Colorado Broadens Whistleblower Protection for State Employees Who Disclose Confidential Information

Tim Kratz and Kristen Baylis in our Denver office have reported on an important new law in Colorado, extending whistleblower protection to state employees who disclose confidential information in the context of reporting waste, mismanagement of public funds, abuses of authority or illegal and unethical practices to a designated “whistleblower review agency.”  To review the article, click here

This type of protection is in line with the whistleblower immunity provided by the new federal Defend Trade Secrets Act (to review our recent article regarding the new federal Defendant Trade Secrets Act, click here) and indicative of a trend placing limits not only on non-competition agreements, but also on the extent to which trade secrets can be protected.

 

 

California Federal Court Grants TRO Under New Federal Trade Secrets Law

In the first decision under the federal Defend Trade Secrets Act of 2016 (DTSA), which was signed into law on May 11, 2016, a California federal court has granted a temporary restraining order (TRO) against a sales consultant who changed employers and allegedly stole confidential data in violation of federal and state trade secret laws and employment agreements. In Henry Schein, Inc. v. Cook, No. 16-cv-03166-JST, 2016 U.S. Dist. LEXIS 76038 (N.D. Cal. June 10, 2016), the district court entered a TRO enjoining the defendant from using or disclosing the plaintiff’s confidential information and trade secrets and from soliciting customers that were assigned to her during her employment.

Background

The defendant Jennifer Cook was employed by the plaintiff Henry Schein, Inc. (“HSI”), a distributor of medical, dental and veterinary supplies and equipment, from April 2005 to May 13, 2016 when she resigned and began working for one of HSI’s competitors, Patterson Dental. Cook was a Field Sales Consultant for HSI who entered into confidentiality and non-solicitation agreements in 2005 and 2011 that prohibited her from copying or taking any of HSI’s confidential information.  HSI alleged that Cook: (1) forwarded from her work email account, to her personal email account, HSI customer practice reports and additional customer-related reports, including an equipment inventory report, price quotations for prospective customers, and equipment proposals; (2) logged into HSI’s system and effectively updated onto her laptop HSI customer related sales and ordering data and then failed to return her laptop for two weeks; (3) accessed HSI’s computer system on the day she resigned, enabling her to obtain on her iPad, large amounts of ordering and purchase data for each of the HSI customers that had been assigned to her; (4) attempted to erase the e-mails she sent from her HSI computer; and (5) attempted to divert HSI customers to Patterson Dental, including by visiting the offices of certain HSI customers and deleting the HSI product ordering icon from their computer systems and destroying HSI catalogues and business cards.

On June 9, 2016, HSI sued Cook in federal district court and asserted a federal claim for misappropriation of trade secrets under the DTSA as well as seven other state law claims, including, among others, claims under the California Uniform Trade Secrets Act and California Unfair Competition Law and for breach of contract. HSI filed an application for a TRO on the same day that it filed its lawsuit.

One day later, on June 10, 2016, the federal district court found that HSI was likely to succeed on the merits of its claims because it demonstrated that Cook e-mailed and downloaded, to her personal devices, confidential information from HSI before leaving her employment to work at a competitor and Cook had signed agreements containing confidentiality and non-solicitation provisions. The court also found that Cook would suffer no undue hardship from the entry of a TRO because HSI only requested that Cook be enjoined from soliciting HSI customers to which she was assigned – conduct that was already prohibited under her confidentiality and non-solicitation agreement.  Finally, the court found that the public interest is served when a defendant is asked to do no more than abide by trade laws and the obligations of contractual agreements signed with her employer.  Accordingly, the court granted a TRO prohibiting Defendant from accessing or using HSI information and from contacting or soliciting HSI customers.  Notably, the court did not require a bond because the TRO would not cause any damage to Cook’s legitimate business and in her contracts with HSI she agreed that HSI could seek injunctive relief without a bond.

Lessons Learned

The swift grant of a TRO by the federal district court demonstrates the utility of the new federal trade secrets law in protecting trade secrets and holding employees accountable for violating contractual and common law obligations to employers who provide them with access to confidential information and trade secrets to further business interests.

To review our prior posts regarding the Defend Trade Secrets Act of 2016, please click here and here.

Jackson Lewis attorneys are available to answer questions regarding this case and assist employers with trade secrets protection under the Defend Trade Secrets Act of 2016.

 

New Connecticut Statute Restricting Physician Non-Compete Agreements

Edward M. Richters has written on the Jackson Lewis website about a new Connecticut law, Senate Bill 351 (as amended), which establishes significant new restrictions on physician non-compete agreements in Connecticut.  http://www.jacksonlewis.com/publication/new-connecticut-statute-restricts-physician-non-compete-agreements

 

 

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.

***

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.

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