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Thursday Wrap-Up (April 12, 2012): Noteworthy Trade Secret, Non-Compete and Cybersecurity Stories from the Web

 
by John Marsh 12. April 2012 05:45

The big news this week was the Ninth Circuit's decision in U.S. v. Nosal and the Second Circuit's decision in U.S. v. Aleynikov (briefly addressed below).  Here is a rundown of the notable decisions and posts of another busy week:
 
Trade Secret and Non-Compete Posts and Articles:

  • Yesterday, the U.S. Court of Appeals for the Second Circuit issued its opinion explaining why it vacated the criminal conviction of former Goldman Sachs programmer Sergey Aleynikov in February.  As expected, the Second Circuit held that the actual software he stole was "not produced for or placed in interstate or foreign commerce" as required under the Economic Espionage Act. (A PDF copy of the decision can be found below).  I am in the process of reviewing it more closely and I will have a post addressing it over the weekend. 
  • Massachusetts may be the next state to adopt the Uniform Trade Secrets Act according to Foley Hoag's Massachusetts Noncompete Blog.  Brian Bialas is reporting the bill was introduced in late January and testimony addressing the pros and cons of the bill was presented to the Massachusetts Joint Committee on the Judiciary on February 28, 2012.  Brian's take is that bill has received lukewarm support from the legal community because of potential complications with the pending non-compete legislation as well as concerns by lawyers about their ability to recover treble damages.
  • The long-running prosecution of a former Intel engineer who stole technology estimated at $1 billion has resulted in a plea on the eve of trial.  Biswamohan Pani, who prosecutors say downloaded Intel's confidential documents after joining rival Advanced Micro Devices Inc., could see 20 years' imprisonment, a $250,000 fine and three years of probation for each count, according to the plea agreement.
  • Akerman's HR Defense Blog warns of the dangers of failing to tailor your non-competes to how your employees perform their job in "Horse Doctors Make Housecalls: A Lesson in Why Boiler-Plate Non-Compete Agreements May Not Hold Up in Court."  Kenneth Vanko has a thorough post about the Florida decision, Heiderich v. Florida Equine Veterinary Svcs., Inc, as well.
  • For those doing business in China, a non-disclosure agreement is not enough.  Rather, in a post entitled, "NNN Agreements: Watching the Sausage Get Made," Dan Harris' China Law Blog advocates provisions that also restrain competition and forbid use of the trade secrets, and his post details the factors to consider when drafting and negotiating those agreements.
  • U.S. District Court Judge Robert Payne has dismissed Kolon's antitrust counterclaim against DuPont.  While DuPont had moved for summary judgment on various grounds, including a request that the case be dismissed because of Kolon's spoliation of evidence (see the update on this request in this previous post), Judge Payne's summary judgment ruling focused on the the merits of the antitrust issues.  (A copy of the 51-page opinion is attached below).  I believe there are no further claims remaining in this case and Kolon will now be left to appeal this decision to the Fourth Circuit.
  • Watch out for inconsistent forum selection clauses in transactions involving multiple agreements warns Seyfarth Shaw's Trading Secrets Blog.  The post details a recent ruling by the District Court of Colorado in Robert Stuart v. Marshfield Doorsystems, Inc. which declined to dismiss an action filed in Colorado because only one of the integrated agreements (the employment agreement with the non-compete) specified Chicago as the forum for the dispute. 

Cybersecurity Posts and Articles: 

  • "Why Aren't Companies Better Prepared for Data Breaches?" asks Catherine Dunn on Corporate Counsel's website. 
  • The Threat Post Blog has an article warning "Executives Abroad May Get Owned Before They Get Off the Tarmac." 
  • According to The Wall Street Journal, "The Enemy Within: For the IT staff, the biggest security risk is…the IT staff." 

News You Can Use:

  • The New York Times' Personal Tech page has advice for "Eluding a Barrage of Spam Text Messages."

U.S. v. Aleynikov.pdf (85.90 kb)

Dupont v. Kolon - Opinion dismissing antitrust counterclaim.pdf (4.18 mb)

 

Update on Storing Trade Secrets in the Cloud: Lots of Angst, Some Solid Commentary, But Still No Court Rulings

 
by John Marsh 7. April 2012 19:00

Last November, I wrote about the basics of cloud computing as well as some best practices for protecting trade secrets stored in the cloud. Given the fast pace of innovation, and the exponential number of recent reports of hacking and cybertheft, my colleague John Molnar and I decided an update was in order. We have assembled a number of posts on the cloud issue and incorporated our own recommendation.

The Legal Analysis: To date, no court has yet considered the question of whether a company's placement of trade secrets in a cloud-based network would be unreasonable.  However, as the title of my post suggests, there has been no shortage of articles and posts from legal and technical commentators. 

For example, in a guest post for Forbes entitled "Is It Safe To Store Your Trade Secrets In the Cloud?", Finnegan lawyers Rob McCauley, Ming Yang, and Jared Schuettenhelm worry about the legal ramifications of storing trade secrets in the cloud. According to their post, if the cloud is known to not be 100% secure, a court might find that a company failed to take reasonable efforts to maintain the confidentiality required for most trade secret claims. Such a ruling would have potentially great ramifications when one considers the fact that cloud computing typically includes e-mail services like Google’s Gmail and Microsoft’s Hotmail as well as document synchronization like Apple’s iCloud. 

To demonstrate that a company protected its trade secrets, Peter Vogel of Gardere recommends negotiating the right to regularly conduct audits, as well as a provision ensuring deletion of all information if and when the relationship with the cloud provider is terminated. These provisions would help insulate a business from any claim that it acted unreasonably in storing confidential information in the cloud.

In a post entitled "How to Avoid Losing Your Trade Secrets When Moving to the Cloud," IP blogger Peter Toren proposes a two step test for determining if a trade secret owner has made a reasonable effort to ensure confidentiality in the cloud. First, Peter advocates that a business require its cloud service vendor to certify that it has appropriate security procedures. Second, the trade secret owner needs to do more than simply accept the vendor's assurances at face value, and Peter believes a showing that a company performed due diligence to verify the vendor's claimed security procedures would demonstrate that it acted reasonably. I would tend to agree.

Technical Considerations: Given the importance of due diligence for verifying the security of cloud storage, what should be checked? Jon Brodkin of InfoWorld gives seven recommendations from the technology research firm Gartner, Inc. While his post is several years old, it provides sound advice like demanding transparency from the cloud service vendor, checking on the specific jurisdiction where the data will be stored in, and ensuring data segregation -- all of which remain important today. 

Similarly, as Mary Beth Hamilton of Eze Castle Integration notes in the Wall Street & Technology Blog, a trade secret owner needs to check how the vendor handles external security threats as well as internal data comingling.  But it is not just a vendor’s technology that needs to be investigated. Due diligence should include the vendor’s physical facility as well. Cloud computing expert George Hulme recommends redundant data backup beyond the cloud vendor. Trade secret data would be saved to the cloud while still being backed up locally.

The Takeaway? If concerns about security cannot be resolved, a company may want to consider an in-house private cloud as Bart Copeland, CEO of cloud software provider ActiveState, recommends. While a private cloud might not be right for every enterprise, it would allow the trade secret owner to exercise full control. Of course, some of the benefits of cloud computing would be lost  but the risk of losing those trade secrets and the inability to get legal relief to retrieve or protect them should outweigh those considerations.

Lastly, the best defense of trade secrets in the cloud may be the simplest. A trade secret owner needs to be sure that the benefits of storing a trade secret in the cloud outweigh the risks. Put differently, that which is not stored in the cloud cannot be stolen from the cloud. Consequently, the best protection for a company's crown jewels is to keep them out of the cloud entirely and only store trade secrets of lesser value in the cloud. 

 

General Patent Corp. v. Wi-LAN: To What Extent Can In-House Counsel Be Restrained from Working for Competitors?

 
by John Marsh 28. February 2012 10:00

Law360 is reporting that General Patent Corporation (GPC) is appealing an opinion denying its request to enforce a non-compete against its former General Counsel who joined the legal department of a competitor and former suitor, Wi-LAN, Inc., last fall.  Efforts to restrain in-house counsel are exceedingly rare, and I have to confess that Southern District of New York Judge John Kennan's opinion slipped under my radar screen when he issued it last November.  Having now had the opportunity to read it, the opinion presents a number of very, very interesting issues, including one of great interest to many readers:  can in-house lawyers be restrained by a covenant not to compete?  (I have attached a PDF of the Opinion as well as GPC's appellate brief below).
 
The facts are straightforward.  GPC partners with patent holders such as inventors, universities and small patent owners to license and enforce their patents. Defendant Paul Lerner served as GPC's General Counsel and on its Board of Directors and Executive Committee up until his departure.  In 2004, he signed a covenant not to compete that precluded him from working for any of GPC's competitors for 1 year.  The covenant did not apply, however, if Lerner's employment was "terminated by [GPC] without Cause" or if he was constructively discharged.
 
In the Fall of 2011, Wi-LAN entered into discussions to acquire GPC and signed a confidentiality and non-solicitation agreement with GPC so that it could conduct its due diligence.  Wi-LAN later made an offer to acquire GPC in an April 2011 term sheet, but one week before the acquisition was scheduled to close in June, Wi-LAN decided not to proceed.  
 
At about the time those negotiations fell through, Lerner began discussing possible employment with Wi-LAN.  When he resigned and joined Wi-LAN in September 2011, GPC sought and secured a temporary restraining order preventing Lerner from working with Wi-LAN on business development and patents that he had worked on while at GPC.  At the preliminary injunction stage, however, Judge Kennan declined to enjoin Lerner or Wi-LAN any further.

Despite its misgivings about Lerner's departure, the district court found that the covenant only applied if there was a termination for cause; since Lerner voluntarily resigned, the court found that the non-compete did not apply.  Frankly, the district court may have misconstrued the covenant and interpreted it backwards, at least based on the provision quoted in GPC's appellate brief to the Second Circuit. However, the court was also unpersuaded that GPC had viable trade secrets, a more problematic ruling for GPC since that would be the legitimate business interest necessary to justify the non-compete. 
 
As for the non-solicitation agreement singed by Wi-LAN, the district court did not enforce it despite finding that Wi-LAN breached it by hiring Lerner.  The district court found that GPC had failed to demonstrate a sufficient protectable interest.  I would differ with this holding as well, as it it is difficult to see how a company doesn't have some kind of protectable interest in preventing a senior officer from joining a competitor that was on the cusp of acquiring it two months before.  However, this battle was lost when the court found the non-compete did not apply and that GPC lacked trade secrets justifying protection. 
 
Can an in-house lawyer be restrained?  Surprisingly, Judge Keenan did not address this issue in his opinion. The extent to which a lawyer can be restrained, as well as to what extent he or she is bound by trade secret law, is a topic very much in the news these days.  Given the number of issues here, I'll focus today on the ethical canons that are implicated and the ability of a lawyer to be contractually restrained from servicing a future client (I'll address the other issues in a later post).  
 
The majority rule holds that lawyers cannot be restrained from representing their clients by a non-compete. The basis for this rule can be found in Ethical Rule 5.6 of the Rules of Professional Conduct and DR 2-108 of the Canons of Ethics.  Although 5.6 and 2-108 use language that might suggest that they only apply to agreements between lawyers (i.e., law firms), the ABA has concluded that they should be applied to in-house counsel as well.  And as Russell Beck notes in a recent article for New England In-House entitled "Are New England's in-house counsel free to join competitors?, "as the New Jersey Advisory Committee on Professional Ethics (relying on Virginia, Illinois, Connecticut, Washington and Philadelphia bar opinions, as well as cases involving outside counsel) assayed, `the overwhelming majority of jurisdictions in the United States follow the ABA’s approach and hold that restrictive covenants affecting lawyers, whether employed by corporations or private law firms, generally violate state ethical standards.'" 
 
The takeaway?  While there might be some obstacles in some jurisdictions, an in-house lawyer should be able to move to a competitor and avoid imposition of covenant not to compete, so long as he or she is providing legal services in that new position and avoids disclosing privileged information and any trade secrets.

GPC v. Wi-LAN Order and Opinion.pdf (91.13 kb)

General_Patent_Corp._Brief[2].pdf (860.02 kb)

 

Avoiding Disputes Over IP Ownership: Two Recent Cases Reinforce the Importance of Agreements with Researchers and Engineers

 
by John Marsh 14. February 2012 10:45

Two high profile cases have drawn attention to a frequent problem in trade secret cases involving medical researchers, software developers and engineers: Who owns the trade secrets or inventions at issue, the employee or the employer? As one might expect, a well drafted employment agreement will go a long way to resolving this question.

The first case, Abramson Cancer Center of the Univ. of Penn. v. Craig Thompson, M.D., Case No. 11-cv-09108-LAK (S.D.N.Y.), highlights the problems that the absence of an employment or consulting agreement may create. Late last year, the University of Pennsylvania's Abramson Cancer Institute sued its former research director, Dr. Craig Thompson, as well as the company that he formed after his departure, Agios Pharmaceuticals. Penn's Institute claims that Dr. Thompson took an "innovative cancer metabolism research platform" with him that was the property of the Institute. The Institute claims it has been damaged to the tune of a whopping $1 billion. As Dr. Thompson is now the President of Memorial Sloan-Kettering Cancer Institute, this dispute has garnered a number of headlines.

I have attached the amended complaint below. As you can see, there is no claim invoking a specific employment contract (while there is an invocation to an Institute Agreement, there does not appear to be any allegation that Dr. Thompson signed it).  Instead, the amended complaint primarily relies upon statutory and common law claims that Dr. Thompson owed a duty to the Institute to disclose any of his inventions or research and that he failed to disclose his discoveries while he served as research director. One would expect that Dr. Thompson and his company will emphasize the absence of any written agreement on this issue, a fact that may complicate the question of owns what. We'll obviously wait to see how things shake out.

Now compare the Northern District of Illinois' recent decision in Motorola, Inc. v. Lemko Corp., Case No. 08 C 5427 (N.D. Ill.), where the existence of a provision establishing the employer's ownership of the inventions proved critical.  (I have attached a copy of the opinion below). In Lemko, Motorola brought a trade secret action against a number of former employees who had formed a competing company, Lemko, to develop and sell devices that arose from their work on Motorola's distributed mobile architecture. The employee agreements of two of the former employees, Shaowei Pan and Nicholas Labun, contained  a provision assigning to Motorola "the entire right, title and interest in all my inventions, innovations, or ideas developed or conceived by me solely, or jointly with others, at any time during my employment ... related to the actual or anticipated business activities of Motorola." 

Pan and Labun began doing work for Lemko while they were still employed by Motorola. In 2007, Hanjuan Jin, one of Motorola's former employees, was stopped at O'Hare International Airport before boarding a one-way flight to China and it was discovered that she had documents containing Motorola's trade secrets. (Jin was convicted last week of stealing Motorola's trade secrets). Motorola later brought this action and asserted that various Lemko patents were the property of Motorola because they were related to inventions and innovations that Pan and Labun had developed for Motorola.
 
Lemko, Pan and Labun moved for summary judgment but that motion was denied because the district court found there were sufficient issues of material fact regarding whether Lemko's inventions and technology fell within the relevant employment agreements. The case settled shortly after that ruling last month.

While an agreement should considerably strengthen an employer's hand, it is important to remember that several states have specifically addressed this situation with legislation. California, for example, provides a safe harbor for employees who develop inventions or technology entirely on their own time without using their employer's resources or equipment, so long as those efforts do not relate to work performed for their employer. That statute, California Labor Code § 2870, expressly trumps any employment agreement that purports to require an employee to assign an invention that would otherwise be his under this statute.

The takeaway? Make certain that every researcher, technician and developer has a written employment or consulting agreement that includes a provision defining who owns what intellectual property that he or she develops while employed. Also, make sure that there is a requirement that they disclose any inventions that they believe that they have independently derived so that the issue of ownership can be flushed out and resolved before they decide to go forward in any new venture. Finally, double-check your state's law to see whether there are any statutes or authority addressing this situation.

The Leonard and Madlyn Abramson Family Cancer Research Institute at the Abramson Cancer Center of the University of Pennsylvania v Craig Thompson M D .pdf (416.45 kb)

Motorola Inc v Lemko Corp et al .pdf (1.23 mb)

 

Is Your Lawyer the Weakest Link? Hackers Are Now Targeting Law Firms to Get Secret Deal Data

 
by John Marsh 3. February 2012 10:30

A profoundly troubling article by Bloomberg details expanding efforts by hackers to attack system networks of law firms to cull confidential data on sensitive deals and transactions. According to the January 31, 2012 article entitled "China-Based Hackers Target Law Firms to Get Secret Deal Data," the attacks have been sufficiently serious that the FBI's cyber division convened a meeting with the top 200 law firms in New York City last November to address the rising number of law firm intrusions.

One attack in particular involved China-based hackers looking to derail a $40 billion acquisition of the world's largest potash producer by an Australian mining conglomerate. The hackers "zeroed in on offices on Toronto's Bay Street, home of the Canadian law firms handling the deal." According to the article:

"Over a few months beginning in September 2010, the hackers rifled one secure computer network after the next, eventually hitting seven different law firms as well as Canada’s Finance Ministry and the Treasury Board, according to Daniel Tobok, president of Toronto-based Digital Wyzdom. His cyber security company was hired by the law firms to assist in the probe. The investigation linked the intrusions to a Chinese effort to scuttle the takeover of Potash Corp. of Saskatchewan Inc. by BHP Billiton Ltd. as part of the global competition for natural resources, Tobok said. Such stolen data can be worth tens of millions of dollars and give the party who possesses it an unfair advantage in deal negotiations, he said."

Why law firms? The article quotes Mary Galligan, the head of the FBI's cyber division in New York as observing that "as financial institutions in New York City and the world become stronger, a hacker can hit a law firm and it’s a much, much easier quarry.” Galligan's unit held the meeting with the 200 law firms as a result. “We told them they need a diagram of their network; they need to know how computer logs are kept,” the article quotes Galligan as saying of the meeting. “Some were really well prepared; others didn’t know what we were talking about.”

Mandiant, a cybersecurity firm based out of Alexandria, Virginia, estimates that 80 law firms were hacked last year. "Spear phishing" attacks (i.e., targeted attacks at particular individuals) or gaps when transitioning information to cloud storage sites are the preferred means of attack right now. At the November meeting, the FBI also recommended that the law firms review their mobility policies, including the security of e-mail linkups and mobile phones.

The takeaway? As trade secret lawyers, we frequently advise our clients on the importance of managing sensitive information -- i.e., limiting access, use of encryption, having sound security policies that are implemented, and creating a culture of security. To the extent that law firms are managing highly sensitive technical data or are involved in highly sensitive transactions, they need to apply their own advice to their employees and IT networks.

 

Acordia of Ohio v. Fishel: The Ohio Supreme Court Considers Whether a Merger Triggers a Non-Compete

 
by John Marsh 5. December 2011 10:45

A merger's impact on the non-competes of the merged company remains a hot topic (see my October 7, 2011 post about the U.S. Court of Appeals for the First Circuit's reasoning in OfficeMax v. LeVesque, which found the non-competes at issue did not protect the new company). Three weeks ago, the Ohio Supreme Court heard oral argument in a case, Acordia of Ohio LLC v. Fishel, that will go a long way in determining whether non-competes that do not specifically address the new company survive a merger in Ohio.

In Acordia of Ohio, the trial court refused to enforce the four non-competes in question. It ruled that under the specific language of those contracts, the restrictive covenants were confined to the specifically named employers, which changed over time after a series of successive mergers. After each merger, the company holding the specific non-compete disappeared. According to the trial court, this effectively terminated employment under each non-compete and triggered the time period of each non-compete. By the time the four employees decided to leave and join a competitor, each of their non-competes had expired under this analysis. 

The First Appellate District in Hamilton County affirmed the ruling late last year, looking not only at the language of the agreements in question but relying on Ohio statutory law to support its holding (citing in particular, Ohio R.C. 1701.82(A)(3)), which deals with the legal effects of a merger of Ohio corporations). The First District relied on older Ohio Supreme Court authority holding that "the absorbed company ceases to exist as a separate business entity" and that "[b]ecause the predecessor companies ceased to exist following the respective mergers, the Fishel team's employment ceased to exist following the respective mergers, the Fishel team's employment with those companies was necessarily terminated at the time of the applicable merger." 

Former Ohio Court of Appeals Judge Marianna Brown Bettman's Legally Speaking Ohio Blog has a fine summary of the questions asked by the Ohio Supreme Court Justices at the November 15, 2011 oral argument.  It is tough to handicap how the Court will rule. Logically, the employees' position does not make sense: if the company in fact disappears, what is there to trigger, let alone compete against or protect, since there is no company left?  On the other hand, Ohio courts have shown increasing antipathy to non-competes over the past four years; given the language of the non-competes and the apparent absence of a provision allowing for the assignment to successors or assigns, it is altogether possible that the Supreme Court could affirm that the non-competes expired. This one is too close to call.

The takeaway? A better definition of "Company" under the Agreement (one that explicitly includes successors and assigns) as well as a provision providing that the agreement shall inure to the benefit of the parties' successors and assigns would have better protected the employers. In addition, to remove all doubt, perhaps the simplest approach would be for all of the employees re-sign their non-competes with the new employer just before or after the merger.

 

Protecting Trade Secrets in the "Cloud"

 
by John Marsh 16. November 2011 10:45

More and more companies are using “cloud computing” for the offsite storage and use of their proprietary data and information. To date, no court has yet addressed whether a company’s storage of trade secrets in the cloud compromises those trade secrets’ status. However, as the argument will inevitably be made in litigation, there are a number of steps a business can take to defuse any argument that its information is not adequately protected within the cloud.

Cloud computing presents a different paradigm for the storage, use and delivery of computer resources. Unlike traditional desktop computing, data is not stored or used with purchased software products installed on a local computer, but rather through a service kept in the cloud that is accessed and billed as needed. The data is stored remotely on third party servers accessed via the Internet, as opposed to a private computer or network. The cloud may be reached through traditional computers and mobile devices, such as cell phones and tablets.

Storage costs tend to be lower within the cloud, as large upfront capital expenditures for computing infrastructure and software are reduced to routine operating costs as the specific services are used. In addition, data in the cloud may be accessed regardless of the user’s location or device. Cloud computing solutions are also readily scalable as a company's needs change.

As a result, everyone seems to be embracing the cloud. The research firm Forester has estimated that the global market for cloud computing will grow from $41 billion in 2010 to $240 billion in 2020. Apple has introduced iCloud which will sync remotely-stored data between devices. Amazon’s Cloud Player allows music to be stored online and then played on different devices. And Microsoft is adding more and more cloud-based services to its products like Windows and Office. 

Trade secrets are frequently stored within the cloud. They may be passively stored as data or actively used with a service hosted in the cloud. A trade secret may even be stored locally on its owner’s private network, transmitted to the cloud to be manipulated by a service, and then brought back to the owner’s network where the results are saved. A trade secret owner may not fully appreciate every time a trade secret makes its way into the cloud. Online backup services place data, including trade secrets, on servers in the cloud. And a trade secret sent as an attachment to web-based e-mail is passing through the services’ servers. 

What can a business do to protect its trade secrets in the cloud? While there is no court decision to serve as a guide, there are some common sense steps that can followed. The first step is obviously to ensure that the cloud computing service provider’s security policies, practices and infrastructure adequately safeguard the confidentiality of the information. The service provider’s encryption arrangements should be examined and verified. It is important to remember that because your senstive data is being pooled with the sensitive data of others, your cloud provider is a "target-rich" environment for hackers and cybercriminals. Make sure that your IT staff has completely satisified itself that the cloud provider is capable of protecting your trade secrets.

Second, a company should consider adding a second layer of encryption to data containing a trade secret. Two layers of encryption are more difficult to infiltrate than just one, especially since the client’s encryption would be independent of the service provider’s encryption.

Third, terms of service for any cloud computing service should be reviewed thoroughly. Terms outlining ownership, the right to conduct audits, and continued confidentiality and deletion of data once the relationship ends should be included. The service provider should be liable for its subcontractors or other parties it uses and should be required to maintain data-protection or cyber-liability insurance coverage that adequately protects the trade secrets that it may store or use. Additional ideas for contractual terms are included in a fine recent post on the TechNewsWorld Blog.

Cloud computing will continue to grow in popularity because of its cost and access advantages. As trade secret owners may face challenges to their use of the cloud to store their trade secrets, adopting some of the practices suggested above will hopefully reduce arguments that they have failed to protect those secrets in the cloud and provide an added level of security.  (I'd like to thank my colleague John Molnar for his help with this post).

 

TianRui Group v. ITC: What Happens in China, Does Not Stay in China

 
by John Marsh 14. October 2011 10:07

Fairly or unfairly, China is perceived as the Wild Wild West (or East) when it comes to the protection of intellectual property and trade secrets. Given the perceived lack of protection afforded IP, U.S. companies have become more aggressive in using state and federal remedies to protect their trade secrets. A significant ruling by the U.S. Court of Appeals for the Federal Circuit this week expands the ability of U.S. companies to sue Chinese parties for the misappropriation of trade secrets even though a substantial amount of the activity may have taken place in China. In TianRui Group Co. v. International Trade Commission, Fed. Cir., Case No. 2010-1395 (Oct. 11, 2011), the Federal Circuit has held that the International Trade Commission has statutory authority over conduct occurring in China in the course of a trade secret misappropriation investigation.  

The dissent takes the majority to task for allowing extraterritorial jurisdiction over the following undisputed facts: a Chinese licensee (Datong ABC Castings Company) used a manufacturing process in China which another Chinese company (TianRui Group) misappropriated when it hired Datong's Chinese employees to make railway wheels in China. 

Amsted Industries, an American manufacturer of cast steel railway wheels, had licensed that manufacturing process to Datong for a foundry in China. TianRui approached Amsted in 2005 to negotiate a similar license but was unable to reach an agreement with Amsted; it then hired nine of Datong's employees trained in the process at issue to manufacture the wheels. All of the employees had been notified that the Amsted process was confidential and eight of the nine had signed confidentiality agreements. TianRui ultimately sold the wheels in the U.S. through a joint venture.
 
Amsted filed a complaint with the ITC, arguing that the importation of the wheels violated § 337 of the Tariff Act of 1930, 19 U.S.C. §1937, because the manufacturing process at issue was developed in the U.S. and protected under domestic trade secret law. The administrative judge agreed and rejected arguments by TianRui that Congress did not intend for § 337 to be applied extraterritorially. The ITC elected not to review that decision and issued a limited exclusion order.
 
After a review of the relevant legislative history, the Federal Circuit found that the ITC properly applied § 337 based on TianRui's conduct in the U.S. -- namely, the importation of the wheels into the U.S.  Conceding that most of the offending conduct took place in China, the Federal Circuit emphasized the ITC was empowered by Congress to set the conditions for which products may be imported into the U.S.
 
The TianRui Group holding is sure to stir controversy; however, what cannot be disputed is the fact that U.S. companies now have a meaningful remedy to address concerns about protecting their IP in China.

 

OfficeMax v. Levesque: A Painful Lesson for Post-Acquisition Enforcement of Non-Competes

 
by John Marsh 7. October 2011 11:00

In the employment context, courts frequently construe the language of a non-compete against the employer who drafted it, reasoning that the employer's stronger bargaining position and the public policy against restraints of trade favor that approach. As a result, drafting errors, ambiguities or other issues can come back to not only haunt the employer who drafted an agreement but a business that ultimately acquires or merges with that employer. Case in point is the recent ruling in OfficeMax v. Levesque, Case No. 10-2423, U.S. Court of Appeals for the First Circuit (Sept. 29, 2011); in that case, the First Circuit applied a literalistic approach to the non-competes at issue and found that they were no longer enforceable because they had expired 15 years before. (A PDF copy of the opinion is below and thanks to Zachary C. Jackson who wrote an article about this case in JDSupra).
 
In 1996, David Levesque and Dana Rattray were asked by their employer LS&H, an office services company, to sign non-competes in anticipation of its acquisition by another office services company, BCOP. The non-competes expressly contemplated that the acquisition was the reason for the non-competes; in addition, Levesque and Rattray specifically agreed to enter into substantially similar non-competes with BCOP after the acquisition. However, the specific provisions detailing the scope of the non-competes stated they would run "[f]or a period of 12 months after termination of my employment with LS&H." After BCOP completed the acquisition, Levesque and Rattray refused to sign new non-competes but were permitted to continue working at BCOP. In 2004, BCOP merged with OfficeMax.

Levesque was terminated in 2009 and Rattray resigned in 2010. Both tried to find work in the printing services business, but ultimately found that they could only find work in the office supply business. (This factor, although not discussed, likely had some impact on the First Circuit's determination). When OfficeMax brought separate actions to enforce the non-competes, the district court enforced them. The First Circuit, however, reversed. The First Circuit empahsized the fact that despite the parties' awareness of the imminence of the acquisition, the non-compete's language was nevertheless limited to LS&H and did not mention BCOP or any successor or assign. As a result, the plain language of that provision had to control.
 
There are three lessons to be drawn from OfficeMax: (1) from the drafting standpoint, broadly defining the "employer" or "company" to include affiliates and successors and assigns would have included BCOP and OfficeMax; (2) insisting upon execution of the new non-competes as a condition of employment after the acquisition would have eliminated this possibility; and (3) from the acquirer's perspective, thorough diligence and insistence on new agreements with broader language prior to the acquisition would have remedied this problem.

OfficeMax v. Levesque.pdf (81.51 kb)

 

Amylin v. Eli Lilly: Raising the Bar to Proving Irreparable Injury in the Trade Secret Case?

 
by John Marsh 13. July 2011 11:00

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

 

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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