Trading Secrets

Inevitable Disclosure of Nooks and Crannies

Michael Elkon — Mon, 01 Feb 2010 08:25:55 -0600

When explaining to lay people what we do, trade secret practitioners often use the classic examples of the formula for Coca-Cola or KFC’s secret recipe of eleven herbs and spices. Now, we can add as an illustration the nooks and crannies of Thomas’ English Muffins, as demonstrated by a case filed by Bimbo Bakeries (“BBakeries”) in the Eastern District of Pennsylvania. BBakeries, which sells a variety of different breads and baked goods, brought an action against Chris Botticella, a high-level BBakeries executive, on January 15, 2010. In the action, BBakeries is seeking, among other things, a preliminary injunction forbidding Botticella from commencing employment as an executive with Hostess Brands, a BBakeries competitor. The Honorable R. Barclay Surrick of the Eastern District of Pennsylvania held a hearing on BBakeries’ motion on January 25, 2010. At present, he has not ruled on the motion.

Not unlike other major companies that have pursued an executive going to competitors, BBakeries is proceeding against Botticella on an inevitable disclosure theory. BBakeries’ claim is that Botticella’s knowledge of its trade secrets and confidential information is so thorough that he would inevitably use that information in his work for Hostess, thus violating a non-disclosure agreement with BBakeries and the Pennsylvania Uniform Trade Secrets Act. In its motion and accompanying declarations, BBakeries alleges that Botticella is one of “less than ten people in the world with full knowledge of how to produce Thomas’ English Muffins, famous for their distinctive ‘nooks and crannies’ characteristics.” BBakeries also claims that Botticella knows the cost structure and strategies for most of its products, such as its “super premium breads.” All of this information would, according to BBakeries, give Hostess an improper competitive advantage. Finally, BBakeries asserts that Botticella concealed his intentions to move to Hostess, and then instructed his secretary to delete information from his hard drive.

As evidenced by the proposed findings of fact and conclusions of law filed by Botticella on January 29, 2010, Botticella is making several counter-arguments, which include the following: (1) there is no evidence as to Botticella’s responsibilities for Hostess, including whether he will be working on its English muffins, so BBakeries cannot show that he would inevitably disclose confidential information; (2) Botticella did not look at confidential materials sent to him by BBakeries after signing an “Acknowledgment and Representation Form” with Hostess on December 7, 2009; (3) the materials that Botticella deleted from his hard drive were of a personal nature, although he did accidentally delete work files; and (4) Botticella used an external storage device to practice his computer skills.

Botticella also argues that the inevitable disclosure doctrine should not apply because BBakeries set forth his post-employment obligations in its agreement with him. That agreement included a non-disclosure covenant, but not a non-compete provision. Thus, Botticella posits, the agreement provides a contractual framework governing his post-BBakeries employment and that framework should trump the inevitable disclosure doctrine.

Webinar: Computer Fraud and Abuse Act - What do you need to know?

Erika Birg — Wed, 27 Jan 2010 13:26:06 -0600

Tomorrow - January 28, 2010, 10 A.M. PDT

Our previous webinars have covered the basics of trade secrets and trade secret litigation. The third in our webinar series will focus on claims under the federal Computer Fraud and Abuse Act. The CFAA has, over the last decade, gained traction as a powerful weapon for companies to obtain injunctive and monetary relief when employees steal their employers' proprietary information. However, asserting a CFAA claim is not as straightforward as it seems. Over the years, some courts have expanded its applicability in the misappropriation context, while others have tried to limit use of the CFAA. Our webinar, The Computer Fraud and Abuse Act: What You Need To Know, will, among other things, describe the basics of a CFAA claim, identify the various interpretations of certain key elements of a CFAA claim as it is asserted in the misappropriation context, and discuss best practices for asserting and defending CFAA claims. We are joined by a computer forensic expert who will describe the various means of obtaining computer evidence to support a CFAA claim and will provide you with tips on preserving electronic evidence. You may register here.

First Circuit Court of Appeals Liberally Construes Personal Jurisdiction, Leading to 1.16 Million Dollar Verdict

Paul Freehling — Mon, 04 Jan 2010 14:45:46 -0600

Can a California corporation with virtually no ties to Rhode Island nonetheless be sued in Rhode Island federal court for misappropriation of a Rhode Island company’s trade secrets because the California corporation lured away a Florida employee who had a confidentiality agreement with the Rhode Island company? Yes, according to the United States Court of Appeals for the First Circuit. Astro-Med, Inc. v. Nihon Kohden America, Inc., Nos. 08-2334 and 08-2335, 2009 WL 3384786, 158 Lab. Cas. ¶60,887, and 29 IER Cas. 1543 (1^st Cir., Oct. 22, 2009).

Although the three judges did not agree on the reason for upholding the district court’s jurisdiction over the California corporation and although the non-compete clause in the ex-employee’s employment agreement with his former employer contained an undeniably excessive territorial restriction, the court affirmed judgment against the ex-employee for breach of contract – and against the California corporation for tortious interference with the Rhode Island competitor’s prospective economic advantage.

Astro-Med is a Rhode Island company that manufactures and sells “instruments for sleep and neurological research and clinical applications of sleep science and brain wave recording and analysis.” It employed Kevin Plant as a trainer and product demonstrator in Rhode Island. His employment agreement contained a comprehensive trade secrets-confidentiality provision as well as a one-year non-compete clause covering a vast territory: the whole of Europe and North America. The agreement recited that it would be governed by Rhode Island law and that all disputes would be heard in a Rhode Island court.

When Plant asked Astro-Med for a transfer to Florida, Astro-Med agreed and soon promoted Plant to District Sales Manager. In his positions with Astro-Med in Rhode Island and Florida, Plant had access to his employer’s most sensitive proprietary and secret business information.

Two years following Plant’s transfer, Astro-Med competitor Nihon Kohden America, a California company that had virtually no ties to Rhode Island but was fully aware of Plant’s contract, lured Plant away from Astro-Med to be Kohden’s Florida sales representative. Astro-Med promptly sued both Plant and Nihon in a Rhode Island state court. Both defendants were charged with misappropriation of trade secrets, which is a violation of the Rhode Island Uniform Trade Secrets Act. Astro-Med also accused Plant of breach of contract and Nihon of tortious interference with prospective economic advantage.

The defendants removed the lawsuit to federal court on the basis of diversity of citizenship. Then, Nihon moved to dismiss the complaint as against it for lack of in personam jurisdiction or, in the alternative, to transfer the case to Florida or California as a more convenient forum, and Plant joined in the venue motion. The district court denied both motions.

Following “especially hard-fought” litigation, a jury returned a verdict in favor of Astro-Med against both defendants and awarded $375,000 in damages. The court added exemplary damages, attorneys’ fees, costs, and sanctions that brought the judgment to $1.16 million. The defendants, of course, appealed from the denial of their motions as well as the judgment. The appellate court affirmed the district court’s rulings.

Precedent in the First Circuit holds that minimum contacts with the forum state means satisfaction of three requirements: relatedness, purposeful availment, and reasonableness. Attacking relatedness, the defendants argued that all activity between Nihon and Plant occurred in Florida or California, and that Nihon never came in contact with Rhode Island in the course of wooing or employing Plant. Further, Nihon had no place of business, assets or employees in Rhode Island. Yet, District Judge Woodcock, sitting in the appellate court by designation, agreed with the trial judge that the relatedness requirement was satisfied by applying the “effects test” since Nihon’s “conduct in Florida and California was a cause of the breach of contract – the actual injury – that occurred in Rhode Island.”

The “effects test” is commonly applied in determining whether a tort action bears a significant relationship to the forum state even though the tortfeasor, while not physically present there, purposefully engages in acts that cause injury there. The Astro-Med decision is unusual because the court held that the relatedness prong of the jurisdictional analysis was satisfied in Rhode Island on the basis that Nihon’s conduct outside that state caused breach of a Rhode Island contract.

Judge Woodcock said that there was purposeful availment because Nihon was aware of Plant’s contract at all relevant times and knowingly accepted the risk of a possible lawsuit in Rhode Island by Astro-Med. The reasonableness test was met by litigation against Nihon in Rhode Island because, even though all of the events relevant to Nihon’s relationship with Plant took place in Florida and California, because “the Florida and California witnesses and evidence were heading for trial in Rhode Island” in any event since, indisputably, Astro-Med had a right to litigate with Plant in that state.

The defendants insisted that the non-compete clause in Astro-Med’s contract with Plant was invalid because its territorial coverage obviously was over-broad. Over-broad? Yes, said the district and appellate courts, but not invalid. The clause could be “partially enforced” by “restricting its territorial application to the state of Florida and to a limited subset of Astro-Med customers.” Moreover, as the “breaching party,” Plant had no cause to complain since he “is being held to a more narrowly circumscribed agreement than the one he signed.”

In separate opinions, the other two jurists on the appellate panel, Circuit Judges Howard and Lipez, concurred in the result. Judge Howard took exception to Judge Woodcock’s jurisdictional analysis on the ground that it was irreconcilable with First Circuit precedent, while Judge Lipez challenged the legitimacy of that precedent.

Judge Howard noted that, to justify jurisdiction over an out-of-state defendant, the plaintiff must demonstrate that the claim relates to or arises out of the defendant’s contacts with the forum state. He stressed that Judge Woodcock’s application of the “effects test,” that is, where the injury occurred, to the relatedness prong of minimum contacts is irreconcilable with unequivocal First Circuit holdings that relatedness cannot be based solely on the in-forum consequences of distant conduct. He concluded that Judge Woodcock’s jurisdictional decision nevertheless was correct because a special rule can be applied in a business tort case where the defendant’s conduct was purposeful and where exercising jurisdiction is reasonable. In those circumstances, a court may construe the relatedness requirement “slightly more generously than we might in [other cases, thereby permitting] the best-suited forum to entertain the dispute.” The Rhode Island district court was that “best-suited forum.”

Circuit Judge Lipez, also concurring, bemoaned what he called “an analytical flaw in our precedent” which seemingly confines the “effects test to the purposeful availment prong of the specific jurisdiction inquiry. It is the illogic of that precedent that has required my concurring colleague to justify our outcome here by raising the possibility of a special relatedness test for business torts.” Rather, according to Judge Lipez, the “in-forum impacts of conduct undertaken outside the forum” – the “effects test” – is properly considered both “in evaluating personal availment [and in] the relatedness inquiry. In my view, therefore, there should be no need for a special category of economic or business tort.”

The Astro-Med case shows that an employer of someone who has a confidentiality and non-compete agreement with a former employer can be forced to defend misappropriation of trade secrets and tortious interference litigation in an inconvenient forum, especially when the prospective employer was aware of the agreement at all relevant times and the former employer is located within the First Circuit. Further, the prospective employer and ex-employee will not necessarily prevail in their challenge to an invalid non-compete clause where a court exercises “blue pencil” authority to modify the clause.

Right to a Jury Trial for Unjust Enrichment Claims

Erika Birg — Tue, 29 Dec 2009 16:11:35 -0600

I start by warning you that this case is old, over 5 years old, in fact. However, when it arrived in my regular e-mail of case synopses, I thought I would take a look, and given the long, slow holiday week, I thought it might have a nugget to share and to keep in mind as we go into 2010.

The case, The Newark Group, Inc. v. Sauter, Civ. Action No. C2:01-CV-1247, 2004 WL 5782100 (S.D. Ohio), was pending back in 2004. This particular opinion, on Defendants' motion to strike Plaintiff's jury demand, was decided in April 2004. Nevertheless, I think the point the court makes may be helpful.

The question before the court on Defendant's motion was whether the plaintiff was entitled to a trial by jury on its claims for damages in a trade secrets case under a theory of unjust enrichment. Defendants argued that under a trade secret case, an unjust enrichment claim was nothing more than a claim in equity, not triable to a jury.

The court easily rejected the claim under Ohio's Trade Secret Misappropriation Act. In explaining its decision, the court noted that the trade secret statute provides several methods by which to calculate damages, including unjust enrichment. And, that the statute

acknowledges that calculating monetary damages for trade secret misappropriation may be difficult to ascertain, it therefore provides specific methods by which to calculate monetary damages. One method for measuring damages is by calculating the amount of unjust enrichment caused by such misappropriation. The fact that the statute contemplates different means of calculating damages does not transform the statutorily created legal theory of recovery . . . to become an equitable claim to relief.

The other two methods of calculating damages: actual loss caused by the misappropriation and imposition of a reasonable royalty also are not equitable relief, just other methods of calculating the monetary damages available to a successful plaintiff. Even though the statute refers to "equitable," it means fair. The damages remedies are legal in nature and thus triable to a jury -- even if difficult to ascertain.

Happy New Year to all!

Non-competes and Trade Secrets in the Business Negotiation Context

Michael Elkon — Tue, 15 Dec 2009 16:43:04 -0600

Although most non-compete and trade secret disputes arise from the employer-employee relationship, these issues can arise in any number of contexts. One situation is in business-to-business negotiations. OnBrand Media v. Codex Consulting, Inc., a November 19, 2009 decision from the Georgia Court of Appeals, involves a dispute between entities involved in joint venture negotiations relating to developing and marketing of a software program.

OnBrand Media, Inc., (“OnBrand”) and Lisa Jones developed and produced a multimedia e-mail software program called EyeMail. OnBrand and Jones began negotiations with Open Systems, Inc. (“OSI”) to form a joint venture relationship for the development of a software program that they would market to Aflac Insurance. OSI provides technology services and software development to various companies, including Aflac, with which it had already entered into an agreement to provide certain programming services. Jones introduced EyeMail to OSI in 2005, describing it as a marketing tool for sending out email messages with embedded audio, video, animated graphics, and flash applications.

In 2005 and 2006, OnBrand, Jones, and OSI discussed forming a joint venture to pursue the EyeMail project with Aflac. During the negotiations, OSI realized that the EyeMail program would require a separate portal, so it approached Codex Consulting, Inc. Codex agreed to develop the portal in exchange for a share of the ultimate EyeMail subscription revenues. Before Jones and OnBrand would agree to disclose technical details regarding EyeMail, they insisted that Codex and OSI sign non-disclosure agreements (“NDAs”) with OnBrand. Codex and OSI did so in October 2006.

After reviewing the EyeMail code, Codex and OSI decided that the program was not a feasible product to sell to Aflac and went about developing their own program called “RightMail.” Although OSI and Codex continued negotiations with OnBrand, hoping that it could assist in selling the RightMail program to Aflac, the negotiations ultimately ended after OnBrand and Jones threatened legal action when OSI and Codex refused to call the program Eyemail. OnBrand and Jones filed suit against OSI and Codex in June 2007, alleging claims for breach of contractual duty of good faith and fair dealing, misappropriation of trade secrets, deceptive trade practices, fraud and deceit, tortious interference with a business opportunity, intentional infliction of emotional distress, violation of the Georgia Uniform Deceptive Trade Practice Act ("UDTPA"), and breach of confidentiality. OSI and Codex filed a motion for summary judgment, which the trial court granted.

The court of appeals upheld the trial court’s grant of summary judgment to OSI and Codex. The court spent some effort deciding the right level of scrutiny for a business-to-business agreement covering information shared in negotiations before deciding to apply the same intermediate level of scrutiny ordinarily applied to professional partnership agreements. The court did not explain why applying intermediate scrutiny (as opposed to the heightened scrutiny standard applicable to employment and franchise agreements or the relaxed scrutiny applicable to sale of business agreements) mattered. In fact, the NDAs were likely unenforceable under any standard of review because, as the court found, the non-compete provisions in the NDAs lacked temporal or geographic limitations, which are necessary for all agreements, not just those subject to the intermediate level of scrutiny. The time spent discussing the applicable scrutiny also is a bit puzzling given that the court did not explain how the three levels of scrutiny would differ.

The court then addressed the non-disclosure requirements of the NDAs. The court affirmed the trial court’s finding that OnBrand and Jones did not produce any evidence that OSI and Codex used or disclosed confidential information. (It is unclear as to whether the Court also found that the non-disclosure provisions were unenforceable. Georgia requires non-disclosure provisions to include time limitations, so it is likely that OnBrand and Jones would have lost even if they had shown that OSI and Codex had used or disclosed confidential information.) Furthermore, the court of appeals found that OnBrand and Jones’s action for breach of the duty of good faith and fair dealing was contingent on its contractual claims, so the infirmities of the latter doomed the former.

The court then moved on to OnBrand and Jones’s trade secret claim. It found that the claim failed as a matter of law because OnBrand and Jones voluntarily disclosed their trade secrets to OSI and Codex. Thus, there was no misappropriation because OSI and Codex did not use improper means to acquire the program.

The court also affirmed dismissal of the remaining claims, holding

(1) that OnBrand and Jones’s claim for fraud failed because they presented no evidence that OSI and Codex had false intentions when they entered into the NDA;

(2) that OnBrand and Jones’s claim for tortious interference with business relations failed as to Aflac because OSI and Codex were not strangers to the relationship;

(3) that OnBrand and Jones’s claims as to three additional customers failed because OnBrand and Jones never showed that they were likely to form relationships with those entities;

(4) that OnBrand and Jones’s deceptive trade practices claims failed because the evidence reflected that customers understood that OSI was not trying to sell them EyeMail; and

(5) that OnBrand and Jones did not demonstrate that OSI and Codex engaged in “extreme and outrageous conduct” to support a claim for intentional infliction of emotional distress.

Although each of these holdings may provide instruction for future claimants, OnBrand Media is most remarkable for the court’s first impression decision that business-to-business agreements in the joint venture context covering information shared in negotiations are subject to intermediate scrutiny. Of course, in the end, that decision did not affect the result here, but it may affect the outcome of future cases.

R. Milligan, K. Kappes, T. Nelson Contributed to California Trade Secrets Book

Erika Birg — Mon, 14 Dec 2009 17:35:25 -0600

Our own Robert Milligan, Kurt Kappes, and Timothy Nelson contributed a chapter, "Trade Secret Audits and Protection Plans," to the November 2009 update of the Continuing Education of the Bar's Treatise Trade Secrets Practice in California. Robert also co-authored a second chapter entitled "Litigation Issues." The book is the preeminent treatise in California on trade secret law, and it is cited by practitioners and courts for its reasoning on trade secret issues.

In Robert, Kurt, and Tim's chapter on trade secret audits, the authors recommend that "companies should ensure that they have adequate trade secret protections in place by conducting a thorough analysis of their protections through a formal trade secret audit." The authors also note that "Experience has shown that companies gain tremendous value by taking a proactive, systematic approach to assessing and protecting their trade secret portfolios through regular trade secret audits."

Robert's litigation chapter identifies issues in trade secret misappropriation cases from the perspective of both the trade secret owner and the accused misappropriator. In analyzing litigation procedure, the chapter identifies preliminary issues, pretrial motions, trial issues, and post-resolution issues. The chapter also addresses other remedies against trade secret misappropriation not based on the Uniform Trade Secrets Act (UTSA). The relationship of trade secret protection under the UTSA and protection under other state and federal statutes is also discussed.

Atlanta Trade Secrets Team Published in the Georgia Bar Journal

Erika Birg — Sat, 12 Dec 2009 13:57:05 -0600

In the December 2009 edition of the Georgia Bar Journal, Michael Elkon, Erin McPhail Wetty and I published an article about Georgia's HB 173: "Georgia Gets Competitive." The article discusses some of the most troublesome areas of Georgia's current law on non-competes and then how HB 173 proposes to address those areas.

Does My Movie Theater Have Trade Secret Protection?

David Monachino — Thu, 19 Nov 2009 14:29:31 -0600

It is generally accepted that that compilations of public information can constitute a trade secret provided that the compilation has unique value, but will that protection extend to watching Michael Jackson's This Is It in an IMAX theater? A New York State court may soon be answering that question in Imax Corporation, v. Cinemark USA, Inc., NY Sup. Ct., NY Co., Ind. No. 09603441.

In its lawsuit, IMAX claims that for five decades it “has specialized in the design and manufacture of highly propriety, premium quality, large-format, immersive theatre systems.” Since 1997, Cinemark-one of the largest movie exhibitors in the world-has been a valued customer of IMAX. Separate and apart from the actual technological components of IMAX's theatre systems, IMAX claims that since its inception in 1967 dedicated significant time and resources, including hundreds of millions of dollars, to the extensive research and development, marketing and promotion of a highly proprietary, immersive theatre experience that is unique to IMAX. Beginning in 1997, IMAX and Cinemark allegedly entered into a series of contracts that provided for the installation, maintenance and operation of IMAX theaters at Cinemark locations, and the marketing and commercial promotion of IMAX by Cinemark.

IMAX claims that it recently discovered that, contrary to representations Cinemark made to IMAX, the parties' business relationship has been blatantly used by Cinemark to attempt to reproduce the entire, trademarked "IMAX Experience®" in the form of a product that Cinemark unveiled earlier this year and that Cinemark refers to as "Extreme Digital Cinema" and "Cinemark XD," or simply, "XD." Whereas for years IMAX theatres have been widely marketed and promoted as having "screen[s] that typically span from wall to wall and floor to ceiling... and loudspeaker technology that ensures every theatre seat is in a good listening position," Cinemark has marketed and promoted its XD as a cinema with "huge wall-to-wall screens, wrap around sound [to] ensure that every seat is an intense sensory experience." Adding fuel to the fire, IMAX claims that Cinemark has touted its XD as being "just like" and in some instances, "better than" IMAX.

Thus, IMAX seeks redress for Cinemark's willful breach of contract, fraud, tortious interference with existing and prospective economic relations, breach of the implied warranty of good faith and fair dealing, unjust enrichment and deliberate acts of bad faith, as well as misappropriation of trade secrets.

The ruling of this case could have interesting implications in light of the United State’s Supreme Courts recent grant of certiorari (argued on November 9^th) on what has been called the "business method patent" case, Bilski v. Kappos, where the Court appears poised to rule that the business method claim at issue is not the valid subject of a patent. Whether the Court will provide further guidance as to what is and what is not a patentable "process" is uncertain. A ruling that sides with the Patent Office could bar patents on processes and methods of doing business, such as online shopping techniques, medical diagnostic tests and procedures for executing trades on Wall Street. But, such a ruling also may lend support for making your IMAX experience a trade secret.

A Classic Fight Over Venue

Michael Elkon — Tue, 17 Nov 2009 12:03:44 -0600

Because the laws of various states regarding non-compete clauses differ significantly, cases involving these provisions often entail fights at the outset as to the proper venue. The Eastern District of Pennsylvania recently faced just such an issue in CertainTeed Corp. v. Nichiha USA, Inc., Civil Case No. 09-CV-3932-LS, 2009 WL 3540796 (E.D. Pa. Oct. 29, 2009). In that matter, CertainTeed contested with Bruno Demey, its former Director of Manufacturing and Technology, and Nichiha, Demey’s new employer, over whether litigation between the parties should go forward in Pennsylvania or Georgia.

CertainTeed’s headquarters are located in Valley Forge, Pennsylvania, and it has manufacturing plants in Indiana, North Carolina, and Oregon. Its confidential information, trade secrets, and computer servers are located in Valley Forge. CertainTeed hired Demey in March 2003. Demey executed a non-compete agreement with CertainTeed in September 2004. During his employment with CertainTeed, Demey resided in South Carolina and made numerous trips to Valley Forge for meetings.

The timeline of events relevant to the litigation are as follows:

1. Demey resigned from CertainTeed on August 20, 2009.

2. Demey filed a complaint and motion for a preliminary injunction in the Superior Court of Fulton County, Georgia on August 24, 2009. Demey stated that he intended to move to Georgia to work for Nichiha and therefore sought injunctive relief against CertainTeed setting forth: (a) that the non-compete and non-disclosure terms of the non-compete agreement are unenforceable under Georgia law; and (b) that CertainTeed could not take action to enforce the covenants against Demey or otherwise preclude Demey from working for Nichiha.

3. On August 26, 2009, CertainTeed removed the state court action to the United States District Court for the Northern District of Georgia.

4. CertainTeed filed an action against Demey and Nichiha in the Eastern District of Pennsylvania on August 28, 2009. CertainTeed alleged a breach of contract claim and breach of fiduciary duty claim against Demey, a tortious interference with contractual relations claim and an unfair competition claim against Nichiha, and violations of the Pennsylvania, South Carolina, North Carolina, Indiana, and Oregon trade secrets acts, as well as a civil conspiracy claim, against Demey and Nichiha.

5. On August 31, 2009, CertainTeed requested a preliminary injunction and temporary restraining order.

6. On September 2, 2009, the Georgia district court granted Demey’s motion for a temporary restraining order and enjoined CertainTeed from enforcing the non-competition covenant in Georgia. On that same date, Nichiha filed a motion to dismiss, transfer or stay the Pennsylvania action.

7. On September 3, 2009, CertainTeed filed a first amended complaint in the Pennsylvania action, removing any claim to enforce the non-compete covenant in Georgia.

The Pennsylvania district court ultimately decided to deny Nichiha’s motion to dismiss, stay, or transfer and therefore let CertainTeed proceed with its claims in Pennsylvania. In its order, the Pennsylvania court addressed three issues. First, it rejected Nichiha’s claim that the first-filed rule required that the matter progress exclusively in Georgia. The court found that the Pennsylvania action was not “truly duplicative” of the Georgia action because the former included a number of claims that were not present in the latter. The court rejected Nichiha’s assertion that the claims asserted by CertainTeed were mandatory counterclaims in the Georgia action, instead finding that the trade secret claims were not so related to the non-compete claims that separate trials would lead to “substantial duplication of efforts.”

The district court next addressed the issue of venue. It decided that a substantial portion of the events at issue took place in Pennsylvania. Specifically, it cited CertainTeed’s allegations that: (a) Demey and Nichiha would be sharing and utilizing confidential information and trade secrets that originated, and are stored, in Valley Forge, Pennsylvania; and (b) Nichiha and Demey conducted negotiations while Demey was in Pennsylvania.

Finally, the district court answered the question of whether it should transfer the case to Georgia in the negative. After recognizing that a plaintiff’s choice of forum is a “paramount consideration,” the court remarked that CertainTeed’s key witnesses and documents are maintained on servers located in Valley Forge. The court also decided that the Eastern District of Pennsylvania is as convenient as the Northern District of Georgia for non-party witnesses. Thus, for the time being, the case between CertainTeed, Demey, and Nichiha will proceed on two fronts.

Competitive Intelligence Article Authored By Seyfarth Shaw LLP Trade Secret Lawyers

Erika Birg — Mon, 16 Nov 2009 10:37:53 -0600

Competitive intelligence is a business function that many large companies utilize for the purpose of gathering and analyzing useful information about competitors in an ethical manner. Two Seyfarth Shaw LLP trade secret lawyers recently had an article published about this important business function and some of the trade secret issues involved.

Michael Wexler and Robert Milligan's article, "Keep On the Right Side of the Line: A Trade Secret Law Perspective," was published in the September-December 2009 issue of Competitive Intelligence Magazine, which is a publication of the Society of Competitive Intelligence Professionals (“SCIP”), www.scip.org. The article discusses the pitfalls a company encounters when it does not do enough to protect its key information. The authors also address some best practices for competitive intelligence (CI) professionals to gather useful information in an ethical manner while simultaneously protecting their own companies from disclosing sensitive information. They note that

Companies must continuously and aggressively seek new and effective ways to protect their proprietary and trade secret information. If a trade secret is leaked, its value to the company may be severely compromised and lost forever. Likewise, to avoid the often detrimental and serious repercussions that accompany improper intelligence gathering, companies must be extremely vigilant to ensure that they use only ethical means to acquire information about their competitors.

According to Michael and Robert, "A CI professional should gather intelligence by examining published information sources, conducting interviews, and using other ethical information gathering methods." They also point out that companies' needs for creative trade secret protections has increased due to advances in technology and telecommunications. The authors conclude, "Competitive intelligence is an important aid to a company in the marketplace if it is gathered properly. However, if the information is gathered improperly, the information ceases to constitute competitive intelligence at all, and can result in detrimental and serious consequences for the CI professionals involved and their company."

Review - Monitoring the Revolving Door Webinar

Erika Birg — Thu, 12 Nov 2009 16:06:48 -0600

We are pleased to announce that the Trade Secrets, Computer Fraud, and Non-Competes Group's first webinar on November 5, 2009 entitled Monitoring the Revolving Door: Protecting Your Trade Secrets in Today's Economy was a tremendous success.

There were over 550 registered attendees in various legal and business positions, including business leaders, general and associate in-house counsel, human resource professionals, franchise professionals, competitive intelligence professionals, and outside counsel, from numerous domestic and international locations.

The first webinar covered best practices for protecting your company’s trade secrets and managing risk from trade secret claims. Rarely does a day go by without a news report of another high profile theft of important data from a company or the loss of key employees to competitors. Employer downsizing and competitive pressures have increased the need for companies to ensure that they have adequate protections in place to safeguard company assets.

Topics discussed in the first series of informative discussions included:

Identifying trade secrets
Adequately protecting trade secrets
Conducting trade secret "audits"
Implementing effective trade secrets policies and procedures

As discussed during the presentation, seeking trade secret counseling and a secret audit can assist clients to determine best practices to help protect their most important assets.

For those interested professionals who were not able to attend the first webinar and would like to listen to the recorded audio webinar or would like a copy of the presentation materials, please submit your request to sguigliano@seyfarth.com

Coming up on December 9th, we will host the second in our series, Trade Secret Triage and Restrictive Covenant Relief. Please register (link to website registration) to join us to discuss what to do when you fear that someone has misappropriated your trade secrets.

Brekka decision continues to get press attention

Erika Birg — Wed, 11 Nov 2009 08:44:05 -0600

Amy E. Bivins recently published another article in the Daily Labor Report addressing the effects of the Ninth Circuit's Brekka decision, which we have posted about previously. Ms. Bivins quotes Seyfarth attorney Carolyn Sieve on the issue. Carolyn reminded employers that they "should not rely solely on a potential CFAA claim to protect their proprietary information." Indeed, employers will need to consider what access to computer systems is "authorized."

Trade Secret Claim Wins Out to Protect Software.

Michael Elkon — Tue, 10 Nov 2009 14:52:31 -0600

In Coleman v. Retina Consultants, P.C., the Georgia Supreme Court reversed a trial court’s decision to enjoin a former employee based on his non-compete provision, but it upheld the injunction to the extent that it prevented the employee from using his former employer’s trade secrets. The case is especially interesting from a factual perspective, as it covers the increasingly common situation of an employee and employer disputing ownership of software developed over the course of employment. The relevant facts as follows:

Retina Consultants is a medical practice specializing in retina surgery. Retina Consultants hired Brendan Coleman as a software engineer in 2000. When Coleman joined Retina Consultants, he already had written and marketed a medical billing program called Clinex. While employed by Retina Consultants, Coleman, with the assistance of the doctors who worked for Retina Consultants, modified his Clinex program to suit Retina Consultants’s specific business needs. Coleman integrated Retina Consultants’s trade secrets and confidential information into the new program, which was named Clinex-RE. Clinex-RE integrated electronic medical records, image storage, and a billing software component. Clinex and Clinex-RE are different programs, but Clinex-RE only works in conjunction with Clinex.

In 2003, Coleman and Retina Consultants entered into a Software Agreement that set forth that Retina Consultants owned Clinex-RE, Coleman owned Clinex, and that Retina Consultants had a non-exclusive license to use and sell Clinex. The Software Agreement also contained a non-compete provision stating that “Coleman will not distribute, vend or license to any ophthalmologist or optometrist the Clinex software or any computer application competitive with the Clinex-RE software without the written consent of Retina Consultants.”

Shortly before resigning on November 24, 2008, Coleman removed all applicable encryption keys and source and access codes for Clinex, along with any manual/installation instructions. After his resignation, Coleman attempted to license Clinex and Clinex-RE to other ophthalmologists; refused to disclose to Retina Consultants the passwords required to use Clinex and Clinex-RE software; refused to provide copies to Retina Consultants of all documentation in his possession and control relating to the programming and use of the software; refused to return to Retina Consultants copies of the Clinex-RE software; used Retina Consultants’s trade secrets; and took funds from a bank account belonging to a business set up jointly by Retina Consultants and Coleman. It is not unreasonable to speculate that the trial court was influenced by Coleman’s pre- and post-resignation behavior when it elected to enjoin Coleman in a broad fashion based on the non-compete provision.

Coleman appealed directly to the Georgia Supreme Court, which held unsurprisingly that the non-compete provision was unenforceable because it lacked geographic or temporal terms. However, the Supreme Court decided that the Clinex-RE package was a trade secret belonging to Retina Consultants, so Coleman could be enjoined from using it. Coleman could not be enjoined from using Clinex, because that was his property. Thus, the Supreme Court found that the trial court erred when it enjoined Coleman from retaining Clinex encryption keys, access codes, source codes, manual/installation instructions, passwords, and documentation. In the end, Retina Consultants was able to prevent Coleman from using the software that it owned, but the trial court went too far in stopping Coleman from using his software and in enforcing a limitless non-compete provision.

The case illustrates the fact that the statutory protections of an applicable trade secret statute can act as a useful backstop in the event that a non-compete provision is unenforceable.

Mark It Confidential: Allowing Customers To Share Price Quotes Eviscerates Trade Secret Status

Guest Author for TradeSecretsLaw.com — Fri, 06 Nov 2009 16:01:32 -0600

By Jason Stiehl

Often one of the most confidential aspects of a business is its pricing mechanism and the quotes that it provides its customers. It is for this reason that the general rule governing trade secret law is that a company’s non-published pricing is a trade secret. See generally PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7^th Cir. 1995). What happens, however, when a company does not prohibit its customer from sharing that pricing with others in the industry?

This precise question was addressed in Southwest Stainless, LP v. Sappington, 582 F.3d 1176 (10^th Cir. 2009), and we touched on it in an earlier posting. However, as the issue comes up fairly frequently, we thought it might warrant deeper discussion.

In Southwest Stainless, the U.S. Court of Appeals for the Tenth Circuit held that although pricing generally may be protectable, a court needs look at the specific pricing at issue in the case to determine whether the company protected that pricing. Ultimately, the Court in Southwest Stainless held that sharing pricing with a customer, without restriction, removes any claim of confidentiality that may have existed.

John Sappington and William Emmer worked for over ten years supplying metals to customers in the Tulsa-area on behalf of Southwest Stainless. Within a month of each other (and shortly after the departure of another Southwest employee), Sappington and Emmer left Southwest to work for a local competitor, Rolled Alloys. After their departure, Southwest identified two Southwest customer (previously serviced by Sappington and Emmer) who transferred business to Rolled Alloys. At trial, it was adduced that the former employees had assisted in preparing pricing quotes to these customers, including re-quoting Rolled Alloys’ prices at a price lower than the Southwest quote known to the former employees. The trial court entered judgment on behalf of Southwest, relying upon the steps undertaken by Southwest to keep its pricing confidential, such as: (1) confidentiality agreements, (2) password protection, (3) expenditure of hundreds of thousands of dollars to keep the information confidential, and, notably (4) the admission of the former employees that they understood price quotes to be confidential. Southwest Stainless, 582 F.3d at 1189.

On appeal, the Tenth Circuit reversed this holding,[1] drawing a distinction between “general measures” used to protect trade secrets and the “particular” pricing at issue in this case. Id. at 1190. It cited record evidence that Southwest had provided customers with “posted pricing,” that customers revealed competitors’ pricing, and that Southwest did not prevent customers from sharing its information. Id. The Tenth Circuit relied upon the United States Supreme Court decision of Rucklehaus v. Monsanto Co., 467 U.S. 986, which held:

If an individual discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret, his property right is extinguished.

Here, because Stainless had “disclosed the quote” and the customer was “under no obligation to keep the information confidential,” the Court held the district court erred in holding such a price quote confidential and reversed the judgment in favor of the Plaintiff.

This holding implies, however, that a company still may be able to assert trade secret protection for information necessarily shared with customers so long as the company requires its customers to treat the information as confidential as well.

[1] Notably, the opinion affirmed the remaining counts, including a breach of non-competition agreements, which ultimately awarded the same damages sought through the trade secret claim.

First Webinar Today - Monitoring the Revolving Door

Erika Birg — Thu, 05 Nov 2009 08:10:05 -0600

Today is the first in our series of webinars. Our team will be discussing identifying and protecting your company's trade secrets. Please join us. Information on registration is available here.

Coming up on December 9th, we will host the second in our series, Trade Secret Triage and Restrictive Covenant Relief. Please register to join us to discuss what to do when you fear that someone has misappropriated your trade secrets.

IBM v. Johnson: the Second Circuit Weighs In

Michael Elkon — Wed, 28 Oct 2009 18:37:21 -0600

When we last wrote about IBM’s efforts to enjoin David Johnson, its former Vice President of Corporate Development, from joining Dell, Judge Stephen Robinson of the Southern District of New York had denied IBM’s second motion for preliminary injunction and the Second Circuit Court of Appeals was preparing to hold oral argument on the matter. The Court of Appeals has now issued a brief order upholding Judge Robinson’s decisions. After setting forth that it would review the District Court’s denials of the motions for preliminary injunction under the deferential abuse of discretion standard, the Court of Appeals upheld the denial of the first motion for preliminary injunction. In so doing, it cited to the trial court’s finding that Johnson was “extremely credible” and that IBM’s witness “lacked familiarity with documents bearing on the controversy.” The Court of Appeals also rejected IBM’s attacks on the trial court’s order denying the second preliminary injunction, finding that the trial court was correct when it held that it could not address the second motion because it concerned the same facts as the first motion, which was at that time before the Second Circuit.

The matter now returns to the trial court. In the last actions taken in the trial court prior to the resolution of the appeal, Johnson had moved to dismiss two counts of IBM’s Amended Complaint. The trial court had also denied Johnson’s request to stay discovery, instead directing the parties to agree on a scheduling order. The case will now proceed on those two fronts.

"Establishing CFAA Violations By Former Employees," published in Employment Law 360

Erika Birg — Wed, 28 Oct 2009 15:41:59 -0600

On October 27, 2009, Robert Milligan and Carolyn Sieve published their article, "Establishing CFAA Violations By Former Employees," in the Employment Law 360. The article further examines the Brekka decision we have posted about previously. In particular, Robert and Carolyn point out that the Brekka decision may require employers to "rethink their strategies" for protecting company property.

Daily Journal Article Indicates Trade Secret Interest on "upswing"

Erika Birg — Tue, 27 Oct 2009 16:19:50 -0600

In an article published today by the Daily Journal, "Economy Leads Companies to Sue Ex-Workers," (linked with permission) author Laura Ernde talks with a number of California practitioners about what they see happening with trade secrets litigation in the wake of the California Supreme Court's ruling in Edwards v. Arthur Anderson and the economy.

Although Ernde indicates that the anecdotal evidence is that interest in trade secrets is on an "upswing," according to Seyfarth Shaw's own Carolyn Sieve and Robert Milligan, research regarding filings in Los Angeles indicates that the actual number of lawsuits mentioning "trade secrets" has decreased over the last two years.

Ernde's article also touches on the "inevitable disclosure" doctrine, noting that under FLIR v. Parrish, 2009 DJDAR 8598, the doctrine is no longer applicable in California.

Coffee Wars Come to a Grinding Halt: Starbucks Settles Lawsuit Again Former Executive

Erin Wetty — Mon, 26 Oct 2009 09:19:52 -0600

Earlier this month, Starbucks Corp. filed a complaint in the U.S. District Court for the Western District of Washington to seek enforcement of a noncompetition agreement it entered into with former Division Senior Vice President Paul Twohig.

According to Starbucks, Twohig purportedly had accepted a position with Dunkin’ Donuts as its Brand Operations Officer, which would have been in violation of the non-competition agreement he entered into with Starbucks.

On Friday, October 23, 2009, Starbucks announced that it had resolved its dispute with Twohig. The settlement agreement included promises by Twohig that he would complete initial training at Dunkin’ Donuts, but would not otherwise work there until January 15, 2010, approximately ten months after Twohig left Starbucks’ employ.

In addition, Starbucks is to receive $500,000 as part of the settlement. Starbucks has not reported who will be responsible for this payment.

The case was Starbucks Corp. v. Paul Twohig, case number 09-01404, U.S. District Court for the Western District of Washington.

Monitoring the Revolving Door: Protecting Your Trade Secrets in Today's Economy

Erika Birg — Tue, 20 Oct 2009 13:32:05 -0600

Please join us for the first of our Trade Secrets Webinar Series
Monitoring the Revolving Door:
Protecting Your Trade Secrets in Today's Economy
on November 5, 2009

Seyfarth Shaw’s Trade Secrets, Computer Fraud, and Non-Competes Group is pleased to announce a comprehensive webinar series on trade secrets, computer fraud, and non-competes in today’s economy.

The first webinar will cover best practices for protecting your company’s trade secrets and managing risk from trade secret claims. Employer downsizing and competitive pressures have increased the need for companies to ensure that they have adequate protections in place to safeguard company assets. Rarely does a day go by without a news report of another high profile theft of important data from a company or the loss of key employees to competitors.

Topics slated for discussion in the first of our series of informative discussions include:

Identifying trade secrets
Adequately protecting trade secrets
Conducting trade secret "audits"
Implementing effective trade secrets policies and procedures

Date: November 5, 2009

Time:
10 am – 11:30 am Pacific
11:00 am – 12:30 pm Mountain
12:00 pm – 1:30 pm Central
1:00 pm – 2:30 pm Eastern

Panelists:

Michael Wexler, Seyfarth Shaw LLP
Kurt Kappes, Seyfarth Shaw LLP
Robert Milligan, Seyfarth Shaw LLP

Register: www.seyfarth.com/events

Next Trade Secrets Webinar Program
Trade Secret Triage and Restrictive Covenant Relief
Wednesday, December 9, 2009

Once an employee is out the door, the swift and certain reaction of management is essential to protecting the company's valuable business information. Kate Perrelli and Erika Birg will discuss generally (1) immediate steps to take upon an employee's departure; (2) assessment of potential claims; (3) forensic analysis of electronic clues in support of potential claims; and (4) steps to prepare for litigation, if necessary.