The issue of trade secret identification, on its face, seems like an elementary and uncontroversial one. In concept, every trade secret plaintiff should be expected to identify the trade secrets in the lawsuit it brings. After all, the plaintiff knows best what it considers to be a trade secret and what it doesn’t consider to be a trade secret, and the defendant shouldn’t be left to guess what those trade secrets might be. For these and other reasons, California, a key bellwether state for trade secret law, has long required by statute that a party claiming trade secret misappropriation identify those trade secrets with specificity before being permitted to conduct discovery relating to its trade secret claim. However, nothing tests the limits of common sense like the realities of litigation, and plaintiffs in California have complained that this procedure has been misused by defendants to frustrate or derail otherwise meritorious trade secret cases. Perhaps for these reasons, courts outside California remain divided over the so-called California rule as several recent rulings have demonstrated. Continue Reading Are Other States Following California’s Lead On Trade Secret Identification?
Here are the noteworthy trade secret and restrictive covenant posts from September and some of October:
- Massachusetts is once again contemplating multiple bills regarding non-competes as well as a possible adoption of what appears to be the DTSA advises Russell Beck in his Fair Competition Blog. Russell and his team also have summaries of legislative activity in Maryland, Maine, Michigan, New York, Oregon, Pennsylvania, Washington and West Virginia, among others.
Trade Secret and Non-Compete Cases. Posts and Articles:
- The reaction from the trade secret community to the recently-released Obama IP Strategy Report has been one of disappointment. Expectations soared after the Obama administration announced its trade secrets initiative in February but the recent Report barely mentions trade secrets. In a post for Orrick’s Trade Secrets Watch, Michael Spillner notes the strategy’s need for a civil cause of action. Likewise, Misty Blair of Seyfarth Shaw’s Trading Secrets Blog observes the Report’s failure to address trade secret protection more comprehensively as “a bit of a surprise.”
- “Illinois Appellate Court Requires Two Years of Employment for Postemployment Restrictive Covenants” reports Stacey Smiricky and Trina Taylor of Faegre Baker & Daniels for Lexology. Epstein Becker’s Trade Secrets & Noncompete Blog and Seyfarth Shaw’s Trading Secrets Blog also have posts on the decision. And Kenneth Vanko unloads on the decision in his Legal Developments in Non-Competition Agreements Blog.
- In “Contractual Override of Trade Secret Law,” Dennis Crouch details a recent Federal Circuit decision in his Patently-O Blog affirming a New York federal court’s holding that a non-disclosure agreement’s requirement that confidential information be specifically designated trumped state trade secret law holding otherwise. As a result of the plaintiff’s failure to designate the information as “confidential” under the NDA, the court applied California law and held the information could not qualify as a trade secret. Lesson? Don’t include this language in your NDA, because in my experience, parties rarely have the time (or inclination) to designate each and every piece of information as “confidential.”
- “Are An Employer’s Business Plans Discoverable In Non-Compete Litigation?” asks Jason Cornell of Fox Rothschild about a case in Ohio for Mondaq.
- “New Jersey Federal Court Allows Non-Party to Employment/Non-Compete Agreement to Invoke Arbitration Clause,” advises David Walsh for Jackson Lewis’ Non-Compete & Trade Secret Report Blog.
- “China Worries Improve Prospects Of Trade Secrets Bill” reports Ryan Davis for Law360.
- “Chemical, oil companies fear potential EPA rule will expose trade secrets” advises Julian Hattem for The Hill.
- “Face It: Judges Sometimes Hate Competition Cases” delivers Kenneth Vanko in a bit of hard of truth in his Legal Developments in Non-Competition Agreements Blog.
- “Answers To Your Questions On Noncompete Agreements” provides Donna Ballman for her Screw You Guys, I’m Going Home Blog.
- “Detecting Insider Threats to Trade Secrets” advises Catherine Dunn for Corporate Counsel.
- If you don’t have a non-compete with a Chinese employee, don’t expect to restrain him or her advises the China Bridge IP Law Commentary Blog. In “Why China Supreme Court Agreed with Resigned Employees Establishing Competing Businesses?,” Luo Yanjie details a recent high court ruling explaining Chinese law on this issue.
- For The Wall Street Journal’s take on the recent indictment of Chinese turbine manufacturer Sinovel, see “U.S. Looks to Blunt Corporate Espionage by Chinese Firms.”
- “Best Practices For Enforcing Restrictive Covenants” advises Susan Trench of Arnstein & Lehr for Law360.
Cybersecurity Posts and Articles:
- “Beware the Internet and the danger of cyberattacks,” warns Robert Samuelson for The Washington Post.
- “NSA revelations throw wrench into lawmakers’ cybersecurity push” advises Brendan Sasso for The Hill.
- “5 Ways to Boost Your Company’s Cybersecurity Strategy” recommends Catherine Dunn for Corporate Counsel.
Computer Fraud & Abuse Act Articles, Cases and Posts:
- “You May Not Like Weev, But Your Online Freedom Depends on His Appeal” advises Wired on the appeal of Andrew Aurnheimer of his CFAA conviction.
- “There Is Now a Split Within the District of Massachusetts over the Proper Interpretation of the Computer Fraud and Abuse Act” announces Brian Bialas for Foley & Hoag’s Massachusetts Noncompete Law Blog.
Have a happy and safe Fourth of July!
Trade Secret and Non-Compete Posts and Articles:
- Good advice from Josh Durham: “Use Covenants Not To Compete To Protect Legitimate Business Interests, Not Just Because You’re Scared Of A Little Competition.” In his post for Poyner Spruill’s Under Lock & Key Blog, Josh recounts the holding of a recent North Carolina case, Phelps Staffing LLC v. CT Phelps, Inc., in which the court found that a non-compete involving temporary staffing employeees lacked a legitimate business interest to justify the restraint. It is an important reminder to companies to ensure that their non-competes be narrowly tailored to protect interests that actually arise from the former employee’s employment.
- Sergey Aleynikov will stand trial a second time, this time in New York State’s Supreme Court, for the alleged theft of Goldman Sachs’ trade secrets, reports The Wall Street Journal and Law360. Judge Ronald Zweibel ruled that the state charges were not barred by the dismissal of his federal conviction under the Economic Espionage Act last year by the U.S. Court of Appeals for the Second Circuit. (For more on the Aleynikov saga, see my posts here and here).
- For more on the Ohio Supreme Court’s recent holding that rental payments are trade secret, see Todd Sullivan’s take in his Trade Secrets Blog. Todd notes the incongruity in the Court’s reasoning that disclosure of the trade secrets would lead to a “poisonous” tenant environment, despite the fact that it noted later in its opinion that the landlord’s expert said tenants were incentivized not to share rental information. (My post on the case can be found here).
- “Pushing Back Against Restrictive Covenants in Physician Agreements” advocates Mark Gisler as he questions whether non-competes violate the American Medical Association’s code of ethics.
- “Illinois Federal Court Issues Preliminary Injunction Prohibiting Use Of Misappropriated Trade Secrets But Rejects Request For Expanded Injunction Based On Alleged “Inevitable Disclosure” reports Paul Frehling for Seyfarth Shaw’s Trading Secrets Blog.
- “Florida Court Reverses Preliminary Injunction on Restrictive Covenant,” reports Peter Vilmos for Burr & Forman’s Non-Compete Trade Secrets Law Blog. Eric Ostroff also has a post on the case in his Trade Secrets Law Blog.
- “When a Restriction on Soliciting “Prospective” Customers Is Unreasonable (and How to Fix It),” recommends Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
- “Never Bring a Knife to a Gun Fight: One Simple Weapon to Fight Economic Espionage in a Cyberspace World,” warns Hayden J. Silver III for Womble Carlyle for The Compass.
- “Why intellectual property theft is everyone’s problem,” remind Texas U.S. Attorneys Sarah Saldana and John M. Bales for The Dallas Morning News.
- “Does social media change the meaning of “solicitation”? How to prevent ex-employees from using social networks to lure employees or customers” recommends Jon Hyman for Inside Counsel.
- “Why Abuse of Discretion Matters to Employers (Non-Compete),” advises Rob Radcliff for his Smooth Transitions Blog.
- “Trade Secret “Inevitable Disclosure” Doctrine Taking Shape in North Carolina,” advises Betsy Cook Lanzen of Womble Carlyle for The National Law Journal.
Cybersecurity Posts and Articles:
- “Reflections On Recent Cybersecurity Developments,” ponder David N. Fagan, John K. Veroneau, Robert Nichols and Kristen E. Eichensehr of Covington & Burling LLP for Law360.
- “The War On Cybercrime: How Far Can You Go?” posits Gabriel Ramsey, Mark Mermelstein and James Hsaio of Orrick for Corporate Counsel.
- “Is the Specter of a Cyber Cold War Real?” asks James McGregor for The Atlantic.
- “Law firm fell victim to phishing scam, precipitating $336K overseas wire transfer, bank suit alleges,” reports Debra Cassens Weis for The ABA Journal’s Law News Now.
- “Looking at the Future of Cybersecurity,” predicts Sue Reisinger for Corporate Counsel.
Computer Fraud and Abuse Act Posts and Cases:
- Looking for a post-mortem on the recent CFAA trial of David Nosal? Then check out “In Executive’s Trade Secret Prosecution, a Company’s Outsized Role,” by Vanessa Blum who covered the trial for The Recorder, Venkat Balasubrumani’s post in the Technology & Marketing Law Blog and Daniel Joshua Salinas’ post for Seyfarth Shaw’s Trading Secrets Blog.
- Earlier this week, The Washington Post ran a front-page story, “As cyberthreats mount, hacker’s conviction underscores criticism of government overreach,” detailing the prosecution of hacker Andrew Auernheimer.
- Similarly, The ABA Journal has drawn attention to efforts to reform the CFAA, in an article “Hacker’s Hell: Many want to narrow the Computer Fraud and Abuse Act,” by Stephanie Francis Ward.
Should confidential information shared with a customer lose its trade secret status if it is not accompanied by a confidentiality agreement? Courts are split on this tricky issue, but in State Ex Rel. Lukens v. Corporation for Findlay Market of Cincinnati, the Ohio Supreme Court ruled last week that, in the context of a commercial lease, information shared with tenants (i.e., customers) does not require a confidentiality agreement. (A PDF copy of the opinion can be found below).
Background: The lawsuit was filed by Kevin Luken, an attorney and brother of Mike Luken, proprietor of Luken’s Poultry, Fish & Seafood, a longtime vendor at the Findlay Market in Cincinnati, a popular public market in Cincinnati. According a local media report, Luken sought the records for the sake of “accountability” because he “wanted to see if he was being charged the same rent as his competitors in the historic market.”
Luken requested copies of those leases through a public records request with the City of Cincinnati, but the rental amounts were redacted in the city’s response. The market facility is owned by the City of Cincinnati and managed by the nonprofit Corporation for Findlay Market (the Findlay Market).
Luken filed a writ of mandamus to compel production of the redacted rental information but the First Appellate District located in Cincinnati denied that public records request, reasoning it was protected from disclosure under Ohio’s public records laws because it qualified as a trade secret.
On appeal, the Ohio Supreme Court affirmed that the rental information was a trade secret, focusing on two issues. First, the Supreme Court agreed with the Findlay Market that the rental information was potentially valuable to competitors. The Findlay Market presented expert testimony that the term and rental rate for subleases in the commercial context are secrets closely guarded by property managers and that knowledge of these items about competitors would be “invaluable” to competitors.
The Supreme Court appeared to accept a policy argument — that public disclosure of this information would impair the landlord’s ability to get and keep tenants and “create a poisonous environment” among the tenants, who would inevitably compare notes. Disclosure of the information, therefore, would put the Findlay Market at a competitive disadvantage.
The second point, was in the Court’s view, a “close call” — namely, whether the Findlay Market had taken sufficient precautions to safeguard its trade secrets. Luken presented evidence that the Findlay Market failed to get acknowledgements or agreements from tenants that the terms of the leases were confidential, as well as evidence that some tenants shared the rental terms with vendors.
Nevertheless, the Supreme Court found that the Findlay Market’s actions were adequate to safeguard the trade secrets under industry standards. The Findlay Market kept the only unredacted copies of the leases in a locked fling cabinet and limited access to employees on a need-to-know basis. Significantly, Findlay Market’s expert provided unrefuted testimony that the precautions used by Findlay Market were standard for commercial property managers. The expert further testified that customers were unlikely to share the information because they realized it was to their benefit not to disclose. On this record, the Supreme Court found that Findlay Market had met its burden.
The Takeaways? First, in essence, sharing information with a customer or client does not waive trade secret status; this common sense notion seemed to predominate the Supreme Court’s analysis. Businesses should not be expected to get non-disclosure agreements from their customers over pricing. Given the inherent sensitivities of customer relationships, it should not surprise anyone that a business might not demand confidentiality as a condition of doing business.
Second, given the relatively weak safeguards undertaken by the Findlay Market, expert testimony proved to be critical in this dispute. That testimony assuaged the Supreme Court’s concerns about those efforts as it was heavily rooted on what was standard for the industry. In some respects, this makes sense, as determining what is reasonable may frequently require examining what others in an industry do in similar circumstances. However, it begs the question that if no one treats the information as a trade secret, is it entitled to protection?
Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:
Trade Secret and Non-Compete Posts and Articles:
- As many of you know, the Obama Administration has invited public comments on possible federal trade secret legislation by April 22, 2013. Peter Toren has posted his letter and comments to the Administration on his blog and I would commend everyone to review them and to get their own comments to the Administration if they favor a federal trade secret statute. I am hoping to get my letter and comments finished and posted as well by the end of the week.
- Similarly, in “Obama Administration’s Request for Public Comment on Trade Secrets Law Underscores Importance for Companies to Protect Their Proprietary Assets Now,” Robert Milligan has a fine summary on a recent American Bar Association resolution supporting a federal trade secrets civil cause of action in Seyfarth Shaw’s Trading Secrets Blog.
- The dismissal of Macy’s breach-of-confidentiality-agreement claim against Martha Stewart Living Omnimedia generated some headlines last week. Bloomberg has a nice summary of the decision, which was issued from the bench.
- “Dispute Involving 3-D Printers And Covenant Not To Compete Proves That Details Matter,” advises Josh Durham for Poyner Spruills’ Under Lock & Key Blog.
- “Devicor, Major Player in Medical Device Industry, Loses Non-Compete Case Against Former Employee,” reports Jonathan Pollard for the non-compete blog.
- “Employees still use online file sharing, even if companies prohibit its use,” warns Lucas Mearian for ComputerWorld.
- “Protecting Trade Secrets: How many shades of gray do you need to count?” asks Neil Wilkoff for IP Finance.
- “6th Circuit Addresses Reasonable Protection of Trade Secrets,” advises Eric Ostroff in his Trade Secrets Law Blog.
- “Nebraska Court Addresses Meaning of ‘Solicitation’ in Non-Compete Agreement,” reports Ken Wentz for Jackson Lewis’ Non-Compete & Trade Secrets Reporter.
- “Why Courts Like Non-Solicits over Non-Competes,” advises Rob Radcliff in his Smooth Transitions Blog.
- “No-Hire Provisions In Settlement and Commercial Agreements — Are they Legal?” asks Robert Goldstein for Epstein Becker’s Trade Secrets & Non-Compete Blog.
- “Does the Alabama Trade Secrets Act Limit Remedies for Theft of Information?” asks Gill Egan for Burr & Forman’s Non-Compete Trade Secrets Blog.
- “Settlements (Part 2 of 3): 5 Reasons Non-Compete Cases Should (and Do) Settle,” advises Kenneth Vanko in his Legal Developments in Non-Competition Agreements.
Cybersecurity Posts and Articles:
- In “Civil Liberties Fears Dooms House Cybersecurity Bill,” The New York Times Bits Blog reports that President Obama is threatening to veto CISPA because of privacy concerns.
- “Amendments to CISPA a Threat to Cybersecurity?” asks Stewart Baker in Covington’s Cyberblog.
- “Spending Bill’s China Cybersecurity Provision Is Unclear,” advises H. Deen Kaplan, Thomas L. McGovern and Harriet P. Pearson, Hogan Lovells LLP for Law360.
- “King & Spalding Blocks Email Access Amid Security Concerns,” reports Beth Winegarner for Law360.
Computer Fraud and Abuse Act Posts and Cases:
- “Shameful: Tech Companies Fighting Against Necessary CFAA Reform And CISPA Fixes,” complains TechCrunch.
- “Hacking the Law: Fights Over Cyber-Security and a Silicon Valley Divide,” reports Rachel Swan for SFWeekly.
- “Amending the Computer Fraud and Abuse Act,” proposes Peter Toren for Bloomberg.
- For the latest on developments in the U.S. v. Nosal trial, see “Ex-KFI Worker Recounts Trade Secret Theft In Hacking Trial’ by Beth Winegarner for Law360 and “Prosecutors Get Key Testimony From Ex-Lover in Hacking Trial,” by Vanessa Blum for The Recorder.
A salesman’s solicitation of his former clients, coupled with his previous access to trade secrets, has led to enforcement of a non-compete spanning six states. In FirstEnergy Solutions v. Flerick, the U.S. Court of Appeals for the Sixth Circuit applied a deferential review of the Ohio district court’s opinion enforcing that one-year non-compete. A PDF copy of the opinion can be found below.
Background: Paul Flerick was a salesman for FirstEnergy. While negotiating the terms of his employment with FirstEnergy, Flerick expressed concerns about the proposed noncompete and attempted to negotiate a revision that would allow him to work for a competitor after leaving FirstEnergy as long as he did not directly contact FirstEnergy’s customers. FirstEnergy refused, telling him that it was a “[c]ondition of hire.” Flerick eventually capitulated and signed the agreement.
After receiving a negative review and reassignment, Flerick joined Reliant Energy, a competitor of FirstEnergy. After his resignation, FirstEnergy reminded him about his noncompete clause, and Flerick said that it would not be an issue. When asked about his plans, he declined to provide any information. Flerick was required to and did return all company-issued electronic devices and all company documents.
When FirstEnergy learned that Flerick was working for Reliant, it sent Flerick a cease-and-desist letter. Reliant’s counsel replied and indicated that Flerick did not possess any confidential information, had not solicited any customers to whom he sold electricity in the year before he left FirstEnergy, and that the provision prohibiting Flerick from working for a competitor was overly broad and unenforceable.
After suing Flerick, FirstEnergy learned (and the District Court found) that Flerick had improperly solicited his largest customer from First Energy (Duke Realty) and that he also improperly contacted other FirstEnergy customers in Pennsylvania, New Jersey, Ohio and Maryland through intermediaries.
The U.S. District Court for the Northern District of Ohio enforced the non-compete reasoning that Flerick had breached it by soliciting his former customers and because he still possessed confidential information that he had obtained while employed by First Energy. The court enforced the non-compete for the full year and in the six states in which First Energy did business.
Last week, the Sixth Circuit affirmed that injunction, ruling that under Ohio state law, violation of the non-compete when coupled with the possession of confidential information was enough to warrant enforcement of that non-compete clause, even one over six states. Applying a very deferential review, the Sixth Circuit emphasized repeatedly the improper solicitations of former clients by Flerick as well as the fact that Flerick understood that the non-compete was a condition of employment. The Sixth Circuit reasoned that Flerick was free to operate in five other states in which FirstEnergy did not do business and was not unduly harmed by the injunction.
The Takeaway: First, it appears that Flerick’s counsel tried the IBM v. Visentin defense — i.e., arguing that efforts to safeguard the legitimate protectible interests of FirstEnergy would obviate the need for a non-compete. However, that effort was doomed by subsequent disclosure that Flerick had improperly solicited FirstEnergy’s clients.
Second, this opinion demonstrates the deferential review accorded a trial court in injunctive relief proceedings and the importance of prevailing at the trial court level. The trial court was clearly unhappy about Flerick’s solicitation of his former customers and enforcement of a non-compete throughout six states seems severe. However, the Sixth Circuit refused to disturb the injunction.
Finally, I have to confess I was disappointed with the Sixth Circuit’s further justification for the non-compete because of Flerick’s exposure to trade secrets of First Energy. Extended to its logical conclusion, any non-compete would be fully enforceable on this basis because most employees are inevitably exposed to confidential information of their former employer. Had the Sixth Circuit simply left the need to protect customer relationships as the basis for the non-compete, it would have been more than enough since it was Flerick’s improper pursuit of those customers that drove the injunction.
7. PhoneDog v. Kravitz (U.S. Dist. Ct. for Northern Dist. of Cal.), Eagle v. Morgan (U.S. Dist. Ct. for Eastern Dist. of Penn.) and Christou v. Beatport (U.S. Dist. Ct. Col. May 2012). As employers continue to grapple with managing their employees’ use of social media, these three cases illustrate the consequences that can flow from uncertainty over who owns social media property such as a Twitter handle, a LinkedIn account or password log-in information. As trade secret claims are tougher and tougher to assert because of the inherent visibility of social media information, employers can be expected to rely more on traditional claims of ownership for social media as a result of these cases.
PhoneDog v. Kravitz and Eagle v. Morgan have both received considerable media attention as they are among the first cases to address ownership of LinkedIn and Twitter accounts. However, because they arose in situations where the employers failed to have formal policies or written agreements establishing the parameters for the ownership of social media, the employers were unable to secure conclusive determinations and forced to litigate the cases. Indeed, in the PhoneDog case, the employee was able to keep the disputed Twitter handle as part of the settlement. Ultimately, disputes like these will be less frequent as employers recognize the importance of policies and written agreements in ensuring that their social media accounts and log-in information remain their property. For more on these cases, please see my posts here and here.
6. Acordia of Ohio v. Fishel (Supreme Court of Ohio) and DePuy Orthopaedics, Inc. v. Waxman (1st App. Dist. Florida). In a year in which it became more difficult to enforce non-compete agreements, these decisions stood out because they held that in the context of a merger, non-compete provisions would survive and be enforced to the benefit of the new company. The Acordia of Ohio case raised eyebrows here in Ohio because the Ohio Supreme Court initially declined to enforce the non-compete on the grounds that the covenants at issue did not specifically provide for assignment or have language establishing that they would benefit any successor or assign of the employer. However, in a highly unusual development, the Ohio Supreme Court agreed to reconsider the decision and reversed itself in October.
5. U.S. v. Liew (U.S. Dist. Ct. for Northern Dist. of Cal.). Why is a criminal case that has not even gone to trial and in which one of the major defendants was dismissed No. 5 in the Trade Secret Litigator’s Top 10? The timing of this case and the willingness of the U.S. Department of Justice to indict a company (Pangang Group) owned by officials of the Chinese government are the reasons for its inclusion, as this case may ultimately be remembered as the tipping point in cementing the perception that China was a threat to the trade secrets of American companies.
It is important to remember that the unprecedented indictment of Pangang Group took place in February when Chinese Vice President Chair Xi Jinping was visiting the United States. Prior to that visit, complaints about the misappropriation of the trade secrets were largely perceived as anecdotal. In my view, there seemed to be a hesitancy on the part of many to complain about the perceived lack of protection of trade secrets in China, perhaps because raising these concerns might result in retaliation or that those raising them might be accused of racism.
However, about the time of that visit, leading media, including The Wall Street Journal and The New York Times ran a number of articles highlighting the complaints of many U.S. companies about the failure (or in some cases, the active participation) of the Chinese Government in cases of trade secret theft. During that visit, Vice President Joe Biden and Senator John Kerry both were reported to have expressed concern about, among other things, the complaints of their constituents about the theft of trade secrets.
In this context, the announcement of the indictment of Pangang Group signified an acknowledgement of the federal government to not only recognize the problem but take forceful action to combat it. It also served as a catalyst for media attention, which in turn brought concerns about protection of trade secrets in China to the surface.
4. American Chemical Society v. Leadscope (Ohio Supreme Court), SASCO v. Rosendin Electric (California 4th App. Dist.), MPI Release, LLC v. Loparex LLC (U.S. Dist Ct. for Southern Dist. of Indiana), and Best Medical Int’l v. Spellman (U.S. Dist. Ct. for Eastern Dist. of Pa.). These four cases highlight the increasing dangers that can arise from an ill-advised trade secret case as they all involved awards against plaintiffs who were essentially found to have brought their trade secret cases in bad faith.
The American Chemical Society case resulted in a jury verdict of over $26.5 million in compensatory and punitive damages in favor of the defendants, former employees who counterclaimed and successfully argued the underlying trade secret litigation against them was brought maliciously to destroy their company (it ultimately settled for about $20 million). In SASCO, a California appellate court affirmed a significant award of attorneys fees after a plaintiff dismissed a weak trade secrets case.
The increasing frequency of these cases should serve as a powerful reminder that companies considering trade secret claims need to carefully evaluate those claims and remember the power of the “David v. Goliath” narrative in trade secret cases.
Stay tuned for Nos. 1 through 3 this weekend.
Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well one or two that I missed over the past couple of weeks:
Noteworthy Trade Secret and Non-Compete Posts and Cases:
- A Congressional investigation has ignited a political firestorm by finding that two Chinese telecommunications companies pose a national security threat, reports The Wall Street Journal. The companies, Huawei and ZTE, wished to merge with American companies so that their shares could be publicly listed here in the U.S., but the House Intelligence Committee, in a bipartisan report, savaged them, citing among other things, their poor record in protecting the intellectual property and trade secrets of others. The Washington Post quotes the investigation as stating that “Huawei and ZTE have failed to assuage the committee’s significant security concerns presented by their continued expansion into the United States. In fact, given their obstructionist behavior, the committee believes addressing these concerns have become an imperative for the country.” (A copy of the Report can be found in the PDF below).
- The criminal trade secrets case against former Bridgestone research engineer Xiaorong Wang has unraveled as prosecutors dismissed the 3 remaining counts after an Ohio federal judge dismissed the other 12 charges against him, reports Alison Grant of The Plain Dealer. U.S. District Court Judge James Gwin found that there was insufficient evidence to support those charges, which included theft of trade secrets and making false statements to investigators. Prosecutors argued the technology was proprietary and that Wang had intended to sell the information to other tire makers.
- The American Chemical Society (ACS) has announced that it has settled its long-running trade secret dispute with Leadscope, a company founded by former ACS employees, for $22.7 million. The Supreme Court of Ohio had recently affirmed approximately $11.5 million of a $26.5 million verdict, upholding a claim of unfair competition against ACS but reversing a defamation claim valued at $15 million. I am guessing that the settlement approximates the accumulated prejudgment interest and attorneys fees for the unfair competition claim. For more on this important case, see my post from last month.
- Trade secret claimants in California who secured a stipulated injunction in a dispute won an important victory, reports Epstein Becker’s Trade Secrets & Noncompete Blog. In Wanke Residential, Comm’l & Indus., Inc. v. Superior Court of California, the Fourth Appellate District Court of Appeals held that a party may not defend against the enforcement of a court order by simply arguing that the underlying order is legally erroneous. Rather, a party is limited to challenging the validity of the injunction “only in the narrow circumstance in which the party can demonstrate that the injunction was beyond the trial court’s jurisdiction to issue in the first instance.” Daniel Joshua Salinas of Seyfarth Shaw’s Trading Secrets Blog also has a post about the decision.
- Interested in “Practical Pointers in Respect to Non-compete Agreements in China”? Then consider McDermott Will & Emery’s recent newsletter on the subject.
- “Trade Secret Misappropriation – $taggering Numbers For Employers to Consider” notes the Michigan Employment Law Advisor Blog.
- Kenneth Vanko has a fine update on various decisions around the country addressing lost profits, remedies and other procedural issues arising in non-compete and trade secret cases.
- “Theft of trade secrets worsening in China-U.S. business” advises Reuters.
- On the social media front, the federal battle over a LinkedIn account has survived a motion for summary judgment and will go to trial on October 16, 2012, reports Venkat Balasubramani in the October 7, 2012 edition of the Technology & Marketing Law Blog. In Eagle v. Morgan, the district court has dismissed the former employee’s claims under the Computer Fraud and Abuse Act (failure to present adequate evidence of damages) and Lanham Act (failure to demonstrate sufficient likelihood of confusion) but has elected to retain supplemental jurisdiction over the remaining state law claims. For more on the Eagle v. Morgan case, see my post from earlier this year.
Computer Fraud and Abuse Act Posts and Articles:
- “New Federal Legislation Proposed To Amend Computer Fraud and Abuse Act To Address Unauthorized Cloud Computing Activities” from Jessica Mendehlson of Seyfarth Shaw’s Trading Secrets Blog. For a more critical take on the proposed legislation, see Eric Goldman’s post from yesterday.
- Poyner Spruill’s Under Lock & Key Blog has a nice summary of recent split within CFAA cases, including the U.S. District Court of Eastern Pennsylvania’s decision in Synthes, Inc. v. Emerging Medical, Inc. applying the more narrow version.
- And in a post from July that I missed, Professor Orin Kerr, one of the leading voices for that narrower version of the CFAA, gave his take on recent decisions and legislative developments for The Volokh Conspiracy (a hat tip to Kenneth Vanko for posting this article).
- For a contrary view, the IP Stone Blog asks “Computer Fraud and Abuse Act: Did the Ninth Circuit Blow It?”
Cybersecurity Posts and Articles:
- Defense Secretary “Panetta Warns of Dire Threat of Cyberattack on U.S.” according to The New York Times.
- Stewart Baker continues to churn out solid, thought-provoking posts for Steptoe’s Cyberblog as he advocates taking the fight to cyberthieves and hackers. In his post entitled “Good News for Cybersecurity and Attribution?”, Stewart dismisses protestations within the cybersecurity community that the bad guys can’t be identified and punished.
- In a post entitled “Clouds, Mobile Devices and the Workplace,” The Massachusetts Non-Compete Blog’s Brian Bialas cites to a recent article by Margaret Keane on the subject.
News You Can Use:
- For you informed voters, you should consult “What the Presidential Candidates Say About Tech” in The New York Times Bits Blog.
The Ohio Supreme Court has decided to reverse a significant ruling it issued five months ago, and has now held that covenants not to compete are like any other agreement and automatically transfer after a merger. In Acordia of Ohio v. Fishel, the Supreme Court held that its May 25, 2012 ruling was erroneous and that any shortcomings in the language of the covenant would not prevent its transfer to the merged company. (A copy of the Court’s opinion can be found in the PDF below).
Background: Four employees challenged their non-competes, arguing that after a series of mergers, their non-competes were no longer enforceable. They argued that the literal language of their covenants was confined to the previous employer and did not extend to future companies or use language extending the covenant to the company’s “successors and assigns.” When the employees left several years later, they argued that their non-competes had begun to run at the time of the merger and were now expired. The trial court and the Court of Appeals for the First District agreed.
A 4 to 3 majority of the Ohio Supreme Court also initially agreed. Since the covenant did not include assignees nor provide for the assignment to a successor, the majority reasoned, the relationship terminated when the employer ceased to exist as a result of the merger, and the non-compete began to run (although technically there was no longer any employer to benefit from the non-compete). Thus, under its terms, the covenant had expired before the employees left to join a new employer
The Ohio Supreme Court’s reversal: The reaction within the Ohio business community was swift and outraged. As reported by former Ohio Appellate Judge Marianna Bettman Brown, Acordia had “heavy fire-power” in support of its request for reconsideration, as the Ohio Chamber of Commerce and a number of other businesses filed for reconsideration as amici in support of Acordia. In July, the Ohio Supreme Court relented, voting 6 to 1 to reconsider its ruling.
That same 6 to 1 vote held up in the reversal, with Justice Paul Pfeifer the lone dissenter. The majority opinion written by Justice Judith Lanzinger provided few clues about what caused her, Chief Justice Maureen O’Connor and Justice Yvette McGee Brown to switch their votes. Rather, Justice Lanzinger simply said the Court had erred because it had misread language from a previous case that “a merger involves the absorption of one company by another” and that “the absorbed company ceases to exist as a separate business entity.”
Instead, Justice Lanzinger applied a different conceptual approach, and reasoned that the “absorbed company becomes a part of the resulting company following the merger.” As a result, the merged entity has the ability to enforce noncompete agreements as if it “had stepped into the shoes of the absorbed company.”
The Trade Secret Litigator’s Take: As you can tell, I am puzzled about what caused the 3 members of the Court to change their mind. I have found myself waffling back and forth on it, so I can’t fault the three justices. This is a tough case, as both cases presented well reasoned arguments.
It may break down as simply as a basic value judgment: if you believe that statutes should trump private contracts, you will ultimately agree with the majority. If you believe that non-competes should be strictly construed, you would be inclined to agree with Justice Pfeifer’s dissent.