Last week, the iconic restaurant chain Hooters sued an emerging rival, La Cima Restaurants, for claims under the Uniform Trade Secrets Act and Computer Fraud and Abuse Act. Hooters, the self-proclaimed “beach-themed establishment” with waitresses who present “an all-American cheerleader image,” claims that La Cima has entered into a series of franchise development agreements to operate the aptly-named competitor Twin Peaks Restaurants throughout the Southeast. I am not making this up. The Non-Compete News Blog has a thoroughly entertaining post on the complaint in greater detail for those interested.

La Cima hired a former executive of Hooters, Joseph W. Hummel, as well as a number of other former executives this summer. According to Hooters’ Complaint, Hooters discovered that in the weeks leading up to his resignation, Hummel downloaded and transmitted to his private e-mail account a substantial number of highly confidential and sensitive documents including, among other things, Hooter’s distribution infrastructures, sales figures, and plans to capitalize on internal market forecasts. 

Other sensitive documents were accessed from Hooter’s computer servers after his last day, which Hooters blames on the circumstances of Hummel’s abrupt departure. Hummel is alleged to have accessed the server at least five times after his departure to secure some of the trade secrets in question. Curiously, Hooters has elected not to sue Hummel or the other individuals, at least at this time.

The key lesson from this case? The importance of stopping further electronic access of a critical employee or executive upon learning that he or she is leaving to join a competitor. At least as of the time of this post, Hooters has not requested a temporary restraining order, and one can’t help but wonder whether its apparent laxity in safeguarding that information may have contributed to the decision not to pursue what would otherwise be critical relief. 

A very significant ruling has just been issued by Judge William H. Walls of the U.S. District Court for New Jersey in a topic of great concern in the trade secret community — namely, whether trade secret information that has been posted on the Internet loses its trade secret status forever.  Forgive the length of this post, but I think the importance of this decision merits a thorough discussion.  (A copy of the opinion is attached below).

On August 18, Judge Walls applied a fact-based analysis and concluded that various postings on the Internet in that case were not sufficient to waive trade secret protection. I believe this case, Syncsort Incorporated v. Innovative Routines, International, Inc., 2011 U.S.  Dist. LEXIS 92321, (D.N.J. August 18, 2011), will be the first of a series of important rulings demarcating the protection of trade secrets disclosed on the Internet. (A quick “thank you” to my colleague Lorraine Hernandez for bringing this important decision to my attention).

In the lawsuit, Syncsort alleged Innovative Routines had improperly developed a software to translate documents written with Syncsort’s command language to Innovative Resource’s command language. According to Syncsort, Innovative Routines could not perform this translation without Synchsort’s trade secrets. Innovative Resources secured the trade secrets from a source in breach of a confidentiality agreement; after the lawsuit was filed, it appears that Innovative Resources then scoured the Internet to try to show that the information was already available on the Internet.

Innovative Resources identified 6 postings that it believed caused the loss of trade secrecy: (1) a 2-page “Technical Specification” for an earlier version of the software; (2) a “Technical Bulletin” posted on a university website in violation of Syncsort’s license agreement with that school; (3) an employee’s posting of Syncsort’s “Application Guidelines” on his personal website; (4) a handful of “very brief discussions” of the software on a website called IT Toolbox; (5) a copy of Syncsort’s UNIX Reference Guide that was posted on a Korean website; and (6) another copy of that same Reference Guide that was posted on a Japanese website.

In response, Syncsort emphasized that the posts had been taken down quickly (in particular, the Reference Guides) and that most of those posts only included minimal portions of the command language. It forcefully made the classic “combination” argument — that even if bits and pieces of the command language were publicly available, they were not enough to negate trade secrecy because those pieces did not provide enough information to be useful to Innovative Resources in creating its translator.

In his opinion, Judge Walls looked at each post, the circumstances surrounding each post, and the response by Syncsort upon learning of each post. Judge Ward then found that “the public posting of parts of the command language did not destroy the trade secret because the information contained in those postings was insufficient to develop the translator.” Although there were 2 occasions where an entire copy of Syncsort’s UNIX Reference Guide was posted on the Internet, once each in Korea and Japan, Judge Walls concluded that even though “[t]hese Guides could be used to develop [Innovative Resource’s] ssu2scl translator” the “posts were “sufficiently obscure or transient or otherwise limited” so that it was not made “generally known to the relevant people” (like potential competitors)”. He noted that in both of those instances, the information was quickly removed and there was no evidence that information became widely available, or that competitors or other unauthorized persons accessed or even attempted to access the information. As a result, Judge Walls concluded that Syncsort’s information remained a trade secret and that Innovative Resources should be enjoined.

As some of you may recall, the issue of the impact of posts on the Internet was addressed in a previous post of mine that discussed the holding in Silicon Image, Inc. v. Analogix Semiconductor, Inc., 2007 U.S. Dist. LEXIS 96073 (N.D. Cal. Jan. 17, 2008) and the risk of disclosure presented by third parties like WikiLeaks. However, the analysis in Silicon Image was not as extensive nor were the Internet posts as significant to the trade secrets in that case.  

There are four reasons why I think this ruling will be important in other future trade secret cases. First, Judge Walls wisely avoided an absolutist view that once anything appears on the Internet, it is lost as a trade secret. Instead, Judge Walls’ looked carefully at the circumstances surrounding the posts and their context in the trade secret claims as a whole. This is the correct approach, as it mirrors the analysis used in other instances of “public disclosure” alleged in trade secret cases (i.e., disclosure to customers, sharing with vendors, publication by the government, disclosure in a patent application).  

Second, a subtle but equally important aspect is the ruling’s implicit recognition of the vastness of the Internet. Simply because some data inadvertently makes its way into the information ocean that is the Internet does not mean that everyone surfing, floating or swimming in that ocean has seen it or used it. In this respect, Judge Wall’s practical ruling effectively requires the defendant to show that a competitor has truly accessed or used the information posted on the Internet. An intermittent or transient post by a third party on his/her own website or on a message board should be distinguished from a broad, longstanding and widespread post that might be found, for example, on a company’s own website. To use a metaphor, if an employee improperly shoutsa out his employer’s trade secrets at a busy, noisy corner on a Friday night at Times Square, but no one hears it, records it or is aware of it, has the trade secret really been lost? 

Third, Judge Walls recognized the limited and transient nature of some of the disclosures in question due to the efforts of Syncsort to remove the information from the Internet. Like all trade secret cases, it shows the importance of diligence and moving quickly to stem a breach. It also serves to reinforce a plaintiff’s claim that the information was truly valuable and important in the first place.  

Finally, Judge Walls found that some of the information posted on the Internet was insufficient to provide development of a translation utility; in other words, he applied the bedrock principle of trade secret law that while some elements of a trade secret may be publicly available, the combination of those public elements with other confidential information, may still qualify as a trade secret, particularly where the trade secret cannot be replicated. This point is sometimes lost in cases where there has been a disclosure of information on the Internet. 

Companies and lawyers should celebrate this thoughtful and reasoned ruling which is really the first ruling to truly consider the reality of the Internet today.
 

Syncsort v. Innovative Routines.pdf (84.06 kb)

Has Mattel finally had enough? A press release issued after a withering ruling by U.S. District Court Judge David Carter suggests that the embattled toymaker may be prepared to finally throw in the towel in its epic battle with rival MGA. Yesterday, Judge Carter assessed an additional $85 million in punitive damages and $139.5 million in attorneys fees against Mattel. This will be added to the $88 million that a Southern California jury awarded to MGA last spring when it found Mattel had misappropriated MGA’s trade secrets. 

The following lines from Judge Carter’s opinion have generated the most media attention: “Mattel asserted a copyright claim that was stunning in scope and unreasonable in relief it requested,” Judge Carter wrote. “The claim imperiled free expression, competition, and the only serious competitor Mattel had faced in the fashion doll market in nearly 50 years.” Ouch.

Some day, someone will write a very, very, very long book about this case, which is best described as the legal equivalent of an ultimate fighting cage match between the two very bitter rivals. Mattel won round one, persuading a jury to award $100 million against MGA in 2008 for the theft of trade secrets for the Bratz dolls line, arguing that the idea was conceived by former employee Carter Bryant while he was still employed by Mattel. However, after the Ninth Circuit reversed, MGA won round two earlier this year, securing an $88 million verdict against Mattel on evidence that Mattel employees slipped into MGA’s showrooms at toy fairs using phony business cards. The jurors awarded MGA $3.4 million for each of the 26 instances in which they found that Mattel had misappropriated a trade secret; in his post-trial rulings, Judge Carter reduced the overall award to $85 million. (As a matter of full disclosure, I litigated a commercial injunction case against Mattel several years ago).

Now to the “tell” in the Mattel press release: “Mattel strongly believes that the outcome at the trial level is not supported by the evidence or the law,” Mattel said in a statement. “We remain committed to finding a reasonable resolution to the litigation.” Roberto Duran could not have said it better.

The takeaway? Avoid blood feuds.

Hewlett Packard and Oracle’s increasingly bitter feud took an unexpected turn last week when HP was forced to backtrack from earlier claims that a former senior executive, Adrian Jones, had improperly backed up files before joining Oracle last March.

HP sued Jones in April, asserting that a month before he left HP he copied “hundred of files and thousands of emails” containing HP trade secrets onto an external hard drive (a copy of the complaint is linked below). Like many high profile trade secret cases, the lawsuit against Jones was accompanied by much fanfare as it followed the highly publicized departure of HP’s former CEO Mark Hurd, whom HP also sued for breach of his NDA when he too joined Oracle last September.

HP has now been forced to concede that Jones did not back up his computer with the hard drive in February (Jones’ filings and recent letter to the court detailing these concessions can be found at the link above). Instead, HP admits that hard drive was connected to the computer and the files copied in December by HP, which was investigating Jones for ethics violations at that time. According to the Wall Street Journal, HP has acknowledged that the serial number of that hard drive “matches the hard drive used by HP to create an image of Jones’ HP-issued laptop on or about December, 21, 2010.”  HP’s forensic investigator said in an email turned over in discovery that he was no longer claiming that a backup occurred and that it was “a dead issue.” 

As one would expect, Jones’ attorneys have demanded that the case be dismissed and threatened to seek attorneys fees against HP for filing a bad faith trade secret action. HP has defended its suit by emphasizing Jones kept and ultimately returned other confidential documents after the lawsuit’s filing, contrary to his initial sworn declaration that he did not possess any confidential information. 

The lesson for all of us? Verify your critical evidence before you file for a TRO. We all know how quickly important decisions are made in the TRO context and that they are compounded by the stress and emotion that come with these disputes. Nevertheless, if you are relying on one witness’ recollection of critical events, drill down and double-check that testimony before filing. Likewise, if you are relying on a single piece of forensic evidence (like the USB device that was described in HP’s complaint), take the time to have an outside vendor check and certify what you and your client think you have found. It will reduce, if not eliminate, the risk of finding out later you were wrong and having to explain that to a judge and very unhappy defendant. 

HP v Jones Complaint.pdf (765.79 kb)

An employee’s erasure or physical destruction of data on the hard drive of his company-owned computer may be enough to trigger a claim under the Computer Fraud and Abuse Act (CFAA). In Deloitte & Touche LLP v. Carlson, et al., U.S. Dist. Ct., N.D. Ill., Case No. 11 C327 (July 18, 2011) (Zagel, J.), the U.S. District Court for the Northern District of Illinois recently held that an employee’s destruction of data qualifies as the access “without authorization” required by the CFAA, 18 U.S.C. §1030(a)(5). (Thanks to the Internet Cases blog for its report on this case).
 
Deloitte brought the action against a former Senior Manager in its Security and Privacy Practice, Lyle Carlson, and another former employee, David Deckter. Carlson admitted to physically shattering the hard drive of his company-owned laptop before returning it (a curious approach for a former Senior Manager of Deloitte’s Security and Privacy Practice); Deckter, on the other hand, used a commercially available software program called “Eraser” to permanently delete substantial volumes of Deloitte data from his computer.
 
Carlson and Deckter moved to dismiss Deloitte’s complaint and, as to the CFAA claim, argued that as they were employees of Deloitte at the time, they did not access a protected computer without authorization. The district court disagreed, noting that Carlson’s “data destruction was done, in part, to cover his tracks in wrongfully soliciting Deckter” and in so doing, was “acting contrary to his employer’s interests, thereby ending his agency relationship with Deloitte and making his conduct ‘without authorization.'” The district court also noted that Carlson and Deckter acted contrary to Deloitte’s policies, which required the return of all confidential information.
 
The take-away? Good exit and termination policies helped Deloitte keep its CFAA claim. Deloitte’s policies required the return of all data and information at the termination of employment. The district court’s opinion suggested that had Deloitte’s policy permitted erasure by the employee, this claim might not have survived. Therefore, it may be worthwhile to double-check your client’s exit policies to make certain that they mandate the return of all company information and data and don’t provide an “out” for a troubled employee to cover his tracks.

For those of you who were able to join the recent PLI presentation on “Trade Secret Theft: Effective Tools for High Stake Disputes,” I hope you enjoyed it as much as Victoria Cundiff and I did. For those that were not, here are some of the highlights:
 
Hiring Employees with Non-Competes:  This remains a real source of concern for employers who do not want to get ensnared in litigation over a hire.  Victoria discussed the recent holding in IBM v. Visentin, 2011 WL 672025 (S.D.N.Y. 2011), where the Southern District of New York modified a non-compete to permit a former IBM employee to work for Hewlett-Packard because of steps the employee and Hewlett-Packard took to protect IBM’s proprietary interests.  Visentin is similar factually to the recent Aspect Software case about which I wrote last month.  In Aspect Software, the District Court of Massachusetts arrived at a different result despite similar efforts by the former employee and Avaya.  Although the holding in Aspect Software may be the exception, it reinforces the importance of selecting the right forum. 
 
“Procedural” Safeguards:  One question highlighted concern about the effectiveness of written agreements and other safeguards that are, at the end of the day, dependent upon the good faith of the employee or business partner receiving the confidential information.  Although there are measures to protect trade secrets that minimize or counteract this human element (encryption, monitoring data usage and access, etc.), those safeguards cannot completely eliminate the human component. 

I had the privilege of speaking on a panel in May with Malcolm Harkins, Intel’s Chief Information Security Officer, on the challenges of protecting sensitive data in the age of WikiLeaks.  While Malcolm addressed a number of procedures and techniques available to an employer, I was struck by how much he stressed the creation of a vigilant and proactive culture to protect that data.   At the end of the day, that culture, along with the reinforcment and training necessary for instilling that culture, remains the best defense.

This dovetails into another issue that arose as a result of a question, the importance of annual training and certifications/acknowledgements for the protection of confidential information.  As Victoria noted, it’s a good idea to have execution of the certifications coincide with other annual events, such as open enrollment for health insurance and annual reviews.  
 
Challenges for Multi-Jurisdictional Clients:  “One-state-fits-all” agreements may be difficult to enforce because of the differences in non-compete and trade secret law from state to state.  A forum selection clause may not solve that problem, as out-of-state courts may disregard the forum selection clause under choice of law principles and apply their own law if they see fit.  Victoria noted that when selecting choice of law for an agreement, it may be worthwhile to factor in where your competitors are located (for example, California) in anticipation that any dispute with a former employee make take place there.
 
WikiLeaks, the Internet and Trade Secrets:  Not surprisingly, this remains an issue of real concern, particularly the question of whether a trade secret claim is lost once the trade secret makes its way to the Internet.  As some may recall, I addressed this issue in a post in May; there is some authority allowing for a claim for a trade secret that has made its way to the Internet, provided one can demonstrate, among other things, that steps were taken to remove it from the Internet, that it was posted only briefly, etc.  I am going to dig deeper to see what other courts have said and put together a future post on this topic.

Charges of spoliation of evidence are frequently levelled in trade secret cases but rarely result in formal judicial findings of misconduct and sanctions. That may be changing. Last week, on the eve of jury selection, the U.S. District Court for the Eastern District of Virginia in Richmond found that key employees of the defendant, Kolon Industries, Inc., deliberately deleted emails and other evidence and engaged in prolonged efforts to conceal that conduct. The district court has sanctioned Kolon by ordering that an adverse inference instruction will be given to the jury and has awarded DuPont its attorneys fees in connection with the motion. (A special thanks to Mark Klapow for bringing this ruling to my attention).
 
This case has been the subject of significant media coverage already and is shaping up to be the East Coast version of the Mattel/MGA dispute. For the uninitiated, DuPont sued Kolon, a company with its headquarters in South Korea, 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. 
 
The Virginia ip Law Blog has a thorough summary of the case, which has generated over 1,200 pleadings and orders. There have been a number of noteworthy rulings that have garnered commentary, ranging from rulings relating to the viability of Kolon’s antitrust claim against DuPont to a recent decision finding the Department of Justice and DuPont did not improperly collude in connection with subpoenas used to gather evidence for the prosecution.

Not surprisingly, given the scope of this case, the July 21, 2011 Order (a link for which is below) is not light reading and spans 91 pages. After finding misconduct by a number of key employees, the district court declined to enter a default against Kolon because of two relatively prompt litigation holds and because the company itself had not systematically engaged in the misconduct. Nevertheless, the district court did find that a number of key employees who interacted with Mitchell deliberately, willfully and in bad faith deleted a substantial amount of emails immediately after the filing of the complaint; it further found that they also set upon a course to conceal their conduct from the court and DuPont. Balancing the fact that many of the emails were recovered while many others were not, the court found that there was more than adequate grounds for a spoliation jury charge.

On these facts, the district court concluded that the best remedy was “to inform the jury that certain Kolon executives and employees, after learning that DuPont had sued Kolon, deleted much electronically stored information that would have been available to DuPont for use in presenting its case.” The district court further held that the “jury then should be allowed to infer that the recoverable deleted information would be helpful to DuPont and harmful to Kolon.” Finally, the district court ordered that “jury should be told that the fact of deletion, without regard to whether the deleted material was recovered, may be taken into account in assessing the element of Kolon’s intent and knowledge” (Opinion at pp. 87-88).

The takeaway? Litigation holds may provide a corporate defendant with some protection but there needs to be follow through within the company to ensure that the litigation hold is not only distributed to the appropriate employees but that it is also followed by those employees. Special care may also need to be taken with key employees located outside the U.S., who may not be as familiar with the severe consequences of preserving email and other electronic information in U.S. litigation.

 DuPont v. Kolon Spoliation Order.pdf (2.24 mb)

A recent trade secret case involving a “love triangle” between three pharmaceutical companies, Amylin Pharm., Inc. v. Eli Lilly & Co., Case No. 11-CV-1061 JLS (NLS), U.S. Dist. Ct. for the Southern Dist. of California, illustrates the challenge of proving irreparable harm. (Many thanks to the Emergency Business Litigation Blog for writing a fine post on this case and bringing it to my attention).
 
The facts are straightforward. Amylin and Lilly had created an alliance to develop a drug, exenatide, for the treatment of Type 2 diabetes. Earlier this year, Amylin learned that Lilly had entered into another alliance with a competitor of Amylin’s, Boehringer Ingelheim GmbH, to develop a similar drug. Amylin then sought a TRO to prevent the disclosure of confidential information by Lilly’s sales staff to that competitor.
 
The district court struggled with the existence of irreparable injury from the beginning. Although the district court granted a TRO (a link to that decision appears below), it avoided any serious analysis of irreparable injury and held that California courts “have presumed irreparable harm when proprietary information is misappropriated.” The district court focused on what it perceived to be a strong showing on the the likelihood of the merits prong necessary for an injunction — namely, that because Lilly’s sales staff had the confidential information, they would inevitably disclose or use that information during the sales process. 
 
After the preliminary injunction hearing and briefing, however, the district court declined to issue an injunction (a link to that opinion also appears below). Citing the Supreme Court’s holding in Winter v. NRDC, 555 U.S. 7 (2008), that a claimant must show that irreparable injury is likely, the district court rejected Amylin’s contention that Lilly’s sales representatives would misuse confidential information as speculative. In particular, it was persuaded by  Lilly’s argument that FDA’s regulations prohibited Lilly’s reps from making statements without any adequate supporting data. Notably, Amylin was unable to show that those reps would be willing to risk the wrath of the FDA during the sales process. The court also noted that money damages could compensate Amylin if it were in fact injured. 
 
Had Amylin been able to proffer any direct or compelling circumstantial evidence of misappropriation, the result may have been different. Remarkably, the district court did not address its concerns about inevitable disclosure, concerns that had figured so prominently in its TRO decision. I suspect that the court was uncomfortable relying on that doctrine in the face of FDA regulations that apparently obviated the court’s previous reservations. 
 
The takeaway? Many of us have expected the holdings in eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), and Winter would eventually filter down to trade secret cases. A party seeking an injunction has always been expected to come forward with evidence of improper conduct or misappropriation so that a court is comfortable finding irreparable injury. This means thorough investigation, forensic examination of laptops or other devices, or other means of identifying misappropriation is increasingly important. While many courts recognize the importance of circumstantial evidence in trade secret cases, (see Stratienko v. Cordis Corp., 429 F.3d 592 (6th Cir. 2003)), direct evidence of misconduct or misappropriation may now be critical to proving misappropriation and irreparable injury.
 

 

I will be co-presenting a webinar tomorrow from 1 p.m. to 2 p.m. EST called “Trade Secret Theft: Effective Tools for High Stakes Disputes” through the Practicing Law Institute (PLI) with Victoria Cundiff of Paul Hastings Janofsky & Walker LLP. As many of you who practice in the trade secret area know, Victoria is one of the preeminent lawyers in this space and it is a real privilege to co-present with her. I have learned a lot already just preparing for the seminar with her.
 
Our presentation will focus on best practices and recent case law involving written agreements, exit interviews, hiring employees with non-competes, navigating through the landmines of social media and the internet, multi-jurisdictional challenges for employers, and other topics of interest in trade secret and non-compete law. Registration and pricing information for the webinar can be found at the following PLI link. For those that are available, it should be a practical, thorough and interesting seminar and we hope you can attend.

I have written previously on the challenges of protecting trade secrets in the context of arbitration. A case filed yesterday in New York Supreme Court by the venture capital firm Advanced Equities, Inc. (AEI) reinforces the necessity of getting injunctive relief from a court while an arbitration is pending and an arbitrator is being selected.
 
As Law360 is reporting, AEI sued its former employee, Jared Carmel, and his new employer, Felix Investments, LLC, alleging that Carmel and Felix are misappropriating its trade secrets, among other things.  Like many disputes in the financial services sector, AEI and Felix have a history, as Felix was formed by a former employee and officer, Frank Mazzola (who AEI has also joined as a defendant) and the firms have already been in litigation over Felix’s claims that AEI has defamed it. AEI and Felix have been in the news lately, as they are apparently fierce competitors in a potentially lucrative market of securities: shares of Facebook and Twitter from employees interested in selling them in advance of any initial public offering.
 
While the allegations of the lawsuit are relatively straightforward (i.e., breach of fiduciary duty, theft of trade secrets, intentional interference of contract), what is noteworthy is the fact that AEI has already filed an arbitration proceeding against Carmel before the Financial Industry Regulatory Authority (otherwise known as FINRA). Normally, a court might defer to that pending proceeding and stay any lawsuit filed afterward; however, given the delay that accompanies the appointment of an arbitrator, courts have found that it is appropriate for a party to request an injunction during this process to preserve its trade secrets. See Performance Unlimited, Inc. v. Questar Publishing, Inc., 52 F.3d  1373 (6th Cir. 1994).  
 
The takeaway?  Follow AEI’s example and file for a TRO in court even though your trade secrets claim may be subject to an arbitration provision. While this approach is costly and potentially duplicative in some respects, the alternative is that your client’s trade secrets may be lost during the inevitable delay that comes with the selection and approval of an arbitrator. The better solution, of course, is to draft your agreements to carve out trade secret and intellectual property disputes from any arbitration provision so that added expense and potential motion practice about the appropriate forum is eliminated.