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 firstname.lastname@example.org (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.”
Noteworthy Trade Secret Discovery Opinions:
- The forensic review of a former employee or business partner’s computer is one of the most intrusive and contentious discovery procedures in trade secret litigation. An opinion issued by the U.S. District Court for the District of Columbia illustrates the many challenges that a court faces when the parties can’t reach agreement on a protocol for that review. In Bioconvergence LLC v. Attariwalla, Judge Rudolph Contreras encountered an interesting twist: a forensic review of the computer of the defendant’s spouse.
- Are communications with the FBI about an opposing party privileged? Not in my court, ruled Magistrate Judge Thomas Farrish in Pfizer, Inc. v. Regor Therapeutics, Inc. pending in the U.S. District Court of Connecticut. Magistrate Farrish found any privilege attaching to the FBI communications was waived because they were not in response to a request by government officials but rather appeared to be intended “to incite [the government] to attack the informant’s adversary.”
The Latest on the FTC and Other Regulatory Actions:
- You’re traveling through another dimension, a dimension not only of sight and sound, but one without noncompetes. Jim Pooley will serve as your guide as you enter this Twilight Zone (which sounds suspiciously like a dimension run by the FTC, or even worse, California). In Jim’s most recent post for The IP Watchdog, Jim provides advice about preparing for a world without noncompetes that every employer should follow (narrow NDAs, strengthening relationships with employees).
- The FTC has generously extended the time for comments to its proposed ban by thirty days to April 19, 2023, reports Russell Beck in his Fair Competition Blog.
- Anyone remember Gladys Kravitz? The busybody neighbor in the 1960s Bewitched TV series who was always peering through the curtain of her window snooping to find out what was going on at her Wicken neighbor Elizabeth Montgomery’s home? Well, according to Russell, a couple of senators are doing their best imitation of Gladys, demanding that the U.S. Chamber of Commerce disclose its legal basis for its recent objection to the FTC’s proposed ban as well as a list of its donors by March 13. Expect a response from the Chamber similar to this one.
- Blog posts and articles on the FTC’s proposed rule have flooded the internet. But one that really stands out is Jackson Lewis’ Erik Winton, Clifford Atlas, Daniel Thornton and Daniel Doron’s analysis of how the FTC has deviated from its own workshops and from its own experts in formulating its proposed ban.
- The analysis of Professor Evan Starr, one of the foremost researchers on the economic impact of noncompetes, figured prominently in the FTC’s reasoning for its proposed ban. Evan has a new paper out, “Do Firms Value Court Enforceability of Noncompete Agreements? A Revealed Preference Approach.” The paper’s focus is on the extent to which companies value the ability to enforce noncompetes for workers earning less than $100K. For Evan’s take on his research and its impact on the FTC’s proposed rule, check out our interview of Evan for the Fairly Competing podcast last month.
- Leave it to a Buckeye to see the FTC proposed ban through the lens of a college football fan. Ken Winkler of Berman Fink & Van Horn, and a proud graduate of THE Ohio State University, ponders the impact a ban would have on the contracts of coaches and (gasp!) players.
- In the latest episode of “Regulators Gone Wild,” the National Labor Review Board (NLRB) ruled last month that the proffer of a draft severance agreement containing broad confidentiality and non-disparagement provisions violated the National Labor Relations Act. For more on this decision, see Epstein Becker’s post in its Trade Secrets & Employee Mobility Blog and Seyfarth’s take on the decision in its Trading Secrets Blog.
- Is the next wave of regulatory action against NDAs likely to come from state attorney generals? Hugo Glazman thinks so in an article for ALM Benefits Pro.
China and Trade Secrets:
- Last year, the Biden administration announced it was going to discontinue the so-called China Initiative that the Department of Justice (DOJ) launched in 2018 to combat identified threats to the U.S. from China, including economic espionage and trade secret theft. However, according to a Lexology post by Dechert, reports of the China Initiative’s death have been greatly exaggerated. According to Dechert, “[f]ar from discontinuing its focus on a perceived Chinese threat, the DOJ has simply refocused its efforts away from prosecuting Chinese academics towards more substantial Chinese threats like economic espionage, export control and sanctions violations, and technology theft.”
State Restrictive Covenant Decisions:
- The influential Delaware Chancery Court continues to trend against noncompetes. As I reported last November, the Chancery Court declined to enforce a noncompete accompanying the sale of a business and most recently, the Chancery Court declined to enforce restrictive covenant and forfeiture provisions in a limited partnership agreement. In Ainslie v. Cantor Fitzgerald, L.P., No. 9436-VCZ, 2023 WL 106924 (Del. Ch. Jan. 4, 2023), the Chancery Court found the covenants to be “facially overbroad” and declined to “blue pencil” those provisions; it also applied Delaware’s reasonableness test to invalidate a forfeiture provision requiring a return of capital and deferred compensation if the employee violated his restrictive covenants. For more on the decision, see Paul Hastings’ Jenifer Baldocchi, Kenneth Gage, Christopher Sheaffer and Samuel Domjen’s post.
- Make sure your restrictive covenants have assignment clauses. That’s the lesson from Intertek Asset Integrity Management, where Texas’ Twelfth Court of Appeals held the purchaser of a business could not enforce an employee’s noncompete because the underlying employment agreement lacked an assignment clause. For more on that case, see Alexandria Amerine and Jonathan Clark’s post for Sheppard Mullins’ Labor and Employment Law Blog.
State Legislative Developments:
- Apparently banning noncompetes isn’t good enough in California. Assembly Member Kevin McCarty has introduced AB 747 which would impose penalties on employers and their attorneys if they attempt to enforce a noncompete, as detailed in Ogletree Deakin’s Thomas McInerny’s recent post. According to Tom, attorneys could be burned at the stake (just kidding!) and face suspension, disbarment, or other discipline by the State Bar of California for presenting an employee or prospective employee with a covenant not to compete or attempting to enforce a covenant not to compete.
- Indiana’s Senate passed a ban on physician noncompetes last month reports Leslie Benita Muniiz for InkFreeNews.
Litigation Funders Beware!
- Chief Judge Colm Connolly’s opinion requiring fulsome disclosures by litigation funders continues to roil the Delaware federal court, writes Jonathan Stroud in a guest post for Patently-O. And that ruling may be driving non-practicing entities and litigation funders away from Delaware to Texas, according to Angela Morris in an article for IAM.
- Want to persuade a litigation funder to help you with your trade secrets case? Then make sure that your case can meet the considerations listed in this article for the Litigation Funders Journal.
Other Noteworthy Posts:
- There has been no bigger advocate of the importance of trade secret audits than Mark Halligan and his latest article in Mondaq provides the basics for companies interested in automating their trade secret auditing process.