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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.

Federal Legislative Developments including the Protecting American Intellectual Property Act and Recent Federal Noncompete Legislation:

  • As the FTC’s proposed ban potentially stalls, bipartisan support for some kind of federal legislation banning or limiting noncompetes has begun to mount. Two bipartisan bills have been recently reintroduced in the Senate, according to Neal Winrich of Berman Fink & Van Horn. On January 31, 2023, Senator Chris Murphy (D-CT) and House Representative Mike Garcia (R-CA) announced their intention to reintroduce the Workforce Mobility Act. According to Neal, that bill would ban the enforcement of most noncompetes, though it would not go as far as the rule proposed by the FTC. And early last week, Senator Marco Rubio (R-FL) and Senator Maggie Hassan (D-NH) reintroduced a narrower bill called the Freedom to Compete Act targeted at protecting low-wage workers from noncompetes.
  • On January 5, 2023, President Biden signed the Protecting American Intellectual Property Act (PAIPA) into law. As I wrote in my wrap-up post last month, this appears to be a legislative retread of a 2021 bill that imposes sanctions on foreign companies and individuals believed to be linked to misappropriation of American company’s trade secrets. While some commentators applauded its passage, Jim Pooley has renewed his previous criticisms in a recent post for The IP Watchdog that this legislation will simply inspire similar copycat legislation and sanctions from foreign countries (i.e., China) which will be more severe than those imposed by the United States.

China, Spying and Risks to U.S. Trade Secrets and Intellectual Property:

  • Moving away from trade secret legislation directed at China, the recent balloon imbroglio (I half expected Wile E. Coyote to fall out of the balloon and have an anvil land on his head) has exacerbated tensions between the U.S. and China. A timely post in Dan Harris’ China Law Blog talks about the extent of China’s economic espionage and spying and how it is evolving.

Notable DTSA and Federal Trade Secret Opinions and Posts:

  • If you are thinking of asserting a bad faith counterclaim for attorneys’ fees under the DTSA or your state’s version of the UTSA, you should first review a recent opinion by the U.S. District Court for the District of Minnesota. In Schwan’s Co. v. Cai, District Court Judge John Tuhnheim dismissed a bad faith counterclaim for attorneys’ fees, reasoning that under Minnesota’s version of the UTSA, no such claim existed under the language of that statute. As for the DTSA bad faith claim, the District Court held that claim failed because the defendant could not plausibly assert the necessary subjective and objective speciousness requirements, which could only be established at the conclusion of the case if the defendant is successful.
  • Wondering if your liquidated damages provision will hold up in a trade secrets dispute? Then you may be interested in the U.S. Court of Appeals for the Eleventh Circuit’s opinion in SIS LLC v. Stoneridge Software Inc. et al., Case Number 21-13567. The trade secret case involved two technology companies who once attempted to work together and the enforceability of a liquidated damages provision in their agreement. The Eleventh Circuit refused to enforce the liquidated damages provision, reasoning that rather than applying and estimating the plaintiff’s lost profits, the liquidated damages provision simply imposed a rigid formula and therefore amounted to an improper penalty under Georgia law. For more on the decision, check out Eric Barton’s post for Seyfarth’s Trading Secrets Blog.
  • You think you had a bad day? Take a look at the ruling against the plaintiff in Nutmeg Gaming & Bingo Prods. v. Abbott Prods. In its opinion rejecting the request for a preliminary injunction, the U.S. District Court for Connecticut issued numerous grounds for its denial, including a finding that the plaintiff failed to establish irreparable injury because it tried to simply rely on a provision that the parties agreed that irreparable injury would be present if there were a violation (thanks to Vicki Cundiff for bringing this opinion to my attention).

Recent State Trade Secret and Restrictive Law Cases and Developments:

  • PegaSystems’ appeal of the $2 billion jury verdict against it in Fairfax County, Virginia was recently bolstered by an amicus brief filed by the American Intellectual Property Law Association (AIPLA). In its amicus brief, the AIPLA expresses concern over how the trial court instructed the jury on Appian’s unjust enrichment claim; specifically, that instruction may have created confusion by inadvertently shifting the burden of demonstrating those unjust enrichment damages from the plaintiff Appian to the defendant PegaSystems. Given the volatility and emotion of trade secrets cases, straightforward and unambiguous jury instructions making clear that the plaintiff, not the defendant, has the burden of proof are critical, particularly as unjust enrichment theories appear to be emerging as the preferred theory for damages in trade secrets cases.

State Legislative Developments:

For the In-House Lawyers:

  • Fisher & Phillips’ Barbara Jean D’Aquila has written an excellent analysis of the considerations and measures that companies should be weighing for potential insider threats to confidential information.
  • An employer’s BYOD policy and program is an important safeguard for protecting trade secrets and confidential information. For a good primer on the competing cybersecurity and privacy interests and some recommended best practices, check out the Norton Rose and Fulbright blog post by Liana Di Giorgio, Marisa Kwan, Joseph Cohen-Lyons and Curtis Armstrong.
  • What lessons do the recent politician’s imbroglios over classified documents provide to departing CEOs? Check your bags and your desks to avoid unnecessary trade secret disputes, writes Michael Peregrine for Forbes.

For the Litigators:

  • In his Patently O Blog, Dennis Crouch has a post reminding litigators of the importance of prevailing at the trial court level on any disputes over a protective order and the challenge of appealing from an adverse ruling. In Modern Font Applications, LLC v. Alaska Airlines, Inc., Alaskia Airlines refused to allow Modern Font’s in-house counsel to review the source code it disclosed in discovery.  The Utah magistrate judge and District Court agreed, finding that the Modern Font in-house counsel was a competitive decisionmaker and refused to modify the standard protective order to allow access.  On this point, the court concluded that Modern Font’s key business activity is IP licensing, and the in-house counsel is intimately involved with that activity.