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.