03242012Given the tough legal market and the resulting fragmentation within the legal community, it was inevitable that lawyers would find themselves battling over trade secrets as law firms splinter and partners attempt to take their books of business else where.  When it comes to lawyers and law firms, nothing is ever simple, and there are a number of nuances to these disputes that make them especially challenging.

Let’s talk about the recent cases.  The Wall Street Journal is reporting that Joseph C. Maher II, a former attorney from the renowned plaintiffs’ law firm, Weitz & Luxenberg PC, has filed a lawsuit against his old firm accusing it of “possessing a cache of confidential files from a competitor that allegedly could be used to earn millions of dollars.”  Maher, who was also the head of Weitz & Luxenberg’s Los Angeles office, claims the firm had a massive database on its internal network of confidential client and legal files that it allegedly purloined from one of its leading competitors, the Texas-based law firm, Waters & Kraus LLP.  The two law firms have offices across the country and compete for similar clients who may have asbestos-related claims.

This is not the only high profile case involving a dispute over lawyers and trade secrets.  Last month, SNR Denton’s lawsuit with Huron Consulting over the hiring of a team of consultants was back in the news.  Huron sued SNR Denton after the law firm hired health care partner Lisa Murtha, a former Huron consultant, whom Huron claims breached her noncompete agreements by recruiting other Huron employees to join her in jumping to the firm.  Also last month, Elliott Greenleaf & Siedzikowski sued a former partner and his new firm for allegedly installing software on Elliott Greenleaf’s computers that allowed him to have continued access to the firm’s files through the “cloud.”

These trade secret disputes between lawyers raise a number of tricky issues.  The most obvious are:

No. 1:  Can lawyers or law firms impose agreements on their associates or partners restricting them from taking clients?   As I wrote last month in my post about the GPC v. Wi-LAN case over the hiring of a former General Counsel, the answer is generally “no.”  Most states have adopted Ethical Canon 5.6 or its counterpart DR 2-108 that forbid restrictive covenants limiting lawyers because they interfere with a client’s ability to choose his or her own lawyer (the apparent exceptions being Arizona and California, which I am told have rejected the categorical rule).  That being said, there are occasional outlier decisions that may fail to apply this majority rule, as this post from Fisher & Phillips’ Non-Compete and Trade Secrets Blog demonstrates.

For those attorneys interested in finding out more about these issues or what their states may have to say, check out Russell Beck’s article for New England In-House,  Marshall H. Tanick and Phillip J. Trobaugh’s article on Minnesota law (“Non-Competes for Professionals: It is Not for Amateurs”), and this thorough discussion going on within Linked In’s Noncompete Lawyers Group.

No. 2:  Are lawyers subject to trade secret laws?  Absolutely.  So long as they abide by the ethical canons, lawyers should be able to protect their own confidential information and trade secrets.  Last month, Todd Sullivan’s Trade Secrets Blog wrote a post about a Texas case where a court granted a TRO to prevent a law firm’s former office manager from “teaching” a competitor how to do asbestos litigation in return for an agreement to split the proceeds 50-50.  According to Todd, the trade secrets addressed the firm’s “strategy and method of prosecuting asbestos cases and other mass toxic tort cases.”

No. 3:  What can lawyers and law firms do to protect themselves?  Practice what we preach.  In my experience, lawyers are extraordinarily careful about protecting their clients’ confidences.  However, when it comes to their own potential trade secrets, I suspect most lawyers are more concerned about practicing law, protecting their clients, and bringing in more clients than they are about protecting themselves (a not uncommon trait among professionals; doctors, for example, are notorious for ignoring the business aspects of their practices so they can focus on practicing medicine).  As I wrote last month, the consequences of this inattention can manifest themselves in dangerous ways, as lawyers are now perceived as soft on security, at least by cyberthieves and hackers. 

Similarly, if you and a partner or law firm are going to part ways (or looking to bring a new partner aboard), make sure that you first consult the ethical guidelines in your state about how to handle these situations (when and how to approach clients, etc.).  Then make sure that you conduct yourself in the same manner that you would recommend to a client. 

The takeaway?  It is a rough and tumble world, so govern yourselves accordingly!

Perhaps the busiest week in recent memory, so let’s get to the highlights: Trade Secret and Non-Compete cases:
    • Parker Poe’s Trade Secret & Unfair Competition Reporter asks whether “Trade Secrets Misappropriation Claims [are] under Attack in North Carolina?”  The post discusses a recent case, AECOM Technology Corp. v. Keating, in which North Carolina’s Business Court dismissed a claim because the alleged trade secrets — customer lists, customer contract information, pricing information and product information – were pled too generally to state a claim for misappropriation.  The post’s author expresses concern that a trade secret plaintiff in North Carolina will now face the Hobson’s choice of disclosing its trade secrets to survive a motion to dismiss.
    • If you are a dog-lover, you will enjoy Kenneth Vanko’s Legal Developments in Non-Competition Agreements post that describes a non-compete case, Western Indus. v. Lessard, out of Pennsylvania that imposed a mandatory injunction requiring the return of a bedbug-detecting beagle that a former employee was trying to sell on eBay.
    • Trade secrets and the Internet are back in the news: Russell Beck’s Fair Competition Blog writes about a recent opinion by the Southern District of Ohio, Allure Jewelers, Inc. v. Ulu, that denied a TRO because the plaintiff disclosed its alleged trade secrets on the Internet.  For more on protecting trade secrets over the Internet, check out my post last August on the Syncsort v. Innovative Routine decision, as well as the Trading Secrets Blog’s post on the Allure Jewelers case earlier this week.
    • Foley & Hoag’s Security Privacy and the Law Blog highlights the emerging split between courts under the Computer Fraud and Abuse Act (CFAA) over the scope of the phrase “exceeds authorized access,” a key element for a claim under the CFAA.
    • Seyfarth Shaw’s Trading Secrets Blog also has fine post on one of the CFAA decisions discussed in the post above, Walsh Bishop & Assoc. v. O’Brien.  In that case, the Minnesota District Court dismissed the employer’s claim because it found that the employees had authorized access to the information they allegedly stole.
  • One more CFAA post to check out, this one noting that “Merger Sabotage [is] Not a Damage Element under Computer Fraud Law.”  In that article reprinted in Corporate Counsel, Saranac Hale Spencer details the ruling in Sealord Holdings v. Radler by the Eastern District of Pennsylvania finding that the plaintiff failed to adequately aver specific damages to satisfy the standards under Twombly and Iqbal.
  • Whether non-competes can be enforced against lawyers remains a hot topic.  For those practicing in Minnesota, check out Marshall H. Tanick and Phillip J. Trobaugh’s article entitled “Non-Competes for Professionals:  It is Not for Amateurs” which also addresses Minnesota’s law for non-competes against accountants and doctors.
  • The Virginia Non-Compete Blog, whose focus is on the protection of employees, details a recent decision, United Marketing Solutions v. Goldberg, refusing to enforce a non-compete provision against a franchisee because it was overly broad.
  • For those in the financial community, Fisher & Phillips’ Non-Compete and Trade Secrets Blog offers “Protocol for Broker Recruiting:  5 Things to Consider.”  For the uninitiated, the Protocol is a voluntary agreement between financial firms designed to manage the transition of brokers and clients between those firms.
  • “Europe Inconsistently Protects Trade Secrets,” according to a survey cited by The Chemical Processing website.  According to Sarah Turner, counsel at Hogan Lovells and co-author of that survey, “[t]he differences in protection across the EU mean that businesses trading in some parts of Europe are in danger of losing significant revenue to their competitors” because investors may be “more willing to invest in countries where they believe that their secrets are adequately protected from misuse or misappropriation.”
  • “Without Chemical Trade Secrets, Innovation in America Could Become a Spy Game” notes the blog American Chemistry Matters.  The post also decries a proposed rule by the EPA that would require chemical manufacturers to disclose confidential chemical identities in health and safety studies.
Cybersecurity:
  • “Survey Says Canada Tops Mobile Data Loss, 58 Percent of Organizations Lose Data Through Insecure Mobile Devices” says Websense.
  • Social hacktivists have got the media’s attention.  Holman Jenkins of The Wall Street Journal says “Worry About the Hackers You Don’t See” because social hacktivists’ own tactics have been used against them; meanwhile, The New York Times peers into “The Soul of the New Hacktivist.”
  • Has the era of “Bypassing the Password” arrived?  According to The New York Times, the Defense Department will be funding a program to develop software that determines, just by the way you type, that you are indeed the person you say you are. 
News You Can Use:
    • Forbes warns not to ignore that file cabinet in a guest post by Mark Emery entitled “Paper Chase: The Huge Security Risks in Your File Room.”
    • “Cisco to Secure Employees’ Devices” according to The New York Times.  Seeking to capitalize on the growing “Bring Your Own Device” (BYOD) to work movement, Cisco will offer a service to interested customers to preserve their security and still allow employees to utilize their own smartphones and other devices.

Companies frequently wrestle with the decision of whether to seek a temporary restraining order (TRO) in trade secret and covenant not to compete cases.  03202012The hesitancy is understandable, since a request for an injunction adds a level of expense and commitment that does not accompany a conventional lawsuit. 

As a result, after discovering a potential violation, companies will sometimes opt to send a cease and desist letter in the hope that it may cause a potential defendant to refrain from any further misconduct or lead to a settlement of the dispute.  However, it is important to remember that there is a risk that any delay may be perceived by a court as a sign of a lack of urgency, importance or irreparable injury.

Two recent cases and a recent post by the Delaware Non-Compete Blog illustrate the consequences of delay.  In a February 2, 2012 Order denying a plaintiff’s TRO request in Digital Generation v. Boring, the Northern District of Texas reasoned that the plaintiff’s “decision to wait 44 days after [the defendant’s] termination before seeking a TRO suggests that the perceived risk to [plaintiff] is not immediate.”  (A copy of the opinion is attached below). 

Similarly, last month in a patent case, Cephalon v. Sun Pharmaceuticals, the District Court of New Jersey denied a request for a TRO, holding that “[I]n light of the continued unwarranted delays in prosecuting this action, plaintiff has not demonstrated that it will suffer immediate and irreparable harm absent the entry of a temporary restraining order.”  Unfortunately, the court’s opinion does not provide much detail about the delays, presumably because of a protective order in the case that placed much of the relevant information and briefing under seal.

Finally, the Delaware Non-Compete Blog wrote an excellent post last week aptly named “Settlement Discussions Not An Excuse for Delayed TRO Application To Enforce Noncompete.”  According to the post, the Chancery Court was troubled by the fact that the plaintiff had waited four months after learning of the defendants’ activities before seeking the TRO. The plaintiff argued the delay was due in part to its efforts to work out a standstill agreement with the defendants.  As noted in the transcript excerpt below, the Chancery Court wasn’t impressed:

“You can’t have a problem in November and come running in here [in March], you know, two days after you file your papers, and say all of a sudden you need a TRO. We don’t operate like that.

And the fact that you tried to … negotiate a standstill, that’s great, but if you think that your rights are really being harmed to the extent that you say they are, you have to go on a parallel path to get some judicial relief. You haven’t moved fast enough, and I’m not giving you a TRO.”

From a litigator’s standpoint, the issue of undue delay can greatly complicate a TRO request and may be the proverbial straw that breaks the camel’s back.  As I have written many times before, some courts already may be ambivalent about trade secret and non-compete cases and TROs in particular, since consideration of a TRO request is generally disruptive to the court’s docket and schedule for that day.  In addition, the bar for demonstrating irreparable injury in commercial and IP cases in federal court has been raised by the U.S. Supreme Court’s decisions in eBay Inc. v. MercExchange LLC, 547 U.S. 388 (2006), and Winter v. NRDC, 555 U.S. 7 (2008), and district courts have applied that heightened standard in recent trade secret cases such as Amylin Pharm v. Eli Lilly & Co. 

So what is the best course of action?  In my experience, a cease and desist letter seldom resolves a dispute and, as the blog post above suggests, is rarely rewarded by the court.  Consequently, a company needs to make a decision relatively quickly on whether the dispute at hand is indeed one worthy of seeking a TRO.  If it is, the company should move aggressively for the TRO.

If, however, your client still wants to attempt to resolve things before bringing a TRO action, keep the defendant on a very short leash and impose a deadline.  If you cannot secure an acceptable agreement, file your TRO request promptly after that deadline.  This will preserve your ability to continue to negotiate a resolution, perhaps one brokered by the court, and refute the argument that your client has unduly delayed or lacks irreparable injury as a result.

Order Denying Digital Generation’s Motion for TRO.pdf (161.98 kb)

For those looking for a break from bracket-mania, here are some noteworthy reports from the web on trade secret law, non-competes and cybersecurity: Trade Secrets and Non-Competes:
  • Allergan v. Merz “Botox” Injunction Update: In the wake of Judge Andrew Guilford’s sweeping ten-month injunction forbidding them from selling Xeomin, Merz Aesthetics and Merz Pharmaceutical issued a press release yesterday committing to the remediation plan outlined in the court’s order. In addition, blogger Michael Sacopolos, who has been following the case closely, reported that Merz has placed the offending employees on administrative leave. For those who reviewed Judge Guilford’s rulings, the fact that none of the 7 employees had been terminated or reassigned was a point of concern. It sounds like this case is headed towards settlement, and there was apparently a hearing this past Tuesday, the results of which have yet to be reflected in any order.
  • Law 360 is reporting Sara Lee settled its non-compete case with former executive Vincent Burns and Tyson Foods. At a recent hearing, Burns had been forced to acknowledge that he had kept documents marked confidential. 
  • The Southern District of California has dismissed Gabriel Technologies’ trade secret claims against Qualcomm, claims that Gabriel had valued in excess of — wait, wait, let me get my pinkie close to my lips — $1 billion dollars. The district court found that there were two separate instances in 2003 and 2004 where Gabriel had “suspected” that its trade secrets were being misappropriated.  (A PDF copy of the opinion is attached below).
  • Seyfarth Shaw’s Trading Secrets Blog has several noteworthy posts this week, including an important non-compete decision by the Nevada Supreme Court, as well as what appears to be a groundbreaking Computer Fraud and Abuse case defining “unauthorized access” by a Colorado federal court.
  • “Will New Jersey continue to recognize ‘Inevitable Disclosure’ under Its New Trade Secrets Act?” Arent Fox asks. The article notes that a recent federal decision, IDT Corp. v. Unlimited Recharge Inc., questions the doctrine’s ongoing viability, albeit in a dicta footnote.
  • In a follow up post on the IP Watchdog, Nicholas Mattingly concludes that the America Invents Act’s newly-expanded “prior commercial use” defense will lead to more trade secrecy and adversely impact innovation in the U.S. 
Cybersecurity:
  • “Boards of Directors Largely Ignoring Cyber-Risk Security Management” according to Corporate Counsel’s Catherine Dunn. In her post, she says executives are falling behind the learning curve on technical issues.
  • Are Facebook, YouTube and other social media companies enablers for cybercriminals? In a Forbes article entitled “Social Media Companies Contribute to Cybercrime,” Jody Westby of Global CyberRisk argues that their failure to cooperate promptly with hacking or cybertheft reports frustrates effective law enforcement efforts.
  • In a post entitled “Inside the Stratfor Attack,” the New York Times Bits Blog outlines the attack on the consulting firm, an attack that “rummaged through Stratfor’s financial information, e-mail correspondence and subscribers’ personal and financial information, occasionally deleting its most valuable data — all in full view of F.B.I. agents” who were unable to stop the hackers at that point.
News You Can Use:
  • “Lost phone? There’s an 89% chance somebody tried to access data.” Those are the results of a test conducted by Symantec, the LA Times reports. 
  • It was inevitable. There is now “An App for Watching for Personal Security Breaches”, according to the New York Times.
Gabriel v Qualcom re Order Granting in Part and Denying in Part Motion for Summary Judgment.pdf (91.24 kb)

I had a wonderful visit to Toledo for the Toledo Intellectual Property Law Association’s Spring Seminar last week (thanks to Ray Meiers and TIPLA for their invitation and hospitality). Here are the highlights of the three-hour presentation:

My Not-So-Fearless Predictions for 2012: 

My presentation included a recap of 2011 (which incorporated my top 10 trade secret decisions of last year), as well as my predictions for trends in trade secret and non-compete law for 2012. Here are some of those predictions:

1.  Uncertainty under the America Invents Act will lead to more trade secrets. Changes wrought under the AIA will lead to uncertainty in the patent context and result in greater emphasis on trade secret protection. James Schweikert and I have written about the impact of the newly-expanded prior commercial use defense and my opinion that it will lead to more use of trade secrets.   One critical factor, however, not confined to any of the AIA’s new procedures or provisions is the uncertainty that comes with such significant change.  Uncertainty of this magnitude inevitably leads to litigation and greater expense to prosecute and litigate patents.  I predict that the AIA will prove to be a veritable cornucopia of litigation.  Consequently, in close calls between patents and trade secrets, companies will opt for trade secret protection to avoid that expense.

2.  More international issues. China, DuPont v. Kolon, cyberattacks — more and more high profile trade secrets disputes will involve foreign parties and issues.

3.  Courts will continue to permit greater employee mobility. Efforts to enforce non-competes will get tougher and tougher as more courts tacitly adopt the California model.  Expect more legislative efforts like those in Illinois and Virginia that look to level the playing field between employees and employers.  The lesson?  Choose your battles wisely. 

4.  Social media will continue to accelerate change in trade secret and employment relationships. Rulings in the PhoneDog v. Kravitz and Eagle v. Morgan cases will cement the importance of written agreements in disputes over ownership and control (I predict the former employees in each case will prevail).  Given the continued exponential growth of social media, the law of unintended consequences will continue to vex employers and provide greater uncertainty in 2012. 

5.  Emphasis on “Ownership” and “Inventorship” Provisions. For these reasons, companies should focus on cleaning up and strengthening their inventorship and ownership provisions in employment and consultant contracts.  Relying on these provisions in a litigation may be cleaner at the end of the day, as it will allow a plaintiff to emphasize the theft of information without worrying about having to argue over its secrecy.  

Calling all Inventors:

Patrick Anderson, the President of Patent Calls, Inc., a patent monetization firm based out of Austin, Texas, provided insights to inventors and companies looking to maximize the financial benefits of their patents. I learned a lot from Patrick’s presentation about the depth, nature and scope of the patent monetization community.  

Patrick detailed a number of the different business models available to a patent owner, including offensive acquisitions, exclusive agency and contingent advisory services. These models include very little, if any, advanced cash, with most of the patent owner’s revenue being generated through licensing services.  I can’t do justice to those concepts in this short post but for those interested in learning more, the slide deck for Patrick’s PowerPoint presentation can be found here.  

The Power of Stories:

The morning’s final speaker was Sam Han, PhD, a professor of law at the University of Dayton. Sam’s presentation addressed the topic of substance abuse and lawyers, the role of key chemicals that operate within the brain, and their impact on human behavior.   

To illustrate his main points, Sam provided a number compelling stories, including one from Gary Klein’s bestseller, “Sources of Power: How People Make Decisions.”  To explain how the brain breaks down and segregates information, Sam described the story of the HMS Gloucester, a battleship tasked with shooting down silkworm missiles during the Persian Gulf War.  The ship’s crew faced the excruciating decision of whether to fire upon fast-moving radar blips, not knowing whether they were approaching enemy missiles or friendly craft returning to a nearby carrier.   

You could have heard a pin drop in the auditorium as Sam walked the audience through what it was like in the ship’s command center that morning.  It reminded me of the old trial lawyer bromide about making sure you communicate your case through a story, and of the sway that stories hold over us, even as we become adults.  

In a resounding victory, Botox manufacturer Allergan, Inc. has secured a permanent injunction from a  California federal court forbidding competitors Merz Pharmaceuticals and Merz Aesthetic from rolling out the sale of Xeomin for cosmetic purposes for the next ten months. Remarkably, the misappropriation at issue primarily arises from customer lists and contact information — information that has been increasingly difficult to protect in recent trade secret cases. 

While the injunction issued on Friday, March 9, 2012 by U.S. District Court Judge Andrew Guilford permits limited sale of the product for therapeutic purposes, it is clear that the primary and desired purpose of the drug is for aesthetic and cosmetic purposes. (Copies of the District Court’s Findings of Fact and Conclusions of Law and its Injunction Order are attached as PDFs below). Merz had planned its launch of Xeomin for cosmetic purposes on March 15.
 
At the close of the nine day bench trial, Judge Guilford stated that he had concluded there were “dramatic acts of misappropriation” and his opinion emphasizes that his findings of fact were “largely based” on the credibility of the witnesses. As appellate courts tend to be very deferential to a trial court’s assessment of truthfulness, this particular holding may insulate the ruling from attack on appeal.

The evidence of misappropriation appears to be largely circumstantial and rests on inferences Judge Guilford drew from the belated production of confidential documents by Merz in July 2011, documents that showed that Merz had copies of Allergan’s trade secrets. For this reason, this case resembles the infamous Qualcomm v. Broadcom dispute, in which Qualcomm employees and counsel failed to timely produce important and relevant documents and were sanctioned by the district court for that failure in a series of highly-publicized rulings and decisions.
 
Facts of the case: In the spring and summer of 2010, Merz hired seven sales representatives and business managers from Allergan to assist Merz in its sale of Xeomin. Each of them had been involved in the sale of Botox and each had signed a non-disclosure agreement forbidding them from disclosing Allergan’s trade secrets and confidential information. During the course of forensic examinations of the former employees’ computers, Allergan discovered that a number of the employees had sent copies of customer lists, including vast spreadsheets with contact information for those customers, to their personal email accounts just before their departure.
 
Allergan then sought a TRO in August 2010 to prevent any use of that information. Merz, however, vigorously argued that it had not received or used Allergan’s trade secrets. Merz’s counsel stated in briefing and oral argument to the Orange County Superior Court that it “is not in possession, nor has it ever been in possession, of any of the Alleged Confidential Information,” that “[t]here is no evidence that our corporate entities knew, condoned, authorized, used, disclosed, took any of these trade secrets,” and that with respect to Allergan’s confidential and proprietary information, Merz “[has] never seen it. [Doesn’t] know what it is. [Doesn’t] want it, and [hasn’t] done anything.” The Superior Court denied the TRO as a result.
 
Belated Production of Documents: Nearly a year later, however, Merz produced documents that contradicted its previous assertions at that TRO conference. That belated disclosure and the number and nature of those documents figured prominently in Judge Guilford’s analysis. Judge Guilford identified nearly a dozen confidential Allergan documents that Merz had in its possession prior to the TRO conference in August 2010, including internal emails circulating a confidential Allergan PowerPoint addressing its launch of another cosmetic product (Juvederm), detailing Allergan’s sales volumes in specific territories, Allergan employee information that was apparently used for recruiting purposes, and information about Allergan’s Partner Privilege Program.

Perhaps most notably, Judge Guilford identified an August 2, 2010 email requesting “Competitive info” from the former Allergan employees that “BCC’d everyone on this email so that [they] may remain anonymous and exit [their] current positions without any problems.” That last email appears particularly damning because it was two days before the TRO hearing at which Merz’s lawyers said Merz didn’t have and wasn’t using Allergan’s trade secrets. In response to that email, one of the former employees responded a week later saying he had a “flashdrive [ ] loaded up with some key account documents, SPP/payer info, some [sic] BOTOX slide sets, etc.”

Merz argued that it did not use those documents and therefore did not misappropriate any of Allergan’s trade secrets. Judge Guilford, however, rejected those protestations, found that he did not believe the witnesses that Merz presented in its defense, and held that there was “overwhelming” direct and circumstantial evidence of misappropriation. This is where the importance of his ruling on the witnesses’ credibility will become so important on appeal.

Finally, in a ruling that is reminiscent of the rulings in Qualcomm, Judge Guilford has directed Merz to continue to look for missing documents in a court-supervised “Examination and Remediation Process.” If additional documents or trade secrets are discovered, Judge Guilford may impose sanctions against Merz (he has refrained from imposing attorneys fees and other sanctions thus far).

Why is this case important? First, it appears that Merz’s in-house counsel and senior management undertook significant steps before and during the litigation to ensure that the sales staff did not use any of Allergan’s documents or trade secrets; however, those steps were undermined by Merz’s apparent failure to examine and produce four of the former employees’ email files during its initial production. Second, Judge Guilford’s injunction barring the March 15 product launch is an extraordinary ruling given the amount of time that has passed and that a monetary remedy could have been imposed in the form of a royalty or other type of award. 

This decision is sure to keep in-house counsel and outside counsel up at night trying to figure out how to make sure their clients gather and timely produce information to them. The belated disclosures that contradicted previous claims to the Superior Court proved to be damning evidence in this case.

Allergan v. Merz Findings of Fact and Conclusions of Law.pdf (178.19 kb)

Allergan v. Merz Injunction Order.pdf (49.53 kb)

The Wall Street Journal has a fascinating story today about how the investigation of Walter Liew and Pangang Group Company Limited unfolded last year.  This case is rapidly becoming the highest profile prosecution in the relatively short history of the Economic Espionage Act — a prosecution that has expanded to include the Pangang Group, a company owned and controlled by the Chinese government.  

As I wrote last month, in essence, the U.S. Attorney for the Northern District of California indicted China for the theft of DuPont’s trade secrets for the process and manufacture of titanium dioxide (TiO2).  Titanium dioxide is a commercially valuable white pigment that is used in a large number of materials ranging from paints to plastics to paper and is particularly valuable in military and aerospace applications. 

The Wall Street Journal article provides further detail about the investigation and documents that led to the indictment of Pangang Group, including the description of documents confiscated from Liew’s home.  According to the Wall Street Journal, in a letter written by Liew to Pangang, “he stated that a high-ranking Chinese Communist Party leader asked him in 1991 to bring the titanium-dioxide-making secrets back to China.”  Liew has since filed an affidavit disavowing the contents of those documents and claiming that they “are not accurate or reliable.”

Liew reportedly received more than $12 million from a Pangang subsidiary between 2009 and 2011 for his efforts.  He recruited former DuPont employees, including Tim Spitler, an engineer from Reno, Nevada, and Tze Chao, a 36-year DuPont employee, to allegedly provide him with DuPont’s titanium-oxide trade secrets. Chao pleaded guilty to conspiracy to commit economic espionage last week and he is quoted in the article as saying that Chinese officials led him astray by “overtly appeal[ing] to my Chinese ethnicity and ask[ing] me to work for the good of the [People’s Republic of China].”

Unfortunately, the story does not shed any further light on two of the more interesting features of the case.  First, there is no explanation for the release of two unidentified senior Pangang Group executives who were detained during a visit to California to meet with Liew.  They were initially held as material witnesses while the FBI reviewed and translated documents retrieved from the Liews’ home.  According to the article, prosecutors decided they could no longer hold the men as witnesses and allowed them to return to China.  Why they were not charged, when the FBI had discovered the trove of documents, still remains a mystery.  Second, there is no detail surrounding the apparent suicide of Spitler, who had agreed to serve as an important witness in the government’s case and killed himself just before the indictment of Pangang Group last month.

The story is important in three respects:  (1)  It emphasizes that international economic espionage should be an issue of grave concern for companies doing business outside the U.S.; (2) It reinforces the importance of the pending legislation to add a civil cause of action to the Economic Espionage Act, an amendment that would provide U.S. businesses with a powerful tool to combat international misappropriation of their trade secrets; and (3) It serves as yet another reminder of the importance of aggressively safeguarding your trade secrets.  While DuPont is lauded for its vigilance (it commenced a civil action against Liew and promptly notified federal authorities), the FBI is concerned that the problem is growing despite its efforts to raise the awareness of companies to this threat.

It was another busy week in the trade secret, non-compete and cybersecurity world: Trade Secrets and Non-Competes:
  • On Tuesday, a federal district court enjoined Merz Pharma GmbH from selling its cosmetic drug, Xeomin, on the eve of its nationwide launch because of Merz’s misappropriation of Allergan’s trade secrets for Botox. Bloomberg is reporting that Central District of California Judge Andrew Guilford cited “dramatic examples of misappropriation” of Allergan’s proprietary information, saying he was troubled that some Allergan employees signed contracts with Merz and then delayed giving final notice to begin e-mailing company data to themselves. Judge Guilford issued the ruling after a nine-day bench trial and indicated he would issue a more detailed opinion and order on March 9 providing his reasoning and further detail on the injunction. 
  • Mattel has filed its appellate brief in its appeal of the $310 award against it in its trade secret dispute with MGA and apparently abandoned its copyright claim against MGA. Instead, Mattel focused on challenging the attorneys fees award, which it characterized as “improper, bloated, excessive, unreasonable or even false” and “unnecessary,” as well as the jury’s calculation of damages for each of the trade secrets it found Mattel misappropriated.
  • Former Dupont engineer Tze Chao pleaded guilty to one charge of conspiracy to commit economic espionage in the unfolding criminal prosecution of the Chinese state-owned company, Pangang Group. Chao, 77 years old, was with DuPont for 36 years before being approached by Pangang and Walter Liew to review blueprints that were apparently stolen from DuPont for a titanium oxide plant. He is expected to cooperate with the prosecutors.  For more information on the indictment of Pangang Group, check out my post from last month.
  • The Virginia Supreme Court has issued a ruling that has good news and bad news for trade secret plaintiffs.  Seyfarth Shaw’s Trading Secrets Blog has a thorough summary of the opinion, Collelo v. Geographic Services, which holds that claims under the Virginia Uniform Trade Secrets Act are not confined to competitors (in this case, a former customer engaged in misappropriation) and which also holds that a plaintiff has to establish different theories or categories of damages if it asserts additional contractual or tort claims.
  • Seyfarth Shaw’s Trading Secrets Blog has a second topical post about a case out of Massachusetts that presents yet another “what not to do” parable with non-competes and employment agreements after a merger.  In Grace Hunt IT Solutions, LLC v. SIS Software, LLC, a Massachusetts Superior Court refused to enforce the non-competes of three former employees because the employer had materially changed their compensation structure after a merger.
  • For those interested in further analysis on the impact of the American Invents Act on trade secrets, check out the IP Watchdog’s recent post “Prior user rights and the incentive to keep innovations secret.”  In a guest post, Nicholas Mattingly of Mattingly & Malur PC argues that “§ 273 realigns this constitutional foundation to one favoring secrecy” because “Prior user rights create an incentive for prior users to keep their technology secret by eliminating any liability on behalf of themselves to a subsequent patentee.” My colleague James Schweickart and I have each written several posts on this issue and my take is that it is way too early to tell whether that incentive is significant enough to truly cause that kind of shift. 
Cybersecurity:
  • The big news this week was the arrest of 5 hackers associated with Anonymous, as well as reports that one of its ringleaders, a fellow known as “Sabu,” had snitched on his partners in crime. The New York Times Bits Blog has a fine update on these developments.
  • In a sobering post entitled “Social Hackers: You Can Only Hope to Contain Them” on Forbes, Patrick Taylor writes on the steps that CIOs and other business professionals can take to minimize social engineering and cyberphishing attacks.
  • FBI Director Robert Muehler is on record now as believing that cyber-threats are becoming the No. 1 threat to U.S. security, surpassing even terrorism.
News You Can Use:
  • To avoid “Six simple online security mistakes,” check out Dave Thiers’ article on Forbes.
Many trade secret cases, especially those in the financial sector, arise out of the departure of important sales representatives who leave for greener pastures and try to take their former clients with them, typically in violation of a non-solicitation agreement. In these cases, one of the most hotly contested issues is figuring out which customers are covered by the non-solicitation agreement.  
 
A recent opinion from one of New York’s State Supreme Courts, Aon Risk Services v. Cusack, highlights the importance of the language of the actual non-solicitation provision, as well as the order enforcing it. This opinion arises in the context of a plaintiff’s request to have a former employee and his new employer held in contempt of a previous preliminary injunction order.  (A PDF copy of the court’s February 17, 2011 opinion is attached below).  As you will see below, the court followed the letter of the order and found no violation.
 
For those unfamiliar with non-solicitation agreements, they allow former employees to compete with their former employer provided the former employees do not contact or solicit their former customers. Courts are generally more receptive to enforcing these agreements than covenants not to compete because they strike a reasonable balance between protecting the legitimate business interests of the former employer in its customers but still allow the former employees to make a living. However, it is important to remember that, like any restrictive covenant, courts will generally provide no more protection than the plain language of the agreement provides. 
 
Back to the case at hand. Aon Risk Services Northeast sued Michael Cusack, a former Senior Vice President and Managing Director, and his new employer, Alliant Insurance Services, alleging that they had orchestrated a massive raid on the clients and employees of Aon’s Construction Services Group. After a preliminary injunction hearing last year, Supreme Court Judge Bernard J. Fried entered an order forbidding Cusack and Alliant from “soliciting business from or entering into any business relationship with, on behalf of Alliant, any Aon client or customer for whom any such former Aon employee was the producer or on whose account he or she worked during the twenty-four (24) months prior to June 13, 2011.” According to Judge Fried, the only “former Aon employee” covered by this language was Cusack, a determination that proved critical.
When two of Alliant’s other employees (who coincidentally, were also former Aon employees) sent emails to or contacted several of Aon’s clients, Aon filed an order to show cause why Alliant should not be held in contempt for violation of the order. Aon argued that those clients had been serviced by Cusack previously and fell within the intent of the order. 
 
Judge Fried rejected that argument and found, under the literal language of his injunction, that the provision did not apply to the other Alliant employees and questioned whether he even had jurisdiction over those employees.  In an interesting twist, Judge Fried noted that his interpretation was consistent with a press release issued by counsel for Aon that described the order as covering Aon clients “with whom Cusack might have had contact while employed at Aon.”
 
It is unclear why Aon (or Judge Fried) did not simply identify the clients that it believed should be subject to the order during the course of the preliminary injunction hearing.  This would have provided the requisite clarity to avoid future disputes about the scope of the order. In my experience, a list of customers covered by the order has the additional benefit of frequently promoting settlement of a dispute as the parties have the opportunity to try to negotiate who or what should be covered.
 
The takeaway? There are two: (1) To paraphrase former Arizona Cardinals coach Denny Green, the order (or the agreement) “is what it says it is.” As a result, don’t expect a court to enforce anything more than what the language of an agreement or an order expressly provides; and (2) In the context of a request for an injunction involving a solicitation dispute, consider proposing a list of customers to the court (or to the opposing party) to provide clarity to the order, minimize future disputes, and perhaps even facilitate a resolution of this issue.

The Toledo Intellectual Property Law Association has invited me to speak at its Spring Meeting for the presentation “The Addictive Nature of IP Issues” on Wednesday, March 7, 2012 at the Toledo University School of Law at 8:30 a.m. For those in Ohio in need of CLE credit and interested in attending, a brochure with further information about the presentation is attached as a PDF below. 

I will be speaking on “Trade Secrets: Recent Developments in 2011 and Trends and Predictions for 2012.” Professor Sam S. Han, Ph.D. and J.D., of the University of Dayton Law School and Patrick Anderson, J.D., President of Patent Calls, Inc. in Austin Texas, will be joining me and presenting as well. Sam will speak on “Biochemical Pathways: A Presentation on Substance Abuse” and Patrick will address “Patent Monetization:  Who, What and How?”

I spoke last summer in Toledo for the Ohio State Bar Association and it was a tremendous audience, very engaged and thoroughly on top of the IP issues we discussed that day. Those in need of 3.00 hours CLE, including 1.00 of substance abuse credit, should certainly join us.

2012 TIPLA Spring Seminar Brochure.pdf (121.11 kb)