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Cloudy, with a Chance of Litigation: The Weather Channel's Trade Secret Woes Illustrate The Challenges of Licensing Database Information

 
by John Marsh 18. July 2013 13:00

A recent trade secrets decision out of New Jersey against The Weather Channel illustrates some interesting trade secret issues that arise in licensing agreements -- namely, to what extent can a licensee extract itself from a licensing agreement when it concludes that it can gather the subject matter of the license from other publicly available places (or come up with the information more cheaply).   

In Events Media Network, Inc. v. The Weather Channel, 2013 U.S. Dist. LEXIS 97514 (July 12, 2013), U.S. District Court Judge Robert P. Kugler denied a motion to dismiss filed by The Weather Channel, finding that the plaintiff Events Media Network, Inc. (EMNI) had presented sufficient allegations of trade secret theft to move the case forward.  EMNI contends that The Weather Channel took proprietary information that was supplied under their license agreement and improperly used it after the license expired.

The case involves one of the thorniest issues that arise in trade secret litigation -- whether a compilation of publicly available information can qualify as a trade secret. In its Amended Complaint (attached as a PDF below), EMNI described its business as collecting, reviewing and distributing information for various local and national events and attractions.  While it conceded that none of the individual bits of data gathered together was confidential, EMNI argued that once that information was gathered together from the various sources using a custom built database, it qualified as a trade secret.

Applying Georgia's Uniform Trade Secret Act, Judge Kugler agreed, at least at this early stage of the litigation, that EMNI had identified sufficient evidence that the information it supplied to The Weather Channel, organized in the fashion that it was, constituted a trade secret.  In this respect, his decision rests on solid ground and is consistent with the pleading standards that benefit a trade secrets plaintiff at this early juncture of the case. Todd Sullivan notes that The Weather Channel does not appear to contest that it used the information and predicts the case will be mediated or settled soon.

I Agreed to What?!!!  The case raises another interesting trade secret issue that has been in the news lately -- whether the terms of a written contract can trump trade secret law.  According to the Amended Complaint, EMNI and The Weather Channel contractually agreed that the information supplied by EMNI under the license agreement was proprietary.  As a result, EMNI argued that provision should estop The Weather Channel from claiming otherwise.

A recent case out of the U.S. Court of Appeals for the Federal Circuit, Convolve and MIT v. Compaq and Seagate, held that the contract between the parties may be controlling on the question of whether information qualifies as a trade secret and that the parties can decide between themselves what needs to be done to ensure trade secret status.  In that case, the Federal Circuit found that the plaintiff's failure to designate information as "confidential" -- as was required under a non-disclosure agreement -- doomed the plaintiff's trade secret claim (for more on the case see Dennis Crouch's post in Patently O Blog as well as Jason Stiehl's post for Seyfarth Shaw's Trading Secrets Blog).

Here, EMNI used the language of the contract to its advantage and argued that The Weather Channel had conceded the proprietary nature of the information under the license.  The lesson?  In written agreements negotiated between sophisticated commercial parties, courts will frequently defer to the language of the agreement.

Quick Takeaway for Licensees: Do your due diligence and if you have skepticism over the value of what you are going to be licensing, it may be best to say "no thanks" to the deal.

Quick Takeaway for Licensors: The language of your agreement may prove critical so make sure that your licensee concedes that the information that you are supplying is protected and proprietary. More often than not, the court will apply the language agreed to by the parties.

EMNI Amended Complaint.pdf (1.56 mb)

Tags:

Georgia | Licensing | New Jersey | Non-Disclosure Agreements | Trade Secrets | Uniform Trade Secrets Act (UTSA)

 

Wednesday Wrap-Up (July 10, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 10. July 2013 21:20


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:

Trade Secret and Non-Compete Cases. Posts and Articles:

  • There has been an uptick in media coverage and criticism of non-competes this week, which dovetails with the growing legislative efforts in several states to limit or restrict the use of non-competes.  "More firms requiring non-compete agreements: Efforts to retain employees being tested in courts, statehouses," reports Jonnelle Mart for The Wall Street Journal's Market Watch. Likewise, The Los Angeles Times has chimed in, "Contracts, court rulings giving employers legal upper hand: Emboldened by Supreme Court decisions and a weak job market, employers are starting to require workers to sign away their rights in return for a job."
  • "Legally Smited Eaton Asks Supreme Court of Mississippi to Reinstate Civil Trade Secret Theft Case Against Five Former Employees," reports Todd Sullivan in his Sullivan's Trade Secrets and Employee Defections Blog.
  • Texas "Appeals Court OKs Extension Of Insurer's Noncompete Deal," advises Law360.
  • "Can Confidential Info That’s Not a Trade Secret Be Misappropriated?" asks Eric Ostroff in his Protecting Trade Secrets Blog as he discusses a recent case out of Arizona.
  • Jon Cavicchi is ramping his Trade Secrets Vault Blog back up. Check out his many new posts, including his re-posting of some valuable advice on "Implementing a Trade Secret Audit."
  • "Is An Assigned Non-Compete Agreement Enforceable?" asks Monika Vyas Scott for Burr & Forman's Non-Compete Trade Secrets Law Blog and she summarizes the law in states throughout the Southeast.
  • For those looking for more on the Illinois Appellate Court's recent decision that an employee must be employed at least two years for a non-compete to be enforceable, Kenneth Vanko is not quite yet done venting about the reasoning in Fifield v. Premier Dealer Services.
  • "Scientist pleads guilty in Pa. trade secrets case" reports Associated Press. Tung Pham, who was charged with stealing trade secrets from his employer to take to a competitor in China, pleaded guilty in federal court in Philadelphia to seven counts of wire fraud, prosecutors said last week.
  • "Medtech inventor claims Ethicon lawyer tricked him into divulging trade secrets" advises the Massachusetts Medical Device Journal. Todd Sullivan also provides his take on the case here.
  • For tips on dealing with whistleblowers and trade secrets, check out Robert Milligan's post "An Employee Is Stealing Company Documents…That Can’t Be Protected Activity, Right?" for Seyfarth Shaw's Trading Secrets Blog.
  • "When An Employee Goes 'Snowden:' State High Court To Decide If An Employer Can Be Liable For A Rogue Employee's Disclosure of Confidential Information," reports Joe Wilson for Kelley Drye's DC Metropolitan Business Law Alert.
  • "iPads and Blackberries: The Hidden Dangers for Employers," warns Amy Dehnel for Berman Fink Van Horn's Georgia Non-Compete & Trade Secrets Reporter.
  • For a primer on "Health Care Non-Compete Agreements," in Tennessee, check out Cole Dowsley's post for Thompson Burton's Litigation & Dispute Resolution Blog.

Cybersecurity Posts and Articles:

  • "NIST Releases Draft Outline of Cybersecurity Framework for Critical Infrastructure," notes the National Institute of Standards and Technology's Tech Beat.
  • For two completely different takes on recent testimony before the House Energy and Commerce Oversight Subcommittee yesterday, compare "China Bears Burden Of Stopping IP Theft, Panel Hears," from Law360 with "U.S. Defenses 'Feeble' against Chinese Cyber Threat, Experts Testify," from Main Justice.
  • "Report Details Data Breaches in California," advises Cheryl Miller for Corporate Counsel.
  • "US, China kick off annual dialogue with talks on cybersecurity," reports The Washington Post.
  • "You Aren't Using These 10 Simple Security Settings," laments Jess Fee for Mashable.
 

Thursday Wrap-Up (July 4, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 4. July 2013 07:30

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 Cases. Posts and Articles:

  • The reaction from the trade secret community to the recently-released Obama IP Strategy Report has been one of disappointment. Expectations soared after the Obama administration announced its trade secrets initiative in February but the recent Report barely mentions trade secrets.  In a post for Orrick's Trade Secrets Watch, Michael Spillner notes the strategy's need for a civil cause of action.  Likewise, Misty Blair of Seyfarth Shaw's Trading Secrets Blog observes the Report's failure to address trade secret protection more comprehensively as "a bit of a surprise." 
  • "Illinois Appellate Court Requires Two Years of Employment for Postemployment Restrictive Covenants" reports Stacey Smiricky and Trina Taylor of Faegre Baker & Daniels for Lexology. Epstein Becker's Trade Secrets & Noncompete Blog and Seyfarth Shaw's Trading Secrets Blog also have posts on the decision.  And Kenneth Vanko unloads on the decision in his Legal Developments in Non-Competition Agreements Blog.
  • In "Contractual Override of Trade Secret Law," Dennis Crouch details a recent Federal Circuit decision in his Patently-O Blog affirming a New York federal court's holding that a non-disclosure agreement's requirement that confidential information be specifically designated trumped state trade secret law holding otherwise. As a result of the plaintiff's failure to designate the information as "confidential" under the NDA, the court applied California law and held the information could not qualify as a trade secret.  Lesson?  Don't include this language in your NDA, because in my experience, parties rarely have the time (or inclination) to designate each and every piece of information as "confidential."
  • "Are An Employer's Business Plans Discoverable In Non-Compete Litigation?" asks Jason Cornell of Fox Rothschild about a case in Ohio for Mondaq.
  • "New Jersey Federal Court Allows Non-Party to Employment/Non-Compete Agreement to Invoke Arbitration Clause," advises David Walsh for Jackson Lewis' Non-Compete & Trade Secret Report Blog.
  • "China Worries Improve Prospects Of Trade Secrets Bill" reports Ryan Davis for Law360.
  • "Chemical, oil companies fear potential EPA rule will expose trade secrets" advises Julian Hattem for The Hill.
  • "Face It: Judges Sometimes Hate Competition Cases" delivers Kenneth Vanko in a bit of hard of truth in his Legal Developments in Non-Competition Agreements Blog.
  • "Answers To Your Questions On Noncompete Agreements" provides Donna Ballman for her Screw You Guys, I'm Going Home Blog.
  • "Detecting Insider Threats to Trade Secrets" advises Catherine Dunn for Corporate Counsel.
  • If you don't have a non-compete with a Chinese employee, don't expect to restrain him or her advises the China Bridge IP Law Commentary Blog. In "Why China Supreme Court Agreed with Resigned Employees Establishing Competing Businesses?," Luo Yanjie details a recent high court ruling explaining Chinese law on this issue.
  • For The Wall Street Journal's take on the recent indictment of Chinese turbine manufacturer Sinovel, see "U.S. Looks to Blunt Corporate Espionage by Chinese Firms."
  • "Best Practices For Enforcing Restrictive Covenants" advises Susan Trench of Arnstein & Lehr for Law360.

Cybersecurity Posts and Articles:

  • "Beware the Internet and the danger of cyberattacks," warns Robert Samuelson for The Washington Post.
  • "NSA revelations throw wrench into lawmakers’ cybersecurity push" advises Brendan Sasso for The Hill.
  • "5 Ways to Boost Your Company's Cybersecurity Strategy" recommends Catherine Dunn for Corporate Counsel.

Computer Fraud & Abuse Act Articles, Cases and Posts:

  • "You May Not Like Weev, But Your Online Freedom Depends on His Appeal" advises Wired on the appeal of Andrew Aurnheimer of his CFAA conviction.
  • "There Is Now a Split Within the District of Massachusetts over the Proper Interpretation of the Computer Fraud and Abuse Act" announces Brian Bialas for Foley & Hoag's Massachusetts Noncompete Law Blog.

Have a happy and safe Fourth of July!

 

Should BioTech Companies Have to Forfeit Their Trade Secrets for the Public Good?

 
by John Marsh 1. July 2013 22:30

There have been a number of thought-provoking articles in the wake of the U.S. Supreme Court's decision last week in Association for Molecular Pathology v. Myriad Genetics, a decision that found that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated. At least one commentator has opined that the decision has sent shockwaves through the very foundation of the biotech industry.  Not surpisingly, a decision of this magnitude tends to trigger ripples in all areas of intellectual property, and trade secret law is no exception.

In a provocative Op-Ed for The New York Times entitled "Our Genes, Their Secrets," researcher Eleonor Pauwells takes Myriad to task because it has compiled a substantial and highly proprietary database of its genetic research but has declined to share the contents of that database with other research bodies and healthcare organizations. She advocates that the federal government should use its powers to compel Myriad and other BioTech companies to share their trade secrets for the public good.

Specifically, Eleonor advocates that the United States Food and Drug Administration "should immediately investigate the impact of trade-secret protection on innovation in personalized medical treatments. The FDA could also mandate public disclosure as a condition of market approval for genetic testing. Insurers too have some leverage: they could refuse reimbursements unless clinical data is shared for interpretation." In other words, if Myriad wants to commercially benefit from its trade secrets, it should be compelled to share them with the government.

By some accounts, Myriad has invested more than $500 million in this proprietary database.  It does not appear that the database was created through federal funding or through some other federal largesse that might entitle the government to some claim to the database or the data contained within that database.  In other words, the database is the result of Myriad's own money and effort.  So the question is whether the government can, or should, compel Myriad to share the fruits of its investment with others?

Growing Tensions Between Trade Secrets and The Public Interest: This is not the first time that someone has suggested that the public interest should trump the investment that a company has made in its trade secrets. Some have opined that the trade secrets of voting company manufacturers should be set aside so that the public can verify that their machines have properly tallied votes. Likewise, the highly-charged debate over fracking has pitted public interest groups against energy firms as they jockey over the disclosure of the chemicals and processes used by those companies in the fracking process. The dispute over Myriad's database is not a new one and has been percolating for years as researchers and others have complained about its refusal to allow others to access its database.  As trade secret protection continues to grow as a means of protecting intellectual property, these disputes will continue to emerge.

Apples and Oranges?  The Supreme Court's reluctance to provide a patent grant in the Myriad decision should not be construed as momentum to diminish trade secret status in situations involving the public interest. While patents and trade secrets are kindred spirits (the old adage that every patent starts its live as a trade secret comes to mind), the policies behind these two types of intellectual property are very different. The patent system is intended to spur innovation by providing a quid pro quo to the inventor -- in exchange for revealing his or her invention, the patentholder receives a grant of exclusivity which allows others to study, design around or build upon that invention. This bargain necessarily involves disclosure of the novel invention, which is the cornerstone of this innovative process.

In contrast, while innovation may be a consequence and benefit of a trade secret, by its very nature, a trade secret is not intended to be shared nor is novely a key requirement.  Rather, the key purpose of trade secret law is to protect the investment of a particular company by preventing a employee, partner or other party from unfairly exploiting and stealing that investment. Unlike patent law, trade secret law is rooted on an ethical component.

Leaving aside this compact that recognizes the property interest inherent in trade secrets, the notion that a company should be compelled to divest itself of its research and share that research for the public good would almost certainly inhibit the very innovation that Eleonor seeks to promote. Why invest substantial resources in a process, invention or database if you are ultimately going to have to turn it over to the government so that it share that database with your competitors? 

The events of the past few months should temper any enthusiasm for having the federal government serve as a sentinel of proprietary and sensitive information.  Having the government serve as a broker in which it grants access to certain markets in exchange for access to that data is an even worse idea.  For these reasons, no matter how laudable the goal, the government should respect the property interest of a trade secret holder and resist the temptation to interfere. 

Tags:

Trade Secrets

 

Friday Wrap-Up (June 28, 2013): Noteworthy Trade Secret, Covenant Not to Compete and Cybersecurity News from the Web

 
by John Marsh 28. June 2013 01:00

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:

Computer Fraud & Abuse Act Articles, Cases and Posts:

  • As I briefly noted in my post last night, Congresswoman Zoe Lofgren (D-CA) and Senator Ron Wyden (R-OR) have introduced an amendment to the CFAA popularly known as "Aaron's Law," to narrow the CFAA, reports Wired. As readers of this blog know, Swartz had been charged under the CFAA after allegedly accessing the server of MIT to improperly download approximately 4.8 million academic journals; he committed suicide earlier this year after negotiations over his plea bargain broke down. The amendment would, among other things, define access without authorization and exclude online agreements, computer use policies and employment agreements from serving as a basis for a claim under the CFAA.
  • For more commentary on Aaron's Law, see Russell Beck's post in his Fair Competition Blog, Robert Milligan's post for Seyfarth Shaw's Trading Secrets Blog, and Jason Weinstein's take for Steptoe's Cyberblog.

Trade Secret and Non-Compete Cases. Posts and Articles:

  • "Obama Administration Issues New Strategic Plan for Intellectual Property Enforcement," announces Russell Beck, who provides a fine summary in his Fair Competition Law Blog.
  • The ITC and a Chinese court have come to opposite conclusions over the same basic trade secrets dispute, notes Orrick's Trade Secrets Watch Blog. In, "Rubber Match? Resin Trade Secret Battle Results in a Multi-Jurisdictional Draw," Mark P. Wine and Francis Cheever report that the ITC ruled in favor of American rubber manufacturer SI Group but that the Chinese court sided with Chinese manufacturer Sino Legend. For more on the ITC proceeding, see, "ITC judge rules for SI Group in intellectual property case," in RubberNews.com.
  • Speaking of long-running trade secret imbroglios involving Chinese companies, "Chinese Wind-Turbine Maker Sinovel Charged With IP Theft," reports Law360. The U.S. Attorney for Wisconsin has indicted Sinovel for the alleged theft of source code from American Superconductor's computer system. The New York Times also has an article covering the indictment.
  • For those embroiled in a dispute over a forum selection clause in Georgia, "Atlantic Pacific Illustrates Impact of Georgia’s New Restrictive Covenants Law on Forum and Venue Selection Considerations," advises Collin L. Freer for Berman Fink Van Horn's Georgia Non-Compete and Trade Secret News Blog.
  • "U.S. District Judge in Massachusetts Declines to Enforce Noncompetes Because the Jobs of Two Employees 'Materially Changed,'” advises Brian Bialas for Foley & Hoag's Massachusetts Noncompete Law Blog.
  • "Tyco Accused Of Smear Campaign In Trade Secrets Row," reports Law360.
  • For more on the new Connecticut non-compete statute, see "Non-Compete Legislation In Connecticut," by David Popick for Epstein Becker's Trade Secrets & Noncompete Blog, and, "Connecticut Law Restricts the Use of Non-Compete Agreements in Acquisitions and Mergers," by Patricia Reilly, Matthew Curtin and Stephen Rosenberg for Littler's Unfair Competition & Trade Secret Counsel Blog.
  • "Rogue Employees - What to do?" asks Rob Radcliff for his Smooth Transitions Blog.
  • "Takeaways From UK's Vestergaard Trade Secrets Case," advise Akash Sachdeva and Ben Hitchens of Edwards Wildman Palmer LLP for Law360.

Cybersecurity Posts and Articles:

  • "Bank’s new cybersecurity audits catch law firms flat-footed," reports Martha Neil for the ABA News.
  • "Big Banks Worried About Outside Counsel Who BYOD," advises David Hechler for Corporate Counsel.
  • "FINRA Sees 'Proliferation' of Complaints About Cybersecurity Breaches, Official Says," reports Maria Lockshin for Bloomberg BNA.
  • "Federal Data Breach Legislation Introduced, But Will It Go Anywhere?" asks Christin McMeley of Davis Wright Tremaine for JDSupra.
 

Congresswoman Zoe Lofgren's Shrewd Move to Add a Federal Civil Trade Secret Remedy to the Economic Espionage Act

 
by John Marsh 27. June 2013 23:40

In an unexpected but significant development, Silicon Valley Congressman Zoe Lofgren has introduced a bill that would add a civil cause of action to the Economic Espionage Act (EEA).  At the present time, the EEA only authorizes the federal government to pursue civil and criminal actions.  Last week, Congresswoman Lofgren introduced H.R. 2466, which is titled the “Private Right of Action Against Theft of Trade Secrets Act of 2013” (“PRATSA”) and it is a welcome effort to provide a federal civil remedy to companies that have had their trade secrets stolen.  (A hat tip to Robert Milligan and Daniel Joshua Salinas for their excellent post on this amendment).

PRATSA is remarkably simple. First, it only seeks to add a civil remedy for violations of 18 U.S.C. §1832(a) which presently permits criminal prosecutions for trade secrets "related to a product or service used in or intended for use in interstate or foreign commerce."  Second, it explicitly exempts efforts to lawfully reverse engineer a trade secret, addressing a potential ambiguity that existed previously under the EEA.

In this respect, Congresswoman Lofgren's bill stands in contrast to previous efforts to add a civil cause of action to EEA that sought to add a number of provisions that may have, in retrospect, unduly complicated their passage.  In 2011 and again in 2012, Senators Chris Coons and Herb Kohl introduced the Protecting American Trade Secrets and Innovation Act (PATSIA) that was directed primarily at international trade secret misappropriation.  PATSIA proposed, among other things, an ex parte seizure order that would have allowed a claimant to seize misappropriated product or preserve evidence, as well as heightened pleading requirements.  Both of those efforts to enact PATSIA ultimately languished in committee.

The amendment is a shrewd one because it complements another amendment that Congresswoman Lofgren recently introduced with Senator Ron Wyden (D-OR) to narrow the Computer Fraud and Abuse Act (CFAA).  That proposal, which has been named Aaron's Law, seeks to remedy perceived abuses of the CFAA, the complaints over which reached a crescendo earlier this year when Internet activist Aaron Swartz committed suicide during the course of his prosecution under the CFAA.  (For more on the Swartz prosecution, see my post earlier this year here). 

Among other things, Congresswoman Lofgren's amendment to the CFAA would effectively prohibit employers from using the CFAA for trade secret misappropriation claims.  A number of courts, including the U.S. Courts of Appeal for the Fifth, Seventh and Eleventh Circuits have allowed employers to use the CFAA to ensnare former employees who violated computer use policies when they improperly accessed and then took trade secrets from their computers with them to their new employer.

In other words, Congresswoman Lofgren has dangled the carrot of a possible trade secret civil remedy in exchange for the stick of narrowing the CFAA to eliminate its use as a trade secret statute.  I suspect that her proposal will be particularly popular in her home state of California, since it provides those employers with a federal trade secret remedy that has been lacking since the U.S. Court of Appeals for the Ninth Circuit held that the CFAA should not be applied to violations of computer use policies.

All in all, a very positive development.  The simplicity of the amendment, coupled with the recent recognition that trade secret theft has become a matter of national security, will hopefully ensure its passage into law.

Tags:

Computer Fraud and Abuse Act (CFAA) | Economic Espionage Act | Trade Secrets

 

Episode 11 of the Fairly Competing Podcast: Trade Secrets, Back to Basics Part 2

 
by John Marsh 26. June 2013 09:55

Kenneth Vanko, Russell Beck and I have completed our eleventh Fairly Competing Podcast, "Trade Secrets, Back to Basics Part 2."

In Episode 11, Russell, Ken and I discuss commonly used security measures businesses implement to protect trade secret information. We examine security steps companies should take at the time key employees join the organization, as well as those exit interview steps that lead to the better protection of confidential business information. Finally, we discuss the perils of "bring your own device" policies that companies utilize, which may impact the ability to protect trade secrets adequately.

You can listen to the podcast by going to the Fairly Competing website or clicking the link below. Or you can subscribe to the podcast on iTunes. (As always, we'd appreciate your feedback).

Listen to this episode.

Tags:

Podcast Episodes | Trade Secrets

 

Thursday Wrap-Up (June 20, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web

 
by John Marsh 20. June 2013 11:30

The corrected version of today's Thursday Wrap-Up post is posted below. A technical glitch caused the post to inadvertently launch last night so we apologize to our subscribers. We appreciate your loyalty and work hard to deliver valuable content. Thank you for your patience. 

Now, to the noteworthy trade secret, non-compete and cybersecurity stories from the past week:

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

  • For you sports fans, a budding dispute is emerging in the NBA over the enforceability of Boston Celtics coach Doc Rivers' non-compete. Rivers, one of the more highly regarded NBA coaches, has been approached by the Los Angeles Clippers but a non-compete in his contract may prevent his move. For their take on the situation, check out Rob Dean's post, "Calling Foul on Doc Rivers’ Non-Compete Contract," for Frith & Ellerman's Virginia Non-Compete Blog as well as Kenneth Vanko's post in his Legal Developments in Non-Competition Agreements Blog.
  • Wondering how the U.S. Supreme Court's Myriad decision may affect the use of trade secrets? Then check out "In Setting Genes Free, Supreme Court Decision Will Put Greater Emphasis on Trade Secret Protection in Biotech," by Michael Baniak for Seyfarth Shaw's Trading Secrets Blog.
  • For the latest on the high profile prosecution of Walter Liew and the Pangang Group, see "Trade Secrets Charges Survive Dismissal Bid In DuPont Case," reports Law360.
  • "Creators of 5-hour ENERGY file complaint against DOJ for requesting 'trade secrets,'" advises Joyce DeWitt for the Statesman Journal Blog.
  • In a surprisingly sympathetic article about Sergey Aleynikov's legal travails entitled "Questions Linger in Case of Copied Code," Reed Albergotti expresses concern about the most recent prosecution in The Wall Street Journal.
  • "Google, Judges Duck Latest Version of Trade Secrets Case," reports Law360.
  • Looking for a "Broker Update" on trade secret and non-compete disputes in the financial industry? Then check out Rob Radcliff's post in his Smooth Transitions Blog.
  • "Enforceability of a Noncompete Agreement will Often Depend Upon Context," advises Jason Shinn for the Michigan Employment Law Advisor Blog.
  • "No, No, No – Your Independent Contractor Cannot Sign a Noncompete. Never. Ever," exclaims Tiffany Hildreth for Strasburger's Noncompete Blog.
  • "No Sanctions For Text Message Deletion," advises Christopher Brif for the IT-Lex Blog.
  • "Trade Secret Suit Against Defense Co. Sent To Arbitration," reports Law360.
  • "The New Prior User Rights Defense: How Often Will It Be Asserted?" ask Robert A. Pollock and Matthew R. Van Eman for Finnegan's America Invents Act Blog.

Cybersecurity Posts and Articles:

  • "Why The NSA Leaks Will Lead To More Economic Espionage Against American Companies," warns John Villasenor for Forbes Tech.
  • "Why Your CEO Is a Security Risk," cautions Rohyt Belani  for the Harvard Business Review Network Blog.
  • Looking for a concise summary of all the pending federal cybersecurity and trade secrets legislation? Then check out "Pols Gone Wild: Congress Discovers Trade Secret Theft and Cybersecurity are Problems; We Sort Through the Explosion of Legislation," by Sophie Yu and Gabriel M. Ramsey for Orrick's Trade Secrets Watch Blog.
  • "5 Data Breach Risks You Can Prevent," proclaim Clark Schweers and Jeffrey Hall for Law Technology News.
  • "The Public/Private Cooperation We Need on Cyber Security," advises Harry D. Raduege, Jr. for the Harvard Business Review Network Blog.
  • "After Profits, Defense Contractor Faces the Pitfalls of Cybersecurity," reports The New York Times.

Computer Fraud & Abuse Act Articles, Cases and Posts:

  • "Minnesota Federal Court Dismisses Computer Fraud and Abuse Act Claim Based on Departing Employee’s Downloading of Customer List," reports Erik von Zeipel for Seyfarth Shaw's Trading Secrets Blog.
  • For more on the recent decision denying a motion to dismiss the CFAA claim in the AMD trade secret case, see Erik Ostroff's post "Computer Fraud and Abuse Act Applied Narrowly In AMD Case," for his Protecting Trade Secrets Blog.
 

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.
 

Pulse Technologies, Inc. v. Notaro: Pennsylvania Supreme Court Enforces Non-Compete and Holds Offer Letter Not Binding on Employer

 
by John Marsh 12. June 2013 09:45

One of the issues that divides many states is whether a covenant not to compete that is offered after the start of employment is enforceable.  Most states (such as Florida, Illinois, Massachusetts, New York and Ohio) recognize that mere continued employment is sufficient consideration to support a non-compete that is signed after an employee begins working for his or her employer. 

However, a sizable minority of states (such as North Carolina, Pennsylvania and Texas) generally refuse to enforce a non-compete that is presented after an employee begins work. In those states, continued employment is considered insufficient consideration as a matter of law and those states require that any non-compete signed after an employee has begun working must be supported by new and independent consideration such as a genuine promotion, stock options or some other tangible exchange.

Not surprisingly, things can get tricky in jurisdictions that do not recognize "subsequent" non-competes when it is unclear when the employee actually begins working or where there is a potential number of employment agreements.  On May 31, 2013, the Pennsylvania Supreme Court was forced to address this situation and determine whether a signed offer letter that did not mention a non-compete was the parties' agreement or whether a subsequent employment agreement with a restrictive covenant signed on the employee's first day of work constituted the actual employment contract.

In Pulse Technologies, Inc. v. Notaro, the Pennsylvania Supreme Court found that the signed offer letter that did not mention a non-compete was not a binding  employment contract between the parties.  Instead, the Supreme Court held that the non-compete included in the formal employment agreement signed on the employee's first day was part of the actual contract between the employer and employee, and that the non-compete was therefore supported by consideration (new employment) and enforceable. (A copy of the opinion can be found as a PDF below; a special thanks to Mark Grace of Cohen & Grace for giving me an update on the opinion).

Background Facts:  In 2005, Pulse Technologies extended an offer of employment to Peter Notaro in a letter that described the new position, responsibilities, location, base salary, benefits, effective date and confidentiality requirements. The offer letter stated "You will be asked to sign our employment/confidentiality agreement" and that "[w]e will not be able to employ you if you fail to do so."  Finally, the offer letter stated "the first day of employment you will be required to sign an Employment Agreement with definitive terms and conditions outlining the offer terms and conditions contained herein." The letter did not mention any covenant not to compete.

Notaro signed the offer letter as instructed and on the first day of his employment with Pulse Technologies, he was asked to sign an employment agreement that contained a covenant not to compete. Notaro read, understood and signed the employment agreement and never objected or questioned the non-compete.

In 2010, Notaro resigned from Pulse Technologies to join a competitor, MK Precision, LLC.  Pulse Technologies sued to enforce the non-compete and secured a preliminary injunction enforcing it. However, on appeal, the Pennsylvania Superior Court of Appeals reversed and vacated the preliminary injunction, reasoning that because the offer letter did not mention the non-compete, the subsequent non-compete was not supported by adequate consideration.

The Pennsylvania Supreme Court's Reasoning: The Pennsylvania Supreme Court rejected that reasoning, reversed the Appellate Court's holding and reinstituted the non-compete. The Supreme Court held that the offer letter was simply part of the hiring process and did not constitute the actual employment contract between Notaro and Pulse Technologies. 

Focusing on the language and circumstances surrounding the offer letter, the Supreme Court concluded that the offer letter was simply intended to summarize a number of the key terms of the proposed employment relationship and that it was executed with "a view toward executing a binding contract in the future." The Supreme Court emphasized that the offer letter's language made clear that execution of an actual employment agreement would be required for any employment relationship and that as a result, the restrictive covenant was ancillary (or a essentially a condition) of the proposed employment relationship. Consequently, the subsequent non-compete was enforceable because it was supported by consideration -- the offer and acceptance of employment at the start of the parties' relationship.

The Takeaway:  If you are an employer in a state that does not recognize continued employment as sufficient consideration for a non-compete, this is an important decision. To its credit, the Pennsylvania Supreme Court did not elevate form over substance and instead took a hard look at the language and the circumstances of the offer letter and properly recognized that it was not the actual employment agreement. This decision should provide comfort to employers who do not expect that an offer letter will summarize each and every term of the prospective employment.

However, on a practical level, the most effective step that an employer can take to avoid this situation is to be open from the beginning about its expectation that a new employee will have to sign a restrictive covenant. It is always preferable to explain to a prospective employee that a restrictive covenant will be part of any employment package. Not only will that approach ensure that an employer has conformed with the law in jurisdictions such as North Carolina, Pennsylvania and Texas, but it will reduce the potential for confusion, bitterness or litigation in the future.

Pulse Technologies v. Notaro.pdf (51.34 kb)

Tags:

Non-Compete Enforceability | Pennsylvania | Restrictive Covenants

About John Marsh

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

Disclaimer

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

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