Tuesday, November 25, 2014

2014 AIPLA Trade Secret Law Summit Is Nearing

For those attorneys who follow this blog, I encourage you to consider attending the American Intellectual Property Law Association's Trade Secret Law Summit. The event will be held on December 4 and 5 at Intel Corporation in Santa Clara, California. You still can register for this event, and you do not need to be a member of the AIPLA to participate.

Registration information is available at this link.

The program for this year, much like last, is simply outstanding. The complete CLE outline is available on the AIPLA's registration information page. If you read through the outline, it is easy to see why trade secret and non-compete lawyers should not miss this event.

I am pleased to be moderating the last session of the 2-day event, Perspectives from the Bench: How State and Federal Judges View the Growth and Scope of Trade Secrets Disputes. I will be joined by the Honorable James Ware (Ret.), who previously was the Chief Judge of the Northern District of California. Also on the panel is the Honorable James Kleinberg (Ret.), a former California Superior Court judge in Santa Clara, County.

Thursday, November 20, 2014

Supreme Court of Arizona Gives Trade Secrets Preemption a Narrow Construction

Perhaps the most boring question in all of trade secrets law generates a lot of commentary, particularly in the blogosphere.

The question is whether the displacement provision of the Uniform Trade Secrets Act applies to claims based on misappropriation of confidential information that isn't valuable enough to meet the trade secret definition. If that's not scintillating, I don't know what is.

If you can contain your excitement, know that courts take differing points of view on this and so the question is somewhat significant to nerds. I gave my view on this a few years back, summarizing the policy rationale for taking a broad view of preemption - one that would displace claims based on misappropriation of confidential information.

The Supreme Court of Arizona yesterday disagreed with me (who doesn't?) and found that a narrow view of preemption was appropriate, relying heavily on the text of the UTSA provision which states that preemption doesn't affect "other civil remedies that are not based on misappropriation of a trade secret." The case is Orca Communications Unlimited, LLC v. Noder, No. CV-13-0351. (This is the Scalia-Easterbrook-Garner school of textualism at its best, revealing just how influential that cadre has been at influencing law over the past 20 years.)

The defendant made some of the same arguments about the absurdity of narrow-form preemption that I have made before. There are many good reasons for broadly interpreting preemption, including some the Arizona court cited and rejected - the uniform structure the UTSA creates for dealing with claims of data misappropriation, the specter of greater punitive damages for misappropriating less valuable types of information. To me, the soundest rationale lies in the incentives that underlie preemption.

If parties have a common-law claim for misappropriation of confidential information, why would they subject themselves to having to prove that it's a trade secret? I cannot understand this. The remedies available to a trade-secret holder aren't materially more significant. The damages theories (aside, possibly, from a royalty-based theory) are not all that different than those found in tort law. But to prove the existence of a trade secret, you must show how the information derives value from being secret and rigorous security measures. Allowing a plaintiff to default to a common-law theory for virtually the same type of information would provide no incentive for a business to undertake secrecy measures.

Just as problematically, in many jurisdictions, this would enable a plaintiff to bring claims in the alternative (i.e., it's a trade secret, but if not, then it's confidential). This alternative pleading scheme, which narrow-form preemption openly invites, undermines the entire purpose of the displacement clause.

Tuesday, November 11, 2014

Unpacking Bad Faith

A very smart lawyer at a very large firm once told me something very convincing.

All the good stuff lies in the privilege log.

The notion of "bad faith" prompted this comment. And by bad faith, I generally refer to the defense perception that many competition cases simply are motivated by a piling on of litigation costs - usually from an established player onto a start-up or nascent rival. As bad faith is often the standard for fee-shifting - certainly under state trade secrets law - then the concept becomes important for building a defense.

The problem for many defense lawyers (and more importantly, their clients) is proving bad faith. The concept smacks of deception, and by its nature the source of its proof largely is outside the control of the defense. On rare occasions, the defense will uncover a smoking gun - this usually is an e-mail, by the way - or a document that suggests an improper purpose behind the lawsuit. That purpose would be to achieve something other than a victory on the merits or a legitimate settlement of a valid claim.

A problem that has vexed me for some time is how to unpack bad faith through discovery. It's a knotty issue, with proof often a patchwork maze of inferences here and there from poorly conceived claims or simple lack of proof. But even a crummy case on the merits might not equate to "bad faith."

Is there something else? Some other way to prove it?

I have talked before about lawyer involvement in perpetuating bad faith claims as a major issue that underlies competition lawsuits. Lawyers often assume their clients' identities and are complicit in maintaining claims that fill up the courts for no legitimate reason. Because competition disputes are amenable to discovery morasses, this is a serious issue. Another serious issue is incompetence. Competition law is not easy, nor intuitive. And many lawyers simply don't understand the law very well. Add to that the declining market for legal services, and attorneys able to grab a competition case see a source of fee revenue for the taking. It's a toxic brew.

So recalling what my colleague said about privilege, is there a way to circumvent it? There might be. It's called the "crime-fraud" exception. Lawyers and clients labor under a terrible misconception of privilege. It is the exception and not the rule, so it's carefully scrutinized and particularly favored. This is particularly so since it's antithetical to the goal of the adversarial process: to find out the truth when reaching a result.

The essence of the crime-fraud exception is fairly straightforward: a lawyer does not render professional services if she is assisting the client to perpetrate a crime or a fraud. In some places, courts give "fraud" a rather broad interpretation. It follows, then, that if a lawyer is facilitating a frivolous suit, then her discussions with her client about how to achieve this should be discoverable. This may loosely be called a "fraud upon the court" (though I recoil at that term), or something akin to fraud.

The procedural hurdle is that the party seeking discovery must advance a preliminary showing of bad faith. This is no small feat. But if a party can present this, then it may ask the court to review otherwise designated privileged material. This in camera review (likely, of attorney-client e-mails) will enable the court to act as a gatekeeper and ferret out truly privileged materials that don't further the fraud.

But communications where a client seeks counsel's assistance in perpetuating a frivolous claim are not privileged and should be disclosed. This rule makes sense when one considers that counsel have an ethical duty to the court, as well as her client. And it further makes sense when one realizes courts have the inherent authority to control their docket and advance cases towards a speedy, just resolution. If a lawyer is assisting a client perpetuate a nonsense claim, why should this help be immune from disclosure?

Tuesday, November 4, 2014

Aleynikov's Observations on Juries

Jurors called to serve look forward to the possibility of drawing an exciting (even if tragic) case.

Non-compete cases are not exciting.

At least by the average layperson's standard.

This is why the specter of a jury trial may cause parties to rethink whether to take the case to trial. From a plaintiff's perspective, it could fear that it will put the jury to sleep explaining a legitimate business interest and the importance of profit margins. And there is the almost inevitable risk that the jury will be flummoxed by an esoteric, confusing damages presentation. Defendants often harbor the same doubts about jury trials, because one or two bad facts could case a jury to form an opinion on liability quickly and then take the plaintiff's mere say-so as evidence.

Consider this from the trial of Sergey Aleynikov, as recounted in Michael Lewis's book Flash Boys: "...when [Aleynikov] looked over, he saw that half the jury appeared to be sleeping." Aleynikov, as we know, was the programmer who left Goldman Sachs' high-frequency trading desk for Teza Technologies - and, in doing so, brought on a slew of litigation that seemingly touched every jurisdiction on the East Coast. And Aleynikov's case had that dose of intrigue that most competition cases don't - computer code deposited in Germany and the specter of Wall Street trading.

Employers often combat the uncertainty of a jury trial with a contractual waiver (enforceable in federal courts and in most states) or a clause requiring the merits to be dealt with in arbitration. The former preserves the availability of appellate review, while the latter allows for companies to conduct their disputes in a quasi-private manner and with more control over the process.

An interesting question, which seems to have generated almost no decisions, is whether a third-party is bound by a jury trial waiver clause. Suppose an employee waives his right to a jury trial, but his new employer is a defendant on a related tort claim for inducing a non-compete violation. Can the plaintiff invoke the jury trial waiver against the third-party?

I don't think so.

Although there is some authority for extending choice-of-law and choice-of-venue clauses to non-parties, jury trial waivers seem different. For one, the right to a jury trial is embodied in the Constitution, though not incorporated to the States. In addition, state constitutions typically have some additional constitutional guarantee. Therefore, the nature of the right seems qualitatively different - even if for reasons that don't appear to extend beyond mere tradition alone.