Trading Secrets

Trade Secret Theft Prosecution Cases In The News

Justin K. Beyer — Wed, 16 May 2012 14:49:37 -0600

During the past week, federal courts around the country have seen a handful of high profile pleas, convictions and sentencing in cases in which defendants are accused of stealing their former employer’s trade secrets.

On May 7, 2012, Yuan Li, a former research scientist with Sanofi Aventis, who had pled guilty to one count of violating 18 U.S.C. § 1832 (the section of the Economic Espionage Act dealing with commercial economic espionage) in January 2012, was sentenced to 18 months in prison by the United States District Court for the District of New Jersey. In pleading guilty, Li, a Chinese national, admitted to stealing data on Sanofi’s compounds, including their chemical structures, and sending that data via email or through use of a thumb drive to her home computer. Li was also ordered to pay $131,000 in restitution damages to Sanofi.

Later that same week, on May 9, 2012, the United States District Court for the Northern District of California convicted former Silicon Valley engineer, Suibin Zhang, of five counts; three counts for his theft and copying of trade secrets and downloading the trade secrets from a secure database, one count for duplication of trade secrets, and one count for possession of stolen trade secrets. This verdict followed a two-week bench trial before Judge Ronald M. Whyte, which concluded on November 9, 2011.

The evidence presented against Zhang during trial showed that, while employed as a project engineer for Netgear, Inc., he accessed the secure database of Marvell Semiconductor, Inc., downloading information with the intent of using that information after accepting a job at Marvell’s chief competitor, Broadcom Corporation and later loading Marvell’s trade secret information onto his Broadcom laptop. Zhang will be sentenced on August 27, 2012, and could face 10 years in prison, up to $250,000 in fines, plus restitution damages to Marvell if the court deemed such restitution damages appropriate.

Also last week, on May 11, 2012, former Frontier Scientist Inc. chemist, Prabhu Mohaptra, entered a guilty plea in the United States District Court for the District of Utah, pleading guilty to one count of unlawful access to a protected computer. Mohaptra’s guilty plead was in exchange for the government dropping 25 other charges against him.

Mohaptra admitted to improperly accessing Frontier’s chemical resource notebook and emailing certain chemical formulas to his brother-in-law in India. Mohaptra’s case marks the first time that the Economic Espionage Act was used to prosecute a case in Utah. Mohaptra is scheduled for sentencing on August 28, 2012, at which time he faces up to five years in prison.

Each of these cases highlight the need for companies to monitor the access of its employees to secure databases. Companies should consider using additional preventive means to prohibit employees from stealing trade secrets, such as configuring the operating system to restrict access to external devices, thus, restricting the ability to download information to an external device; blocking a user from uploading information to a web-based site; and/or utilizing software that blocks employees from sending emails to certain domain names. In situations like this, companies may also wish to consider placing blocks on the ability of its employees to email certain domain names that are known to be used for personal email accounts. In an era in which data is becoming increasingly portable, companies much increase their vigilance in monitoring use and exporting of its data and trade secrets.

Georgia's New Restrictive Covenant Act Turns One Year Old

Daniel Hart — Mon, 14 May 2012 10:37:09 -0600

By Daniel Hart and Bob Stevens

Friday, May 11, 2012 marked the one-year anniversary of Georgia’s new Restrictive Covenant Act ("New Act"). As we have written on this blog before (here and here), passage of the New Act marked a dramatic change in Georgia’s public policy regarding restrictive covenants in employment agreements. Prior to passage of the New Act, Georgia was one of the most difficult jurisdictions for employers to enforce restrictive covenants against former employees. With the passage of the New Act, Georgia is now a comparatively favorable forum for employers seeking to enforce restrictive covenants against former employees.

Among other changes, the New Act creates statutory presumptions under which courts must presume that restrictive covenants two years or less in duration are reasonable in time and that restrictive covenants more than two years in time are unreasonable. It also eases the drafting requirements for specific restrictive covenants, abolishes the previously existing requirement of a time-restriction for non-disclosure provisions, and creates a statutory burden-shifting regime whereby, if employers can meet an initial burden of showing that restrictive covenants are in compliance with the statute, parties challenging such restrictive covenants bear the burden of establishing that the covenants are unreasonable.

Perhaps most significantly, the New Act also permits Georgia courts to "blue pencil" (i.e., partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under prior Georgia law. Because the New Act applies only to restrictive covenants entered into on or after May 11, 2011, few court decisions have construed the New Act in the one-year since its passage. But in one decision, the United States District Court for the Northern District of Georgia exercised its power under the New Act to modify a restrictive covenant that would have been unenforceable under previous Georgia law.

In that decision, Pointenorth Ins. Group v. Zander, No. 1:11-cv-3262-RWS, 2011 U.S. Dist. LEXIS 113413 (N.D. Ga. 2011), an employer sought to preliminarily enjoin its former employee from violating customer nonsolicitation covenants in an employment agreement that she signed on May 11, 2011 – the same day that the New Act went into effect. The covenant prohibited the employee from soliciting, accepting, or attempting to solicit or accept, "any of the Employer’s clients which would be in competition with the products or services offered by the Employer, including actively sought prospective clients, with whom Employee had any contact or who were clients of Employer within the three months immediately preceding such termination of this Agreement." The district court granted the employer’s motion for preliminary injunction. Although the covenant was overbroad because it extended to all of the employer’s customers, and not merely those with whom the employee had interacted, the court blue-penciled the provision to prohibit the employee only from soliciting customers whom she had contacted and assisted with insurance. By prohibiting the employee only from "soliciting" these customers, the court also effectively struck the term "accepting" from the provision.

The Pointenorth decision remains significant in that it is the first – and, to date, only – published opinion in which a court has used its power under the New Act to modify an overbroad restrictive covenant. Although only time will tell whether other courts follow the lead of the Pointenorth court, this decision – and the language of the New Act itself – suggest that employers will have considerably greater ease in enforcing restrictive covenants in Georgia than they did prior to enactment of the New Act.

Despite this positive trend for employers, it is also clear that Georgia courts will continue to apply previous Georgia law to agreements that pre-date the New Act, as illustrated by another decision of the United States District Court for the Northern District of Georgia that we previously discussed here. In that case, Boone v. Volt Information Sciences, Inc. v. Corestaff Support Servs., Inc., No. 1:11-CV-1175-RWS 2011, U.S. Dist. LEXIS 119297 (N.D. Ga. 2011), a former employee and his new employer filed a declaratory judgment action against a former employer, seeking a declaration that a noncompete agreement between the employee and former employer was unenforceable under Georgia law. The noncompete agreement had a Delaware choice-of-law provision, and the district court initially concluded that Delaware law would apply to the agreement because Delaware law is in accord with Georgia’s new public policy position on restrictive covenants in employment agreements. On a motion for reconsideration, the district court vacated its prior order, holding that, under the Georgia Court of Appeals’ decision in Bunker Hill Int’l, Ltd. v. Nationsbuilder Ins. Servs., Inc., 710 S.E.2d 662 (Ga. Ct. App. 2011), courts must apply Georgia public policy in effect at the time the agreement was entered into. Because the agreement was signed in 2008, it was subject to Georgia’s old public policy, which was not in accord with Delaware law. Finding that the noncompete agreement was unenforceable as a matter of law under old Georgia law, the court granted summary judgment to the plaintiffs on their claim for declaratory relief.

Despite the limited number of published decisions that have interpreted the New Act in the first year of its existence, three trends appear clear: (1) Georgia courts are considerably more likely to enforce restrictive covenants under the New Act than they were under prior Georgia law, (2) Georgia courts will "blue pencil" overbroad restrictive covenants, and (3) Georgia courts will continue to apply prior Georgia law to agreements that predate the New Act. If you have employees in Georgia and have not yet updated your standard restrictive covenant agreements to take advantage of the New Act, now is an excellent time to take advantage of this change in the law. If you are interested in reviewing your existing restrictive covenant agreements for compliance with the New Act, or if you would like assistance drafting such agreements for your workforce, contact a Seyfarth Shaw Trade Secrets Group attorney.

North Carolina Federal District Court Confirms Importance of Alleging Actual Harm in Pleadings

Jessica Mendelson — Thu, 10 May 2012 10:00:44 -0600

On April 25, 2012, a federal judge in North Carolina issued a ruling granting in part and denying in part motions to dismiss involving claims for trade secret misappropriation, breach of contract, and conversion in a dispute between two pharmaceutical companies in the case of River’s Edge Pharmaceuticals v. Gorbec Pharmaceutical Services, Inc. This decision confirms, to an extent, the need to plead actual, rather than speculative harm to prevent dismissal for failure to state a claim.

River’s Edge Pharmaceuticals (“River’s Edge”) is a company which distributes pharmaceutical products and aims to provide “reasonably priced alternatives to costly name brand pharmaceuticals.” The company began marketing and developing certain alleged unapproved pharmaceutical products through an FDA approved process known as Drug Efficacy Study Implementation (“DESI”).

In 2007, River’s Edge began working with another pharmaceutical company, Gorbec, to manufacture DESI drugs and test and formulate generic drugs under the Abbreviated New Drug Application (“ANDA”) process. According to the pleadings, the parties agreed to a contract, and agreed the terms would be memorialized in writing, however this was never actually done. River’s Edge began submitting purchase orders to Gorbec, however, and Gorbec performed according to the agreed upon terms.

River’s Edge alleges that beginning in 2010, Gorbec’s executives began making statements about how they owned the “know-how, intellectual property, and regulatory approvals” which River’s Edge had hired and paid them to develop. According to River’s Edge, these statements were made despite the fact that River’s Edge was the actual owner. In addition, Gorbec threatened to stop work on River’s Edge’s products, and made statements of intent to compete with the company. River’s Edge alleges that all of these actions would harm the company and would worsen its chances of getting FDA approval. Gorbec, by contrast, alleged it had agreed to manufacture these drugs based on River’s Edge’s representations and proceeded to do so for three years. However, Gorbec alleges that during that time, River’s Edge received a warning letter from the FDA asking the company to cease sales. River’s Edge allegedly failed to tell Gorbec about it. Gorbec alleges River’s Edge also failed to pay in full for the work they had performed.

River’s Edge filed a complaint against Gorbec and its President, J. Michael Gorman, in the Middle District of North Carolina, requesting declaratory relief, and alleging breach of contract, breach of fiduciary duty, constructive fraud, promissory estoppel, unjust enrichment, conversion, misappropriation of trade secrets, and punitive damages. Gorbec filed a counterclaim, alleging breach of contract, unjust enrichment, negligent misrepresentation, fraud, and unfair and deceptive trade practices.

Both parties recently filed motions to dismiss. Gorbec moved to dismiss all counts of the amended complaint, except for declaratory relief, while River’s Edge moved to dismiss each and every one of Gorbec’s counterclaims.

With regard to breach of contract claim, the court granted Gorbec’s motion in part to the extent the claimed breach was based on Gorbec’s statements of ownership or intent to compete, but denied the motion to the extent the breach alleged pertained to Gorbec’s cessation of ANDA-related work.

Similarly, with respect to the breach of fiduciary duty claim, the court granted the motion to dismiss to the extent the claim was based on Gorbec’s threatened or potential conduct, but denied the motion to the extent the claim was based on Gorbec’s refusal to provide River’s Edge with complete copies of communications with the FDA and info regarding pending ANDAs and said things suggesting ownership of River’s Edge’s intellectual property. The court also dismissed the claims for constructive fraud and unjust enrichment, holding the plaintiff’s allegations failed to state a claim. The court however found that there were sufficient facts to state a claim for both conversion and misappropriation of trade secrets. On the misappropriation of trade secrets cause of action, however, the court held that while there was sufficient facts to state a claim, the burden would be on River’s Edge to show Grobec had the opportunity to acquire, use and disclose such information without consent.

With respect to Gorbec’s counterclaims, the court dismissed the claim for negligent misrepresentation and denied the motion to dismiss for unfair and deceptive trade practices and unjust enrichment, finding sufficient information to state a claim. Additionally, the court found Gorbec had sufficiently alleged a claim for breach of contract regarding the work Gorbec had done for the ANDA process, but dismissed the claim to the extent it was based on River’s Edge’s failure to enter into a marketing agreement. Similarly, the court denied the motion to dismiss the count of fraud to the extent it was based around River’s Edge’s fraudulent concealment of the warning letter, but dismissed the claim to the extent it was based on the idea that River’s Edge formed its own manufacturing company in order to get around its contract.

The Court’s ruling suggests the need to plead with specificity. Here, claims based on speculative damages, and threatened or potential conduct failed to survive dismissal. This confirms the importance of alleging clear harm in one’s pleadings, and shows that to gain a more favorable result for a client, a pleading needs to be framed in such a way that it avoids speculation.

United States v. Nosal Update: Solicitor General and DOJ Still Deciding Whether To File Writ Of Certiorari With United States Supreme Court

Robert Milligan — Wed, 09 May 2012 10:25:23 -0600

According to a recent filing with the California federal district court in the United States v. Nosal case, the Solicitor General, in consultation with the Criminal Division of the Department of Justice and the United States Attorney’s Office, is still deciding whether to file a writ of certiorari with the United States Supreme Court.

The writ would challenge the Ninth Circuit's recent decision in the case which circumscribes the use of the Computer Fraud and Abuse Act to primarily hacking activities, rather than violations of employer computer usage policies or internet service providers' terms of service/use, and request that the Supreme Court resolve the current circuit split. We previously discussed the Court's decision and its impact. Other legal commentators such as John Marsh, Ken Vanko, and Nick Akerman have weighed in on the decision. The parties' stipulation indicates that the government's deadline to file the writ is July 9, 2012.

Should your company be interested in taking a side in the dispute, including joining a letter to the Solicitor General or participating in an amicus filing, please contact your Seyfarth attorney contact or submit your interest here.

California Federal Court Transfers Trade Secret Dispute Involving High-Tech Gloves To New York

Robert Milligan — Wed, 09 May 2012 09:27:08 -0600

By Robert Milligan and Jeffrey Oh

In today’s dynamic environment of interstate commerce, including internet transactions, deciding on the proper venue for a trade secret misappropriation dispute can be a complicated process involving a number of different factors particularly if the parties are domiciled and/or transact business in different states.

In the case of GLT Technovations, LLC v. Fownes Brothers & Co., 2012 WL 1380338 (N.D.Cal.), District Judge Ronald M. Whyte of the U.S. District Court for the Northern District of California granted the Defendant's Motion to Transfer pursuant to 28 U.S.C. § 1404(a) and sent the case to the Southern District of New York where a related case was already pending. Section 28 U.S.C. § 1404(a) provides that "[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented."

According to the pleadings, the Plaintiff, GLT Technovations, LLC (“GLT”), is a California based company registered in Nevada that has developed a “capacitive leather” technology called TouchTec. This technology allows TouchTec glove-wearers to control devices with capacitive touch screens, such as the iPhone, without having to expose their hands to the elements. According to the pleadings, while GLT developed the technology independently, it has partnered with Massachusetts based Broleco Worldwide, Inc. (“Broleco”) to handle the exclusive manufacturing of TouchTec. Broleco is authorized by GLT to handle marketing of the technology to third party apparel manufacturers. In addition, GLT allows Broleco to share its trade secret information, including “capabilities, functionality, upcoming products and techniques related to the use of capacitive leather,” with potential third party partners after said parties have signed non-disclosure agreements (“NDA”).

According to the pleadings, in September 2009, the Defendant, Fownes Brothers & Co. (“Fownes”), expressed interest in licensing TouchTec after witnessing GLT’s presentation of the technology at New York City’s “Fashion Week.” GLT and Fownes entered into an NDA, delivered to Fownes by Broleco, soon after in April 2010 while the two companies explored pursuing a business relationship. In the subsequent months, Broleco sales representatives visited Fownes’ offices in New York to sell them on the idea of using the technology. In February 2011, Fownes purchased two orders of TouchTec leather from Broleco, and also visited Broleco’s warehouse located in Johnstown, New York. Not long after, Fownes announced the development of its own technology similar to TouchTec, and has not placed any additional orders for GLT’s product since.

Reacting to what it believes is the misappropriation of its proprietary trade secret information, GLT distributed a letter to Fownes’ potential retail partners in January 2012 informing them of its claims and the potential dangers of selling Fownes’ products. In response, Fownes filed a complaint before the U.S. District Court for the Southern District of New York alleging “violations of the Lanham Act, unfair competition and tortious interference with business relations.” Just four hours later, GLT filed a complaint before the U.S. District Court for the Northern District of California “seeking a declaratory judgment that it did non violate the Lanham Act,” and alleging the misappropriation of its trade secrets, breach of the NDA and unfair competition. Fownes then filed a Motion to Transfer the suit to the U.S. District Court for the Southern District of New York, which Judge Whyte granted on April 20, 2012.

In consideration of transfer under 28 U.S.C. § 1404(a), Judge Whyte evaluated the eight factors “to determine whether transfer is appropriate” laid out in Williams v. Bowman, 157 F.Supp.2d 1103, 1106 (N.D.Cal.2001). They include: “(1) the plaintiff’s choice of forum, (2) convenience of the parties, (3) convenience of the witnesses, (4) ease of access to the evidence, (5) familiarity of each forum with the applicable law, (6) feasibility of each forum with the applicable law, (7) any local interest in the controversy, and (8) the relative court congestion and time of trial in each forum.”

For the first factor, Judge Whyte noted that “a plaintiff’s choice of forum should be afforded substantial weight[,]” but that this should be given less consideration when the activities alleged in the complaint have little to no connection to the forum. Although GLT is based out of California, all of its interactions with Fownes - including those done through Broleco - occurred in New York. Given that the “center of gravity” of the dispute is in New York, the court weighed this factor in favor of the Defendant.

The second and third factors, or so-called “convenience factors,” do not only take into account the number of witnesses who would be inconvenienced by hearing the suit in either forum, but also the potential quality and relevance of their testimony to the issues in the case. GLT’s complaint is almost entirely based on Fownes’ interactions with Broleco, which occurred in New York between companies based out of New York and Massachusetts, respectively. Since the Southern District of New York would undeniably be more convenient to the employees of these two entities, as well as to any non-party witnesses yet to be named, Judge Whyte weighed these two factors in favor of the Defendant.

For the same reasons used to weigh factors one through three in favor of the Defendant - namely the relevant interactions between Fownes and Broleco all taking place in New York - the court weighed factor four (ease of access to the evidence) in favor of the Defendant.

Arguing its case for weighing the fifth and sixth factors in its favor, GLT asserted that the case should be heard in a California court because its claims arise under California statutes and common law. In response, Judge Whyte cited multiple district court decisions where federal courts were deemed “fully capable of applying California law.” Similarly, although the NDA contained a California choice-of-law provision, the court noted that the provision, unlike a forum selection clause, was not “determinative in resolving a motion to transfer.” With Fownes’ own suit against GLT still pending in the Southern District of New York, the court stated its preference for both cases to be heard and decided by a single judge familiar with the facts and arguments of the case.

Evaluating the final two factors, Judge Whyte did not find a compelling reason to deny the Defendant’s Motion to Transfer. Although Judge Whyte agreed with GLT that California has a distinct interest in protecting the intellectual property rights of local businesses, “the bi-coastal nature of the transactions…and the parties impacted by this case” make it so that neither forum has a greater interest or right to hear the case than the other. With regards to the final factor, since neither GLT nor Fownes argued for or against transfer based on the congestion of either court, the court considered “that factor to be neutral.”

Taking all eight factors into account, Judge Whyte determined the overall weight of the facts to be overwhelmingly in favor of transfer to the U.S. District Court for the Southern District of New York. In particular, the court focused on “the convenience to the witnesses, the ease of access to evidence, and the possibility of consolidation with other litigation” in granting the Motion to Transfer.

The court's decision underscores the importance of including mandatory forum selection clauses in non-disclosure agreements to secure a party's desired forum and filing first in contentious trade secret disputes.

Upcoming Client Webinar on May 22nd: Protecting Your Trade Secrets in the Financial Services Industry

Robert Milligan — Tue, 08 May 2012 11:55:31 -0600

The fourth webinar of the 2012 series will focus on trade secret considerations in the banking and finance industry, including prosecuting claims against former employees who are FINRA members. Topics will include:

What practical steps can financial services institutions implement to protect trade secrets and client relationships
What should you do if your trade secrets are improperly removed or disclosed, or if your former employee is violating his/her agreements
How does the 2011 America Invents Act (Patent Reform Legislation) potentially impact the use of trade secrets
How do you prosecute a case against a former employee who is a FINRA member

Our panel consists of attorneys with experience advising clients on trade secret and non-compete issues concerning best practices, risk mitigation, and prosecuting and defending trade secret misappropriation claims. CLE credit will be available for participants in New York, Illinois, and California.

To register, please click here.

April Fools' Day Prank Leads To Trade Secrets Litigation

Paul Freehling — Mon, 07 May 2012 17:54:06 -0600

A recent federal decision from Connecticut confirms the notion that information knowingly posted on the Internet by its owner cannot constitute a protectable trade secret.

On April 1, 2011, April Fools' Day, a human relations consulting firm SharedXpertise allegedly disseminated by email and on its website a false statement that it had acquired its competitor LRP Publications. Kutik, a consultant for LRP, was offended. He promptly sued SharedXpertise in the Connecticut federal court and alleged unfair competition, violation of the Connecticut Unfair Trade Practices Act, and other causes of action. He claimed that as a result of the press release, potential vendors and attendees signed up for SharedXpertise’s May 2011 conference instead of LRP’s competing event scheduled for October 2011.

Kutik served interrogatories and a request for production which would have had the effect of requiring SharedXpertise to identify the sponsors and providers for the May event. SharedXpertise objected and sought a protective order permitting the information to be produced for “attorneys eyes only” because, supposedly, it constituted confidential trade secrets. According to SharedXpertise, the only legitimate use of the information was to facilitate a comparison of the names on the list with the names of persons and entities expected to attend, but not attending, the October conference, and the attorneys could make this comparison. Kutek disputed the claim that SharedXpertise closely guarded its customer list, pointing out that the requested information was prominently displayed on SharedXpertise’s website, and an attendance list was handed out at the conference. Further, he said that his own analysis of the information, based on 22 years in the industry, would be more efficient than his counsel’s review alone.

Magistrate Judge Margolis issued a compromise ruling. She ordered SharedXpertise to produce without an “attorneys’ eyes only” restriction information “readily available on defendant’s website,” but she permitted SharedXpertise to limit to Kutek’s attorneys access to names “not openly identified through resort to defendant’s website” Kutik v. SharedXpertise Media, LLC, 2012 WL 1435288 (D.Conn. 2012). The court's ruling confirms that although an entire list of customers may not constitute a trade secret, a portion or sub-set of the list that is not publicly available may qualify for trade secret protection.

Update: New Online Anti-Piracy Initiatives in the U.S. and Europe

Joshua Salinas — Fri, 04 May 2012 11:43:19 -0600

Yesterday, Robert Milligan and I had the wonderful opportunity to present at the 2012 ITechlaw World Technology Law Conference in Washington, D.C. We discussed the new online anti-piracy legislation and developments in the U.S. and Europe. In particular, we covered the highly controversial and failed SOPA and PIPA legislation, the new proposed CISPA and OPEN legislation, and legislation from Ireland, Spain, and the European Union (i.e. ACTA). You can access a copy of our presentation materials here.

We had great comments and questions from some of the leading technology and intellectual property law attorneys from around the world, including the U.K., Ireland, Canada, Germany, Australia, Belgium, and France.

Members of the audience generally expressed two main concerns regarding the new online anti-piracy legislation: (1) the exportation of U.S. intellectual property law on foreign countries, and (2) the increased liability of intermediaries. For example, some argued that it was improper to increase the burdens and liabilities of intermediaries, such as Internet service providers and payment providers that are not in the business of policing copyright infringement. Audience members also noted that any proposed legislation should be an open and transparent process where the various stakeholders, including the public, should be part of the dialogue. Further, audience members expressed doubts as to whether the legislation would actually fix the problem as those in the pirate community have been very adept at putting up new infringing sites after earlier sites have been shut down.

The content providers are the major proponents of the new anti-piracy legislation. The proliferation of the internet, the increase in bandwidth, and the perceived lack of effective enforcement mechanisms are believed to have fostered the rise in online piracy. This has led content providers to become more aggressive in their anti-piracy efforts.

One interesting note is that while the Motion Picture Association of America (MPAA) is an understandably strong proponent for the recent anti-piracy legislation, the Recording Industry Association of America (RIAA) has been a relatively quiet supporter. The difference is believed to be a result of consumers’ increased use of online music stores, such as iTunes, which have decreased the amount of online music piracy. The MPAA is still struggling with online movie sales.

Another interesting aspect of the recent anti-piracy developments is that some audience members argued that the changes are proposed by a relatively small industry - content providers - and will increase the burdens and costs on the significantly larger internet industry.

We also learned that the Ireland anti-piracy legislation, which was recently passed, may have been incorrectly perceived as SOPA 2.0 or the “Irish SOPA.” Ireland had previously failed to enact certain provisions of the Copyright Directive. Thus, Ireland did not enact novel and extreme anti-piracy legislation, but simply updated its copyright laws to conform to the rest of Europe, at least according to one audience member.

During the dialogue, most everyone recognized that a solution is needed to combat piracy, but many expressed their doubts that the currently proposed U.S. and European legislation will be sufficient. There was also at least an acknowledgment by some of the audience members that some portions of the various anti-piracy legislation may have some value in drafting future legislation.

In a Case of First Impression, a New York State Court Requires Specific Pleading of a Trade Secret Cause of Action Before Proceeding with Discovery

David Monachino — Thu, 03 May 2012 15:38:12 -0600

In what has been a growing trend across the country, on April 20, 2012, a New York state court has required that a plaintiff specifically plead its trade secrets in detail before proceeding with discovery. In MSCI et al. v. Jacob, Axioma, New York State Supreme Court, New York County, No. 651451/2011, the complaint alleged misappropriation of source code trade secrets by Axioma and Jacob, a former MSCI employee who now works for Axioma. Defendants argued that plaintiffs should be required to identify and describe their alleged trade secrets early in a litigation before the trade secret defendant produces its own confidential information and trade secrets.

At a conference held on November 21, 2011, the Court stated that as a plaintiff MSCI is required to identify its trade secrets; and, in response to MSCI's proposal, as a first step, ordered that MSCI identify with specificity the information that it is not claiming to be trade secret. Despite the Court's instruction, five months later defendant MSCI again sought judicial intervention because it claimed that Axioma was seeking to delay discovery in order to avoid having to submit its own source code for inspection.

The New York Court agreed with the defendants noting that "[m]erely providing defendants with plaintiffs' 'reference library' to establish what portions of their source code are in the public domain shifts the burden to defendants to clarify plaintiffs' claim." The Court went on to hold that: "[o]nly by distinguishing between the general knowledge in their field and their trade secrets, will the court be capable of setting the parameters of discovery and will defendants be able to prepare their defense."

Seyfarth Attorneys to Speak at 2012 ITechLaw World Technology Law Conference & Annual Meeting on New Online Anti-Piracy Initiatives in the U.S. and Europe

Joshua Salinas — Wed, 02 May 2012 16:13:19 -0600

Late last Thursday, April 26, 2012, the U.S. House of Representatives approved the Cyber Intelligence Security Protection Act (CISPA). CISPA is a cybersecurity bill that allows the government and U.S. companies to share confidential and classified information regarding potential cyber attacks. The purpose of the bill is to strengthen U.S. infrastructure and protect it from hackers who steal valuable information, including prized trade secrets.

We previously blogged about the Department of Justice’s support for an expansive reading of the Computer Fraud and Abuse Act to strengthen national security and protect critical infrastructure.

CISPA is highly controversial and opponents argue that the exchange of confidential and private information between the government and U.S. companies threatens the privacy rights of U.S. citizens who use those companies’ services. President Obama also threatened to veto the bill due to these privacy concerns.

CISPA comes off the heels of two extremely controversial, but failed, anti-piracy bills: SOPA (Stop Online Piracy Act) and PIPA (Protect IP Act). These two bills sought to empower U.S. intellectual property rights holders to take action against foreign infringing websites that are located outside of the U.S., and, thus outside the scope of the Digital Millennium Copyright Act.

Both SOPA and PIPA suffered from wide public protests and substantial criticism this past January, with opponents arguing that SOPA and PIPA would lead to a censored and restricted Internet and cause Internet service providers to monitor users’ computer activities.

CISPA previously contained an “intellectual property” component, but that language was rewritten to distance the bill from the negativity and increasing criticisms surrounding SOPA and PIPA. Proponents of CISPA wanted to emphasize that the bill primarily seeks to protect against cyber attacks and not copyright or trademark infringment. The developments of this bill merit attention.

On Thursday, Robert Milligan and I will be presenting this week at the 2012 ITechLaw World Technology Law Conference & Annual Meeting in Washington, D.C., to discuss recent developments in online anti-piracy initiatives in the U.S. and Europe. While the U.S.’ attempts to pass SOPA and PIPA proved unsuccessful, several countries such as Ireland and Spain have already introduced their own anti-piracy legislation. Further, the European Union is currently attempting to enact ACTA - an international treaty that would establish a global standard for intellectual property rights. The outcomes from these foreign legislations may help the U.S. tailor its own anti-piracy legislation.

We will post our presentation materials later this week.

Massachusetts Legislature Considers New Social Media Bill

Ryan Malloy — Tue, 01 May 2012 12:05:04 -0600

By Ryan Malloy and Erik Weibust

The Massachusetts legislature recently joined the growing wave of states nationwide that are considering bills, which, if enacted, would forbid employers from requesting social media user names and passwords from employees or prospective employees. The issue of privacy with regards to social media accounts has garnered significant attention across the country during recent months, as some employers have blocked employee access to social media websites such as Facebook or Twitter, while others have terminated employees for refusing to provide their account access information.

The Massachusetts Social Media Privacy Bill (entitled “An Act relative to social networking and employment”) provides, rather simply, that “[n]o employee or prospective employee shall be required to provide access to an employer for a social networking site.” Furthermore, the bill prohibits any employer from asking employees or prospective employees to provide “any password or other related account information in order to gain access to the employee’s or prospective employee’s account or profile on a social networking website or electronic mail.” The bill makes clear that it does not prohibit employers from obtaining information about employees or prospective employees that is in the public domain, such as by searching their publicly-available online profiles on Facebook, LinkedIn, or the like, nor does it “limit an employer’s right to promulgate and maintain lawful workplace policies governing the use of the employer’s electronic equipment, including policies regarding internet use, social networking site use, and electronic mail use.”

As previously reported, on April 9, 2012, Maryland became the first state to pass a social media privacy bill. In addition to prohibiting employers from asking or forcing employees and prospective employees to provide social media login credentials, the Maryland bill prohibits employers from taking adverse action against an employee who refuses to hand over the requested social media information. Although legislatures in other states, including California, Illinois, and Michigan, are also considering similar bills, Congress is not yet on board. In late March, a rule amendment that would have allowed the Federal Communications Commission to prevent employers from forcing potential employees to disclose social media passwords was halted.

Illinois Federal Court Limits Discovery of IP Address Identification Information from ISPs in John Doe Actions: Highlights Continuing Challenge of Identifying Anonymous Posters Of Trade Secrets and Other Intellectual Property On Internet

Robert Milligan — Fri, 27 Apr 2012 15:06:02 -0600

By Robert Milligan and Jeffrey Oh

As highlighted in our recent webinar, The New Risk: Employee Theft Of Trade Secrets And Confidential Information In The Name Of Protected Whistleblowing, companies continue to struggle with anonymous whistleblowers in the Internet and social media age, including anonymous individuals who post trade secrets and other intellectual property on the Internet. Courts are often relunctant to require internet service providers ("ISPs") to disclose account holder information pursuant to a plaintiff's third party subpoena in a John Doe action against the alleged infringer/misappropriator without a strong showing on the merits by the plaintiff.

In a recent federal case from Illinois, Pacific Century International, Ltd. v. John Does 1-37, No. 12 C 1057, Chief Judge James F. Holderman of the U.S. District Court for the Northern District of Illinois granted in part and denied in part plaintiff’s motion to compel ISPs’ compliance with previously issued subpoenas.

Over the past decade, US courts have seen a marked rise in copyright lawsuits as media companies scramble to protect their intellectual property from digital infringement. Within this landscape, no industry has been more litigious than that of adult entertainment and pornography. To date, over 118 suits have been filed on behalf of producers of pornographic movies with over 15,000 defendants being named in just the last year and a half. Given the anonymity accorded to Internet users, copyright holders are often only able to identify alleged infringers by their IP addresses, requiring them to file against anonymous John Does. During the ensuing discovery, the plaintiffs in these suits often seek subpoenas from ISPs demanding information on the individuals associated with anonymous IP addresses. However, despite their frequency the validity of these subpoenas is often challenged by ISPs.

In Pacific Century International, Ltd., the court held that the subpoenas for information linked to IP addresses specifically named in the suit with direct evidence of infringement should be enforced, but that subpoenas seeking information related to non-party IP addresses should not. The ruling encompasses six cases, which were consolidated due to their similarities, stemming from four separate cases filed in varying Districts over the infringement of copyrighted pornographic videos shared online using the BitTorrent peer-to-peer (“P2P”) file-sharing protocol.

In its analysis, the court outlined what it sees as the typical holding pattern for suits of this nature: (1) the plaintiffs sue large numbers of Doe defendants in a single suit; (2) they obtain through subpoena the identities linked to IP addresses; (3) they threaten the identified parties with legal action, often leveraging them into settlement due to the stigma associated with pornography. Once a subpoena is issued, ISPs are required to inform Doe defendants of the case prior to divulging their information in order to give them the opportunity to dispute the claim. The court noted two arguments used by previous Doe defendants that would compel the court to quash the subpoenas. First, if the Doe defendant does not reside in “the judicial district in which the action was brought” then they may argue that they are not subject to the personal jurisdiction of the court. Second, “the Doe defendants [can] contend that joinder of the defendants is improper under Federal Rule of Civil Procedure 20(a)(2).”

To skirt this judicial hurdle, the plaintiffs in three of the four underlying cases named a single defendant connected to an IP address located in the district where each respective suit was filed, but were seeking through discovery the identities of individuals linked to non-party IP addresses, or those that were not joined as defendants. The ISPs argued, and the courts agreed, that “the identity [sic] of individuals connected with non-party IP addresses is not relevant to the pending claims.” Allowing the plaintiffs to justify the subpoena based on the identities’ associated with non-party IP addresses relevance to “claims against future defendants who have not yet been sued” was not something the court was willing to accept. The plaintiffs’ claim of civil conspiracy was also rejected in all of these cases due to the anonymous nature of the BitTorrent protocol in which users are blind to the identities of fellow users “and have no connection to them beyond the mere fact that they downloaded the same file.” The court also struck down the civil conspiracy claim based on the plaintiffs’ failure to plead “the existence of an agreement among the alleged conspirators.” Based on this reasoning, the court denied the motion to compel the ISPs to comply with the five subpoenas where the identities of non-party ISPs were sought, quashing all five completely.

In the last of the four underlying cases, the plaintiffs named 37 specific defendants with IP addresses located within the jurisdiction of the U.S. District Court for the Southern District of Texas in which plaintiffs brought suit. The corresponding subpoena sought the identity of a single Doe defendant. In evaluating the motion to compel for this case, the court found that the subpoena would be a minimal burden on the ISP and was therefore not subject to rejection based on the court’s obligation to protect non-party witnesses from “undue burden.” Fed. R. Civ. P. 45(c)(3)(A)(iv). Similarly, questions of relevancy and personal jurisdiction were set aside given that the IP address in question was already a named defendant who resides within the district’s jurisdiction. Although the joinder issue of whether the plaintiffs are justified in bringing the suit against these multiple defendants remains, the court reasoned that it was not relevant to the motion to compel the ISPs to comply with the subpoena. The court noted that ISPs have an obligation to notify their customers of the subpoena in order to give them an opportunity to object, which is when it argued that the joinder issue could be settled. For these reasons, the court granted plaintiffs’ motion to compel for this case.

Litigating against a group of anonymous individuals can be extremely challenging. While the courts appear to be willing to support subpoenas aimed at bringing pirates hiding behind the cloak of anonymity to justice, they will only do so within the strict constructs of the law. Rather than allowing the wholesale indictment of thousands of alleged infringers in a single suit, many courts have begun demanding a higher standard of proof requiring copyright holders and other intellectual property holders to point to the specific individuals they are accusing of infringement or misappropriation. Moreover, using the process of discovery to unearth information on Internet users potentially subject to future claims is not a practice most judges will tolerate. In order to successfully bring suit against Internet users who have allegedly infringed on protected material, complaints must be carefully tailored to meet the requirements of relevancy, personal jurisdiction, and permissive joinder. Additionally, although the temptation to overreach in these suits can be great, it is imperative that a suit of this nature is not so broad in scope that it could be seen as an undue burden on non-parties, including ISPs. Actively protecting against infringement and misappropriation is critical for any owner of intellectual property, yet a large part of this proactive approach may require a great deal of patience in navigating the legal landscape.

New York Federal District Court Strikes Down Application of the Computer Fraud and Abuse Act to ISP Throttling Case

Robert Milligan — Thu, 26 Apr 2012 15:22:00 -0600

By Robert Milligan and Jeffrey Oh

As Internet traffic has exploded in the last decade, Internet Service Providers (ISP) - the companies who build and profit from providing the requisite infrastructure - have had to strategically maintain their networks to satisfy demand under increasingly tightening technological constraints. One way ISPs do this is by employing a practice called “throttling,” or limiting heavy users’ access to Internet servers to free up bandwidth for others. When one subscriber to an ISP’s service makes heavy demands to the network, such as downloading large amounts of videos, other users in the area suffer from decreased speed; throttling is one way of preventing this sort of problem. ISPs typically reserve their right to throttle in their terms and of service with customers.

While ISPs argue that throttling is a necessary practice, others argue that it amounts to the arbitrary limiting of access to a vital communications tool by a corporate entity and constitutes a dangerous overreach of power. Left without regulatory recourse, net neutrality advocates - or those opposed to the practice of throttling - have turned towards the application of other laws in their battle against ISP throttling.

In Serrano v. Cablevision Systems Corp., No. 09-CV-1056 (DLI) (MDG), a class action suit filed in the United States District Court for the Eastern District of New York, Plaintiffs Alyce Serrano and Andrea Londono alleged violations of the Computer Fraud and Abuse Act (CFAA) as well as various state law claims in relation to ISP throttling. According to their complaint, ISP Cablevision “wrongfully limited Plaintiffs’ use of certain peer-to-peer (“P2P”) applications without authorization, and thereby caused damage to Plaintiffs’ computers.” Specifically, Plaintiffs cited 18 U.S.C. § 1030(a)(5)(A)-(C), a section of the CFAA related to damages caused by “the transmission of a program, information, code, or command…without authorization” or “intentionally access[ing] a protected computer without authorization.”

The first key to successfully arguing a violation of the CFAA is proving that any access or action to a protected computer system was done “without authorization.” To Cablevision’s credit, Serrano and Londono both signed “Terms of Service” and “Acceptable Use Policy” documents at the time of their service installation and after subsequent work orders. These documents included provisions for Cablevision to reserve “the right to protect the integrity of its network and resources by any means it deems appropriate. This includes but is not limited to…putting limits on bandwidth.” The agreements also allow them to do so “without prior notification.”

The Court found that Plaintiffs' claims arising under the CFAA were "defeated by the clear language of the Terms of Service and the Acceptable Use Policy." The Court found that based on Plaintiffs' assent to these valid and enforceable provisions, "Plaintiffs cannot now claim that Cablevision acted 'without authorization' when it re-stricted their bandwidth."

Although Serrano and Londono argued that these contracts were vague and ambiguous and should not be considered valid, the Honorable Judge Dora L. Irizarry ruled that they were in fact proper and could be dutifully enforced. Judge Irizarry cited New York law related to agreements made over the internet, or so-called “click-wrap” contracts, in ruling them valid “as long as the consumer is given a sufficient opportunity to read the…agreement, and assents thereto after being provided with an unambiguous method of accepting or declining the offer.” As all such requirements were met in Cablevision’s case, Judge Irizarry ruled that the contracts, and therefore Cablevision’s right to authorized access of Plaintiffs protected computer systems for the purposes of throttling, were in fact legal and granted Cablevision’s motion for summary judgment.

For all of its wide-ranging applicability to legal matters in the digital space, the CFAA does not appear to be of much use in preventing ISP throttling. Arguing that an ISP does not have authorized access to regulate its own networks may be nearly impossible to assert given their financial right to the infrastructure as well as their responsibility to protect its functionality for all users. Coupled with the robust Terms of Service and Acceptable Use Policies likely employed industry wide, ISPs are not likely to be vulnerable to this type of CFAA claim.

It will be interesting to see how the issue of ISP throttling is addressed in future cases and possible legislation. ISPs argue that if they are not allowed to throttle heavy users, all users will eventually suffer from a decrease in Internet speed. As more Internet users trend towards heavy use, the problems may become more pronounced over time. With ISPs struggling to build out next generation networks to handle increased usage, costs could be passed on to consumers in new forms, including multi-tier pricing systems based on bandwidth usage similar to those being introduced by cellular data carriers. While the vast majority of Americans may never be subject to bandwidth throttling, the latitude ISPs are given in establishing this practice will set the stage for how ISPs are able to regulate the networks of tomorrow.

Parties In High Profile Sports Agent Dispute In California Involving Trade Secret and Non-Compete Issues Throw Off The Gloves

Jessica Mendelson — Thu, 26 Apr 2012 12:18:00 -0600

The case of Mintz v. Mark Bartelstein & Associates d/b/a Priority Sports & Entertainment, recently filed in the Central District of California, provides an interesting look at both non-compete and trade secret law, as seen through the world of a sports agent.

Aaron Mintz, a National Basketball Players Association (NBPA) certified player-agent, allegedly resigned from Priority Sports & Entertainment on March 23, 2012. Immediately following his alleged resignation, Mintz signed a contract with Creative Artists Agency (CAA), a competitor agency.

On the day of Mintz’s resignation, he filed a complaint for declaratory relief against Mark Bartelstein & Associates, Inc., d/b/a Priority Sports & Entertainment. Mintz’s claim for relief was based on the argument that non-compete agreements are illegal under California law. The terms of Mintz’s contract with Priority Sports & Entertainment contained a two-year non-compete clause, which prohibits Mintz from representing any Priority Sports & Entertainment clients, either directly or indirectly. Under the terms of the contract, both parties consented to the jurisdiction of the Illinois State Courts. According to Mintz, however, the court should apply California law and the restrictive covenant should not be enforced because its enforcement would be contrary to public policy, since such provisions are prohibited under California Business and Professions Code Section 16600, restrictive covenants are prohibited in the employment context.

Although the parties’ choice of law agreement generally governs which law is applied, in Hughes Electronics Corp. v. Citibank Delaware, the court held that if the chosen state’s law is contrary to a fundamental public policy of the forum state, the parties’ choice of law will not be enforced. Here, Mintz argues that the prohibition of non-compete agreements is a fundamental state policy, and as a result, the court must consider the effect of the non-compete clause, which would restrict him from competing in his trade within the state he lives in, and decide in his favor.

Since the initial complaint was filed, Priority Sports has filed an answer, along with a number of counterclaims against both Mintz and his new employer, Creative Artists Agency (“CAA”). Priority Sports alleges that Mintz and CAA are engaged in “a reckless and relentless claim to improperly solicit Priority Sports’ clients by misappropriating and misusing Priority Sports’ confidential, proprietary and trade secret information and by tarnishing Priority Sports’ and Mark Bartelstein’s good name.” According to Priority Sports' counterclaim, Mintz has been working for CAA for months, even though he was still under contract with Priority, a direct competitor.

Priority Sports asserts a variety of counterclaims, including breach of contract, breach of the covenant of good faith and fair dealing, breach of the duty of loyalty, intentional interference with contractual relations, intentional interference with present and prospective economic advantage and business relationships. Additionally, the company alleges misappropriation of trade secrets, conversion, and violation of California Penal Code section 502, stem from Mintz’s removal of Priority Sports’ property, including files, a laptop, cell phone and office keys, as well as business emails and customer lists sent to his Gmail Account.

Priority further alleges defamation, trade libel, conspiracy, and unfair business practices under the California Unfair Business Practices Act. The company alleges Mintz made statements defaming both Bartelstein and Priority Sports, including suggesting that he had done “all the work” and that there was likely to be a “mass exodus” of players from Priority Sports’ client roster. It is also alleged that Mintz was working for and soliciting clients for CAA, even while he was still employed by Priority Sports, and that Mintz disclosed confidential information to CAA regarding his former employer.

Following Priority Sports’ answer and counterclaims, Mintz curiously initiated an additional lawsuit against both Priority and Mark Bartelstein individually in the Central District. Mintz’s new lawsuit alleges Priority Sports has engaged in an “unrelenting campaign of illegal conduct,” including, “impersonating Mintz in order to gain unauthorized access” to his internet account. Mintz also alleges Bartelstein has made false statements to third parties so as to interfere with Mintz’ prospective economic relationships with clients. Mintz asserts seven causes of action: violation of the Computer Fraud and Abuse Act, violation of the Electronic Communications and Privacy At, violation of the California Data Access and Fraud Act, defamation, invasion of privacy, interference wit prospective economic advantage, and unfair business acts and practices.

The court’s decision as to whether to apply California or Illinois law is likely to be a key factor in this case, as it plays a significant role in determining whether the non-compete agreement should be enforced. It will also be interesting to see if Priority Sports opens up a second front in Illinois to attempt to enforce the non-compete. Additionally, what the court chooses to consider a trade secret in the sports agency context will also likely play a role in the case’s outcome. John Marsh has also blogged on this high profile case on his trade secret blog, Trade Secret Litigator. With all of the allegations each party is making, it is difficult to predict how this case will turn out, but we will continue to keep you posted as the case progresses.

No Cause of Action Under Georgia's or Utah's Trade Secrets Statutes for Misappropriation of Confidential and Proprietary Information Not Qualifying as Trade Secret

Paul Freehling — Wed, 25 Apr 2012 11:10:23 -0600

Thanks to a recent decision of the Georgia Supreme Court, the assignee of confidential and proprietary information has found itself in a Catch 22 dilemma, precluded from suing under the state’s trade secrets statute because the information did not qualify as trade secrets but prohibited by that statute from bringing related common law claims. Robbins v. Supermarket Equipment Sales, LLC, 290 Ga. 462, 722 S.E.2d 55 (Feb. 6, 2012). A similar ruling was issued by the Utah Court of Appeals a few days later. CDC Restoration & Construc., LC v. Tradesmen Contractors, LLC, 2012 Ut. App. 60 (Feb. 24, 2012). Other courts interpreting the preemption provision of the Uniform Trade Secrets Act are divided.

In the Georgia case, the final act of an insolvent company was to assign its confidential and proprietary library of drawings to an entity newly created for the purpose of conducting the same business, with the same employees, as the assignor. Former employees of the assignor made copies of the drawings and went to work for a competitor. The assignee sued them for misappropriation. The trial court held, and the Georgia Supreme Court agreed, that the assignee was basically engaged in a continuation of the assignor’s business and, therefore, had standing to sue even though the misdeed took place before the assignment (indeed, before the assignee even was formed). But in light of the provision in the Georgia Trade Secrets Act stating that the statute supersedes all common law actions for trade secret misappropriation, and notwithstanding the conclusion that the confidential information did not qualify as a trade secret because it was not adequately protected, the supreme court held that the trial court abused its discretion by enjoining the miscreants from using the misappropriated property.

Section 10-1-767(a) of Georgia’s trade secrets statute states that the law “shall supersede conflicting tort, restitutionary, and other laws of this state providing civil remedies for misappropriation of a trade secret.” Even though the state Supreme Court held that assignee SES’ proprietary information did not constitute a trade secret, the court interpreted the statute as precluding common law claims based on the same allegations that underlie the trade secret misappropriation cause of action. The court said: “For the [statute] to maintain its exclusiveness, a plaintiff cannot be allowed to plead a lesser and alternate theory of restitution simply because the information does not qualify as a trade secret under the act.”

The Utah opinion, which was the subject of a Seyfarth Shaw blog shortly after it was issued, emphasized that a uniform act is to “be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of the [trade secrets] chapter among states enacting it.” The court cited decisions to a similar effect in state and federal courts of Hawaii, Kentucky, Michigan, New Hampshire (Mortgage Specialists, Inc. v. Davey, 904 A.2d 652, 663 (N.H. 2006) (collecting cases holding to the contrary but rejecting them), Ohio (Allied Erecting & Dismantling Co. v. Genesis Equip. & Mfg., Inc., 649 F.Supp.2d 702, 720-22 (N.D. Ohio 2009) (collecting majority cases), Tennessee (Hauck Mfg. Co. v. Astec Indus., Inc., 375 F.Supp.2d 649, 655 (E.D. Tenn. 2004) (same), and Virginia.

Thus, for plaintiffs in several states, such as Utah and Georgia, pleading misappropriation of proprietary information failing to qualify as a trade secret, the only way around those holdings may be by pleading some form of misconduct that is not based on theft of confidential data.

Law School Exam-Type Trade Secret Complaint Survives a Specific Pleading Challenge in Colorado Federal Court

David Monachino — Tue, 24 Apr 2012 11:30:34 -0600

As discussed in today's trade secrets webinar entitled "Pleading, Proving and Protecting Trade Secrets in Litigation," in an all to common theme, the plaintiff in L–3 Communications Corporation v. Jaxon Engineering & Maintenance, Inc. et al., 2012 WL 1020516 (D.Colo. March 27, 2012) contended that several of its former employees devised a plan to leave L3 and create a competing business entity regarding specialty electronic equipment by using, among other things, misappropriated, customer lists and pricing data. In what the Court characterized as "the answer to a law school examination", L3's twenty-six claim Amended Complaint asserted a wide variety of legal theories for recovery, including theft of trade secrets.

Although the Amended Complaint contained some 400 allegations spread over 87 pages, the Defendants moved to dismiss, among other claims, the trade secret claim. The Defendants argued that L3's claim under the Colorado Uniform Trade Secrets Act should be dismissed, because the claim "fails to identify sufficiently any alleged trade secrets, and fails to plead which Defendants allegedly misappropriated such alleged trade secrets." The District Court disagreed and held that although the "Defendants would certainly prefer that L3 be even more specific in identifying each particular allegedly misappropriated trade secret, and that it be prohibited from referencing other alleged trade secrets in more general terms, the Court cannot say that the Amended Complaint is so bereft of specifics regarding any of the trade secrets at issue here that dismissal is warranted."

Hey Lumbergh, You Don't Own My Facebook Account: Maryland Passes Legislation To Protect Employee's Social Media Accounts

Jessica Mendelson — Wed, 18 Apr 2012 22:21:59 -0600

Recently the legality of requiring prospective hires to hand over social networking usernames and passwords received national attention when New York Sen. Charles Schumer and Connecticut Sen. Richard Blumenthal asked the U.S. Department of Justice to investigate whether the practice violates federal laws. Although federal legislation has yet to be passed, state legislatures have begun to address the issue.

This month, Maryland will become the first state to pass a law on the practice. Two identical bills, S.B. 433 and H.B. 964, were passed by the State legislature on Monday, and are now headed to Governor Martin O’Malley, who is likely to sign the legislation into law. Under this legislation, which will take effect on October 1, 2012, employers and their agents or representatives are prohibited from requiring workers and job applicants to “disclose any user name, password, or other means for accessing a personal account or service” electronically. In addition, employers are prohibited from refusing to hire an applicant for not providing access to such information. Similarly, employers are not permitted to terminate or discipline an employee for refusing to provide such information.

In addition to protecting the privacy of current and prospective employees, the Maryland law also provides employers with some protections as well. Under the terms of the law, employees are prohibited from downloading “unauthorized employer proprietary information or financial data” to personal accounts or to websites, and employers are permitted to investigate upon hearing of such activity. Such investigations are intended to ensure “compliance with applicable securities or financial law or regulatory requirements.” Additionally, employers are permitted to require employees to provide passwords and login information for non-personal accounts that are part of the employer’s own systems, such as company e-mail accounts. Please find our management alert on this new law.

Similar legislation has been filed or is under consideration in other states, including California, Illinois, and New Jersey. In New Jersey, Assemblyman John Burzichelli recently proposed legislation, stating that the practice of handing over usernames and passwords is "no different than asking someone to turn over a key to their house. Demanding this information is akin to coercion when it might mean the difference between landing a job and not being able to put food on the table for your family."

In Illinois, State Representative LaShawn Ford proposed House Bill 3782, which would prevent employers from requesting any employee or prospective employee to provide a password or account name for a social networking site. The Illinois state Senate will vote on the bill in the next couple of weeks. Assuming the bill passes in the Senate, it will move to a full House vote. According to Ford, the bill will help prospective employees, “afraid to speak up because they don’t want to prevent themselves from receiving employment, and it protects employers from facing future lawsuits,” which in turn saves taxpayers money.

The increasing state and federal regulation of this practice suggests a growing trend in protecting the privacy of individual employees. However, some employers are getting around this legislation through the use of third party applications, such as BeKnown or BranchOut, which can be used to provide limited access personal profiles if a job seeker allows it. Often, a prospective employee will be asked to check a box in the job application allowing the use of such third party software. Lori Andrews, an internet privacy law professor at Chicago-Kent College of Law, worries about the pressure placed on applicants, even those who voluntarily provide access to social networking websites. According to Andrews, "Volunteering is coercion if you need a job."

Some states, such as California, have taken viewpoints like Andrews’ into account in proposing legislation. California Senator Leland Yee (D-San Francisco/San Mateo) recently introduced legislation designed to prevent employers from requesting employees or job applicants provide their social media usernames and passwords, and prohibit employees from voluntarily sharing such information. According to Yee, “It is completely unacceptable for an employer to invade someone’s personal social media accounts. Not only is it entirely unnecessary, it is an invasion of privacy and unrelated to one’s work performance or abilities.” The Senate Committee on Education recently approved the legislation authored by Senator Yee.

The debate over the amount of privacy interest prospective employees and existing employees are entitled to with respect to social networking is far from over, and we will continue to provide updates in this important area.

Upcoming Client Webinar on April 24th: Pleading, Proving and Protecting Trade Secrets in Litigation

Robert Milligan — Tue, 17 Apr 2012 14:07:19 -0600

Seyfarth Shaw LLP is pleased to announce its third webinar in the 2012 Trade Secrets Webinar Series entitled "Pleading, Proving and Protecting Trade Secrets in Litigation” scheduled for April 24, 2012 at 1 p.m. e.s.t. The speakers for this informative webinar are Seyfarth Shaw LLP partners Michael Wexler, Robert Niemann, and David Monachino.

Most Federal and state courts require that claims for trade secret protection, including claims under the Uniform Trade Secrets Act, be plead specifically as to the nature of the trade secret, or suffer the consequences of challenges to the pleadings. The challenge is to plead with reasonable particularity without actually disclosing the secrets in a public document. From the defense stand point, the identity of the trade secret is paramount to prepare defenses, determine the value of the secrets, and determine if they were actually misappropriated. Our panel will cover all the ethical, technical and practical aspects of initial pleadings that are fundamental to the filing and defending of trade secret claims.

Discovery in trade secret claims often requires plaintiffs to describe the secrets with reasonable particularity before any discovery can be conducted. Disclosures can be made pursuant to statutory requirements, discovery requests, declarations, or by testimony. Defendants wanting to frame discovery to the exact issues and secrets in each case can employ numerous tactics when plaintiffs fail to meet the reasonable particularity requirements. Our panel will explore all of the methods used by both parties to litigation to protect and compel adequate disclosures at the appropriate time.

The timing for use of stipulations and protective orders is always an issue during each trade secrets case. Seeking Court intervention may also come into play in regard to adequate identification of secrets. Our expert panel will review the policies and tactics behind recent case decisions interpreting judicial enforcement and methods of ensuring adequate but fair disclosure for all parties. You can register here. CLE credit will be available to participants in New York, Illinois, and California.

Sale of Business "Good Will" and Subsequent Competition with Purchaser May Subject Seller to Perpetual Restrictions on Contacting Former Customers and Clients

Paul Freehling — Thu, 12 Apr 2012 16:13:33 -0600

A recent Second Circuit Court of Appeals decision provides guidance regarding New York law concerning permissible and impermissible competitive conduct by the seller of a business, including its “good will,” who -- without giving a non-compete covenant -- thereafter goes into competition with the purchaser. The Second Circuit was aided by New York’s highest court which answered certified questions concerning the proper interpretation of the so-called “Mohawk doctrine.” The Second Circuit held that, in perpetuity, the seller may not disparage the purchaser, may not actively solicit former clients/customers but may respond truthfully to factual questions posed by them on their own initiative, may not provide the new employer with information that is proprietary to the purchaser but may assist in developing a plan to attract former clients/customers, and may attend meetings with them but must take a largely passive role. Bessemer Trust Co., N.A. v. Branin, Docket Nos. 08-2462-cv(L) and 08-2677-cv(XAP) (2d Cir., Apr. 5, 2012).

Defendant Branin sold the assets of his investment portfolio management business to Plaintiff Bessemer Trust. The assets included client accounts and “good will.” He did not give Bessemer a non-compete covenant. After the sale, Branin worked for Bessemer for a short time, but then resigned and joined competitor Stein Roe Investment Counselors. Branin made no promises to Stein Roe that his clients would follow him, but communicated his hope that 80% of the $2.3 million in revenue he had been generating for Bessemer would transfer to Stein Roe within a year. Before leaving Bessemer, Branin did not inform any of his clients of his impending move.

After Branin commenced employment with Stein Roe, he did not initiate contacts with his former clients. When they asked why he had left Bessemer, he gave mostly benign responses (for example, that Stein Roe’s method of dealing with clients is “more appropriate for my training and experience”). Bessemer sued Branin when the large Palmer family account that he had been managing for 15-20 years transferred to Stein Roe.

The Palmer family’s representative had called Branin and inquired about his reasons for leaving Bessemer. When Branin gave his standard answer, the representative requested a meeting to discuss how the account would be managed if it was moved to Stein Roe. Branin helped Stein Roe prepare by providing information about the Palmer family and the family’s investment philosophy. Branin attended the meeting between the Palmer family and Stein Roe, but took a passive role, apart from making introductions and occasionally amplifying a point. Afterwards, the Palmer family invited Branin to their home to make a specific proposal. Branin accepted the invitation and, while there, told them that Stein Roe’s fees would be the same as Bessemer’s and that the president of Stein Roe would be the number two person on the account. The Palmer family transferred their account to Stein Roethe next day.

Relying on Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276, 283, 419 N.E.2d 324, 328 (1981) -- “the vendor is not at liberty to destroy or depreciate the thing which he has sold; there is an implied covenant on the sale of ‘good will’ . . . not to solicit the customer which he has parted with; it would be a fraud on the contract to do so” -- the district court held that Branin had violated New York law with regard to the Palmer account and awarded Bessemer $1.25 million. Both parties appealed.

The federal appellate court initially concluded that under New York law, the principles set forth in Mohawk were unclear as applied to the facts of the Bessemer-Branin litigation. Accordingly, the Second Circuit certified several questions about the Mohawk doctrine to the New York Court of Appeals. Based on the answers, the federal appellate judges concluded that the district court judge erroneously focused on Branin’s intentions rather than his actions. Therefore, the district court’s judgment for Bessemer was vacated, and the case was remanded for further proceedings.

This decision teaches that the buyer of a personal services business (and other purchasers of “good will”) should insist on a covenant not to compete from the seller. Bessemer’s failure to do so has cost the company millions of dollars in lost revenue and enormous legal fees (there have already been five published opinions over the course of the litigation’s six years, and it isn’t over). Under the rules articulated by the New York Court of Appeals, some of which may be a bit naïve (is it believable that sellers of “good will” with long-standing business relationships will forego all meaningful communications with former clients/customers in perpetuity?), absent a covenant future sales of “good will” followed by the seller’s entry into competition could generate similar fact-intensive and expensive lawsuits.

Ninth Circuit En Banc Panel Tells Employers That Computer Fraud and Abuse Act Is Only To Combat Hacking, Not Employee Trade Secret Misappropriation: United States Supreme Court May Need To Resolve Circuit Split

Robert Milligan — Tue, 10 Apr 2012 16:16:46 -0600

On Tuesday, April 10, 2012, a Ninth Circuit en banc panel released its highly anticipated decision in United States v. Nosal and affirmed the judgment of the district court dismissing criminal counts against a former employee of a headhunter firm accused of violating the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq. by conspiring with employees of the former employer to log on to the employer's confidential database and send proprietary files to a competitor.

The opinion, authored by Chief Judge Alex Kozinski, and supported by a majority of the 11-judge court, made the following general statements in its introduction:

Computers have become an indispensable part of our daily lives. We use them for work; we use them for play. Some times we use them for play at work. Many employers have adopted policies prohibiting the use of work computers for nonbusiness purposes. Does an employee who violates such a policy commit a federal crime? How about someone who violates the terms of service of a social networking website?

This depends on how broadly we read the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030.

The Court then went on to reject the federal government's interpretation of the CFAA, finding that the statute was meant to punish hacking, not misappropriation of trade secrets. To find otherwise, Judge Kozinski reasoned would "criminalize any unauthorized use of information obtained from a computer" and "make criminals of large groups of people who would have little reason to suspect they are committing a federal crime."

"Minds have wandered since the beginning of time and the computer gives employees new ways to procrastinate, by g-chatting with friends, playing games, shopping or watching sports highlights," Kozinski wrote. "Such activities are routinely prohibited by many computer-use policies, although employees are seldom disciplined for occasional use of work computers for personal purposes. Nevertheless, under the broad interpretation of the CFAA, such minor dalliances would become federal crimes. While it's unlikely that you'll be prosecuted for watching Reason.TV on your work computer, you could be. Employers wanting to rid themselves of troublesome employees without following proper procedures could threaten to report them to the FBI unless they quit. Ubiquitous, seldom-prosecuted crimes invite arbitrary and discriminatory enforcement."

The Court acknowledged that the Eleventh, Fifth, and Seventh Circuits permit employers to pursue CFAA claims against employees who violate computer use policies or violate duties of loyalty to their employer.

The Court reasoned though:

"We remain unpersuaded by the decisions of our sister circuits that interpret the CFAA broadly to cover violations of corporate computer use restrictions or violations of a duty of loyalty. See United States v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010); United States v. John, 597 F.3d 263 (5th Cir. 2010); Int’l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006). These courts looked only at the culpable behavior of the defendants before them, and failed to consider the effect on millions of ordinary citizens caused by the statute’s unitary definition of “exceeds authorized access.” They therefore failed to apply the long-standing principle that we must construe ambiguous criminal statutes narrowly so as to avoid “making criminal law in Congress’s stead.” United States v. Santos, 553 U.S. 507, 514 (2008).

We therefore respectfully decline to follow our sister circuits and urge them to reconsider instead. For our part, we continue to follow in the path blazed by Brekka, 581 F.3d 1127, and the growing number of courts that have reached the same conclusion.

The Ninth Circuit concluded that because Nosal’s accomplices had permission to access the company database and obtain the information contained within, the government’s charges fail to meet the element of “without authorization, or exceeds authorized access” under 18 U.S.C. § 1030(a)(4).

Because Nosal's alleged accomplices had permission to access the company database, they did not "exceed authorized access" under the CFAA, the Court held. "The government assures us that, whatever the scope of the CFAA, it won't prosecute minor violations," Kozinski added. "But we shouldn't have to live at the mercy of our local prosecutor."

In a powerful dissent, Judge Barry Silverman wrote:

This case has nothing to do with playing sudoku, checking email, fibbing on dating sites, or any of the other activities that the majority rightly values. It has everything to do with stealing an employer’s valuable information to set up a competing business with the purloined data, siphoned away from the victim, knowing such access and use were prohibited in the defendants’ employment contracts. The indictment here charged that Nosal and his co-conspirators knowingly exceeded the access to a protected company computer they were given by an executive search firm that employed them; that they did so with the intent to defraud; and further, that they stole the victim’s valuable proprietary information by means of that fraudulent conduct in order to profit from using it. In ridiculing scenarios not remotely presented by this case, the majority does a good job of knocking down straw men — far-fetched hypotheticals involving neither theft nor intentional fraudulent conduct, but innocuous violations of office policy.

The majority also takes a plainly written statute and parses it in a hyper-complicated way that distorts the obvious intent of Congress. No other circuit that has considered this statute finds the problems that the majority does. (emphasis added)

It remains to be seen whether the federal government will seek Supreme Court review. There is clearly a circuit split on this important issue. While purportedly committing a federal crime by violating a company's computer policies by playing sudoku or watching March Madness seems laughable, the majority's decision leaves employers in the Ninth Circuit, and particularly California, with less options than those in other circuits that recognize CFAA claims (both civil and criminal) for wrongful access of company computers to steal company data for competitive purposes. We will provide additional insight on the implications of the Court's decision in later posts. As a preliminary matter, companies operating in the Ninth Circuit should reevaluate the scope of access that they provide their employees on their computer systems and limit access to highly valuable information to only those who need to know.