Non-Compete and Trade Secrets News for the week ended March 31, 2017
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The Defend Trade Secrets Act and "Continuing" Misappropriations
The Eastern District of Pennsylvania rejected a defense challenge to the Defend Trade Secrets Act, which I must confess I didn't see coming.
In Brand Energy & Infrastructure Svcs., Inc. v. Irex Contracting Group, No. 5:16-cv-2499, the court first noted that the DTSA can apply to continuing acts of misappropriation that began before the law's enactment in May of 2016 if those acts continued later. This would, for instance, capture a continuing improper or unauthorized use of an alleged trade secret.
The court then rejected a constitutional challenge as applied to the facts under the ex post facto clause of the United States Constitution. In a long and interesting passage, the court noted the DTSA's heavy reliance on state versions of the Uniform Trade Secrets Act and described how the DTSA was substantially different in its textual description of the law's effective date. As a result, the court found Congress intended to apply the DTSA to continuing claims of misappropriation and to provide a remedy that dealt not only with the acts occurring after the effective date but before as well.
A copy of the decision is available here.
The Anheuser-Busch Whistleblower Case
Remember James Clark? Yeah, I didn't think so. Clark accused Anheuser-Busch of filing a "strategic lawsuit against public participation" (called a "SLAPP action") when it accused him of misappropriating trade secrets related to A-B's brewing process. Clark allegedly took the information to institute a class action against A-B concerning the supposed mislabeling of alcohol content on its beer products.
A California district court had denied Clark's motion to dismiss the case as an improper SLAPP suit. Clark then appealed, a procedure that many state SLAPP statutes allow (even though the denial of a motion to dismiss is not otherwise appealable). In late 2015, the Ninth Circuit reversed and found the district court incorrectly determined that Clark's efforts to litigate (or share information with class counsel) were not the type of "protected activity" encompassed within California's SLAPP statute. The circuit court then remanded for the district court to determine whether A-B had established some probability of success on its misappropriation claim. That inquiry is a core part of determining whether an anti-SLAPP motion should be granted.
Last week, the district court once again ruled in A-B's favor and found it demonstrated such a probability of success, thereby denying Clark's anti-SLAPP motion for a second time. The court commented briefly on Clark's whistleblower defense, a topic of particular interest given how the Defend Trade Secrets Act contains a specific provision to protect whistleblowers The problem for the court, it appeared, is that assisting in a class action is not at all whistleblowing activity. Under California law, for instance, protected whistleblowing activity involves some complaint to a governmental agency.
A copy of the opinion is available here. Clark, by the way, appealed the adverse ruling once again.
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For an extended discussion on the various States' treatment of consideration in non-compete contracts, please see Sheppard Mullin's article in The National Law Review. Not surprisingly, Illinois merits an extended discussion.
GeekWire reports on the passage of a non-compete bill in the Washington House. The bill is generally considered employee-friendly, particularly as to technology workers. Amazon has been fairly aggressive in its use of non-competes.
Friday, March 31, 2017
Friday, March 24, 2017
The Reading List (2017, No. 12): One Reason Florida Is So Non-Compete Friendly
Non-Compete and Trade Secrets News for the week ended March 24, 2017
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Florida Non-Competes and Evidentiary Presumptions
The Florida District Court of Appeal's decision last week in Allied Universal Corp. v. Given illustrates why Florida is the safest haven for non-compete enforcement. It further shows how employers have benefited from a statutory directive that entitles them to a presumption of irreparable injury upon the showing of a legitimate business interest. That irreparable-injury showing is an indispensable component of injunctive relief. The case also shows the uphill burden an employee faces in trying to rebut evidence of a legitimate business interest, here the relationships that enable a salesperson to generate business. Employees who do so face a high discovery burden in amassing that type of evidence. Typically, they'll need something like high turnover or customer attrition or a narrative that shows how the new company provides a different customer value-proposition than the old one. A link to the Allied Universal case is available here.
(Eric Ostroff also discusses this decision in a blog post.)
The "Cloud" as a "Protected Computer" under the CFAA
The employment-related claims that a company may have under the Computer Fraud and Abuse Act all have a common requirement, which often is just assumed to exist in litigation: the access of a "protected computer." The way the CFAA is worded, any computer connected to the internet falls within the definition.
A fair number of cases now do not deal with claims where sensitive information was removed from a workplace computer. Instead, they concern disputes over information stored on a cloud-based platform that employees from computers access. So what happens when an employee continues to access this same platform, wrongfully, following termination of employment? Is this access of a cloud-based device equivalent to a "protected computer"? In Estes Forwarding Worldwide, LLC v. Cuellar, a federal judge in the Eastern District of Virginia said yes. But the analysis was very thin and not particularly persuasive.
Prior decisions, such as the Hawaii case of Property Rights Law Group v. Lynch, suffer the same flaw: no real attempt to reconcile a cloud-based service with the definition of a "protected computer." They seem to pivot to the fact that the computer was connected to the internet and end it right there. To the extent this issue becomes a genuine dispute among district courts, it seems Congress could head off the problem by extending the jurisdictional hook to accessing information stored on a cloud-based platform. After all, what's one more amendment to the CFAA?
The Estes Forwarding decision is available here.
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Florida Non-Competes and Evidentiary Presumptions
The Florida District Court of Appeal's decision last week in Allied Universal Corp. v. Given illustrates why Florida is the safest haven for non-compete enforcement. It further shows how employers have benefited from a statutory directive that entitles them to a presumption of irreparable injury upon the showing of a legitimate business interest. That irreparable-injury showing is an indispensable component of injunctive relief. The case also shows the uphill burden an employee faces in trying to rebut evidence of a legitimate business interest, here the relationships that enable a salesperson to generate business. Employees who do so face a high discovery burden in amassing that type of evidence. Typically, they'll need something like high turnover or customer attrition or a narrative that shows how the new company provides a different customer value-proposition than the old one. A link to the Allied Universal case is available here.
(Eric Ostroff also discusses this decision in a blog post.)
The "Cloud" as a "Protected Computer" under the CFAA
The employment-related claims that a company may have under the Computer Fraud and Abuse Act all have a common requirement, which often is just assumed to exist in litigation: the access of a "protected computer." The way the CFAA is worded, any computer connected to the internet falls within the definition.
A fair number of cases now do not deal with claims where sensitive information was removed from a workplace computer. Instead, they concern disputes over information stored on a cloud-based platform that employees from computers access. So what happens when an employee continues to access this same platform, wrongfully, following termination of employment? Is this access of a cloud-based device equivalent to a "protected computer"? In Estes Forwarding Worldwide, LLC v. Cuellar, a federal judge in the Eastern District of Virginia said yes. But the analysis was very thin and not particularly persuasive.
Prior decisions, such as the Hawaii case of Property Rights Law Group v. Lynch, suffer the same flaw: no real attempt to reconcile a cloud-based service with the definition of a "protected computer." They seem to pivot to the fact that the computer was connected to the internet and end it right there. To the extent this issue becomes a genuine dispute among district courts, it seems Congress could head off the problem by extending the jurisdictional hook to accessing information stored on a cloud-based platform. After all, what's one more amendment to the CFAA?
The Estes Forwarding decision is available here.
Friday, March 17, 2017
The Reading List (2017, No. 11): Trade Secrets Everywhere, Including the Bedroom...
Non-Compete and Trade Secrets News for the week ended March 17, 2017
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Trade Secrets Identification
The most difficult procedural issue in trade secrets cases involves when and how the plaintiff should disclose its trade secrets. Defendants frequently object to discovery until it has a specific itemization of the secrets the plaintiffs claims have been misappropriated. Courts have wide discretion to handle these types of disputes, and will do so on a case-by-case basis. A federal district court in Oregon, in the case of Quaiz v. Rockler Retail Group, Inc., No. 3:16-cv-1879, recently denied a defendant's motion to identify and stay discovery. As that case shows, the strength of an early-identification motion often is directly related to the allegations of the complaint. Here, the plaintiff gave more specificity than is often seen, confining the trade secret to a particular product and related designs. A copy of the opinion, which provides helpful analysis, is available here.
Trade Secrets Injunctions
The Georgia case of Pinnacle Agriculture Distribution, Inc. v. Mayo Fertilizer, No. 1:17-cv-29, deals with the scope of trade secrets injunctions. It illustrates that when plaintiffs present compelling evidence of misappropriation, a broader injunction may be in order. Here, an ex-employee of Pinnacle Agriculture had provided his new employer with his entire customer list and specific details about those customers, along with other information concerning Pinnacle's branch sales (including details on every product sold and profit margin for each sale). This is true smoking-gun evidence. Despite the lack of any non-compete, the court's injunction operated just like one. Both the employee and the new employer were barred from conducting business with Pinnacle's accounts. A copy of the injunction is available here.
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The San Francisco Business Times, along with many other outlets, reports this week on Google's attempt to stop Uber's self-driving car technology. Google's effort to enjoin Uber builds on its previous complaint, which I discussed last week. The new evidence Google submitted includes a damaging witness statement from the main individual defendant's former co-worker along with an expert witness.
In more trade secrets news, the Chicago Tribune this week published an article describing Motorola Solutions' suit against Hytera Communications. The trade secrets apparently pertain to Motorola's radio technology and involve more than 7,000 allegedly stolen files. Motorola sued under both the Defend Trade Secrets Act and the Illinois Trade Secrets Act. A copy of the Complaint is available here.
Finally, not sure really how to introduce this one, but Absorption Pharmaceuticals has claimed that Reckitt Benckiser, the maker of, um, K-Y lubricants, stole its trade secrets on a sexual performance enhancer. This claimed misappropriation arose out of the second most common factual scenario for theft: a purported business deal that fell apart. Absorption Pharmaceuticals is asking for an injunction to prohibit RB from selling Duration - a premature ejaculation spray. At the very least, it's a clever product name. A copy of the Complaint is available here.
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Trade Secrets Identification
The most difficult procedural issue in trade secrets cases involves when and how the plaintiff should disclose its trade secrets. Defendants frequently object to discovery until it has a specific itemization of the secrets the plaintiffs claims have been misappropriated. Courts have wide discretion to handle these types of disputes, and will do so on a case-by-case basis. A federal district court in Oregon, in the case of Quaiz v. Rockler Retail Group, Inc., No. 3:16-cv-1879, recently denied a defendant's motion to identify and stay discovery. As that case shows, the strength of an early-identification motion often is directly related to the allegations of the complaint. Here, the plaintiff gave more specificity than is often seen, confining the trade secret to a particular product and related designs. A copy of the opinion, which provides helpful analysis, is available here.
Trade Secrets Injunctions
The Georgia case of Pinnacle Agriculture Distribution, Inc. v. Mayo Fertilizer, No. 1:17-cv-29, deals with the scope of trade secrets injunctions. It illustrates that when plaintiffs present compelling evidence of misappropriation, a broader injunction may be in order. Here, an ex-employee of Pinnacle Agriculture had provided his new employer with his entire customer list and specific details about those customers, along with other information concerning Pinnacle's branch sales (including details on every product sold and profit margin for each sale). This is true smoking-gun evidence. Despite the lack of any non-compete, the court's injunction operated just like one. Both the employee and the new employer were barred from conducting business with Pinnacle's accounts. A copy of the injunction is available here.
***
The San Francisco Business Times, along with many other outlets, reports this week on Google's attempt to stop Uber's self-driving car technology. Google's effort to enjoin Uber builds on its previous complaint, which I discussed last week. The new evidence Google submitted includes a damaging witness statement from the main individual defendant's former co-worker along with an expert witness.
In more trade secrets news, the Chicago Tribune this week published an article describing Motorola Solutions' suit against Hytera Communications. The trade secrets apparently pertain to Motorola's radio technology and involve more than 7,000 allegedly stolen files. Motorola sued under both the Defend Trade Secrets Act and the Illinois Trade Secrets Act. A copy of the Complaint is available here.
Finally, not sure really how to introduce this one, but Absorption Pharmaceuticals has claimed that Reckitt Benckiser, the maker of, um, K-Y lubricants, stole its trade secrets on a sexual performance enhancer. This claimed misappropriation arose out of the second most common factual scenario for theft: a purported business deal that fell apart. Absorption Pharmaceuticals is asking for an injunction to prohibit RB from selling Duration - a premature ejaculation spray. At the very least, it's a clever product name. A copy of the Complaint is available here.
Friday, March 10, 2017
The Reading List (2017, No. 10): South Carolina Interprets Stealth Confidentiality Agreement
Non-Compete and Trade Secrets News for the week ended March 10, 2017
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South Carolina Non-Competes
The Court of Appeals of South Carolina issued a very interesting and important ruling on the oft-overlooked interplay between non-disclosure and non-competition covenants. The case is Fay v. Total Quality Logistics, LLC, No. 2014-1828.
In Fay, the Court of Appeals determined that an indefinite non-disclosure agreement operated as a stealth non-competition restriction, because it provided that if the ex-employee entered into a similar business as his employer and worked in a similar type of position, he would "necessarily and inevitably" use the employer's confidential information to perform his job. In other words, the agreement attempted to graft the devilish "inevitable disclosure" doctrine into a non-disclosure/non-competition covenant. Bad move. This contractual language in effect prohibited the employee ever from competing with his former employer. Under South Carolina's strict "blue-pencil" rule, the court couldn't modify the contract to add in a reasonable time limit. As such, it was unenforceable.
The concurring opinion offered the same conclusion, but first looked to Ohio law because that's what the parties agreed to apply to the contract. But even under Ohio law (which is more friendly), the indefinite non-disclosure agreement would be unenforceable. Fay represents yet another case in an emerging area: an employee's challenge of a broad non-disclosure agreement and arguing it operates as a stealth non-compete. You can read the opinion of the Court of Appeals by clicking here.
Proposed Amendments to CFAA
The Computer Fraud and Abuse Act has been amended many times since it first appeared on the scene in 1986. In reality, it needs to be rewritten or broken up into several different laws. But it's back on the legislative docket, at least if one Congressman has his way.
Rep. Tom Graves (R. GA) has proposed the Active Cyber Defense Certainty Act. The bill would allow victims of cyber-attacks to engage in limited defensive measures to identify and stop attackers. In essence, it's a bill that enables "hacking back" and formalizes that concept as a defense to prosecution for unlawful computer access. The text of the bill is available here.
The theory of hack-backs have generated a lot of debate among scholars in recent years, with some arguing that, even if legal, it could have dramatic unintended consequences in ensnaring innocent third-parties. It is often difficult to trace the source of a hack.
***
In other news, a great deal of news is floating around about Waymo, LLC v. Uber Techs., Inc., the trade secrets case involving Google's self-driving technology. News reports first surfaced a few weeks ago about the claim that featured, at its core, the departure of Waymo manager Anthony Levandowski and the supposed downloading of nearly 14,000 confidential Waymo files. Waymo appears to have suspected misappropriation based on the erroneous e-mail transmission of a circuit board drawing, intended for Uber but delivered instead to Waymo. A copy of the Complaint, which features a claim under the Defend Trade Secrets Act, is available here. The "Introduction" sets forth the big-picture story and is a great example of persuasive legal writing.
***
For those interested in the ex parte seizure order procedure available under the DTSA, this link contains the first ever federal court seizure order carried out. The case is Mission Capital Advisors LLC v. Romaka, No. 1:16-cv-5878 (S.D.N.Y.). The collateral costs of obtaining such an order are fairly high. Of note, the defendant in this case never was represented by counsel during the litigation.
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Finally, the U.S. Attorney's Office in the Middle District of Louisiana released a statement on February 16 that confirms the sentence of Brian Johnson for violating Section (a)(5)(A) of the CFAA. Johnson's guilty plea stemmed from his installation of malicious code on Georgia-Pacific's information technology system after G-P terminated his employment. The code resulted in significant damage to G-P's operations. Johnson will serve a 3-year prison term and must pay more than $1 million in restitution.
***
South Carolina Non-Competes
The Court of Appeals of South Carolina issued a very interesting and important ruling on the oft-overlooked interplay between non-disclosure and non-competition covenants. The case is Fay v. Total Quality Logistics, LLC, No. 2014-1828.
In Fay, the Court of Appeals determined that an indefinite non-disclosure agreement operated as a stealth non-competition restriction, because it provided that if the ex-employee entered into a similar business as his employer and worked in a similar type of position, he would "necessarily and inevitably" use the employer's confidential information to perform his job. In other words, the agreement attempted to graft the devilish "inevitable disclosure" doctrine into a non-disclosure/non-competition covenant. Bad move. This contractual language in effect prohibited the employee ever from competing with his former employer. Under South Carolina's strict "blue-pencil" rule, the court couldn't modify the contract to add in a reasonable time limit. As such, it was unenforceable.
The concurring opinion offered the same conclusion, but first looked to Ohio law because that's what the parties agreed to apply to the contract. But even under Ohio law (which is more friendly), the indefinite non-disclosure agreement would be unenforceable. Fay represents yet another case in an emerging area: an employee's challenge of a broad non-disclosure agreement and arguing it operates as a stealth non-compete. You can read the opinion of the Court of Appeals by clicking here.
Proposed Amendments to CFAA
The Computer Fraud and Abuse Act has been amended many times since it first appeared on the scene in 1986. In reality, it needs to be rewritten or broken up into several different laws. But it's back on the legislative docket, at least if one Congressman has his way.
Rep. Tom Graves (R. GA) has proposed the Active Cyber Defense Certainty Act. The bill would allow victims of cyber-attacks to engage in limited defensive measures to identify and stop attackers. In essence, it's a bill that enables "hacking back" and formalizes that concept as a defense to prosecution for unlawful computer access. The text of the bill is available here.
The theory of hack-backs have generated a lot of debate among scholars in recent years, with some arguing that, even if legal, it could have dramatic unintended consequences in ensnaring innocent third-parties. It is often difficult to trace the source of a hack.
***
In other news, a great deal of news is floating around about Waymo, LLC v. Uber Techs., Inc., the trade secrets case involving Google's self-driving technology. News reports first surfaced a few weeks ago about the claim that featured, at its core, the departure of Waymo manager Anthony Levandowski and the supposed downloading of nearly 14,000 confidential Waymo files. Waymo appears to have suspected misappropriation based on the erroneous e-mail transmission of a circuit board drawing, intended for Uber but delivered instead to Waymo. A copy of the Complaint, which features a claim under the Defend Trade Secrets Act, is available here. The "Introduction" sets forth the big-picture story and is a great example of persuasive legal writing.
***
For those interested in the ex parte seizure order procedure available under the DTSA, this link contains the first ever federal court seizure order carried out. The case is Mission Capital Advisors LLC v. Romaka, No. 1:16-cv-5878 (S.D.N.Y.). The collateral costs of obtaining such an order are fairly high. Of note, the defendant in this case never was represented by counsel during the litigation.
***
Finally, the U.S. Attorney's Office in the Middle District of Louisiana released a statement on February 16 that confirms the sentence of Brian Johnson for violating Section (a)(5)(A) of the CFAA. Johnson's guilty plea stemmed from his installation of malicious code on Georgia-Pacific's information technology system after G-P terminated his employment. The code resulted in significant damage to G-P's operations. Johnson will serve a 3-year prison term and must pay more than $1 million in restitution.
Friday, March 3, 2017
The Reading List (2017, No. 9): The First Defend Trade Secrets Act Verdict Arrives
Non-Compete and Trade Secrets News for the week ended March 3, 2017
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Defend Trade Secrets Act
On February 24, 2017, a jury in the Eastern District of Pennsylvania rendered a verdict in favor of Dalmatia Import Group and against FoodMatch, Inc. under the Defend Trade Secrets Act. As of this posting date, the verdict is not available for viewing, but McDermott Will & Emery (counsel for plaintiff) reports that the judgment will exceed $5 million.
The case grew out of FoodMatch's product launch of what Dalmatia called a "copycat line of fruit spreads." FoodMatch previously had been a Dalmatia distributor in the United States but terminated that relationship and began its own competing line of products. FoodMatch also purportedly engaged Dalmatia's contract manufacturer, who apparently knew of the fruit spread recipes, to develop a competing product line.
The DTSA is largely consistent with state law in terms of the damages remedies available to aggrieved plaintiffs like Dalmatia. It is important to note, too, that this was not just a DTSA case; Dalmatia claimed counterfeiting under the Lanham Act. And though the case seemed to progress quickly to verdict given the DTSA's short history (it was signed into law on May 11, 2016), Dalmatia filed the case well before then and added the DTSA claim later.
Nevada Legislator Introduces Non-Compete Bill
Nevada made news last year for soundly rejecting the blue-pencil doctrine. This year, an Assemblyman has introduced Bill No. 149, which would limit non-competition agreements to a duration of 3 months after the end of employment. The bill further codifies the rule-of-reason analysis used by Nevada courts currently. If a company entered into an agreement with a longer, and therefore statutorily unreasonable, duration, it would be subject to a fine of up to $5,000.
The bill has been referred to the Committee and Commerce and Labor. A PDF copy of the bill is available here.
Fee Awards in Texas
Try making sense of this development. A Harris County, Texas jury awarded an employee nearly $200,000 in attorneys' fees after the jury found his ex-employer pursued a trade secrets misappropriation claim in bad faith.
But the same jury awarded the employer nearly $500,000 in attorneys' fees after finding the employee failed to comply with a confidentiality clause. It's hard for me to understand how to reconcile the two awards. A blog post further describes this rather contentious suit.
Overbroad Non-Competes in Louisiana
As I've discussed several times in the past, Louisiana has a very nuanced framework for non-compete agreements. Most importantly, non-competes must specify a parish or municipality where the restriction applies, and the employer must do business there. Courts have been strictly applying this language.
In Affordable Roofing v. Artigues, 2:16-cv-16872 (E.D. La.), a federal district court determined that a non-compete applying "in any state" where the employer conducts business was void. The employer conceded this but argued the employee in any event knew precisely where the employer did business. As is fairly obvious, such an interpretation would violate the plain language of the statute. A copy of the Order is available here.
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Defend Trade Secrets Act
On February 24, 2017, a jury in the Eastern District of Pennsylvania rendered a verdict in favor of Dalmatia Import Group and against FoodMatch, Inc. under the Defend Trade Secrets Act. As of this posting date, the verdict is not available for viewing, but McDermott Will & Emery (counsel for plaintiff) reports that the judgment will exceed $5 million.
The case grew out of FoodMatch's product launch of what Dalmatia called a "copycat line of fruit spreads." FoodMatch previously had been a Dalmatia distributor in the United States but terminated that relationship and began its own competing line of products. FoodMatch also purportedly engaged Dalmatia's contract manufacturer, who apparently knew of the fruit spread recipes, to develop a competing product line.
The DTSA is largely consistent with state law in terms of the damages remedies available to aggrieved plaintiffs like Dalmatia. It is important to note, too, that this was not just a DTSA case; Dalmatia claimed counterfeiting under the Lanham Act. And though the case seemed to progress quickly to verdict given the DTSA's short history (it was signed into law on May 11, 2016), Dalmatia filed the case well before then and added the DTSA claim later.
Nevada Legislator Introduces Non-Compete Bill
Nevada made news last year for soundly rejecting the blue-pencil doctrine. This year, an Assemblyman has introduced Bill No. 149, which would limit non-competition agreements to a duration of 3 months after the end of employment. The bill further codifies the rule-of-reason analysis used by Nevada courts currently. If a company entered into an agreement with a longer, and therefore statutorily unreasonable, duration, it would be subject to a fine of up to $5,000.
The bill has been referred to the Committee and Commerce and Labor. A PDF copy of the bill is available here.
Fee Awards in Texas
Try making sense of this development. A Harris County, Texas jury awarded an employee nearly $200,000 in attorneys' fees after the jury found his ex-employer pursued a trade secrets misappropriation claim in bad faith.
But the same jury awarded the employer nearly $500,000 in attorneys' fees after finding the employee failed to comply with a confidentiality clause. It's hard for me to understand how to reconcile the two awards. A blog post further describes this rather contentious suit.
Overbroad Non-Competes in Louisiana
As I've discussed several times in the past, Louisiana has a very nuanced framework for non-compete agreements. Most importantly, non-competes must specify a parish or municipality where the restriction applies, and the employer must do business there. Courts have been strictly applying this language.
In Affordable Roofing v. Artigues, 2:16-cv-16872 (E.D. La.), a federal district court determined that a non-compete applying "in any state" where the employer conducts business was void. The employer conceded this but argued the employee in any event knew precisely where the employer did business. As is fairly obvious, such an interpretation would violate the plain language of the statute. A copy of the Order is available here.
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