Wednesday, April 18, 2012

Case Law Update: Source Code "Crimes", The Duty of Loyalty, and Trade Secrets Preemption (My Favorite!)

The year continues to churn out some interesting cases, and they're getting a bit tough to keep up with. Here is a brief survey of some developments I found this past week, broken down by general topic. As you can tell from the title, there is a trade secrets preemption case to report on. I am, for some reason I cannot figure out, oddly fascinated by this procedural topic. This is not something to emulate or be proud of. But it is what it is. Here we go...

Trade Secrets

The Supreme Court of Georgia, in Robbins v. Supermarket Equipment Sales, LLC, 290 Ga. 462 (2012), adopted what I call broad form preemption under the Uniform Trade Secrets Act. Preemption is the idea that if you're claiming trade secret protection, that's your sole remedy; you can't default to some other common law tort as an alternate theory of recovery. In Robbins, the Court held that because the plaintiff alleged certain design drawings for refrigeration "skins" (incidentally, no clue what this is) were trade secrets, the trial court could not award injunctive relief under another equitable theory once the plaintiff failed to prove its trade secrets case. Significantly, the Court stated that because "the drawings were not ultimately found to be trade secrets under the [UTSA] did not make the preemption clause inapplicable." This is the correct result, but by no means are other states in accord.

Employee Duty of Loyalty

In most states, an employee owes a duty of loyalty to an employer. This is different than a "fiduciary" duty, which is accorded somewhat of a special place in the law - reserved in the corporate context for senior officers, directors, and shareholders.

The stinger on duty of loyalty claims is the idea of salary forfeiture. That is to say, an employer may be able to clawback salary paid during a period of disloyalty. Easier said than done. A recent case out of Alabama demonstrates why. In AK Steel Corp. v. Earley, 809 F. Supp. 2d 1326 (S.D. Ala. 2011), the court granted summary judgment in favor of a claim made against several employees for breach of the duty of loyalty. The case was decided under Ohio law, which has adopted the "faithless servant doctrine." The doctrine allows for salary forfeiture only if the acts of disloyalty "permeated" the employee's service. In that case, the employer could not show any active competition prior to termination, meaning that the transfer of a few files did not rise of the level of pervasive disloyalty required for salary forfeiture.

On to Missouri and another duty of loyalty case, Western Blue Print Co., LLC v. Roberts, 2012 Mo. LEXIS 93 (Mo. Apr. 17, 2012). This case arose in a somewhat familiar fact pattern. Roberts was a branch manager for Western Blue, a document management service company. One of the largest clients of the company was the University of Missouri. After obtaining the university contract, Western Blue had to subcontract a portion of the business to a certified minority business enterprise. At this point, Roberts took an interest in an MBE contractor but never disclosed it to Western Blue. In fact, she was approached later about it and denied any arrangement with the subcontractor at all.

When the relationship fractured, Roberts actively worked for the subcontractor, orchestrated the mass exodus of Western Blue employees, recruited them to work for the subcontractor, and bid on - and won- the university contract. This resulted in Western Blue's closure of the branch office. Western Blue sued, won $600,000 in damages, and nearly $250,000 in legal fees. On appeal, the Supreme Court of Missouri reversed, holding Roberts was not a top corporate official of Western Blue and therefore not a fiduciary. Central to the Court's reasoning was the absence of any non-compete agreement between Western Blue and Roberts, and the fact that the knowledge she obtained was simply the product of what she naturally would acquire during the course of her job. For reasons I can't figure out, Western Blue abandoned at trial a separate claim for breach of the duty of loyalty, a duty which is ascribed to regular employees.

Given the facts, this is an unusual result. The Court carefully parsed certain facts to hold Roberts did not violate any pre-termination duty not to compete with Western Blue. It overlooked some essential facts that clearly suggested she was less than forthright and might have gained a head-start when working for the subcontractor. Had Roberts been bound by a reasonable restrictive covenant, the case would have turned out completely different. Or perhaps, Roberts never would have done what she did. To put it mildly, she found a narrow path - a very narrow path - to victory.

Economic Espionage Act

The Second Circuit overturned the conviction of former Goldman Sachs programmer Sergey Aleynikov in U.S. v. Aleynikov, 2012 U.S. App. LEXIS 7439 (2d Cir. Apr. 11, 2012). The man with the name similar to pick-your-Chicago Blackhawks-defensemen from the late '90s had been convicted under various federal statutes, including the Economic Espionage Act when he uploaded source code relating to Goldman's high frequency trading operations. Aleynikov took the source code with him to Teza Technologies in Chicago, where he more than doubled his salary. After conviction in the District Court, his prison term was set at more than 8 years. (Interestingly, there was related non-compete litigation in the Circuit Court of Cook County between Citadel Investment Group and Teza.)

The circuit court found the EEA did not apply, because Goldman's HFT system was not produced for or placed in interstate or foreign commerce. Goldman kept the system confidential and had no intention of selling it or licensing it to anyone. Therefore, by the terms of the EEA, the indictment was improper. The concurring opinion is interesting, as it suggests that Congress ought to revisit the EEA so that its terms reflect its intent.

No comments:

Post a Comment