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 and Abuse Act Posts and Cases: 
  • In a case that is already at the center of the debate raging over the scope of the CFAA, David Nosal was convicted yesterday on six counts by a San Francisco jury. The Recorder’s Vanessa Blum has been following the trial closely and her summary of the verdict and trial can be found here. The Ninth Circuit, in a widely reported en banc opinion last year, dismissed six of the CFAA charges against the former Korn/Ferry International employee on the grounds that the district court had too broadly applied the terms “exceeded authorized access,” but prosecutors were able to salvage three of the claims on remand. Not surpisingly, Nosal attorneys are optimistic about their grounds on appeal.
  • “Why Is Congress Trying to Make Our Internet Abuse Laws Worse, Not Better?” ask Profossors Orin Kerr and Lawrence Lessig for The Atlantic.
Trade Secret and Non-Compete Posts and Articles: 
  • “AT&T Ducks $35M Trade Secrets Suit Over Smartphone Tech,” reports Law360.
  • “Zynga Rival Fires Back in Trade Secret Suit,” reports Max Taves for Corporate Counsel.
  • “Physician Non-Competes Upheld by South Carolina Court of Appeals: Baugh v. Columbia Heart Clinic, P.A.,” reports Andy Arnold for the Beat Your Non-Compete Blog.
  • “Employee Data Theft and Corporate Hacking Studies Point to Need for Additional Federal Trade Secrets Legislation,” advise Robert Milligan and Jessica Mendelson for Seyfarth Shaw’s Trading Secrets Blog.
  • North Carolina “Appeals court calls non-compete agreements ‘unconscionable’ in local staffing company dispute,” reports Chris Bagley for the Triangle Business Journal.
  • “Mass-Mailing To Public Employees Did Not Violate Non-Solicitation Agreement,” reports John Paul Nefflen for Burr & Forman’s Non-Compete Trade Secrets Law Blog.
  • “Trade Secrets In the Cloud: When Can Cloud Providers Access and Share Your Information?” asks Eric Ostroff in his Trade Secrets Law Blog.
  • Looking for more on the New Jersey statute limiting non-competes for unemployed workers? Then check out Kenneth Vanko’s post, “New Jersey Non-Compete Bill Follows Maryland Lead – And Then Takes It a Step Further,” as well as Epstein Becker’s post.
  • “Google Says IP Law Boutique Must Hand Over Personnel File,” reports Law360.
  • “What tech companies can learn from Coca-Cola: Trade secrets can be effective at protecting software code and other related assets,” recommend Gregory Novak and Matt Todd for Inside Counsel.
  • “Settlements (Part 3 of 3): Dealing With a Defendant’s Bankruptcy in Non-Compete Litigation,” advises Kenneth Vanko for his Legal Developments in Non-Competition Agreements.
  • Russell Beck has posted his always outstanding “Issues and Cases in the News for April 2013” on his Fair Competition Blog.
Cybersecurity Posts and Articles:
  • CISPA passed the U.S. House of Representatives last week. For details on the bill and mounting oppositiion from privacy advocates, see Hayley Tsukayama’s post for The Washington Post here.
  • Verizon issued its Data Breach Investigations Report for 2013, a fine summary of which can be found here, courtesy of Lucian Constantin for PCWorld.
  • “Law Firms Must Devote More Resources To Data Security,” advises Daniel B. Garrie of Law & Forensics LLC for Law360.
  • “Cyber Criminals Have Small Businesses in Their Cross-Hairs,” warns Joshua Sophy for Small Business Trends.

As readers of this blog know, I’m active in the American Intellectual Property Law Association’s (AIPLA) Trade Secret Law Committee, having served as Litigation Subcommittee Chair and presently as Vice Chair.  For those who are either attending the AIPLA’s Spring Meeting in Seattle, Washington on May 1 through May 3, 2013 or still considering it, I wanted to let you know about a number of exciting trade secret presentations that will be offered, including one of which I will be presenting. 

On Thursday, May 2, 2013 (2:00 – 3:30 pm), Josh Durham of Poyner Spruill, LLP will be moderating the presentation, “A Global Marketplace and a Mobile Workforce—Can a Trade Secret Possibly be Kept SECRET?”  The presentation will include competing views and hopefully a debate over the Computer Fraud and Abuse Act between Dan Westman of Morrison Foerster, LLP and Professor Eric Goldman of Santa Clara University School of Law, High Tech Law Institute.  The presentation will also include “Extraterritorial Protection of Trade Secret Rights”  by Jay H. Reiziss of Brinks Hofer Gilson & Lione.  Finally, Palk Saber of IBM Corporation will present “Appropriate Steps to Safeguard Trade Secrets from a Corporate Perspective.”  (A special thanks to Seth Hudson for all of his outstanding work in organizing this panel and presentation).

After that presentation, from 3:30 to 5:30 p.m., Peter Toren of Weisbrod Matteis & Copley, PLLC, will speak and chair a discussion on “The Obama Administration’s Strategy on Mitigating the Theft of US Trade Secrets—What Every US Company Needs to Know.”  After Peter’s presentation, the AIPLA Trade Secret Law Committee will have a panel discussion on the Obama Administration’s Trade Secrets Initiative.  Committee Chair Janet Craycroft of Intel Corporation, Peter Toren, Dan Westman and I will participate in that discussion and we are hoping Peter will be able to persuade representatives of the Administration to join us as well. 

Finally, I have the privilege of presenting “2013 Trade Secret Law Mid-Year Review: Greater Emphasis from the Obama Administration, New Federal and State Legislation and Noteworthy Federal and State Cases” on Friday, May 3, 2013 at the Closing Plenary Session at 10:15 a.m.

For those still interested in registering for the AIPLA’s Spring Meeting, here’s the link. Hope to see you there!

As promised, I am posting my intended letter to the Obama Administration’s U.S. Intellectual Property Enforcement Coordinator, Victoria Espinel, in response to her recent request for public comments on potential trade secret legislation. 

Executive Summary:  Regular readers of this blog will not be surprised as I advocate that a civil cause of action be added to the existing framework of the Economic Espionage Act (EEA), preferably by enacting a modified version of the Protecting American Trade Secrets and Innovation Act (PATSIA) proposed last year by U.S. Senator Chris Coons. 

I have proposed three modifications to PATSIA (explained in greater detail in my letter below):

(1) that the statute be confined to international trade secret misappropriation;

(2) that objections to venue, such as forum non conveniens, be prohibited so long as the requirements of 28 U.S.C. §1391 are met; and

(3) that PATSIA’s ex parte seizure order be scaled back and modelled after what are commonly known as Anton Piller orders which are used in Commonwealth nations to prevent the destruction of evidence.

For those that have not provided their comments to the Administration yet but wish to do so by Monday, April 22, 2013 (tomorrow), the link to provide comments can be found here. 

Here is my letter:

————————————————————————————————————————————–

The Honorable Victoria Espinel                                   

Re:      Response to Request for Public Comments for “Trade Secret Theft Strategy Legislative Review” (78 Fed. Reg. 16875, March 19, 2013)

Dear Ms. Espinel:

I am submitting this letter in response to the Administration’s “Request for Comments and Notice for Trade Secret Theft Strategy Legislative Review” as published in the Federal Register (the “Notice”).

The Growing International Trade Secret Threat and The Need for Further Legislative Action.  The rise in the theft of trade secrets from U.S. companies by foreign hackers and international misappropriation has been widely reported and is well documented.  Last year, the National Security Agency described trade secret theft as the greatest transfer of wealth in history, estimating the losses of theft of trade secrets and cyber breaches to be in excess of $334 billion per year.  In February 2013, the security company Mandiant Corporation reported that the Chinese government was sponsoring cyber-espionage to attack top U.S. companies.  Likewise, CREATE.org has recently released a white paper that highlights how far-reaching and challenging the risks of trade secret theft are for companies operating on a global scale.

The Missing Component:  A Federal Civil Cause of Action.  For these reasons, I believe that the Administration should use its considerable influence and resources to support legislation creating a federal civil cause of action and remedy for international trade secret misappropriation utilizing the existing framework of the Economic Espionage Act (“EEA”). 

This federal civil cause of action or remedy should not undermine, preempt or disturb existing state law causes of action and remedies, which are more than adequate to address domestic trade secret theft.  Rather, the federal civil cause of action would be directed exclusively to remedying situations involving the theft of trade secrets by international misappropriation.  Any federal civil cause of action should provide remedies similar to those provided in the Uniform Trade Secret Act (“UTSA”), including providing for appropriate injunctive relief, unconditional royalty damages, attorneys’ fees, and exemplary damages equal to at least the twice any award of damages.

A federal cause of action empowering companies to protect their own trade secrets from international misappropriation would help relieve the federal government, in this time of limited government resources, of sole responsibility for the protection of American trade secrets abroad.  In addition, enforcement would be enhanced because U.S. companies understand their own technology and trade secrets best and they are incentivized to litigate aggressively to protect those assets.  In addition, despite their best efforts, government agencies and prosecutors may not be able to move as quickly or with the nimbleness of a private litigant in some circumstances.  Given the importance of speed and injunctive relief in trade secret cases, a federal private right of action would be a powerful tool in the case of international trade secret misappropriation.

While state trade secret laws afford U.S. companies many protections, they cannot match the potential international scope and procedural remedies or protection that a federal court can provide in the case of international trade secret misappropriation.  The ability to issue and serve subpoenas throughout the U.S. and the broad jurisdictional powers of federal courts would greatly assist many trade secret claimants in cases of international misappropriation. 

The Administration Should Support the Protecting American Trade Secrets and Innovation Act with Three Modifications.  Senator Chris Coons previously introduced legislation (S. 3389, 112th Congress), known as the Protecting American Trade Secrets and Innovation Act of 2012 (“PATSIA”), that seeks to  amend the EEA to provide, among other things, a private civil cause of action for trade secret theft. 

The Administration should support enactment of PATSIA.  In addition, I would respectfully propose the following three modifications:

1.      PATSIA should be focused and confined to international trade secret misappropriation.  Existing state law trade secret remedies are more than adequate to protect domestic trade secret misappropriation.

2.      To ensure that the civil cause of action’s remedial purpose (i.e., providing American companies with a federal forum for international misappropriation) is not frustrated, PATSIA should preclude objections to venue, such as challenge on the grounds of forum non conveniens, so long as the action satisfies the venue requirements of 28 U.S.C. §1391.

3.      The ex parte seizure order proposed under PATSIA should be narrowed and additional safeguards should be added to ensure that it is not misused.  I would propose that the seizure order be modeled on Anton Piller orders that have been utilized by courts in Australia, Canada and the United Kingdom to seize and protect evidence.  To secure an ex parte seizure order, I would propose that an applicant be required to establish the following by clear and convincing evidence: (a) a strong prima facie case against the defendant; (b) that the alleged misappropriation is serious and that there is a probability of irreparable injury; and (c) that there is a possibility that the defendant will destroy or remove relevant evidence or misappropriated product.  Finally, to ensure protection and preservation of the material to be seized, a judicial officer should be appointed to oversee execution of the order and to retain possession of any evidence or product that is seized until the defendant has an opportunity to challenge the seizure.

Thank you for the opportunity to be heard.  If I can provide any further assistance or information, please do not hesitate to let me know.

Very truly yours,

John F. Marsh

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.

FirstEnergy v. Flerick.pdf (133.92 kb)

Kenneth Vanko, Russell Beck and I have completed our sixth Fairly Competing Podcast, “Practical Considerations When Seeking Injunctive Relief.” 

Because they are the most common form of relief in non-compete and trade secrets cases, preliminary injunctions and TROs require parties to act and respond very quickly.  In this episode, Russell, Ken and I each discuss what businesses need to consider when moving for injunctive relief, the differences between temporary restraining orders and preliminary injunctions, expedited discovery, and local practice related to injunctions in various courts throughout the United States.

You can listen to the podcast by visiting the Fairly Competing website or clicking the link below.  Or subscribe to the podcast on iTunes.  We’d appreciate your feedback. 

Our next podcast will address issues accompanying trade secret cases involving self-styled whistleblowers, such as the recent case brought by Anheuser-Busch InBev against James Clark.

Listen to This Episode

Wow, it was a busy week. 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:
  • Federal prosecutors were dealt a severe blow in the Economic Espionage Act case brought against affiliates of the Pangang Group (a company with ties to the Chinese government), as U.S. District Court Judge Jeffrey White quashed summons against them in the U.S. v. Liew case.  As reported by Bloomberg and Law360, this is the second time that summons have been quashed and it increasingly appears that the government will not be able to serve, let alone prosecute, these companies for their alleged role in the theft of DuPont’s titanium dioxide trade secrets.
  • “New Jersey Legislators Propose Banning Non-Compete Agreements With Employees Who Can Claim Unemployment,” reports Jessica Mendelson for Seyfarth Shaw’s Trading Secrets Blog. Also see Law360’s article, “NJ Bill Targets Noncompete Restrictions On Unemployed.”
  • Honey, I stole the trade secrets!  “Can an Employee Use a Spouse to Circumvent Restrictive Covenants? Georgia Court of Appeals Says ‘No,'” advises Amy Dehnel for Berman Fink Van Horn’s Georgia Non-Compete and Trade Secret News.
  • “Merrill Lynch Says Ex-Advisers Stole Client Info,” reports Law360, when they joined competitor Wells Fargo.
  • “Wisconsin Researcher Accused of Economic Spying for China,” reports Bloomberg.
  • “Plaintiff’s Foreign Operations Result in ‘Lessened’ Deference to Choice of Home Forum in Trade Secret Misappropriation Case,” advises John C. Law, Ph.D. of McDermott Will & Emery for the National Law Review.
  • “Frisby-Eaton Whistleblower Settles with Frisby, Tolling Agreement Persists with Eaton,” advises Alison Grant for The Plain Dealer and Todd Sullivan for his Trade Secrets Blog.
  • “Get Smart About Noncompetes,” advises Alan Bush for The Texas Lawyer.
  • Don’t forget the importance of “Trade Secrets and Due Diligence,” a reminder by Eric Ostroff for his Trade Secrets Law Blog.
  • For a recent non-compete case out of Florida’s Fifth District Court of Appeal, see “A Court’s Order Must Comply With The Restrictive Covenant It Seeks To Enforce,” by Kain & Associates’ ComplexIP.com.
  • “Enforcing a Non-Compete Agreement in Florida: What Evidence is Relevant?” asks Jason Cornell for Fox Rothschild’s South Florida Trial Practice Blog.
  • “Non-competes: HR’s version of the Prenup,” proclaims Steve Boese for Fistful of Talent.
  • “5 Privacy and Data Security Measures That Can Protect Your Company Against Trade Secret Theft,” recommends Lindsey Tonsager for Covington’s Inside Privacy Blog.
  • Kenneth Vanko has the first of three posts on why certain non-compete and trade secrets cases may not settle for his Legal Developments in Non-Competition Agreements Blog.
  • And for the litigators, “Don’t Forget about E-Discovery When Moving to The Cloud,” advises Jay Yurkiw for Porter Wright’s Technology Law Source Blog.
Cybersecurity Posts and Articles:
  • As many of you may have noticed last week, The Wall Street Journal launched a Risk & Compliance Reporter that will cover, among other things, developments in cybersecurity.  It is worth bookmarking. To that end, here is one of the introductory posts, “Three Tactics for Cyber defense” by Mark G. Graff.
  • “How To Mitigate The IP Risks Of Data Breaches,” advises Carol Anne Been and Andy Blair of Dentons for Law360.
  • In an op-ed piece for The New York Times “Closing the Door on Hackers,” Marc Maifret, CTO for BeyondTrust wonders whether software companies are incentivized to allow hacking.
  • “Insider Theft: the Real Cyber Threat?” asks The Wall Street Journal’s Corruption Currents Blog.  The post quotes Mike Dubose of Kroll as estimating the average time between an internal breach and its discovery is 32 months.
  • “As more hackers target lawyers, here’s how to protect client data,” recommends Rachel Zahorsky for the ABA’s Techshow.
  • “U.S. Undersecretary to Discuss Hacking With Chinese Officials,” reports Bloomberg.
  • “Silicon Valley Fights Restrictions on Chinese Tech,” reports The Wall Street Journal.
  • “A Different Approach To Foiling Hackers? Let Them In, Then Lie To Them,” recommends Andy Greenberg for Forbes. (And don’t forget to at least buy them a drink).
Computer Fraud & Abuse Act Posts and Cases:
  • The trial in the prosecution of David Nosal is underway in San Francisco and expected to go about 12 days. Here are some of the articles covering it: “In High-Tech Hacking Trial, a Battle of Low-Tech Openings,” notes Max Taves, who is covering the Nosal trial, for The Recorder. Also check out Vanessa Blum’s article, “Amid Calls for Reform, a Rare Trial of Hacking Law,” also for The Recorder.
  • “Here are eight cyber crooks who got less prison time than Andrew Auernheimer,” advises Dan Kaplan for SC Magazine.
  • “NY Times Reporter Jenna Wortham Accidentally Reveals How She Violated Both The CFAA & The DMCA,” reports Techdirt.
  • “7th Circ. Won’t Resurrect Employer Email Hack Suit,” reports Law360, as the plaintiff was unable to demonstrate that the alleged invasion of privacy cost him more than $5,000.

04062013The ubiquitous cease-and-desist letter.  It frequently precedes an IP dispute, and even more frequently, a trade secret or non-compete case.  If it is well written (witness Jack Daniels’ splendid letter from last year), it can win you cyber applause.  If it is clumsily written, it can expose you to ridicule (see the Hopaurus Rex rebuttal). 

But if it is really, really poorly written, can it expose you and your client to civil liability?  That is the question posed by two fine blog posts calling attention to the hazards of a cease-and-desist letter sent to a third party, such as a new employer who has hired an employee with a non-compete. 

Defamation? No problem.  Two weeks ago, Ken Vanko gave his thoughts, largely dismissing the risks of a defamation claim (but reserving judgment on the potential for a tortious interference claim).  And this week, Kara Maciel wrote about a recent decision from the U.S. District Court for the District of Columbia, Murphy v. LivingSocial, Inc., which held that an employer enjoyed absolute immunity from a defamation claim for the cease-and-desist letter it sent to a new employer. 

As a long time devotee of the cease-and-desist letter, I agree with Ken and Kara.  I don’t believe that I have ever worried about a potential defamation claim when sending a letter to a competitor, new employer or other third party.  I do my best to keep it as factual as possible by enclosing and citing the agreement in question, identifying the evidence that has been uncovered of any breach or misappropriation, and laying out my client’s contention.  This approach was largely endorsed by the District Court in the LivingSocial, Inc. decision.

Tortious Interference with Contract:  The Velcro Claim.  A claim for intentional interference with contract, however, can be a more troublesome claim.  If the former employee is terminated by his or her new employer after the letter is sent, it is altogether possible that the former employee may sue you or your client for tortiously interfering with his contractual relationship with that subsequent employer.

A 2009 Ohio case, Hidy Motors, Inc. v. Sheaffer, illustrates how this claim can unfold.  In that case, an employer, Hidy Motors, learned that a former employee, Gary Sheaffer, had joined a competitor in apparent violation of a non-compete.  As a result, Hidy Motors notified the new employer that Sheaffer’s employment was in violation of his non-compete with Hidy Motors. 

When Sheaffer was fired, he claimed that Hidy Motors’ communication about the non-compete interfered with his contract with his new employer.  Hidy Motors’ efforts to dismiss the case were unsuccessful because the court reasoned that its non-compete might not be enforceable.  In other words, because the enforceability of that covenant was not certain, Hidy Motors’ justification for interfering with Sheaffer’s employment contract might be lacking.  Whether a party is justified or has a privilege for interfering with a contract frequently involve disputed issues of fact, so an employer could find itself going before a jury on an intentional interference claim.

The Takeaway:  So how do you reduce your risk from a potential tortious interference claim?  Follow the same rules that you would to avoid a potential defamation claim:  keep it factual, enclose the agreement, and advise the new employer or third party of your client’s position. 

Alternatively, you can elect not to send a letter to the new employer at all.  If you are confident that you are ultimately going to be in litigation with the former employee, it may not be necessary to arm him or her with a potential counterclaim.

Finally, you can opt for a middle path:  notify the new employer of the non-compete but advise it that you will allow the new employee to remain provided you receive adequate assurances that your customer relationships and trade secrets are properly protected.  It will open the door for a compromise and perhaps avoid litigation altogether.

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:
  • House Intelligence Committee Chairman Mike Rogers (R-MI) has announced that he will be presenting a bill later this year that will penalize foreign countries that sponsor hackers that attempt to steal trade secrets from U.S. companies. In an article for Main Justice, Katy O’Donnell writes that Rogers will be considering some unconventional remedies such as suspension of visas and other tools.
  • “DuPont Wins Kolon Property In $920M Recovery Effort,” reports Law360.
  • For the latest on the Eagle v. Morgan social media ownership case, see Jessica Mendelson’s post for Seyfarth Shaw’s Trading Secrets Blog. As Jessica details, the trial court found that Dr. Eagle’s former employer misappropriated her LinkedIn profile but that Dr. Eagle failed to prove her damages.
  • “Live Events Agency Sues Former Employees And Independent Contractor For Breach Of Non-Solicitation Agreements,” advises John Paul Nefflen for Burr & Forman’s Non-Compete Trade Secrets Blog.
  • “Patterson Atty Gained Secrets Through Ruse, Doc Says,” reports Law360. According to the article, the attorney approached a Pennsylvania physician to advise him and then extracted information from the inventor of surgical stapling technologies in order to give a client a leg up in licensing negotiations.
  • “Cease and Desist Letters Enjoy an Absolute Privilege from Libel Claims,” advises Kara Maciel for Epstein Becker’s Trade Secrets & Non-Compete Blog.
  • “MGA’s Trade Secrets Claim On Brink In Bratz Case,” reports Law360, as MGA fights upstream to revive its trade secrets claim.
  • “Restaurant Industry Giant Landry’s Sues Former Employee & Rival Restaurant Company,” advises Jonathan Pollard in the non-compete blog.
  • “Many U.S. Businesses in China Cite Data Theft,” reports Carlos Tejada for The Wall Street Journal’s Corruption Currents Blog. According to the survey, 26% of companies with a presence in China have had their trade secrets stolen and 40% see the risks rising.
  • “How New Trade Secret Legislation Impacts Pharma Compliance Programs,” reports Fish & Richardson’s Jose Sierra for the Pharmaceutical Compliance Monitor.
  • “Practice Tip: Don’t Call Your Liquidated Damages Clause a ‘Penalty In the Contract,” cautions Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • For the litigators: “Sanctions For Deleted Facebook Give Employers A Boost,” reports Law360. Epstein Becker has a post about the case as well.
Cybersecurity Posts and Articles:
  • In The Wall Street Journal’s “Weekend Interview” entitled, “Why China is Reading Your Email,” cyber expert Timothy Thomas believes the recent cyber attacks are part of a military strategy and that an offensive strategy may be needed.
  • “Cyberattacks Seem Meant to Destroy, Not Just Disrupt,” notes Nicole Petlroth for The New York Times Bits Blog.
  • “New Hacking Study Shows What Good Guys Are Up Against,” advises The Wall Street Journal’s Digits Blog.
Computer Fraud and Abuse Act Posts and Cases:
  • “Aaron Swartz’s Prosecutors Were Threatened and Hacked, DOJ Says,” reports David Kravets for Wired.
  • “Is the Computer Fraud and Abuse Act a Failed Experiment?” asks Brian Bialas in Foley & Hoag’s Massachusetts Noncompete Law Blog, in a rejoinder to Eric Goldman’s post on the CFAA last week.

Anheuser-Busch InBev’s lawsuit against a former operations director turned lawyer turned whistle blower illustrates many of the special challenges in a whistle blower trade secret case.  The former employee, James Clark, claims that AB InBev has watered down its beer and he has garnered generally favorable media treatment this week by filing a motion to dismiss the case against him under California’s whistle blower statute.  (Full disclosure:  I represented Anheuser-Busch in a litigation about 10 years ago).
 
According to Bloomberg, AB InBev sued Clark, a former director of operations support, one week after the company was accused of overstating the alcohol content in several of its beers. Clark worked at Anheuser-Busch from 1998 until June, when he resigned to become (gasp) a lawyer.  Clark held several quality-assurance positions before rising to director of operations support.

Consumers have filed at least eight lawsuits accusing AB InBev of adding water to beers including Bud Ice, Budweiser, Busch Ice and Michelob.  AB InBev asserts Clark has improperly divulged or misrepresented confidential information to the lawyers for those plaintiffs.  In February, Clark apparently refused AB InBev’s demand that he testify under oath about whether he had divulged any confidential information in connection with those lawsuits.

The Streisand Effect:  Clark has not hesitated to seize the bully pulpit.  In moving to dismiss the case because he believes California law bars using strategic lawsuits against public participation (SLAPP) as a means of intimidation, Clark argues that the lawsuit is intended to silence and punish him for standing up for consumers.  (PDF copies of the Complaint and Motion to Strike can be found below). 

AB InBev’s lawsuit did not generate much publicity when it was filed on March 1, 2013.  In contrast, Clark’s claims and motion have generated a fair amount of media coverage since their filing on March 29, 2013.  In this respect, AB InBev’s case, like many cases against self-styled whistle blowers, may have led to the dreaded Streisand Effect — that in attempting to fight unwanted or unfavorable publicity, a company ends up unintentionally creating even more media attention.

The Collision Between The First Amendment and Trade Secret Law:  I have written before about the special challenges of prosecuting a trade secrets case against the whistle blower.  There is a long tradition in our country generally supportive of whistle blowers.  Think Ida Tarbell and Standard Oil, Upton Sinclair and the meat packing industry, Ralph Nader and the Corvair, Daniel Ellsberg and the Pentagon Papers — the list goes on and on.  Courts are not immune to the romance of the narrative of the heroic employee trying to protect the public and reveal the alleged misdeeds of his former employer.

Not surprisingly, former employees making these claims can effectively cloak themselves within the protections of the First Amendment and federal courts in particular have been receptive to that defense, especially in areas of public health and safety.  While states such as California and Ohio may allow trade secret protection to trump First Amendment concerns in certain situations, federal courts have generally found that such efforts to squelch this speech qualify as a forbidden prior restraint.   (For more on this issue, see my earlier post on the Julius Baer v. WikiLeaks case).

The Takeaway:  Suing a whistle blower is always a high-wire act.  Unfavorable media attention and the thicket presented by the First Amendment are frequently a part of the fabric of these disputes.  A trade secret claimant needs to tread carefully and have a thick skin. 

I will continue to monitor the case and provide an update when the court rules on Clark’s Motion to Strike.

AB Complaint (2).pdf (720.10 kb)

Clark Motion to Dismiss.pdf (1.21 mb)