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 and Abuse Act Posts and Cases:
Trade Secret and Non-Compete Posts and Articles:
Cybersecurity Posts and Articles:
Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Legislation | Non-Compete Enforceability | Non-Solicitation Agreements | Trade Secrets | Weekly Wrap-Up Posts
As readers of this blog know, I'm active in the American Intellectual Property Law Association's (AIPLA) Trade Secret Law Committee, having served as Litigation Subcommittee Chair and presently as Vice Chair. For those who are either attending the AIPLA's Spring Meeting in Seattle, Washington on May 1 through May 3, 2013 or still considering it, I wanted to let you know about a number of exciting trade secret presentations that will be offered, including one of which I will be presenting.
On Thursday, May 2, 2013 (2:00 – 3:30 pm), Josh Durham of Poyner Spruill, LLP will be moderating the presentation, "A Global Marketplace and a Mobile Workforce—Can a Trade Secret Possibly be Kept SECRET?" The presentation will include competing views and hopefully a debate over the Computer Fraud and Abuse Act between Dan Westman of Morrison Foerster, LLP and Professor Eric Goldman of Santa Clara University School of Law, High Tech Law Institute. The presentation will also include "Extraterritorial Protection of Trade Secret Rights" by Jay H. Reiziss of Brinks Hofer Gilson & Lione. Finally, Palk Saber of IBM Corporation will present "Appropriate Steps to Safeguard Trade Secrets from a Corporate Perspective." (A special thanks to Seth Hudson for all of his outstanding work in organizing this panel and presentation).
After that presentation, from 3:30 to 5:30 p.m., Peter Toren of Weisbrod Matteis & Copley, PLLC, will speak and chair a discussion on "The Obama Administration’s Strategy on Mitigating the Theft of US Trade Secrets—What Every US Company Needs to Know." After Peter's presentation, the AIPLA Trade Secret Law Committee will have a panel discussion on the Obama Administration’s Trade Secrets Initiative. Committee Chair Janet Craycroft of Intel Corporation, Peter Toren, Dan Westman and I will participate in that discussion and we are hoping Peter will be able to persuade representatives of the Administration to join us as well.
Finally, I have the privilege of presenting "2013 Trade Secret Law Mid-Year Review: Greater Emphasis from the Obama Administration, New Federal and State Legislation and Noteworthy Federal and State Cases" on Friday, May 3, 2013 at the Closing Plenary Session at 10:15 a.m.
For those still interested in registering for the AIPLA's Spring Meeting, here's the link. Hope to see you there!
Tags: AIPLA Spring Meeting
As promised, I am posting my intended letter to the Obama Administration's U.S. Intellectual Property Enforcement Coordinator, Victoria Espinel, in response to her recent request for public comments on potential trade secret legislation.
Executive Summary: Regular readers of this blog will not be surprised as I advocate that a civil cause of action be added to the existing framework of the Economic Espionage Act (EEA), preferably by enacting a modified version of the Protecting American Trade Secrets and Innovation Act (PATSIA) proposed last year by U.S. Senator Chris Coons.
I have proposed three modifications to PATSIA (explained in greater detail in my letter below):
(1) that the statute be confined to international trade secret misappropriation;
(2) that objections to venue, such as forum non conveniens, be prohibited so long as the requirements of 28 U.S.C. §1391 are met; and
(3) that PATSIA's ex parte seizure order be scaled back and modelled after what are commonly known as Anton Piller orders which are used in Commonwealth nations to prevent the destruction of evidence.
For those that have not provided their comments to the Administration yet but wish to do so by Monday, April 22, 2013 (tomorrow), the link to provide comments can be found here.
Here is my letter:
The Honorable Victoria Espinel
Re: Response to Request for Public Comments for “Trade Secret Theft Strategy Legislative Review” (78 Fed. Reg. 16875, March 19, 2013)
Dear Ms. Espinel:
I am submitting this letter in response to the Administration’s “Request for Comments and Notice for Trade Secret Theft Strategy Legislative Review” as published in the Federal Register (the “Notice”).
The Growing International Trade Secret Threat and The Need for Further Legislative Action. The rise in the theft of trade secrets from U.S. companies by foreign hackers and international misappropriation has been widely reported and is well documented. Last year, the National Security Agency described trade secret theft as the greatest transfer of wealth in history, estimating the losses of theft of trade secrets and cyber breaches to be in excess of $334 billion per year. In February 2013, the security company Mandiant Corporation reported that the Chinese government was sponsoring cyber-espionage to attack top U.S. companies. Likewise, CREATE.org has recently released a white paper that highlights how far-reaching and challenging the risks of trade secret theft are for companies operating on a global scale.
The Missing Component: A Federal Civil Cause of Action. For these reasons, I believe that the Administration should use its considerable influence and resources to support legislation creating a federal civil cause of action and remedy for international trade secret misappropriation utilizing the existing framework of the Economic Espionage Act (“EEA”).
This federal civil cause of action or remedy should not undermine, preempt or disturb existing state law causes of action and remedies, which are more than adequate to address domestic trade secret theft. Rather, the federal civil cause of action would be directed exclusively to remedying situations involving the theft of trade secrets by international misappropriation. Any federal civil cause of action should provide remedies similar to those provided in the Uniform Trade Secret Act (“UTSA”), including providing for appropriate injunctive relief, unconditional royalty damages, attorneys’ fees, and exemplary damages equal to at least the twice any award of damages.
A federal cause of action empowering companies to protect their own trade secrets from international misappropriation would help relieve the federal government, in this time of limited government resources, of sole responsibility for the protection of American trade secrets abroad. In addition, enforcement would be enhanced because U.S. companies understand their own technology and trade secrets best and they are incentivized to litigate aggressively to protect those assets. In addition, despite their best efforts, government agencies and prosecutors may not be able to move as quickly or with the nimbleness of a private litigant in some circumstances. Given the importance of speed and injunctive relief in trade secret cases, a federal private right of action would be a powerful tool in the case of international trade secret misappropriation.
While state trade secret laws afford U.S. companies many protections, they cannot match the potential international scope and procedural remedies or protection that a federal court can provide in the case of international trade secret misappropriation. The ability to issue and serve subpoenas throughout the U.S. and the broad jurisdictional powers of federal courts would greatly assist many trade secret claimants in cases of international misappropriation.
The Administration Should Support the Protecting American Trade Secrets and Innovation Act with Three Modifications. Senator Chris Coons previously introduced legislation (S. 3389, 112th Congress), known as the Protecting American Trade Secrets and Innovation Act of 2012 (“PATSIA”), that seeks to amend the EEA to provide, among other things, a private civil cause of action for trade secret theft.
The Administration should support enactment of PATSIA. In addition, I would respectfully propose the following three modifications:
1. PATSIA should be focused and confined to international trade secret misappropriation. Existing state law trade secret remedies are more than adequate to protect domestic trade secret misappropriation.
2. To ensure that the civil cause of action’s remedial purpose (i.e., providing American companies with a federal forum for international misappropriation) is not frustrated, PATSIA should preclude objections to venue, such as challenge on the grounds of forum non conveniens, so long as the action satisfies the venue requirements of 28 U.S.C. §1391.
3. The ex parte seizure order proposed under PATSIA should be narrowed and additional safeguards should be added to ensure that it is not misused. I would propose that the seizure order be modeled on Anton Piller orders that have been utilized by courts in Australia, Canada and the United Kingdom to seize and protect evidence. To secure an ex parte seizure order, I would propose that an applicant be required to establish the following by clear and convincing evidence: (a) a strong prima facie case against the defendant; (b) that the alleged misappropriation is serious and that there is a probability of irreparable injury; and (c) that there is a possibility that the defendant will destroy or remove relevant evidence or misappropriated product. Finally, to ensure protection and preservation of the material to be seized, a judicial officer should be appointed to oversee execution of the order and to retain possession of any evidence or product that is seized until the defendant has an opportunity to challenge the seizure.
Thank you for the opportunity to be heard. If I can provide any further assistance or information, please do not hesitate to let me know.
Very truly yours,
John F. Marsh
Economic Espionage Act | International | Legislation | 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:
Computer Fraud and Abuse Act Posts and Cases:
Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Economic Espionage Act | IP Litigation | Legislation | New York | Non-Compete Enforceability | Non-Solicitation Agreements | Ohio | Restrictive Covenants | 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
Kenneth Vanko, Russell Beck and I have completed our sixth Fairly Competing Podcast, "Practical Considerations When Seeking Injunctive Relief."
Because they are the most common form of relief in non-compete and trade secrets cases, preliminary injunctions and TROs require parties to act and respond very quickly. In this episode, Russell, Ken and I each discuss what businesses need to consider when moving for injunctive relief, the differences between temporary restraining orders and preliminary injunctions, expedited discovery, and local practice related to injunctions in various courts throughout the United States.
You can listen to the podcast by visiting the Fairly Competing website or clicking the link below. Or subscribe to the podcast on iTunes. We'd appreciate your feedback.
Our next podcast will address issues accompanying trade secret cases involving self-styled whistleblowers, such as the recent case brought by Anheuser-Busch InBev against James Clark.
Listen to This Episode
Injunctions | Non-Compete Enforceability | Podcast Episodes | Restrictive Covenants | Trade Secrets
Wow, it was a busy week. 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 Posts and Cases:
China | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Economic Espionage Act | Florida | IP Litigation | International | Legislation | Non-Compete Enforceability | Restrictive Covenants | Texas | Trade Secrets | Weekly Wrap-Up Posts
The ubiquitous cease-and-desist letter. It frequently precedes an IP dispute, and even more frequently, a trade secret or non-compete case. If it is well written (witness Jack Daniels' splendid letter from last year), it can win you cyber applause. If it is clumsily written, it can expose you to ridicule (see the Hopaurus Rex rebuttal).
But if it is really, really poorly written, can it expose you and your client to civil liability? That is the question posed by two fine blog posts calling attention to the hazards of a cease-and-desist letter sent to a third party, such as a new employer who has hired an employee with a non-compete.
Defamation? No problem. Two weeks ago, Ken Vanko gave his thoughts, largely dismissing the risks of a defamation claim (but reserving judgment on the potential for a tortious interference claim). And this week, Kara Maciel wrote about a recent decision from the U.S. District Court for the District of Columbia, Murphy v. LivingSocial, Inc., which held that an employer enjoyed absolute immunity from a defamation claim for the cease-and-desist letter it sent to a new employer.
As a long time devotee of the cease-and-desist letter, I agree with Ken and Kara. I don't believe that I have ever worried about a potential defamation claim when sending a letter to a competitor, new employer or other third party. I do my best to keep it as factual as possible by enclosing and citing the agreement in question, identifying the evidence that has been uncovered of any breach or misappropriation, and laying out my client's contention. This approach was largely endorsed by the District Court in the LivingSocial, Inc. decision.
Tortious Interference with Contract: The Velcro Claim. A claim for intentional interference with contract, however, can be a more troublesome claim. If the former employee is terminated by his or her new employer after the letter is sent, it is altogether possible that the former employee may sue you or your client for tortiously interfering with his contractual relationship with that subsequent employer.
A 2009 Ohio case, Hidy Motors, Inc. v. Sheaffer, illustrates how this claim can unfold. In that case, an employer, Hidy Motors, learned that a former employee, Gary Sheaffer, had joined a competitor in apparent violation of a non-compete. As a result, Hidy Motors notified the new employer that Sheaffer's employment was in violation of his non-compete with Hidy Motors.
When Sheaffer was fired, he claimed that Hidy Motors' communication about the non-compete interfered with his contract with his new employer. Hidy Motors' efforts to dismiss the case were unsuccessful because the court reasoned that its non-compete might not be enforceable. In other words, because the enforceability of that covenant was not certain, Hidy Motors' justification for interfering with Sheaffer's employment contract might be lacking. Whether a party is justified or has a privilege for interfering with a contract frequently involve disputed issues of fact, so an employer could find itself going before a jury on an intentional interference claim.
The Takeaway: So how do you reduce your risk from a potential tortious interference claim? Follow the same rules that you would to avoid a potential defamation claim: keep it factual, enclose the agreement, and advise the new employer or third party of your client's position.
Alternatively, you can elect not to send a letter to the new employer at all. If you are confident that you are ultimately going to be in litigation with the former employee, it may not be necessary to arm him or her with a potential counterclaim.
Finally, you can opt for a middle path: notify the new employer of the non-compete but advise it that you will allow the new employee to remain provided you receive adequate assurances that your customer relationships and trade secrets are properly protected. It will open the door for a compromise and perhaps avoid litigation altogether.
Tags: cease and desist letter, defamation, tortious interference
Non-Compete Enforceability | Restrictive Covenants | Trade Secrets
Computer Fraud and Abuse Act Posts and Cases:
China | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | DuPont v. Kolon | International | Mattel v. MGA | Non-Compete Enforceability | Non-Solicitation Agreements | Pennsylvania | Restrictive Covenants | Social Media | Trade Secrets | Weekly Wrap-Up Posts
Anheuser-Busch InBev's lawsuit against a former operations director turned lawyer turned whistle blower illustrates many of the special challenges in a whistle blower trade secret case. The former employee, James Clark, claims that AB InBev has watered down its beer and he has garnered generally favorable media treatment this week by filing a motion to dismiss the case against him under California's whistle blower statute. (Full disclosure: I represented Anheuser-Busch in a litigation about 10 years ago). According to Bloomberg, AB InBev sued Clark, a former director of operations support, one week after the company was accused of overstating the alcohol content in several of its beers. Clark worked at Anheuser-Busch from 1998 until June, when he resigned to become (gasp) a lawyer. Clark held several quality-assurance positions before rising to director of operations support.
Consumers have filed at least eight lawsuits accusing AB InBev of adding water to beers including Bud Ice, Budweiser, Busch Ice and Michelob. AB InBev asserts Clark has improperly divulged or misrepresented confidential information to the lawyers for those plaintiffs. In February, Clark apparently refused AB InBev's demand that he testify under oath about whether he had divulged any confidential information in connection with those lawsuits.
The Streisand Effect: Clark has not hesitated to seize the bully pulpit. In moving to dismiss the case because he believes California law bars using strategic lawsuits against public participation (SLAPP) as a means of intimidation, Clark argues that the lawsuit is intended to silence and punish him for standing up for consumers. (PDF copies of the Complaint and Motion to Strike can be found below).
AB InBev's lawsuit did not generate much publicity when it was filed on March 1, 2013. In contrast, Clark's claims and motion have generated a fair amount of media coverage since their filing on March 29, 2013. In this respect, AB InBev's case, like many cases against self-styled whistle blowers, may have led to the dreaded Streisand Effect -- that in attempting to fight unwanted or unfavorable publicity, a company ends up unintentionally creating even more media attention.
The Collision Between The First Amendment and Trade Secret Law: I have written before about the special challenges of prosecuting a trade secrets case against the whistle blower. There is a long tradition in our country generally supportive of whistle blowers. Think Ida Tarbell and Standard Oil, Upton Sinclair and the meat packing industry, Ralph Nader and the Corvair, Daniel Ellsberg and the Pentagon Papers -- the list goes on and on. Courts are not immune to the romance of the narrative of the heroic employee trying to protect the public and reveal the alleged misdeeds of his former employer.
Not surprisingly, former employees making these claims can effectively cloak themselves within the protections of the First Amendment and federal courts in particular have been receptive to that defense, especially in areas of public health and safety. While states such as California and Ohio may allow trade secret protection to trump First Amendment concerns in certain situations, federal courts have generally found that such efforts to squelch this speech qualify as a forbidden prior restraint. (For more on this issue, see my earlier post on the Julius Baer v. WikiLeaks case).
The Takeaway: Suing a whistle blower is always a high-wire act. Unfavorable media attention and the thicket presented by the First Amendment are frequently a part of the fabric of these disputes. A trade secret claimant needs to tread carefully and have a thick skin.
I will continue to monitor the case and provide an update when the court rules on Clark's Motion to Strike.
AB Complaint (2).pdf (720.10 kb)
Clark Motion to Dismiss.pdf (1.21 mb)
Tags: Anheuser-Busch, InBev
California | Non-Disclosure Agreements | Trade Secrets
Powered by BlogEngine.NET 220.127.116.11
Theme by Mads Kristensen
Join me on Linked In!
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.
© 2011 Hahn Loeser & Parks LLP
The material available on this site is for information purposes only and does not constitute legal advice, nor is it intended as a substitute for legal counsel.