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)
Georgia | Licensing | New Jersey | Non-Disclosure Agreements | Trade Secrets | Uniform Trade Secrets Act (UTSA)
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:
Cybersecurity Posts and Articles:
China | Criminal Proceedings | Cybersecurity | Illinois | Non-Compete Enforceability | Pennsylvania | Texas | Trade Secrets | Weekly Wrap-Up Posts
Computer Fraud & Abuse Act Articles, Cases and Posts:
Have a happy and safe Fourth of July!
California | China | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Discovery Issues | Economic Espionage Act | Illinois | Massachusetts | New Jersey | New York | Non-Compete Enforceability | Non-Disclosure Agreements | Ohio | Restrictive Covenants | Trade Secrets | Trial and Evidentiary Issues | Weekly Wrap-Up Posts
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.
China | Computer Fraud and Abuse Act (CFAA) | Criminal Proceedings | Cybersecurity | Georgia | International | International Trade Commission | Legislation | Massachusetts | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets | Weekly Wrap-Up Posts
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.
Computer Fraud and Abuse Act (CFAA) | Economic Espionage Act | Trade Secrets
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.
Podcast Episodes | Trade Secrets
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:
California | China | Computer Fraud and Abuse Act (CFAA) | Criminal Proceedings | Cybersecurity | Discovery Issues | Economic Espionage Act | Patents | International | Massachusetts | New York | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets | Weekly Wrap-Up Posts
Trade Secret and Non-Compete Posts and Articles:
Computer Fraud and Abuse Act Posts and Cases:
DuPont v. Kolon | International | Non-Disclosure Agreements | Weekly Wrap-Up Posts | International Trade Commission | Uniform Trade Secrets Act (UTSA) | China | Cybersecurity | Massachusetts | Non-Compete Enforceability | Criminal Proceedings | Legislation | Injunctions | Discovery Issues | Computer Fraud and Abuse Act (CFAA) | Florida | Illinois | California | Trade Secrets
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)
Non-Compete Enforceability | Pennsylvania | Restrictive Covenants
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