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The AIPLA Trade Secrets Summit: High Points regarding Injunctions, Trade Secret Identification, High Tech Cases and Criminal Referrals

 
by John Marsh 27. October 2013 17:30

I wanted to continue my wrap up of some of the other high points from the American Intellectual Property Law Association (AIPLA) Trade Secrets Summit on Tuesday but there was so much fine content that I could not do it justice in a single post.  Consequently, I will follow up with a final post on the Summit as well as high points from the cybersecurity and trade secret presentations from the AIPLA Annual Meeting last week.  Here are some additional highlights:

In the litigation and procedure session, Russell Beck of Beck Reed Riden, Kenneth Vanko of Clingen Callow and Anthony Sammi of Skadden Arps covered the important issues to consider when bringing a TRO or injunction in a trade secrets case.

Decline of the Inevitable Disclosure Doctrine?  Russell noted the realities of the increasingly high standard for injunctions in state and federal courts. He also started an interesting conversation within the panel about the inevitable disclosure doctrine (a doctrine that holds that even the most conscientious employee may not be able to avoid using a former employer's trade secrets if he/she joins a competitor). Russell noted that the recent case in Washington involving Amazon.com and Google -- which rejected the inevitable disclosure doctrine -- is consistent with what he is seeing by courts. In short, if the employee is clean when he/she leaves, it is simply very difficult to restrain him or her from working for a competitor in the absence of a non-compete.

The Increasing Importance of Trade Secret Identification.  Kenneth Vanko outlined the trend of recent cases requiring plaintiffs to identify their trade secrets early in a case. This was a key theme at the Summit and at the AIPLA Annual Meeting as it seemed each speaker observed greater emphasis from courts requiring plaintiffs to identify their trade secrets at key junctures.  Ken emphasized the importance of specificity and doing your best to focus on pursuing the best trade secrets at issue throughout the proceeding.  Ken noted that other jurisdictions are following the lead of California, Delaware and Minnesota in requiring some degree of disclosure early in a proceeding. For those asserting trade secrets that involve some compilation of publicly known information, Ken noted that courts have imposed a higher burden on those types of trade secrets -- requiring plaintiffs not only to identify those trade secrets but to explain how those compilations qualify as a trade secret.

The Importance of Selecting Your Best Witness Early.  Tony Sammi's presentation focused on the special challenges of trade secrets in highly technical cases. Tony emphasized the importance of identifying the witness who could best explain the technology and trade secrets to a judge or jury. Tony noted that the most knowledgeable witnesses in his cases are generally not the managers but instead the coders themselves.

Negative Use.  The panel emphasized the importance of "negative use" in trade secrets cases -- the concept that a defendant doesn't have to necessarily use or incorporate a trade secret into its product to receive a benefit from that trade secret. They agreed that this concept can be a tricky one and often does not get the attention it deserves despite the fact that a defendant can benefit from avoiding the blind alleys and goose chases of the development process by finding out what hasn't worked.

In the afternoon, the Summit focused on the criminal trade secrets front. Gabriel Ramsey of Orrick, Eduardo Roy, and Michael Weil of Orrick provided plenty of war stories in their panel discussion about their experiences in advising clients who bring, or are on the receiving end of, a criminal trade secrets prosecution.

Know Your Federal District. The panel agreed that knowing the dynamics of your local federal prosecutors and investigators' office was key to securing a criminal referral. They noted that you will likely have to package your trade secret claim to the duty agent for the FBI or other contact. The panel observed that these agents and officials are no different from those in the private sector and they are most interested in cases that will bring attention and favorable press to them and their offices.  Also, the panel emphasized that you may find that your best contact is not necessarily a prosecutor but a secret service agent or FBI agent.  Every district is different and relationships matter.

Factors that may make a trade secret case more sexy for a criminal referral include the potential for a powerful press release, high dollar numbers, travel opportunities for the officer, the existence of a foreign national in the alleged theft, or the potential for a civil case that might bring big fines. The panel acknowledged that only the most egregious cases between domestic competitors will get a prosecutor or agent's attention.  They noted that there is frequently a bias against trade secrets cases because of the existence of a civil remedy.

The panel also emphasized the importance of the absence of skeletons in the client's closet and that the client should be clean. Otherwise, the client might find itself in a situation where the prosecutor turns the tables and prosecutes the client, as these cases frequently involve former employee who can be expected to throw dirt right back at their prior employer (accusing them of securities violations, whistleblower, etc.).

Miscellaneous Points.  The panel agreed that in concurrent civil and criminal investigations, that while the government can’t use a civil case as a stalking horse for its criminal case and for discovery, there is nothing wrong with a civil defendant bringing evidence to prosecutors.  The risk of course is that whatever is given to the prosecutor will have to be shared with the defendants’ legal team.  Another interesting issue that the panel raised involved the company’s obligations to a former employee charged with stealing from that company – namely, is there insurance coverage?  As readers of this blog know, this question is now front and center in Sergey Aleynikov’s long-running dispute with Goldman Sachs and is the subject of a pending declaratory relief action in New Jersey.  The panel could offer no clear answers on this question but advised that companies need to be aware of their potential coverage.

One point of discussion was how best to defuse criminal proceeding when representing the company.  Eduardo noted that it may be in the company’s interest to clean house and fire everybody that was involved to mitigate the company's damages and exposure.  The panel emphasized the importance of having a full legal team given the range of important legal issues – i.e., counsel skilled in internal investigations, labor and employment counsel for possible terminations.

Again, I will wrap up next with a discussion of the final session of the Summit that covered prosecuting trade secret claims before the International Trade Commission as well as the trade secrets and cybersecurity presentations at the AIPLA's Annual Meeting.

Tags:

Criminal Proceedings | Inevitable Disclosure | Injunctions | Trade Secrets

 

Highlights from the AIPLA Trade Secrets Summit: The Challenges of Trade Secret Litigation on the In-House/Outside Counsel Relationship

 
by John Marsh 24. October 2013 17:00

Reports of the Trade Secret Litigator’s death have been greatly exaggerated and in fact, I was spotted on Tuesday at the American Intellectual Property Law Association’s Trade Secrets Summit in Washington, D.C. For those unable to attend, I thought a quick wrap up of the high points of the day's excellent content would be helpful.

Seyfarth’s Robert Milligan, David Rikker of Raytheon, Mark Mermelstein of Orrick and Christian Scali of The Scali Firm started out the day addressing the dynamics of trade secret litigation, focusing on the key points in successfully managing the in-house/outside counsel relationship.  The panel covered an awful lot of ground, but the high points included:

Cease and Desist Letters:  The consensus seemed to be that they may be more trouble than they are worth.  Each of the outside counsel panelists emphasized the importance of accuracy and timing, as there is always the risk that a client’s investigation may not be complete at the time of drafting the letter. However, the letters can achieve their initial desired effect as David Rikker says Raytheon takes them seriously.

Ex parte TROs: No surprise here, the panel agreed that they are rarely granted except for preservation orders where there are egregious facts giving rise to concerns over spoliation or destruction of evidence.

Special Dangers of Motions to Seal:  Protective orders are no longer perfunctory and the panel reported that they are increasingly seeing defendants oppose motions to place trade secrets under seal as defendants use the protective order as an opportunity to lay out their objections to the bona fides of those trade secrets. Robert Milligan said they have almost become the equivalent of summary judgment disputes in California.  Of course, the consequences of denial of a motion can be catastrophic so the panel emphasized the importance of making your record for an appeal to preserve your trade secrets.

Criminal Referral:  Mark Mermelstein spoke about the advantages of initiating a criminal investigation as opposed to a civil claim. Those pros include the fact that the government can, among other things, use false identities to gather evidence from the potential defendant (civil lawyers are prohibited by the ethical rules from using those means), issue a 2703 order to secure the identities for an ISP address associated with misappropriation or cybertheft, and ultimately issue a search warrant if necessary.  Mark also noted that the federal government also can rely on multi-lateral treaties to enlist the help of foreign law enforcement. Finally, Mark observed that a criminal proceeding can be the most effective way of collecting ill-gotten gains as the leverage of jail time may persuade potential defendants to repatriate those moneys.

Mark did identify several reasons why a company may not want to pursue a criminal option. The law of unintended consequences may reign, particularly as the client will ultimately lose control of any criminal investigation to the prosecutors or federal authorities. Fall out could also include damage to customer relationships, since some of those customers could be ensnared as witnesses or even targets. Finally, for publicly-held companies, depending on the scope of the breach and the resulting publicity, a public investigation and prosecution could affect share price or lead to shareholder litigation.

Best Practices for Keeping In-House Counsel Happy: David Rikker listed the following best practices for a healthy counsel relationship: clear and timely communication, helping in-house counsel get the business unit’s buy-in for any investigation or litigation, thorough early case assessment to help manage expectations, and, not surprisingly, no surprises!  David emphasized the importance of an early case assessment that includes looking at the pros and cons of a prosecution or litigation. He acknowledged that in-house counsel appreciate that outside lawyers cannot anticipate every eventuality but a frank conversation of uncertainty is important, particularly for the business unit personnel.

On-Boarding: The issue of on-boarding is growing in importance as more companies are hiring people with restrictive covenants or trying to mitigate their risk from trade secret fall out. Robert put together a highly entertaining video of what companies should not do (that video, along with one addressing best practices for on-boarding is available on Youtube and I will provide a link in a future post).  All of the outside lawyers emphasized the importance of getting the prospective employee’s written employment agreements as part of the hiring process.  From the in-house perspective, David Rikker emphasized the need for a culture of ethics and responsibility -- that a company has to make clear that it is not soliciting its competitors’ trade secrets when it hires new employees, and that after hiring, new employees need to understand that they have to keep those trade secrets out of the new employer’s environment.

Off-Boarding:  As time was winding down, the panel did not have the opportunity to comprehensively address best practices in the departing employee context.  David noted the need for clear rules on, among other things, thumb drive use, third party storage and use of DropBox.  Above all, he emphasized the importance of a culture of responsibility.

I will follow up with another post summarizing the rest of the day’s discussions. The content and speakers were generally superb and a special shout out is warranted to Peter Torren of Weisbrod Matteis & Copley, Seth Hudson of Clements Bernard, Orrick’s Warrington Parker and Intel’s Janet Craycroft for their efforts in putting this together for the AIPLA’s Trade Secret Law Committee.

Tags:

Cease and Desist Letters | Criminal Proceedings | Discovery Issues | Injunctions | Trade Secrets

 

Thursday Wrap-Up (June 13, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 13. June 2013 11:15

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

Trade Secret and Non-Compete Posts and Articles:

  • "Can Business Relationships Be Trade Secrets? VA Federal Court Says No" advises Eric Ostroff in his Protecting Trade Secrets Blog. In Cablecom Tax Services v. Shenandoah Telecomms. Co., U.S. District Court Judge Michael Urbanski dismissed a tax consultant’s trade secrets claim against its telecommunications customers, reasoning that the consultant’s alleged relationships with tax authorities, a  tax-law "accounting system," and its ability to negotiate property tax discounts did not qualify as protectable trade secrets under Virginia's Uniform Trade Secrets Act. Scott A. Schaefers also has a post on this case for Seyfarth Shaw's Trading Secrets Blog.
  • And while we are on the topic of trade secrets cases in Virginia, are you looking for a primer on the epic DuPont v. Kolon case? Then check out the superb post analyzing DuPont's case by Eulonda Skyles and Michael Spillner for Orrick's Trade Secrets Watch Blog.
  • Speaking of DuPont and Kolon, "Kolon Succeeds in Getting Its Trade Secret Theft Arraignment Postponed," advises Todd Sullivan in Sullivan's Trade Secrets Blog.
  • "Ex-Advanced Micro Workers Can't Shake Trade Secrets Suit," reports Law360 and Bloomberg. For more on the AMD trade secrets dispute, see my post from last month on the recent preliminary injunction restraining those same employees from misappropriating AMD's trade secrets.
  • "Newscaster tripped up by Non-Compete," reports Dan Frith for Frith & Ellerman's Virginia Non-Compete Law Blog.
  • "It’s Not Just for Patents Anymore: Using the ITC to Combat Theft of Trade Secrets," recommends Mark Memelstein and Misasha C. Suzuki for Orrick's Trade Secrets Watch Blog.
  • "Hey, I Thought We Had An Agreement: California Appellate Court Allows Party To Seek Attorney’s Fees In Trade Secret Case," exclaims Paul Henson in a guest post for Seyfarth Shaw's Trading Secrets Blog.
  • Jason Cornell of Fox Rothschild has another post comparing different state's non-compete laws, this time "A Comparison Of Illinois And Florida Law Governing Non-Compete Agreements," for Mondaq.
  • "UK Supreme Court Rules on Case Involving Misuse of Trade Secrets by Former Employee," reports Ezra Steinhardt for Covington's Inside TechMedia Blog.
  • Jay Yurkiw of Porter Wright continues to churn out fine posts on e-discovery issues relevant to trade secret and non-compete disputes. For his latest, see "Court Relies on Proportionality to Deny Inspection of Defendant’s Computers, Cell Phones and Email Accounts" for Porter Wright's Technology Law Source Blog.
  • "Deter Cyber Theft Act Would Augment Federal Policy Against Industrial Espionage," advises Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • Interested in the interplay between "Liquidated Damages and Non-Competes"? Then check out Devin C. Dolive's post for Burr & Forman's Non-Compete Trade Secrets Law Blog. 

Cybersecurity Posts and Articles:

  • "Outside Law Firm Cybersecurity Under Scrutiny," advises Catherine Dunn for Corporate Counsel.
  • "China's Cyber Stonewall: Beijing won't stop until it pays a price for its Internet thievery," thunders The Wall Street Journal.
  • "How Vulnerable is Your Company to a Cyber Breach?" ask Clark Schweers and Jeffrey Hall for Corporate Counsel.
  • "What If China Hacks the NSA's Massive Data Trove?" ponders Conor Freidersdorf for The Atlantic.
  • "Could Overreaction to Cybersecurity Threats Hurt Transparency at Home?" worries David S. Levine for Slate.

Computer Fraud and Abuse Act Posts and Cases:

  • In an initial skirmish that will inevitably lead to a lawsuit against the prosecutors in the Aaron Swartz CFAA case, "Judge Rejects Aaron Swartz's Estate's Request to Release Names of Individuals Involved in his Prosecution," reports Hayes Hunt in the From the Sidebar Blog.
 

Thursday Wrap-Up (May 30, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 30. May 2013 11:30
Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:

Cybersecurity Posts and Articles: 
  • Last week's report from the privately-funded IP Commission has triggered a lot of commentary on the issue of China, cybersecurity, and the international misappropriation of trade secrets. The Economist has chimed in, "Fighting China’s hackers: Is it time to retaliate against cyber-thieves?," The New York Times has offered an Op-Ed "Preventing a U.S.-China Cyberwar," as has Gerry Smith for The Huffington Post, "'Hacking Back' Could Deter Chinese Cyberattacks, Report Says." Lisa Kilday also has a post for The IP Watchdog, as does Sophie Yu for Orrick's Trade Secrets Watch Blog.
  • For a contrarian view of the report and its authors, see TechDirt's article, "Fear Mongering Report Suggests 'IP Theft From China' One Of The Biggest Problems America Faces."
  • "A primer on the keys to a complete cybersecurity incident response plan: Inside counsel that understand cybersecurity become defenders of their companies," advises Daniel Lim for Inside Counsel.
  • "Hackers Find China Is Land of Opportunity," reports Edward Wong for The New York Times.
  • "FTC Fires Back In Cybersecurity Case," reports Brent Kendall for The Wall Street Journal's Law Blog.
  • "FTC Announces Information about Upcoming Mobile Security Forum," advises Mike Nonanka for Covington's Inside Privacy Blog.
  • Rob Radcliff provides his take on BYOD policies in his Smooth Transitions Blog.
  • "Employers Must Obtain Employee Consent For BYOD Programs," recommends Yaron Dori and Jeff Kosseff of Covington & Burling LLP for Law360.
Trade Secrets and Non-Compete Cases, Posts and Articles
  • "Kolon Asks 4th Circ. To Ax $920M DuPont Trade Secrets Award" reports Law360.  In a summary of the oral arguments before the 4th Circuit Court of Appeals, Scott Flaherty reports that Kolon focused on Judge Robert Payne's denial of its motion to recuse himself because of his former firm's involvement in a patent dispute for DuPont and on what Kolon believed was DuPont's failure to provide proof on a trade secret by trade secret basis.
  • "Illinois Appellate Court Partially Reverses Broad Non-Compete Injunction Against Physicians," reports Molly Joyce for Seyfarth Shaw's Trading Secrets Blog.
  • "Customer Lists as Trade Secrets: What Protections Are Sufficient?" asks Eric Ostroff in his Protecting Trade Secrets Blog.
  • Brian Bialas suspects that the recent AMD v. Feldstein decision by the U.S. District Court of Massachusetts may have extended the inevitable disclosure doctrine in Massachusetts. In his post for Foley & Hoag's Massachusetts Noncompete Law Blog, Brian notes the fact that Judge Hillman entered an injunction despite the defendants' protestations that they had already turned over all confidential information to a third-party neutral after the lawsuit was commenced, reasoning that they, "must all remember large amounts of confidential AMD information that they learned during their employment."  (For more on the decision, see my take here).
  • A case out of New York's Fourth Appellate Department suggests that coupling a grant of stock options with a non-compete can be a messy affair if not done right, advises Jonathan Pollard in a recent post for the non-compete blog.
  • "Former Outback Steakhouse Employee Not Necessarily 'Down Under' For Allegedly Breaching Fiduciary Duty" advises Amy Dehnel for Berman Fink & Van Horn's Georgia Non-Compete & Trade Secret News Blog.
  • In "Pennsylvania Appellate Court Orders Sanctions for Plaintiff’s Bad-Faith Trade Secret Misappropriation Claims," Scott Schaeffers examines the recent Kraft v. Downey case for Seyfarth Shaw's Trading Secrets Blog.
  • Rob Radcliff provides his take on BYOD policies in his Smooth Transistions Blog.
  • "Employers Must Obtain Employee Consent For BYOD Programs," recommends Yaron Dori and Jeff Kosseff, Covington & Burling LLP for Law360.
  • "Chinese Trade Secret Theft Hits Universities," reports Press Millen for Womble Carlyle's Trade Secrets Blog.
  • "Non-Compete Agreements Aren’t for Everyone: The Necessity of Proving a 'Legitimate Business Interest,'” advises Betsy Lensan Cook of Womble Carlyle for National Law Review.
  • "Exercise Gym Instructor Enjoined By Non-Compete Agreement," reports David Poppick for Epstein Becker's Trade Secrets & Noncompete Blog.
Computer Fraud and Abuse Act Posts and Cases:
  • "Password Sharing and the Computer Fraud and Abuse Act, Revisited," considers Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
 

Thursday Wrap-Up (May 23, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 23. May 2013 11:30

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

Trade Secret and Non-Compete Posts and Articles:

  • A Pennsylvania Court of Appeals has rejected the two-prong test (objective test of speciousness and subjective test for bad faith) used by many federal courts for an award of attorneys fees for a bad faith trade secrets action under the Pennsylvania Uniform Trade Secrets Act reports Law360. In Kraft v. Downey, the Superior Court reversed a trial court's dismissal of a claim for attorneys fees by the defendants, even though the plaintiffs prevailed at trial on other claims. (A hat tip to Mark Grace for forwarding the opinion to me).
  • Ericsonn and Airvana have reached an agreement in principle to settle their trade secrets case, Bloomberg is reporting. Airvana had secured a preliminary injunction in New York Supreme Court that had threatened to disrupt a $3 billion opportunity with Sprint and had resulted in Airvana's claim that Ericsonn had violated the injunction. For more on the case and injunction, see my March post here.
  • For the latest involving the prosecution of Walter Liew for the alleged theft of DuPont's titanium dioxide trade secrets, see "Feds Say Execs Can't Ax DuPont Trade Secrets Charges," as reported by Law360.
  • "Using Computer Forensics to Investigate IP Theft," advise Sid Venkatasen and Elizabeth McBride for Law Technology News.
  • "Kentucky Court Finds No Insurance Coverage for Trade-Secrets Claim," reports Eric Ostroff in his Trade Secrets Law Blog.
  • "Massachusetts Federal Court Takes Jurisdiction Over 'One-Man' Georgia Corporation Whose Agent Allegedly Stole Trade Secrets in Massachusetts," reports Brian Bialas for Foley & Hoag's Massachusetts Noncompete Law Blog.
  • "Recapping the Latest Blue Belt Tech. Non-Compete Dispute (This Time vs. Stryker)," summarizes Jonathan Pollard for the non-compete blog.
  • "Act On Clarifying Ownership of Work-Related Social Media Accounts Before You Become 'Dinner,'" recommends Daniel Schwartz in his Connecticut Employment Law Blog.
  • If you are into podcasts, check out, "The Administration is Focused on Preventing Trade Secrets Misappropriation. Your Business Should Be, Too," by Victoria Cundiff of Paul Hastings.
  • "Proposed Non-Compete Legislation in Connecticut Follows Legislative Trend" advises Kenneth Vanko in his Legal Developments in Non-Competition Blog.
  • If you are interested in more on the $44 million verdict in the Wellogix/Accenture dispute, check out "I Thought We Broke Up Years Ago! Why You Should “Throw Out” Trade Secrets As Soon As A Business Relationship Ends" by Matthew Kugazaki and Valerie Goo for Orrick's Trade Secrets Watch and Eric Ostroff's "A Cautionary Tale About Sharing Trade Secrets With Consultants — Fifth Circuit Affirms $44 Million Verdict."

Cybersecurity Posts and Articles:

  • "California law would require breach notice if online account information is stolen," reports Dan Kaplan for SC Magazine.
  • "Cyber Compliance: Hiring a Cybersecurity IT Firm for Rookies," advises Christopher Matthews for The Wall Street Journal's Risk & Compliance Reporter.
  • "Why CISPA is a global problem," warns TechnoLlama.
  • "Data Breach - Your Organization Needs a Plan" recommends Nicole Reiman of Schnader Harrison Segal & Lewis LLP for JDSupra.
  • "Corporate Security's Weak Link: Click-Happy CEOs: Top Bosses, Exempt From Companywide Rules, Are More Likely to Take Cyber-Attackers' Bait," reports The Wall Street Journal. For more on Spearphishing (or attacks geared towards senior executives better known as whaling, see my post here).
  • "GSA, DOD Solicit Advice On Revamping Cybersecurity," advises Kathryn Brenzel for Law360.

Computer Fraud and Abuse Act Posts and Cases: 

  • "Applying Georgia Long-Arm Statute, Eleventh Circuit Finds No Personal Jurisdiction Based on Internet Activity" in a CFAA dispute, courtesy of Colin Freer for Berman Fink Van Horn's Georgia Non-Compete and Trade Secret News Blog.
 

AMD v. Feldstein: Massachusetts Federal Court Finds Misappropriation Does Not Require Proof of Actual Use of Trade Secrets (Hint: What Should Happen When An Employee Downloads One Million Files Before Leaving)

 
by John Marsh 17. May 2013 09:40

In an important decision issued on Wednesday, a Massachusetts federal court has found that the absence of proof of actual use of the trade secrets was not fatal to claims brought by Advanced Micro Devices, Inc. (AMD) against four of its former employees.  In AMD, Inc. v. Feldstein, Judge Timothy S. Hillman found that evidence that several of the employees downloaded and transferred significant data, coupled with other facts, was sufficient circumstantial evidence of misappropriation to justify an injunction.  (A PDF of the court's decision can be found below).

This decision cuts against other recent cases holding that a trade secret claimant must come forward with evidence of actual misappropriation to make its claim.  I have detailed the forensic analysis below, because it was critical in making the circumstantial case that trade secrets were taken and likely being used, and rendered the versions presented by the employees implausible.

Background:  AMD brought this case in January 2013 against former employees Robert Feldstein, Manoo Desai, Nicolas Kociuk and Richard Hagan, each of whom had each left AMD to join a competitor, Nvidia.  AMD secured a temporary restraining on the strength of non-disclosure and non-solicitation clauses in the employees' Business Protection Agreements that they had signed as a condition of employment with AMD and had moved for a preliminary injunction formalizing that TRO.

Feldstein, the most senior of the employees, was the first to leave and just before resigning in July 2012, he took a sabbatical during which time 8,148 files were copied from AMD's intranet via Feldstein's AMD-issued laptop.  The files included a Gmail contacts file, a Microsoft Outlook inbox file and several business-strategy-related documents.  He also downloaded a Technology Licensing Overview PowerPoint presentation that he later conceded was "problematic."

Desai, a Senior Manager, joined Nvidia in December 2012 and forensic analysis showed that 7,899 documents were transferred from her AMD-issued laptop to a folder located on the external hard drive.  The night before she left AMD, her husband downloaded all of these files at her request because she wanted to preserve "her personal files, including family photos, personal emails and tax information" and she claimed that she "instructed him not to take any confidential AMD information."  Desai accessed this information on her Nvidia-issued laptop later, but claimed she was searching for personal information.  She obviously never returned the information.

Kociuk reported to Desai and was part of her integration team.  Forensic analysis revealed that his user account was used to assist Desai in copying or transferring very large file systems for subsequent use (he said this was done only to help her erase her personal data from AMD).  He admitted he used a utility application, Robocopy, to create duplicate images of the entire file structure of his two AMD-issued computers.  More than -- wait, let me lift my pinkie to my lips -- one million files were copied onto a pair of external hard drives.  Kociuk claimed that he did this to preserve copies of personal information and data.  He left to join Nvidia on January 11, 2012, the event that triggered the lawsuit and TRO.  After downloading the files, Kociuk signed an acknowledgement that he was not retaining any of AMD's confidential information.

In addition, AMD presented evidence of some solicitation of then-current AMD employees by Feldstein, Desai and Hagan.  None would admit that the conversations were actual solicitations but it appeared from emails and text messages that some informal solicitation may have taken place.

The District Court's Reasoning:  Judge Hillman addressed the split in authority in Massachusetts over whether acquisition of trade secrets by improper means is sufficient to establish misappropriation or whether, alternatively, a plaintiff is required to prove actual use above and beyond acquisition by improper means.  He did not address the pros and cons of each line of cases, but instead, he simply elected to go with the line of cases permitting acquisition by improper means. 

Judge Hillman recounted the forensic evidence outlined above and found that it was "compelling."  He noted that all of the former employees made copies of confidential information of AMD, retained that information, and immediately began working for significant competitor.  He noted that Feldstein in particular had access to extremely sensitive business strategy and licensing agreement information which he acknowledged was "problematic."

This circumstantial evidence, in the court's view, destroyed the credibility of the alternative explanations offered by the employees as well as their other testimony that they did not intend to misappropriate the trade secrets or that they could not possibly use that knowledge to benefit Nvidia in their current position.

The Takeaways:  From the employee side, what were these people thinking?  Kociuk's decision to copy one million files destroyed the believability of the employees' protestations of misappropriation.  The strength of the forensic evidence also spilled over into the issue of whether improper solicitations occurred, because the ambiguous signals and communications at issue there suddenly took on more sinister overtones against the backdrop of the massive downloading of these and other files.

On the employer's side, forensic evidence saved the day here and was used to build a compelling story.  Although there was no evidence of actual use of the trade secrets, the sheer amount of data transferred, the suspicious timing of the downloading and the timing of the employees' departures to the same competitor led the court to conclude that these employees were likely already using or likely to use these trade secrets in the future. 

As I noted at the outset, several courts have recently required parties to come forward with actual proof of misappropriation (a decision out of Georgia imposing this standard can be found here).  This new standard, in my view, is incorrect and difficult, if not impossible, to meet.  Evidence of the proverbial "smoking gun" rarely exists and it is unrealistic to expect a tortfeasor to fall to his or her knees and admit "I did it!"  To the contrary, in the crucible of litigation, one can reasonably expect the tortfeasor's story to harden now that he or she is confronted with tne consequences of his/her actions.  Trade secret claims, like claims for fraud or unfair competition, are inherently based upon some degree of deceit and as a result, by their very nature, often can only be proven by circumstantial evidence.

Judge Hillman did not identify the particulars of the injunctive relief he was going to enter in the case, so I will keep you updated when he ultimately does issue that injunction.

AMD v Feldstein et al _Opinion .pdf (135.06 kb)

Tags:

Injunctions | Non-Disclosure Agreements | Non-Solicitation Agreements | Trade Secrets

 

Thursday Wrap-Up (May 16, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 16. May 2013 10:31

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

Trade Secret and Non-Compete Posts and Articles:

  • Bloomberg has received withering criticism for allowing the presumably confidential information of its customers to be viewed (and most likely used) by its reporters. Last week, Bloomberg said it had now restricted its journalists from accessing information about terminal subscribers, including when they last logged on, when they subscribed and how often they accessed features like news or the chat function. CNBC, The New York Times and The Wall Street Journal all have comprehensive articles on the scandal. Bloomberg's troubles underscore the challenges of maintaining ethical screens and walls between business units who have potentially divergent interests over confidential information. 
  • "Credit Suisse says ex VP stole trade secrets in move to Goldman," reports Reuters
  • "5th Circ. Affirms $44M Wellogix Jury Award In Trade Secret Spat," reports Law360.
  • "Trade Secret 'Watch List': Bill Would Establish Monitoring List of Countries Engaging in Cybertheft, and Make U.S. Intelligence Czar the Point Person," reports Robert Isaackson for Orrick's Trade Secrets Watch.
  • "New Massachusetts Superior Court Noncompete Decision Discusses the 'Material Change' Defense and Shows the Benefit to Employers of Having a 'Material Change' Clause in Noncompete Agreements," advises Brian Bialas for Foley & Hoag's Massachusetts Noncompete Law Blog.
  • Josh Durham reports on the latest non-compete involving a doctor, "NC Court of Appeals Orders Injunction In OB-GYN Covenant Not To Compete Case," for Poyner Spruill's Under Lock & Key Blog.
  • And while we are talking about physician non-competes, the recent $39 million "Tuomey verdict could make hospitals more cautious in doctor contracts," advises Adam Kerlin for Reuters.
  • "Florida Court Discusses Trade Secrets in Discovery," reports Solomon Genet for the Trade Secrets Law Blog.
  • "Show Me the Money - Injunctions are Not Cheap," warns Rob Radcliff in his Smooth Transitions Blog.
  • "You Can't Reverse Blue-Pencil a Non-Compete," advises Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • "Trade Secrets Law Still Murky in Georgia Courts," reports Alyson Palmer for Corporate Counsel.
  • Fracking and trade secrets remain a combustible combination, as Law 360 reports that, "Enviros Must Show Need To Get Trade Secret Docs: Pa. Court."
  • For an excellent summary of the key points of the new Texas Uniform Trade Secrets Act, see, "Texas Trade Secrets Law Gets Business-Friendly Upgrade," by Jesse Davis for Law360.
  • A recent study finds that over 90% of innovative products are never patented, reports Eric Ostroff in a recent post for his Trade Secrets Law Blog. According to Eric, the study looked at the "R&D 100 Awards" to reach its conclusions. The results of this study of course reinforce the importance of making sure your trade secret protections are adequate.
  • Attention eBay shoppers: "Coca Cola’s secret formula for sale for 15 million dollars," reports DailyBhaskar.com

Cybersecurity Posts and Articles:

  • The theft of nearly $45 billion was from New York banks by cyberthieves was widely reported in the past week. For an analysis of the legal fallout, see, "Lessons From the New York ATM Heist," by Jason Weinsten for Steptoe's Cyberblog.
  • "Legal Showdown on Cybersecurity: Hotelier Wyndham Challenges FTC's Authority to Police Corporate Data Practices," reports The Wall Street Journal.
  • "Cyberattacks Against U.S. Corporations Are on the Rise," reports The New York Times.
  • "'Bring Your Own Device' is Evolving from a Trend to a Requirement," advises Arik Hesseldahl for All Things Digital
  • "Hacking back: Digital revenge is sweet but risky," advises Melissa Riofrio for PCWorld.  

Computer Fraud and Abuse Act Posts and Cases:

  • "No Damages? Illinois Federal Court Tosses Computer Fraud and Abuse Act Claim Alleging Hacking of Law Firm Network," reports Paul Freehling for Seyfarth Shaw's Trading Secrets Blog.
  • "Should Lying About Your Age Online Be a Federal Crime?" asks Peter Torren in an article for Corporate Counsel.
 

Thursday Wrap-Up (May 9, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 9. May 2013 06:20

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

Cybersecurity Posts and Articles:

  • Well, it's official: "U.S. Blames China’s Military Directly for Cyberattacks," reports The New York Times. Also see "PENTAGON: Chinese Hackers Have Stolen Data From 'Almost Every Major U.S. Defense Contractor,'" asserts The Business Insider, "Pentagon report says U.S. computer hacking 'appears to be attributable' to Chinese government," reports The Verge and "U.S. Says China's Government, Military Used Cyberespionage," reports The Wall Street Journal.
  • "A cybersecurity primer for legal departments: Understanding the basic terms and concepts needed to protect your company from cyber attacks" by David Lim for Inside Counsel.

Trade Secret and Non-Compete Posts and Articles:

  • Less than two months after its introduction, Texas has adopted the Uniform Trade Secrets Act effective Sept. 1, 2013, reports Orrick's Trade Secrets Watch Blog. It appears that the version adopted is similar to that proposed by Dallas State Senator John Carona and will include a presumption in favor of granting protective orders to protect trade secrets in litigation, including limiting access to confidential information to attorneys and their experts. (For more on the proposed statute, see my post earlier this year as well as Robert Milligan's recent post).
  • Connecticut is joining the list of states tinkering with their non-compete laws, advises Daniel Schwartz in his Connecticut Employment Law Blog.  In "Bill Targets Non-Compete Agreements But Would Also Create New Cause of Action," Daniel reports that the bill allows "reasonable" non-competes but would permit an aggrieved employee the right to sue if the non-compete was unreasonable or the employee was not provided with at least 10 days to consider the non-compete before signing it.
  • "Chinese Couple Sentenced to 3 Years and 1 Year for Theft of GM Hybrid Technology," advises Todd Sullivan in his Trade Secrets Blog.
  • And in another prosecution, "Ex-Frontier Chemist Dodges Prison For Disclosing Recipes," as Law360 reports that the U.S. District Court for Utah sentenced Prabhu Prasad Mohapatra to time served — three days — and ordered him to pay $3,435 in restitution.
  • "Georgia Supreme Court Rejects Independent Claim for Inevitable Disclosure of Trade Secrets," reports Eric Ostroff in his Trade Secrets Law Blog.  Kenneth Vanko has a post on the case as well in his Legal Developoments in Non-Competition Agreements Blog.
  • Eric Ostroff also has a fine post entitled "Five Ways to Protect Trade Secrets When an Employee Departs."  If you have not bookmarked Eric's blog, you should as he is churning out very good content regularly.
  • Those in Pennsylvania should be aware of a decision out of the U.S. Eastern District of Pennsylvania reports the Employee Discrimination Reporter. In De Lage Landen v. Thomasian, the District Court refused to enforce a non-compete despite proof that the former employee had breached a non-solicitation provision by approaching a former colleague. The court reasoned that the parties were not sufficient competitors, there was no showing of future harm, money damages were available, and therefore no irreparable harm was present.
  • "Fracking and Trade Secrets: An Introduction," advises Kenneth Vanko in his Legal Developoments in Non-Competition Agreements Blog.
  • "Fisher/Unitech (Basically) Loses Non-Compete Fight Against Former Sales Exec," advises Jonathan Pollard for the non-compete blog.
  • "Doctor Non-Solicitation Agreement Not Supported By Legitimate Business Interest," reports Zach Jackson for Epstein Becker's Trade Secrets & Noncompete Blog.
  • "Employers Slow To Guard Data Amid Social Media, Tech Boom," bemoans Erin Coe for Law360.
  • "Data Security Policies and Procedures Still Lacking," warns Catherine Dunn for Corporate Counsel.
  • In "Unleashing job hoppers could give economy a bounce," Reynolds Holdings posits in an article for Reuters that releasing unemployed workers from their non-competes might help the economy.
  • "China Non-Competes. The Basics Have Become Clearer," advises Dan Harris in his China Law Blog.

Computer Fraud and Abuse Act Posts and Cases:

  • "California Federal Court Dismisses Computer Fraud and State Unfair Competition Claims Alleged Against Ex-Employees Accused Of Stealing Computer Source Code," reports Paul Freehling for Seyfarth Shaw's Trading Secrets Blog.
  • "Programmer Arrested For Cyberattack On Ex-Employer," reports Law360.
  • "Use a Software Bug to Win Video Poker? That’s a Federal Hacking Case," proclaims Kevin Paulson for Wired.
  • "Who's at Fault for the CFAA Mess? Blame Congress," sighs Brian Bialas for Foley & Hoag's Massachusetts Noncompete Law Blog. Sounds good to me.
 

Thursday Wrap-Up (May 2, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 2. May 2013 07:10

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

Trade Secret and Non-Compete Posts and Articles:

  • Good advice from Josh Durham: "Use Covenants Not To Compete To Protect Legitimate Business Interests, Not Just Because You’re Scared Of A Little Competition." In his post for Poyner Spruill's Under Lock & Key Blog, Josh recounts the holding of a recent North Carolina case, Phelps Staffing LLC v. CT Phelps, Inc., in which the court found that a non-compete involving temporary staffing employeees lacked a legitimate business interest to justify the restraint. It is an important reminder to companies to ensure that their non-competes be narrowly tailored to protect interests that actually arise from the former employee's employment.
  • Sergey Aleynikov will stand trial a second time, this time in New York State's Supreme Court, for the alleged theft of Goldman Sachs' trade secrets, reports The Wall Street Journal and Law360. Judge Ronald Zweibel ruled that the state charges were not barred by the dismissal of his federal conviction under the Economic Espionage Act last year by the U.S. Court of Appeals for the Second Circuit. (For more on the Aleynikov saga, see my posts here and here).
  • For more on the Ohio Supreme Court's recent holding that rental payments are trade secret, see Todd Sullivan's take in his Trade Secrets Blog. Todd notes the incongruity in the Court's reasoning that disclosure of the trade secrets would lead to a "poisonous" tenant environment, despite the fact that it noted later in its opinion that the landlord's expert said tenants were incentivized not to share rental information. (My post on the case can be found here).
  • "Pushing Back Against Restrictive Covenants in Physician Agreements" advocates Mark Gisler as he questions whether non-competes violate the American Medical Association's code of ethics.
  • "Illinois Federal Court Issues Preliminary Injunction Prohibiting Use Of Misappropriated Trade Secrets But Rejects Request For Expanded Injunction Based On Alleged “Inevitable Disclosure” reports Paul Frehling for Seyfarth Shaw's Trading Secrets Blog.
  • "Florida Court Reverses Preliminary Injunction on Restrictive Covenant," reports Peter Vilmos for Burr & Forman's Non-Compete Trade Secrets Law Blog.  Eric Ostroff also has a post on the case in his Trade Secrets Law Blog.
  • "When a Restriction on Soliciting "Prospective" Customers Is Unreasonable (and How to Fix It)," recommends Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • "Never Bring a Knife to a Gun Fight: One Simple Weapon to Fight Economic Espionage in a Cyberspace World," warns Hayden J. Silver III for Womble Carlyle for The Compass.
  • "Why intellectual property theft is everyone’s problem," remind Texas U.S. Attorneys Sarah Saldana and John M. Bales for The Dallas Morning News.
  • "Does social media change the meaning of “solicitation”? How to prevent ex-employees from using social networks to lure employees or customers" recommends Jon Hyman for Inside Counsel. 
  • "Why Abuse of Discretion Matters to Employers (Non-Compete)," advises Rob Radcliff for his Smooth Transitions Blog.
  • "Trade Secret “Inevitable Disclosure” Doctrine Taking Shape in North Carolina," advises Betsy Cook Lanzen of Womble Carlyle for The National Law Journal.

Cybersecurity Posts and Articles:

  • "Reflections On Recent Cybersecurity Developments," ponder David N. Fagan, John K. Veroneau, Robert Nichols and Kristen E. Eichensehr of Covington & Burling LLP for Law360.
  • "The War On Cybercrime: How Far Can You Go?" posits Gabriel Ramsey, Mark Mermelstein and James Hsaio of Orrick for Corporate Counsel.
  • "Is the Specter of a Cyber Cold War Real?" asks James McGregor for The Atlantic.
  • "Law firm fell victim to phishing scam, precipitating $336K overseas wire transfer, bank suit alleges," reports Debra Cassens Weis for The ABA Journal's Law News Now.
  • "Looking at the Future of Cybersecurity," predicts Sue Reisinger for Corporate Counsel.

Computer Fraud and Abuse Act Posts and Cases:

  • Looking for a post-mortem on the recent CFAA trial of David Nosal? Then check out "In Executive's Trade Secret Prosecution, a Company's Outsized Role," by Vanessa Blum who covered the trial for The Recorder, Venkat Balasubrumani's post in the Technology & Marketing Law Blog and Daniel Joshua Salinas' post for Seyfarth Shaw's Trading Secrets Blog.
  • Earlier this week, The Washington Post ran a front-page story, "As cyberthreats mount, hacker’s conviction underscores criticism of government overreach," detailing the prosecution of hacker Andrew Auernheimer.
  • Similarly, The ABA Journal has drawn attention to efforts to reform the CFAA, in an article "Hacker’s Hell: Many want to narrow the Computer Fraud and Abuse Act," by Stephanie Francis Ward.
 

FirstEnergy Solutions v. Flerick: Solicitation of Former Clients Results in Enforcement of Non-Compete in Six States

 
by John Marsh 17. April 2013 23:55

A salesman's solicitation of his former clients, coupled with his previous access to trade secrets, has led to enforcement of a non-compete spanning six states.  In FirstEnergy Solutions v. Flerick, the U.S. Court of Appeals for the Sixth Circuit applied a deferential review of the Ohio district court's opinion enforcing that one-year non-compete.  A PDF copy of the opinion can be found below.
 
Background:  Paul Flerick was a salesman for FirstEnergy.  While negotiating the terms of his employment with FirstEnergy, Flerick expressed concerns about the proposed noncompete and attempted to negotiate a revision that would allow him to work for a competitor after leaving FirstEnergy as long as he did not directly contact FirstEnergy’s customers. FirstEnergy refused, telling him that it was a “[c]ondition of hire.”  Flerick eventually capitulated and signed the agreement.

After receiving a negative review and reassignment, Flerick joined Reliant Energy, a competitor of FirstEnergy.  After his resignation, FirstEnergy reminded him about his noncompete clause, and Flerick said that it would not be an issue.  When asked about his plans, he declined to provide any information. Flerick was required to and did return all company-issued electronic devices and all company documents. 

When FirstEnergy learned that Flerick was working for Reliant, it sent Flerick a cease-and-desist letter.  Reliant’s counsel replied and indicated that Flerick did not possess any confidential information, had not solicited any customers to whom he sold electricity in the year before he left FirstEnergy, and that the provision prohibiting Flerick from working for a competitor was overly broad and unenforceable.
 
After suing Flerick, FirstEnergy learned (and the District Court found) that Flerick had improperly solicited his largest customer from First Energy (Duke Realty) and that he also improperly contacted other FirstEnergy customers in Pennsylvania, New Jersey, Ohio and Maryland through intermediaries.
 
The U.S. District Court for the Northern District of Ohio enforced the non-compete reasoning that Flerick had breached it by soliciting his former customers and because he still possessed confidential information that he had obtained while employed by First Energy.  The court enforced the non-compete for the full year and in the six states in which First Energy did business.
 
Last week, the Sixth Circuit affirmed that injunction, ruling that under Ohio state law, violation of the non-compete when coupled with the possession of confidential information was enough to warrant enforcement of that non-compete clause, even one over six states.  Applying a very deferential review, the Sixth Circuit emphasized repeatedly the improper solicitations of former clients by Flerick as well as the fact that Flerick understood that the non-compete was a condition of employment.  The Sixth Circuit reasoned that Flerick was free to operate in five other states in which FirstEnergy did not do business and was not unduly harmed by the injunction.

The Takeaway:  First, it appears that Flerick's counsel tried the IBM v. Visentin defense -- i.e., arguing that efforts to safeguard the legitimate protectible interests of FirstEnergy would obviate the need for a non-compete.  However, that effort was doomed by subsequent disclosure that Flerick had improperly solicited FirstEnergy's clients.

Second, this opinion demonstrates the deferential review accorded a trial court in injunctive relief proceedings and the importance of prevailing at the trial court level.  The trial court was clearly unhappy about Flerick's solicitation of his former customers and enforcement of a non-compete throughout six states seems severe.  However, the Sixth Circuit refused to disturb the injunction.

Finally, I have to confess I was disappointed with the Sixth Circuit's further justification for the non-compete because of Flerick's exposure to trade secrets of First Energy.  Extended to its logical conclusion, any non-compete would be fully enforceable on this basis because most employees are inevitably exposed to confidential information of their former employer.  Had the Sixth Circuit simply left the need to protect customer relationships as the basis for the non-compete, it would have been more than enough since it was Flerick's improper pursuit of those customers that drove the injunction.

FirstEnergy v. Flerick.pdf (133.92 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.

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