Living in Columbus, Ohio, it’s hard not to be inspired by the pageantry, excitement and, yes, the big money that is college football. As the BCS championship game for this season approaches (Monday at 8:30 p.m.), I was reminded of an interesting blog post from the sports website “Outkick the Coverage” asking why universities don’t require their football coaches to sign non-compete agreements.
 
The premise of this intriguing post by Clay Travis, a sports journalist and lawyer, has some appeal. After all, highly-compensated executives are frequently required to sign non-competes, so why shouldn’t high-powered coaches like Nick Saban or Urban Meyer? They run the most important revenue-generating team in the university’s athletic department, control the relationships with key recruits, and are paid tremendous sums for doing so. Nick Saban’s total pay package, for example, could approach $32 million and Fortune magazine has described him as the most powerful coach in all of sports. It certainly seems as if universities (and their fans) are at great risk, since the coaches could move at will, and take their coaching staff and conceivably key recruits with them.

I decided to take my own look at the contracts of a number of prominent college football coaches to see if this was true. Based on my admittedly unscientific sample, I would have to disagree with Clay, as I found a variety of provisions that function as restrictive covenants in the contracts that I reviewed. Although there were no true non-compete provisions, each contract had terms that would significantly impede a coach trying to quickly move to another school without the consent of his former employer.  
 
A couple of disclaimers are in order. I confined my review to the contracts of Nick Saban, Urban Meyer (his Florida contract, as his fully-negotiated Ohio State contract is not yet available), Jim Tressel and Les Miles. Each of these coaches had won a national championship and competed for that prize fairly consistently, so I felt they were good benchmarks. I don’t know whether I uncovered all of the amendments to these contracts (these amendments invariably follow a big bowl win or when another football power expresses interest in that coach); as a result, if any of the contracts have been amended in relevant part, I will leave it to my readers to let me know.

Now to the contracts themselves. First, two of the contracts (Nick Saban’s Alabama contract and Meyer’s Florida contract) had provisions forbidding the coach from recruiting high school athletes that he or the school had contacted for one year after his departure. This clever provision mirrors a restrictive covenant because it would prevent a coach from taking any recruits with him. Recruiting is the lifeblood of any football program and it cannot be effectively delegated to staff, since the head coach may be needed to close the deal with a prized recruit. Since schools like Alabama and Florida contact most if not all of the best athletes nationally, the coach would have a limited number of athletes available to him to recruit at his new school. As a practical matter, this provision would take a coach out of the game for a year and force him to do what Urban Meyer did this past year — work for ESPN or find another job outside coaching.

Second, a number of the contracts have significant buyouts or liquidated damages provisions that would be triggered if the coach left to join another school. For example, Les Miles’ contract has a liquidated damages provision of $1.25 million if he leaves to join the University of Michigan, his alma mater and probably the only real competition for Miles’ services (Miles is the coach of No. 1 LSU and won a championship in 2008). Likewise, former Ohio State coach Jim Tressel’s contract had a $1 million liquidated damages provision that would kick in if he left for another school within six months of any resignation.

To understand the impact of this type of provision, one need only look at what coach Rich Rodriguez and his new employer, the University of Michigan, endured when he left West Virginia University to join Michigan in 2007. West Virginia had negotiated a $4 million buyout with Rodriguez, and it balked at the move and sued him to enforce that provision. Ultimately, Rodriguez and Michigan ended up paying the $4 million. The buyout and resulting contentious litigation proved to be a huge distraction and tarred Rodriguez in the eyes of many influential Michigan supporters.  Rodriguez floundered at Michigan and was fired after only three years.
 
Third, Saban’s contract has a provision protecting the “Confidential Information” of Alabama’s Athletic Department, acknowledging the importance of that information, and stating that Alabama would be entitled to an injunction resulting from the incalculable injury that would arise from the disclosure of that information. As anyone in the trade secret community knows, this type of provision can be used to jam up any departing employee. It is not difficult to imagine how a state court in Tuscaloosa might construe this provision if Saban decided to take his considerable talents to Gainesville or Tallahassee.
 
To sum up, while I found an interesting blend of novel and conventional approaches, the end result would likely be the same: A coach moving to another school (particularly to a conference rival) would face some real legal obstacles, similar to those presented in many conventional non-compete disputes. College football fans can now breathe easier.

LinkedIn, Twitter and other social media are in the news again. Three courts are now considering the question of who owns the social media accounts before them. While none of the cases, detailed below, have definitively resolved the ownership question, taken together, they do provide a road map to what a company should be doing to better protect itself. 
 
Let’s start with the first of two decisions issued last Fall.  In Ardis Health, LLC v. Nankivell, Case No. 11 5013 (NRB) (Oct. 19, 2011, S.D.N.Y.), a former employee who was responsible for Ardis Health’s social media and related websites refused to return the access information for those accounts. Relying on a Work Product Agreement that the employee signed, Ardis Health was able to secure a preliminary injunction compelling the return of the access information for those accounts. This decision was pretty straightforward as the employee had signed an agreement and there was no dispute over who owned the accounts.
 
In the second case, however, there is a genuine dispute over who owns the social media account. In PhoneDog v. Kravitz, Case No. 3:11-cv-03475 (MEJ) (N.D. Cal., Nov. 8, 2011), the employer, PhoneDog, brought an action against its former employee, Noah Kravitz, to recover the Twitter account “@PhoneDog_Noah”, a substantial account with over 17,000 followers. Unlike Ardis Health, PhoneDog did not have an agreement or policy to establish ownership of the account (if it did, it was not raised or discussed in the opinion). 
 
The opinion in PhoneDog only addresses Kravitz’s Motion to Dismiss, and therefore has limited value because it only found that PhoneDog presented cognizable claims. However, the district court did recognize that PhoneDog adequately presented claims for misappropriation of trade secrets (specifically, the password account) and conversion. (For a more thorough discussion of these two cases and links to the two opinions, see Russell Beck’s fine post in the Fair Competition Blog). Frankly, from my vantage point, the trade secret claim appears to be pretty thin and if PhoneDog is going to prevail, it will have to be on the conversion claim.
 
The most recent decision, Eagle v. Morgan, Case No. 11-4303 (E.D. Pa., Dec. 22, 2011), involves a battle over who owns the plaintiff Dr. Linda Eagle’s LinkedIn account. Dr. Eagle, who had built a business providing training for the financial services industry, sold her company, Edcomm, last year. In 2008, Dr. Eagle established an account with LinkedIn and she used her account to promote Edcomm’s banking education services, build her own professional reputation, and build social and professional relationships. An employee of Edcomm helped her maintain her LinkedIn account and had access to her password. 
 
Last June, Dr. Eagle was terminated by the new owners of Edcomm, and she later discovered she could not access her LinkedIn account. When Edcomm refused to return the LinkedIn account, she filed a lawsuit claiming that she owned the account and that Edcomm was essentially misappropriating it. Of course, Edcomm and the new owners counterclaimed and alleged Edcomm owned the account. 
 
In support of Edcomm’s claims, they alleged that Edcomm had policies that required employees to create and maintain LinkedIn accounts, that Dr. Eagle’s account was used for Edcomm business, and that Edcomm employees assisted in developing her profile and maintaining her account. Notably, however, Edcomm did not identify an agreement or policy indicating that Edcomm owned the LinkedIn account.
 
When Dr. Eagle moved to dismiss the counterclaims, Edcomm withdrew its claim that the LinkedIn account was a trade secret (a wise decision) as well as its conversion claim (perhaps not so wise) and relied soley on a claim for misappropriation of an idea under Pennsylvania law. Based on the policies detailed above, the Eastern District of Pennsylvania concluded that Edcomm had presented a claim sufficient to survive dismissal at this early stage and that discovery would need to be conducted to determine who truly owned the account. (For further analysis, check out Eric Meyer’s post on The Employer Handbook Blog and a copy of the opinion can be found here).
 
The takeaway? The importance of written agreements and policies establishing ownership. In Ardis Health, the employer was able to compel its former employee to turn over the access information for its social media accounts because there was a written agreement. 
 
In contrast, in PhoneDog and Eagle, while both employers survived motions to dismiss, both face uphill battles, in my view, in establishing that they own the accounts. This is because, in the absence of a clear written understanding between the employer and employee, a court will likely be heavily influenced by whatever the Twitter and LinkedIn User Agreements say. In the case of LinkedIn, for example, the account and agreement are almost certainly going to be with the individual.
 
This may not be a big deal for many companies who may decide that they are better served by having no agreements or policies on ownership because that will better promote and encourage individuals to network, to sell, and to build professional relationships unimpeded by a corporate policy. However, to the extent that employees are charged with overseeing the social media accounts for their employer, policies and agreements are critical as the Ardis Health case illustrates. Many small businesses rely heavily on their Facebook presence for their marketing, and it could be catastrophic if a disgruntled employee departs and refuses to provide the required access and account information or tries to modify or alter the Facebook site. 
 
At the end of the day, the culture and goals of the company should drive any policies or agreements, but it is important that the company at least considers the consequences if those agreements and policies are not created or implemented.

01041012Now for the top three decisions and cases for 2011:

3.  Syncsort Inc. v. Innovative Routines Int’l, Inc.  (U.S. District Court for New Jersey)
At the start of the year, the rise of social media and the nihilism of WikiLeaks were both perceived as looming threats to trade secrets.  Both phenomena were intertwined with the speed, transparency and ease of use arising from the Internet. 

Syncsort brought a thorough and thoughtful approach to what degree a trade secret posted on the Internet may lose its protection.  In Syncsort, the defendant Innovative Routines (IR) identified six separate posts of some or all of the trade secrets on different websites.  However, rather than apply a formalistic rule — i.e., if information is ever posted on the Internet, it is no longer secret — U.S. District Court Judge Walls applied a fact-based inquiry that looked at the circumstances surrounding each of the posts at issue.  (For a more detailed analysis of Judge Wall’s reasoning and a link to the opinion, please see my August 27, 2011 post).  
 
In short, Judge Walls provided the same analysis to postings on the Internet as he would have if there were allegations that trade secrets were disclosed to third parties, to the government, or to independent contractors.  He looked at the circumstances of each post, how much information was disclosed, the nature of the website in question, how long it was up, whether there was proof that the defendant or anyone else looked at the information, and the plaintiff’s efforts to remove the trade secrets from those websites.
 
As the accessibility and ease of the Internet only increase (social media, personal devices, etc.), it is inevitable that many future trade secret cases will involve situations where some of the trade secrets in dispute made their way to the Internet.  The rational, factual approach by Judge Walls should be applied by courts applyin those future disputes.
 
2.  TianRui Group v. International Trade Commission (U.S. Court Appeals for the Federal Circuit)
If the No. 1 ranking was based solely on what decision has generated the most buzz, then TianRui Group v. ITC would be the hands-down winner.  It is easily the most discussed trade secret case of the year.  (Law 360 and Lexology have featured what seems like nearly a dozen or so articles about this decision in the two months since it was issued).  This decision has probably garnered this attention because of the mounting level of frustration over the challenges of protecting intellectual property in China.
 
In TianRui Group, the Federal Circuit upheld a decision by the ITC to ban the defendant TianRui Group from importing steel cast wheels into the U.S. due to its misappropriation of an American company’s trade secrets in China.  As the dissent noted, nearly all of the circumstances giving rise to the case took place in China.  While the bulk of the opinion is devoted to whether the ITC had the authority under Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, to impose the ban on these facts, it is a significant decision because of the extraterritorial application of this U.S. law.   

Why is this decision No. 2?  What cut against it was the relatively narrow subject matter of the opinion.  Although it is a fascinating decision with potentially far-reaching implications for many U.S. companies doing business overseas, the reality is that most trade secret lawyers outside of Washington, D.C. and New York probably won’t find themselves litigating a Section 337 claim before the ITC. 

In addition, while I certainly don’t profess to be an expert in Section 337 proceedings, I have some concerns about TianRui Group’s future viability.  The extraterritorial breadth of this holding gives me some pause about whether it will be followed, or perhaps even reversed.
 
As a result, the No. 1 trade secret case of the year is . . .
 
1.  E.I. Du Pont de Nemours and Company v. Kolon Indus., Inc. (U.S. District Court for the Eastern District of Virginia and U.S. Court of Appeals for the Fourth Circuit)
This is a remarkable and important case on a number of fronts.  It is a major case involving the misappropriation of trade secrets by a foreign competitor, an important element given the increasingly international character of many trade secret disputes.  It features not one but two important spoliation of evidence opinions, another issue common to trade secret litigation.  It involves allegations of intrigue between the plaintiff, DuPont, and the federal government resulting in an important opinion by the Fourth Circuit clarifying the scope of concurrent criminal and civil actions.  Finally, and perhaps most notably, it resulted in an enormous jury verdict — $920 million.  For these reasons, DuPont v. Kolon gets my vote as the case that shaped trade secret law most profoundly in 2011.

For those who have missed the fun, DuPont sued Kolon, a South Korean company, in February 2009, claiming that Kolon had misappropriated trade secrets relating to the body armor, Kevlar, after Kolon hired a former DuPont employee, Michael Mitchell.  While working with Kolon, Mitchell served as a go-between with other former DuPont employees and he ferried various DuPont trade secrets to Kolon.  After DuPont discovered Mitchell’s actions, it notified the FBI and Department of Commerce, who then launched their own investigations.  Mitchell ultimately pled guilty to theft of trade secrets and obstruction of justice.  

Now to its holdings.  Spoliation has become the issue du jour in many trade secret cases and this case will provide a roadmap to many future litigants.  In DuPont, U.S. District Court Judge Payne ruled on duelling spoliation motions, ultimately rejecting Kolon’s motion and granting DuPont’s motion.  He ordered that an instruction be provided to the jury that Kolon executives deleted  information and allowing the jury to draw an inference that the missing information would have been helpful to DuPont and harmful to Kolon.  (For greater detail on these decisions, see my post last summer as well as a couple of fine posts by the E-Discovery Law Alert Blog). 
 
As noted above, this case is also noteworthy because of unsuccessful efforts by Kolon to quash a subpoena served on it by the Justice Department in a parallel criminal action.  In In re: Grand Jury Subpoena, 646 F.3d 159 (4th Cir. 2011), the Fourth Circuit rejected Kolon’s claims that Justice Department had improperly colluded with DuPont and directed DuPont to collect discovery that the government could not have otherwise secured through that subpoena. 
 
Finally, the impact of the enormous $920 million verdict in this case reinforces its importance.  Although last month Kolon successfully fended off DuPont’s efforts to get around Virginia’s $350,000 punitive damages cap, Kolon will face a multi-million dollar attorneys fee award.  Given the vast numbers at issue in this case, one can reasonably expect that this case will be the subject of further motion practice and appeals well into 2012 and 2013.
 
***

As I noted in my initial post on the 2011 Top Ten, there were a number of other cases that were worthy of mention, but just didn’t quite make the cut.  They include, in no particular order: 

  • AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp. (U.S. Court of Appeals for the Eighth Circuit) — reiterating that trade secret law does not require novelty, only that it would require effort to replicate trade secrets;
  • Office Max v. Levesque (U.S. Court of Appeals for the First Circuit) — holding non-compete that did not include successor was no longer enforceable;
  • Figueroa v. Precision Surgical (U.S. Court of Appeals for the Third Circuit) — holding that company’s failure to fulfill terms of non-compete precluded its enforcement;
  • Wrig v. Junkermeir (Montana Supreme Court) — holding that employer cannot restrain a fired employee without cause;
  • Lucht’s Concrete Plumbing, Inc. v. Horner (Colorado Supreme Court) — holding continued employment qualifies as consideration for non-compete;
  • Eastman Chem v. Alphapet (2011 US. Dist. Lexis 127757 (D. DE Nov. 4, 2011)) — applying Iqbal and Twombly standards to trade secret claims; 
  • Amylin v. Eli Lilly (U.S. District Court for the Southern District of California, Los Angeles) — applying a more intensive application of what constitutes “irreparable injury” and finding absence of proof of direct misconduct weighs against application of injunction;
  • Home Paramount Pest Controls v. Shaffer (Virginia Supreme Court) — finding overly broad non-compete will not be enforced; and
  • St. Jude Medical v. Zou (Los Angeles Superior Court) — $2.3 billion award entered against absentee defendant for trade secret misappropriation.

* * *
I want to thank David Almeling, Victoria Cundiff, Mark Halligan, Wil Rao and Dan Westman, all of whom took time from their busy practices to provide me with their feedback on my list and share their own thoughts about what they thought were the top cases of 2011. 

All in all, a very turbulent but exciting year.  2012 may prove up to the task as well, as many of these cases will likely involve appeals and as trade secret and non-compete litigation continues at its torrid pace.

12312011Today’s post features Nos. 4 through 6 of the Top Ten Trade Secret and Non-Compete Decisions of 2011. They are:

6. IBM v. Visentin (U.S. District Court for the Southern District of New York and U.S. Court Appeals for the Second Circuit) and Aspect Software v. Barnett (U.S. District Court for Massachusetts)
These two cases presented the same issue — to what extent should a non-compete be enforced when the new employer and former employee have put safeguards in place to protect the plaintiff’s trade secrets and customer relationships. Both of these cases provide a fine example of what a company should do if it wants to hire an employee with a non-compete but minimize potential entanglements with the former employer (see my previous blog post on the Aspect Software case  where the former employee and new employer incorporated 8 steps to safeguard the plaintiff’s interests).
 
However, taken together, these two cases also reinforce another feature of non-compete and trade secret cases — their unpredictability.  In Visentin, the Southern District of New York (and later, the Second Circuit) found that the former employee and the new employer (HP) had acted reasonably to protect the business interests of the former employer (IBM) and that the non-compete should not be enforced to prevent the employee’s new job with HP.  In contrast, in Aspect Software, although the district court commended the former employee and his new employer, Avaya, for “the scrupulous steps” they took to safeguard the plaintiff’s trade secrets and customer relationships, it still enforced the non-compete because of concerns that the employee would inevitably use his former employer’s trade secrets.  

As increased employee mobility and a poor economy continue into 2012, look for more cases like Visentin and Aspect Software.  Courts will be forced to balance the interests of all parties and still protect the legitimate interests of the former employer.  These cases may have a profound impact on the viability of the inevitable disclosure doctrine, the traditional counterweight to an employee’s assurances about his or her good faith efforts to protect the former employer’s trade secrets.

5. Mattel v. MGA (U.S. District Court for the Southern District of California, Los Angeles)
Will it ever end? 

When I first started putting this list together, I thought about using movie titles to highlight the key qualities of each case.  When it came to selecting a title for this bitter case, plenty came to mind — “There Will Be Blood” and “Drag Me to Hell” certainly would have captured it nicely.  However, the most fitting title is probably “Reversal of Fortune” as this epic lawsuit, at least in its most recent round, has swung decisively in favor of MGA.

If you are reading this post, you are likely familiar with the history of this dispute which began in 2003, when Mattel first sued MGA for stealing the idea for the pouty-lipped Bratz Line through a former Mattel employee.  In 2008, Mattel won a $100 million jury verdict, only to see that judgment reversed by the Ninth Circuit.  Then, in April 2011, MGA prevailed during the second jury trial, not only persuading the jury to reject Mattel’s claims but also to award MGA $83 million on its trade secret counterclaims.  That award swelled to $310 million when the district court imposed exemplary damages and attorneys fees in post-trial proceedings.
 
What will the next ruling bring?  No one really knows, as the trade secret version of Jarndyce and Jarndyce continues to work its way through California’s federal courts.

4. U.S. v. Nosal (U.S. Court of Appeals for the Ninth Circuit)
The scope of the Computer Fraud and Abuse Act (CFAA) continues to beguile litigants and courts alike, and no CFAA case raised more eyebrows in 2011 than the Ninth Circuit’s decision in U.S. v. Nosal, 642 F.3d 781 (9th Cir. Apr. 28, 2011). In Nosal, the Ninth Circuit held that the violation of a computer use policy that placed “clear and conspicuous restrictions on the employees’ access” to the employer’s computer system and the specific data at issue could be enough to qualify as conduct that exceeded authorized access, a necesssary element of a CFAA claim. 

Given this taffy-like definition of the critical “accessed without authorization” requirement, Nosal‘s holding has been applied broadly in other contexts. For example, in September, the Northern District of California applied Nosal‘s reasoning to online agreements in a civil dispute between commercial parties.  In Facebook v. MaxBounty, Case No. CV-10-4712-JF (N.D. Cal, Sept. 14, 2011), that district court found that a violation of Facebook’s terms of use could qualify as access without authorization under the CFAA.
 
Nosal has generated more critical commentary than any other CFAA case in recent memory. While it was initially welcomed by many in the trade secret community because it would bolster employers’ protections under the CFAA, libertarian groups such as the Electronic Frontier Foundation argued that Nosal could criminalize the very acts outlined above as violations of broadly written Terms of Service.
 
Perhaps as a result of this uproar, the Ninth Circuit indicated on October 27, 2011 that it would rehear Nosal en banc and advised district courts that Nosal was not to be used as precedent in the meantime.  Oral argument was heard on December 15, 2011 and even those reading the tea leaves left in the wake of that argument are having difficulty divining what the Ninth Circuit will do.

We will reveal our top three cases next week, so please stay tuned. In the meantime, have a safe and happy new year.

12302011The end of the year always brings a number of thoughtful (and some not so thoughtful) reflections on the top ten major events of the past year (Top Ten News Stories, Top Ten Songs, Ten Worst Movies, etc.). As 2011 comes to a close, it’s clear that it has been a remarkable year for the trade secret and non-compete bar, so I couldn’t resist assembling a Top Ten List of the most significant trade secret and non-compete decisions for 2011.  

As I worked on my list, what struck me most was the number of strong contenders for 2011 (the honorable mention list will bear this out).  Even though I confined my list to civil cases (leaving out a number of high profile federal prosecutions) and decided not to include recent legislative developments (such as the proposed amendment to the Economic Espionage Act, New Jersey’s enactment of the Uniform Trade Secrets Act (UTSA) and Georgia’s recent Non-Compete Statute), I could have easily put together a compelling top twenty list. 

That being said, without further ado, here are Numbers 10 through 7:
 
10. TCW Group Inc. v. Jeffrey Gundlach (Los Angeles County Superior Court)
This high profile trade secret dispute between TCW, the asset-management affiliate of Societe Generale SA, and its former star bond trader, Jeffrey Gundlach, had a lot to offer:  significant media coverage, salacious allegations (TCW had a field day detailing Gundlach’s left-behind stash of pornography, sexual devices and drug paraphernalia for the media circus; despite TCW’s gallant effort to slip those vices into evidence, the trial court properly excluded them), and, of course, a very large verdict.  After a six week trial, the jury awarded $66.7 million to Gundlach for unpaid wages but also found that he stole TCW’s trade secrets.  The valuation of those trade secrets, which TCW claimed exceeded $81 million, was to be decided in post-trial proceedings before the trial court. 
 
The sheer theatrics of this case, which apparently settled yesterday, compel a seat at the Top Ten table.  However, the absence of a seminal ruling kept this entertaining soap opera out of the Top Five.
 
9. Marsh USA Inc. v. Cook (Texas Supreme Court)
Texas has been perceived as ambivalent when it comes to enforcing non-competes, but the Texas Supreme Court’s decision in Marsh USA Inc. v. Cook on June 24, 2011 appears to signal that Texas is now moving away from its previous strict enforcement.  In Marsh USA, the Texas Supreme Court abandoned a formalistic approach to analyzing consideration supporting a non-compete, rejecting the former employee’s argument that his non-compete lacked appropriate consideration because the consideration in question (stock options) did not reasonably relate to the interest that the former employer sought to protect. 
 
The decision does not break any new ground, at least outside of Texas.  Rather, what merited its inclusion in the Top Ten boiled down to demographics — namely, the fact that the highest court of the second most populous state is now more readily willing to enforce covenants not to compete.  As the Texas economy continues to chug along (Forbes identified Austin (No. 1), San Antonio (No. 4), Houston (No. 5) and Dallas (No. 7) in its top ten projected boomtowns earlier this year) and Texas continues to grow, its legal decisions may come to increasingly shape the national debate, just as California has for the past several decades.
 
8. Reliable Fire Equip. v. Arredondo (Illinois Supreme Court)
As one of the more populous states having adopted the UTSA and recognizing non-competes, Illinois has long been an important bellwether state for trade secret protection.  Not surprisingly, when the Illinois Supreme Court issued its ruling in Reliable Fire Equip. v. Arredondo on December 1, 2011, resolving a split that had emerged among the intermediate courts of appeal within Illinois, many followed the decision closely. 

As I wrote earlier this month about this decision, the Illinois Supreme Court held that a company must come forward with proof of a legitimate business interest to justify the imposition of a non-compete.  While this decision will likely lead to more litigation due to the fact-based nature of that inquiry, it will ensure that companies do not wield their non-competes without supporting trade secrets, customers or other legitimate reasons to justify enforcement of the restrictive covenant at issue.  Look for other courts to follow the Illinois Supreme Court’s lead in this era of employee mobility.
 
7. Hewlett-Packard v. Perez, Perez v. Hewlett-Packard and Cisco’s Blog (Santa Clara County Superior Court, California and Harris County, Texas)
High profile trade secret cases frequently involve a race to the courthouse as the former employer and ex-employee jockey to secure a definitive ruling from the forum they believe will adopt their legal position on the non-compete in question. This year’s featured “race to the courthouse” was the dispute between Hewlett-Packard and its former Chief Technologist, Paul Perez, who left HP in November to join Cisco.

As regular readers of this blog will remember, this dispute generated tremendous interest because of the unusual step taken by Cisco’s General Counsel, Mark Chandler, of issuing a blog post calling out what Cisco perceived to be HP’s repeated efforts to prevent its former employees from working for Cisco.  Chandler’s blog post challenged HP’s new leadership to adhere to its previous values of mobility and opportunity.

The case was also noteworthy because the Texas trial court refrained from the opportunity to rule first on the Perez non-compete, despite the fact that the Perez had been a Texas resident and had suddenly moved to California, ostensibly to secure the protections of California law.  The Texas court’s abstention appears to have been rooted in its irritation at HP’s failure to notify Perez’s counsel of the TRO conference and to advise the Texas court of a previously-scheduled conference set to go in California later that day on these same issues (at least this was the account provided in Chandler’s blog post; there was no ruling on the Harris County docket when I last looked).  The California court subsequently allowed Perez to work for Cisco so long as he did not use or reveal any of HP’s trade secrets or confidential information.
 
Stay tuned for Nos. 6 through 4 in my next post.

You can’t swing a patent application around a room of IP lawyers without hitting a commentator who has written or spoken about the impact of the recently-enacted America Invents Act (AIA) on future patent prosecution and litigation. In contrast, very little, if anything, has been written about the impact of the AIA on the future of trade secrets. Will it lead to greater use of trade secret protection by companies? Are there particular categories of trade secrets that are more likely to be affected than others? These are just a few of the questions being raised in the wake of the AIA.

This will be the first of several posts over the coming months analyzing different aspects and provisions of the AIA and their potential impact on the use of trade secrets. Today’s post will focus on the AIA’s expansion of what is known as the “prior commercial use” defense (or as some are simply calling it, the “prior use” defense); I have have a follow-up post next week evaluating the impact that defense may have on trade secret and patent protections. 
 
Let me begin by predicting that expansion of the prior commercial use defense is going to inexorably lead to greater reliance on trade secret protections for many commercial activities. While my bias may be showing here, I am not alone in reaching this conclusion (no less an IP blogging authority than the IP Watchdog has concluded that that “the law now favors the party that keeps the trade secret over the party that dissemnates the information for the benefit of the public.”) 

I think this is the only conclusion that one can reasonably draw after looking at the statute, its exceptions, and the many situations and activities that will now potentially fall within this defense.  Simply put, a trade secret owner who thoroughly documents the commercial activity at issue should be able to withstand a claim of patent infringement if he or she meets the criteria below.

Recent History of the Prior Use Defense: To understand this defense, you have to look briefly at its recent history. Prior to the AIA’s enactment, 35 U.S.C. 273 limited the prior use defense to business methods patent infringement claims. Under that defense, a defendant could avoid liability if, acting in good faith, he or she “actually reduced the subject matter to practice at least one year before the effective filing date of such patent, and commercially used the subject matter before the effective filing date of such patent.” 

When this defense was codified in 1992 to address concerns in the financial industry about the scope of business method patents, it was greeted with skepticism by many in the patent community. One commentator later described it as a “reprieve” for trade secrets and a “disaster” for patent law, and expressed concern that it would dilute the importance of patents, undermine the policy of shared innovation so central to patent law, and possibly lead to dogs and cats sleeping together. In all seriousness, those concerns proved to be unwarranted, as it appears that most business owners elected to secure patent protection rather than rely on the perceived vagaries of that defense.

That may now change. The AIA now will extend the prior commercial use defense from business method patents to patents for processes, machines, manufactures, and compositions of matter issued after September 16, 2011. The prior commercial use must take place between the earlier of one year before the effective filing date of the patent application or public disclosure by the patentee. Assuming that it can meet that temporal standard, the defendant must also show that the invention or process was, in good faith, commercially used in the U.S. in an internal commercial use, in an actual arm’s length sale, or other transfer that resulted in a commercial use. (A link to the full text of the new provision can be found here). 

This is a significant expansion of this defense and it is important to understand what it can do for a company, as well as what it cannot do. Of course, it is important to remember this is simply a defense, not a right. In other words, it is a safe harbor that protects the inventor or company that wishes to use the invention or process in private. It is not, however, a means for invalidating or affirmatively challenging a patent.

To take advantage of this defense, a company will bear the burden of demonstrating its prior commercial use by clear and convincing evidence. Therefore, there will a premium on assembling and maintaining reports, logs, laboratory notebooks, and emails documenting that commercial activity.  (I will talk about this in greater detail next week).
 
Limitations on the Prior Commercial Use Defense: And, naturally, like any good sausage, I mean law, there are multiple exceptions to the prior commercial use defense.  For example, this defense is personal to the party performing or directing the performance of the commercial activities at issue and can only be transferred if the entire enterprise or business line is sold or transferred.  Other limitations include:

  • The defense is not valid if the commercial activity was derived from the patentee. 
  • This defense can only be used for the physical sites where the commercial activity took place before the effective filing date of the asserted patent (i.e., the prior use does not extend to other locations or facilities after the filing date).
  • This defense is not a general license of the asserted patent, but rather extends only to the subject matter of the relevant claims.
  • The defense requires continuous use.
  • This defense is not valid against an institution of higher learning or a technology transfer organization associated with such an institution.
  • This defense is not available for activities that the Federal Government is prohibited from funding.  

Next week, I will spar with my patent colleague, James Schweikert (who generously contributed his thoughts and time to this post) about the pros and cons of patents vs. trade secrets in this unfolding prior commercial use context. Until then, have a happy and safe holiday.

As lawyers, we sometimes lose sight of the purpose that gave rise to a statute or legal doctrine in the first place. For that reason, it is refreshing to read an opinion that takes a step back to thoroughly examine the underlying goals behind the legal principles at issue. The U.S. Court of Appeals for the Eighth Circuit’s recent holding in AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., Case No. 10-3444 (8th Cir., Dec, 13, 2011), is one of those rare cases that methodically does so in the trade secret context. 
 
In affirming the trade secret rulings by the district court under Indiana and Missouri law, the Eighth Circuit reiterated three core principles of trade secret law: (1) unlike patent law, trade secrets derive their primary value not from their novelty but rather from the fact that they are secret and require effort and resources to compile; (2) that commercial ethics are the key underpinning of trade secret law; and (3) the fact that a trade secret may be reverse engineered does not render that trade secret unprotectable.

This dispute arose from the misappropriation of technical information necesary to secure FAA compliance for the repair and maintenance of a helicopter engines developed by Rolls-Royce. Because Rolls-Royce’s predecessor, Allison Engine Co., had failed to exert tight control over that technical information, third-party overhaul shops saw the opportunity to step in and compete for those ervices. One of those repair and overhaul shops, AvidAir, secured some of that technical information without Rolls-Royce’s consent in the 1990s. As Allison, and later Rolls-Royce, sought to improve the controls over that information, they discovered that AvidAir had improperly secured that technical information from authorized maintenance shops and was using it to repair and overhaul those engines.

After a jury awarded $350,000 to Rolls-Royce for the misappropriation of the technical information, AvidAir appealed and argued that the information was not worthy of trade secret protection. AvidAir argued that the technical information at issue did not provide independent economic value because there was only a trivial amount of information that was not readily ascertainable from prior publicly available materials and that those improvements offered no engineering advances.

The Eighth Circuit rejected that contention, reasoning that the “existence of a trade secret is determined by the value of a secret, not the merit of its technical improvements. Unlike patent law, which predicates protection on novelty and nonobviousness, trade secret laws are meant to govern commercial ethics.”

The Eighth Circuit rejected AvidAir’s other main argument, that the information could be easily reverse engineered, by focusing on AvidAir’s conduct. Noting that AvidAir repeatedly elected to take Rolls-Royce’s information rather than compile it on its own from publicly available sources, the Eighth Circuit held that AvidAir’s conduct belied any claim that the information was readily ascertainable or not valuable to a competitor. By so doing, the Eighth Circuit joined other courts that have recently rejected a defendant’s efforts to “retrace” its steps and argue it could have gathered the information from publicly available sources.

The takeaway? The AvidAir opinion does not break any new ground, although it may provide support for those cases where the trade secrets at issue are close calls. The opinion’s real value comes from its methodical analysis and affirmation of the key concepts underpinning trade secret law.

A recent decision by the Montana Supreme Court raises one of the trickier situations in the trade secret and non-compete practice: Can you, or better yet, should you, enforce a covenant not to compete against an employee that you just fired?  In Wrig v. Junkermier, Case No. DA 11-0147 (Nov. 22, 2011), the Montana Supreme Court held “an employer normally lacks a legitimate business interest in a covenant when it chooses to end the employment relationship.” Applying that rule, the court refused to enforce a non-compete after the employer elected not to renew the employee’s contract.   Many courts are, at best, ambivalent about non-competes and some are even hostile towards them (California forbids them except in the most limited of circumstances). Trying to enforce a restrictive covenant against an employee who has just been terminated in The Great Recession may be no easy task. Whatever the law, in these situations, an employer will need to overcome the sense that it is “piling on” or rubbing it with that employee. Most jurisdictions require that a company show a legitimate business interest, such as the protection of trade secrets or customer relationships, that justifies enforcement of a non-compete. In this sense, Montana has now joined Illinois and many other states that require that showing. In the case of a fired employee, however, a court may expect a compelling showing of that interest. In the absence of that showing, a court may reason that the employer’s claim that the recently-fired employee now suddenly poses a competitive threat is disingenuous. Or, as the Montana Supreme Court put it, “[a]n employer’s decision to end the employment relationship reveals the employer’s belief that the employee is incapable of generating profits for the employer.” (For a more thorough analysis of the facts and reasoning of the Wrig decision, check out Non-Compete and Trade Secrets Blog’s fine post on this case).   Of course, the circumstances giving rise to the termination will be key. As the Montana Supreme Court recognized, a protectable interest may be found if the firing arose from misconduct of the employee. Thus, as in any injunction case, the conduct of the employee, as well as the employer, will heavily influence the court’s exercise of discretion.   The takeaway? As an employer, take a long, hard look at whether it is worth the time and expense to enforce the non-compete of a fired employee. Be prepared to face an uphill fight if your client has fired or laid off the employee. Having documentation supporting a termination for cause will be critical but also do not understimate the importance of demonstrating a compelling trade secret or customer relationship interest.

In the first installment of this post last week, we looked at the emerging BYOD (Bring your own device to work) movement and the IT community’s concerns about security. This week, in Part II of that post, we drill down on those security issues and look at what others are doing to address them.

Security concerns: The first and greatest security concern arises from the complication of retrieving confidential information and trade secrets before an employee resigns or is terminated. If an employee has copied, transferred or downloaded that information into his or her personal device, the risk that everything has not been returned, deleted or destroyed increases significantly. 
 
The second concern is carelessness: in a widely reported story earlier this year, an Apple employee apparently left his unreleased iPhone 5 prototype at a bar, causing understandable angst within Apple.  
 
The third concern, as we noted last Friday, is the fact that mobile devices and employees are increasingly being targeted by cyberthieves. As Symantec reports, one third of data breaches in 2010 occurred through mobile devices. A popular means of penetration is using Trojans that pose as legitimate apps, which are then uploaded to mobile app marketplaces in the hopes that an employee may download and install them into them their phones, which will then in turn allow malicious code to enter into the employer’s infrastructure. This means of attack, coupled with the target efforts at individuals because of the ability of crooks to gather information about them through social media, will only likely increase.
 
So what can a company do? The first step before implementing a new policy should be to find out who is accessing the company’s servers and what devices the employees are using. Until that audit is conducted, the company literally has no idea who is tapping in to its servers.  Once it understands what devices are being used and by which employees, it can evaulate the type of policy that may fit its business.

Not surprisingly, the degree to which an employer imposes a personal device policy depends largely on what type of “work” the employee will be performing on his or her device.  An employee’s use of his personal smartphone or laptop to access email will likely face little opposition from the employer, so long as the email is accessed through a web-based program such as Webmail. Because Webmail is Internet-based and allows the employee to access their email account from literally any computer in the world, accessing email from the employee’s personal device is of little consequence. The company already has internal security measures in place to protect the access of email on the Webmail server (through, among other things, the use of an https:// address).

Security is of greater concern, however, where the employee seeks to “tap in” to an employer’s exchange or other internal server. If not blocked, that access is easy for the employee, with even the iPhone or Droid default email program allowing access to the exchange server with just the simple input of the employee’s username and password. 

Companies that elect to allow their employees to access exchange servers or other databases which house sensitive or confidential information should consider requiring those employees to download a program or application onto their device which gives the IT department the ability to monitor the employee’s use of the server and “wipe” the device should it become lost or compromised. Of course, employees may be more reluctant to allow their IT departments access to their personal devices, the same ones on which they store photos of their children, their favorite music, and applications which access personal Facebook or Twitter accounts. For personal devices, employees obviously have a greater expectation of privacy than the work-issued laptop that they might also use for personal reasons.

Marisa Viveros, a VP for Security at IBM, recently outlined the following practical steps a company and its employees can take right now to protect their work and personal data:

  • Make sure you protect access to your device with a password or PIN to keep intruders out if the device is lost or stolen.
  • Only download applications from well-known, trusted sites.
  • Make sure you install system updates and run anti-malware as prompted.
  • Back up your data on a regular basis.
  • Have the ability to track your phone and remotely wipe all its data if it is stolen. You can easily find an app that will allow you to do this.

Finally, an employer who wants to err on the side of extreme caution when it comes to protecting its confidential information (including trade secrets) should either: (a) not allow employees to use personal devices for work purposes at all; or (b) require those employees to install on whatever security measures are necessary to protect the information on those personal devices. Its employees might not be happy about being given such an ultimatum, but those employers should also be prepared to offer a work-issued device to the employee if they are expected to be “available” after 5:00 p.m. If you don’t want your employees using their personal devices to access the email exchange server, then you may have no choice but to give them (and pay for a data plan for) a Blackberry or comparable device. 

As they have in the past, employers and employees will eventually figure out how to balance the competing concerns of convenience and security and shape a policy that best fits that company. In the meantime, there will invariably be bumps along the road as they figure out how best to integrate these technological issues into the workplace. (A special shout-out to my colleague Phil Eckenrode, a vocal member of the BYOD community, for his hard work and assistance with this post.)

As some of you may know, Symantec issues Internet Security Threat Reports each year. While there were a number of noteworthy findings in the most recent edition, the most striking was that more than one in three data breaches involved a mobile device, a finding that should only reinforce the concerns that gave rise to yesterday’s post about the use of employee’s personal devices for work. I have attached a PDF below of the report for those of you who want to read it but want to avoid having to get on Symantec’s mailing list.  (Just kidding, Symantec).

Symantec expects cybercriminals to increase their attacks on mobile devices in 2011 and 2012. As the executive summary ominously observes: “The installed base of smart phones and other mobile devices had grown to an attractive size in 2010. The devices ran sophisticated operating systems that come with the inevitable vulnerabilities—163 in 2010. In addition, Trojans hiding in legitimate applications sold on app stores provided simple and effective propagation method. What was missing was the ability to turn all this into a profit center equivalent to that offered by personal computers. But, that was 2010; 2011 will be a new year.”

Other highpoints of the report include:

  • The specific targeting of individuals through the use of information gathered through social media information is expected to increase. For more on this practice, known as spear-phishing or in the case of high value targets such as CEOs, whaling, please see my November 4, 2011 post. 
  • Currently most malicious code for mobile devices consists of Trojans that pose as legitimate applications. These applications are uploaded to mobile “app” marketplaces in the hopes that users will download and install them. 
  • Attack toolkits continue to lead in Web-based attack activity because “[t]heir ease of use combined with advanced capabilities make them an attractive investment for attackers.”

In addition to identifying these threats, as the Womble Carlyle Trade Secret Blog wryly notes, Symantec has also recently supplied a profile of your friendly neighborhood trade secret thief. He is 37 years old, white, male and probably a programmer or engineer. That should narrow things down.

 

Symantec 2010 Report.pdf (1.62 mb)