Two apologies are in order. First, I have been on vacation, and swamped with a preliminary injunction and upcoming trial, and, as a result, I have not been able to keep up with the blog in the past two weeks. Second, as some of you may have noticed, we have had some delayed postings and graphics issues (including the absence of today’s photo) and I apologize for any inconvenience. We have recently switched to a new web design and hosting company to provide a better user experience and have been working through some issues. Thanks for your patience during this transition. Now, here are the noteworthy posts of the past week and some catch-up on posts from the past couple of weeks: Trade Secret and Non-Compete Cases, Posts and Articles:
  • In an article entitled, “Litigation Over Noncompete Clauses Is Rising,” by Ruth Simon and Angus Loten for The Wall Street Journal, the increasing use and litigation over non-competes is questioned for its impact on startups and small companies. Fellow trade secrets blogger and podcaster Russell Beck is quoted in the article (a special kudos to Russell).
  • In a similar vein, “Tide turning against use of noncompete agreements in Mass.,” reports Don Siefert for techflash.
  • In “U.S. Senators Propose Legislation To Strengthen Federal Criminal Trade Secret Laws,” Robert Milligan writes about recent proposed amendments to the Economic Espionage Act for Seyfarth Shaw’s Trading Secrets Blog.
  • For the latest decision addressing whether a trade secret claimant should be found to have brought an action in bad faith, see Kenneth Vanko’s recent posts here and here on a case he recently litigated before the U.S. Court of Appeals for the Seventh Circuit, Tradesman Int’l v. John Black. 
  • In “Printing Hard Copies of Stolen Source Code: The Difference Between Freedom and Incarceration in the Second Circuit,” for Orrick’s Trade Secrets Watch, Eulanda Skyles tries to divine what the U.S. Court of Appeals for the Second Circuit was thinking when it recently affirmed the conviction of Societe Generale trader Samarth Agrawal under the Economic Espionage Act (EEA). Good luck. Frankly, I thought the Court’s efforts to distinguish its ruling in U.S. v. Aleynikov bordered on nonsensical and can largely be explained by the fact that it knew its decision was wildly unpopular and led to an amendment to the EEA to avoid any similar rulings in the future.
  • “Employment Agreement Mandating Arbitration With Exclusion To Seek Equitable Relief From Court For Non-Compete Violations Found Unconscionable” reports Paul Freehling for Seyfarth Shaw’s Trading Secrets Blog. Paul has another interesting post, “Georgia Court Rules That Non-Compete Does Not Bind Seller’s Agents,” addressing an issue that frequently arises.
  • “Judge Won’t Toss $100M Trade Secret Suit Against Akorn,” reports Law360.
  • It’s not just for the feds anymore, as state attorney generals are increasingly bringing trade secret enforcement actions, as reported by Mark Mermelstein, Melanie Philips and Ryan C. Micallef in, “AGs to the Front Lines: State Attorneys General Begin Wielding Unfair Competition Laws against Foreign IP Thieves,” for Orrick’s Trade Secrets Watch.
  • “Chinese court hands down milestone IP ruling: Shanghai worker for Eli Lilly and Co. forced to pay 20 million yen for stealing trade secrets,” advises Zach Warren for Inside Counsel.
  • “S.C. Supreme Court Addresses Trade Secrets in Discovery,” advises Eric Ostroff in his Protecting Trade Secrets blog.
  • “Judge Rejects Kolon Recusal Bid In DOJ Trade Secrets Case” reports Law360.
  • “Controlling Risk in Non-Compete Litigation,” advises Jason Cornell of Fox & Rothschild for Mondaq.
  • For some practical tips to, “Stop Employees from Taking Information to Compete Against You,” see M. Cheryl Kirby’s post for Strasburger’s Noncompete Blog.
  • “Be Wary of Illinois Choice of Law Provisions in Non-Compete Agreements,” recommends Chip Collins for Burr & Forman’s Non-Compete Trade Secrets Law Blog.
  • “Using Computer Forensics to Investigate IP Theft,” advises Sid Venkatesan and Elizabeth McBride for Law Technology News.
  • “Making a Federal Case for Trade Secret Theft,” from Leigh Ann Buziak of Blank & Rome for Corporate Counsel.
  • “Judge Grimm’s Important Guidance on Social Media Evidence Authentication,” provides Shawn Tuma in his Computer Data Privacy Social Media Law Blog.
Cybersecurity Posts and Articles:
  • “In-House Counsel as Cybersecurity First-Line Defenders,” reports Alice Lin Geene for Corporate Counsel.
  • “5 Ways To Keep Unauthorized IP Out Of Your Supply Chain,” advises Marlisse Silver Sweeney for Corporate Counsel.
  • “You can’t firewall human nature,” warns JP Mangalindan for Fortune.
Computer Fraud & Abuse Act Posts and Articles:
  • “Ex-Dresser-Rand Managers Get Trade Secrets Suit Pared,” Law360 reports that a federal court in Pennyslvania has adopted the reasoning of U.S. v. Nosal.
  • “New Hampshire Struggles with First Circuit Precedent on the Computer Fraud and Abuse Act, Too,” advises Brian P. Bialas for Foley & Hoag’s Massachusetts Noncompete Law Blog.
  • “Revisiting ‘Damage’ and ‘Loss’ Under the Computer Fraud and Abuse Act,” considers Kenneth Vanko for JD Supra Law News.
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 Cases. Posts and Articles:
  • “Seagate Technology Recoups $630 Million Trade-Secrets Award” reports Business Week.  A Minnesota state appeals court has ruled that an arbitrator didn’t exceed his authority in awarding Seagate $525 million (and an additional $105 million in interest) in its trade secret dispute with Western Digital and a former Seagate employee. The arbitrator had found that some of the defendants’ evidence was fabricated regarding three of the trade secrets at issue and entered judgment against Western and the employee, Sining Mao, as a sanction.
  • “Even Preparing To Compete In Texas May Be Prohibited During A Non-Competition Covenant Period” advises Paul Freehling for Seyfarth Shaw’s Trading Secrets Blog.  Rob Radcliff also has a post on this decision, “Anti-Planning Provisions – A New Non-Compete Weapon?” in his Smooth Transitions Blog.
  • And speaking of Texas, “Physician Noncompetition Agreements May Be Challenged More Often After Recent Texas Appellate Decision” warns Randy Bruchmiller for Seyfarth Shaw’s Trading Secrets Blog.
  • “Five Year Non-Compete Enforced In Indiana” reports Peter Steinmeyer for Epstein Becker’s Trade Secrets & Noncompete Blog.
  • For the latest on non-compete legislation in Massachusetts, see “Massachusetts Noncompete Bill – Hearing Date” by Russell Beck in his Fair Competition Law Blog.  Seyfarth Shaw’s Erik Weibust also has a post on the legislation.
  • The Southern District of New York has recently held “Marketing Concepts Are Not Trade Secrets” advises Eric Ostroff in his Trade Secrets Protection Blog.
  • In “Don’t Chase Your Tail in Pursuit of the “Perfect Non-Compete,” Michael Greco offers some sound and practical advice in Fisher & Phillips’ Non-Compete and Trade Secrets Blog.
  • “The Line Between Trade Secrets and Patents: Getting Dual IP Coverage on the Same Technology” recommends Matthew Poppe and Morvarid Metanat for Orrick’s Trade Secrets Watch Blog.
  • “Myriad’s Trade Secret Trump Card: The Myriad Database of Genetic Variants” reports Courtenay Brinckerhoff of Foley & Lardner for JDSupra Law News.
  • “The next controversy in genetic testing: clinical data as trade secrets?” ask Robert Cook-Deegan, John M. Conley, James P Evans and Daniel Vorhaus for The European Journal of Human Genetics.
  • “The Business End Of The ‘Snowden Lessons'” reports Anne Sutton of Dentons and Erik Laykin of Duff & Phelps Corp. for Law360.
  • “More Answers To Your Noncompete Questions” provides Donna Ballman for her Screw You Guys, I am Going Home Blog.
  • “Texas Public Information Act: Shielding Your Company from the Open Records Sword” advises Jack Skaggs of Jackson Walker for JDSupra Law News.
  • In “Trade Secrets Whistleblower SLAPPed In Effort to Dismiss Lawsuit,” Ken Vanko reports on the recent dismissal of a whistleblower claim brought against Anhueser-Busch in his Legal Developments in Non-Competition Agreements Blog.  For more on this case, see my post from the spring.
Cybersecurity Posts and Articles:
  • Looking to limit others from digitally eavesdropping you?  Then check out “Digital Tools to Curb Snooping” by Somni Semgupta for The New York Times Bigs Blog.
  • “U.S. Cybersecurity Plan Not Designed To Increase Regulation, Officials Say” claims Bloomberg BNA.
  • “How America Is Fighting Back Against Chinese Hackers” advises Adam Clark Estes for Gizomodo.
Computer Fraud & Abuse Act Posts and Articles:
  • “MIT Intervenes In Release Of Aaron Swartz Case Details” reports Gerry Smith for The Huffington Post.

A recent $6.9 million verdict by a Pennsylvania state court judge serves as a stark warning to employers that hire a group of employees who resign together en masse. The case, B.G. Balmer & Co. Inc. v. Frank Crystal & Co., out of Chester County in Pennsylvania arose out of claims that a group of insurance brokers violated the non-solicitation clause in their employment agreements with their former employer, B.G. Balmer.

These mass exodus cases happen frequently in the financial services industry and can be particularly dangerous cases, especially where the employees improperly solicit colleagues or clients to join them before leaving. These cases are notoriously contentious and emotional — think about your standard non-compete case, throw in a cup of betrayal, shake well, and then add a healthy jolt of steroids. I have not yet been able to locate the trial court’s opinion yet (I understand it may be filed under seal) but Gregory D. Hanscom has a fine post about the case in Fisher & Phillips ‘ Non-Compete and Trade Secrets Blog.

According to Gregory, the group of departing employees first began to consider switching insurance brokers from B.G. Balmer to Frank Crystal & Co. when they individually met with a recruiter in May 2003. Less than three months later, those employees all resigned from B.G. Balmer on the same day (never a great idea) and promptly started working for Crystal.  After they left, about 20 of B.G. Balmer’s clients switched their accounts to Crystal.

After B.G. Balmer secured a preliminary injunction restraining the employees (affirmed on appeal by the Pennsylvania Superior Court), the dispute proceeded to a bench trial to determine the ultimate issues of liability and damages. According to Gregory’s account of the case, B.G. Balmer effectively painted a sinister picture of the employees’ actions. B.G. Balmer argued that the former employees engaged in a calculated and concerted effort to disrupt its business by resigning on the same day and attempting to induce a number of clients to switch insurance brokers. The trial court rejected the employees’ argument that the clients chose to switch insurance brokers on their own volition, and not because of any improper solicitation.

The trial court awarded $2.4 million in compensatory and $4.5 million in punitive damages, an unusual ruling since judges are generally perceived as being less willing to award punitive damages than juries.

Watch Out for Breach of Fiduciary Duty Claims.  In addition to claims of the breach of a non-compete or non-solicitation agreement, one of the common claims that arise in these mass exodus cases is whether the former employees breached their fiduciary duties to their former employer when they planned to leave.  Many states, including Ohio, impose a fiduciary duty of loyalty on an employee not to compete or harm his or her employer while he/she is on that employer’s payroll.

Most states do recognize that an employee has the right to prepare to leave his or her job. Consequently, routine preparations to compete — interviewing, leasing office space, hiring an accountant, forming a company, issuing business cards — are frequently permitted.  So long as the employee takes those actions after hours and not at the office, those actions will generally found to be proper.

However, things can get more interesting when the employee recruits others to leave while they still share the same employer.  In my experience, courts will tolerate 2 or 3 employees having conversations about leaving their job together. However, courts grow more suspicious as that number grows, particularly when the departures then appear timed to put the former employer in the lurch or cause it substantial damage.   My experience and research indicate that the facts of each case dictate whether the employees acted inappropriately.

However, there is one line in the sand that will trigger a finding of a breach of the duty of loyalty: if the employee solicits a customer before leaving.  In my experience, courts will tolerate some mistakes but it is the solicitation of clients before resigning, misconduct that is compounded exponentially in mass exodus cases, that sets courts off the deep end. The punitive award in the B.G. Balmer case is an important reminder of that fact.

Takeaways:  For the employees looking to avoid a mass exodus claim against them, take heed of the Trade Secret Litigator’s Seven Deadly Sins of Departing Employees. These rules are particularly important to follow in mass resignation cases because as the B.G. Balmer case makes clear, every action may take on a more sinister note when it is coupled with the actions of other co-workers who are planning on leaving. The cumulative effect of this evidence can be devastating.

For employers taking on a group of employees, make sure that they follow their non-solicitation agreements, if they have any. If they do not have those agreements, make certain that they also do not solicit co-workers or clients until after they leave. Make sure they keep it clean.

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 Cases. Posts and Articles:
  • “Connecticut Governor Vetoes Noncompete Statute Passed By Legislature,” reports Daniel P. Hart for Seyfarth Shaw’s Trading Secrets Blog. Last Friday, Governor Dannel P. Malloy vetoed Public Act No. 13-309, sending the bill to the legislature with a letter noting his concerns about a lack of clarity in the final version of the bill. The bill essentially required employers to provide some reasonable notice of a non-compete to an employee or prospective employee.  David Popick has a post for Epstein Becker’s Trade Secrets & Noncompete Blog, as does Russell Beck in his Fair Competition Blog.
  • “Texas Appeals Court Guts $40M Energy Trade Secret Verdict” against Southwestern Energy Group, reports Law360.
  • “Elevator Sales Company and Former Employee in Interesting Non-Compete Fight,” reports Jonathan Pollard in the non-compete blog.
  • “Are WWE Wrestling Results Trade Secrets?” asks Eric Ostroff in his Trade Secrets Protection Blog.
  • “Recent Conflicting Decisions Make It Potentially Easier and Harder to Enforce Non-Competition and Non-Solicitation Covenants,” advises Choate Hall & Stewart’s Employment and Benefit Group for JDSupra.
  • “Using Covenants Not to Compete in the Health Care Industry Part 1 – Understand the Basics,” advises Lee A. Spinks from Poyner Spruill.
  • And while on the topic of non-competes and doctors, “Judges giving departing doctors new leverage,” reports Claire Bushey for Crain’s Chicago Business.
  • “Restaurant Wars: Restrictive Covenants for Chefs & Tandoori Chicken Tikka,” reports Daniel Schwartz for the Connecticut Employment Law Blog.
  • “California officials wrestle with handling trade secrets on fracking,” reports The Los Angeles Times.
  • “Benefits of Early Discovery in Defending Trade Secret Misappropriation Claims,” advise Brent J. Gurney, Joshua T. Ferrentino and Alexander B. White for The New York Law Journal.
  • “Factors to Consider in Cross-Border Trade Secret Protection,” recommends The IP Exporter.
  • “Smoking Gun or Blowing Smoke? Five Tips to Make Sure That Computer Forensic Evidence of Trade Secret Theft Is What You Think It Is,” advise Thomas Gray and Elizabeth McBride for Orrick’s Trade Secrets Watch.
  • “My Issue With PRATSA: The Rule of Lenity,” argues Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • “Please, Do Not Trust Your New Employer to Interpret Your Non-Compete Clause,” pleads Laura Ellerman for Frith & Ellerman’s Virginia Non-Compete Law Blog.
  • “Money, Money, Money: Top 10 Trade Secret Verdicts,” reports Rob Shwartz and Cam Pham for Orrick’s Trade Secrets Watch.
  • “Five Things to Consider When Hiring an Employee From a Competitor,” recommends Benjamin Fink for Berman Fink Van Horn’s Georgia Non-Compete & Trade Secrets Report Blog.
Cybersecurity Posts and Articles:
  • “U.S., Firms Draw a Bead on Chinese Cyberspies,” reports The Wall Street Journal. This fascinating articles details the recent cooperation between the Obama Administration and various technology and internet companies.
  • “Nations Buying as Hackers Sell Computer Flaws,” reports The New York Times.
  • “Cybersecurity Pros Call For Federal Breach Notification Law,” advises Law360.

A recent trade secrets decision out of New Jersey against The Weather Channel illustrates some interesting trade secret issues that arise in licensing agreements — namely, to what extent can a licensee extract itself from a licensing agreement when it concludes that it can gather the subject matter of the license from other publicly available places (or come up with the information more cheaply).  

In Events Media Network, Inc. v. The Weather Channel, 2013 U.S. Dist. LEXIS 97514 (July 12, 2013), U.S. District Court Judge Robert P. Kugler denied a motion to dismiss filed by The Weather Channel, finding that the plaintiff Events Media Network, Inc. (EMNI) had presented sufficient allegations of trade secret theft to move the case forward.  EMNI contends that The Weather Channel took proprietary information that was supplied under their license agreement and improperly used it after the license expired.

The case involves one of the thorniest issues that arise in trade secret litigation — whether a compilation of publicly available information can qualify as a trade secret. In its Amended Complaint (attached as a PDF below), EMNI described its business as collecting, reviewing and distributing information for various local and national events and attractions.  While it conceded that none of the individual bits of data gathered together was confidential, EMNI argued that once that information was gathered together from the various sources using a custom built database, it qualified as a trade secret.

Applying Georgia’s Uniform Trade Secret Act, Judge Kugler agreed, at least at this early stage of the litigation, that EMNI had identified sufficient evidence that the information it supplied to The Weather Channel, organized in the fashion that it was, constituted a trade secret.  In this respect, his decision rests on solid ground and is consistent with the pleading standards that benefit a trade secrets plaintiff at this early juncture of the case. Todd Sullivan notes that The Weather Channel does not appear to contest that it used the information and predicts the case will be mediated or settled soon.

I Agreed to What?!!!  The case raises another interesting trade secret issue that has been in the news lately — whether the terms of a written contract can trump trade secret law.  According to the Amended Complaint, EMNI and The Weather Channel contractually agreed that the information supplied by EMNI under the license agreement was proprietary.  As a result, EMNI argued that provision should estop The Weather Channel from claiming otherwise.

A recent case out of the U.S. Court of Appeals for the Federal Circuit, Convolve and MIT v. Compaq and Seagate, held that the contract between the parties may be controlling on the question of whether information qualifies as a trade secret and that the parties can decide between themselves what needs to be done to ensure trade secret status.  In that case, the Federal Circuit found that the plaintiff’s failure to designate information as “confidential” — as was required under a non-disclosure agreement — doomed the plaintiff’s trade secret claim (for more on the case see Dennis Crouch’s post in Patently O Blog as well as Jason Stiehl’s post for Seyfarth Shaw’s Trading Secrets Blog).

Here, EMNI used the language of the contract to its advantage and argued that The Weather Channel had conceded the proprietary nature of the information under the license.  The lesson?  In written agreements negotiated between sophisticated commercial parties, courts will frequently defer to the language of the agreement.

Quick Takeaway for Licensees: Do your due diligence and if you have skepticism over the value of what you are going to be licensing, it may be best to say “no thanks” to the deal.

Quick Takeaway for Licensors: The language of your agreement may prove critical so make sure that your licensee concedes that the information that you are supplying is protected and proprietary. More often than not, the court will apply the language agreed to by the parties.

EMNI Amended Complaint.pdf (1.56 mb)

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 Cases. Posts and Articles:
  • There has been an uptick in media coverage and criticism of non-competes this week, which dovetails with the growing legislative efforts in several states to limit or restrict the use of non-competes.  “More firms requiring non-compete agreements: Efforts to retain employees being tested in courts, statehouses,” reports Jonnelle Mart for The Wall Street Journal’s Market Watch. Likewise, The Los Angeles Times has chimed in, “Contracts, court rulings giving employers legal upper hand: Emboldened by Supreme Court decisions and a weak job market, employers are starting to require workers to sign away their rights in return for a job.”
  • “Legally Smited Eaton Asks Supreme Court of Mississippi to Reinstate Civil Trade Secret Theft Case Against Five Former Employees,” reports Todd Sullivan in his Sullivan’s Trade Secrets and Employee Defections Blog.
  • Texas “Appeals Court OKs Extension Of Insurer’s Noncompete Deal,” advises Law360.
  • “Can Confidential Info That’s Not a Trade Secret Be Misappropriated?” asks Eric Ostroff in his Protecting Trade Secrets Blog as he discusses a recent case out of Arizona.
  • Jon Cavicchi is ramping his Trade Secrets Vault Blog back up. Check out his many new posts, including his re-posting of some valuable advice on “Implementing a Trade Secret Audit.”
  • “Is An Assigned Non-Compete Agreement Enforceable?” asks Monika Vyas Scott for Burr & Forman’s Non-Compete Trade Secrets Law Blog and she summarizes the law in states throughout the Southeast.
  • For those looking for more on the Illinois Appellate Court’s recent decision that an employee must be employed at least two years for a non-compete to be enforceable, Kenneth Vanko is not quite yet done venting about the reasoning in Fifield v. Premier Dealer Services.
  • “Scientist pleads guilty in Pa. trade secrets case” reports Associated Press. Tung Pham, who was charged with stealing trade secrets from his employer to take to a competitor in China, pleaded guilty in federal court in Philadelphia to seven counts of wire fraud, prosecutors said last week.
  • “Medtech inventor claims Ethicon lawyer tricked him into divulging trade secrets” advises the Massachusetts Medical Device Journal. Todd Sullivan also provides his take on the case here.
  • For tips on dealing with whistleblowers and trade secrets, check out Robert Milligan’s post “An Employee Is Stealing Company Documents…That Can’t Be Protected Activity, Right?” for Seyfarth Shaw’s Trading Secrets Blog.
  • “When An Employee Goes ‘Snowden:’ State High Court To Decide If An Employer Can Be Liable For A Rogue Employee’s Disclosure of Confidential Information,” reports Joe Wilson for Kelley Drye’s DC Metropolitan Business Law Alert.
  • “iPads and Blackberries: The Hidden Dangers for Employers,” warns Amy Dehnel for Berman Fink Van Horn’s Georgia Non-Compete & Trade Secrets Reporter.
  • For a primer on “Health Care Non-Compete Agreements,” in Tennessee, check out Cole Dowsley’s post for Thompson Burton’s Litigation & Dispute Resolution Blog.
Cybersecurity Posts and Articles:
  • “NIST Releases Draft Outline of Cybersecurity Framework for Critical Infrastructure,” notes the National Institute of Standards and Technology’s Tech Beat.
  • For two completely different takes on recent testimony before the House Energy and Commerce Oversight Subcommittee yesterday, compare “China Bears Burden Of Stopping IP Theft, Panel Hears,” from Law360 with “U.S. Defenses ‘Feeble’ against Chinese Cyber Threat, Experts Testify,” from Main Justice.
  • “Report Details Data Breaches in California,” advises Cheryl Miller for Corporate Counsel.
  • “US, China kick off annual dialogue with talks on cybersecurity,” reports The Washington Post.
  • “You Aren’t Using These 10 Simple Security Settings,” laments Jess Fee for Mashable.
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 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!

07012013There have been a number of thought-provoking articles in the wake of the U.S. Supreme Court’s decision last week in Association for Molecular Pathology v. Myriad Genetics, a decision that found that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated. At least one commentator has opined that the decision has sent shockwaves through the very foundation of the biotech industry.  Not surpisingly, a decision of this magnitude tends to trigger ripples in all areas of intellectual property, and trade secret law is no exception.

In a provocative Op-Ed for The New York Times entitled “Our Genes, Their Secrets,” researcher Eleonor Pauwells takes Myriad to task because it has compiled a substantial and highly proprietary database of its genetic research but has declined to share the contents of that database with other research bodies and healthcare organizations. She advocates that the federal government should use its powers to compel Myriad and other BioTech companies to share their trade secrets for the public good.

Specifically, Eleonor advocates that the United States Food and Drug Administration “should immediately investigate the impact of trade-secret protection on innovation in personalized medical treatments. The FDA could also mandate public disclosure as a condition of market approval for genetic testing. Insurers too have some leverage: they could refuse reimbursements unless clinical data is shared for interpretation.” In other words, if Myriad wants to commercially benefit from its trade secrets, it should be compelled to share them with the government.

By some accounts, Myriad has invested more than $500 million in this proprietary database.  It does not appear that the database was created through federal funding or through some other federal largesse that might entitle the government to some claim to the database or the data contained within that database.  In other words, the database is the result of Myriad’s own money and effort.  So the question is whether the government can, or should, compel Myriad to share the fruits of its investment with others?

Growing Tensions Between Trade Secrets and The Public Interest: This is not the first time that someone has suggested that the public interest should trump the investment that a company has made in its trade secrets. Some have opined that the trade secrets of voting company manufacturers should be set aside so that the public can verify that their machines have properly tallied votes. Likewise, the highly-charged debate over fracking has pitted public interest groups against energy firms as they jockey over the disclosure of the chemicals and processes used by those companies in the fracking process. The dispute over Myriad’s database is not a new one and has been percolating for years as researchers and others have complained about its refusal to allow others to access its database.  As trade secret protection continues to grow as a means of protecting intellectual property, these disputes will continue to emerge.

Apples and Oranges?  The Supreme Court’s reluctance to provide a patent grant in the Myriad decision should not be construed as momentum to diminish trade secret status in situations involving the public interest. While patents and trade secrets are kindred spirits (the old adage that every patent starts its live as a trade secret comes to mind), the policies behind these two types of intellectual property are very different. The patent system is intended to spur innovation by providing a quid pro quo to the inventor — in exchange for revealing his or her invention, the patentholder receives a grant of exclusivity which allows others to study, design around or build upon that invention. This bargain necessarily involves disclosure of the novel invention, which is the cornerstone of this innovative process.

In contrast, while innovation may be a consequence and benefit of a trade secret, by its very nature, a trade secret is not intended to be shared nor is novely a key requirement.  Rather, the key purpose of trade secret law is to protect the investment of a particular company by preventing a employee, partner or other party from unfairly exploiting and stealing that investment. Unlike patent law, trade secret law is rooted on an ethical component.

Leaving aside this compact that recognizes the property interest inherent in trade secrets, the notion that a company should be compelled to divest itself of its research and share that research for the public good would almost certainly inhibit the very innovation that Eleonor seeks to promote. Why invest substantial resources in a process, invention or database if you are ultimately going to have to turn it over to the government so that it share that database with your competitors? 

The events of the past few months should temper any enthusiasm for having the federal government serve as a sentinel of proprietary and sensitive information.  Having the government serve as a broker in which it grants access to certain markets in exchange for access to that data is an even worse idea.  For these reasons, no matter how laudable the goal, the government should respect the property interest of a trade secret holder and resist the temptation to interfere. 

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: Computer Fraud & Abuse Act Articles, Cases and Posts:
  • As I briefly noted in my post last night, Congresswoman Zoe Lofgren (D-CA) and Senator Ron Wyden (R-OR) have introduced an amendment to the CFAA popularly known as “Aaron’s Law,” to narrow the CFAA, reports Wired. As readers of this blog know, Swartz had been charged under the CFAA after allegedly accessing the server of MIT to improperly download approximately 4.8 million academic journals; he committed suicide earlier this year after negotiations over his plea bargain broke down. The amendment would, among other things, define access without authorization and exclude online agreements, computer use policies and employment agreements from serving as a basis for a claim under the CFAA.
  • For more commentary on Aaron’s Law, see Russell Beck’s post in his Fair Competition Blog, Robert Milligan’s post for Seyfarth Shaw’s Trading Secrets Blog, and Jason Weinstein’s take for Steptoe’s Cyberblog.
Trade Secret and Non-Compete Cases. Posts and Articles:
  • “Obama Administration Issues New Strategic Plan for Intellectual Property Enforcement,” announces Russell Beck, who provides a fine summary in his Fair Competition Law Blog.
  • The ITC and a Chinese court have come to opposite conclusions over the same basic trade secrets dispute, notes Orrick’s Trade Secrets Watch Blog. In, “Rubber Match? Resin Trade Secret Battle Results in a Multi-Jurisdictional Draw,” Mark P. Wine and Francis Cheever report that the ITC ruled in favor of American rubber manufacturer SI Group but that the Chinese court sided with Chinese manufacturer Sino Legend. For more on the ITC proceeding, see, “ITC judge rules for SI Group in intellectual property case,” in RubberNews.com.
  • Speaking of long-running trade secret imbroglios involving Chinese companies, “Chinese Wind-Turbine Maker Sinovel Charged With IP Theft,” reports Law360. The U.S. Attorney for Wisconsin has indicted Sinovel for the alleged theft of source code from American Superconductor’s computer system. The New York Times also has an article covering the indictment.
  • For those embroiled in a dispute over a forum selection clause in Georgia, “Atlantic Pacific Illustrates Impact of Georgia’s New Restrictive Covenants Law on Forum and Venue Selection Considerations,” advises Collin L. Freer for Berman Fink Van Horn’s Georgia Non-Compete and Trade Secret News Blog.
  • “U.S. District Judge in Massachusetts Declines to Enforce Noncompetes Because the Jobs of Two Employees ‘Materially Changed,’” advises Brian Bialas for Foley & Hoag’s Massachusetts Noncompete Law Blog.
  • “Tyco Accused Of Smear Campaign In Trade Secrets Row,” reports Law360.
  • For more on the new Connecticut non-compete statute, see “Non-Compete Legislation In Connecticut,” by David Popick for Epstein Becker’s Trade Secrets & Noncompete Blog, and, “Connecticut Law Restricts the Use of Non-Compete Agreements in Acquisitions and Mergers,” by Patricia Reilly, Matthew Curtin and Stephen Rosenberg for Littler’s Unfair Competition & Trade Secret Counsel Blog.
  • “Rogue Employees – What to do?” asks Rob Radcliff for his Smooth Transitions Blog.
  • “Takeaways From UK’s Vestergaard Trade Secrets Case,” advise Akash Sachdeva and Ben Hitchens of Edwards Wildman Palmer LLP for Law360.
Cybersecurity Posts and Articles:
  • “Bank’s new cybersecurity audits catch law firms flat-footed,” reports Martha Neil for the ABA News.
  • “Big Banks Worried About Outside Counsel Who BYOD,” advises David Hechler for Corporate Counsel.
  • “FINRA Sees ‘Proliferation’ of Complaints About Cybersecurity Breaches, Official Says,” reports Maria Lockshin for Bloomberg BNA.
  • “Federal Data Breach Legislation Introduced, But Will It Go Anywhere?” asks Christin McMeley of Davis Wright Tremaine for JDSupra.

In an unexpected but significant development, Silicon Valley Congressman Zoe Lofgren has introduced a bill that would add a civil cause of action to the Economic Espionage Act (EEA).  At the present time, the EEA only authorizes the federal government to pursue civil and criminal actions.  Last week, Congresswoman Lofgren introduced H.R. 2466, which is titled the “Private Right of Action Against Theft of Trade Secrets Act of 2013” (“PRATSA”) and it is a welcome effort to provide a federal civil remedy to companies that have had their trade secrets stolen.  (A hat tip to Robert Milligan and Daniel Joshua Salinas for their excellent post on this amendment).

PRATSA is remarkably simple. First, it only seeks to add a civil remedy for violations of 18 U.S.C. §1832(a) which presently permits criminal prosecutions for trade secrets “related to a product or service used in or intended for use in interstate or foreign commerce.”  Second, it explicitly exempts efforts to lawfully reverse engineer a trade secret, addressing a potential ambiguity that existed previously under the EEA.

In this respect, Congresswoman Lofgren’s bill stands in contrast to previous efforts to add a civil cause of action to EEA that sought to add a number of provisions that may have, in retrospect, unduly complicated their passage.  In 2011 and again in 2012, Senators Chris Coons and Herb Kohl introduced the Protecting American Trade Secrets and Innovation Act (PATSIA) that was directed primarily at international trade secret misappropriation.  PATSIA proposed, among other things, an ex parte seizure order that would have allowed a claimant to seize misappropriated product or preserve evidence, as well as heightened pleading requirements.  Both of those efforts to enact PATSIA ultimately languished in committee.

The amendment is a shrewd one because it complements another amendment that Congresswoman Lofgren recently introduced with Senator Ron Wyden (D-OR) to narrow the Computer Fraud and Abuse Act (CFAA).  That proposal, which has been named Aaron’s Law, seeks to remedy perceived abuses of the CFAA, the complaints over which reached a crescendo earlier this year when Internet activist Aaron Swartz committed suicide during the course of his prosecution under the CFAA.  (For more on the Swartz prosecution, see my post earlier this year here). 

Among other things, Congresswoman Lofgren’s amendment to the CFAA would effectively prohibit employers from using the CFAA for trade secret misappropriation claims.  A number of courts, including the U.S. Courts of Appeal for the Fifth, Seventh and Eleventh Circuits have allowed employers to use the CFAA to ensnare former employees who violated computer use policies when they improperly accessed and then took trade secrets from their computers with them to their new employer.

In other words, Congresswoman Lofgren has dangled the carrot of a possible trade secret civil remedy in exchange for the stick of narrowing the CFAA to eliminate its use as a trade secret statute.  I suspect that her proposal will be particularly popular in her home state of California, since it provides those employers with a federal trade secret remedy that has been lacking since the U.S. Court of Appeals for the Ninth Circuit held that the CFAA should not be applied to violations of computer use policies.

All in all, a very positive development.  The simplicity of the amendment, coupled with the recent recognition that trade secret theft has become a matter of national security, will hopefully ensure its passage into law.