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.
Criminal Proceedings | Inevitable Disclosure | Injunctions | Trade Secrets
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.
Cease and Desist Letters | Criminal Proceedings | Discovery Issues | Injunctions | Trade Secrets
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:
Cybersecurity Posts and Articles:
Computer Fraud and Abuse Act Posts and Cases:
DuPont v. Kolon | International | Non-Disclosure Agreements | Weekly Wrap-Up Posts | International Trade Commission | Uniform Trade Secrets Act (UTSA) | China | Cybersecurity | Massachusetts | Non-Compete Enforceability | Criminal Proceedings | Legislation | Injunctions | Discovery Issues | Computer Fraud and Abuse Act (CFAA) | Florida | Illinois | California | Trade Secrets
China | Cybersecurity | DuPont v. Kolon | Illinois | Injunctions | International | Massachusetts | Non-Compete Enforceability | Pennsylvania | Restrictive Covenants | Trade Secrets | Weekly Wrap-Up Posts
Computer Fraud and Abuse Act Posts and Cases:
California | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Economic Espionage Act | Injunctions | Legislation | New York | Pennsylvania | Restrictive Covenants | Social Media | Texas | Trade Secrets | Uniform Trade Secrets Act (UTSA) | Weekly Wrap-Up Posts
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)
Injunctions | Non-Disclosure Agreements | Non-Solicitation Agreements | Trade Secrets
Trade Secret and Non-Compete Posts and Articles:
Cybersecurity Posts and Articles:
Computer Fraud and Abuse Act Posts and Cases:
Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Florida | Injunctions | Patents | Legislation | New York | Non-Compete Enforceability | Pennsylvania | Restrictive Covenants | Texas | Trade Secrets | Uniform Trade Secrets Act (UTSA) | Weekly Wrap-Up Posts
China | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Economic Espionage Act | Illinois | Inevitable Disclosure | Injunctions | Legislation | Non-Compete Enforceability | Non-Solicitation Agreements | Pennsylvania | Social Media | Texas | Trade Secrets | Uniform Trade Secrets Act (UTSA) | Weekly Wrap-Up Posts
Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Florida | Illinois | Inevitable Disclosure | Injunctions | IP Litigation | New York | Non-Compete Enforceability | Non-Solicitation Agreements | Ohio | Social Media | Trade Secrets | Weekly Wrap-Up Posts
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)
Tags: non-compete, covenant not to compete
Injunctions | Non-Compete Enforceability | Ohio | Restrictive Covenants | Trade Secrets
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