Media Room

dedicated, diverse counsel helping you reach your goals

 

Thursday Wrap-Up (August 16, 2012): Noteworthy Trade Secrets, Covenant Not to Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 16. August 2012 23:00

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well one or two that I missed over the past few weeks (better late than never):
 
Noteworthy Trade Secret and Non-Compete Posts and Cases: 

  • Manhattan District Attorney Cyrus Vance has arrested ex-Goldman Sachs programmer Sergey Aleynikov for the alleged theft of Goldman's proprietary code for its high frequency trading program.  Aleynikov was previously convicted by a Manhattan jury under the Economic Espionage Act but that verdict was overturned by the U.S. Court of Appeals for the Second Circuit in February.  (My take on the Second Circuit's opinion (hint:  I didn't agree) can be found here).  The New York Times quotes Vance as follows:  “This code is so highly confidential that it is known in the industry as the firm’s 'secret sauce.' Employees who exploit their access to sensitive information should expect to face criminal prosecution in New York State.  According to The Times, Vance charged Aleynikov with the unlawful use of secret scientific material and duplication of computer-related material, both felonies under New York State law. If convicted, he could serve 1 to 4 years in prison.
  • In the final chapter of another noteworthy criminal trade secret proceeding, former-Intel engineer Biswamohan Pani was sentenced to a 3 year prison term after pleading guilty to stealing Intel's computer chip manufacturing and design secrets.  Prosecutors say the 36-year-old Pani downloaded secret documents from Intel in May 2008, shortly after he announced he was leaving to join rival Advanced Micro Devices.  Intel valued those documents at between $200 million and $400 million. 
  • And in yet another criminal trade secrets case, a former Bridgestone scientist, Xiaorong Wang, has pleaded not guilty to charges that he stole trade secrets from his former employer in Akron and then lied to federal investigators.  Wang's trial is set for September 25, 2012. 
  • If you are advising companies in the healthcare industry, you will want to read an article by Kathryn Hacket King of Snell & Wilner about the "Enforceability and interpretation of agreements prohibiting 'direct and indirect' solicitation of health care employees."  In ProTherapy & Associates, LLC v. AFS of Bastian, Inc., the Fourth Circuit not only upheld the non-solicitation provisions in question but enforced a liquidated damages clause as well. 
  • "Avoiding Trade Secret Litigation in the Life Sciences" by Choate Hall & Stewart LLP's Eric J. Marandett and Margaret E. Ives provides some sound tips when negotiating collaboration agreements with potential partners. 
  • "Mergers & Acquisitions: Don't Forget About Employee Compliance with Nondisclosure Agreements" advises The Michigan Employment Law Advisor
  • And speaking of mergers and non-disclosure agreements, the Delaware Supreme Court has issued its formal opinion affirming the Chancery Court's injunction against Martin Marietta for breaching its NDA and using confidential information in its hostile bid for Vulcan Materials.  The Delaware Corporate & Commercial Law Blog has a post about the decision and link to the opinion.  (For more on this case, see my posts here and here). 

Computer Fraud and Abuse Act Posts 

  • Confusion over the scope of the Computer Fraud and Abuse Act continues, as there is now a split within the First Circuit according to Foley & Hoag's Massachusetts Noncompete Blog.  The U.S. District Court for the District of New Hampshire has recently adopted the narrow reasoning of U.S. v. Nosal, thus separating itself from an earlier decision by the U.S. District Court for the District of Massachusetts, which had applied the broader rule permitting the use of the CFAA for violations of computer-use policies. 

Cybersecurity Posts and Articles 

  • "Cybersecurity Becoming No. 1 Concern for GCs and Directors" notes Catherine Dunn forCorporate Counsel. 
  • "Why It Pays to Submit to Hackers" explains Wired. 
  • "How To Create and Remember Strong Passwords" advises Larry Magid for Forbes
  • "Don’t forget these 5 security issues in your BYOD policy" reminds Jon Hyman's Ohio Employer's Law Blog. 

News You Can Use:

  • "How to make your lost phone findable" by David Pogue of The New York Times.
 

Apple v. Samsung Update: Judge Koh Issues Her Opinion Protecting Intel, Qualcomm, IBM, Nokia and Microsoft Trade Secrets

 
by John Marsh 14. August 2012 07:45

Last week, I wrote about the media's scrutiny of Apple's many trade secrets and the special challenges for any party trying to protect its trade secrets in a public proceeding, especially a high profile one generating media coverage. As my post noted, there were several media reports of preliminary rulings by U.S. District Court Judge Lucy Koh on some of the trade secrets questions raised by the parties and by Reuters, which had sought the release of some of that data. Reuters had intervened in the lawsuit and challenged a number of the parties and third parties' claims of trade secrecy. Late last Thursday, Judge Koh issued a 29-page opinion and order formally addressing the various trade secrets claims of Apple and Samsung, as well as those of non-parties Intel, Qualcomm, IBM, Nokia and Microsoft. (A copy of the opinion is attached as a PDF below).

Judge Koh's opinion strikes the right balance on the many trade secrets presented. Her analysis notes the historic right of public access to court documents and records and the strong presumption in favor of access unless a particular court record is traditionally kept secret. Her opinion emphasized the public's interest in this trial and the importance of certain data being publicly available to assist in the public's understanding of the eventual outcome. 

While her analysis is sound, the opinion avoids any bold pronouncements about the importance of trade secrets or forceful rulings regarding the intersection of trade secrets and public proceedings. As a result, her fact-based opinion, while highly visible, probably won't have far-reaching consequences because her holdings are strongly rooted in the arguments and facts before her. Frankly, this was probably the right approach given the myriad of claims, arguments and facts at issue in this very complex dispute.
 
Apple and Samsung's Trade Secrets: As to Apple's many trade secrecy claims, Judge Koh ordered that evidence of Apple's profits and other financial data would not be placed under seal. Judge Koh was unpersuaded by Apple's claims that evidence of past profits and unit sales data could be used to meaningfully predict its future business plans that might benefit competitors. Perhaps more significantly, Judge Koh noted that Apple's request for $2.5 billion in damages, the extreme importance of the public's understanding of the eventual outcome and the extraordinary public interest that this trial had generated strongly weighed in favor of disclosure of this data.
 
Apple was able to preserve the trade secrecy of some information. Judge Koh did place information regarding Apple's production and supply capacity, its source code, its licensing information and some of its marketing survey data under seal. She applied the same analysis and rationale to Samsung, which made similar requests for its confidential financial information and trade secrets.  
 
Third Parties' Trade Secrets: Not surprisingly, Judge Koh was more sympathetic to the claims of third parties such as Intel, Qualcomm, IBM, Nokia and Microsoft, who sought to prevent disclosure of the terms of their licensing agreements to the public. She found that the "public release of such information would place these third-parties in a weakened bargaining position in future negotiations, thereby giving their customers and competitors a significant advantage." She, therefore, sealed all information related to the pricing terms, royalty rates and payments of all current and past licensing agreements.

One interesting issue: IBM and Reuters appear to have sparred over the publication of its licensing agreement, as Reuters threatened to publish it because the agreement had been served as an exhibit on all parties. While IBM was apparently unsuccessful in getting a TRO barring its publication, Judge Koh rejected Reuters' waiver argument, reasoning that none of the information had been publicly disseminated and that "such limited disclosure does not strip IBM's information of its trade secret status. She firmly warned Reuters that if it did publish that information, it would be in direct violation of her order.

The Takeaway? Judge Koh's opinion may provide some support down the road for parties trying to protect public disclosure of their trade secrets at trial, but her fact-based opinion will have limited presidential value. 

For that reason, Magistrate Clifford Shirley's opinion in the high profile trade secret prosecution of Wycko employees convicted of stealing Goodyear's trade secrets in 2010 probably provides the best guidance, particularly for trade secret claimants. In U.S. v. Roberts, 2010 U.S. Dist. LEXIS 25236 (D. Tenn. March 17,2010), Magistrate Shirley not only struck the right balance between the competing needs for public access and trade secrecy, but provided a template for future courts confronted with similar questions. Observing the "flat absurdity  for the trial judge to compel [Goodyear] to publicly disclose its processes in the act of protecting them from disclosure," Magistrate Shirley balanced the needs of the criminal defendants, the public's right to access and Goodyear's trade secrets by limiting disclosure of the trade secrets -- illicit photographs taken of Goodyear's manufacturing operations -- to display of the photos to the jury alone.

Apple v. Samsung.pdf (144.98 kb)

Tags: , , ,

IP Litigation | Licensing | California | Trade Secrets | Patents

 

Thursday Wrap-Up (August 9, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 9. August 2012 10:30

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well one or two that I missed from the previous week:

Noteworthy Trade Secret and Non-Compete Articles, Cases and Posts:

  • A San Jose jury has awarded $112 million to networking equipment supplier Brocade Communications Systems Inc., finding that A10 Networks Inc. stole its trade secrets and infringed its intellectual property to start a competing business with ex-Brocade workers, reports Law360. Brocade's press release also indicated that Brocade had asserted claims for patent and copyright infringement that covered all of A10’s AX Series load balancing server products.
  • In a high profile healthcare dispute, Renown Heath has reached an agreement with the Federal Trade Commission and the Nevada Attorney General's office over its non-competes with 10 staff cardiologists it formerly employed in Nevada. Renown had cornered about 97% of the cardiology market and its acquisition of previously independent cardiology groups was perceived as likely to result in price increases to health plans and individuals paying for cardiology services in the area. The settlements will allow those cardiologists to join competing practices without penalty.
  • Many settlement agreements and consent decrees have non-disparagement provisions, but are those provisions enforceable? According to Berman Fink Van Horns' Georgia Non-Compete and Trade Secret News Blog, they may not. In Sesolinc Group, Inc. v. Metal-con Inc., 2012 WL 2119768 (S.D. Ga. June 11, 2012), a Georgia federal court declined to approve a consent decree presented by the parties because it might entangle the court in First Amendment issues such as potentially enforcing an order forbidding constitutionally-protected commercial speech. 
  • What are holdover clauses and are they enforceable? Kenneth Vanko answers both questions in his recent post on the South Carolina Supreme Court's decision in Milliken & Co. v. Morin upholding the enforceability of these provisions, which are designed to protect the ownership and assignability of inventions created with an employer's confidential information after an employee's departure.
  • Another court has signalled that circumstantial evidence of misappropriation is insufficient to overcome an employee's denials, advises Epstein Becker's Trade Secrets & Noncompete Blog.  In a Georgia appellate decision, Contract Furniture Refinishing & Maintenance Corp. of Georgia d/b/a The Refinishing Touch v. Remanufacturing & Design Group, the court ruled that while the plaintiff TRT produced strong circumstantial evidence that the defendant Deutsch may have misappropriated or disclosed its trade secrets, the “evidence is also consistent with the direct evidence that Deutsch did not in fact do so. The circumstantial evidence therefore has no probative value, and TRT cannot demonstrate a genuine issue of fact with regard to its misappropriation of trade secrets claim.”
  • Indiana businesses better have reasonable time, subject matter and geographic limitations in their confidentiality agreements or they may not be enforceable, warns Seyfarth Shaw's Trading Secrets Blog
  • If you have clients in the financial and investment communities, you should read "For some firms, brokerage-hiring protocol no longer holds value" by Dan Jamieson for Investment News.
  • Interested in the "State of Texas Non-Competes"? Consult Rob Radcliffe's Smooth Transitions Blog, where he has posted an article he recently wrote on the matter (the news is good for employers).
  • E. Patrick Ellisen and Daniel T. McCloskey have advice for "Protecting Confidential Information and IP Amid Employee Mobility" in an article for Corporate Counsel.
  • At long last, something upon which members of Congress can agree. Last week, the U.S. House of Representatives voted to approve H.R. 6029, the Foreign and Economic Espionage Penalty Enhancement Act of 2012, which increases the penalties under the Economic Espionage Act from the statutory maximum for economic espionage and the theft of trade secrets for the benefit of a foreign entity to 20 years from 15, raises the fine that can be imposed to a maximum of $5 million from $500,000, and adds criminal penalties for passing trade secret information that would benefit a foreign government.  A companion bill, S. 678, with similar language is under review by the Senate.

Computer Fraud and Abuse Act Posts:

  • Foley & Lardner's Privacy & Security Source Blog is not happy about the recent decisions in Nosal and WEC Carolina in its post "De-CFAA-nating Federal Law: Recent Appeals Courts Decisions Weaken Statutory Protections Against Unauthorized Use of Electronic Data." For the views of other trade secrets blogs on the WEC Carolina decision, see Seyfarth Shaw's post, Fisher & Phillips' post, Epstein Becker's post and Littler's post (my take can be found here). 
  • A California federal court has allowed a CFAA claim arising out of the violation of a computer use policy to go forward because the policy limited the access of the former employee, reports Eric Goldman in his Technology & Marketing Law Blog. In Weingand v. Harland Financial Solutions, C 11 3109 EMC (N.D. Cal.; June 19, 2012), the Northern District found that the reasoning in U.S. v. Nosal did not apply because the policy in question prohibited the access at issue.

 
Cybersecurity Posts and Articles:

  • For those interested in finding out what sank the Cybersecurity Act of 2012, there are plenty of opinions from which to choose. Steptoe & Johnson's Cyberblog and Peter S. Vogel share their thoughts. Shockingly, The New York Times blames the Republicans while The Wall Street Journal blames the Democrats. And, as always, Catherine Dunn of Corporate Counsel has a fine piece entitled, "A Long, Hot Summer for Corporate Cybersecurity."
  • "Protect your IP: hashing your passwords" counsels Scott Flaherty of Briggs and Morgan. 
  • "'Spearphishing' Fraud Hooks More Victims: How cybercriminals disguise themselves as your bank, your boss, or even the IRS" advises Jen Weiczner of SmartMoney.

News You Can Use:

  • And The New York Times Bits Blog provides some advice on "What You Can Do to Better Protect Your Apple Account."
 

Apple v. Samsung: The Challenge of Protecting Trade Secrets at Trial and Other Lessons for Trade Secret Owners and Lawyers

 
by John Marsh 7. August 2012 10:30

The Apple v. Samsung case in the U.S. District Court for the Northern District of California is poised to become the intellectual property equivalent of the O.J. Simpson trial, as it is easily one of most widely followed IP dispute in years. The intense media coverage has brought an important issue to the forefront -- namely, how to handle sensitive information that is bound to be included in this type of dispute. 

Apple is famously secretive, having gone so far as to build an offsite, employees-only-restaurant so competitors could not eavesdrop on its employees. As a result, one of the issues that has received the most attention is the degree to which some of Apple's trade secrets have been disclosed at trial. Apple's experience provides a number of lessons to companies about the challenges of protecting trade secrets in open court, especially in a high profile case. 

On Saturday, The Wall Street Journal ran an article, "Apple's Secrets Revealed at Trial," that was its most popular online article over the weekend. The article detailed, for example, the testimony of Phil Schiller, Apple's senior VP of world-wide marketing, who revealed how much Apple spends on marketing the devices at issue. Schiller testified that Apple had spent $647 million advertising the iPhone in the U.S., from its release in 2007 through its fiscal year 2011. For the iPad, which was first sold in 2010, he estimated $457.2 was spent.

Some of the trade secrets disclosed ran counter to Apple's professed marketing and business strategy. For example, The Journal described the testimony of Scott Forstall, a senior VP who oversees the software for Apple's mobile devices, who was forced to admit that as early as January 2011, an Apple executive advocated that Apple build a tablet with a 7-inch screen. (Apple has generally disputed the appeal of devices smaller than its 9.7-inch iPad, although The Journal says there are reports that Apple is developing a smaller model). According to The Journal, Forstall described "locking down" one floor of Apple's buildings with cameras and keycard readers to strengthen security and he admitted that Apple employees put a sign up on the front door with the words Fight Club written on it, referring to the hit movie in which characters are told that the first rule of Fight Club is not to talk about Fight Club. (For more, check out The New York Times article, "At Its Trial, Apple Spills Some Trade Secrets.")

Apple has won some and lost some trade secret battles in the case. It tried to limit the admissibility of a marketing survey of its customers, arguing that parts of it were a trade secret, but U.S. District Court Judge Lucy Koh disagreed. In addition, Apple has attempted, with mixed success, to seal sales documents that Samsung wished to use in cross-examination. Indeed, the issue of Apple's trade secrets has long been a pressure point in this case, as Samsung unsuccessfully sought other trade secrets of Apple in a discovery dispute last year.

The trial has also involved the possible disclosure of trade secrets of third parties. Intel and Qualcomm have both filed motions to protect information contained in their licensing agreements and have battled with Reuters over the degree of disclosure that should be provided to the media. This of course places additional pressures on Apple, as important customer or vendor relationships may be frayed as they are drawn into the litigation.

What are the lessons for a business trying to protect its trade secrets in open court?  The Apple v. Samsung dispute highlights a number of important challenges in any trial, but especially in a trade secrets trial. Here are some facts every company needs to face: 

1.  Accept that the standard is against you. Courts, especially federal courts, are generally reluctant to seal the court room and very sensitive to the need for open proceedings.  However, simply because a company seeks to protect its trade secrets does not mean it has to disclose the very trade secrets it seeks to protect, let alone other trade secrets. For an excellent analysis of the balancing that every court should apply, see Knoxville U.S. Magistrate Clifford Shirley's opinion in U.S. v. Roberts, a high profile criminal case that involved the theft of Goodyear's trade secrets.

2.  Be prepared to battle the media. In a high profile case, this is almost a certainty. As newspaper budgets have shrunk, a high profile trial is fertile ground for local or national coverage. However, even efforts to seal what your client might think is a low profile dispute may raise the media's ire and provoke a battle over a protective order. Consequently, have a brief ready to go that anticipates the First Amendment issues and the need to protect trade secrecy.

3.  Choose Your Battles Wisely. Given the realities outlined above, don't squander your credibility and resources fighting over lower level trade secrets or confidential information. Know what trade secrets are truly important and be prepared to battle over them as they arise in the case. Also, insist on an order that any confidential documents will be presented to the court first before the opposing party tries to use them in open court so that you are not closing the proverbial barn door after the horse has escaped.

Tags: , ,

Intellectual Property | IP Litigation | Trade Secrets

 

Thursday Wrap-Up (August 2, 2012): Noteworthy Trade Secrets, Covenant Not to Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 2. August 2012 12:55

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

  • Mitsubishi Electric & Electronics USA Inc. has persuaded a trial court to set aside a $124 million jury verdict against it arising from Grail Semiconductor Inc.'s claims that Mitsubishi breached a non-disclosure agreement by disclosing confidential information for a memory chip to an affiliate, Mitsubishi-Japan and a jointly owned Japanese company, Renesas.  Bloomberg is reporting that Santa Clara Superior Court Judge Kenneth Barnum concluded that the jury's damages analysis was flawed but that he upheld the jury's findings of liability.  The verdict was the 13th largest jury verdict in the U.S. so far in 2012.
  • In yet another bad faith case, Judge Jane Magnus-Stinson of the U.S. District Court for the Southern District of Indiana has imposed attorneys fees and costs against a plaintiff and its lead counsel, finding that the action was "essentially a vendetta" against the former employees "designed . . . to litigate them to death, rather than out of a genuine concern about protecting intellectual property."  In Loparex, LLC v. MPI Release, LLC, Judge Magnus-Stinson was influenced by the fact that Loparex had filed, but quickly dismissed, an action against one of the former employees in Illinois, after warnings from the Illinois court about its concerns about Loparex's ability to identify its trade secrets, and then refiled that action before her.  (A PDF copy of the opinion can be found below).
  • Non-competes do not violate the Texas Deceptive Trade Secrets Act, reports Gray Plant Moody.  The article details the recent decision by the U.S. District Court for the Northern District of Texas in Mary Kay, Inc. v. Amy Dunlap, 2012 U.S. Dist. LEXIS 86499 (N.D. Tex. June 21, 2012), which also rejected a challenge under the Sherman Act.
  • For those in Illinois, the Illinois Fourth Appellate District has recently applied the new analysis supplied under Reliable Fire Equip. v. Arrendondo to enforce a non-compete, reports DeBlasio Donnell's Litigation Blog.  In Zabaneh Franchises, LLC v. Walker, the Fourth Appellate District reversed the trial court's decision not to uphold the covenant not to compete, reasoning that the employee was only restricted from soliciting customers that she had serviced for her former employer. 
  • Oklahoma companies and attorneys interested in "Dissecting the Oklahoma Non-Compete Statute Phrase by Phrase" should consult Shawn J. Roberts' post. 
  • For a good summary of the pending In re Certain Rubber Resins trade secret case before the International Trade Commission, see Brian Vogel's article at Inside Counsel
  • Interested in finding out more about the Protecting American Trade Secrets and Innovation Act of 2012? Check out Crowell & Moring's Mark Klapow's article, "The Latest Attempt to Federalize Trade Secret Law," in Law360.
  • If you are thinking of sending a cease and desist letter, you might want to consider the approach used in Jack Daniels' splended letter, which has gone viral (it was even commented upon in The Atlantic). You will be sure to avoid the ridicule that came from the clever response to the Hopasaurus Rex cease and desist letter.

 
Cybersecurity Posts and Articles: 

  • If you are looking for the latest on the pending cybersecurity legislation, there is plenty to sink your teeth into. Foley & Hoag's Security, Privacy and The Internet Blog reports on the Obama administration's decision to throw its weight behind Senator Joseph Lieberman's Cybersecurity Act of 2012. 
  • Also check out  The New York Times two articles, "Senators Force Weaker Safeguards Against Cyberattacks" and "Again, Wrangling Over Surveillance in the Cybersecurity Bill."
  • For Baker & Hostetler's Data Privacy Monitor Blog's take on the Cybersecurity Legislation, check out its posts asking "Can National Security Trump Politics This Close to the Election?"
  • Steptoe & Johnson's Sally Abertazzie's E-Commerce Law Week shares her thoughts on the legislation, as well as a nice summary of the First Circuit's recent decision in  Patco Construction Company v. People’s United Bank holding that a bank's security was commercially unreasonable in connection with a claim over cybertheft of a customer's funds.
  • Finally, The Washington Post weighed in last week on the legislation with its editorial entitled "Stockpiling arms against cyberattacks" and appears convinced the threat is real and that our private and public bodies need to take some action.
  • "Smartphones are becoming top targets for cyber attacks" reports MoneyWeb, particularly because they are expected to become the equivalent of wallets, replacing credit cards and cash.

News You Can Use: 

  • The Wall Street Journal's Digits Blog cautions that "Do You Use Free Wi-Fi? It May Be Legal to Sniff All Your Data." 
  • And for the highly paranoid, Forbes' Andy Greenberg advises "How To Bust Your Boss Or Loved One For Installing Spyware On Your Phone."

Loparex Order 07.31.12.pdf (109.26 kb)

 

Thursday Wrap-Up (July 26, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 26. July 2012 17:45

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

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

Computer Fraud and Abuse Act Posts:

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

Cybersecurity Posts and Articles: 

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

News You Can Use:

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

SASCO v. Rosendin Electric: Another Unsuccessful Trade Secret Plaintiff Gets Drilled for Bringing a "Bad Faith" Action

 
by John Marsh 18. July 2012 11:30

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

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

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

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

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

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

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

Sasco v Rosendin Opinion.pdf (178.37 kb)

 

Friday Wrap-Up (July 13, 2012): Noteworthy Trade Secrets, Covenant Not to Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 13. July 2012 15:30

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:
 
Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • A Washington federal judge issued a writ of garnishment on behalf of DuPont last week against Kolon Industries Inc., ordering an associated company to become a garnishee following DuPont's $920 million trade secret verdict against Kolon last fall, Law360 is reporting. A PDF copy of the order can be found below. The parties are waiting on a ruling on DuPont's motion for permanent injunction from U.S. District Court Judge Robert Payne back in Richmond Virginia. For more on the DuPont v. Kolon case, see my previous posts here and here. 
  • An Illinois court has recently found that breach of an agreement must be material to void a non-compete reports Epstein Becker's Trade Secrets and Noncompete Blog.  The case, InsureOne Indep. Insur. Agency v. Hallberg, involved the enforcement of a non-compete that accompanied a sale of a business.  For what it is worth, in my experience, courts tend to be less forgiving of a breach by an employer in non-competes involving an employee.
  • Michigan is the latest state to consider scaling back its enforcement of non-competes. Senate Bill 786, which was introduced in late 2011, would require Michigan employer to advise a potential employee of the requirement to sign a non-compete agreement as a condition of employment. This requirement is gaining traction nationally, as New Hampshire recently adopted a similar statute imposing a similar requirement upon its employers, which becomes effective tomorrow. 
  • What are the risks and benefits of suing the company that hires a former employee with a non-compete? The Delaware Non-Compete Blog has a practical post outlining the practical considerations every company should weigh before joining a competitor in a dispute over a covenant not to compete. 
  • For those interested in working through the legal thicket of garden leave provisions -- i.e., provisions that pay an employee for a post-employment waiting period so that he/she does not compete -- check out the Burr & Forman Non-Compete and Trade Secrets Blog's recent post, which provides a good summary of the caselaw construing these provisions.

Computer Fraud and Abuse Act Cases and Posts:

  • The Solicitor General has been granted a 30 day extension so he can continue to evaluate whether he wants to appeal from the Ninth Circuit's en banc decision in U.S. v. Nosal, reports Seyfarth Shaw's Trading Secrets Blog.  That decision narrowly applied the CFAA, finding that a violation of a computer use policy was insufficient to trigger that statute.  For more detail, see my earlier post.
  • A New York state court has recently decided to follow Nosal's holding in a short decision dismissing a CFAA claim, reports Foley & Hoag's Massachusetts Non-Compete Blog. The opinion MSCI Inc. v. Jacob, 2012 N.Y. Slip. Op. 05107 (N.Y. App. Div., 1st Dep't June 26, 2012), provides little detail but signals the growing divide over the scope of the CFAA. 
  • Littler's Unfair Competition & Trade Secrets Counsel Blog has a post about another recent CFAA decision, Del Vecchio v. Amazon, where the plaintiff's CFAA claim was dismissed because it failed to provide specific facts showing the actual value of the trade secrets at issue or the actual profits lost as a result of the theft.

Cybersecurity Posts and Articles: 

  • The big news this week was the breach of 400,000 Yahoo accounts but The New York Times is reporting that the breach extends beyond Yahoo to Gmail, Hotmail, and AOL Users. 
  • "Cybercriminals Sniff Out Vulnerable Firms" advises The Wall Street Journal
  • Forbes' Andy Greenberg details the plan on "How To Hijack 'Every iPhone In The World.'"
News You Can Use: 
  • Can this relationship be saved? "He Texts, She Tweets—Are They E-Compatible? Setting Digital Ground Rules to Become E-Compatible With Family and Friends" writes Elizabeth Bernstein in The Wall Street Journal.

 Dupont v Kolon - Writ of Garnishment.pdf (86.82 kb)

 

Thursday Wrap-Up (July 5, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 5. July 2012 12:00

Here are the noteworthy trade secrets, non-compete and cybersecurity stories from the past week:


Noteworthy Trade Secret and Non-Compete Posts and Cases:

  • The big news in the trade secret blogosphere this week was Todd Sullivan's announcement that he will be leaving Womble Carlyle and forming a litigation boutique firm, Graebe Hanna & Sullivan. Todd has been blogging since 2006 and his contributions to the Trade Secrets Blog made it one of the best, and funniest, trade secret blogs. Hopefully, he will find the time to launch a new blog after he hits the ground with his new firm. 
  • Google has been sued for allegedly copying portions of its video chat platform from the company Be In, which offers its own video chat program, CamUp. Be In alleges that it discussed a business deal with Google at a meeting in London last April. According to the complaint, after signing a non-disclosure agreement with Google, "Be In provided a live demonstration of its CamUp product, and proposed that a 'Watch with your Friends' button be embedded within all YouTube pages."
  • Law360 is reporting that trade secret claims brought by Therason against former McDermott Will & Emery partner John Fuisz have been dismissed as untimely. Therason, at the time a client of McDermott, had alleged that Fuisz had shared its trade secrets with a pharmaceutical company formed by his family members.
  • Are you an employee looking down the barrel of a cease and desist letter from your former employer? Then you should review Rob Dean's latest post on the Virginia Non-Compete Blog for advice on how to respond.
  • For those practicing in Illinois, Kenneth Vanko reports that Illinois courts are all over the place in their application of the Illinois Supreme Court's Reliable Fire v. Arredondo decision last year. In Reliable Fire, the Supreme Court found that an employer had to come forward with evidence of a legitimate business interest to justify enforcement of any covenant not to compete. As Kenneth and I both predicted, this fact-based approach has made non-compete cases highly unpredictable and more uncertain for employers and employees.
  • The IPKat Blog has an interesting post about how trade secrets may serve to enhance the reputation of some companies.
  • Although it is a relative newcomer to the blogosphere, Burr & Forman's Non-Compete & Trade Secrets Blog continues to churn out good, practical posts. This week's post, "Court Says It’s Time to Pay The Piper, Even if the Piper Hasn’t Paid: Fee Provisions and Third Party Payments," looks at the enforceability of prevailing party provisions in non-compete disputes


Cybersecurity Posts and Articles:

  • Concerns about confidentiality, privilege and cloud computing continue to swirl, and Peter S. Vogel's Internet, Information Technology and e-Discovery Blog has some helpful links to a recent interview that Peter gave on the subject as well as a Texas CLE on the subject.


News You Can Use:

  • "Fix That Password—Now!" says The Wall Street Journal, with some advice on what passwords work best.
 

Thursday Wrap-Up (June 28, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 28. June 2012 10:45

Here are the noteworthy posts, articles and cases of the past week:

Trade Secret and Non-Compete Cases and Posts:

  • U.S. District Court Judge Gary Keess issued his opinion explaining his reasons for denying CBS' Motion for TRO to prevent the premiere of ABC's Glass House reality show.  A copy of the Opinion can be found in the PDF below. As expected, Judge Keess expressed "serious doubts" about whether CBS had any trade secrets, let alone whether ABC had misappropriated them. He dismantled CBS' claims that its Big Brother "House Guest" manual qualified as a trade secret (labelling it "generic") and found that the "filming, editing and production techniques" were commonplace in the industry. Judge Keess also rejected any claim of irreparable injury, reasoning any harm was readily compensable by a damages award.  For more on this case, see my earlier posts here and here.
  • MGA's insurers have sued for their share of the $137 million in lawyers' fees and costs award in the epic MGA v. Mattel "Bratz" case according to Alison Frankel's On The Case Blog. National Union Fire Insurance Company of Pittsburgh and Crum & Forster Specialty Insurance Company have filed a declaratory action for those fees and MGA is expected to oppose the complaint as premature.
  • The "inevitable disclosure doctrine" appears to be on life support in Massachusetts, according to recent posts in Kenneth Vanko's Legal Developments in Non-Competition Agreements Blog and Seyfarth Shaw's Trading Secrets Blog. Both posts describe the U.S. District Court of Massachusetts' ruling in U.S. Elec. Svcs., Inc. v. Schmidt, 2012 U.S. Dist. LEXIS 84272 (D. Mass. June 19, 2012), that the doctrine cannot be applied in the absence of a non-compete, at least under Massachusetts law. 
  • For those practicing before the International Trade Commission, the ITC 337 Blog has a comprehensive summary of the latest trade secret cases filed before the ITC. 
  • In a post entitled "Can I Protect My Trade Secrets Via Social Media Policy," James Douglass provides a nice recap of the recent National Labor Relations Board's opinion on social media and how to draft enforceable social media policies to protect your trade secrets in Fisher & Philips' Trade Secrets and Noncompete Blog
  • "You Want to Enforce a Non-Compete? Bad Facts, Sir, Give Me Some Bad Facts!"  advises the Mass Law Blog. Well stated, Mass Law Blog, well stated.
  • "Employers beware: Revisions of non-compete agreements are becoming essential" writes Richard Glovsky for Inside Counsel. Richard's article details the challenges of enforcing non-competes against employees who are promoted, reassigned or take on additional responsibilities. 
  • How will the America Invents Act's "prior user rights" impact the bio and pharma industries? The Patent Docs Blog has a post that concisely summarizes the debate at the recent BIO International conference (the post concludes that the impact may be minimal). 
  • Are you representing both the employee accused of stealing trade secrets and his/her new employer? Then you should read "Three Pitfalls of Joint Representation in Non-Compete Cases" by W. Mark Bennet for Strasburger's NonCompete Blog

 
Cybersecurity: 

  • "Lawyers Get Vigilant on Cybersecurity" reports The Wall Street Journal. For more on this issue, please see my February post detailing increasing cyberattacks directed at lawyers. 
  • The latest headache in BYOD? "Who Owns the Email?" asks Gardere's Peter Vogel in his Internet, Information Technology and e-Discovery Blog
  • Monica Bay details "The Fast Rise of the 'Bring Your Own Device' Buzzword" in Corporate Counsel
  • For an interesting take on the ongoing debate over the pending cybersecurity legislation, check out Forbes writer Ken Silverstein's "Cyber Security Debate Pits Corporate Interests Against National Security."
  • Looking for "An App that Encrypts, Shreds, Hashes and Salts"?  Check out this post on The New York Times Bits Blog.

News You Can Use: 

  • The Time Management Ninja has "10 Apps to Make Your iPad More Productive."
  • In "Stunning Progress in Technology: The Death of Unskilled Labor," Forbes' Aaron Franks details the changes in tech manufacturing that may mean these jobs are never coming back.

CBS v ABC Order 06 21 12.pdf (63.65 kb)

About John Marsh

John Marsh Hahn Law AttorneyI’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@hahnlaw.com.

Disclaimer

The information in this blog is designed to make you aware of issues you might not have previously considered, but it should not be construed as legal advice, nor solely relied upon in making legal decisions. Statements made on this blog are solely those of the author and do not necessarily reflect the views of Hahn Loeser & Parks LLP. This blog material may be considered attorney advertising under certain rules of professional attorney conduct. Regardless, the hiring of a lawyer is an important decision that should not be based solely upon advertisements.

BlogRoll

Download OPML file OPML