Non-Compete and Trade Secrets News for the week ended March 31, 2017
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The Defend Trade Secrets Act and "Continuing" Misappropriations
The Eastern District of Pennsylvania rejected a defense challenge to the Defend Trade Secrets Act, which I must confess I didn't see coming.
In Brand Energy & Infrastructure Svcs., Inc. v. Irex Contracting Group, No. 5:16-cv-2499, the court first noted that the DTSA can apply to continuing acts of misappropriation that began before the law's enactment in May of 2016 if those acts continued later. This would, for instance, capture a continuing improper or unauthorized use of an alleged trade secret.
The court then rejected a constitutional challenge as applied to the facts under the ex post facto clause of the United States Constitution. In a long and interesting passage, the court noted the DTSA's heavy reliance on state versions of the Uniform Trade Secrets Act and described how the DTSA was substantially different in its textual description of the law's effective date. As a result, the court found Congress intended to apply the DTSA to continuing claims of misappropriation and to provide a remedy that dealt not only with the acts occurring after the effective date but before as well.
A copy of the decision is available here.
The Anheuser-Busch Whistleblower Case
Remember James Clark? Yeah, I didn't think so. Clark accused Anheuser-Busch of filing a "strategic lawsuit against public participation" (called a "SLAPP action") when it accused him of misappropriating trade secrets related to A-B's brewing process. Clark allegedly took the information to institute a class action against A-B concerning the supposed mislabeling of alcohol content on its beer products.
A California district court had denied Clark's motion to dismiss the case as an improper SLAPP suit. Clark then appealed, a procedure that many state SLAPP statutes allow (even though the denial of a motion to dismiss is not otherwise appealable). In late 2015, the Ninth Circuit reversed and found the district court incorrectly determined that Clark's efforts to litigate (or share information with class counsel) were not the type of "protected activity" encompassed within California's SLAPP statute. The circuit court then remanded for the district court to determine whether A-B had established some probability of success on its misappropriation claim. That inquiry is a core part of determining whether an anti-SLAPP motion should be granted.
Last week, the district court once again ruled in A-B's favor and found it demonstrated such a probability of success, thereby denying Clark's anti-SLAPP motion for a second time. The court commented briefly on Clark's whistleblower defense, a topic of particular interest given how the Defend Trade Secrets Act contains a specific provision to protect whistleblowers The problem for the court, it appeared, is that assisting in a class action is not at all whistleblowing activity. Under California law, for instance, protected whistleblowing activity involves some complaint to a governmental agency.
A copy of the opinion is available here. Clark, by the way, appealed the adverse ruling once again.
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For an extended discussion on the various States' treatment of consideration in non-compete contracts, please see Sheppard Mullin's article in The National Law Review. Not surprisingly, Illinois merits an extended discussion.
GeekWire reports on the passage of a non-compete bill in the Washington House. The bill is generally considered employee-friendly, particularly as to technology workers. Amazon has been fairly aggressive in its use of non-competes.
Showing posts with label Whistleblowers. Show all posts
Showing posts with label Whistleblowers. Show all posts
Friday, March 31, 2017
Friday, May 13, 2016
In Wake of Defend Trade Secrets Act Passage, a New Whistleblower Ruling Protects Employees
I cannot begin to wade into the commentary surrounding the passage of the Defend Trade Secrets Act, which officially became the law this week. The summaries of this new federal legislation are so numerous and sweeping that I am already too late to the game.
I would like to discuss, though, one provision of the DTSA which protects whistleblowers - those who may need to use or reveal company confidential information to expose fraud, illegality, or some wrongdoing. Section 7 of the DTSA now immunizes employees from civil and criminal liability if they disclose confidential or trade secret information to the government for reporting suspected violations of the law. I wrote recently about the DTSA's new whistleblower provision and how this obscure provision of the new law may result in employers avoiding federal court (at least for a while) during the law's honeymoon period). Mike Greco of Fisher & Phillips takes a deeper dive into the subject, which is worth a read.
Before the DTSA's enactment, the rub of any whistleblowing activity concerning trade secrets, no matter how legitimate, is the potential for a counterclaim. When whistleblowing activity results in litigation against the company, the company may fire back and claim that the disclosure of confidential documents to counsel or the government violates an existing employment non-disclosure agreement.
Two days before President Obama signed the DTSA into law, a federal district court in the Northern District of Illinois addressed the precise type of whistleblowing activity the DTSA is meant to partially immunize. In United States ex rel. Cieszyski v. LifeWatch Services, Magistrate Judge Schenkier dismissed LifeWatch's counterclaim against an ex-employee, Matt Cieszyski, for breach of a non-disclosure agreement.
Cieszyski took corporate documents as part of his pursuit of what is known as a qui tam suit under the False Claims Act. This type of action enables a private person to bring an action in the name of the government if that person has evidence that another has submitted a false claim to the government.
Judge Schenkier found that LifeWatch did not state a plausible claim for breach of the non-disclosure covenant after balancing the countervailing interests Cieszyski had in pursuing his action (which necessarily depended on the information in the claimed confidential documents). Critically, Cieszyski took what he believed was necessary and did not disclose the corporate information to any LifeWatch competitor. The key passage from Judge Schenkier's ruling reads:
"It is unrealistic to impose on a relator the burden or knowing precisely how much information to provide the government when reporting a claim of fraud, with the penalty for providing what in hindsight the defendant views as more than was needed to be exposure to a claim for damages. Given the strong public policy encouraging persons to report claims of fraud on the government, more is required before subjecting relators to damages claims that could chill their willingness to report suspected fraud."
(A "relator" is someone like Cieszyski who brings a qui tam action.)
Keep in mind that the DTSA's whistleblower provisions do not give employees a free pass to do what Cieszyski did. What Cieszyski did in limiting what he took was obviously smart. But an employer still can maintain a counterclaim against a whistleblower if the scope of his or her taking exceeded what was necessary to maintain the qui tam suit (keeping in mind the ex ante perspective used by Judge Schenkier) or if there was some separate disclosure of the documents outside the suit, such as to a competitor.
I would like to discuss, though, one provision of the DTSA which protects whistleblowers - those who may need to use or reveal company confidential information to expose fraud, illegality, or some wrongdoing. Section 7 of the DTSA now immunizes employees from civil and criminal liability if they disclose confidential or trade secret information to the government for reporting suspected violations of the law. I wrote recently about the DTSA's new whistleblower provision and how this obscure provision of the new law may result in employers avoiding federal court (at least for a while) during the law's honeymoon period). Mike Greco of Fisher & Phillips takes a deeper dive into the subject, which is worth a read.
Before the DTSA's enactment, the rub of any whistleblowing activity concerning trade secrets, no matter how legitimate, is the potential for a counterclaim. When whistleblowing activity results in litigation against the company, the company may fire back and claim that the disclosure of confidential documents to counsel or the government violates an existing employment non-disclosure agreement.
Two days before President Obama signed the DTSA into law, a federal district court in the Northern District of Illinois addressed the precise type of whistleblowing activity the DTSA is meant to partially immunize. In United States ex rel. Cieszyski v. LifeWatch Services, Magistrate Judge Schenkier dismissed LifeWatch's counterclaim against an ex-employee, Matt Cieszyski, for breach of a non-disclosure agreement.
Cieszyski took corporate documents as part of his pursuit of what is known as a qui tam suit under the False Claims Act. This type of action enables a private person to bring an action in the name of the government if that person has evidence that another has submitted a false claim to the government.
Judge Schenkier found that LifeWatch did not state a plausible claim for breach of the non-disclosure covenant after balancing the countervailing interests Cieszyski had in pursuing his action (which necessarily depended on the information in the claimed confidential documents). Critically, Cieszyski took what he believed was necessary and did not disclose the corporate information to any LifeWatch competitor. The key passage from Judge Schenkier's ruling reads:
"It is unrealistic to impose on a relator the burden or knowing precisely how much information to provide the government when reporting a claim of fraud, with the penalty for providing what in hindsight the defendant views as more than was needed to be exposure to a claim for damages. Given the strong public policy encouraging persons to report claims of fraud on the government, more is required before subjecting relators to damages claims that could chill their willingness to report suspected fraud."
(A "relator" is someone like Cieszyski who brings a qui tam action.)
Keep in mind that the DTSA's whistleblower provisions do not give employees a free pass to do what Cieszyski did. What Cieszyski did in limiting what he took was obviously smart. But an employer still can maintain a counterclaim against a whistleblower if the scope of his or her taking exceeded what was necessary to maintain the qui tam suit (keeping in mind the ex ante perspective used by Judge Schenkier) or if there was some separate disclosure of the documents outside the suit, such as to a competitor.
Tuesday, April 19, 2016
Why (Some) Companies Won't Sue Under the Defend Trade Secrets Act
The Senate's unanimous passage of the Defend Trade Secrets Act has resulted in a flood of legal blog posts that have, for the most part, extolled the virtues of having a federal regime covering this fourth branch of intellectual property.
However, there are at least three reasons why the Act, which still must pass the House of Representatives, may not result in an immediate wave of federal litigation.
1. The "Inevitable Disclosure" Doctrine's Inevitable Demise
One of the most prominent - and sensible - features of the DTSA is its implicit rejection of the inevitable disclosure theory of misappropriation. That topic has generated a wave of posts on this blog alone. To be sure, it is highly controversial and enables parties to bring suit without evidence of actual or even threatened misappropriation of trade secrets. In practice, it can amount to an implied non-compete without any objective parameters.
Fortunately, few states (Illinois, Iowa, New Jersey are a few) have adopted this theory and many have expressly rejected it (California and Georgia, for example). But in many states, it's just not clear whether inevitable disclosure is a viable theory on which to proceed. Since the Uniform Trade Secrets Act is the basis for most states' law, this uncertainty is a real head-scratcher.
The DTSA now provides that a federal court may grant a plaintiff an injunction as long as it doesn't "prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows."
Since the DTSA is intended to work in tandem with state law, a company that relies on the inevitable disclosure theory of misappropriation has no factual basis to invoke federal law and must proceed in state court.
2. Protecting the Whistleblower
During the amendment process, the Senate added protections in the DTSA which will protect a whistleblower who must disclose trade-secret information as part of reporting wrongdoing by an ex-employer. As part of these protections, an employer will have certain obligations that require it to notify an employee in a contract or policy statement of the DTSA's immunity provisions. If the employer does not provide notice of whistleblower immunity, it "may not be awarded exemplary damages or attorneys fees...in an action against an employee to whom notice was not provided."
It is somewhat unclear whether this provision applies in all trade-secret cases or only those that concern some whistleblowing activity. From the plain language of the DTSA's notice provision, I have to assume that it applies across the board. This is a somewhat obscure and late addition to the DTSA and it's not clear what the House will end up doing with the proposed legislation. But it's reasonable to assume that many smaller employees with less-sophisticated compliance operations will not have fully compliant agreements or policy statements. In that case, employers that feel they have a strong claim for punitive damages and attorneys' fees may have to resort to state law.
3. Fee-Shifting in Federal Court
The last reason that federal suits may not be as prevalent is related to the inherent weaknesses in many trade-secrets cases. This area of the law produces a large volume of silly, frivolous, and anti-competitive litigation. These weak cases often arise in employment-based trade-secrets suits, rather than those that are driven by intellectual property protection. For plaintiffs who seek to deter competition and invoke trade-secrets law in doing so, the federal system may end up helping defendants because of courts' willingness to sanction discovery abuse, bad-faith conduct by counsel, and spurious claims that lack evidentiary support.
The DTSA adopts the familiar bad-faith fee-shifting language now endorsed by most states. So simply as a textual matter, the opportunity for defendants to recover fees shouldn't be all that enhanced. However, practically speaking, federal courts have the know-how and political cover to award sanctions for frivolous cases.
However, there are at least three reasons why the Act, which still must pass the House of Representatives, may not result in an immediate wave of federal litigation.
1. The "Inevitable Disclosure" Doctrine's Inevitable Demise
One of the most prominent - and sensible - features of the DTSA is its implicit rejection of the inevitable disclosure theory of misappropriation. That topic has generated a wave of posts on this blog alone. To be sure, it is highly controversial and enables parties to bring suit without evidence of actual or even threatened misappropriation of trade secrets. In practice, it can amount to an implied non-compete without any objective parameters.
Fortunately, few states (Illinois, Iowa, New Jersey are a few) have adopted this theory and many have expressly rejected it (California and Georgia, for example). But in many states, it's just not clear whether inevitable disclosure is a viable theory on which to proceed. Since the Uniform Trade Secrets Act is the basis for most states' law, this uncertainty is a real head-scratcher.
The DTSA now provides that a federal court may grant a plaintiff an injunction as long as it doesn't "prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows."
Since the DTSA is intended to work in tandem with state law, a company that relies on the inevitable disclosure theory of misappropriation has no factual basis to invoke federal law and must proceed in state court.
2. Protecting the Whistleblower
During the amendment process, the Senate added protections in the DTSA which will protect a whistleblower who must disclose trade-secret information as part of reporting wrongdoing by an ex-employer. As part of these protections, an employer will have certain obligations that require it to notify an employee in a contract or policy statement of the DTSA's immunity provisions. If the employer does not provide notice of whistleblower immunity, it "may not be awarded exemplary damages or attorneys fees...in an action against an employee to whom notice was not provided."
It is somewhat unclear whether this provision applies in all trade-secret cases or only those that concern some whistleblowing activity. From the plain language of the DTSA's notice provision, I have to assume that it applies across the board. This is a somewhat obscure and late addition to the DTSA and it's not clear what the House will end up doing with the proposed legislation. But it's reasonable to assume that many smaller employees with less-sophisticated compliance operations will not have fully compliant agreements or policy statements. In that case, employers that feel they have a strong claim for punitive damages and attorneys' fees may have to resort to state law.
3. Fee-Shifting in Federal Court
The last reason that federal suits may not be as prevalent is related to the inherent weaknesses in many trade-secrets cases. This area of the law produces a large volume of silly, frivolous, and anti-competitive litigation. These weak cases often arise in employment-based trade-secrets suits, rather than those that are driven by intellectual property protection. For plaintiffs who seek to deter competition and invoke trade-secrets law in doing so, the federal system may end up helping defendants because of courts' willingness to sanction discovery abuse, bad-faith conduct by counsel, and spurious claims that lack evidentiary support.
The DTSA adopts the familiar bad-faith fee-shifting language now endorsed by most states. So simply as a textual matter, the opportunity for defendants to recover fees shouldn't be all that enhanced. However, practically speaking, federal courts have the know-how and political cover to award sanctions for frivolous cases.
Wednesday, July 24, 2013
Trade Secrets Whistleblower SLAPPed In Effort to Dismiss Lawsuit
Several weeks ago, John Marsh, Russell Beck, and I discussed on the Fairly Competing podcast the special problems that arise when companies pursue so-called "whistleblowers" for trade secrets misappropriation.
As John wrote on his blog this Spring, such suits may have the unintended consequence of giving the whistleblower a public forum to air her grievances and enable her to draw attention to facts that are potentially embarassing or harmful to the company.
One of the issues that can arise concerns the whistleblower's claim that her activity is protected under the First Amendment. Many states, including California and Illinois, have anti-SLAPP statutes that enable parties who face frivolous strike suits to pursue an early, special motion to dismiss. (SLAPP is an acronym for "strategic lawsuit against public participation.").
This procedure generally allows for: (1) consideration of matters outside the pleadings themselves; (2) a stay of discovery; and (3) mandatory cost- and fee-shifting. Traditionally, SLAPP suits (and anti-SLAPP) motions arise from defamation claims brought against a group of citizens, or notable citizens who have spoken out on a public issue. But they can arise from claims of trade secrets theft, because disgruntled employees often feel as though the public has a right to know of certain non-public information concerning a company's business practices, services, or products.
In our episode of Fairly Competing, John, Russell, and I discussed a particularly interesting suit in California in which James Clark accused Anheuser-Busch (his ex-employer) of filing a SLAPP suit. According to Clark, A-B sued him after he participated in (really, initiated) a class action related to the A-B's supposed mislabeling of alcohol content on its beer products. A-B's claim was for trade secrets misappropriation, arising out of Clark's supposed taking of beer specification sheets and other materials before he left A-B, which arguably were instrumental in the development of the class action suit.
Last week, the California court denied Clark's special motion to dismiss, finding that the trade secrets suit was not a SLAPP under California law. The Court determined Clark's protected activity - that is, participating in the class action against A-B - was "merely incidental" to the claims of trade secrets misappropriation and therefore beyond the anti-SLAPP law. Put another way, A-B's claims stood on their own without reference to the class action suit.
The court's ruling reflects the narrow set-up of California's anti-SLAPP law. In particular, California law does not specifically cover claims brought "in response to" government petitioning activity. Had such a provision been part of the statutory scheme, the court may have considered a number of other factors bearing upon A-B's claim. Illinois' anti-SLAPP law, for instance, is much broader, in that a responsive or retaliatory claim may fall directly within the statute. Courts in Illinois consider on a case-by-case basis whether the suit is truly relatiatory and will examine "retaliatory intent."
However, the court in the A-B case stated that "evidence of [A-B]'s motivation does not establish" that its claims "arose from Defendant's protected activity." The court's decision not to consider subjective intent may be surprising given the nature and purpose of anti-SLAPP laws. As a practical matter, this objective analysis has the effect of requiring courts to assess the nexus, or fit, between the underlying claim and the allegedly retaliatory claim. If the former has an independent factual and legal basis, then it does not "arise from" petitioning activity.
The court did not consider a relatively recent amendment to California's anti-SLAPP law, Section 425.17 of the California Code of Civil Procedure. That section, enacted to prevent "a disturbing abuse" of the anti-SLAPP law, meant to exempt certain actions arising from certain commercial statements or conduct.
The provision is densely worded and may not have directly fit the A-B/Clark dispute. But, at the very least, it recognizes in the SLAPP context the principle that commercial speech generally has more limited protection under the First Amendment compared with non-commercial interests. In this sense, California seems to be shifting away from allowing anti-SLAPP motions if they do not truly concern a matter of important public interest.
As John wrote on his blog this Spring, such suits may have the unintended consequence of giving the whistleblower a public forum to air her grievances and enable her to draw attention to facts that are potentially embarassing or harmful to the company.
One of the issues that can arise concerns the whistleblower's claim that her activity is protected under the First Amendment. Many states, including California and Illinois, have anti-SLAPP statutes that enable parties who face frivolous strike suits to pursue an early, special motion to dismiss. (SLAPP is an acronym for "strategic lawsuit against public participation.").
This procedure generally allows for: (1) consideration of matters outside the pleadings themselves; (2) a stay of discovery; and (3) mandatory cost- and fee-shifting. Traditionally, SLAPP suits (and anti-SLAPP) motions arise from defamation claims brought against a group of citizens, or notable citizens who have spoken out on a public issue. But they can arise from claims of trade secrets theft, because disgruntled employees often feel as though the public has a right to know of certain non-public information concerning a company's business practices, services, or products.
In our episode of Fairly Competing, John, Russell, and I discussed a particularly interesting suit in California in which James Clark accused Anheuser-Busch (his ex-employer) of filing a SLAPP suit. According to Clark, A-B sued him after he participated in (really, initiated) a class action related to the A-B's supposed mislabeling of alcohol content on its beer products. A-B's claim was for trade secrets misappropriation, arising out of Clark's supposed taking of beer specification sheets and other materials before he left A-B, which arguably were instrumental in the development of the class action suit.Last week, the California court denied Clark's special motion to dismiss, finding that the trade secrets suit was not a SLAPP under California law. The Court determined Clark's protected activity - that is, participating in the class action against A-B - was "merely incidental" to the claims of trade secrets misappropriation and therefore beyond the anti-SLAPP law. Put another way, A-B's claims stood on their own without reference to the class action suit.
The court's ruling reflects the narrow set-up of California's anti-SLAPP law. In particular, California law does not specifically cover claims brought "in response to" government petitioning activity. Had such a provision been part of the statutory scheme, the court may have considered a number of other factors bearing upon A-B's claim. Illinois' anti-SLAPP law, for instance, is much broader, in that a responsive or retaliatory claim may fall directly within the statute. Courts in Illinois consider on a case-by-case basis whether the suit is truly relatiatory and will examine "retaliatory intent."
However, the court in the A-B case stated that "evidence of [A-B]'s motivation does not establish" that its claims "arose from Defendant's protected activity." The court's decision not to consider subjective intent may be surprising given the nature and purpose of anti-SLAPP laws. As a practical matter, this objective analysis has the effect of requiring courts to assess the nexus, or fit, between the underlying claim and the allegedly retaliatory claim. If the former has an independent factual and legal basis, then it does not "arise from" petitioning activity.
The court did not consider a relatively recent amendment to California's anti-SLAPP law, Section 425.17 of the California Code of Civil Procedure. That section, enacted to prevent "a disturbing abuse" of the anti-SLAPP law, meant to exempt certain actions arising from certain commercial statements or conduct.
The provision is densely worded and may not have directly fit the A-B/Clark dispute. But, at the very least, it recognizes in the SLAPP context the principle that commercial speech generally has more limited protection under the First Amendment compared with non-commercial interests. In this sense, California seems to be shifting away from allowing anti-SLAPP motions if they do not truly concern a matter of important public interest.
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