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