s limitation of liability provision applied to those claims as well. That opinion, Alabama Aircraft Indus., Inc. v. The Boeing Company, can be found here.
- The U.S. Court of Appeals for the Third Circuit issued yet another opinion taking a narrow approach to a trade secrets claim, affirming the trial court’s decision to deny an injunction against a group of employees. In Matthews Int’l Corp. v. Lombardi, the Third Circuit found that the trial court properly exercised its discretion to limit injunctive relief to a single bad actor and not impose a broader injunction against the remaining individual defendants preventing them from otherwise lawfully competing. The other individuals had already agreed, as memorialized by a subsequent order, to (1) return all of the plaintiff’s information, (2) remove the information from their devices, and (3) refrain from servicing customers who had the plaintiff’s cremation equipment. The Third Circuit reasoned that no injunction was necessary for multiple reasons, including the absence or expiration of any restrictive covenants, the absence of any breach and the plaintiff’s inability to show irreparable injury. Isaiah Weedn has a good summary of the case in Sheppard Mullin’s Trade Secrets Law Blog.
- Federal courts continue to grapple with the importance of circumstantial evidence to demonstrate misappropriation at the summary judgment stage. Last month, I wrote about a decision out of the U.S. District Court for the Northern District of Illinois holding mere possession of a trade secret was insufficient to show use. However, in Clean Energy v. Trillium Transportation Fuels, Inc., Magistrate Peter Bray of the U.S. District Court for the Southern District of Texas held that “proof of ‘use’ often depends upon circumstantial evidence” and found that the circumstantial evidence presented to him was sufficient to deny the defendants’ motion for summary judgment. The cases probably can be reconciled by the fact that there was more circumstantial evidence to offer in the Clean Energy case, but the decisions do highlight a schism on the significance of direct vs. circumstantial evidence.
- Federal courts are also split on the availability of the inevitable disclosure doctrine under the DTSA, according to Mintz’s Oliver Ennis, Nicholas Armington and Adam Samansky in an article for The National Law Journal.
- One of the signature developments of the DTSA has been the mind-numbing number of opinions addressing motions to dismiss under Federal Rule of Civil Procedure 12(b)(6). Fisher & Phillips’ David Walton provides a five-step action plan for making sure your bases are covered if you are filing a claim under the DTSA. Maxwell Goss also has an earlier post this year on the same topic that was published by The Michigan Law Journal.
- Is there a circuit split on the enforceability of forum selection clauses? Given the many differences between state laws on restrictive covenants, a forum selection clause can be outcome determinative. Sarah Tisher of Beck Reed Riden has a post about that split and the prospects that the U.S. Supreme Court may address it.
- The avoided cost theory of damages continues to gain traction as an element of damages in trade secret cases, advises Andrea Feathers for Sheppard Mullins Trade Secrets Law Blog. In essence, the doctrine recognizes the cost savings that a misappropriator realizes when it is able to shortcut the research or development of a product or service by using that trade secret. Heather writes about a recent decision of the U.S. District Court for the Southern District of California in Medimpact Healthcare Sys. v. IQVIA Inc., No. 19cv1865-GPC(DEB), 2022 U.S. Dist. LEXIS 186470, at *1 (S.D. Cal. Oct. 7, 2022), that recognized the availability of the doctrine but deferred ruling on how best to calculate those damages in further briefing. Heather’s post provides a solid summary of the development of this theory of damages and the key decisions that have led to its increasing recognition and use by trade secret owners.
Restrictive Covenant Cases from around the United States:
- Because sophisticated commercial parties are involved, lawyers frequently assume that restrictive covenants accompanying an asset sale or stock purchase agreement are fully enforceable. However, in Kodiak Building Partners, LLC v. Adams, Vice Chancellor Morgan Zurn of the Delaware Chancery Court declined to enforce a covenant not to compete accompanying an asset sale on the grounds that the noncompete was unreasonable and not narrowly tailored to protect a legitimate business interest of the acquiring party. Vice Chancellor Zurn also declined to blue-pencil or rewrite the overly broad noncompete, reasoning that as a matter of public policy, that would only encourage employers to draft similarly overly broad provisions in the future because they would be in a “no lose” position. Arent Fox’s Linda Jackson has a fine article in The National Law Review detailing the Chancery Court’s reasoning; Paul Pryzant and Matthew Simmons also have a post on the decision for Seyfarth’s Trading Secrets Blog and Taft’s Matt Albaugh and his colleagues at Taft also have a comprehensive article on the decision.
- The mere transfer of a customer’s account, without more, is not sufficient evidence that an improper solicitation occurred, reasoned the U.S. District Court for the District of Kansas when it denied a former employer’s request for a temporary restraining order against a former account executive. In Equity Bank v. McGregor, U.S. District Court Judge Daniel Crabtree found that the absence of direct proof of solicitation just easily could mean that the customer decided to transfer without any solicitation and therefore, plaintiffs had failed to demonstrate a substantial likelihood of success on the merits of their claim that their former employee had actually breached her non-solicitation agreement. For more on this case, see Finnegan’s John Paul, Brian Kacedon, Anthony Del Monaco and Eunice Lee’s article on the decision for Lexology.
- Russell Beck provides his take on the most recent decision interpreting the nuances of the garden leave provision of the Massachusetts Noncompetition Agreement Act. In Carroll v. Mitsubishi Chemical America, 2022 WL 16573974 (D. Mass. May 19, 2022) (Boal, M.J.), a former employee demanded garden leave payments under a noncompete that was negotiated in connection with a sale of a business to Mitsubishi. The court rejected Mitsubishi’s motion to dismiss, which was premised on the argument that Mitsubishi had waived the noncompete and therefore any garden leave payment, holding that the former employee had plausibly pleaded allegations that Mitsubishi needed her vote to close the sale and that the noncompete was not waived.
China and Trade Secret Protection:
- The trade secret prosecution of Chinese telecom manufacturer Huawei is back in the news again. The Justice Department has criminally charged two Chinese intelligence officers for attempting to obstruct the ongoing prosecution of Huawei. According to the criminal complaint, those two officers paid a government employee $61,000 in the form of Bitcoin cryptocurrency for confidential information about that prosecution. The Department of Justice also announced related criminal cases, including one that was filed in the U.S. District Court for the Eastern District of New York that accuses operatives working on behalf of the Chinese government of “engaging in a multi-year campaign of threats and harassment to force a U.S. resident to return to China.” That last criminal charge eerily echoes a post by Dan Harris that I included in my wrap up last month that posited the Chinese government was engaging in efforts to intimidate or extort expatriates to press them into service in stealing U.S. trade secrets.
Good Practical Advice:
- The exit interview is one of the most important, but least emphasized, trade secret protections available to an employer. In his most recent post for IP Watchdog, Jim Pooley uses the example of the high-profile trade secret case involving Anthony Levandowski, the Waymo engineer whose exit to Uber spawned one of the most talked-about trade secret cases of the past decade to illustrate that point (for those interested in recaps of the many developments in that case, see my posts here, here and here). Jim notes that it wasn’t until nearly 10 months after Levandowski left that Waymo realized that he had taken 14,000 files with him and that a well-implemented exit interview might have nipped his efforts to take those and other files in the bud. Jim is spot on in emphasizing that the exit interview is the employer’s final opportunity to reinforce the importance of those trade secrets.
- Trade secret cases routinely involve efforts to forensically remove information that does not belong to a party. However, the issue of what to do with social media that may include customer information or other potentially proprietary information can come up from time to time. Parker Poe’s David Pardue has a post on how to manage this novel question.
- For those looking for help on protecting trade secrets in the remote work environment, an article by Jeffrey Salling, Kaitlyn Stone and Michael Zogby for The New Jersy Law Journal lists several key protections that should be undertaken. Most of the recommended protections are straightforward and well established. However, the article places a special emphasis on training and cites a number of court decisions that looked to the degree of training provided by an employer to determine whether it took reasonable steps to protect its trade secrets.