Tuesday, January 31, 2017

Monthly Column (2017, No. 1): Why All the Hullabaloo Over the Ex Parte Seizure Order?

We are closing in on one year of the Defend Trade Secrets Act, with not a whole lot of controversy. So far, no real controversies. No concerns of federalism. No huge legal question that has confounded courts. No apparent abuse of the statute.

I was relatively late to the party in terms of supporting the DTSA, which I originally felt was unnecessary. I warmed to the idea for a number of reasons, which I wrote about months before the law was enacted.

Approximately seven months since enactment, the issue that likely delayed the DTSA's passage for two years and the one that still generates the most commentary is a statutory provision that will yield the smallest practical impact: the ex parte seizure order.

The remedy is designed to give victims of trade secrets theft a quick, uncontested way to seize the instruments of the theft. (Click here for a good summary of what the order, and applying for it, entails, by Wilmer Hale.) The problem is that the remedy really adds nothing to a judge's arsenal of relief and is unnecessary to administer the DTSA effectively.

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I noted this about the ex parte seizure order provision back in 2015 when I endorsed the DTSA: 

This is not the law's most outstanding feature, to be sure. But it's not an independent reason to defeat the law. For starters, I have a hard time believing that federal courts will warm to the idea of this remedy. It will be deployed sparingly...Judges are competent enough to snuff out abuses and impose damages for a wrongful seizure of property. This remedy potentially is a paper tiger, and it will work itself out in practice.

With the benefit of time, I stand by my conclusion. The text of the remedy, found in Section 1836(b)(2), is so long and detailed that one must think think it adds a very heavy substantive and procedural layer of protection that the law otherwise does not afford. That's plainly not the case. In fact, federal courts have wide discretion to implement procedural orders that (a) require the immediate turnover of devices or laptops (the real target of the seizure provision), (b) protect the confidentiality of the information found on devices, and (c) preserve evidence. This authority can be found in the Federal Rules of Civil Procedure and in the court's inherent authority to control and monitor its own docket for the efficient disposition of cases.

For instance, a victim of trade-secret theft always can apply for a temporary restraining order that accomplishes precisely the same thing as a seizure order under the DTSA. Some restraining orders actually mandate conduct. So the DTSA's seizure provision overlaps significantly with what a judge could order under Federal Rule of Civil Procedure 65. Many of the subsets of the DTSA already are part of basic TRO practice, including the provisions on mandating particular findings, a return date for a hearing, a description of the property to be seized, and a surety bond.

The DTSA confusingly says that the seizure provision is unavailable if Rule 65 is inadequate to achieve the provision's purpose. No one really knows what that means, except that it certainly gives a judge reason to hit the pause button. Given the discretion a judge has to order temporary injunctive relief (even on an ex parte basis), it seems overly cumbersome for an attorney to make this showing. About the only real difference between an ex parte restraining order and an ex parte seizure order is that the latter requires a hearing on 7 days. Rule 65 gives you 14 days, so I am unclear why a victim would want to embark on a process, and then defend an order, with a shorter duration.

The DTSA does contain a provision that allows one (probably a third-party) to file a motion for encryption. This would allow one to encrypt information on a seized laptop, for instance, that's unrelated to the theft. Imagine a new employer's product designs which are on an employee's laptop, but which have nothing to do with the case. It seems reasonable and not intrusive to allow the employer to move for prophylactic relief to protect its product designs, but the Federal Rules of Civil Procedure are flexible enough to embrace that right anyway. A non-party who seeks a protective order only needs to first intervene in the case. That can't be much more cumbersome than seeking an encryption order.

District courts seem pretty sanguine about the ex parte seizure order, which bears out what I have been saying about its limited scope and impact. Three separate district courts have issued Rule 65 temporary restraining orders in DTSA cases that seize property. See Magnesita Refractories Co. v. Mishra, No. 2:16-cv-524 (N.D. Ind.); Earthbound Corp. v. MiTek USA, No. C16-1150 (W.D. Wash.); and Panera LLC v. Nettles, No. 4:16-cv-1181 (E.D. Mo.). All Rule 65 orders accomplished precisely what the ex parte seizure order was designed to do.

Another case, OOO Brunswick Rail Mgmt. v. Sultanov, No. 5:17-cv-17 (N.D. Cal.), denied a motion for an ex parte seizure order because it was issuing both (a) a separate evidence preservation order on non-parties that maintained personal e-mail accounts for the defendants, and (b) ordering the defendant to deliver devices to the court at the time of an injunction hearing. These orders fall within the court's inherent authority to issue orders preserving evidence and under Rule 65 itself.

Before the DTSA became law, Professor Eric Goldman of Santa Clara University School of Law wrote that "[i]n light of the remedies already available to trade secret owners in ex parte temporary restraining orders...the seizure provision [of the DTSA] purports to apply to only a narrow set of additional circumstances."

I'm still waiting for someone to tell me what those narrow set of additional circumstances are.

Friday, January 27, 2017

The Reading List (2017, No. 4): Sergey Aleynikov is Back in the News

Non-Compete and Trade Secrets News for the week ended January 27, 2017

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Illinois Restrictive Covenants

Judge Amy St. Eve is among the very best of the judges on the Northern District of Illinois. In The Carlson Group, Inc. v. Davenport, she denied a preliminary injunction motion brought against former key employees on the basis that they violated non-disclosure and non-solicitation covenants. The opinion is notable for its discussion of a temporally unlimited confidentiality clause with a very broad definition of "confidential information." Since the non-solicitation covenant was tied to customers about which the employees had "confidential information," the overbreadth concerns spilled over onto that covenant as well. As usual, her opinions are very clear and informative. A copy of the injunction ruling is available here.

Aleynikov Conviction Reinstated

Sergey Aleynikov, the ex-Goldman Sachs coder who inspired Michael Lewis' Flash Boys, has had his New York state-law conviction for theft of "secret scientific material" reinstated by the Appellate Division. Aleynikov's legal troubles have been chronicled at length here and elsewhere, but this is the latest sobering chapter in multi-pronged journey through the civil and criminal justice system. After a jury convicted Aleynikov in 2015 on state-law theft charges, a State Supreme Court Justice (in New York, that means a trial court judge) threw out the conviction for failure to prove the material elements of the crime. The details of the appellate court's reasoning are somewhat murky and technical - not at all interesting like the actual back-story of this litigation.

The reinstatement means Aleynikov goes back for sentencing. However, since he already has served one year on a federal charge, which later was overturned by the Second Circuit Court of Appeals, he'll get credit for one year of time served. The state-law theft conviction is a Class E felony, with a sentencing range of 1 to 4 years. This means Aleynikov may not face additional jail time. He shouldn't. No one - no matter what they say - even understands what he took. Aleynikov's counsel, Kevin Marino, vows an appeal.

On a related matter, Goldman and Aleynikov are fighting over whether he is entitled to indemnification for defense-related fees from the invalid federal criminal conviction. The Bloomberg story concerning that separate fight is chronicled here.

Customer Lists as Trade Secrets

A very commonly alleged trade secret, particularly in the employment context, is the customer list. However, customer lists come in many different shapes and sizes so it's hard to make blanket statements about what is and isn't legally protected. A federal district court in Texas addresses this question under Ohio's trade-secret statute. The decision is illustrative in showing what level of detail may be required to vest a customer list with trade-secret status. The customer list in KeyCorp v. Holland contained only names and contact information, and the court held that wasn't enough.

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The Fairfield County Business Journal reports on a new non-compete suit brought by Sun Products and Henkel against a former Chief Technology Officer/Senior Vice-President for Research and Development, Carlos Linares. Judge Eginton signed a temporary restraining order that bars Linares from starting his new position at Church & Dwight. It appears that the parties are set to proceed to a preliminary injunction hearing on February 9. Of interest, one of the claims is brought under the Defend Trade Secrets Act and the Connecticut Uniform Trade Secrets Act. Connecticut courts have expressed a willingness to apply the "inevitable disclosure" doctrine, which is largely disfavored under the DTSA. Given that Linares appears to have a non-compete agreement, the potential divergence of the state and federal trade secrets act might not be a central point of contention in the case. But we shall see. A copy of the Amended Complaint is available here.

In a blog post by Tarter Krinksy & Drogin, the authors note that a New York appeals court decided a "Game-Changer on Enforcement of New York Non-Compete Agreements." The post discusses Buchanan Capital Markets, LLC v. DeLucca, 144 A.D.3d 508 (1st Dep't. 2016), and remarks on the case's comment that non-competes in New York are not enforceable unless the employer demonstrates a "continued willingness to employ the party covenanting not to compete." In reality, this case isn't much of a game-changer given the limited appellate analysis. It does remind us, however, that New York courts have issued many decisions that seem to create a per se rule against enforcement in a termination-without-cause scenario. Why a company would want to enforce in that circumstance, by the way, is beyond me.

South Florida's Daily Business Review reports on a case working its way through the Florida Court of Appeals, which concerns State Farm's efforts to protect as a trade secret certain information about where it's selling homeowners' policies. Insurers like State Farm often need to provide data about underwriting activities to state regulators. Depending on the state insurance codes' exemptions, such public disclosure of company-wide data can materially impact trade-secret claims. Insurers' obligations to disclose are similar to what we're starting to see in the fracking industry, which requires similar public disclosure of information but which also allows for certain narrow trade-secret exemptions. This will be an interesting case to watch when the Court of Appeals rules. The case is Office of Insurance Regulation v. State Farm Florida, No. 1D16-2301.

Friday, January 20, 2017

The Reading List (2017, No. 3): Another Non-Compete Case in the Medical Device Business

Non-Compete and Trade Secrets News for the week ended January 20, 2017

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New Jersey Non-Competes

Non-compete disputes in the medical device and implant field are a dime a dozen these days. In that realm comes Synthes, Inc. v. Gregoris, No. 2:16-cv-6255, out of the District of New Jersey. There, Synthes successfully obtained a preliminary injunction against a former area sales vice-president who had sought to join Globus, Inc. to head up its new trauma sales division. The injunction opinion is quite long, but it hits nearly every significant legal question under New Jersey law and is a very readable primer for lawyers and non-lawyers alike.

Of particular interest is the passage concerning the employee's negotiation of a $475,000 payment from Globus if the court enforced Synthes' restrictive covenant. Crediting the employee and his counsel for obtaining this protection, the court felt that this obligation seriously mitigated the undue hardship that otherwise might result from judicial enforcement. This is the double-edged sword of indemnity obligations: they provide much-needed insurance for employees for jumping ship, but undoubtedly hurt the employee when it comes time to litigate. A copy of the Opinion is available here.

Weird Lawsuits

Perhaps because they are wrought with emotion, dust-ups over non-competes can yield some very strange lawsuits. I once had a client sued in divorce court over a non-compete because the business owner's divorce lawyer felt my client's actions somehow impacted marital property. (I won't explain here, but will say it was even more convoluted than it sounds.)

One of these bizarre non-compete related suits comes from Washington, where the Court of Appeals recently affirmed the dismissal of an action against the spouse of a former employee. The employee had breached a non-compete, and the employer sued his spouse for a constructive trust on the earnings that her husband contributed to the family's shared expenses. The employee had filed for bankruptcy, but the judgment concerning the non-compete agreement was deemed non-dischargeable. Suing the spouse didn't help the employer collect. A copy of the Opinion is available here.

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A few weeks back, I commented on the pending cert petition that asked the Supreme Court to address the International Trade Commission's authority to investigate trade secrets theft when the acts occurred outside the United States. As Jones Day writes, the Supreme Court denied Sino Legend's petition, essentially leaving intact the Tian Rui decision from several years ago that allowed the ITC to exclude the importation of goods when the misappropriation occurs outside the U.S.

Milwaukee Mayor Tom Barrett authored an op-ed in the Journal Sentinel in which he advocated for reducing employers' reliance on non-compete agreements. Wisconsin is a rather difficult enforcement state, and despite legislative efforts to liberalize non-compete law there is no indication that this will gain any real foothold. The op-ed provides an interesting viewpoint of those who believe that non-competes stifle, rather than promote, innovation.

Fisher Phillips comments on the Sultanov case, in which a federal judge denied an emergency application under the Defend Trade Secrets Act for entry of an ex parte seizure order. I wrote on this last week. The post nicely summarizes the considerations counsel must consider when seeking this type of extraordinary remedy.

From the Las Vegas strip comes a non-compete dispute between two casinos, Aria and The Cosmopolitan. The lawsuit centers on a claim that a former Aria executive wooed the casino's top customers to gamble at The Cosmopolitan. The dispute has factual shades similar to Golden Road Motor Inn v. Islam, in which the Supreme Court of Nevada held that judicial modification of non-competes was not permitted. The Las Vegas Review-Journal reports on the emergency proceedings now pending in federal court.

And in my favorite story over the past seven days, the New York Post has an article about a competition dispute between two barber shops. Three former stylists left Paul Mole's Barber Shop to start their own business, and none had a non-compete agreement. They are striking back, accusing their former employer of slandering them on Facebook and lodging allegations of "stealing" customers. Though such talk may sound like bluster, it indeed can be defamatory and non-privileged speech, potentially giving rise to presumed legal damages. Rob Radcliff has more on this story, and some practical tips, in his recent blog post.

Friday, January 13, 2017

The Reading List (2017, No. 2): Ex Parte Seizure Orders and Attorney Disqualification

Non-Compete and Trade Secret News for the week ended January 13, 2017

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Defend Trade Secrets Act

We have the first district court opinion dealing with the relatively new (and highly controversial) ex parte seizure order available under the federal Defend Trade Secrets Act. In OOO Brunswick Rail Mgmt. v. Sultanov, a federal district court denied an application to have a court order the seizure of e-mail information maintained by third-party providers (such as Google), reasoning that the providers would be required to preserve it anyway. The court further denied the ex parte application to the extent it sought to seize the company-issued laptop and mobile phone in the defendant's possession, since the court ordered the defendant to produce them at the injunction hearing.

The order, a copy of which is available here, illustrates that the ex parte seizure order remedy may be more bark than bite, as courts already have at their disposal a number of less intrusive means to preserve data and the integrity of the litigation process. They no doubt will use them before deploying this very unique, and disfavored, remedy.

Hard-Drive Inspections

Writing a blog post on motions to compel is like describing your workout routine to someone else. You immediately sense eyes glazing over. However, at the risk of turning readers away, I'll mention one ruling that I recently read.

A recurring trade-secrets discovery issue seems to be one party's request that an adversary turn over hardware for forensic inspection. Because computers and external devices often are the means to pilfer protected information, it is logical for an aggrieved party to ask for a direct inspection of those devices. However, courts still are reluctant to do so and rely on the traditional discovery process to generate accurate responses, even when computers make the process more cumbersome and opaque. Courts normally won't order the direct production of devices unless there is proof they were used in the act of misappropriation or there is some history of discovery non-compliance. But even then, as Brand Services, LLC v. Irex Corp. illustrates, courts have the discretion to order the production of electronically stored information pursuant to a less intrusive key-word search protocol. Direct production of devices remains the exception rather than the rule.

Ethics

Non-compete disputes raise a lot of interesting conflicts and ethics question. But a very stark and sobering reminder comes from CytImmune Sciences, Inc. v. Paciotti, in which Judge Paul Grimm of the District Court of Maryland disqualified an employee's counsel because he previously worked on the same confidentiality agreement on the plaintiff's behalf many years prior.

Judge Grimm disqualified Alston & Bird since the lawyer's continued representation of the employee was materially limited due to his past representation of the employer. The material limitation apparently crystallized when defense counsel did not advance an argument on the agreement's enforceability (a facial challenge) during injunction briefing. That was particularly problematic for the court since it found the agreement unenforceable on its face and felt another attorney could have made a "full-throated facial challenge to the breadth of the" contract. The ruling is available here. (Not addressed, but perhaps looming, is the possibility the firm will need to disgorge fees from the engagement.)

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From around the web, lots of material on the Defend Trade Secrets Act percolating...

Cozen O'Connor writes that trade secrets litigation will spike in 2017. In Judge Grimm's parlance, I'll lodge a "full-throated" disagreement. It may, but who knows? The post seems to suggest the ex parte seizure order process is the reason, but come on. No one sues based on the slim chance that a court may issue what amounts to a temporary discovery order. What seems likely is an uptick in federal litigation, as practitioners have a full year to assess the DTSA, and employees have a full year of ignoring both common sense and their lawyers' advice on how to leave their jobs.

The Legal Intelligencer has an overview of the DTSA, and it emphasizes remedies. Again, there's a fulsome discussion of the seizure order. Lots of noise about something unlikely to generate much real action.

In a similar vein, Christopher Stief of Fisher & Phillips published this piece on Law.com, also discussing questions looming as courts implement the DTSA.

Somewhat related to DTSA commentary is Perkins Coie's terrific post from January 5 entitled How Will Criminal Trade Secret Prosecutions Fare under President Trump? This article describes the federal criminal statutory framework for trade-secret theft, which was rarely used until the Obama Administration made it a priority. This is well worth a read, even for civil litigators.

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Finally, there's an interesting DTSA case pending in New Jersey called Chubb INA Holdings v. Chang, No. 3:16-cv-02354. Pending before the District Court is a defense motion to dismiss a Computer Fraud and Abuse Act claim and a DTSA claim.

The CFAA motion is premised on a Nosal-style theory that the employee's access to protected computers was not in excess of authorized access, while the DTSA argument presents a more novel issue. It examines the DTSA's applicability to conduct that at least started before the DTSA went into effect. From briefing, it appears the question may hinge on whether the new federal statute would apply to either an inevitable disclosure theory of misappropriation or the continued retention of information after the DTSA's effective date (even if the predicate acts took place beforehand).

The motion to dismiss is available here. The response brief is here.

Friday, January 6, 2017

The Reading List (2017, No. 1): Malpractice Claims and Florida in a "Non-Compete Crisis"?

Non-Compete and Trade Secrets News for the week ended January 6, 2017

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Commercial real estate broker Avison Young has sued three former brokers who joined Cushman & Wakefield. According to Crain's Chicago Business, the factual predicate for the complaint appears to be the downloading of firm confidential material before departure. The lawsuit is pending in the Circuit Court of Cook County, Illinois.

The law firm of Foley & Lardner was sued by its client, 1347 Property Insurance Holdings, Inc., for failing to secure non-compete agreements from key employees of a company that the client acquired. The Complaint, filed in the Eastern District of Wisconsin, alleges that the employees formed a rival and then solicited the acquired entity's most significant clients. 1347 Property seeks damages of over $1.5 million arising from business that it would have kept if the executives had been required to sign enforceable non-competes. The Complaint is available here.

Illinois' new non-compete law took effect on January 1. The Freedom to Work Act generally prohibits non-compete contracts for low-wage employees. Please review my prior blog post about the new law.

Jonathan Pollard, a non-compete and trade secrets lawyer in Florida, has posted an excellent YouTube video of what he calls Florida's "non-compete crisis." Pollard is a strong, principled voice in this field and has some excellent perspectives on Florida law. Recall that many states, including Illinois, view Florida law as so extreme to call it contrary to public policy. I wrote on this particular issue about 18 months ago.

Seyfarth Shaw's Trading Secrets blog discusses a petition for certiorari that asks the Supreme Court to rule on the International Trade Commission's authority to investigate and adjudicate acts of trade secret misappropriation that occur entirely overseas. The ITC's enforcement activity in this area is a relatively new phenomenon and springs largely from the 2011 Tian Rui case.

Fisher & Phillips reports on a new Colorado case, which concerned a protective order dispute and the potential ramifications for protecting trade secrets in litigation. It's a very interesting read, stemming from a case where the underlying claims have nothing to do with trade secrets.

Also outside the non-compete context, but certainly relevant to non-compete claims, is the Appellate Court of Illinois decision in Carlson v. Jerousek. Though a personal injury case, the dispute involved an appeal from a contempt citation for the plaintiff's refusal to turn over five personal computers for forensic imaging. The appellate court found that the trial court failed to conduct an appropriate balancing test that governed the need for forensic imaging, principally because the computers lacked any nexus to the dispute and because the plaintiff had no history of shirking discovery obligations. This could prove to be a very important foundational e-discovery case in Illinois for competition disputes.

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This time of year, the blogosphere is crowded with year-end wrap-up posts. I went with four of them, so I have little room to complain about the fire-hose of information circulating around. I recommend checking out two of them.

The National Law Journal has Epstein Becker & Green's "Key Trade Secret and Non-Compete Developments in 2016."

Russell Beck's Fair Competition Law post contains a more comprehensive list of non-compete and trade secret developments, which goes beyond the year's most significant highlights that I discussed .