Defend Trade Secrets Act Set to Become Law

For the first time, there will be a federal private right of action for misappropriation of trade secrets. The Defend Trade Secrets Act (“DTSA”), passed by both houses of Congress, is headed to President Barack Obama for his signature and his office has stated it “strongly supports” the legislation. The DTSA will become effective upon the President’s signature and will apply to any misappropriation of trade secrets that occurs on or after the date it is signed by the President.

On April 4, the U.S. Senate passed the DTSA by a vote of 87-0. In a procedural maneuver, the Senate bill was presented to the House for a vote on April 27, and it passed by a vote of 410-2. For additional information, see our articles, Defend Trade Secrets Act Advances: Getting Closer to Law? and Defend Trade Secrets Act — Congress Tries Again.

Companies that are victims of trade-secret theft will have an alternative to state law (and thus, to the state courts in which cases often are brought) to bring a civil action to enjoin violations of trade-secret theft and to seek a remedy for violations that already have occurred.

State Law

Although there are similarities between the DTSA and state trade secrets acts, the uncertainty of protection for trade secrets from one state to another, as well as the chilly reception in some state courts to out-of-state plaintiff companies, created bi-partisan support for the DTSA. With its federal forum and federal remedy, the DTSA, over time, will create a nationwide body of law and provide a degree of predictability to company litigants.

The DTSA does not preempt state trade secrets laws, and state law and state courts will remain an option for victims of trade secret theft. Companies still will need to consider whether the state law and court is preferable to the DTSA and federal court. However, the DTSA will help protect trade secrets across multiple jurisdictions. Even companies with operations in only one state can benefit significantly from access to federal courts and federal judges under the DTSA, particularly if the relevant state courts have been slow to respond, or even hostile, to trade-secrets litigation. Moreover, the DTSA does not prevent companies from having their cases heard in federal court alongside parallel, “pendent” claims under any state trade secret act — in effect, favorable state trade secret law may accompany federal DTSA claims in the same case.

Inevitable Disclosure

One important distinction between the DTSA and some state trade secret laws may be the potential availability of the “inevitable disclosure” doctrine under state law in some circumstances. The DTSA expressly rejects the “inevitable disclosure” doctrine and precludes a court from enjoining a person from entering into an employment relationship. The Act further requires evidence of threatened misappropriation rather than merely information that the person knows.

Seizure Orders

The DTSA’s most significant substantive addition to trade secret protection, and certainly its most controversial, is its authorization of ex parte seizure orders — a provision that, since the first iteration of the DTSA in 2012, had derailed passage of the legislation. The DTSA strictly limits the ability of a court to issue a seizure order. Such an order must be the “narrowest” necessary to achieve the purpose of the order, according to the Senate bill.

Further, the circumstances under which such an order can be issued also are limited. Filing a complaint does not mean a seizure order will be automatically, even likely, issued; fairly substantial proof will be required to obtain this extraordinary interim remedy. In addition, a court can impose significant sanctions on a plaintiff who wrongfully obtains an order to seize another’s property.

Notice

The DTSA imposes conditions on a successful plaintiff’s recovery of attorneys’ fees and exemplary damages. Attorneys’ fees and exemplary damages are not recoverable unless the employer has provided the defendant employee, consultant, or contractor with notice of certain immunity from criminal and civil prosecution granted by the DTSA to persons who disclose trade secrets by the means provided by the DTSA (principally, to government agencies and under seal in court proceedings).

The notice must be in any contract or agreement that governs the use of trade secrets or confidential information. It applies to contracts and agreements that are entered into, or updated, after enactment of the DTSA. Therefore, all new non-disclosure agreements, confidentiality agreements, employment agreements, consulting agreements, and independent (or other) contractor agreements containing non-disclosure provisions must include the required notice. Failure to include the notice may preclude availability of a significant financial recovery.

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Significant, too, is what DTSA does not change, in particular, the need to adhere to best practices in protecting trade secrets. The DTSA does not eliminate the need for companies to identify their trade secrets, protect them against inappropriate use or disclosure, and establish the steps taken to maintain their secrecy. For example, documents containing trade secrets should be labeled as confidential, their distribution should be limited, they should be maintained in secure areas (e.g., locked cabinets), and individuals who are privy to such secrets should be trained on the nature of that information and how to safeguard it. Similarly, access to computer files containing such information should be restricted, and those with access should be trained on the files’ confidentiality. Following such steps not only can limit the risk of inappropriate use or disclosure, but also may prove invaluable when seeking a court’s protection for the trade secrets involved. All this will remain true under the DTSA.

For companies with multi-state operations, and even for companies with single-state operations but whose trade secrets are portable across state lines (by hard copy documents or electronically), the DTSA affords a new weapon to protect trade secrets nationwide. In addition, because trade secrets litigation often involves violations of non-competition or non-solicitation agreements, such claims also may be brought in federal court in tandem with the alleged DTSA violation. Thus, the DTSA may provide a new, meaningful alternative to state court litigation when seeking to protect trade secrets and related unfair competition. Finally, all agreements with non-disclosure provisions should include the notice provision required by the DTSA.

Jackson Lewis attorneys are available to answer inquiries regarding this and other workplace developments and assist with trade secrets protection.

9th Circuit: Claims proceed in California despite French forum selection clause

A federal appeals court has held a forum selection clause in a non-disclosure agreement does not cover trade secret misappropriation and related claims that are not based on the agreement. In re Orange, S.A. v. United States District Court, 2016 U.S. Ap. LEXIS 648 (9th Cir. 2016).  Telesocial is a San Francisco start-up, formed in 2008, to solve a unique telecommunications problem: how to enable telephone calls between users of social media without the need for telephone numbers.  To remedy the problem, Telesocial created a custom software application (app) named “Call Friends,” which allows users of social networks (such as Facebook) to place carrier-based phone calls directly to other users.  Orange, a French telecommunications provider, approached Telesocial about a possible agreement to acquire the app.  Orange and Telesocial executed a non-disclosure agreement (“NDA”) to facilitate the discussions, during which Telesocial allowed Orange personnel to download and use the demonstration app.  The NDA included a forum selection clause, which stated, “[a]ny and all dispute, controversy, claim or question arising out of or relating to the Agreement including the validity, binding effect, interpretation, performance or non performance thereof shall first be submitted to the respective authorized management of the Parties for discussion in good faith and amicable resolution.  In the event the Parties cannot resolve such dispute on an amicable basis within (30) thirty days after the beginning of such discussion and after making their best efforts to do so, then the Parties hereto irrevocably consent that the matter shall be submitted to the Court of Paris (France).”

Orange abruptly terminated negotiations, electing instead to create the technology itself. Telesocial subsequently filed an action in the Northern District of California, alleging violations of the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030, California state law claims for breach of contract for violating Telesocial’s “Terms of Use” regarding the demonstration app, breach of the covenant of good faith and fair dealing, theft of trade secrets, and unfair competition.  The district court denied Orange’s motion to dismiss under the terms of the forum selection clause, holding the claims were outside the clause’s scope.  Orange petitioned the Ninth Circuit for a writ of mandamus.  The Ninth Circuit denied the petition, agreeing that the claims were outside the clause’s scope.

The Ninth Circuit reasoned that Telesocial’s CFAA, theft of trade secrets, and unfair competition claims were predicated on Orange’s using fictitious names to use Telesocial’s app and hacking into Telesocial’s servers after Orange ceased the discussions at the center of the NDA. Telesocial’s contract claims, moreover, stemmed from a breach of Telesocial’s “Terms of Use” agreement.  Nothing in the claims required the district court to interpret, let alone reference, the NDA to issue a ruling on Telesocial’s claims.  The Ninth Circuit distinguished precedent affording a broader interpretation to combination arbitration/forum selection clause, in part on ground that arbitration agreements, unlike forum selection clauses, are to be given broad interpretations where possible.

The takeaway: although forum selection clauses are often an important tool in structuring business relationships to minimize disruptive litigation, they have limits which parties need to consider.

Utah Enacts New Laws Addressing Post-Employment Restrictions and Unauthorized Computer Use

Utah

Conrad S. Kee from our Salt Lake City office and Cliff Atlas, co-chair of the firm’s non-compete practice group have written on the firm’s website about two new important laws in Utah, the Post-Employment Restrictions Act and the Computer Abuse and Data Recovery Act.

North Carolina Supreme Court Reiterates Limited Blue Pencil Approach to Overbroad Non-Competes

North Carolina

M. Robin Davis and Conrad S. Kee have written on the Jackson Lewis website about a recent decision from the North Carolina Supreme Court reversing a court of appeals decision and re-affirming that judges in that state may only apply a limited blue pencil to non-compete agreements.

 

 

Defend Trade Secrets Act Advances: Getting Closer to Law?

Defying claims that bi-partisanship in Congress is dead, the United States Senate has passed the Defend Trade Secrets Act by a vote of 87-0. The measure, approved by the upper chamber on April 4, goes to the House of Representatives, which is considering a very similar bill with sponsorship from both sides of the aisle. The President has expressed support for such a law. In February, we wrote about the introduction of the DTSA in the Senate. (See http://www.jacksonlewis.com/publication/defend-trade-secrets-act-congress-tries-again)

The DTSA, for the first time, would create a federal private right of action for misappropriation of trade secrets. This would provide companies that are victims of trade-secret theft an alternative to state law (and thus, to the state courts in which cases often are brought) to bring a civil action to enjoin violations of trade-secret theft and to seek a remedy for violations that already have occurred.

As we discussed in February, there are many similarities between the DTSA and state trade secrets acts. But these similarities have not always been reflected in interpretations of those statutes. The uncertainty of protection for trade secrets from one state to another, as well as the chilly reception in some state courts to out-of-state plaintiff companies, remains a significant motivating factor behind the DTSA. By providing a federal forum and remedy, the DTSA, over time, would create a nationwide body of law and provide a degree of predictability to company litigants. That said, the DTSA does not preempt state trade secrets laws, and thus state law and state courts will remain an option for victims of trade secret theft. Companies still will need to consider whether the state law and court is preferable to the DTSA and federal court, but the DTSA will be helpful in protecting trade secrets across multiple jurisdictions. Even for companies with operations in only one state, access to federal courts and federal judges under the DTSA can be a significant benefit, particularly if the relevant state courts have shown themselves to be slow to respond, or even hostile, to trade-secrets litigation.

Perhaps the new law’s most significant addition to trade secret protection is its authorization of ex parte seizure orders — a provision that, in the past, has derailed passage of these bills and which is still controversial. The DTSA addresses these concerns by more narrowly restricting the ability of a court to issue a seizure order. Such an order must be the “narrowest” necessary to achieve the purpose of the order, according to the Senate bill. Further, the circumstances under which such an order can be issued also are restricted. Filing a complaint does not mean a seizure order is automatic or even likely; fairly substantial proof will be required to obtain this extraordinary interim remedy. And there are significant sanctions the court can impose on a plaintiff that wrongfully obtains an order to seize another’s property.

What’s Next?

President Obama has come out strongly in favor of the DTSA. So have numerous companies and business groups. Now, the DTSA goes back to the House of Representatives for further consideration in conjunction with the nearly identical House bill with numerous bi-partisan sponsors. The House bill, however, has been stuck in committee since October of last year. It remains to be seen whether the House leadership will move its bill out of committee and reconcile it to the Senate version. If it does, then the DTSA may well be one of the few pieces of legislation to get passed and signed into law this election year.

In the Meantime . . .

Whether the DTSA passes or not, companies are well-advised to identify their trade secrets, protect them against inappropriate use or disclosure, and establish the steps taken to maintain their secrecy. For example, documents containing trade secrets should be labeled as confidential, their distribution should be limited, they should be maintained in secure areas (e.g., locked cabinets), and individuals who are privy to such secrets should be trained on the nature of that information and how to safeguard it. Similarly, access to computer files containing such information should be restricted, and those with access should be trained on the files’ confidentiality. Such steps not only can limit the risk of inappropriate use or disclosure, they also are invaluable when seeking a court’s protection of the trade secrets at issue.

For companies with multi-state operations, and even for companies with single-state operations but whose trade secrets are portable across state lines (by hard copy documents or electronically), the DTSA provides an opportunity to create uniformity and certainty in protecting trade secrets. In addition, because trade secrets litigation often involves violations of non-competition or non-solicitation agreements, such claims also may be brought in federal court in tandem with the DTSA violation. Thus, the DTSA could provide a new, meaningful alternative to state court litigation when seeking to protect trade secrets and related unfair competition.

Jackson Lewis attorneys are available to answer inquiries regarding this and other workplace developments and assist with trade secrets protection.

 

Florida Federal Court Raises the Bar on Irreparable Injury

Florida sign Businesses seeking injunctive relief to enforce non-competition agreements in Florida might be required to show the confidential information they seek to protect is neither unnecessary nor outdated, according to a recent ruling in Transunion Risk and Alternative Data Solutions, Inc. v. Challa, 2016 U.S. Dist. LEXIS 166346, Case No. 9:15-cv-91049 (S.D. Fla. March 23, 2016).  The defendant/former employee in that litigation testified that he would not use his extensive knowledge of the plaintiff/former employer’s confidential business information to perform his new job with a competitor.  Despite the court’s acknowledgement of a legal presumption that the plaintiff would be irreparably injured by the defendant’s employment with a competitor, the defendant was able to avoid a preliminary injunction with his own self-serving testimony about his job duties. This was also despite the court’s specific finding that the former employer “has a substantial likelihood of success on the merits of its claim for breach of the Agreement.”  The court ruled that the presumption of irreparable harm was rebuttable and that the defendant presented sufficient evidence to rebut the presumption.

In testimony at the preliminary injunction hearing, the defendant explained the nature of his new position, the publicly available information that he utilized to perform his new job functions, and the reasons why he did not need the plaintiff’s confidential information in his new position. The court also pointed out that 14 months had passed since the defendant last had access to the plaintiff’s confidential information and that both parties agreed that the data fusion industry in which they worked was rapidly evolving. As a result, the court denied plaintiff’s motion for a preliminary injunction.

The court further noted that ‘[t]o succeed on the merits of its claim, [the former employer] must also establish damages resulting from the breach.” The court then questioned whether the former employer would be able to do so “in light of the findings and conclusions” reached by the court in denying the preliminary injunction.

Employers seeking to enforce non-competes should proactively gather and be prepared to present evidence in hearings seeking preliminary injunctive relief to show that a former employee’s new position will necessarily entail utilization of the employer’s valuable confidential information. Based on Transunion, companies face an uphill battle if they request injunctive relief to prevent employment by a competitor which might be seen as only to preserve the confidentiality of unnecessary or outdated information.

Unintended Consequences of Arbitration Provisions

A recent unpublished decision of the United States District Court, Eastern District of Pennsylvania, highlights the importance for employers to review carefully their agreements containing restrictive covenants to ensure they do not unintentionally limit the available avenues for relief.

In Healthcare Servs. Grp., Inc. v. Fay, 2015 BL 33694 (Oct. 14, 2015), Healthcare sued two former employees (and their new employer) for violation of their non-compete agreements, misappropriation of  trade secrets, and  tortious interference.  The District Court granted Healthcare’s motion for a preliminary injunction in May 2013.  The two former employees appealed, and the Third Circuit affirmed in February 2015, sending the matter back to the District Court for further proceedings.  The case remained in the District Court without further action until a telephone conference with the court in July 2015.  In August 2015, the two former employees moved to compel arbitration of Healthcare’s claims pursuant to the arbitration provision of the employment agreement at issue. The arbitration provision stated in relevant part:

Any dispute that in any way relates to the Plan or this Stock Option Agreement … shall be submitted to mandatory and binding arbitration … The decision of the arbitrator shall be final and binding on both parties … Notwithstanding the foregoing, the Company may seek temporary and/or preliminary injunctive relief against Employee … in an appropriate state or federal court with jurisdiction over the matter before initiating arbitration.

Healthcare opposed the employees’ motion to compel arbitration.  Healthcare did not argue the arbitration provision was invalid; after all, it had drafted the agreement in the first instance. Rather, Healthcare argued that it would be prejudiced by arbitration now, more than two years after it commenced the action in the District Court.

The court granted the motion to compel arbitration, reasoning that the provision was valid, and Healthcare suffered no prejudice.  Although more than two years had elapsed since the commencement of the action, nothing substantive had occurred in the matter beyond the  preliminary injunction application and appeal.  The court further reasoned that arbitration could not have commenced anyway until after the appeal was ruled upon, which process concluded in February 2015.  The Court also noted that Healthcare allowed the matter to lay dormant from that point until August 2015.

It is not unusual to see an arbitration clause in an employment agreement which permits the employer to seek a temporary restraining order or preliminary injunction in court.  In certain situations, there may be legitimate business reasons why an employer would want proceedings in a non-compete matter, beyond the initial preliminary injunction application, decided by an arbitrator. For example, the employer may prefer the confidentiality associated with arbitration as well as potentially more limited discovery and lower litigation costs.  However, there often are equally or more compelling reasons to keep restrictive covenant proceedings in court, before a judge.  For example, broader discovery may be needed to effectively prosecute the case.  In addition, the need for exigent relief often is better addressed by emergent applications to a judge than the likely slower process of arbitration.

Here, even if Healthcare had been denied preliminary injunction relief, it may have preferred to keep the matter before a judge to be able to renew the application on a fuller discovery record.  With the preliminary injunction granted, Healthcare likely preferred to have the same judge from whom it received a favorable ruling determine an application for a permanent injunction.  Despite Healthcare’s desire to keep the matter in the district court (for these or perhaps other reasons), it was hamstrung by the language of its own agreement, which did not exclude restrictive covenant matters in their entirety from arbitration.

For these reasons, employers should review their agreements containing restrictive covenants to make sure the language concerning arbitration of claims is consistent with their needs.

Consideration for Non-Competes in Illinois: You’re Better Off in Federal Court

The saga of “What consideration is adequate?” in Illinois continues. What has become clear is that federal courts are more forgiving than Illinois state courts on this issue.

On March 10, 2016, Judge Gettleman of the federal court in Chicago issued a ruling on this issue in R.J. O’Brien & Associates, LLC v. Williamson, Case No. 14 C 2715.  In this case, defendant Williamson signed two agreements when he was hired in 2012 in which he promised that, for a period of time after his employment with plaintiff R.J. O’Brien & Associates (“R.J.”) ended, he would not solicit R.J.’s employees or customers.  One year later, Williamson quit abruptly and, within a week, was soliciting his former colleagues, with the hope that they would bring their business with them to R.J.  One of them did just that.

R.J. sued Williamson for damages—not for injunctive relief—for its loss of the employee he solicited and who took her customer accounts to Williamson’s new employer. Williamson ultimately moved for summary judgment, claiming that because Williamson had not been employed for two years after he signed the agreement (he quit after one year) there was inadequate consideration for the restrictions and, therefore, they were invalid.  In asserting this argument, he relied on the now (in?)famous 2013 decision by the Illinois Appellate Court in Fifield v. Premier Dealer Services, Inc., and subsequent Illinois state court decisions following Fifield. The court in Fifield held that, absent additional consideration (i.e., more than hiring the person or simply allowing them to stay employed), a restrictive covenant agreement would not be enforceable unless the employer employed the individual for at least two years after signing the restrictive covenant agreement.

This argument was not the silver bullet Williamson likely thought it would be. R.J. brought its lawsuit in federal court, not state court.  And in the federal courts in Illinois, prior to R.J.’s filing of its suit against Williamson, four of the five federal court cases involving Fifield’s supposed “bright-line” rule of two years’ continued employment rejected that rule and, instead, favored a case-by-case analysis of all factors bearing on the issue of consideration (such as compensation, termination-related terms, etc.).  Judge Gettleman, in R.J. O’Brien & Associates, became the fifth federal judge to reject the two-years’ employment bright-line rule.  Judge Gettleman also noted that he was influenced by the fact that Williamson had voluntarily resigned (this was of no moment to the Illinois court in Fifield, remember); R.J. had honored its obligations to Williamson during his employment; and R.J. had taken measures that benefited Williamson and which could have put R.J. at risk of liability should Williamson violate certain rules regulating R.J.’s business—all of which reflected adequate consideration for the restrictive covenants.

The R.J. O’Brien & Associates decision, when added to the prior four federal court decisions rejecting Fifield’s bright-line rule, has a simple statement to make to employers in Illinois:  If an employee departs in less than two years after signing a restrictive covenant agreement, the employer should seek to enforce that agreement in federal court, if federal jurisdiction can be attained.

Use Of Personal Cloud-Based Document Accounts Requires New Strategies By Employers

googledocsWhether Google Docs, Dropbox, or some other file sharing system, employees, especially millennials and other digital natives, are increasingly likely to set up personal cloud-based document sharing and storage accounts for work purposes, usually with well-meaning intentions, such as convenience and flexibility. Sometimes this is done with explicit company approval, sometimes it is done with tacit awareness by middle management, and often the employer is unaware of this activity.

When an employee quits or is terminated, however, that account, and the business documents it contains, may be locked away in an inaccessible bubble. Worse, the employee could access trade secrets and other information stored in the cloud to unfairly compete. For example, in 2012, the computer gaming company Zynga sued a former employee for uploading trade secrets onto the employee’s personal Dropbox account before leaving to work for a competitor. At a minimum, it may take time to recover the information or obtain the user name and password from the former employee.  Storage of proprietary information, especially personally identifiable information (PII) on personal cloud accounts also increases the risk of a company data breach if the information is hacked.  Finally, allowing business documents to be stored outside of the system can also create headaches when enacting a litigation hold or responding to electronic discovery requests in litigation. What should employers be doing now, to address this trend?

Institute Written Policies Regarding Use of Cloud-Based Storage Accounts

Companies should consider issuing clear policies on the use of personal cloud-based accounts for work purposes, before the litigation storm clouds gather. The most straightforward approach, utilized by many employers, is a strict prohibition on use of personal accounts to store any company-related information.  Another option for smaller companies who rely on cloud-based computing or storage for cost reasons or flexibility is to select a secure system controlled by the employer with a requirement that employees record user name and passwords for all accounts with the company, and have them acknowledge that the password and user name are property of the company. (A similar policy is important for company social media accounts like Twitter, Facebook, and LinkedIn)  A written policy may merely dissuade use of secret cloud storage accounts and not completely eliminate problems in this area, but a clear directive also allows an employer to show a court that a former employee was violating company protocol and may hasten recovery of documents if the employee is uncooperative in returning the information. More importantly, the lack of a policy addressing cloud-based storage accounts could be used to show that the company failed to take reasonable measures to protect the confidentiality of its trade secrets, which could lead to a loss of legal protection.

Address Recovery of Any Stored Files When an Employee Departs

The task of recovering company property from terminated employees has become greatly complicated by the use of Google Docs, DropBox and similar applications. Employees are also increasingly likely to send documents to their cloud-based email accounts such as Gmail.com for offsite use.  HR professionals should ask departing employees the direct question of whether they have ever stored company documents on the cloud.  If so, a company representative may need to insist on personally witnessing the former employee delete the items from her account, including the “trash” file.  The company may want to first retain a copy of what was sent or stored as evidence if there is a concern about unfair competition or possible litigation.  Pursuant to the maxim of “trust but verify”, forensic searches of the departing worker’s computer are critical if there is any suggestion of competitive intent.

Incorporate Cloud-Based Storage Accounts in Your Litigation Strategy

Litigators need to tailor discovery to address these cloudy issues as well. An employee sued for breach of non-compete may state under oath that he has not “taken” any information or documents from the company, only to have it revealed later that he had been storing customer information on a spread sheet on Google Docs for the past four years while employed, and that he continued to have access to the information after he left. Did he “take” the documents or did he just know where they were parked? Interrogatories should ask about any information stored on the cloud or accessible to the former employee, not just information in the employee’s “possession.”

One thing is for sure, employers need to get their corporate head out of the clouds, because employee use of personal cloud-based document management is only increasing.

Congress Tries Again – The Defend Trade Secrets Act

Jackson Lewis attorneys Peter R. Bulmer, A. Robert Fischer, Michael S. Kantor, and David E. Renner have prepared a detailed update on the firm’s website on the status of a bill in Congress which would create a federal trade secrets law, known as the Defend Trade Secrets Act.  Stay tuned for further developments!

 

 

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