U.S. Solicitor General, Donald B. Verrilli, Jr., has announced that his office has decided not to appeal from the U.S. Court of Appeals for the Ninth Circuit’s 9-2 en banc decision narrowing the scope of the Computer Fraud and Abuse Act (CFAA) in U.S. v. Nosal (for more on that announcement, see Seyfarth Shaw’s post yesterday detailing that decision). I had promised to do a recap of what others in the trade secret community and other interested commentators had to say about the decision, as well as my own take on the decision after having had the opportunity to more carefully review it and its construction of the CFAA. And, unfortunately for employers in the Ninth Circuit and especially those in California, I have concluded the Ninth Circuit dropped the ball on this one.

First a quick recap of Nosal. The federal government indicted David Nosal, a former employee of AON, for violating the CFAA because after his resignation, he persuaded other former colleagues at AON to access their computers and gather information that would be helpful to his new venture. AON had a policy forbidding the use of company computers for anything other than company business, so the government argued that Nosal and those employees had exceeded their authorized access of the protected computers in question by violating those polices. 

The district court rejected that argument and dismissed the CFAA claim. The first panel of the Ninth Circuit reversed the trial court, finding that violating a computer use policy was sufficient grounds for exceeding authorized access in April 2011. The Ninth Circuit then agreed to reconsider the panel en banc and then issued its 9-2 ruling on April 10.

What Other Commentators Think: No surprises here. Bloggers and commentators who represent employers were generally disappointed with the decision, while academics, privacy advocates and the media were generally enthusiastic about it. Of all of the fine commentary on both sides of the holding, I especially liked Kenneth Vanko’s take on the decision.  

The Trade Secret Litigator’s Take: When I first read the Nosal decision, I wanted to agree with Chief Judge Kozinski and the majority for primarily three reasons. First, like others, I was troubled by the potential for Internet Service Providers or companies like Facebook, Google and others to use their “Terms and Conditions” (i.e., the fine print accompanying each application, license or grant of access to use their site) to convert every garden-variety breach of contract action into a CFAA case. 

Second, like Kenneth Vanko, I thought that in the context of trade secret litigation, the CFAA was arguably redundant. Most employers and companies already have plenty of legal remedies under state trade secret laws, through breach of contract remedies such as breach of a non-compete or non-disclosure agreement, and under common law claims of breach of fiduciary duty and conversion.   

Third, there has also been mounting criticism of federal prosecutors for criminalizing trivial things like inadvertently scavenging for arrowheads in a national park (take a look at The Wall Street Journal’s series of articles on these and other prosecutions), and the CFAA could present yet another opportunity for an overzealous prosecutor. In that respect, the Nosal majority’s concern was not “chimercal” as Judge Kozinski noted.

Despite these leanings, when one applies a plain reading to the language of the statute, the Nosal majority simply got it wrong on two counts. (I have attached a link to the statute for everyone to see for themselves). 

There are two key provisions of the CFAA at issue. First, subsection 1030(a)(4) reads as follows:

“[Whoever] knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.”

The second relevant provision is 1030(e)(6) which defines the critical terms “exceeded authorized access.” It defines those words to mean “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.”

First, the underlined language “knowingly and with intent to defraud” and “by means of such conduct furthers the intended fraud . . .” obviates the majority’s concern that the statute could be used to criminalize or expose an employee for checking out ESPN at work, as such a frolic could not credibly be equated with an intent to defraud. The minority correctly criticized the majority for setting up “straw men” arguments because of the existence of that limiting language.

Second, the majority punted on the plain meaning of the language “exceeded authorization access.” When faced with prosecutor’s arguments that it would be rendering some of the language of the definition superfluous if it adopted Nosal’s interpretation (in particular, it would be ignoring the word “so”), the majority resorted to arguing that the government’s interpretation would render other provisions of the CFAA superfluous (in particular subsection 1030(a)(4)). However, as the minority pointed out, that issue or subsection was not before the majority, and the Ninth Circuit erred in entertaining these hypothetical positions to interpret what was otherwise straightforward language before it.

The decision’s impact? In the four months since Nosal was issued, its reasoning has rippled well beyond the Ninth Circuit. Two district courts in Michigan and the U.S. Court of Appeals for the Fourth Circuit in WEC Carolina Energy v. Miller, have adopted some or all of Nosal’s reasoning and have refused to extended the CFAA to computer usage policies. As I noted earlier this week, there is now a full-blown split between the circuit (the reasoning of the Fifth, Seventh and Eleventh Circuits was rejected in Nosal and in WEC Carolina). For this reason, it is disappointing that the Solicitor General did not throw his considerable weight behind an appeal to see that this split was resolved.

Nosal’s impact will be felt greatest in California, which rarely enforces non-competes. As a result, I think employers in California will feel Nosal’s brunt most because they are pretty much now limited to California’s version of the Uniform Trade Secret Act.

What can employers do? As I mentioned on Monday, the Fourth Circuit found that the policy in question in WEC Carolina only addressed “use” and did not forbid “accessing” the computer for any improper purpose. Consequently, tailoring your client’s computer use policies to forbid accessing files for any purpose beyond the employer’s business or interests could salvage a CFAA claim, at least for those in the Fourth Circuit.

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week: Noteworthy Trade Secret and Non-Compete Posts and Cases: 
  • Mitsubishi Electric & Electronics USA Inc. has persuaded a trial court to set aside a $124 million jury verdict against it arising from Grail Semiconductor Inc.’s claims that Mitsubishi breached a non-disclosure agreement by disclosing confidential information for a memory chip to an affiliate, Mitsubishi-Japan and a jointly owned Japanese company, Renesas.  Bloomberg is reporting that Santa Clara Superior Court Judge Kenneth Barnum concluded that the jury’s damages analysis was flawed but that he upheld the jury’s findings of liability.  The verdict was the 13th largest jury verdict in the U.S. so far in 2012.
  • In yet another bad faith case, Judge Jane Magnus-Stinson of the U.S. District Court for the Southern District of Indiana has imposed attorneys fees and costs against a plaintiff and its lead counsel, finding that the action was “essentially a vendetta” against the former employees “designed . . . to litigate them to death, rather than out of a genuine concern about protecting intellectual property.”  In Loparex, LLC v. MPI Release, LLC, Judge Magnus-Stinson was influenced by the fact that Loparex had filed, but quickly dismissed, an action against one of the former employees in Illinois, after warnings from the Illinois court about its concerns about Loparex’s ability to identify its trade secrets, and then refiled that action before her.  (A PDF copy of the opinion can be found below).
  • Non-competes do not violate the Texas Deceptive Trade Secrets Act, reports Gray Plant Moody.  The article details the recent decision by the U.S. District Court for the Northern District of Texas in Mary Kay, Inc. v. Amy Dunlap, 2012 U.S. Dist. LEXIS 86499 (N.D. Tex. June 21, 2012), which also rejected a challenge under the Sherman Act.
  • For those in Illinois, the Illinois Fourth Appellate District has recently applied the new analysis supplied under Reliable Fire Equip. v. Arrendondo to enforce a non-compete, reports DeBlasio Donnell’s Litigation Blog.  In Zabaneh Franchises, LLC v. Walker, the Fourth Appellate District reversed the trial court’s decision not to uphold the covenant not to compete, reasoning that the employee was only restricted from soliciting customers that she had serviced for her former employer. 
  • Oklahoma companies and attorneys interested in “Dissecting the Oklahoma Non-Compete Statute Phrase by Phrase” should consult Shawn J. Roberts’ post. 
  • For a good summary of the pending In re Certain Rubber Resins trade secret case before the International Trade Commission, see Brian Vogel’s article at Inside Counsel. 
  • Interested in finding out more about the Protecting American Trade Secrets and Innovation Act of 2012? Check out Crowell & Moring’s Mark Klapow’s article, “The Latest Attempt to Federalize Trade Secret Law,” in Law360.
  • If you are thinking of sending a cease and desist letter, you might want to consider the approach used in Jack Daniels’ splended letter, which has gone viral (it was even commented upon in The Atlantic). You will be sure to avoid the ridicule that came from the clever response to the Hopasaurus Rex cease and desist letter.
Cybersecurity Posts and Articles: 
  • If you are looking for the latest on the pending cybersecurity legislation, there is plenty to sink your teeth into. Foley & Hoag’s Security, Privacy and The Internet Blog reports on the Obama administration’s decision to throw its weight behind Senator Joseph Lieberman’s Cybersecurity Act of 2012. 
  • Also check out  The New York Times two articles, “Senators Force Weaker Safeguards Against Cyberattacks” and “Again, Wrangling Over Surveillance in the Cybersecurity Bill.”
  • For Baker & Hostetler’s Data Privacy Monitor Blog’s take on the Cybersecurity Legislation, check out its posts asking “Can National Security Trump Politics This Close to the Election?”
  • Steptoe & Johnson’s Sally Abertazzie’s E-Commerce Law Week shares her thoughts on the legislation, as well as a nice summary of the First Circuit’s recent decision in  Patco Construction Company v. People’s United Bank holding that a bank’s security was commercially unreasonable in connection with a claim over cybertheft of a customer’s funds.
  • Finally, The Washington Post weighed in last week on the legislation with its editorial entitled “Stockpiling arms against cyberattacks” and appears convinced the threat is real and that our private and public bodies need to take some action.
  • “Smartphones are becoming top targets for cyber attacks” reports MoneyWeb, particularly because they are expected to become the equivalent of wallets, replacing credit cards and cash.
News You Can Use: 
  • The Wall Street Journal’s Digits Blog cautions that “Do You Use Free Wi-Fi? It May Be Legal to Sniff All Your Data.” 
  • And for the highly paranoid, Forbes’ Andy Greenberg advises “How To Bust Your Boss Or Loved One For Installing Spyware On Your Phone.”
Loparex Order 07.31.12.pdf (109.26 kb)

07302012There is now a full-blown and growing split between the federal courts of appeal over the scope of the Computer Fraud and Abuse Act (CFAA).  On Thursday, July 26, 2012, the U.S. Court of Appeals for the Fourth Circuit adopted the reasoning of the U.S. Court of Appeals for the Ninth Circuit in its April 12, 2012 decision in U.S. v. Nosal, narrowly applied the CFAA, and dismissed an employer’s complaint against a former employee for copying confidential information from his work computer. (A PDF copy of the opinion can be found below).

In WEC Carolina Energy v. Miller, the Fourth Circuit has found that the CFAA will only be applied to hacking incidents and not to the theft of trade secrets. (A hat tip to Kenneth Vanko who spent his Saturday detailing this development in his Legal Developments in Non-Competition Agreements Blog. Venkat Balasubramani and Eric Goldman’s takes on the case can be found in their Technology & Marketing Law Blog and Josh Durham of Poyner Spruill also has a thorough write up).

Factual Background:  Miller, a former employee of WEC, was alleged to have copied confidential and proprietary information before leaving to join his new employer, Arc Energy Services. WEC Carolina had computer usage policies that forbade employees from using confidential information or copying information to their personal computers. WEC alleged that Miller had taken that information and used it for a presentation to a customer on behalf of Arc, a presentation that allegedly won that client over to Arc. In short, not the most compelling trade secrets case.

The U.S. District Court of South Carolina dismissed the CFAA claim, reasoning that because the policies in question only addressed improper “use” and not “access,” WEC Carolina could not establish that Miller acted without authorization or exceeded that authorization when he accessed the confidential information. The district court declined to exercise supplemental jurisdiction over the remaining state law claims and dismissed the case.

Fourth Circuit’s Reasoning:  Because the CFAA provides for criminal as well as civil penalties, the Fourth Circuit applied the rule of strict construction to the CFAA. Focusing on the key phrases in the CFAA, the Fourth Circuit concluded, based on its application of “ordinary contemporary, common meaning,” that the word “authorization” meant that an employee is authorized to access a computer when his employer approves or sanctions “his admission to that computer.” Applying that definition, the Fourth Circuit reasoned that an employee accesses a computer “without authorization” when he gains admission to a computer without approval. Similarly, the Fourth Circuit concluded that an employee “exceeds authorized access” when he has approval to access a computer but uses that access to obtain or alter information outside the bounds of his approved access.

Applying these definitions, the Fourth Circuit found that neither forbade Miller’s “use” of information that was validly accessed in the first place. The Fourth Circuit acknowledged that its holding would “disappoint employers hoping for a means to rein in rogue employees.” But the Fourth Circuit emphasized that it was “unwilling to contravene Congress’s intent by transforming a statute meant to target hackers into a vehicle for imputing liability to workers who access computers or information in bad faith, or who disregard a use policy.” (Query: if the policy had forbid accessing information for purposes other than furthering WEC Carolina’s business, would that policy have been sufficient to trigger a claim under the CFAA?).

The Takeaway: There is now an even greater impetus for the U.S. Solicitor General to appeal from the ruling in Nosal. We now have, on the one side, the Fourth Circuit and Ninth Circuit holding that violations of computer use policies do not amount to a violation of the CFAA, and the Fifth, Seventh and Eleventh Circuits on the other side holding that violations of those policies do qualify as violations of the CFAA.  

In the meantime, employers in Maryland, North Carolina, South Carolina, Virginia and West Virginia will not be able to use a violation of a computer use policy as a basis for a claim under the CFAA. They will have to rely instead on the Uniform Trade Secrets Act and common law claims in any trade secret disputes against employees whom the employers believe used their work electronic devices to take confidential information.

WEC Carolina v. Miller.pdf (65.78 kb)

07262012Greetings from Rehoboth Beach!  Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:
 
 
Noteworthy Trade Secret and Non-Compete Posts and Cases: 

  • The Northern District of California has ruled that federal authorities have not properly served Chinese defendants in the DuPont/Pangang Group criminal proceeding arising out of the alleged theft of trade secrets for DuPont’s titanium dioxide process. The district court found that service of Pangang’s U.S. subsidiary (of which it owns 75%) did not constitute proper service as there was insufficient evidence that Pangang controlled that affiliate (can’t say that I understand that reasoning but will see if I can get a copy of the court’s opinion). Prosecutors have until Aug. 16 to report back to the court on how they intend to proceed; it is being reported that this is a significant blow to the prosecution. As readers of this blog may recall, this case is one of the highest profile cases yet brought under the Economic Espionage Act because Pangang Group is owned by the Chinese government and one of the parties indicted by the government. (A special thanks to Janet Craycroft of Intel for reporting this development to me). 
  • Speaking of trade secrets and China, a recent survey of Chinese executives shows that 2/3rds of them have non-competes. It would be interesting to see how Chinese courts have responded to efforts to enforce them.
  • Pharmaceutical and medical device companies: Be careful what you share with the FDA as the Medical Device and Diagnostic Industry Blog is reporting that the FDA is now being accused of having improperly released trade secrets that were provided to it in an article, “How FDA Dumped Device Secrets in Cyberspace.” The FDA has also taken a beating for allegedly spying on a number of its whistle blower employees whom it believed were disclosing trade secrets; The New York Times had a recent editorial, “The Spy Hunt for Whistle-Blowers,” criticizing the FDA for those efforts.
  • It’s not all “touchy feely” in the organic dairy market, as the gloves have come off in a trade secrets dispute between Horizon Organic and rival Organic Valley over the hiring of a former employee of Horizon. The employee, Larry Hansen, was dairy operations manager for milk quality and supply at Horizon for four years before taking a similar job at Organic Valley. Horizon claims that Hansen had access to its supplier list, which it keeps confidential, as well as its purchasing price “tolerances and strategies” and sales demand projections, which it also safeguards. Horizon believes that he is violating a non-disclosure agreement that he signed while at Horizon. 
  • What is the status of non-compete reform legislation in Massachusetts? Brian Bialas has an update in Foley & Hoag’s Massachusetts Non-Compete Blog.
  • Memo to Florida employers hiring new employees with non-competes: Do NOT agree to indemnify them for any potential claims or litigation, warns Burr & Forman’s Trade Secrets & Non-compete Blog.
  • For those in Connecticut, Daniel Schwartz’s Connecticut Employment Law Blog has a practical post “Drafting the Restrictive Covenant to Protect Your Interest” under Connecticut law. 
  • Electronic discovery and litigation holds can be a prominent part of any trade secret case, so defendants are breathing a sigh of relief as the U.S. Court of Appeals for the Second Circuit has rejected District Court Judge Scheindlin’s ruling that a failure to issue a litigation hold is reckless per se.  Peter S. Vogel’s Internet, Information Technology and e-Discovery Blog details this recent ruling in Chin v. Port of Authority of New York, overturning a decision by Judge Scheindlin that has been criticized as utopian and impossible to meet.
  • Did the CEO of an Irish pharmaceutical-services company breach a non-disclosure agreement when he publicly stated that a rival was on the block? The Wall Street Journal is reporting this imbroglio in an article entitled, “Study in How Not to Keep a Deal Secret.”

Computer Fraud and Abuse Act Posts:

  • Another district court from Michigan has adopted the reasoning of the Ninth Circuit in U.S. v. Nosal, reports Jessica Mendehlson in Seyfarth Shaw’s Trading Secrets Blog. In Dana Ltd. v. American Axle & Mfg. Holdings, the district court found that several former employees did not exceed their authorized access when they erased a number of files that would have presumably shown that they were taking their employer’s trade secrets with them.  

Cybersecurity Posts and Articles: 

  • For more on the pending cybersecurity bill, see The Wall Street Journal’s article, “Cyber Bill Relies on Voluntary Security.” The article indicates that the Obama administration is not happy with the present bill as Republican House members are resisting giving any further control over cyber issues to the Department of Homeland Security.
  • From The New York Times Bits Blog, “Hackers Demonstrate a Rising Vulnerability of Smartphones” according to experts speaking at the Black Hat security conference in Las Vegas.

News You Can Use:

  • Suffering from “Digital Overload?” The New York Times has some advice on how to take a deep breath and take a step away from your devices. Baby steps, people, baby steps.

The Acordia of Ohio v. Fishel case has taken an unexpected turn, as the Ohio Supreme Court has granted a request for reconsideration of its May 24, 2012 decision in which it refused to enforce a non-compete in the context of a corporate merger or reorganization because of the perceived shortcomings in the language of the non-competes before it. Former Appellate Judge Marianna Brown Bettman has a very thorough and excellent post of this highly unusual decision in her Legally Speaking Ohio Blog, which closely monitors proceedings before the Ohio Supreme Court.
 
For those not familiar with the decision, the Acordia case involved an effort by a company to enforce a non-compete against several former employees who had signed covenants not to compete with a corporate predecessor. However, the non-competes in question did not specifically include language or provisions making clear that assignees or corporate affiliates were covered by the non-compete. The trial court, the First Appellate District (the court of appeals for Hamilton County, which includes Cincinnati) and ultimately the Ohio Supreme Court, all applied the specific language of the non-compete and found the failure to include language that applied the non-compete to assignees, successors or affiliates doomed its enforcement. Acordia had relied on an Ohio statute that provided that by operation of law all assets of the merged company transfer to the acquiring or new company. 

The decision has apparently caused great consternation in the business community. Judge Bettman notes that 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. She quotes the following language: “The heart of this case is a simple question: when a lawyer drafts a competition agreement for a corporate client, does the lawyer need to include “successors and assigns” language or not… [S]ince this Court issued its decision in this case, the Internet has been filled with advice and reminders to lawyers to include such language when drafting all their employment agreements and other corporate contracts.” 

According to Judge Bettman, these business amici emphasized that this is not a mere matter of contract law but, rather that, under the Ohio constitution, it is the General Assembly, not the Supreme Court, that has the power to establish and modify state law and the General Assembly has made it clear that such language is not necessary when a corporation goes through a statutory merger.

The vote to reconsider was 6 to 1, which is intriguing because Acordia was a 4 to 3 decision. It will be interesting to see if any of the justices who voted with the majority are seriously considering changing their vote. Frankly, I am genuinely surprised by this development and I now believe that the Supreme Court may reverse itself and apply the majority rule permitting the transfer of non-competes after a merger or reorganization. I will keep you posted on any further rulings and developments in this important case.

My apologies for not adhering to my regular “Thursday Wrap Up” schedule but I have been on the road and very busy with some out-of-town depositions. Without any further excuses, here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:   Noteworthy Trade Secret and Non-Compete Posts and Cases: 
  • South Korean manufacturer LG Display Co. has acknowledged 11 people including six of its own employees have been charged with stealing advanced TV display technology from rival Samsung. LG Display said Tuesday that it was charged along with the 11 for alleged theft of OLED technology between 2010 and 2011. Three of those charged currently work at Samsung Display, a display making unit of Samsung Electronics Co. LG denied that it or its employees were involved in the technology theft. 
  • The recent SASCO v. Rosendin Electric decision — which affirmed a trial court’s finding that the plaintiff’s action was in bad faith and awarded $484,000 in attorneys fees — is generating a lot of buzz in the trade secret/non-compete blogosphere. Epstein Becker’s Trade Secrets & Noncompete Blog, Seyfarth Shaw’s Trading Secrets Blog and Kenneth Vanko’s Legal Developments in Non-Competition Agreements Blog all have takes on the decision.  As usual, Kenneth’s take is particularly interesting. He has expressed concern in the past about the number of meritless non-compete cases and, as a result, he has advocated that courts should be more willing to impose prevailing party awards in these cases. (For my take on the SASCO decision, see my Wednesday post). 
  • The trade secrets dispute between professional wrestling’s two federations, TNA and WWE, has resulted in a very broad TRO restraining WWE, reports Burr & Forman’s Non-Compete and Trade Secrets Blog. A federal judge in Nashville has put WWE in a sleeper hold over the potential disclosure of trade secrets hold because it hired a former TNA employee to solicit talent from TNA. 
  • Looking to buy a business and considering a non-compete with that transaction? You should review the recent post by Fisher & Phillips’ Non-Compete and Trade Secrets Blog that outlines the ten issues of which you should be aware before going forward with an acquisition. 
  • For those in Georgia, Atlanta lawyers Benjamin Fink and Neil Weinrich share their thoughts about Georgia non-competes entered into between November 3, 2011 and May 11, 2011 that may remain in legal limbo due to the Eleventh Circuit’s recent decision in Becham v. Synthes USA (a link to the decision can be found in my previous post about it here). In their Georgia Non-Compete and Trade Secrets Blog, they detail that court’s finding that Georgia’s previous non-compete statute was unconstitutional and that covenants entered into prior to May 11, 2011 might be legally suspect as a result. 
  • The fact that Google’s Marissa Mayer did not have a non-compete and was able to become Yahoo’s new CEO has sparked a discussion about how a company can protect itself if an executive leaves to join a competitor. Credit Fisher & Phillips’ Michael Greco for starting the conversation with his post, and Elizabeth Dilts’ article in Corporate Counsel is also worth reviewing. 
  • For the litigators: is a former employee an indispensable party in a dispute between two companies arising out of his/her non-compete? Check out this post from the Delaware Corporate & Commercial Litigation Blog for the answer.
Cybersecurity Posts and Articles: 
  • Covington & Burlington’s Inside Privacy Blog is reporting that the Federal Financial Institutions Examination Council has recently issued risk management guidance for depository institutions’ use of cloud computing. This may serve as a first step in setting a standard of care for managing information over the cloud. 
  • Forbes asks “Dropbox Secuirty Breaches: Who’s Guarding Your Secrets in the Cloud?” 
  • In an article entitled “Cyberthieves Hit Small Businesses: Courts Extend Legal Protections to Small Firms Who Were Hacked” the Wall Street Journal’s Joe Palazzolo details two recent rulings by the First Circuit Court of Appeals and a federal district court in Detroit that found that small companies enjoyed some protections against banks who had allowed hackers to improperly withdraw funds from their accounts.
News You Can Use: 
  • Federal Appellate Judge Richard Posner’s article in The Atlantic, “Why There Are Too Many Patents in America,” is raising a lot of eyebrows in the IP community. Judge Posner, one of the formidable minds of the bench, had recently presided over a high profile patent dispute between Apple and Motorola. After dismissing both parties’ claims, Judge Posner voiced concern that the case was emblematic of many unnecessary patent cases in the U.S. His article builds upon that experience and suggests that our patent system has run amok.

07192012Is there renewed momentum for a federal trade secret statute?  Wisconsin Senator Herb Kohl’s office has issued a press release that he is co-sponsoring a new federal trade secrets bill, the Protecting American Trade Secrets and Innovation Act of 2012, with the assistance of Delaware Senator Chris Coons and Rhode Island Senator Sheldon Whitehouse.  A link to the proposed Act can be found here.

Last fall, Senator Kohl and Senator Coons introduced an amendment to add a civil cause of action to the Economic Espionage Act (EEA), an effort that appears to have stalled.  Like that amendment, this latest proposed legislation is intended to make it easier for U.S. companies to defend themselves against trade secret theft and corporate espionage. 

Based on my initial review, the proposed Act is strikingly similar, if not identical in relevant part, to the amendment Senators Kohl and Coons proposed to the EEA last fall.  For example, like that proposed amendment to the EEA, this provision provides for an ex parte seizure order (1) of any property used in connection with the alleged misappropriation of trade secrets or (2) to ensure the preservation of evidence.  It also provides for nationwide service of process, another feature that was heralded in the amendment to the EEA last fall.  Finally, like the proposed amendment last fall, the Act would impose a heightened pleading requirement — namely, a sworn representation that nationwide service of process is required or that the trade secrets were misappropriated to another country.

Unfortunately, it does not appear that the Act would attempt to remedy the havoc caused by the U.S. Court of Appeals for the Second Circuit’s recent opinion in U.S. v. Aleynikov.  As readers of this blog may recall, the Second Circuit, at least in my humble view, imposed an unduly restrictive definition of what trade secrets were included within the EEA, by holding that trade secrets “related to or included in a product that is produced for or placed in interstate or foreign commerce” would not include proprietary software that was not actually sold into commerce.  The proposed Act includes this same language that so flummoxed the Second Circuit and would, in my opinion, substantially limit the number of trade secrets that might be protected under this statute.  (For more on my take on the Aleynikov decision, see my post here).

For those interested in reading more about the legislation, check out Robert Milligan’s post earlier this afternoon in the Seyfarth Shaw Trading Secrets Blog.  Whatever the Act’s shortcomings, it would still be an improvement over existing law, and as I did with the proposed amendment to the EEA, I would urge those in the trade secret community to support its passage.

07182012A recent decision by California’s Fourth Appellate District Court of Appeals highlights the dangers of prosecuting a trade secret case that proves to be unsuccessful — namely, the possibility that a court may find that the action was brought in “bad faith” because one of the elements necessary for that trade secret claim was missing. While the July 11, 2012 decision, SASCO v. Rosendin Electric, Inc., is rooted in California’s version of the Uniform Trade Secret Act (UTSA), (Civ. Code, 3426.4), it is a sobering reminder that a company bringing a trade secrets claim in California may need to have actual evidence of misappropriation to support its claim. (A PDF copy of the opinion can be found below and a hat tip to Dan Westman of Morrison & Foerster for bringing this opinion to my attention).

Facts: SASCO had sued three former senior managers who joined a competitor, claiming that they had misappropriated trade secrets, including certain allegedly proprietary software, for an opportunity that was being pursued by SASCO called the Verizon Trustin Project. After a number of bruising discovery disputes, SASCO was unable to come forward with evidence that the former employees ever misappropriated any trade secrets and it dismissed its claims rather than respond to a motion for summary judgment by the former employees. The employees then sought their attorneys fees, claiming that the action had been brought in bad faith as part of a larger effort to wear them down through litigation.

Holding: The trial court found that SASCO had brought the case in bad faith under California’s version of the UTSA. The trial court explained that SASCO’s suspicions that its former employees had taken other trade secrets was an insufficient basis for asserting the claim and it faulted SASCO for not conducting a thorough investigation before filing the lawsuit. (SASCO’s cause was not helped by the fact that the trial court also believed that the allegedly proprietary software was an “off the shelf” computer program). In light of of the absence of any direct or forensic evidence and affidavits from the former employees that they did not misappropriate the trade secrets, the trial court granted the former employees’ motion for attorneys fees and costs, awarding a total of $484,943.46.

On appeal, the Court of Appeals agreed, holding that the trade secret claims were “objectively specious” which it defined as an action that superficially appears to have merit but for which there is a complete lack of evidence to support the claim. Rejecting SASCO’s interpretation that only “frivolous” claims warranted a bad faith finding, the Court of Appeals reasoned that there was also ample evidence of subjective of bad faith. Specifically, the Court of Appeals was also influenced by the fact that, in a related litigation between SASCO and one of the employees, a federal district court had awarded approximately $570,000 in attorneys fees and costs against SASCO because that litigation appeared to have been initiated as part of an attempt to wear down the former employees with duplicative and costly satellite litigation in two separate forums.
 
My Concerns: Misappropriation can be one of the tougher elements of a trade secret claim to prove and, as a result, other courts have generally found that circumstantial evidence of misappropriation is sufficient. Indeed, I would argue that circumstantial evidence is often critical in trade secret cases, which by their nature, involve stealth and concealment, making it doubly difficult to prove actual misappropriation. As was perhaps best explained by the U.S. Court of Appeals for the Sixth Circuit in its opinion in Stratienko v. Cordis Corp., 429 F.3d 532 (6th Cir. 2005): “Permitting an inference of use from evidence of access and similarity is sound because ‘misappropriation and misuse can rarely be proved by convincing direct evidence.’  Eden Hannon & Co., 914 F.2d at 561 (citing Greenberg v. Croydon Plastics Co., 378 F. Supp. 806, 814 (E.D. Pa.1974)). Presented with ‘defendants’ witnesses who directly deny everything,’ plaintiffs are often required to ‘construct a web of perhaps ambiguous circumstantial evidence from which the trier of fact may draw inferences which convince him that it is more probable than not that what the plaintiffs allege happened did in fact take place.’ Id. Thus, requiring direct evidence would foreclose most trade-secret claims from reaching the jury because corporations rarely keep direct evidence of their use ready for another party to discover.”

Consequently, to the extent that the Fourth District is imposing a duty of direct evidence of misappropriation in all cases, I think it may be imposing an impossible burden on some plaintiffs. If this is the standard, all that a defendant has to do is object or fail to disclose critical evidence and a plaintiff may find itself in a situation that it cannot produce that direct evidence, since evidence of misappropriation is frequently in the hands of the defendant. 

The Takeaway? California plaintiffs need to do their homework and would be well served by making sure that they have some evidence of misappropriation before filing an action. While the Fourth District Court of Appeals acknowledges there may be situations where a plaintiff may bring an action in good faith if it reasonably believes discovery may reveal misappropriation, a forensic examination of any devices of departing employees and other proper investigation should be conducted before filing any action. While I am troubled that the Fourth District appears to be imposing an obligation to come forward with direct evidence given the special challenges of proving direct misappropriation, there does appear to be wiggle room in the opinion for future plaintiffs on this point.

Finally, it should be noted that the SASCO decision may be a bit of an outlier, given some of its unique facts (the dismissal of the claim by SASCO and the satellite litigation in federal court which resulted in a similar award of attorneys fees). However, there are a number of cases working there way through the courts involving claims or findings of bad faith against unsuccessful trade secret plaintiffs (see the recent case filed against Latham & Watkins, and most notably, the American Chemical Society v. Leadscope case currently being considered by the Ohio Supreme Court). Therefore, thinking through your trade secret claims and carefully considering the evidence in support of the elements of those claims before filing a lawsuit is more important than ever.

Sasco v Rosendin Opinion.pdf (178.37 kb)

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:
 
Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • A Washington federal judge issued a writ of garnishment on behalf of DuPont last week against Kolon Industries Inc., ordering an associated company to become a garnishee following DuPont’s $920 million trade secret verdict against Kolon last fall, Law360 is reporting. A PDF copy of the order can be found below. The parties are waiting on a ruling on DuPont’s motion for permanent injunction from U.S. District Court Judge Robert Payne back in Richmond Virginia. For more on the DuPont v. Kolon case, see my previous posts here and here. 
  • An Illinois court has recently found that breach of an agreement must be material to void a non-compete reports Epstein Becker’s Trade Secrets and Noncompete Blog.  The case, InsureOne Indep. Insur. Agency v. Hallberg, involved the enforcement of a non-compete that accompanied a sale of a business.  For what it is worth, in my experience, courts tend to be less forgiving of a breach by an employer in non-competes involving an employee.
  • Michigan is the latest state to consider scaling back its enforcement of non-competes. Senate Bill 786, which was introduced in late 2011, would require Michigan employer to advise a potential employee of the requirement to sign a non-compete agreement as a condition of employment. This requirement is gaining traction nationally, as New Hampshire recently adopted a similar statute imposing a similar requirement upon its employers, which becomes effective tomorrow. 
  • What are the risks and benefits of suing the company that hires a former employee with a non-compete? The Delaware Non-Compete Blog has a practical post outlining the practical considerations every company should weigh before joining a competitor in a dispute over a covenant not to compete. 
  • For those interested in working through the legal thicket of garden leave provisions — i.e., provisions that pay an employee for a post-employment waiting period so that he/she does not compete — check out the Burr & Forman Non-Compete and Trade Secrets Blog’s recent post, which provides a good summary of the caselaw construing these provisions.
Computer Fraud and Abuse Act Cases and Posts:
  • The Solicitor General has been granted a 30 day extension so he can continue to evaluate whether he wants to appeal from the Ninth Circuit’s en banc decision in U.S. v. Nosal, reports Seyfarth Shaw’s Trading Secrets Blog.  That decision narrowly applied the CFAA, finding that a violation of a computer use policy was insufficient to trigger that statute.  For more detail, see my earlier post.
  • A New York state court has recently decided to follow Nosal’s holding in a short decision dismissing a CFAA claim, reports Foley & Hoag’s Massachusetts Non-Compete Blog. The opinion MSCI Inc. v. Jacob, 2012 N.Y. Slip. Op. 05107 (N.Y. App. Div., 1st Dep’t June 26, 2012), provides little detail but signals the growing divide over the scope of the CFAA. 
  • Littler’s Unfair Competition & Trade Secrets Counsel Blog has a post about another recent CFAA decision, Del Vecchio v. Amazon, where the plaintiff’s CFAA claim was dismissed because it failed to provide specific facts showing the actual value of the trade secrets at issue or the actual profits lost as a result of the theft.
Cybersecurity Posts and Articles: 
  • The big news this week was the breach of 400,000 Yahoo accounts but The New York Times is reporting that the breach extends beyond Yahoo to Gmail, Hotmail, and AOL Users. 
  • “Cybercriminals Sniff Out Vulnerable Firms” advises The Wall Street Journal. 
  • Forbes’ Andy Greenberg details the plan on “How To Hijack ‘Every iPhone In The World.'”
News You Can Use: 
  • Can this relationship be saved? “He Texts, She Tweets—Are They E-Compatible? Setting Digital Ground Rules to Become E-Compatible With Family and Friends” writes Elizabeth Bernstein in The Wall Street Journal.
Dupont v Kolon – Writ of Garnishment.pdf (86.82 kb)
Here are the noteworthy trade secrets, non-compete and cybersecurity stories from the past week: Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • The big news in the trade secret blogosphere this week was Todd Sullivan’s announcement that he will be leaving Womble Carlyle and forming a litigation boutique firm, Graebe Hanna & Sullivan. Todd has been blogging since 2006 and his contributions to the Trade Secrets Blog made it one of the best, and funniest, trade secret blogs. Hopefully, he will find the time to launch a new blog after he hits the ground with his new firm. 
  • Google has been sued for allegedly copying portions of its video chat platform from the company Be In, which offers its own video chat program, CamUp. Be In alleges that it discussed a business deal with Google at a meeting in London last April. According to the complaint, after signing a non-disclosure agreement with Google, “Be In provided a live demonstration of its CamUp product, and proposed that a ‘Watch with your Friends’ button be embedded within all YouTube pages.”
  • Law360 is reporting that trade secret claims brought by Therason against former McDermott Will & Emery partner John Fuisz have been dismissed as untimely. Therason, at the time a client of McDermott, had alleged that Fuisz had shared its trade secrets with a pharmaceutical company formed by his family members.
  • Are you an employee looking down the barrel of a cease and desist letter from your former employer? Then you should review Rob Dean’s latest post on the Virginia Non-Compete Blog for advice on how to respond.
  • For those practicing in Illinois, Kenneth Vanko reports that Illinois courts are all over the place in their application of the Illinois Supreme Court’s Reliable Fire v. Arredondo decision last year. In Reliable Fire, the Supreme Court found that an employer had to come forward with evidence of a legitimate business interest to justify enforcement of any covenant not to compete. As Kenneth and I both predicted, this fact-based approach has made non-compete cases highly unpredictable and more uncertain for employers and employees.
  • The IPKat Blog has an interesting post about how trade secrets may serve to enhance the reputation of some companies.
  • Although it is a relative newcomer to the blogosphere, Burr & Forman’s Non-Compete & Trade Secrets Blog continues to churn out good, practical posts. This week’s post, “Court Says It’s Time to Pay The Piper, Even if the Piper Hasn’t Paid: Fee Provisions and Third Party Payments,” looks at the enforceability of prevailing party provisions in non-compete disputes
Cybersecurity Posts and Articles:
  • Concerns about confidentiality, privilege and cloud computing continue to swirl, and Peter S. Vogel’s Internet, Information Technology and e-Discovery Blog has some helpful links to a recent interview that Peter gave on the subject as well as a Texas CLE on the subject.
News You Can Use:
  • “Fix That Password—Now!” says The Wall Street Journal, with some advice on what passwords work best.