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.

Competition Claims: Federal versus State Courts

This post largely is inspired by a YouTube video I watched recently by Jonathan Pollard, who discusses the importance of litigating trade secrets in federal court - particularly if you're a defendant.

Jonathan's 15-minute discussion is a great way for clients - particularly individuals - to understand some of the procedural aspects of litigation. Often times, it is the procedure where disputes like this are decided. And unfortunately, in the world of litigation, procedure tends to be opaque and something we as lawyers merely gloss over.

Having litigated non-compete and trade secret claims for nearly 20 years, I can say with a fair amount of certainty that my work has been split equally in state and federal court. I suspect that the enactment of the Defend Trade Secrets Act last year will slowly start to tilt that equation towards federal litigation.

Here are the biggest differences I have noticed over the years between litigating competition claims in federal versus state courts:

1. Attention to the Merits. The quality of judges in the federal system is - on the main - higher than in state court. This is a pretty uncontroversial generalization to make. Many state court judges are terrific, and some of the best judges I've ever appeared before are products of the state court system. Apart from that, however, state court judges have a higher case load than their federal counterparts. Many state court judges in Illinois have nearly 1,000 cases assigned to them. By contrast, the average number of cases filed per judgeship in federal court is 412. Many judicial districts vary in terms of the time from filing to disposition. But on average, it is fair to say that a federal court judge has fewer assigned cases to her docket than does a state court judge. Therefore, they can devote more attention to fewer cases.
2. Help. Federal judges also have a staff of law clerks, which Jonathan describes in his video. This is an enormous benefit to litigants in emergency injunction proceedings. Quite honestly, even the most astute well-intentioned state court judge isn't going to have the time or resources to evaluate a TRO or preliminary injunction submission with the kind of attention it probably deserves. This certainly is the case with disputes in highly-technical fields or which require analysis of electronic evidence.
3. Hearings. Part of the reason state court judges seem so busy is that they spend more time on routine hearings, status calls, and motions in court. This clogs up the available time for review of documents in chambers, legal research, and thoughtful analysis of contested cases. State judges have no one to draft written orders or opinions, and very rarely do so even on contested dispositive motions. For that reason, too, status court judges are generally much more reliant on oral argument and on in-court presentations by the litigants. In federal court, even contested preliminary injunctions may be resolved solely on the papers rather than on in-court live witness testimony. This, mind you, is not necessarily a benefit of federal court proceedings, though it certainly reduces cost. Often a strong case can come alive in a courtroom and appear more milquetoast solely when considered on the written submissions.
4. Presumptions. The best point Jonathan makes in his video is that many state court judges start with a firm presumption that the plaintiff is correct. One of the reasons this is the case is that state courts are filled with rather form-oriented and even mundane disputes (often with pro se litigants on the other side) where the merits are not contested. Examples are collection disputes, evictions, and mortgage foreclosures. For judges who handle those calls, it's understandable to have a pro-plaintiff bent when the plaintiff is almost invariably the winner. Non-compete and trade secret cases are not susceptible to easy handicapping, and if anything, the merits may tip in favor of the defense.
5. Scheduling. Federal courts operate with a set of procedural rules that are clear, demanding, and inflexible. The rules require early conferencing and discussion of proposed case management, and courts enter scheduling orders that can be changed only on good cause. State courts are notorious for continuances and delays, although that trend seems to be changing. In Illinois, most practitioners ignore our nominal case management rule (sort of a hybrid between Federal Rules of Civil Procedure 16 and 26). Judges seem not to care too much about it.
6. Cost. Because of the demands in federal court (such as for pre-trial orders and expert witness disclosures), many view federal litigation as more expensive. My experience is precisely the opposite. I think the clear nature of the procedural rules, combined with judges' reluctance to blindly continue cases and fewer mundane court appearances, creates a construct in which attorneys can and should litigate disputes more efficiently. Federal courts also have magistrate judges before whom parties to a civil case can consent to have the case heard. 
7. Fee-Shifting. Federal court tends to work better because the defense has greater opportunities for fee-shifting. State court judges are elected officials and face retention every six years. They invariably are the product of local bar associations and simply are loathe to ruffle feathers and sanction intransigent litigants. Federal court judges are appointed for life and have no allegiance to counsel. The Federal Rules of Civil Procedure also contain a number of different mechanisms that make fee-shifting appropriate, particularly when parties are unreasonable in serving or responding to discovery. This deterrent effect tends to reduce litigation cost because parties and counsel simply do not want to expose themselves to fee-shifting - even for discrete discovery dust-ups. In state court, sanctions are handed out so infrequently that delay and distraction seem to be the norm. When a party faces a disparity of litigation resources, this can be crippling.

Is there a clear-cut solution to where a plaintiff or defendant would rather litigate? It would seem to lean pretty strongly towards federal court. But as Jonathan notes, it's particularly crucial for defendants. 

Non-Compete Suits and TROs - Part 1

Companies that face competition from ex-employees often want a temporary restraining order. As readers of this blog know, there is a significant difference between a temporary restraining order and its big brother - the preliminary injunction. This past week, I had a lengthy TRO hearing on behalf of a client in federal district court in Minnesota. TRO practice and procedure differs widely from federal to state court, and even within certain courts - depending on what judge one draws.

This is the first in a three-part series about TROs in the context of non-compete disputes. Today's post reflects on a confusing issue of timing under Federal Rule 65: what does it mean, under the law, for an order to be "temporary" and for how long can courts issue TROs? Part II will focus on the benefits and drawbacks of seeking a TRO, as opposed to a preliminary injunction. And Part III will discuss some practical considerations when presenting and arguing TROs.

(Because it is the end of the year - a notoriously frenetic time for law firms - and because I have an infant who I'd rather spend time with right now, it is unknown when Parts II and III will appear. But let's just say within the next seven days...)

So onto timing. A "temporary" restraining order can only be...temporary.

The confusion for many parties in terms of a TRO's duration stems from the two types of TROs that courts see: those with notice and those without notice (called ex parte TROs). A TRO sought without notice clearly can extend no longer than 14 days under the terms of Federal Rule 65, and courts are highly skeptical of parties who seek such relief without letting the defendant know of the proceeding. In essence, courts will require parties to make an additional showing of why giving the defendant notice is either impractical or itself poses a threat of irreparable harm.

But the issue of TRO duration is less obvious when a party seeks a TRO with notice. Federal Rule 65 (and most state court rules of procedure) do not specifically address this. The 14-day duration limit is expressed in terms of a TRO sought without notice. There is simply no corollary in Rule 65 addressing duration limits for a TRO sought with notice.

So how long can a noticed TRO last? 14 days? Longer, at the court's discretion? The answer has to do with appeal rights. Under the federal rules, a grant or denial of a TRO is not appealable. This differs from the practice of some state courts - Illinois, for instance - which have specific rules of appellate procedure that allow for an appeal of a TRO ruling.

But just looking at Federal Rule 65, if a TRO is not appealable, then it has to be time-limited - whether the petition is filed with or without notice. Interpreting the rule otherwise, a court could simply foreclose an appeal right by calling a preliminary injunction a TRO. Remember: TROs issued with notice resemble preliminary injunctions. Notice concerns are gone. A party may respond with affidavits, exhibits, and even an answer denying material allegations. At that point, a court - depending on what exactly is presented - will have at worst a broad sketch of what an actual preliminary injunction hearing will look like.

So the answer is 14 days in either case. This issue is not the subject of much reported case law for two reasons. First, TROs aren't appealable in federal court so there is almost no circuit law on the subject. Second, parties often agree on how long a TRO should last - even if it's past 14 days. There is a natural incentive for parties to agree so they can adequately prepare for a preliminary injunction hearing.

Case Law Update: The Remedies and Civil Procedure Edition

This is a much overdue case law update, so it's a little lengthy. But on the upside, it touches on a number of different subjects from around the country.

Lost Profits

A federal district court in Indiana excluded significant parts of an expert's lost profits testimony in the hotly contested case of CDW, LLC v. NETech Corp. The case arose out of an allegation that NETech lifted out CDW's Indianapolis branch office and suffered millions in losses in "advanced technology" revenue. On a Daubert motion, the district court excluded a financial expert's "yardstick" methodology for predicting what CDW's Indianapolis branch would have earned but for the alleged wrongful conduct by the ex-employees. The ruling effectively excluded opinions that would have established lost profits of over $17,000,000. The district court allowed an alternative formulation of lost profits in a much lower amount to go to the jury.

Equitable Extension

The extension of non-competes past their expiration date (as measured from the date of termination of employment) is one of the most controversial, hotly contested remedies in litigation. As a federal district court in Idaho noted a few weeks ago, judges normally impose this remedy - when it's available - after a jury finding of breach or after a favorable ruling on summary judgment for the enforcing party. But in unusual cases, like that in MWI Veterinary Supply Co. v. Wotton, 2012 U.S. Dist. LEXIS 131784 (D. Idaho Sept. 14, 2012), the court can issue an extension remedy at a TRO or preliminary injunction phase. That finding was important in the Wotton case since the court had to find extension was appropriate to determine likelihood of success on the merits of the case. The non-compete, which arose out of the sale of a business, expired by the time the court addressed the preliminary injunction motion.

Temporary Restraining Orders

An Ohio court refused to grant a temporary restraining order against a departed sales executive in Chart Industries, Inc. v. Spagnoletti, 2012 U.S. Dist. LEXIS 140102 (N.D. Ohio Sept. 28, 2012), because the non-competition covenant contained no geographic or job-scope limitations. Though careful to note that such covenants were not per se unenforceable, the court stated it was important that the employer did not ask the court to impose any sort of limitation on the covenant at the TRO stage that would make it reasonable. The case demonstrates the continued difficulty courts have enforcing non-competes that contain no limiting language whatsoever. Delaware law applied.

Necessary and Indispensable Parties

In non-compete cases, the plaintiff sometimes will elect to forego suing the new employer and will proceed simply against the employee. There are a number of strategic and substantive reasons why this may be the case. The ruling in OneCommand, Inc. v. Beroth, 2012 U.S. Dist. LEXIS 122587 (S.D. Ohio Aug. 29, 2012), shows that a new employer is not a necessary party who must be part of the litigation under Federal Rule of Civil Procedure 19. Even if the plaintiff has potential claims against a new employer (for interference, trade secrets theft and the like), it is not necessary to make that company a party to a breach of contract suit with the employee.

Jury Trial Waivers

The right to a jury trial can be waived by contract if the waiver is knowing and voluntary. Generally, such waivers are strictly construed, however. One question that frequently arises is how far the contractual waiver extends to non-contract claims, like trade secrets misappropriation. A Delaware court concluded that a jury waiver provision in an asset purchase agreement encompassed related tort claims of trade secrets theft, conversion, and common-law unfair competition - reasoning that the "arising out of" language in the agreement was sufficiently broad to include torts intrinsically related to the contract action. The case is Coface Collections North Am., Inc. v. Newton, 2012 U.S. Dist. LEXIS 124342 (D. Del. Aug. 31, 2012).

Attorneys' Fees

Non-compete litigation can sometimes perpetuate itself solely because of fees that are incurred. An illustration of this problem comes from the case of Cumulus Broadcasting v. Okesson, 2012 U.S. Dist. LEXIS 124836 (D. Conn. Sept. 4, 2012). After the parties settled, they left it to the district judge to award attorneys' fees under a provision of the employment agreement that enabled the plaintiff to recover fees enforcing the non-compete.

The court, seemingly none-too-pleased (particularly since it was not allowed to see the terms of the parties' settlement agreement (?)), significantly pared back what the plaintiff thought it was owed. It essentially limited its fees to those incurred to obtain a preliminary injunction. And even that apparently gave the plaintiff only a small slice of what it wanted. The court ripped about $10,000 in fees off what it cost to take the matter to hearing.

The fee award was $80,317 (inclusive of some $21,000 in costs) - about 1/4 of what the plaintiff incurred and claimed it was entitled to. If nothing else, the case highlights for clients what a preliminary injunction can cost. And it further shows that weak non-compete cases can cost a lot more than the value of the benefit received.

Allocating the Cost of Electronic Discovery In Competition Cases (Genworth Financial v. McMullan)

Electronic discovery is the new frontier in unfair competition cases. Many times, employers will be able to obtain evidence that departing employees e-mailed to themselves clearly proprietary customer lists or downloaded information to a flash drive prior to departing. This conduct raises a host of issues, including potential liability under the Computer Fraud and Abuse Act.

The question courts have struggled with is how to allocate the cost of electronic discovery, as forensic imaging and data recovery expenses can be extraordinary in terms of absolute dollars. There are a number of approaches courts can take, but the presumption under the Federal Rules of Civil Procedure is that the responding party must bear the expense of complying with discovery requests.

Magistrate Judge Grimm has determined that Rule 26 actually guides courts in balancing the factors to determine who should bear the cost of e-discovery. Among the factors to be considered:

(1) whether the discovery sought is cumulative;
(2) whether the discovery sought is obtainable from another reliable source;
(3) whether the requesting party already has had an opportunity to obtain the information;
(4) whether the burden of discovery outweighs its potential benefit.

Several other courts have outlined other factors to consider as well, with some evaluating total costs of production and the importance of the information.

In cases where the departing employees have not preserved evidence or have taken active steps to delete information, courts have the ability to step in and appoint a third-party forensic expert. The question of cost-shifting becomes more nuanced in those situations, and courts again have to weigh factors in assessing which party bears the burden of expense.

A good example of this is the recent case of Genworth Financial v. McMullan. In that case, former employees left Genworth Financial and established a rival entity. The defendants apparently took copies of the plaintiff's ACT database (full of client information) prior to their staggered departures.

After Genworth sued, it noted that certain information it expected to receive in discovery was not provided. Genworth sought some assurances from the defendants that information was being preserved, so that temporary and inactive files were not being deleted or overwritten. The defendants' counsel indicated that they had no intention of imaging the hard-drives. Genworth then filed a motion to have the court appoint a neutral expert to mirror-image the defendants' computers and media devices.

The court granted the motion with relative ease, particularly given the evidence that certain of the defendants in fact transmitted valuable Genworth information to his home computer. Of more importance to the court was one defendant's admission that he discarded the computer hard-drive after receiving a litigation hold letter from Genworth's counsel - clear evidence that he intentionally spoliated evidence. Finally, the court noted that the defendants' transmission of client information to their home computers was not isolated; an overwhelming amount of valuable data was in fact sent.

Accordingly, the court found a sufficient nexus between the trade secrets claim and the computers at issue to justify appointment of a mirror-imaging expert. The protocol for such imaging followed a three-step process. The expert had to (1) image of the computers; (2) recover deleted data and organize the same into a reasonable searchable form; and (3) allow defendants' counsel to examine the data for privilege and responsiveness.

The cost allocation was addressed last. Given defendants' culpability and spoliation of evidence, it had to bear 80 percent of the neutral expert's recovery cost, while the plaintiff had to pay for the remaining 20 percent. The court also awarded the plaintiff recovery of its attorneys' fees.

The takeaways from this case are numerous, but here are three important points to remember:

(1) Spoliation or failure to preserve evidence once under a duty imposed by law can be costly and lead to sanctions;
(2) Courts have discretion to involve neutral experts to manage certain aspects of e-discovery, particularly if the responding party has been obstinate or uncooperative; and
(3) Allocation of the costs of e-discovery, even in the face of clear spoliation, is not subject to any formula and varies widely from case to case, with the requesting party likely to bear some expense regardless of the responding party's culpability.

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Court: United States District Court for the District of Connecticut
Opinion Date: 6/1/10
Cite: Genworth Financial Wealth Mgmt., Inc. v. McMullan, 267 F.R.D. 443 (D. Conn. 2010)
Favors: Employer
Law: Federal Rules of Civil Procedure

Customer Contact May Be Prohibited In Absence of Non-Compete Agreement (Taxsalelists.com v. Rainer)

One issue that frequently comes up in my practice is the extent to which an employer can prevent an ex-employee from contacting customers when there is no non-compete or non-solicitation agreement. Though it's difficult to obtain this remedy, the circumstances are not quite as narrow as many attorneys believe.

Most frequently, post-employment competition without a valid non-compete can be restrained when an employee steals some proprietary data that bears a direct nexus to customer names or goodwill, or when the employee engages in pre-termination competitive activity with certain accounts.

As to the former, it is perfectly logical to prevent customer contact if proprietary customer information (such as a secret list) has been taken. Regarding the latter, courts call this a "headstart" injunction because it purges the unfair competitive advantage gained by an employee before his fiduciary duty of loyalty ended. So the reasoning goes, if an employee has moonlighted and diverted a customer account away for 6 months, then he or she should be restrained from working with that same customer for the same period of time.

A recent case from Colorado illustrates these two situations. In Taxsalelists.com, LLC v. Rainer., a business engaged in providing complete property tax sale lists to affiliates and subscribers suffered a bizarre familial fallout in November and early December. The owner of Taxsalelists.com, John Lane, hired his two stepsons and their wives in 2008 as employees. In July of 2009, one of the two stepsons, Matthew, resigned. While employed at Taxsalelists.com, Matthew had enabled his Gmail account to forward any personal e-mail to his company account. When Matthew quit, he forgot to disable this feature.

This might not have been a big deal, except that the plaintiff claimed Matthew was providing Taxsalelists.com's customer database to a direct competitor both before and after his employment at Taxsalelists.com ended. At the time of an injunction proceeding, a review of e-mail information seemed to confirm that the other step-son, who is still employed by Taxsalelists.com, was enabling Matthew to provide such proprietary information illegally to a direct competitor.

The court had little trouble issuing a temporary restraining order on a complaint charging violation of the Computer Fraud and Abuse Act, breach of fiduciary duty, and a host of other common-law claims. The TRO ruling is interesting in a few separate respects:

(1) It was issued ex parte (i.e., without notice) on the basis that the defendants may seek to destroy electronic evidence, hard drives and relevant information if given notice of the TRO hearing.

(2) The TRO prohibited all of the defendants from contacting any of plaintiff's customers contained on the appropriated e-mail/customer lists.

With compelling evidence of misappropriation of customer data, the court was able to fashion what amounts to a non-compete even though no contract prohibiting customer competition was in place. Under most state trade secrets statutes and the common law of fiduciary duty, courts have wide latitude to remedy acts of unfair competition, and in many cases a strong case on one of these theories may enable a plaintiff to restrain more competitive acts than even the most airtight agreement.

UPDATE X1: This matter settled with no admission of liability by the Defendants who strongly denied any misappropriation ever occurred.

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Court: United States District Court for the District of Colorado
Opinion Date: 12/11/09
Cite: Taxsalelists.com, LLC v. Rainer, 2009 U.S. Dist. LEXIS 122274 (D. Colo. Dec. 11, 2009)
Favors: Employer
Law: Federal

Discovery Dispute In Trade Secrets Action Symptomatic of Fishing Expedition (IKON Office Solutions v. Konica Minolta)

Trade secrets actions are notorious for creating intractable discovery thickets. The fundamental problem usually revolves around interrelated concepts: the defendant's request to know exactly what trade secrets are at issue, and the plaintiff's need to know what the defendant has. The former automatically implicates grave intellectual property protection concerns, while the latter often is a ruse to obtain more information than really should be at issue.

Very few jurisdictions place the burden on the plaintiff to disclose the precise nature of trade secrets at the outset of the case. California mandates this by statute. Illinois should have, but legislation on this issue stalled while the General Assembly tried to clean up its own act.

In almost every trade secrets suit, the defendant issues initial discovery requests seeking to place some parameters on the case by asking for an identification of what the specific trade secrets are that the defendant is alleged to have misappropriated.

In a dispute between direct competitors in the office equipment business, this tension led to a common discovery log-jam. IKON Office Solutions, the plaintiff in the case, sued Konica Minolta and William Cimler (an ex-IKON employee) under a non-compete and trade secrets misappropriation theory. Not surprisingly, the defense wanted to know what trade secrets were the subject of the complaint.

IKON balked and would not disclose the precise trade secrets at issue, identifying only a broad range of customer information. This is inadequate and abusive, particularly in a case where the crux of the dispute focuses on customer solicitation.

But litigation is a common tactic over this issue, even in cases like the IKON-Konica Minolta case where the employee's non-compete expired prior to the start of litigation and the ex-employer defaults to a trade secrets claim. Not surprisingly, Konica Minolta prevailed in its contentious discovery battle, as the court would not allow IKON to simply identify broad categories of information and to fish for Konica's own confidential business information through vague, abusive written discovery requests. The intent in cases like this is obvious: the plaintiff wants to use the litigation process to unearth for itself who its ex-employee has contacted or solicited.

In a trade secrets action, plaintiffs can and should be required to identify the allegedly misappropriated trade secrets at the outset. It is a mystery why plaintiffs don't use the procedure Judge Milton Shadur approved of years ago and simply move for an order requiring the defendant to turn over any documents or electronically-stored information in his possession so that the Plaintiff can see what he or she has taken. There is nothing wrong with waiting for this to play out prior to disclosure of a trade secrets identification statement. Without some procedural safeguards and active court involvement in discovery, trade secrets claims frequently become an abyss of litigation, bogged down in discovery squabbles where the merits of the lawsuit are tertiary and only sometimes related to one party's desire to fish around for competitor information.

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Court: United States District Court for the Western District of North Carolina
Opinion Date: 11/25/09
Cite: IKON Office Solutions, Inc. v. Konica Minolta Business Solutions, U.S.A., Inc., 2009 U.S. Dist. LEXIS 116372 (W.D.N.C. Nov. 25, 2009)
Favors: Employee
Law: North Carolina, Federal Rules of Civil Procedure

Temporary Restraining Order In Non-Compete Case Requires Showing of Immediate Harm (Ride-Away Handicap Equip. v. Tracey)

Employer seeking immediate redress from threatened competitive harm have to move fast. The preferred remedy in most non-compete disputes is an injunction, and for extreme emergencies, an employer can seek a temporary restraining order - in effect, a paper trial before the court hears live evidence.

TROs are important because the employer will be largely in control of the documents. At a preliminary injunction, the defense has the benefit of time - time to amass evidence, prepare witnesses and find helpful third-party testimony.

But TROs require exigency. Illustrating this key point is a decision from earlier in the week in Florida federal court. In Ride-Away Handicap Equipment v. Tracey, the employer waited four months after sending a "cease and desist" letter to two ex-employees (and its new employer) to file a TRO petition. It also appears the employer gave no notice of the TRO to the defendants. Notice is not required in some circumstances, but the moving party must show why irreparable injury would result from lack of notice.

The court was unimpressed with the employer's delay and denied the TRO petition without a response. There is no bright-line rule for when an employer must move for injunctive relief. Immediacy, in fact, can arise during the pendency of a dispute, for example if an ex-employee suddenly starts poaching other co-workers or discloses confidential information to a customer in violation of a contract. But in a case where the breach is known to the employer, and the employer waits a few months to seek an injunction to stop that breach, it risks losing a valuable equitable right.

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Court: United States District Court for the Middle District of Florida
Opinion Date: 11/10/09
Cite: Ride-Away Handicap Equipment Corp. v. Tracey, 2009 U.S. Dist. LEXIS 104984 (M.D. Fla. 2009)
Favors: Employee
Law: Federal Rules of Civil Procedure

E-Mail Destruction Leads to Adverse Inference and Fee-Shifting Sanctions (Telequest Int'l v. Dedicated Business Systems)

Few cases implicate discovery sanctions and spoliation of evidence like claims of unfair competition against an ex-employee. With most evidence of trade secrets theft and customer solicitation documented and proven electronically, it is far easier for plaintiffs to trace unfairly competitive activity.

For whatever reason, employees seem to think that computer forensics is still a dark ages novelty. It is routine to read cases where hard-drives are deleted are scraper programs are used to wipe files during litigation. Employees think they are helping their cause by covering their tracks.

They're not.

The recent decision in Telequest International v. Dedicated Business Systems is a good example of what discovery sanctions will be imposed for destruction of evidence. During the course of a protracted discovery dispute about production of documents, one of the defendants ran a "defrag" program just two days before he was under court order to produce a forensic copy of his hard-drive to the plaintiff's expert witness. He installed Secure Clean software, rendering certain key documents untraceable. Though some cases involve e-mail or hard-drive deletion prior to litigation, this occurred well into the dispute. As such, there was no issue the employee was under a duty not to destroy relevant evidence.

Therefore, the primary question was the appropriate level of sanctions. The court discussed the plaintiff's request for a default judgment and concluded this was too severe of a sanction. Instead, the court held an adverse inference instruction to the finder of fact, coupled with a fee award related to the discovery dispute, was a sufficient sanction under the circumstances.

The adverse inference sanction is intended to level the playing field with respect to the discovery violation, since the defendant will be unable to benefit in any way from the deletion activity. Indeed, the fact-finder is instructed that the spoliation is evidence the party did so out of the well-founded fear the contents would harm him.

In a non-compete dispute, this generally means a fact-finder is able to presume improper customer solicitation or wrongful retention of confidential information.

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Court: United States District Court for the District of New Jersey
Opinion Date: 3/11/09
Cite: Telequest Int'l. Corp. v. Dedicated Business Systems, Inc., 2009 U.S. Dist. LEXIS 19546 (D. N.J. Mar. 11, 2009)
Favors: Employer
Law: Federal

Texas Court Reverses Dismissal of CFAA Claim on Jurisdiction Grounds (Ennis Tranportation v. Richter)

I wrote several weeks ago about the bizarre ruling in Texas, where a federal court dismissed a Computer Fraud and Abuse Act claim on subject-matter jurisdiction grounds, holding in essence that removal was not proper because the CFAA is a criminal statute. Though the original CFAA may be criminal in nature, it has been amended several times, and the statute clearly permits civil actions under a number of sections.

Last week, the court granted a motion to reconsider and retained jurisdiction over the case.

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Court: United States District Court for the Northern District of Texas
Opinion Date: 2/24/09
Cite: Ennis Transp. Co., Inc. v. Richter, 2009 U.S. Dist. LEXIS 15585 (N.D. Tex. Feb. 24, 2009)
Favors: Neutral
Law: Federal Rules of Civil Procedure

Kansas Court Sides With Narrow Application of Computer Fraud and Abuse Act (Us Bioservices v. Lugo)

Another court has weighed in on whether the federal Computer Fraud and Abuse Act can be applied to essentially federalize trade secrets claims. The answer, in the case of US Bioservices v. Lugo, was a resounding "no."

In granting the defendant's motion to dismiss the CFAA claim, the court adopted a narrow reading of the predicate act giving rise to liability under the statute. Though the CFAA has a number of different provisions, the touchstone of liability is that a defendant must use a protected computer without authorized access or in a manner which exceeds the access granted to him.

The Lugo case is based on a fairly typical of fact-pattern under the CFAA. An ex-employer claims that an employee downloaded or accessed confidential business information while on her work computer, e-mailed that to another location (usually a home account), and then permitted a new employer to use or obtain the benefit of the stolen data.

Does this activity equate to unauthorized access?

Lugo held no, noting along the way that federal courts are split on the issue. There are a number of factors supporting this narrow reading of the authorization language:

(1) the CFAA is at heart a criminal statute, and the rule of lenity applies
(2) "without authorization" is not defined but means, basically, "without permission" and there was no dispute that the employee had permission to access the information, irrespective of whether she misused it later
(3) the focus of the CFAA is wrongful procurement of data, not wrongful use of it

The court rejected the reasoning applied in other jurisdictions that principles of agency law can be grafted onto the CFAA. Under cases like the influential Citrin decision from the Seventh Circuit, an employee's "access" to his work computer ends when he is in breach of a duty of loyalty. Therefore, in those jurisdictions where Citrin is the prevailing rule, it is much easier to state a claim under the CFAA for cases involving misuse of data.

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Court: United States District Court for the District of Kansas
Opinion Date: 1/21/09
Cite: Us Bioservices Corp. v. Lugo, 595 F. Supp. 2d 1189 (D. Kan. 2009)
Favors: Employee
Law: Federal

Texas Federal Court Dismiss Computer Fraud Claim for Lack of Jurisdiction (Ennis Transportation v. Richter)

A federal court in Texas has dismissed an employment unfair competition case for lack of subject-matter jurisdiction. The plaintiff, Ennis Transportation, had sued its former employees in Ellis County, Texas for misappropriation of trade secrets and a violation of the Computer Fraud and Abuse Act.

The CFAA does contain criminal penalties, but litigants can maintain a civil cause of action and obtain legal and equitable relief under certain provisions of the Act. Increasingly, attorneys (particularly for employers) are federalizing garden-variety trade secrets disputes by adding CFAA claims, particularly after a number of court rulings making it easier to sustain unfair competition actions within the construct of the CFAA.

In this case, however, when the defendants attempted to remove the case to federal court in Dallas, Judge Jane Boyle remanded the case back to Ellis County, holding that the CFAA is a criminal statute and cannot form the basis for removal under federal question jurisdiction.

This is bizarre ruling, given that the CFAA provides for civil remedies. One other court has recognized removal jurisdiction as appropriate. See First Bank & Trust v. Haines, 2006 U.S. Dist. LEXIS 55811 (E.D. La. July 24, 2006).

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Court: United States District Court for the Northern District of Texas
Opinion Date: 1/05/09
Cite: Ennis Transp. Co., Inc. v. Richter, 2009 U.S. Dist. LEXIS 462 (N.D. Tex. Jan. 5, 2009)
Favors: Neutral
Law: Federal Rules of Civil Procedure

Faulty Affidavit Prevents Employer From Obtaining TRO (American Family v. Gustafson)

An effort by American Family Insurance to obtain an ex parte temporary restraining order against a former employee, Barry Gustafson, failed in large part because of an insufficient affidavit submitted by the plaintiff in its TRO application.

The case arose under the Computer Fraud and Abuse Act (CFAA), as well as other pendent state claims for unfair competition. Increasingly, employers are using the CFAA to federalize competition cases, particularly given the expansive reading some circuit courts have given to the statute. The gist of plaintiff's claim was that Gustafson downloaded information from American Family's computers and used that information to solicit away customers for his new venture. The TRO was denied, and the court chastised the plaintiff for its conclusory affidavit.

In particular, the court noted that the affiant could not set forth any facts demonstrating that Gustafson had solicited or continued to solicit customers improperly. Additionally, the affidavit indicated that Gustafson began soliciting customers in July or August of 2008, but given that the complaint and ex parte TRO were filed on December 21, the statements of the affiant undercut any argument of "immediate injury."

The case demonstrates the care which attorneys must take in securing testimony by way of affidavit. Too often, insufficient or hastily prepared affidavits contain inadmissible hearsay or improper conclusions. This can doom an employer's chances of obtaining immediate injunctive relief regardless of the merits.

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Court: United States District Court for the District of Colorado
Opinion Date: 12/22/08
Cite: American Fam. Mut. Ins. Co. v. Gustafson, 2008 U.S. Dist. LEXIS 103068 (D. Col. Dec. 22, 2008)
Favors: Employee
Law: Federal Rules of Civil Procedure

Discovery Dispute Clarifies Permissible Scope of Protective Order in Trade Secrets Case (Directory Concepts v. Fox)

A federal district court opinion and order rendered last week highlights the problem of conducting discovery in a trade secrets case. Normally, it is standard operating procedure for the parties to agree on a protective order to facilitate the orderly, efficient flow of discovery. Indeed, the Uniform Trade Secrets Act actually requires a court to enter a protective order to safeguard against even "an alleged trade secret."

In an Indiana dispute between administrators of yellow pages advertising, the parties were not quite so amenable to agreeing on the terms of a protective order. The defendants challenged the very entry of the protective order claiming that the trade secret information at issue was readily ascertainable in the industry. The court sensibly concluded that this argument went to the ultimate merits of the case, and that plaintiff's allegations demonstrated good cause for entry of a Rule 26(c) protective order.

However, the court addressed a number of other concerns litigants have over the terms of the order. The Seventh Circuit, which includes federal district courts in Indiana, has taken a more hands-on approach to scrutinzing protective orders so that trial judges simply are not allowed to rubber-stamp agreed orders parties place in front of them. The case of Citizens First Nat'l Bank v. Cincinnati Ins Co., 178 F. 3d 943 (7th Cir. 1999), instructs that parties can keep trade secrets out of a public court record if:

(a) the judge satisfies himself that the parties know what a trade secret is and are acting in good faith in deciding which parts of the record are trade secrets; and

(b) the judge makes explicit that either party and any interested member of the public can challenge the secreting of any particular information.

In the case before it, the plaintiff proposed a protective order that did not have a sufficiently demarcated category of confidential information. Specifically, the proposed order defined "trade secrets" as "defined by Indiana Code Section 24-2-3-2 and Indiana case law." The court demurred on plaintiff's attempt.

However, the court accepted the plaintiff's affidavit submitted in support of its motion in which plaintiff broke down categories of alleged trade secrets into sub-categories: Workflow Information, Order Information by Client, Billing Preferences by Region, Databases That Show Billing Preferences by Location and Region, Client Databases Detail by Location, Contact Databases, and Nat Reports by Region or Location. Each category contained examples and identifications of the types of data that plaintiff used to operate is business.

The court incorporated those terms and held that they were "sufficiently specific to satisfy the Court that the parties know what a Trade Secret is..." Finally, the court held that most of the information in the proposed protective order (except, oddly, for Non-Party Private Information) could be designated as "attorneys-eyes only."

Entering a protective order in federal court - especially in districts within the Seventh Circuit - requires much more work and diligence than it does in state court. Normally, defense attorneys can mitigate any concerns about agreeing to or acknowledging that certain information constitutes a trade secret. The easiest way to do this is by inserting a simple clause that states a party's mere designation of a document as "confidential", or the other party's decision not to challenge such a designation with the court, does not operate as an admission as to the trade secret or proprietary status of the document itself.

In fact, defense attorneys who challenge the propriety of a protective order in the first place will be hindering their own chances at discovery and will only add to the time and expense of litigation.

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Court: United States District Court for the Northern District of Indiana
Opinion Date: 12/16/08
Cite: Directory Concepts, Inc. v. Fox, 2008 U.S. Dist. LEXIS 102192 (N.D. Ind. Dec. 16, 2008)
Favors: Employer
Law: Indiana, Federal Rules of Civil Procedure