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: Noteworthy Trade Secret and Non-Compete Posts and Cases: 
  • “Lawyer Disqualified After Allegedly Erasing Data in Trade Secret Dispute” advises The Virginia Non-Compete Law Blog. Rob Dean presents a cautionary tale of why lawyers, particularly those in trade secrets and non-compete cases, need to be especially vigilant  and informed when it comes to issues of electronic discovery and preservation. 
  • “Wynn sues former Chinese executive now working for competitor” to enforce a non-compete against the former executive in Macau, reports Vegas Inc.  In other news of futility, King Canute has commanded the tide to halt.
  • On a related note, “Protecting Your IP in China with an Injunction. Yeah, that’s the ticket” chuckles Dan Harris in his China Law Blog. 
  • For a thorough analysis of the recent trade secrets case brought by Zynga, see Josh Durham’s post in Poyner Spruill’s Under Lock & Key Blog. 
  • “Sports Agent Non-Compete and Trade Secrets Dispute Heats Up in California,” notes Seyfarth Shaw’s Robert Milligan in an update on a high profile case, Mintz v. Mark Bartelstein & Associates d/b/a Priority Sports & Entertainment, pending in the U.S. District Court for the Central District of California. 
  • Are you a departing employee in New Jersey? If so, you should consult Kenneth Vanko’s fine analysis and practical pointers from a recent New Jersey case, Vibra-Tech Engineers, Inc. v. Kavalek, 849 F. Supp. 2d 462 (D.N.J. 2012). According to Ken, a naughty employee, his wife and their two companies provided a veritable list of how not to behave when leaving your employer, violating almost every one of the “Trade Secret Litigator’s 7 Deadly Sins for Departing Employees.”
  • A recent verdict in Oklahoma resulted in a rare type of injunction in trade secret disputes: imposition of a reasonable royalty to compensate the plaintiff.  In Skycam, LLC v. Bennett, the court found that a royalty rather than an injunction was the appropriate from of relief, reports The Trade Secret Institute.
  • Huawei is doing its best to refute the allegations against it in the recent House Intelligence Report, reports Press Millen in Womble’s Trade Secrets Blog. 
  • “Tennessee’s ‘Rule of Reasonableness’ Allows Courts to Modify Non-Compete Agreements” advises John Nefflen of Burr & Forman’s Trade Secrets Noncompete Blog. 
  • For those who practice both patent and trade secret law, Patently O‘s Dennis Crouch has a “must read” article, “Did the AIA Eliminate Secret Prior Art?,” that addresses the changes wrought under 35 U.S.C. § 102.  (For more on this topic, see the post that Robert Latta and I wrote last month).
  • And while on the issue of patents and trade secrets, “Trade Secrets — Less Risky Under AIA Prior User Rights,” advise Judith U. Kim and Katrina P. Quach, Sterne Kessler Goldstein and Fox PLLC for Law360.
  • “Solving the Multi-State Non-Compete Puzzle Through Choice of Law and Venue” writes Paul B. McKeeby for Corporate Counsel. 
  • “Watch your assets! Using injunctions to protect trade secrets, customers, employees, and good will” recommend John C. Glancey and Tobias E. Schlueter of Ogletree Deakins. 
  • “Chinese Electronics Carry Steep Risks For Contractors” warns Dietrich Knauth for Law360. 
  • “How to Protect Your Personal Device (and Personal Information) from Discovery” advises Brian Bialas for Foley & Hoag’s Massachusetts Noncompete Blog.
  • And speaking of e-discovery, “Servers and Hard Drives Disappear, But Court Holds No Spoliation,” reports Kathy Trawinski on a recent opinion out of New Jersey for ELLBLOG.  
Cybersecurity Posts and Articles: 
  • “Defense chief calls cyberspace battlefront of the future” advises Reuters. 
  • “Sarah Palin’s Hacker Turned Down by Supreme Court” by Michelle Bowman for JDSupra. 
  • “Cheat Sheet: What in-house counsel need to know about bring-your-own-device policies” by Julie Beck and Michael Kozubek for Inside Counsel.
  • “BYOD: It’s a Question of Lust (and Trust)” advises NetApp’s David Amerland for Forbes.
News You Can Use:
  • “Knowing When It Pays to Upgrade Your Gadgets” from The New York Times Personal Tech Blog.
  • And in a recent article entitled “The Hoax, the Troll and the Digital Herd” for Forbes, Anthony Wing Sosnar analyzes the herd mentality of the Internet, focusing on the recent hoax over the Sony Nexus X and the outing of the Reddit-uber-troll Violentacrez.

The U.S. Court of Appeals for the Second Circuit has issued an interesting opinion, reversing a preliminary injunction in favor of a departing employee who asked a New York district court to forbid his former employer from enforcing its covenant not to compete against him.  In Hyde v. KLS Professional Advisory Group, Inc., 2012 U.S. App. LEXIS 21111 (2d Cir., Oct. 12, 2012), the Second Circuit found that the employee had failed to demonstrate the most important factor in support of an injunction — irreparable injury — because any potential lost income from the absence of employment opportunities was readily compensable by a money damages award against his former employer.  I have attached a PDF copy of the opinion below.
 
Hyde, a senior executive, was terminated by KLS and he brought a preemptive action to enjoin KLS from enforcing its three-year covenant not compete against him.  Hyde argued that the covenant inhibited him from finding employment and disrupted his relationships with customers, therefore causing him irreparable harm.  The district court agreed and barred KLS from enforcing the non-compete.
 
The Second Circuit’s Reasoning:  The Second Circuit, however, disagreed.  As a preliminary matter, the Second Circuit emphasized that a showing of irreparable injury is “the single most important prerequisite for the issuance of a preliminary injunction.”  The Second Circuit cited a number of cases where courts had denied requests by government employees who had sought injunctions to extend or keep their jobs.  One of those cases, Sampson v. Murray, 415 U.S. 61 (1974), rejected a government employee’s claim that loss of income qualified as irreparable injury and further held that “insufficiency of savings” and difficulty in finding a job were “external factors common to most discharged employees” and only to be considered in extraordinary situations. 
 
Applying that rationale to this case, the Second Circuit found there was no irreparable injury resulting from the loss of a potential job. In fact, the Court reasoned that any lost employment income was readily compensable by a monetary damages award against his former employer.  Likewise, the Second Circuit rejected Hyde’s claim that he was irreparably injured by the loss of his client relationships, citing the multiple agreements that Hyde had signed acknowledging that the client base belonged to KLS.

Finally, although it confined its analysis to the absence of irreparable injury, the Second Circuit did take the time to express concern about the district court’s holding that under New York law, non-competes against fired employees are per se unenforceable.  The Second Circuit cautioned that this rule might not apply to terminations that were for cause.
 
Is this good news for New York employers?  While the Second Circuit’s opinion benefited this particular employer, it may be a mixed ruling ultimately for employers who seek to enforce non-competes in the future.  On the positive side for employers, the Second Circuit rejected the former employee’s effort to preemptively enjoin the former employer and rejected his claims that lost employment was an irreparable injury, which is authority that will benefit employers in the future.  In addition, the Second Circuit noted that non-competes may still be enforced against terminated employees if that termination was for cause. Finally, the Second Circuit emphasized that the written agreements determined that KLS, not Hyde, had rights to the customer relationships.

However, the Second Circuit reiterated the importance of irreparable injury in every injunction and its critical analysis may be relied upon in future cases by departing employees.  For example, I can readily see a former employee (or perhaps a supplier or consultant in a trade secrets case) arguing that an employer’s damages are readily calculable as lost sales, compensable by money damages, and thus, by definition, outside the definition of irreparable injury.  Of course, in the context of non-competes, there are plenty of cases holding that trade secrets and customer relationships are customarily within the definition of irreparable injury, but this opinion could be used to challenge or undermine the reasoning giving rise to those authorities.

Hyde v KLS Prof Adv Group.pdf (57.82 kb)

In the latest twist in the epic trade secret dispute between DuPont and Kolon, the U.S. Attorney for the Eastern District of Virginia, Neil H. Macbride, has indicted Kolon and a number of its top executives for allegedly engaging in a multi-year campaign to steal trade secrets related to DuPont’s Kevlar para-aramid fiber and Teijin Limited’s Twaron para-aramid fiber. The indictment, issued earlier today, seeks forfeiture of at least $225 million in proceeds from the alleged theft of trade secrets from Kolon’s competitors. A PDF copy of the unsealed indictment is attached below.

As readers of this blog know, a jury awarded approximately $920 million to DuPont last year for the misappropriation of certain of its Kevlar trade secrets and in August, District Court Judge Robert Payne entered a 20-year permanent injunction forbidding Kolon from manufacturing Heracron, the competitive product to Kevlar. For more on these and other developments in the DuPont v. Kolon dispute, see my posts here, here and here.

I am going to quote heavily from the press release below, but here is the meat of the indictment: according to the government, from July 2002 through February 2009, Kolon allegedly sought to improve its Heracron product by targeting current and former employees at DuPont and Teijin, a Japanese competitor, and hiring them as consultants, and then asking them to reveal confidential and proprietary information. 

According to the indictment, in July 2002, Kolon allegedly obtained confidential information related to an aspect of DuPont’s manufacturing process for Kevlar, and within three years Kolon had replicated it.  “This successful misappropriation of DuPont’s confidential information, the indictment alleges, spurred Kolon leadership to develop a multi-phase plan in November 2005 to secure additional trade secret information from its competitors, by targeting people with knowledge of both pre-1990 para-aramid technology and post-1990 technologies.”

Many of the allegations mirror evidence that was presented in the civil action brought by DuPont against Kolon. For example, “Kolon is alleged to have retained at least five former DuPont employees as consultants. Kolon allegedly met with these people individually on multiple occasions from 2006 through 2008 to solicit and obtain sensitive, proprietary information that included details about DuPont’s manufacturing processes for Kevlar, experiment results, blueprints and designs, prices paid to suppliers and new fiber technology. In cases where the consultants could not answer Kolon’s specific and detailed questions, Kolon allegedly requested the consultants to obtain the information from current employees at DuPont.”

The indictment also alleges that “during a meeting with one consultant, a Kolon employee surreptitiously copied information from a CD the former DuPont employee had brought with him that contained numerous confidential DuPont business documents, including a detailed breakdown of DuPont’s capabilities and costs for the full line of its Kevlar products, customer pricing information, analyses of market trends and strategies for specific Kevlar submarkets. This wealth of information was allegedly copied and dispersed among several Kolon executives and employees, and the indictment alleges that many of these documents and others associated with the consultants were deleted by the Kolon executives and employees after DuPont filed a civil suit against Kolon in 2009.”

Kolon also is accused of attempting to recruit a former employee of a Teijin subsidiary, Teijin Twaron.  Teijin Twaron sent a letter to Kolon in January 2008 demanding that Kolon cease and desist from seeking to obtain trade secrets related to Twaron, but the indictment alleges that Kolon continued to try to obtain trade secrets, and took additional steps to attempt to avoid detection of its actions.

The indictment further alleges that, “in August 2008, Kolon employees met with a current DuPont employee in a hotel room in Richmond and discussed how the DuPont employee could provide trade secrets to Kolon without leaving evidence.”

In addition to the corporation itself, Kolon executives and employees from Seoul were charged with conspiring together to steal trade secrets and obstruction of justice for deleting information from their computers, including Jong-Hyun Choi, 56,a senior executive overseeing the Heracron Business Team; In-Sik Han, 50, who managed Kolon’s research and development related to Heracron and was allegedly responsible for overseeing the “consulting” sessions with ex-DuPont employees; Kyeong-Hwan Rho, 47, who served as the head of the Heracron Technical Team beginning in January 2008;Young-Soo Seo, 48, who served as the general manager for the Heracron Business Team beginning in November 2006; and Ju-Wan Kim, 40, who was a manager on the Heracron Business Team. 

According to the press release, the conspiracy and theft of trade secrets counts each carry a maximum penalty of 10 years in prison and a fine of $250,000 or twice the gross gain or loss for individual defendants, and a fine of $5 million or twice the gross gain or loss for the corporate defendant. The obstruction of justice count carries a maximum penalty of 20 years in prison and a fine of $250,000 or twice the gross gain or loss for individual defendants, and a fine of $500,000 or twice the gross gain or loss for the corporate defendant. 

Kolon Indictment.pdf (1.35 mb)

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 Minnesota federal district court has vacated a $630.4 million judgment that had been leveled against disk drive maker Western Digital Corp. after rival Seagate Technologies accused Western Digital of misappropriating Seagate’s confidential information and trade secrets after it hired a former Seagate employee. The court confirmed arbitration awards in five trade secret claims that Western Digital and the former employee prevailed upon at arbitration, but vacated the arbitration award for the three trade secret claims that Seagate won. The court ordered another hearing for those remaining three claims before a new arbitrator. Todd Sullivan has a post on the case as well.
  • Zynga is suing a former General Manager over the alleged theft of its trade secrets. Zynga claims Alan Patmore, who previously worked on Cityville, uploaded a number of company trade secrets to a Dropbox account from his company computer just before his departure from the games maker. The allegedly misappropriated trade secrets included, among other things, information on Zynga’s game mechanics, internal assessments of Cityville’s performance, monetization plans, company emails and design documents (including the final design document for an as yet unreleased game). The case is generating a fair amount of media attention, with All Things Digital’s Trisha Duryee providing fine coverage.
  • Three Kentucky men have been charged by federal prosecutors for allegedly using portable USB drives to steal thousands of files from White Drive Products, a hydraulic motor maker, in 2007 and 2008. A federal grand jury this week indicted Phillip Lee Groves, Gregory Lee Wampler and Eric Dale Tinderholt. Groves and Wampler allegedly stole the trade secret information while employed by White Drive and made a business proposal incorporating those trade secrets to a competitor in connection with a pitch to hire them as a commissioned sales force.
  • For the fifth installment of “How to Protect Your IP from China,” see Dan Harris’ China Law Blog.
  • Dennis Rosen has an an intriguing post about dentists and non-competes for Foley & Hoag’s Massachusetts Noncompete Blog.
  • “Preventing an Employee From Working for a Competitor Unravels without an Enforceable Noncompete Agreement” advises the Michigan Employment Law Blog.
  • Interested in the “Enforceability of Noncompete Agreements Post-Merger”? Then check out this recent post by The Delaware Employment Law Blog.
  • For a nice primer on “Potential Antitrust Implications in Resolving Disputes Over An Employee’s Non-Compete Agreement,” see Devin Dolive’s post for Burr & Forman’s Non-Compete Trade Secrets Blog.
  • Looking for more analysis on the Eagle v. Morgan case, the federal dispute over who owns a social media account, an employer or employee? Then check out Jessica Mendehlson’s post on Seyfarth Shaw’s Trading Secrets Blog and Jonanthan Pollard’s post on the non-compete blog.
Cybersecurity Posts and Articles:
  • Orin Kerr and Stewart Baker have dueling posts on The Volokh Conspiracy this past week about the legality of counter-hacking, i.e., hacking the hackers.
  • “Doing the Two-Step, Beyond the A.T.M.” recommends Randall Stross for The New York Times.
  • “Panetta Aims to Get U.S. Businesses More Involved in Cybersecurity” writes Catherine Dunn for Corporate Counsel.
  • “Corporate Attacks Hint Of A Coming ‘Cyber Pearl Harbor'” warns Christopher Helman for Forbes.
  • “Hacking and Reading Someone’s Online Email Just Got Easier in South Carolina” advises Fox Rothschild’s Privacy Compliance & Data Security Blog.
  • “10 steps toward eliminating insider threats” by Paul Kenyon for The Flash in the Pan Blog.
News You Can Use:
  • “Some Advice From Authors on Avoiding Online Distractions” from The New York Times Bits Blog.
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.
Huawei Investigative Report.pdf (617.85 kb)

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. 

Acordia of Ohio Reversal.txt (28.54 kb)

As many of you may know, I have been very active in the American Intellectual Property Law Association’s (AIPLA) Trade Secret Law Committee over the past few years, serving as its Litigation Subcommittee Chair and soon to be assuming the role of Vice-Chairman of the Committee. I want to take this opportunity to encourage you to give serious thought to attending the Trade Secret Summit on Tuesday, October 23, 2012 at the Marriott Wardman Park Hotel in Washington D.C. 

Dan Westman, the outgoing Chair of the Committee, has done a tremendous job of putting the Summit together and he has assembled an impressive panel of speakers who will cover a full range of important and emerging topics, including:

  • The interplay of trade secrets and patents as a result of the America Invents Act, including “prior user” rights;
  • Key developments in trade secret law, including the DuPont v. Kolon case, TianRui Group v. ITC decision and important federal legislation;
  • Special issues presented by spoliation of evidence and electronic discovery; and
  • Corporate counsel perspectives, including measures to protect secrets, trade secret audits and other important tools.

It has been a remarkable year in trade secret law — DuPont v. Kolon, the expansion of the Economic Espionage Act, important federal and state trade secret bills, the emerging split in circuits over the Computer Fraud and Abuse Act — the list continues to grow. The Summit will be a wonderful opportunity to learn more about these and other developments.

Speakers will include what amounts to, in my humble view, a “Who’s Who” of many important figures in the trade secret community, including Victoria Cundiff of Paul Hastings LLP, Mark Halligan of Nixon Peabody LLP, Griffith Price of Finnegan Henderson Farabow Garrett & Dunner, LLP, Peter Toren of Weisbrod Matteis & Copley PLLC, Russell Beck of Beck Reed Riden LLP, Mark Klapow of Crowell & Moring, LLP, Michael Songer of Crowell & Moring, LLP and Eva Almirantearena of Intel Corporation.

For more about the program or to register for the Summit, go to this link. For those attending AIPLA’s Annual Meeting, I would urge you to also plan on attending the Summit which gets under way on the Tuesday of the week of the Annual Meeting. I hope to see you there!

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:  Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • Former L3 Communications employee Sixing Liu was convicted of stealing trade secrets by a Newark, New Jersey jury last week. Liu was convicted of taking restricted military data and presenting them at two conferences in China the previous fall. Prosecutors argued the technology was proprietary and could be used for target locators and other military applications. 
  • “Chinese Smuggler Tried to Sneak Carbon Fiber for Fighter Jets, Feds Claim,” reports Wired.
  • In a panel discussion moderated by the U.S. Trade Representatives, the primary complaint, shockingly, was the theft of valuable U.S. trade secrets by Chinese nationals from within, and without, U.S. corporations, reports Todd Sullivan for his Sullivan’s Trade Secrets & Employee Defections Blog. 
  • Kenneth Vanko has a post on yet another bad faith trade secret case, this time out of Cook County, Illinois.  In Portola Packaging, Inc. v. Logoplaste USA, Inc., Kenneth notes how the trial court, at the end of this case, went back over the evidence and compared it to what the allegations of the complaintrevealed. In addition, the court was influenced by emails that suggested improper intent, as the plaintiff considered a litigation strategy because “new suppliers that are caught up in litigation can scare potential customers.” 
  • A recent California trade secret case appears to have applied a more relaxed showing of particularity of the trade secrets, reports The Software Intellectual Property Report. In VasoNovo v. Grunwald, the court rejected a claim that the plaintiff had not adequately identified the trade secrets in question (which a former employee had used for a patent application), reasoning that at the pleading stage, the “trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.” 
  • AvidAir Helicopter Supply has lost its bid to have the U.S. Supreme Court review its appeal of the Eighth Circuit’s finding that it misappropriated the trade secrets of Rolls Royce, reports Law360. The Eighth Circuit had found that the repair operation misappropriated Rolls Royce’s trade secrets by using purportedly confidential overhaul specifications, and ordered that the technical documents be returned. For more on the case, see my post on the Eighth Circuit’s decision last year.
  • Are you a lawyer in Massachusetts who has been asked to signed a non-compete? Then you may want to consult Brian Bialas’ post in Foley & Hoag’s Massachusetts Non-Compete Law Blog. For more on lawyers and non-competes, see my earlier posts here and here. 
  • In need of a short primer on Tennessee trade secrets law? Then check out John Paul Nefflen’s post for Burr & Forman’s Trade Secrets & Non-Compete Blog, which concerns the recent trade secrets battle between professional wrestling associations TNA Entertainment and World Wrestling Entertainment. 
  • Looking to avoid living in your own private Idaho? Then you better consult Kim Stanger’s report for Law360, “Unclear Standards for for Idaho’s Restrictive Covenants.” 
  • Worried that the new employee you’re hiring might have a non-compete? Seyfarth Shaw’s Molly Joyce has a practical post in the Trading Secrets Blog on the steps an employer should take to avoid that entanglement. 
Computer Fraud and Abuse Act Posts and Articles: 
  • Nick Akerman’s Computer Fraud/Data Protection Blog has a fine post, “High Court May Rule on Computer Law Question,” in which he looks at the recent decisions by the Ninth Circuit in U.S. v. Nosal and the Fourth Circuit in WEC Carolina v. Miller narrowly applying the CFAA and predicts that if the Supreme Court takes the case, it will adopt the broader view of “accessing without authorization” applied by the Fifth, Seventh, Eighth and Eleventh Circuits. 
Cybersecurity Posts and Articles: 
  • A front-page article in last Friday’s edition of The Washington Post, “In cyberattacks, hacking humans is highly effective way to access systems,” makes clear that the easiest way for cyberthieves to hack into a system is through a company’s employees. 
  • For those representing banks and other financial institutions, check out “Hack Attack: U.S. Financial Institutions in the Cross-Hairs” by Mintz Levin lawyers Amy Malone and Cynthia Marose. 
News You Can Use: 
  • “Why We Are So Rude Online,” answers Elizabeth Bernstein for The Wall Street Journal.

Among the big stories in legal circles last week was the kerfuffle over a memo circulated by Yahoo’s General Counsel Ron Bell reminding Yahoo employees that they are not to leak or disclose confidential information. The story should serve as an important lesson of the challenges a company faces in building, or in this case, rebuilding, a culture of confidentiality so important to preserving trade secrets.

The story first appeared on September 24, when All Things Digital’s Kara Swisher wrote about the memo. The “Leaks Uncool” memo is generally believed to have been triggered by a recent leak concerning internal communications about Yahoo’s sale of a portion of its stake in the Alibaba Group before it was final. Swisher quoted the following parts: 
 
“It’s never OK to share information in an internal memo EVEN if the company issues public communications about the same subject . . . We will fire employees who leak company confidential information and we will avail ourselves of all other legal remedies to protect those confidences.”

Bell’s memo also added the following line, which has caused the most controversy: “If you do it, you can go to jail and face a very large fine.” 

As Swisher’s article notes, Yahoo has had significant problems in the past containing leaks (indeed, in 2009, Yahoo’s then-CEO Carol Bartz went so far as to offer a $1,000 bounty for information on leakers), and she even suggests that past management may have encouraged some of those leaks. Not surprisingly, therefore, as Marissa Mayer and other members of the new management team attempt to steady and rebuild Yahoo, one of the critical tasks they face is rebuilding a culture of security and incrementally moving their employees to fully appreciating and respecting its importance. 

Did Bell over overreact? According to Swisher and some commentators quoted in Corporate Counsel, he did. But not in the Trade Secret Litigator’s view.  Executives and lawyers will always face a no-win battle with the media, who in this age of shrinking budgets are increasingly dependent on disgruntled employees or rivals looking to settle a score for their sources. (Witness the recent article “How EA’s legal team keeps one eye on former employees” criticizing EA for (gasp) reminding departing employees that they should remember they signed NDAs and should abide by them in their new job).
 
While you cannot (and should not) completely tune out media criticism, the fact remains that Yahoo, as a technology company, has to reinforce a culture of confidentiality or it will inevitably atrophy. As I have written before, creating a culture of confidentiality and security is the first and most important step in protecting sensitive information. (If you don’t think a culture of confidentiality is important, then you should look at Apple). Unfortunately, to change a company that has been complacent about security some times requires a big stick, or the threat of a big stick, to get people’s attention.

Leave aside all the potential issues relating to regulatory and securities laws that can result from a lax culture of confidentiality. Also set aside, for the moment, all of the issues relating to protection of trade secrets or other intellectual property. A culture of confidentiality remains critical today because of the ever-growing threat posed by hacking and cybertheft. 

Friday’s edition of The Washington Post ran a front-page article entitled “In cyberattacks, hacking humans is highly effective way to access systems.” In other words, perhaps the best target for cyberthieves and other malevolent cyber forces may be employees who are careless or uninformed about the risks to which they can subject their employer online. 

Reinforcing a culture of confidence therefore serves to protect a company on multiple fronts and if the carrot doesn’t work, then you should not hesitate to use the stick.  

What do you do after your federal conviction for stealing trade secrets from your former employer is thrown out on a technicality but another prosecutor charges you for theft under state law? Why you sue the employer from whom you allegedly stole the trade secrets in the first place to cover your legal expenses, of course. Welcome to America, Sergey Aleynikov.

This is the latest salvo in the never-ending saga involving ex-Goldman Sachs programmer Sergey Aleynikov, who filed a lawsuit in New Jersey this week against his former employer Goldman Sachs demanding that the federal court order Goldman Sachs to pay his $2.4 million in attorneys fees and indemnify him for his future attorneys fees for the latest criminal proceedings. (A hat tip to Kenneth Vanko for his post on this case yesterday aptly entitled, “This Move Takes . . . Guts;” a PDF copy of Aleynikov’s complaint can be found below).

Background: For those not following the case, Aleynikov was responsible for developing Goldman’s high frequency trading (HFT) computer programs for various commodities and equities markets. In April 2009, Aleynikov resigned from Goldman and accepted a job at Teza Technologies to help develop that firm’s own version of a computer platform that would allow Teza to engage in HFT. On his last day, Aleynikov transferred thousands of computer files, including source code to the HFT trading system, to a server in Germany that was not blocked by Goldman’s firewall. That evening, at his home, Aleynikov downloaded the material from the German server to his personal computer and then to his laptop and a thumb drive so that he could make it available to Teza.

In December 2010, a federal jury in New York convicted Aleynikov of stealing that source code under the Economic Espionage Act (EEA), but on appeal, the U.S. Court of Appeals for the Second Circuit reversed the conviction in February 2012. In my view and the view of other commentators, the Second Circuit erroneously applied a strained view of the types of trade secrets covered by that provision of the EEA. In August, Manhattan District Attorney Cyrus Vance, Jr. brought a criminal action against Aleynikov for the unlawful use of secret scientific material and duplication of computer-related material, both felonies under New York State law, for essentially the same conduct that was the subject of the reversed federal conviction.

Aleynikov’s Lawsuit for His Defense and Attorneys Fees: The lawsuit brought by Aleynikov cites certain bylaws of Goldman that require the defense and indemnification of officers charged with a crime, a bylaw which is not uncommon in the corporate world. According to The New York Times, Goldman Sachs has paid a large portion of the legal fees for former director, Rajat K. Gupta, who was convicted of leaking boardroom talks to hedge fund magnate Raj Rajaratnam, as well as for Fabrice Tourre, who faces a securities fraud law lawsuit by the SEC. Of course, neither of those Goldman Sachs officers were alleged to have stolen from Goldman Sachs. 

The bylaws in question cover officers who were “made party to a criminal action by reason of the fact that such person was an officer of the company.”   However, it doesn’t seem that Aleynikov was prosecuted by virtue of the fact that he was an officer, or for anything he did in connection with his duties and responsibilities as an officer. To the contrary, he was prosecuted because he was to alleged to have stolen from the company for his position at his new company Teza; the fact that he was a Goldman officer really does not appear to have had any thing to do with his prosecution, other than it provided him with access to the trade secrets in question. Moreover, the alleged misconduct took place after his resignation from Goldman.

Because Goldman Sachs remains a lightning rod for many and is perceived as pulling the strings behind the prosecutions, Aleynikov has achieved almost folk hero status.  In addition, some in the media seem increasingly troubled by the fact that he is being charged again for the same crime, even though double jeopardy apparently does not bar the state court proceedings. As a result, The Wall Street Journal ran a somewhat sympathetic piece on Friday entitled “Programmer’s Case Is Matter of (Legal) Code” (The New York Times article cited above was equally uncritical as was another article on Friday). 

The Trade Secret Litigator will continue to monitor this unusual proceeding and keep you posted on future developments.

Aleynikov v. Goldman Sachs.pdf (2.10 mb)