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.
Noteworthy Posts about the FTC’s Proposed Noncompete Ban
- There was an avalanche of posts and client alerts by the legal community as they tried to get their arms around the FTC’s unprecedented Thursday announcement. However, several posts/client alerts stood out and any one of these will get you what you need to know at this early juncture: posts by Berman Fink & Van Horn, Fisher & Phillips, Epstein Becker, Goodwin Procter and Seyfarth balanced brevity with key points for employers. And Yahoo’s Alexis Keenan has a surprisingly good article describing the potential legal hurdles that the proposed rule will need to overcome.
- As for media coverage, the predictable battle lines are being drawn, ensuring the debate over the FTC’s proposed rule will be a “rough and tumble” one; as my father-in-law always tells me, “when emotion is high, logic is low.” For example, The Wall Street Journal’s Editorial Board expressed concern that the FTC’s rule was a payback to “Big Labor.” Contrast that to how a writer for Slate reacted to the news of the proposed rule, labeling noncompetes a “scourge.”
Important Trade Secret Developments and End-of-Year Summaries:
- Yes, I know, everyone feels compelled to say the past year was important for their industry to lure in their readers and listeners for their end-of-year blog or podcast. But 2022 really was a significant year in trade secret law. Lots of big verdicts, legislation galore, the FTC showing its muscle, and the continuing preeminence of the DTSA, just to name a few developments. For those looking for fine summaries of 2022’s developments, start with Jim Pooley’s recent guest post summarizing key rulings in 2022 for the IP Watchdog, Epstein Becker’s Peter Steinmeyer, Erik Weibust, Kate Rigby and Millier Warner’s Spilling Secrets Podcast detailing 2022’s top developments, Vicki Cundiff and David Almeling’s post in Law 360 detailing the outstanding work done in the Sedona Trade Secret Working Group’s Commentaries, and of course, last but not least, the 2022 Annual Review by the Three Amigos (Russell Beck, Ben Fink and yours truly).
- Russell Beck has published two posts (here and here) detailing the long history of trade secrets, starting with their protection in Roman times to today. Sadly, Russell’s second post falls for the canard that one of our founding fathers, the heroic Sam Slater, was a trade secret miscreant. More on that debate later.
- Can’t get enough of AI and trade secrets? See the latest from Karen Odash and David Walton for Fisher & Phillips Insights Blog.
Pending Federal Trade Secret Legislation-The Protecting American Intellectual Property Act:
- A bipartisan bill called The Protecting American Intellectual Property Act (PAIPA) has been presented to President Bident for his signature. Broadly speaking, the PAIPA would require the President to identify various international misappropriation offenders to Congress, and inclusion on that list could trigger various sanctions against those companies and individuals. The PAIPA appears to be an updated version of a bill that Jim Pooley criticized in 2021; in his post, Jim invoked the law of unintended consequences and warned that the previous bill might not effectively deter trade secret theft, and worse, it could result in copycat legislation in China with considerably more teeth and consequence for American companies.
Restrictive Covenant Cases and Posts from around the United States:
- No-recruit agreements, which are restrictive covenants that forbid a former employee from soliciting his/her former colleagues, are a hot topic in many jurisdictions. Russell Beck has a post in his Fair Competition Law Blog about a series of recent decisions by Massachusetts courts struggling with the type of legitimate business interest (Trade secrets? Customer goodwill? Confidential information regarding those employees?) that would be necessary to justify this form of restrictive covenant.
- The “janitor rule” is alive and well in Georgia, at least according to the U.S. District Court for the Southern District of Georgia. In Amspec, LLC v. Calhoun et al, the District Court found that the employer’s noncompete forbidding the departing employees from working “in any capacity” was unreasonable as a matter of Georgia law. For more on the case, see Jeffrey Mokotoff’s noncompete client alert for Ford Harrison.
- For companies with multiple offices in multiple states, because restrictive covenant law from state to state can vary so, a single misstep may prove fatal. To that end, Parker Poe’s Zach Vanstett has an article reminding readers of the importance of consideration for restrictive covenants in North Carolina.
- And while we’re on the topic of differences between states, note that Alabama and Louisiana require that a person be an employee when he/she signs a noncompete or the agreement is not enforceable. For more on the wackiness that might ensue when a prospective employee signs a restrictive covenant in those two states, see Bradley Arant’s J. William Manuel, John Rodgers and Anne Yuengert’s client alert.
For the In-House Lawyers:
- Looking to avoid having your license agreement implode like Ford Motor Company’s did recently in its trial against Versata? Then look no further than Crowell & Moring’s Mariam Sarwar and Anne Li’s post for Law360. Mariam and Anne provide multiple recommendations to licensees, including cautioning against including broad prohibitions against reverse engineering in the agreement, and taking steps post-license to wall off employees involved in the licensed technology.
- It’s always helpful to have a checklist for a departing employee’s exit interview, and Arent Fox’s Matthew Prewitt and Lauren Schaefer identify the 5 pitfalls every employer wants to avoid.
- If you are advising a manufacturer of custom products and want to ensure the protection of their manufacturing processes as trade secrets, then you should check out Jackson Lewis lawyers James Stone and Zachary Ahonen’s article for Lexology. The article has a good summary of specific cases considering trade secret claims of manufacturers, including some cases where the court found the manufacturer had failed to adequately protect those trade secrets.
- Drafting a forum selection clause with parties outside the U.S.? Then you should review Jesse Mondray’s post detailing drafting errors and ambiguities that led to litigation over those forum selection clauses in Harris Bricken’s China Law Blog.
For the Litigators:
- The public interest factor necessary for an injunction generally gets little more than lip service by a court and parties. However, a recent post by Mintz lawyers Andrew DeVoogd, Gabriella Flick and Serge Subach discusses a patent opinion, Siemens Gamesa Renewable Energy v. General Electric, that departs from that custom. In that opinion, District Court Judge William Young of the U.S. District Court for the District of Massachusetts emphasized the public interest prong (in particular, his concern over climate change) to justify carveouts for the defendant in his injunction.
- This shouldn’t come as a surprise but a 10-month delay in seeking a TRO can prove fatal. In Shenzhen Chengront Technology Co., Ltd v. Besign Direct et al, U.S. District Court Judge Jennifer Rochon for the Southern District of New York declined an ex parte TRO request in a patent infringement case on the grounds of laches. According to Eric Caliguri’s post in The IP Law Blog, Judge Rochon reasoned even if the plaintiff and defendants were attempting to resolve the dispute for 10 months (as the plaintiff claimed), or the plaintiff was looking for counsel, the significant delay supported the inference that plaintiff was not being irreparably harmed by the defendants’ actions.
- Litigation funding is an important development for some trade secret owners who lack the means to pay for expensive litigation. Those considering using a litigation funder and interested in knowing what disclosures they may need to make should read the 80+ page opinion by Chief Judge Colm Connolly of the U.S. District Court for Delaware, who was most unhappy about the disclosure of litigation funding in several patent cases pending before him. Reuters’ Alison Frankel has an article describing what has been called an “inquisition” which also has a link to the opinion.