Friday, June 30, 2017

The Reading List (2017, No. 22): The "Not Precedent Opinions Can Be Interesting" Edition

Non-Compete and Trade Secrets News for the week ended June 30, 2017

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LinkedIn "Solicitations"

From the Appellate Court of Illinois this week, we got treated to a non-precedential Rule 23 order that addresses a fertile area of non-compete litigation. What effect should courts make of LinkedIn invitations to a former employee's co-workers and do those invitations amount to improper "solicitation"?

The court in Bankers Life and Casualty Co. v. American Senior Benefits LLC, 2017 IL App (1st) 160687-U, says no. Justice Simon's order gives a nice summary of similar cases from various jurisdictions and notes that the issue of "solicitation" really turns on the content of the social media post, communication, or invitation to connect. In this particular case, the LinkedIn e-mails were "generic" and mentioned nothing about either the employee's past or current employer. Nor did the e-mails invite former co-workers to leave their job or view an employment opportunity posting.

The Defend Trade Secrets Act and "Inevitable Disclosure"

John Marsh of Bailey Cavalieri has a very insightful post on the Third Circuit's non-precedential order in Fres-Co Systems USA, Inc. v. Hawkins. The case was a typical one in the non-compete field. Sales executive with influence over key accounts bolts for a competitor and then gets sued.

After the district court entered a preliminary injunction in favor of the employer, the Third Circuit reversed and remanded for it to consider the injunction standard more fully. As John notes, however, some of the language in the Third Circuit's order was a little loose (at best) concerning the threat of "irreparable harm" posed by the employee's move to a competitor. In particular, some of the order's reasoning implicitly suggests "inevitable disclosure" may be grounds for enjoining conduct under the Defend Trade Secrets Act. But it never comes right out and says that.

I think there's a danger of reading too much into this non-precedential order. For starters, the court lumped together its irreparable harm analysis for all the substantive legal claims, appearing never to appreciate the limits on injunctive relief under the DTSA. (The court never cites or quotes the limitation at all.) It could have instructed the district court to reconsider the irreparable harm factor in light of the DTSA, but failed to do so. Opportunity missed. That said, the plaintiff moved as well under the Pennsylvania Uniform Trade Secrets Act, which does not contain any DTSA-like limits on injunctive relief. And to be sure, the employee's non-compete would provide a separate grounds on which to analyze irreparable harm.

The Hawkins order is available here.

Trade Secrets Damages

Quantlab Financial prevailed in the Fifth Circuit Court of Appeals, which upheld a jury verdict of $11.2 million stemming from a claim of trade-secrets misappropriation. The case arose before the financial crisis and concerned the then-nascent business of high-frequency trading. The facts sounded a familiar refrain, with the evidence demonstrating large-scale copying and appropriation of trading technology source code and improper computer access by insiders.

The Fifth Circuit's unpublished disposition is located here.

Nevada Changes Non-Compete Statute

Last year, the Nevada Supreme Court in the case of Golden Road Motor Inn v. Islam held that courts could not modify overbroad non-competes, a decision I analyzed at some length. The analysis endures; the rule doesn't. Effective June 3, 2017, Nevada has a new non-compete statute that requires courts to modify overbroad non-competition covenants - a wholesale abrogation of Golden Road Motor Inn. The new law seems to strike a more employee-friendly balance, however, in that it specifically provides that a covenant cannot restrict a former employee if a customer "voluntarily chose to leave and seek services from the former employee." That's a gaping carve-out, sure to invite fact disputes about whether the customer voluntarily left. In other words, Nevada places customer choice above any countervailing employer interest.

Russell Beck's Fair Competition Law blog has an analysis of the new law here.

The Non-Compete PR Crisis

The firm Butzel Long released a Client Alert (really, a white paper) that deconstructed a number of problematic non-compete cases involving low-wage or mid-tier employees. This terrific publication addresses the Jimmy John's, Amazon.com, and Goldfish Swim School cases and offers practical guidance about how these companies could have avoided the nightmare public-relations fallout. I highly recommend this release for any practitioner who works in the non-compete and trade secrets field.

Non-Compete Crackdown in Australia?

The Guardian reports on concerns that the use of non-competes is stifling innovation in Australia, noting the concentration of market power in select industries. The report notes the same general concerns that reform advocates in the United States have, with the most compelling concern being the declining number of start-ups. This concern is all the more acute as the large technology companies continue to expand their reach into non-traditional markets - Amazon's pending acquisition of Whole Foods simply the latest example.

Uber's "Reason to Know" of Trade-Secret Theft

Android Headlines reports that members of Uber's board saw evidence of trade-secret theft concerning Anthony Levandowski's alleged appropriation of LiDAR technology from Google/Waymo. Uber was required to file an accounting with the court disclosing the names of people who may have had access to the files at the heart of Waymo's case. Uber has resisted disclosing a critical due diligence report authored by a firm before it acquired Levandowski's start-up, which likely will color Waymo's theory that Uber had "reason to know" that Levandowski was using Waymo's materials on behalf of Uber. That "reason to know" standard is crucial if Waymo is going to hold Uber liable. This discovery dispute appears to be the make-or-break moment in the biggest trade-secret action of the past several years.

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I will be taking a few weeks off from updating this blog. See you in mid-July!

Wednesday, June 21, 2017

North Carolina's Odd Rule on Appealing Injunctions

Lawyers deal with rules that are substantive and procedural.

For the most part, substantive rules - those governing the merits of a claim - contain some flexibility. That is particularly true in non-compete cases, where the flexibility is a direct reflection on the fact-specific nature of each dispute. Bright-line rules don't work as well because they are subject to manipulation. That is, they run counter to the idea that judges must rule on each case according to the facts presented.

Procedural rules, however, benefit from rigidity. Take the rules concerning time limits on when a party must file a case or respond to discovery. Without bright-line standards, there are no rules for how to conduct the litigation. The whole system becomes a game.

One area of procedural law that is smartly inflexible is appellate jurisdiction.

For many years, courts have noted that clear jurisdictional rules are essential. The Supreme Court, for its part, has worked in recent years to eliminate holes in old case law suggesting that some cases are "practically" or "effectively" final for appeal purposes.

Rules of appellate jurisdiction are crucial in non-compete disputes. Why? Most cases are practically decided at the preliminary injunction stage. In federal court, a grant or denial or injunctive relief affords the litigants a right to appellate review, even if the action itself may result in a damages trial down the road. This basis for appellate jurisdiction - known to lawyers as an "interlocutory" appeal - is crystal clear and provided for by statute.

Not all State court systems follow the federal rules, of course. In Illinois, rulings on temporary restraining orders are immediately appealable. Not so in federal court. One particularly odd rule, though, comes from North Carolina.

There, appeals from interlocutory orders - which preliminary injunctions are, because they are not "final" - are allowed only if they deprive the appellant of a "substantial right that will be lost absent review before final disposition of the case."

North Carolina's rule, as applied to preliminary injunction orders, is hard to square with the common-sense proposition that, above all, jurisdictional rules must be clear to lawyers and litigants.

What, for instance, is a "substantial right"?

That issue has led to some strange decisions involving non-compete cases. For instance, the North Carolina appellate courts have found that bona fide non-competition clauses that bar work in an industry rise to the level of a "substantial right." But they also have found that restraints on working with customers (non-solicitation covenants) do not meet this standard. The idea is that these activity-based restrictions do not prevent a person from earning a living. They merely limit it.

But what if the individual's customer contacts are her stock in trade - the way she makes her living? How is an appellate court to make that decision in the context of a jurisdictional inquiry? In fact, a 2015 case called A&D Environmental Services v. Miller noted this very problem. The court dismissed an employee's appeal from a preliminary injunction order, which limited his work with certain customers. The rationale was that the order only limited his right to earn a living but did not prevent him from doing so. In a footnote, the court then stated the problem with this approach: "We do not suggest that an injunction which merely prevents a person from working with a defined group of customers could never affect a person's substantial rights."

Good luck figuring that out when deciding whether to appeal.

I have no idea why North Carolina courts would embrace such an odd jurisdictional regime, where the appellate court must examine the substance of an injunction order to evaluate the "substantial right" argument and then determine whether the appeal from that order was jurisdictionally sound. The court's work, by that point, is already done. Why not rule on the merits? The obvious danger in avoiding the merits is that by the time the case reaches true finality, the non-compete will by over and therefore moot.

Strangely, North Carolina's appellate jurisdiction analysis may actually incentivize employers to seek narrower relief. If an employer, for instance, has two different restraints to enforce, why go for the broader non-compete if you can foreclose immediate appellate review by enforcing through a preliminary injunction only a non-solicitation covenant? This decisional process, of course, depends on the strength of the evidence and what the employer is trying to protect. But the current appellate jurisdiction case law would seem to discourage enforcement of broader, market-based restraints against salespersons whose value to a third-party employer lies in her customer contacts.

To be sure, that is an odd way for appellate courts to handle non-compete cases and injunction orders. Jurisdictional rules - as opposed to substantive ones - are meant to provide firm, clear guidance. North Carolina's framework does anything but.

Friday, June 16, 2017

The Return of the Fourth Justice: My Concurring Opinion in BHB Investment Holdings v. Ogg

My dear readers may not realize that, despite not being a Michigan attorney, I recently sat as the Fourth Justice on the Court of Appeals of Michigan for the case of BHB Investment Holdings, LLC v. Ogg, or as it should be known for eternity the "Goldfish Swim School Case."

For reasons I haven't quite figured out, my concurring opinion is not available online. Nor does the official reporter appear to recognize my contribution to the Court. So I thought I'd repost my concurrence here.



BHG Investment Holdings, LLC
d/b/a Goldfish Swim School of Farmington Hills

v.

Steven Ogg and Aqua Tots Canton, LLC

No. 330045

Court of Appeals of Michigan

February 21, 2017


Vanko, J., concurring in the judgment and ruminating about other stuff.

"You know, we're living in a society !"
-- George Costanza (Seinfeld, multiple episodes)

I have an Uncle Frank (doesn't everybody?), who is as salt-of-the-earth as you can get. He built his own house, tinkers with small engines, and drinks beer at the Moose Lodge on Sundays. Uncle Frank understands things viscerally and intuitively, in a way that speaks to a man's soul. In other words, you can't bullshit the old curmudgeon. When I see him at family gatherings, he always wants to hear what "the bastard lawyers" are up to. But he says it somewhat in jest.

The analysis of this case is no more difficult than asking a simple question: What would Uncle Frank do?

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I know of two people named Steven Ogg. One is a character actor in TV serial dramas like The Walking Dead and Better Call Saul. The other - the defendant in this case - is a kid who works a job that pays him just enough that one day, if he's frugal, he might be able to buy a used scooter or rent a cheap apartment.

Ogg, a former competitive swimmer, teaches little urchins how to swim at a quaint little place called Aqua-Tots. I mean, seriously, how cute is that name? Unfortunately for Ogg, he used to work at Goldfish Swim School doing basically the same thing. For his work as an instructor, Ogg netted $10.50 per hour. At some point, Goldfish promoted him to a position called "deck supervisor," which sounds more walking around than swimming. For this step up the corporate food-chain, Goldfish upped Ogg's pay by $1.50 per hour. He must have celebrated with a small Slurpee.

Aside from paying Ogg what amounts to minimum-wage work, Goldfish had him sign a one-year non-compete agreement that said he couldn't teach tots to swim within a 20-mile radius. Goldfish later terminated Ogg - apparently deciding he wasn't valued enough. Ogg did what most enterprising young adults do. He found another job.

It was at that point that Goldfish lost its proverbial shit. Ogg did not - it turns out - earn his next meager paycheck by flipping burgers at McDonald's, folding shirts at the Gap, or futzing around with neighborhood landscape projects. He took the job at Aqua-Tots, which technically put him in "breach" of the 20-mile restriction Goldfish had him sign. The record does not reveal any dickering over terms or conventional contract negotiation.

For reasons that confound and amaze, Goldfish decided it was worth the money to sue and keep Ogg from working at Aqua-Tots. It was at this point that the clerk's office should have read the complaint and sent it to my Uncle Frank. He would have called up the courthouse and demanded someone toss the whole file in the shredder. No one would have been worse off had this occurred.

True, this sounds a bit third-world, but these are the times in which we live. Autocrats are celebrated these days. And a hell of a lot of lawyers' fees could have been saved. We'd end up at exactly the same place. Since Goldfish admitted that Ogg hadn't taken anything and hadn't tried to solicit parents of the kids he taught, this third-world approach would have made no difference. I could end my analysis right there.

But I won't. I'll go beyond the framework we should use - WWUFD? - and ruminate some more.

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The majority's opinion is kind of a boring, hackneyed read. Ultimately, it reaches the right result, but whatever happened to snark and sarcasm? Has it no place in appellate jurisprudence?

I give the majority some credit. It at least engages Goldfish's arguments and tries to reason through its motivations for filing suit. I would like to have seen some acknowledgment that Goldfish filed this suit not because Ogg was some grave competitive threat, but because it wanted to send a message to other competitors to stay away from its employees. In other words, I just would have liked to have seen more skepticism through the process of judicial engagement.

So I shall be that skeptic.

Goldfish claims that by using this non-compete agreement for instructors like Ogg it was trying to protect its "techniques and ways in which we do things in our curriculum." I've seen more specificity in a Trump policy proposal. What exactly is Goldfish talking about? Ogg, again a competitive swimmer, obtained the same kind of training and knowledge that any worker anywhere would gain just by working. Every business has "techniques" and "ways in which [they] do things." That hardly justifies the need to claim secrecy over everything or to prevent the movement of labor.

Goldfish even lets the parents observe these "techniques." True, most parents these days dick around on their cellphones while Little Johnny or Jane thrashes around in the water. I mean, what's more important than checking out what Aunt Judy has to say about planting her begonias? But Goldfish wants parents to know these techniques, presumably so they can work with their kids and help them learn. Without this transparency, the whole swim class would be kind of pointless. The curriculum is built on the opposite of secrecy.

The majority also skirts over an obvious point. Goldfish paid Ogg in such a way that undercuts any argument that it "invested" in some proprietary training. So we know that can't be what Goldfish is trying to protect. To be sure, there are a number of municipalities where Ogg earned less than the legal minimum wage. And the 20-mile restriction is awfully significant given that Ogg's pay scale may not have allowed him to cover the cost of driving outside the red zone. If I made as much as Ogg, I'd be eating bologna sandwiches and drinking Natural Light.

I am quite troubled by the majority's statement that it was "reasonable to prevent Ogg from using specific Goldfish methods for a one-year period." That doesn't at all square with its comment that those same instructional methods were not proprietary since they were displayed "in front of hundreds of people daily." The majority seems perfectly willing to accept the contract language for what it is, without evaluating whether the restriction itself protected anything the law deems reasonable. Since when was economic protectionism a legitimate business interest that warranted the court's indulgence?

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We could have made short work of this case. This whole proceeding is uncomfortable and annoying, like water in the ears or that lingering chlorine smell that won't go away. For its part, I hope Goldfish is embarrassed by this. We should have issued a more straightforward ruling that said its non-compete is categorically unenforceable against retail employees who can't possibly cause damage or further a corporate espionage scheme.

I fear we are entering a new realm in which employers will use restrictive covenants by asserting broad, vague interests that are wholly disconnected from the realities of the environment in which they operate. And by doing so, they can tie up competitors and employee in expensive litigation, the cost of which is disproportionate to any conceivable economic gain they ever could possibly obtain through a victory.

We have a name for this in the law: abuse of process. Uncle Frank has a name for this at the Moose Lodge: a pile of crap.

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For these reasons, I concur in the judgment and remain deeply skeptical that we live in an ordered, civilized society.

Friday, June 9, 2017

"Misappropriation" Is Where It's At

When I speak on trade secrets law - which is fairly often - I get skewered by some BigLaw types and self-described "experts" for suggesting lawyers need to focus on the element of "misappropriation."

So step back.

If a plaintiff files a lawsuit and argues trade secrets misappropriation, what does it need to prove?

Really stretching you, but here goes...

(1) That it has a trade secret; and
(2) That the defendant misappropriated it.

And that would be it.

My point is this, in a very general sense: As a defendant, I can't control what type of garbage the plaintiff pulls by claiming some very vague concept rises to the level of a trade secret - that is, it's so valuable that its competitors will gain a distinct economic advantage if secrecy is lost.

To parrot the person who currently is renting office space in the White House....trust me, folks. I have seen this so many times, I get physically ill. Misinformed plaintiff, bolstered by bumptious counsel, takes some "information" that couldn't possibly be valuable secret data and claims some monopolistic right to it against a former insider.

I know it's crap, and my client knows it's crap. But the legal system is not set up to get to a merits decision quickly on whether some concept, idea, or document is a "trade secret."

My other (also somewhat general) point is this: So listen, here's what I (and my client) can control. Whether the defendant engaged in an act of "misappropriation." Some know-it-all reading this post will rebut me and say that you can't determine whether there's been an act of misappropriation without knowing the trade secret.

To that, I say go find another practice area. I'll take my chances. Give me a judge or jury that uses common sense and won't be mesmerized by intricate (often contrived) theoretical arguments. All you're left with is trying to prove what your trade secret is and then dancing around the issue of how that involves my client. If my guy did nothing wrong, I'll win and you'll get your ass kicked again.

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What do I mean by misappropriation? Theft, basically. In plain English, did you take something with you or share something to someone else that breached a confidentiality obligation?

There is a statute, of course, so using the Uniform Trade Secrets Act, I'll condense what the law commissioners have to say. Basically, a plaintiff can prove "misappropriation" in one of three ways:


  1. Improper acquisition. This is just what it sounds like. You acquired a trade secret by violating some duty the law recognizes. This is often a contract - like a non-disclosure agreement - but it also means the general obligation of loyalty employees have to their employers. That means you can't take an engineering drawing, e-mail yourself some business plan, or access a computer to download source code to a thumb drive. Those are all affirmative acts that one engages in to "acquire" information that may be trade-secret level data.
  2. Improper disclosure. This, too, ain't that hard. A "disclosure" means that one with access to a trade secret tells someone else what it is. This could be a new employer, a potential business partner, or a vendor. The idea here is simple - the act of misappropriation involves some third-party, who in turn may be liable to the trade-secret owner if that third-party had reason to know something nefarious was going on.
  3. Improper use. A plaintiff also could try to show improper use of a trade secret. This one is harder to prove, and it's here where the "inevitable disclosure" theory often creeps into litigation. In reality, the catch-phrase "inevitable disclosure" was the wrong way to describe the theory from the beginning - it should have been the "inevitable use" doctrine. This branch of "misappropriation" is the toughest to resolve in discovery, because it often pits varying theories of what exactly the defendant is using against the breadth of what the plaintiff is trying to protect. An example helps. Suppose the plaintiff claims that a new, unreleased product in development constitutes a trade secret. What if the defendant leaves and develops his own product that may share some similar functionality or engineering concept, but that differs in significant ways from what the plaintiff had in development? Aggressive plaintiffs' lawyers always will conjure some narrative to implicate "improper use." But the defendant will usually have the equities and the optics on his side.
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Remember, too, that the available remedies often are directly linked with which branch of misappropriation is at issue. A case involving improper "use" is going to raise the specter of damages, whereas a quick injunction on improper acquisition or disclosure may mean that damages takes a back seat.

All that said, if you're a defendant or a defendant's counsel, focus on misappropriation. Doing so will allow you to shift the narrative and tell an understandable story to the court. You did nothing wrong regardless of what kind of story the plaintiff is telling about the value of its own information.

Friday, June 2, 2017

The Reading List (2017, No. 21): Levandowski's Gone

Non-Compete and Trade Secrets News for the week ended June 2, 2017

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Waymo v. Uber

We know what the lead story is: Waymo's suit against Uber. It seems every week produces new drama in the trade secrets case of the year. Why is it such a deal? We're talking about a technological development - self-driving cars - that may be among the most significant in the past hundred years.

Anthony Levandowski - the star engineer behind Waymo's self-driving car technology - has been fired from Uber. Presumably, his termination is a direct result of Judge Alsup's rulings and orders compelling Uber to account for the 14,000 files Levandowski apparently took before leaving Google. That spelled a clear division in where Uber and Levandowski were headed with this dispute.

For a thorough deconstruction of Levandowski's firing, I highly recommend reading John Marsh's excellent analysis. I couldn't do it better and won't try.

Trade Secrets Injunctions

One of the more vexing procedural questions in trade secrets cases is the extent to which wrongful conduct will be enjoined. To be sure, that was one of the flashpoints of Judge Alsup's ruling that effectively barred Levandowski from working for Uber in any competing capacity. But it didn't strictly limit what Uber could do to develop self-driving technology independent of Levandowski.

On a far more mundane level (all cases are more mundane) is Systems Spray-Cooled, Inc. v. FCH Tech, Inc., No. 16 CV 1085, out of the Western District of Arkansas. There, the court grappled with how much competitive activity to enjoin after two ex-employees had misappropriated certain design drawings and pricing information. The misappropriation finding came as a direct result of the defendants' destruction of hard-drive evidence. Without a governing non-compete, the court was faced with how far to extend a trade-secrets injunction. And here, given the evidence destruction, the court carved a middle ground - barring not only the "use" of certain information (assuming it was still available after the destruction) but also some business activity that arose from the misappropriation itself. The court would not go so far as to prohibit the defendants from working in a competitive industry, but did prevent them from using certain designs to develop competing products.

The price for a broader injunction? A $5 million bond.

David Nosal Heads to Washington?

So what's up with this guy? Besides Levandowski and Sergey Aleynikov, few names have become more household in the trade-secrets arena than David Nosal. The ex-Korn/Ferry executive was convicted under the Computer Fraud and Abuse Act for obtaining the password of a current employee. That allowed Nosal and others to access a database containing valuable information on executive search candidates. (For in-depth coverage, read Professor Orin Kerr's analysis here and a lengthier piece in the Harvard Law Review.)

After Nosal's petition for en banc rehearing was denied by the Ninth Circuit, he appealed his CFAA conviction to the Supreme Court. Representing him? Neal Katyal of Hogan Lovells, the former Solicitor General and premier appellate litigator. Nosal's petition for writ of certiorari was filed May 5.

How much does a typical non-compete case cost?

Aside from "is this thing enforceable?" the question I get asked most is "what's this gonna cost?"

What am I referring to? Non-competes and non-compete suits, of course. No easy answers there, because there are a lot of variables at play. Those variables range from the plaintiff's attorney (competent, middler, or bumptious fool) to the scope of the wrongful conduct alleged. Generally, if the case involves a claim of trade secrets misappropriation with what appears to be some kind of a physical taking of information, the litigation is hard to budget.

But what about a garden-variety non-compete case, about a customer here or there or perhaps even a dispute over the type of work the employee is engaging in? Hard to piece together data, but an unreported case out of Washington noted the prevailing employee spent about $53,000. We know that because the appellate court upheld the fee award. That amount seems about right for a case that does not proceed to trial but instead gets resolved on summary judgment.

The case is Gaddis Events, Inc. v. Wu, No. 75227-8-I, and it's available here.

Friday, May 26, 2017

The Defend Trade Secrets Act Giveth…But Very Little

If you jump to PatentlyO, you’ll read a great column by Dr. Maxwell Goss – a business litigator like me. He offers his thoughts on the scope of “inevitable disclosure” injunctions under the Defend Trade Secrets Act of 2016 (DTSA) and argues that the theory “lives on under the DTSA, albeit in a diminished form.”

This is a pretty hot topic in the area of trade secrets law. Congress passed the DTSA last year and limited the circumstances in which courts could enjoin activity that impacts one’s ability to enter into or maintain an employment relationship.

Dr. Goss outlines this limitation in his discussion, so I won’t repeat it. The upshot is this: under the DTSA, a court can enjoin an employee’s work conduct, or even her ability to work for a competitor at all, if she has engaged in actual or threatened trade secret misappropriation. But it cannot impose limitations on that person’s job merely because she may know of, or have been exposed to, particularly sensitive information.

With the DTSA having recently celebrated its one-year anniversary, we have seen just a trickle of cases to this point. None are all that earth-shattering. Dr. Goss discusses one of the more significant ones—if only because our pool of candidates is so shallow—and it’s the first to discuss the inevitable disclosure theory of misappropriation in some depth.

The case, Molon Motor and Coil Corp. v. Nidec Motor Corp., comes from the Northern District of Illinois (the leading jurisdiction for DTSA filings). Judge Edmond Chang allowed a DTSA claim to proceed based, at least in part, on the plaintiff’s contention that a corporate defendant would inevitably disclose Molon Motor’s trade secrets. Factually, the case follows a painfully familiar paradigm in trade secrets litigation: suspicious pre-termination activity by an ex-employee in accessing and copying sensitive data off a computer system. The complaint offered nothing more. Molon Motor alleged quite simply that, through its hiring of the ex-employee, “Nidec Motor’s use of the trade secrets can be inferred under the ‘inevitable disclosure doctrine.’” (Dkt. Entry 64, at ¶ 67).

In discussing the availability of injunctive relief under the DTSA, Dr. Goss states that “an injunction that does not impact employment may still be based on inevitable disclosure.” This may refer to central fact in the Molon Motor case and which it’s not going to upend anything in the DTSA’s textual limits: the employee isn’t a defendant. Molon Motor only sued its direct competitor.

True, it seeks injunctive relief, but not in a way that would limit the employee’s work with Nidec Motor or even in a manner that would impose stringent conditions on that work. Therefore, the DTSA’s limitations on injunctive relief do not apply at all given the relief Molon Motor seeks. Those limitations speak only of a court’s ability to either (a) “prevent a person from entering into an employment relationship,” or (b) limit the “conditions placed on such employment.”

Another way to look at it: the claim in Molon Motor is not really based on inevitable disclosure by the person with original access to the trade secrets, but rather inevitable use by those to whom he allegedly distributed them. Therein lies the problem with the inevitable disclosure theory under the DTSA: if there was disclosure, then the conduct amounts to actual misappropriation. The concept of “inevitability” then disappears from the equation when actual use is proven.

So what are we using inevitable disclosure for? A gateway to discovery? Apparently, yes. A suit based on suspicion. Troubling.

After one year, where do we stand with the DTSA? Inevitable disclosure injunctions are nominally available in one of three factual circumstances:

  1. Where the plaintiff seeks to enjoin use of trade secrets in a way that does not independently restrain its former employee’s work activity;
  2. Where an ex-employee is not joining another company but instead starts her own business, such that the relief would not prevent her from entering into an employment relationship;
  3. Where the plaintiff claims inevitable use of trade secrets following a failed business transaction in which the putative acquirer learned of those secrets during due diligence.
At least as of now, plaintiffs can gain federal question jurisdiction under the DTSA and seek broader injunctive relief under a State-law UTSA claim (at least in venues like Illinois, which currently recognize inevitable disclosure injunctions). But in those States (like California or Maryland) that reject the inevitable disclosure doctrine, the DTSA offers no gateway to broader injunctive relief.

Thursday, May 25, 2017

The Reading List (2017, No. 20): Are Prince's Unreleased Songs "Trade Secrets"?

Non-Compete and Trade Secrets News for the week ended May 26, 2017

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The Trade Secret Status of Prince's Unreleased Recordings

Prince's death last year unleashed an unfortunate - and somewhat predictable - wave of litigation in his home State of Minnesota.

One lawsuit involves a claim of trade secrets misappropriation. The nature of the action? A sound engineer's possession of five previously unrecorded Prince songs. Prince's estate sued to enjoin the promotion and distribution of those recordings. The engineer signed a Confidentiality Agreement providing that any recordings were the "sole and exclusive property" of Paisley Park Enterprises, a corporation Prince owned while he was alive. The five songs were recorded and edited between 2006 and 2008, long before Prince's death. Around this time, the engineer had stopped working with Prince.

After Prince's estate learned that the engineer was planning to release one of the recordings, it sued and sought both possession of all recordings and a temporary restraining order barring their release. The court ultimately issued a temporary restraining order in favor of Prince's estate and Paisley Park. But the claim to trade-secret protection over the recordings failed.

Though the recordings themselves were kept secret, that alone was not enough to vest them with trade-secret status under Minnesota law. The court stated that "[n]o other artist or record company could take market share from Paisley Park Enterprises by discovering the contents of the disputed recordings." Though the recordings unquestionably had economic value, that value did not derive from their secrecy; rather, the value came from Paisely Park's exclusive right to sell them to the public.

Here is a link to the district court's opinion.

Stryker Wins Sixth Circuit Appeal

Back in February, I noted the significance of Stone Surgical LLC v. Striker Corp., at least in the sense that the Sixth Circuit appeal from a jury verdict raised an interesting choice-of-law question. The dispute centered on a non-compete with a Michigan choice-of-law clause. But the relevant conduct involved a Louisiana salesman who had Louisiana contacts. Given that State's pro-employee stance towards non-compete agreements, the employee (Ridgeway) had a good argument that applying Michigan law would violate Louisiana public policy.

But the Sixth Circuit - though acknowledging it was a fairly close question - found that Louisiana's interest was not materially greater than Michigan's. In other words, though Louisiana had an interest in protecting its residents from unfair and overbroad non-compete agreements, the court had to weigh the employer's interest in protecting its economic rights against a breach. And on that score, it saw no error in the district court's conclusion that Louisiana's interest was not significantly greater. The Michigan choice-of-law clause applied, and the jury's verdict against Ridgeway was upheld.

Here is a link to the Stone Surgical opinion.

Baseless Suits as a "Deceptive Trade Practice"

Defense strategies for fighting frivolous lawsuits generally are fairly limited. Counsel always have the ability to seek fees under Rule 11 or state-law equivalents if the suit is groundless. Most trade-secret statutes have "bad faith" fee-shifting clauses. Those are a tough sell in most suits. In other cases, business corporation act indemnity provisions may give rise to broad fee-shifting. And, of course, prevailing-party clauses that allow for winners to obtain fees may provide relief.

But are there other grounds for prevailing defendants to seek legal costs? The options are out there. I was interested to read an Order out of the Eastern District of Louisiana in a case called Byram Healthcare Centers, Inc. v. Rauth, No. 16-16854. In that case, the court allowed a defendant to counterclaim against her ex-employer for seeking to prevent her from working for a competitor. The legal basis? The state's Unfair Trade Practices Act, which allows a person to bring an action if she suffers "any ascertainable loss of money or movable property, corporeal or incorporeal, as a result of the use or employment by another person of an unfair or deceptive method..."

The gist of the opinion is that misuse of the judicial process itself can be a deceptive trade practice. Some state-law interpretations of the abuse of process tort would say, in essence, the same thing. But state trade practices statutes often provide for mandatory fee-shifting. This is a very creative use of state law by the employee's counsel to gain leverage in a case where the employer, even on a flimsy case, holds all the leverage simply because it is able to bear the cost of litigation.

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It's pretty hard not to read the New York Times and the Washington Post these days, a journalistic battle that illustrates the profound benefits of competition. But the NYT has gone well past all things Russia and has published a series of pieces concerning non-competition agreements. The latest comes from Paul Krugman in an opinion piece tilted "The Unfreeing of American Workers." This article discusses the shackling of employees due to the unreasonable proliferation of non-competes and the irrational linkage of health care to employment. Krugman even manages to work in a reference to Russia - noting American workers are "yoked to corporate employers the way Russian peasants were once tied to their masters' land."

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The Waymo-Uber driverless car technology fight continues to dominate the news. Jonathan Pollard takes an in-depth look at the latest developments, including Waymo's "loss" at not obtaining a broader injunction to stop Uber from pursuing its competing technology. In his usual candid style, Jonathan thinks Uber's lawyers are getting the better of their counterparts at Waymo.

For background on the man at the center of the trade-secrets case of the year, I recommend the Wall Street Journal profile on Anthony Levandowski and his rather unconventional tenure at Google.

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Russell Beck's Fair Competition Law blog discusses an amendment to the Texas Uniform Trade Secrets Act. The amendment does not allow for a trade-secrets injunction that prohibits a person from using his general skill, knowledge, and experience acquired during employment. That language helps, but it still falls short of what is needed - a clear ban on so-called inevitable disclosure injunctions.

Eric Ostroff has an excellent practical piece for lawyers who represent clients in trade-secrets suits. The gist: as an ethical matter, they probably need to encrypt e-mails that refer to the trade secrets. The American Bar Association's opinion on encryption only formalizes what a lot of us have been discussing for sometime, particularly given law firms' obvious status as targets for hackers.

Dechert has a lengthy analysis, in case summary form, of the Ninth Circuit's opinion in United States v. Liew. This matter arose of the conviction of Walter Liew under the Economic Espionage Act arising out of his theft of certain trade secrets of DuPont and his apparent agreement with the Chinese government to supply it with certain technology for titanium dioxide. Confirming the correctness of my decision never to eat Oreo cookies, titanium dioxide is the pigment that makes the center of the Oreo white. Almost as troubling as what Liew did.

Michael Starr of Holland & Knight discusses the Molon Motor case, about which I wrote last week, and its preliminary ruling that an inevitable disclosure claim withstood a defense motion to dismiss. Despite some scuttlebutt, Molon Motor does nothing to pierce the DTSA's ban on inevitable disclosure claims in the employment context. We lawyers tend to overread cases from time to time. The upshot is this: inevitable disclosure claims, even in States that recognize the theory, are incredibly hard to pursue and by no means give an employer a clear path to injunctive relief. Without some evidence of bad-faith conduct giving rise to an actual threat, they almost always fail.

Friday, May 19, 2017

The Reading List (2017, No. 19): The NYT (Again), More Uber, and One Year of the Defend Trade Secrets Act

Non-Compete and Trade Secrets News for the week ended May 19, 2017

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After two weeks, a lot to catch up on...

Abuse of Non-Competes

The big newspaper story on non-competes came in the Saturday New York Times, which discussed the proliferation of non-compete agreements across a range of industries and job positions. The article highlights lawyers' seemingly insatiable appetite to pursue opportunistic litigation at the expense of workers' careers - presumably just to meet their own individual billable-hour budgets. Lawyers are not mouthpieces for their clients' irrational behavior. They have obligations to the court and their adversaries - even if 90 percent of the dolts out their practicing law believe it or not. I certainly hope many of my professional colleagues would read this article and then look at themselves in the mirror for a change.

On a related topic, Jason Shinn has a great post in his Michigan Employment Law Advisor that discusses the need to address non-compete overreaching through enhanced fee-shifting opportunities. Jason feels that a bad-faith fee-shifting clause, akin to what trade-secret law generally allows, would help deter opportunistic non-compete cases. I agree, but of course would like to see a more flexible standard that looks at the objective speciousness of the suit (or threat to sue) rather than one focused on the plaintiff's state of mind.

Waymo/Uber Trade Secrets Litigation

The big litigation story, once again, involves the trade-secrets suit between Google (really, its Waymo unit) and Uber over driver-less car technology. At the epicenter is Anthony Levandowski, who on his way out of Google downloaded 14,000 documents to his personal computer. That is the heart of Waymo's trade-secret claim, even though Levandowski himself is not a defendant in the case. Last Thursday, Judge Alsup issued an Order of Referral - a rare step in civil trade secrets cases - in which he referred the matter to the United States Attorney for possible criminal investigation.

Judge Alsup also entered an order on Waymo's application for interim relief. The order grants partial injunctive relief in Waymo's favor, but does not halt Uber's self-driving car operation. The trade secrets aspect of the order is a tough read, because much of the analysis is redacted. However, the court did bar Levandowski from working on the LiDAR technology. As the court notes, Uber had already removed Levandowski from this work so the balance of harms in granting the narrow(er) injunction tilted heavily in Waymo's favor.

The Defend Trade Secrets Act - Year 1 in Review

We recently passed the one-year anniversary of the Defend Trade Secrets Act's enactment. And predictably, there is no shortage of first-year developments. Greenberg Traurig published a lengthy piece which has some interesting commentary specific to California suits. It also provides a nice comparison of the DTSA and the state-law Uniform Trade Secrets Act.

Paul Mersino of Butzel Long in Detroit wrote a nice one-year summary piece in Crain's Detroit. Paul litigated and prevailed on one of the first applications for an ex parte seizure order -  the most noticeable feature of the DTSA.

A Latham & Watkins Client Alert outlines "5 Lessons Learned as the Defend Trade Secrets Act Turns One." This commentary focuses mainly on the activity to date concerning ex parte seizure order applications, as well as the litigation surrounding acts of misappropriation that pre-date the statute's enactment but continue on past it.

The most interesting anniversary post, though, comes from the PatentlyO Blog, which breaks down the analytics concerning one year of DTSA claims. Notably, the Northern District of California and the Northern District of Illinois have the highest concentration of DTSA suits. The author, Professor David Opderbeck, surmises the prevalence of financial institutions in Chicago may be the cause for Illinois' surprise appearance on the list. It certainly isn't our boom in population growth...

Illinois Inevitable Disclosure Opinion

Maxwell Goss published a guest column on PatentlyO about a new case in the Northern District of Illinois called Molon Motor and Coil Corp. v. Nidec Motor Corp., No. 16 C 03545. Goss concludes that Judge Chang's opinion in Molon Motor may open the door a bit for courts to recognize "inevitable disclosure" under the Defend Trade Secrets Act. That would appear to run counter to the text of the DTSA, which generally prohibits injunctive relief prohibiting a person from entering into an employment relationship and which bars limitations on employment based solely on what the person knows. Goss tries to reconcile Judge Chang's opinion with the DTSA's limitations on injunctive relief by claiming that the court did not deal with a motion for preliminary injunction and instead dealt with a motion to dismiss.

I think there's a danger of overreading the Molon Motor opinion. Rather than deconstructing the procedural posture of the case, it seems much more straightforward to just recognize that the plaintiff filed suit under both the DTSA and the Illinois Trade Secrets Act. At least as of now, a state-law claim can proceed under the inevitable disclosure theory. The court's commentary concerning the DTSA is limited to a separate issue in the case - whether the act of misappropriation occurred before the law went into effect. It simply never analyzes the limitation on the injunctive relief available under the federal claim.

Eventually, it will be interesting to see if Illinois courts re-evaluate the inevitable disclosure doctrine. If not, we'll have an odd mix of federal and state claims where inevitable disclosure injunctions are available under one type of claim but not under another - without any real meaningful distinction in the statutory language enabling such injunctions.

Thursday, May 11, 2017

Trade Secrets and Anti-SLAPP Laws: A Surprising Texas Decision

In recent years, States across the country have enacted Citizen Participation Acts, or as they're commonly known, "anti-SLAPP" statutes. The term SLAPP refers to "strategic lawsuits against public participation." Generally, they are meant to provide a defendant with an expedient way to dismiss a meritless lawsuit brought because of some governmental petitioning activity or due to the exercise of free-speech rights. Crucially, the statutes shift the burden to the plaintiff to demonstrate some factual merit to the case and then, assuming the motion to dismiss is successful, mandate an award of attorneys' fees to a defendant.

Trade secrets lawsuits are not thought to be the foreground for anti-SLAPP suits. Still, they broadly implicate associational activity, in that individuals' rights to associate with co-workers or pursue an occupation can be impacted by frivolous lawsuits. In this regard, the interplay between the text of anti-SLAPP statutes and trade secrets claims can generate considerable tension.

Historically, courts have been reluctant to extend anti-SLAPP protection to defendants in trade secrets action. In California, for instance, the Court of Appeal has held that the State's anti-SLAPP law did not include a trade secrets claim because the conduct complained of did not implicate a person's rights of petition or free speech in connection with a public issue.

Illinois, in recent years, has limited its Citizen Participation Act. The Supreme Court, for instance, appeared to add words to the plain language of the statute, effectively requiring defendants to show that an action "solely" was brought in retaliation for protected speech. As a result, lower courts have not necessarily focused on the underlying conduct of the defendants - which should be the focus an anti-SLAPP inquiry - but rather whether the plaintiff had some legitimate intent in bringing the claim.

In that wake, the Texas Court of Appeals last week applied its Texas Citizens Participation Act ("TCPA") in a way that nominally affords trade secrets defendants with additional protection. In Elite Auto Body LLC v. Autocraft Bodywerks, Inc., the court held that the TCPA may enable a trade-secrets defendant to bring an early motion to dismiss. Crucial to the court's ruling was the protection afforded under the statute to individuals "exercise of the right of association." The TCPA defines that to include: "a communication between individuals who join together to collectively express, promote, pursue, or defend common interests."

The court rejected the plaintiff's argument that some constitutional gloss must be applied to the TCPA's definitions, with the opinion providing a fairly stark example of how textualist judges analyze statutory provisions. In other words, the "communications" that form an associational right (for TCPA purposes) need not touch a matter of public concern - because nothing in the statute says that.

The case may be jarring to some plaintiffs who seek redress for legitimately unfair competition. But the TCPA would allow for them to meet their burden of establishing the factual basis for the lawsuit, just at an earlier time than many plaintiffs would prefer. Conversely, it could provide wrongly sued defendants an early means by which to extricate themselves from suit - with a fee award in tow.

Props, of course, to defense counsel for their excellent advocacy here. It's yet another example of how defense attorneys must get creative in stopping opportunistic, competitive litigation by exploring ways to stop abusive discovery and shift legal fees.

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Next week, I'll summarize the Ninth Circuit's important decision in United States v. Liew. And then in a few weeks, I'll return with my weekly recap, The Reading List.

Friday, May 5, 2017

The Reading List (2017, No. 18): Orly Lobel's NYT Op-Ed

Non-Compete and Trade Secrets News for the week ended May 5, 2017

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The New York Times Op-Ed

Orly Lobel, the author of Talent Wants to be Free, had a lengthy op-ed published yesterday in the New York Times, titled "Companies compete but won't let their workers do the same." For the most part, the editorial sounds the same cautionary tale as does her terrific book. It updates its analysis with the 2016 White House Call to Action and some legislative efforts underway to curb the misuse of non-competes. But its conclusions are largely the same.

In this particular area, Professor Lobel is one of the foremost thought-leaders and influential scholars, along with Evan Starr, Matt Marx, and Norm Bishara. Although I highly recommend Professor Lobel's scholarship and writings to anyone who is interested in labor mobility, one particular point she made in Talent Wants to be Free stuck with me more than any other. It's the concept of "embedded knowledge" and how it can bridge the often confusing gap between protected trade secrets that belong to the company and unprotected skills that belong to an employee.

For more on this topic, see my post from March of 2014.

Waymo v. Uber Update

Every day sees a new twist and turn in the self-driving car dispute between Waymo (an Alphabet affiliate) and Uber. Reuters reports on the court's remarks that Waymo lacks a "smoking gun" concerning Uber's supposed use of any documents taken by Anthony Levandowski. But he apparently is still considering an injunction against Uber. The article also notes Levandowski invoked the Fifth Amendment privilege against self-incrimination during his deposition, which his earlier motions suggested would happen.

On that score, the New York Times reported late last week the Levandowski is taking a hiatus from working on certain technology while the lawsuit remains pending.

Friday, April 28, 2017

The Reading List (2017, No. 17): Non-Competes When the Agreement Expires

Non-Compete and Trade Secrets News for the week ended April 28, 2017

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Non-Competes in Expired Employment Agreements

The case of Metallico Pittsburgh, Inc. v. Newman from the Superior Court of Pennsylvania addressed a question that I have confronted on at least 5 or 6 occasions. What happens when a term employment agreement (say, for three years) that contains a non-compete expires, but the employee stays on in an at-will context? The basic answer is that it depends entirely on the contract language and whether the non-competes start running once the contract is over or once the relationship is over. In Metallico Pittsburgh, the non-competes ran once the relationship ended so the employee's transition to at-will employment did not trigger the time period. Several years ago Illinois courts addressed a case similar to Metallico Pittsburgh and reached the opposite result. But the cases are consistent. The Illinois case involved an agreement that was worded much more favorably towards the employee.

The decision in Metallico Pittsburgh is available here.

Continuing Use Claims under the DTSA


The Defend Trade Secrets Act has generated a fair amount of case law about whether the statute applies to conduct occurring, at least in part, before it went into effect last May. The latest case comes from California, and involves the theory of misappropriation based on improper use of a trade secret. The use prong - as opposed to improper acquisition or disclosure - is more nebulous as far as the DTSA is concerned. Acquisition is usually a discrete event. Disclosure may not be, but it too is usually something that a plaintiff can pinpoint. Use, however, is tough to nail down. Use of a trade secret can occur systematically - continuously from the time the secret is acquired until it's enjoined.

That raises a knotty issue. If the same use-based conduct occurs before and after the DTSA's effective date, does the plaintiff have a federal claim. The district court in Cave Consulting Group, Inc. v. Truven Health Analytics Inc. said no and dismissed it. Applying that court's reasoning, the post-enactment use of the trade secret must be different than what occurred before the law went into effect.

The decision is available here.

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Russell Beck's Fair Competition Law blog has available an updated "Trade Secret and Noncompete Survey -- National Case Graph 2017." The graph has helpful data to show the trends in reported cases. One thing to consider: the rise of private arbitration may not reflect the full scope of how much this type of litigation has grown.

Ever curious to know which States are most and least employer-friendly when it comes to non-compete enforcement? Take a spin through an old favorite of mine, Fifty Ways to Leave Your Employer: Relative Enforcement of Covenants not to Compete, Trends, and Implications for Employee Mobility Policy. Norman D. Bishara wrote this article in 2011 and it graphs the States' enforcement trends. Though the study is now a few years old, I doubt the findings would change significantly. Even in those States with legislative changes (Georgia, Utah), the changes are too new to be statistically important to this research compilation.

Friday, April 21, 2017

The Reading List (2017, No. 16): DuPont Suffers Another Theft

Non-Compete and Trade Secrets News for the week ended April 21, 2017

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DuPont Employee Charged with Trade Secret Theft

No company has had bigger problems with trade secret theft than DuPont. And this problem is not ending anytime soon. The latest alleged misappropriation arises out of New Jersey and has resulted in a criminal complaint against retired chemical engineer Anchi Hou. The facts follow a familiar pattern, if they turn out to be true. Hou allegedly downloaded 20,000 files on DuPont's flexographic printing plate technology before his retirement. Chemical and Engineering News reports on the federal charges. A copy of the Criminal Complaint is available here.

Texas Trade Secrets Fee Boondoggle

A while back, I wrote a brief snippet on an absolutely bonkers trade secrets case in Texas called M-I, LLC v. Russo, where a jury found that an employee had failed to comply with a confidentiality agreement and awarded the ex-employer $500,000. But the same jury found the employer pursued a trade-secrets claim in bad faith and awarded the defendant $200,000 in fees. As one might expect, the lawyers had sumpin' to say 'bout that. A Law360 article by Michelle Casady details the trial judge's exasperation with both sides and his feeling that the whole lawsuit was a "waste of time." This post is definitely worth a read to understand how many judges feel about petty competitive lawsuits that seem only to benefit the lawyers.

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Seyfarth Shaw's Trading Secrets blog has an excellent summary of the trade-secret status afforded customer lists. This particular category of claimed trade secrets generate a high-volume of lawsuits, particularly in the employment context. Courts' treatment of customer lists is highly case-specific because there are so many countervailing arguments. It's crucial to show an act of misappropriation, such as an improper physical or electronic taking of some information.

Automaker Tesla has settled its non-solicitation and trade secrets suit with ex-program manager Sterling Anderson. Anderson was instrumental in developing Tesla's auto-pilot system and allegedly downloaded a number of documents to his laptop upon departing Tesla for Aurora Innovation. Apparently, the settlement was non-confidential, as several outlets (including Fortune) report that Tesla will receive a $100,000 payment and some ongoing ability to audit Aurora Innovation's intellectual property. Out with a whimper, in other words.

Eric Ostroff has written a nice post about a comical incident of trade-secret disclosure by the Orlando Magic, when it tweeted out a picture of a whiteboard listing targeted players it may want to acquire. This proves that the Magic are still incompetent in so many ways.

Law360 reports on a newly-filed case in Illinois state court in the fragmented and highly competitive custom suit industry. It apparently arises out of an ex-employee's departure from Daniel George and new position with ESQ Clothing. According to the report, the employee - Grant McNamara - worked at Daniel George for only a few months but was bound by a fairly broad non-compete. The complaint also appears (from the report at least) to claim "inevitable disclosure" of trade secrets. A few months' employment seems like a fairly weak starting point on which to base an inevitable disclosure. Then again, by definition, they're all weak.

In case you haven't heard, Bill O'Reilly is out at Fox News after the (delayed) fall-out from over a decade's worth of sexual harassment accusations and settlements. The Hollywood Reporter says that O'Reilly's severance agreement terms aren't yet known but that "a non-compete clause will be among them." This is one instance in which I'm all in favor of strict enforcement - in the unlikely event it would ever become necessary - without any regard for a balancing of competing interests.

Utah Business had a terrific article this week on how Utah employers perceive and use non-compete agreements. The article cites a number of statistics that likely parallel the experiences of employers in other States. Utah passed a more restrictive law last year that curtailed the permitted scope of non-compete agreements and enabled employees to obtain attorneys' fees in certain actions.

Finally, Cara Bayles has a Law360 piece on Anthony Levandowski's appeal of an adverse discovery ruling in Waymo LLC v. Uber. Levandowski actually filed a motion to stay entry of the April 10 Order with the Federal Circuit (not the Ninth). I wrote last week about this April 10 discovery order. In general, it concerns the Fifth Amendment issue Levandowski raised concerning Uber's production of a privilege log that would detail some allegedly misappropriated Waymo trade secrets.

Thursday, April 13, 2017

The Reading List (2017, No. 15): Trade Secrets Theft and the Fifth Amendment

Non-Compete and Trade Secrets News for the week ended April 14, 2017

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The Fifth Amendment and Document Production

The Fifth Amendment, and its guarantee against self-incrimination, plays a role in civil litigation and certainly in trade-secret suits. Claims of theft implicate criminal prosecution both at the federal and state level. And while many prosecutors would decline to get involved in a garden-variety civil dispute, the Sergey Aleynikov and David Nosal experiences we have seen suggest that any line-drawing efforts between civil and criminal fact-patterns are tough for anyone to draw. When it comes document production, the general rule is fairly straightforward: the mere act of producing documents (think stolen plans or diagrams) may be a testimonial act for Fifth Amendment purposes. It may, to that end, be an admission that a person has documents that another claims were stolen.

The big trade secret case of the year is in the Northern District of California between Waymo and Uber. And it centers largely on Anthony Levandowski's alleged downloading of 14,000 documents. The case has taken on a life of its own, with twists and turns arising nearly every day on a host of substantive and procedural issues.

One particular filing of interest, though, is Levandowski's effort to avoid having Uber disclose detailed information about the allegedly downloaded documents. The unusual part of Levandowski's motion is that it does not come at the document production stage; instead, he attempted to claim Fifth Amendment rights in Uber's production of a privilege log concerning a particular "due diligence report" that related to Uber's acquisition of Levandowski's company after he left Waymo.

Levandowski's brief is an interesting take on the Fifth Amendment and the testimonial act of document production. It touches, crucially, on issues of attorney-client and common-interest privilege, given a joint defense arrangement between Levandowski and Uber. Here, Levandowski is trying to say that the joint defense between he and Uber allow him to step into the shoes of Uber and prevent it from disclosing details on a privilege log about the due diligence report. Note that Levandowski is not a party to the Waymo suit, but the conduct that is most relevant involves him directly and the allegedly mass download of Waymo materials. Levandowski's brief is available here.

Yesterday, Judge Alsup denied Levandowski's motion, holding that compelling Uber to produce a conventional privilege log would not violate Levandowski's Fifth Amendment rights. The decision is available here. Judge Alsup found that "mere invocation" of one's Fifth Amendment rights cannot automatically supplant conventional privilege log requirements. To this end, he stressed the need for "targeted factual support" - like a privilege log itself - that lends the Fifth Amendment assertion some plausibility.

Interestingly, Judge Alsup touched on an argument not really advanced but which it seems as though he felt was percolating under the surface. He rejected the idea that Levandowski could claim a privilege if the subject due diligence report was provided to Uber so Uber could see whether Levandowski was arriving with baggage - namely a potential trade secret claim to defend. Judge Alsup noted that one cannot use the attorney-client privilege to cloak wrongdoing through "due diligence." Therefore, as a result of the ruling, Uber will have to place the particulars of the due diligence report on a privilege log for Waymo to see. Whether Levandowski will assert further Fifth Amendment rights to its ultimate production remains to be seen. But I think I know the answer.

Bad Faith in California Trade Secrets Actions

I have an article coming out shortly in the Illinois Bar Journal, and it concerns bad faith in trade secrets disputes. In particular, I discuss Illinois' rule that is akin to a Rule 11 "frivolous pleading" standard. I also discuss the rule that seems to prevail elsewhere - the two-part test used by California courts, focusing on objective speciousness and litigation misconduct. As the Court of Appeal in Vescovi v. Clark makes clear, that test is really a one-part test. Objective speciousness probably is enough, because the litigation misconduct derives from the specious nature of the claim. Vescovi is unpublished, but it's a good read nonetheless. A copy of the opinion is available here.

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James Flynn of Epstein Becker & Green published a nice piece on Law360 concerning Justice Gorsuch's track record of resolving trade secrets disputes while a Tenth Circuit judge. It is worth a read.


Friday, April 7, 2017

The Reading List (2017, No. 14): Showing Irreparable Harm Requires Actual Facts

Non-Compete and Trade Secrets News for the week ended April 7, 2017

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Franchise Non-Competes and Irreparable Harm

Disputes over franchise non-competes arise less frequently than employment-based covenants, but they tend to produce some interesting results. Often, they are combined with claims for trademark infringement if franchisees continue to promote their business using the same signage, slogans, or other source indicators that were part of the original franchise relationship. But other times, the franchisee simply ends the relationship and starts a completely separate business in the same territory.

A district court in Nebraska confronted precisely this type of fact-setting in Colorado Security Consultants, LLC v. Signal 88 Franchise Group and denied a preliminary injunction motion brought to enforce a 3-year non-compete. The interesting aspect of the decision, which is available here, concerns the discussion about "irreparable injury," a required element that a plaintiff must prove to establish injunction relief. The court was critical of the plaintiff's conclusory evidence about customer contact. And, at least according to the facts available in this opinion, it appeared the way in which the franchisor elected to end the relationship may have been a contributing factor in the court's denial of its injunction motion. The lesson here is intuitive. If you're asking for injunctive relief, then you need to demonstrate actual, concrete evidence that illustrates how continued competition threatens imminent injury. Abstract statements or mere suggestions of future harm won't cut it.

Bad Faith in Trade Secrets Actions

The bad-faith fee-shifting clause under the Uniform Trade Secrets Act allows for a "prevailing party" to recover fees. By definition, it does not apply to counsel. A successful showing of bad faith by a defendant entitles him to fees only from the plaintiff itself.

Last year, a California Court of Appeal decision in a case called Cypress Semiconductor found that a plaintiff's voluntary dismissal without prejudice did not prevent a defendant from claiming it had been a "prevailing party" for purposes of claiming fees under the bad-faith provision. This past week, the Illinois Appellate Court in an unpublished and non-precedential order disagreed with Cypress Semiconductor. It found that the term "prevailing party" could not include a voluntary dismissal without prejudice. The case is Matrix Basement Systems, Inc. v. Drake.

In the interest of full disclosure, I joined the representation of Tom Drake on appeal after the circuit court had denied his fee petition. Obtaining reversal of an order denying a motion for sanctions is quite difficult under an "abuse of discretion" standard of review, but I felt that Mr. Drake more than deserved a vigorous appeal. The appellate court's order, while not giving us the desired outcome, certainly helped establish that Mr. Drake was the victim of a completely meritless suit that never should have been filed in the first place. The circuit court found that Matrix Basement Systems had indeed lodged allegations against him that were false, but that this alone wasn't enough to warrant sanctions.

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On his Michigan Employment Law Advisor, Jason Shinn has a more in-depth discussion with practical tips on Estes Forwarding Worldwide v. Cueller, the "Google Drive" access case I discussed two weeks back. The tips he offers are geared towards employers who need to secure web-based storage accounts from improper employee use.

Michael Elkon at Fisher & Phillips has an excellent compliance-oriented post dealing with the hiring of employees from competitors. This lengthy post covers a number of specific questions and procedures employers should be asking and investigating when hiring new employees from competitors.

Korn Ferry, the executive search leader which pursued the high-profile Computer Fraud and Abuse Act case against David Nosal, finds itself on the other end of a competition dispute. Spencer Stuart, a K/F competitor, filed suit in Chicago. This case appears to be more of a garden-variety non-compete dispute, but it involves the defection of a group practice leader - Francois Truc - who earned over $4 million a year from Spencer Stuart.

Munger Tolles & Olson released a 2016 Defend Trade Secrets Act Roundup summarizing DTSA filings and major issues that courts have decided under the law as we approach the one-year anniversary of its enactment.

Finally, Seyfarth Shaw this week flagged a pending bill in Missouri that would invalidate restrictive covenants in the employment setting. House Bill 479 would bring Missouri more in line with the California approach to restrictive covenants, which permits them in connection with the sale of a business. We see legislation creep up like this time and again in the States, but it usually is meant to spark debate that leads to incremental reform. Seyfarth's post on the Missouri bill is available here.

Friday, March 31, 2017

The Reading List (2017, No. 13): The DTSA Is Not an Unconstitutional Ex Post Facto Law

Non-Compete and Trade Secrets News for the week ended March 31, 2017

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The Defend Trade Secrets Act and "Continuing" Misappropriations

The Eastern District of Pennsylvania rejected a defense challenge to the Defend Trade Secrets Act, which I must confess I didn't see coming.

In Brand Energy & Infrastructure Svcs., Inc. v. Irex Contracting Group, No. 5:16-cv-2499, the court first noted that the DTSA can apply to continuing acts of misappropriation that began before the law's enactment in May of 2016 if those acts continued later. This would, for instance, capture a continuing improper or unauthorized use of an alleged trade secret.

The court then rejected a constitutional challenge as applied to the facts under the ex post facto clause of the United States Constitution. In a long and interesting passage, the court noted the DTSA's heavy reliance on state versions of the Uniform Trade Secrets Act and described how the DTSA was substantially different in its textual description of the law's effective date. As a result, the court found Congress intended to apply the DTSA to continuing claims of misappropriation and to provide a remedy that dealt not only with the acts occurring after the effective date but before as well.

A copy of the decision is available here.

The Anheuser-Busch Whistleblower Case

Remember James Clark? Yeah, I didn't think so. Clark accused Anheuser-Busch of filing a "strategic lawsuit against public participation" (called a "SLAPP action") when it accused him of misappropriating trade secrets related to A-B's brewing process. Clark allegedly took the information to institute a class action against A-B concerning the supposed mislabeling of alcohol content on its beer products.

A California district court had denied Clark's motion to dismiss the case as an improper SLAPP suit. Clark then appealed, a procedure that many state SLAPP statutes allow (even though the denial of a motion to dismiss is not otherwise appealable). In late 2015, the Ninth Circuit reversed and found the district court incorrectly determined that Clark's efforts to litigate (or share information with class counsel) were not the type of "protected activity" encompassed within California's SLAPP statute. The circuit court then remanded for the district court to determine whether A-B had established some probability of success on its misappropriation claim. That inquiry is a core part of determining whether an anti-SLAPP motion should be granted.

Last week, the district court once again ruled in A-B's favor and found it demonstrated such a probability of success, thereby denying Clark's anti-SLAPP motion for a second time. The court commented briefly on Clark's whistleblower defense, a topic of particular interest given how the Defend Trade Secrets Act contains a specific provision to protect whistleblowers The problem for the court, it appeared, is that assisting in a class action is not at all whistleblowing activity. Under California law, for instance, protected whistleblowing activity involves some complaint to a governmental agency.

A copy of the opinion is available here. Clark, by the way, appealed the adverse ruling once again.

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For an extended discussion on the various States' treatment of consideration in non-compete contracts, please see Sheppard Mullin's article in The National Law Review. Not surprisingly, Illinois merits an extended discussion.

GeekWire reports on the passage of a non-compete bill in the Washington House. The bill is generally considered employee-friendly, particularly as to technology workers. Amazon has been fairly aggressive in its use of non-competes.

Friday, March 24, 2017

The Reading List (2017, No. 12): One Reason Florida Is So Non-Compete Friendly

Non-Compete and Trade Secrets News for the week ended March 24, 2017

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Florida Non-Competes and Evidentiary Presumptions

The Florida District Court of Appeal's decision last week in Allied Universal Corp. v. Given illustrates why Florida is the safest haven for non-compete enforcement. It further shows how employers have benefited from a statutory directive that entitles them to a presumption of irreparable injury upon the showing of a legitimate business interest. That irreparable-injury showing is an indispensable component of injunctive relief. The case also shows the uphill burden an employee faces in trying to rebut evidence of a legitimate business interest, here the relationships that enable a salesperson to generate business. Employees who do so face a high discovery burden in amassing that type of evidence. Typically, they'll need something like high turnover or customer attrition or a narrative that shows how the new company provides a different customer value-proposition than the old one. A link to the Allied Universal case is available here.

(Eric Ostroff also discusses this decision in a blog post.)

The "Cloud" as a "Protected Computer" under the CFAA

The employment-related claims that a company may have under the Computer Fraud and Abuse Act all have a common requirement, which often is just assumed to exist in litigation: the access of a "protected computer." The way the CFAA is worded, any computer connected to the internet falls within the definition.

A fair number of cases now do not deal with claims where sensitive information was removed from a workplace computer. Instead, they concern disputes over information stored on a cloud-based platform that employees from computers access. So what happens when an employee continues to access this same platform, wrongfully, following termination of employment? Is this access of a cloud-based device equivalent to a "protected computer"? In Estes Forwarding Worldwide, LLC v. Cuellar, a federal judge in the Eastern District of Virginia said yes. But the analysis was very thin and not particularly persuasive.

Prior decisions, such as the Hawaii case of Property Rights Law Group v. Lynch, suffer the same flaw: no real attempt to reconcile a cloud-based service with the definition of a "protected computer." They seem to pivot to the fact that the computer was connected to the internet and end it right there. To the extent this issue becomes a genuine dispute among district courts, it seems Congress could head off the problem by extending the jurisdictional hook to accessing information stored on a cloud-based platform. After all, what's one more amendment to the CFAA?

The Estes Forwarding decision is available here.

Friday, March 17, 2017

The Reading List (2017, No. 11): Trade Secrets Everywhere, Including the Bedroom...

Non-Compete and Trade Secrets News for the week ended March 17, 2017

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Trade Secrets Identification

The most difficult procedural issue in trade secrets cases involves when and how the plaintiff should disclose its trade secrets. Defendants frequently object to discovery until it has a specific itemization of the secrets the plaintiffs claims have been misappropriated. Courts have wide discretion to handle these types of disputes, and will do so on a case-by-case basis. A federal district court in Oregon, in the case of Quaiz v. Rockler Retail Group, Inc., No. 3:16-cv-1879, recently denied a defendant's motion to identify and stay discovery. As that case shows, the strength of an early-identification motion often is directly related to the allegations of the complaint. Here, the plaintiff gave more specificity than is often seen, confining the trade secret to a particular product and related designs. A copy of the opinion, which provides helpful analysis, is available here.

Trade Secrets Injunctions

The Georgia case of Pinnacle Agriculture Distribution, Inc. v. Mayo Fertilizer, No. 1:17-cv-29, deals with the scope of trade secrets injunctions. It illustrates that when plaintiffs present compelling evidence of misappropriation, a broader injunction may be in order. Here, an ex-employee of Pinnacle Agriculture had provided his new employer with his entire customer list and specific details about those customers, along with other information concerning Pinnacle's branch sales (including details on every product sold and profit margin for each sale). This is true smoking-gun evidence. Despite the lack of any non-compete, the court's injunction operated just like one. Both the employee and the new employer were barred from conducting business with Pinnacle's accounts. A copy of the injunction is available here.

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The San Francisco Business Times, along with many other outlets, reports this week on Google's attempt to stop Uber's self-driving car technology. Google's effort to enjoin Uber builds on its previous complaint, which I discussed last week. The new evidence Google submitted includes a damaging witness statement from the main individual defendant's former co-worker along with an expert witness.

In more trade secrets news, the Chicago Tribune this week published an article describing Motorola Solutions' suit against Hytera Communications. The trade secrets apparently pertain to Motorola's radio technology and involve more than 7,000 allegedly stolen files. Motorola sued under both the Defend Trade Secrets Act and the Illinois Trade Secrets Act. A copy of the Complaint is available here.

Finally, not sure really how to introduce this one, but Absorption Pharmaceuticals has claimed that Reckitt Benckiser, the maker of, um, K-Y lubricants, stole its trade secrets on a sexual performance enhancer. This claimed misappropriation arose out of the second most common factual scenario for theft: a purported business deal that fell apart. Absorption Pharmaceuticals is asking for an injunction to prohibit RB from selling Duration - a premature ejaculation spray. At the very least, it's a clever product name. A copy of the Complaint is available here.

Friday, March 10, 2017

The Reading List (2017, No. 10): South Carolina Interprets Stealth Confidentiality Agreement

Non-Compete and Trade Secrets News for the week ended March 10, 2017

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South Carolina Non-Competes

The Court of Appeals of South Carolina issued a very interesting and important ruling on the oft-overlooked interplay between non-disclosure and non-competition covenants. The case is Fay v. Total Quality Logistics, LLC, No. 2014-1828.

In Fay, the Court of Appeals determined that an indefinite non-disclosure agreement operated as a stealth non-competition restriction, because it provided that if the ex-employee entered into a similar business as his employer and worked in a similar type of position, he would "necessarily and inevitably" use the employer's confidential information to perform his job. In other words, the agreement attempted to graft the devilish "inevitable disclosure" doctrine into a non-disclosure/non-competition covenant. Bad move. This contractual language in effect prohibited the employee ever from competing with his former employer. Under South Carolina's strict "blue-pencil" rule, the court couldn't modify the contract to add in a reasonable time limit. As such, it was unenforceable.

The concurring opinion offered the same conclusion, but first looked to Ohio law because that's what the parties agreed to apply to the contract. But even under Ohio law (which is more friendly), the indefinite non-disclosure agreement would be unenforceable. Fay represents yet another case in an emerging area: an employee's challenge of a broad non-disclosure agreement and arguing it operates as a stealth non-compete. You can read the opinion of the Court of Appeals by clicking here.

Proposed Amendments to CFAA

The Computer Fraud and Abuse Act has been amended many times since it first appeared on the scene in 1986. In reality, it needs to be rewritten or broken up into several different laws. But it's back on the legislative docket, at least if one Congressman has his way.

Rep. Tom Graves (R. GA) has proposed the Active Cyber Defense Certainty Act. The bill would allow victims of cyber-attacks to engage in limited defensive measures to identify and stop attackers. In essence, it's a bill that enables "hacking back" and formalizes that concept as a defense to prosecution for unlawful computer access. The text of the bill is available here.

The theory of hack-backs have generated a lot of debate among scholars in recent years, with some arguing that, even if legal, it could have dramatic unintended consequences in ensnaring innocent third-parties. It is often difficult to trace the source of a hack.

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In other news, a great deal of news is floating around about Waymo, LLC v. Uber Techs., Inc., the trade secrets case involving Google's self-driving technology. News reports first surfaced a few weeks ago about the claim that featured, at its core, the departure of Waymo manager Anthony Levandowski and the supposed downloading of nearly 14,000 confidential Waymo files. Waymo appears to have suspected misappropriation based on the erroneous e-mail transmission of a circuit board drawing, intended for Uber but delivered instead to Waymo. A copy of the Complaint, which features a claim under the Defend Trade Secrets Act, is available here. The "Introduction" sets forth the big-picture story and is a great example of persuasive legal writing.

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For those interested in the ex parte seizure order procedure available under the DTSA, this link contains the first ever federal court seizure order carried out. The case is Mission Capital Advisors LLC v. Romaka, No. 1:16-cv-5878 (S.D.N.Y.). The collateral costs of obtaining such an order are fairly high. Of note, the defendant in this case never was represented by counsel during the litigation.

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Finally, the U.S. Attorney's Office in the Middle District of Louisiana released a statement on February 16 that confirms the sentence of Brian Johnson for violating Section (a)(5)(A) of the CFAA. Johnson's guilty plea stemmed from his installation of malicious code on Georgia-Pacific's information technology system after G-P terminated his employment. The code resulted in significant damage to G-P's operations. Johnson will serve a 3-year prison term and must pay more than $1 million in restitution.