A Double-Edged Sword: The “Attorney’s Eyes Only” Designation in Trade-Secrets Cases

Trade-secrets cases present a unique set of challenges in the discovery process. In particular, many of these cases are litigated between competitors. Thus, issues arise when producing competitively sensitive documents. Almost always, the parties agree to (or the court enters) some sort of protective order that allows the producing party to designate highly sensitive documents as “attorney’s eyes only” (AEO). In other words, those documents can only be reviewed by the receiving party’s attorneys, not the representatives/employees of the party itself.

But as is the case in many aspects of discovery, this process is subject to abuse. Invariably, producing parties over-designate documents as AEO. This can lead to various problems, as it is difficult to litigate a case without sharing with your client the nature of documents produced by the other side.

Recently, a magistrate judge in the Northern District of Illinois addressed this issue in the case of Global Material Technologies, Inc. v. Dazheng Metal Fibre, Co. The full opinion is worth a read, as it gives a comprehensive discussion of the law applicable to these situations. There’s a link to download the opinion below.

This case involves a trade-secrets misappropriation claim brought by a metal fiber manufacturer against a company to whom it previously outsourced manufacturing operations. Allegedly, the defendant gained access to the plaintiff’s proprietary customer information and pricing strategies and used that information to compete with the plaintiff.

Both the defendant and a non-party produced a number of documents designated as AEO, and the plaintiff filed a motion to challenge these designations.

The court went through the law applicable to these situations:

[T]he party seeking to protect documents . . . must continue to show good cause for confidentiality when challenged. . . . To make that showing, the designating party must show that disclosure will result in a clearly defined and serious injury, by pointing to specific demonstrations of fact. . . . The harm must be significant, not a mere trifle. Conclusory statements—including broad allegations of potential harm or competitive injury—are insufficient to meet the good cause standard. . . . If there is any doubt as to whether the material should be sealed, it is resolved in favor of disclosure.

The court also explained how the AEO designation should be used sparingly:

[T]he AEO designation should only be used on a relatively small and select group of documents where a genuine threat of competitive or other injury dictates such extreme measures. . . . The AEO designation must be used selectively because discovery and trial preparation are made significantly more difficult and expensive when an attorney cannot make a complete disclosure of relevant facts to a client[.]

After reviewing the documents at issue, the court sustained the designations in part and overruled them in part. In particular, the court focused on whether documents produced had become stale — i.e., the passage of time had mooted the documents’ sensitive nature. The court rejected broad allegations of harm, and only sustained those designations that were supported by an affidavit articulating the specific damage that would flow from disclosure.

The court also distinguished between the defendant and a non-party, noting that the non-party bears a lower burden in establishing a right to the AEO designation.

I can’t recall a trade-secrets case that I’ve litigated that did not touch on these issues. The issues presented are far too varied and complex to discuss in a single blog post. But at a high level, lawyers need to start thinking about discovery prior to filing the lawsuit, including what documents will likely be produced by both sides and how those documents will need to be protected.

These issues add a layer of complexity and strategy to discovery, and proactive thinking is necessary to protect your client and prevent/challenge abusive designation by the other side. This starts with the terms of the negotiated (or ordered) protective order, and continues as documents are produced and as litigation strategies shift over time.


Florida Appellate Court Upholds Prohibition on Soliciting Referral Sources

It’s been a while since I’ve posted, as I was in trial and then on vacation. But I’m back and will endeavor to post regularly.

Employee mobility cases often involve the use of customer information or relationships. Many companies try to protect these relationships with restrictive covenants that prohibit competition or solicitation, or both. In Florida, restrictive covenants are governed by statute, Section 542.335, Florida Statutes.

Under this statute, a person trying to enforce a restrictive covenant must plead and prove one or more legitimate business interests. A recent Florida appellate decision, Infinity Home Care, LLC v. Amedisys Holding, LLC, addressed a twist on the typical non-solicitation case: can referral sources be a legitimate business interest? The opinion can be downloaded here.

In this case, a home healthcare company (Amedisys) sued its former employee and her new company, one of Amedisys’s competitors. The employee had signed a non-compete and non-solicitation agreement, which specifically prohibited solicitation of Amedisys’s referral sources.

While at Amedisys, the defendant’s primary job was to develop relationships with case managers at heath care facilities, who could then refer patients to Amedisys for home-care services. After leaving Amedisys, the defendant immediately started soliciting those same case managers to refer business to her new employer.

The lower court ruled that these referral sources were a legitimate business interest. Florida’s Fourth District Court of Appeal agreed. The appellate court noted that the statute lists “substantial relationships with specific prospective or existing customers, patients, or clients.” But the court found that the statute reaches beyond just these specific customer relationships:

Section 542.335, however, clearly states that the legitimate business interests listed in the statute are not exclusive. This allows the court to examine the particular business plans, strategies, and relationships of a company in determining whether they qualify as a business interest worthy of protection. . . . Here, it is undisputed that the relationships Amedisys is trying to protect are its referral sources. As the record shows, these doctors and clinics with whom it has developed substantial relationships are the “lifeblood” of its home health care business.

The appellate court acknowledged conflicting holdings among other Florida District Courts of Appeal on the issue of whether referral sources can be a legitimate business interest. But this result strikes me as the correct one. Plenty of companies rely heavily on referral sources to generate business. Given Florida’s broad restrictive-covenant statute, a company should be able to protect these types of relationships.

But given the divergent holdings, this issue is by no means settled. Any company operating in Florida that wants to protect its referral sources needs to consult with an attorney who can help make sense of the somewhat confusing law in this area.

Florida Appeals Court Clarifies the Injunction Standard in Noncompete Cases

In Florida, restrictive covenants are governed by Section 542.335, Florida Statutes. Plaintiffs bringing claims under this statute often seek emergency injunctive relief. As a recent case illustrated, the standard for an injunction in a restrictive-covenant case is slightly different from the standard in a typical case.

In Florida Digestive Health Specialists, LLP v. Colina (download a pdf of the opinion here), a medical practice sued one of its former partners, a physician, for breaching a non-compete and non-disclosure agreement that he signed when he joined the practice. The medical practice sought a temporary injunction.

There is case law in Florida holding that when deciding whether to issue a temporary injunction, a trial court should consider whether the threatened injury to the plaintiff outweighs the harm to the defendant if an injunction is issued. The lower court here found that the restrictive covenants were enforceable and that the physician violated them. But it applied this benefit-versus-burden test, along with the other injunction prerequisites, and denied the temporary injunction.

Florida’s Second District Court of Appeal looked at the restrictive covenant statute, which provides that the court “[s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.” Thus, the appellate court found that the trial court abused its discretion by applying the above test.

Interestingly, the appellate court did not remand so that the trial court could apply the proper standard. Instead, it instructed the trial court to enter the temporary injunction.

Takeaway: Florida’s restrictive-covenant statute is one of the strongest in the country. But attorneys bringing claims under this statute need to be very familiar with its terms, particularly during an evidentiary injunction hearing. I’ve often seen defendants try to offer evidence of the hardship they will suffer if the injunction is entered. When that happens, the plaintiff’s attorney needs to be ready to object and cite to the statutory prohibition on this type of evidence. More often than not, judges will follow the statute’s plain language and sustain the objection.

Planned Parenthood, Ashley Madison, and Trade-Secrets Theft

It’s been a busy week for corporate espionage. Planned Parenthood is under fire for a video in which its employees were discussing the sale of fetal tissue. Now, Planned Parenthood’s senior counsel is warning that they expect more videos will be released in the coming weeks. These videos were apparently secretly recorded by an organization called The Center for Medical Progress, which opposes abortion.

Separately, Ashley Madison, an online dating website that targets married people looking to have affairs, had all of its customer information stolen. This information has obvious value — the site’s 37 million (!!!) users certainly don’t want their identities revealed. (This information could easily qualify as a trade secret, assuming that the company took reasonable measures to protect it.) The hackers have threatened to release the customer information if Ashley Madison doesn’t shut down its website.

It’s safe to say that you aren’t reading this blog for opinions on abortion or the moral issues surrounding the Ashley Madison website. Which is good, since I have zero interest in getting involved in the underlying debates. But I am interested in what these two stories say about the risks companies face from corporate espionage and trade-secrets theft.

Certainly, Planned Parenthood and Ashley Madison are highly visible targets, which must have been aware that they were susceptible to corporate espionage/hacking. But corporate espionage and trade-secrets theft isn’t limited to controversial or high-profile companies.

All companies need to examine their risk. Most have some type of information that would be valuable in a competitors’ hands. This information could, for example, be taken by a departing employee who is going to work for a competing company. Similarly, companies with robust consumer data are targets for hackers.

I say this often, but it can’t be emphasized enough: Companies must focus on the legal and technical protections necessary to minimize their risk. If you are not identifying your key information, assessing your vulnerabilities, and taking proactive steps to shore them up, you are much more likely to be the victim of corporate espionage or trade-secrets theft. Addressing these issues can seem overwhelming, but that’s no reason to ignore them. If you don’t know where to start, speak with an attorney who specializes in this area of the law.

Small-Town Trade Secrets Fight

Trade secrets are not the exclusive dominion of big business. Virtually all companies have, or at least could have, trade secrets. And all companies face serious risks if they don’t protect their trade secrets. A recent case from the Idaho Supreme Court gives a good example of how even the smallest companies need to focus on trade-secret protection.

La Bella Vita v. Shuler (download here) involves a trade-secrets dispute between two competing hair salons in a small town in Idaho. After a number of employees left the Plaintiff (La Bella Vita) to open a competing salon (Eikova) around the corner, La Bella Vita sued the departing employees, Eikova, and Eikova’s owner (Amanda Schuler). Schuler was La Bella Vita’s former manager. La Bella Vita alleged that the defendants violated their confidentiality agreements and misappropriated trade secrets, including La Bella Vita’s customer information.

The lower court granted summary judgment in the defendants favor, finding no evidence of trade secrets, no misappropriation, and no violation of the agreements. The Idaho Supreme Court reversed, finding a number of genuine issues of material fact.

For a hair salon in small-town Idaho, La Bella Vida was at least somewhat proactive about protecting its confidential information. For example, all employees were required to sign confidentiality agreements. Like many businesses, La Bella Vida was most concerned about protecting its customer information. Over time, it had accumulated a valuable proprietary database about its customers, including each customer’s order history and preferences.

This case centers around whether the customer list was a trade secret, including whether it contained confidential information, and whether La Bella Vida protected it. For example, when Schuler was La Bella Vita’s manager, she used the customer list to create an invite list for her baby shower. When she left, she used the baby-shower list to create Eikova’s customer list. The parties disagree as to whether La Bella Vita’s owner authorized her to use the list for her shower.

La Bella Vita required that all employees sign confidentiality agreements. And all parties testified that they understood that the list needed to be kept confidential. But La Bella Vita could have gone further. Schuler was obviously a key employee. La Bella Vita should have considered having her sign a noncompete or nonsolicitation agreement. And it could have password protected the customer list so that each stylist could only see their own clients, and so that no one could export the entire list. If no one could export the list, it would have been very difficult to create the baby-shower list without the owner’s authorization.

Those relatively minor steps could have saved a lot of money, not to mention heartache. Regardless of how this lawsuit turns out, both sides will likely have spent huge amounts of money litigating. I have no idea what it costs to litigate a case to the Idaho Supreme Court. Nor do I know anything about how much revenue an Idaho salon could generate. But I’m comfortable saying that both La Bella Vida and Eikova will have spent a material amount of their revenue, and suffered through a lot of mental anguish, litigating this case.

All businesses should speak with an attorney who can help them identify their trade secrets and take steps to protect them. A modest investment in protection now can prevent a disaster later.

Major League Trade-Secrets Theft

This morning, the New York Times reported that the FBI is investigating whether front-office employees of the St. Louis Cardinals hacked into the Houston Astros’ computer systems. Apparently, the Cardinals’ employees gained access to the Astros’ “internal discussions about trades, proprietary statistics and scouting reports.”


Virtually all businesses have trade secrets and proprietary information, and baseball teams are no exception. One of the Cardinals’ senior executives, Jeff Luhnow, left the team for the Astros in 2012. While he was at the Cardinals,

The organization built a computer network, called Redbird, to house all of their baseball operations information — including scouting reports and player personnel information. After leaving to join the Astros, and bringing some front-office personnel with him from the Cardinals, Houston created a similar program known as Ground Control.

Once he left, others at the Cardinals allegedly hacked into the Astros’ computer system, using a low-tech method. Not surprisingly, these baseball executives don’t seem to be particularly tech savvy. They simply used the same passwords that Luhnow used when he was still with the Cardinals:

Investigators believe Cardinals officials, concerned that Mr. Luhnow had taken their idea and proprietary baseball information to the Astros, examined a master list of passwords used by Mr. Luhnow and the other officials who had joined the Astros when they worked for the Cardinals. The Cardinals officials are believed to have used those passwords to gain access to the Astros’ network, law enforcement officials said.

This is the first time I can recall this type of corporate espionage taking place between competing sports teams. It will certainly attract a lot of attention, and I’m eager to learn more details about what transpired.

But this case also has a very simple lesson for all companies. When you hire someone from a competitor, their former employer knows what password they were using at their prior job. Obviously, you don’t want them using that same password at your company. Consider assigning a new password. Or instruct the employee to use a different password than they used at their prior job. Either way, you need to make sure that passwords are changed regularly.

Can Periscope Broadcast Your Trade Secrets to the World?

Periscope is an app that allows users to broadcast live video using their smart phone. This technology has the power to transform the delivery of media and information. Essentially, every person can now effortlessly create live video content, whether it’s sharing a family event with those who can’t attend or witnessing a newsworthy event.

I keep hearing more and more about Periscope. For example, I’ve seen media members use it to share press conferences or behind-the-scenes info. At first blush, this may seem irrelevant to your company’s trade secrets. But that may not be the case.

Right now, through Periscope and similar apps, every one of your employees can instantaneously broadcast live video to the world. It’s much easier to share exactly what’s going on, in real time, at your company.

This raises multiple levels of concern. To start, employees may inadvertently transmit proprietary information. For example, an employee could be sharing a broadcast from work intended for his friends and family, while other employees discuss proprietary information within earshot. Even though there was no intent, this information was still shared outside the company.

Even worse, Periscope is a powerful tool in the hands of someone with malicious intent. There has long been a risk that malicious actors can easily capture video. But now, that video can be shared live. For example, an employee could surreptitiously broadcast a company meeting. Or live video of a proprietary process or system.

Periscope is another example of how rapidly evolving technology is constantly creating new risks to your trade secrets. Your trade-secrets policy needs periodic review to make sure it addresses new technology. Depending on the nature of your business, it may make sense to ban live broadcasts completely. Most importantly, you should discuss these issues with an attorney who can help you decide what protections are appropriate for your business.



The DOJ Announced Another Trade-Secrets Prosecution. What Does That Mean For Your Company?

There has been a lot of news coverage of the DOJ’s charges against Chinese professors for trade-secrets theft and violations of the Economic Espionage Act. Stories like this have become more common, as the DOJ has increased its focus on prosecuting trade-secrets theft. Often, these cases involve defendants with connections to foreign governments, and China in particular. As these cases have become more prevalent, the federal government has dedicated more resources to combating them.

Unfortunately, this will have little effect on most companies that fall victim to trade-secrets theft. The DOJ appears to have little interest in prosecuting run-of-the-mill trade-secrets theft, even though there may have been violations of a federal statute like the Economic Espionage Act. The DOJ simply does not have the resources to deal with the huge number of these cases. Thus, the vast majority of trade-secret misappropriation cases will be handled through civil lawsuits.

So what should you do if you believe your company has been the victim of trade-secrets theft? The answer is simple: you need to consult with an attorney specializing in this area of the law as soon as possible. Time is of the essence, and even a delay of a day or two could cause serious problems. Your attorney can advise you of your options. If your case is a good candidate for federal prosecution, your attorney should let you know. More likely, your options will involve civil remedies. Either way, you will need to make important decisions very quickly.

New Hampshire Supreme Court Rules that Trade Secrets are Not Public Records

Companies that provide services to public agencies and entities are often put in a difficult position. To win business, they must include trade secrets as part of their bid. But most documents provided to public agencies are subject to disclosure under freedom-of-information laws. The New Hampshire Supreme Court recently addressed this issue in CaremarkPCS Health, LLC v. New Hampshire Department of Administrative Services (the opinion can be downloaded here).

Caremark submitted a bid for providing pharmacy benefit management services for New Hampshire’s health plan. As part of its bid, Caremark stated that certain information provided contained trade secrets. After Caremark won the bid, the final contract also indicated that Caremark had provided the department with trade secrets.

Soon after, two of Caremark’s competitors made public-records requests to inspect Caremark’s bid. Caremark filed suit and obtained an injunction prohibiting disclosure of the trade secrets (which were not identified in the opinion). The department appealed.

The New Hampshire Supreme Court addressed the question of “whether the [Uniform Trade Secrets Act] prohibits disclosure of trade secrets[.]” They answered this question in the affirmative and upheld the injunction.

The court focused on the portion of the UTSA providing that misappropriation occurs when someone discloses a trade secret without consent, if the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use. The court ruled that the department had acquired Caremark’s trade secrets under such circumstances, for three reasons:

  • The request for proposal provided that the department would endeavor to maintain the confidentiality of those portions of the proposal “clearly and properly marked confidential”;
  • Caremark marked the information at issue as confidential and proprietary; and
  • The final contract provided that both parties were under a duty not to disclose trade secrets.

These three factors provide guidance if your company is in a similar circumstance. You need to have your attorneys carefully examine the RFP language, as well as the applicable state law, prior to submitting a bid. Then, you should mark any documents containing proprietary information and trade secrets. I would prominently affix “CONFIDENTIAL — TRADE SECRETS” on each page containing trade secrets.

Finally, do your best to negotiate the inclusion of confidentiality language in the final contract, as well as language requiring the governmental agency to inform you of any public records request that calls for the trade-secret documents (provided that those provisions are permissible under applicable law).

There is always risk when submitting trade secrets as part of a bid for a government contract. Not only could a court find that the documents are public records, but you are also relying on the government employees to recognize that requested documents were marked as containing trade secrets. Working with an attorney to implement protections like those discussed above can help minimize this risk. But in the end, you will need to make a business decision as to whether the chance of winning the contract is worth this risk.

When It Comes to Trade Secrets, Ignorance Is Not Bliss

Trade-secret misappropriation cases often involve bad actors who deliberately steal trade secrets. But perhaps just as frequently, trade-secrets are misappropriated by people who simply don’t know better. Many don’t even understand what a trade secret is, let alone that there are laws or other obligations prohibiting inappropriate use or disclosure of trade secrets.

I’ve personally seen this happen over and over. An employee leaves one company to join another in the same industry. He takes many of the documents he created at his old job. These documents contain trade secrets. In his mind, they are his documents. He created them, after all! And at his new job, he uses those documents on behalf of his new employer.

Now both companies have a problem. The former employer’s trade secrets are in a competitor’s hands. And the new employer has unwittingly exposed itself to significant liability.

Both companies are to blame for their problems. The first company did not educate its employees about their responsibilities and legal obligations regarding trade secrets and proprietary information, both while working for the company and after they leave. The second company failed to make sure that the new employee did not bring his prior employer’s trade secrets with him.

There are three primary tools for preventing this situation: contracts, training, and exit/intake interviews. Employees with access to proprietary information should sign a non-disclosure agreement that requires them to keep the information confidential. The agreement should provide that all information belongs to the company even if created by the employee, and must be returned upon termination of employment. And the contract should acknowledge that the employee is not bringing any proprietary info or trade secrets from her prior job.

But employees too often don’t read contracts before signing them. That’s where training comes in. During the on-boarding process, and periodically thereafter, use training sessions to reiterate your trade-secret policy.

Finally, use exit interviews to again instruct the departing employee about his post-employment obligations. Consider having him sign an acknowledgement that he has returned all info and is aware of these obligations. When hiring a new employee, talk with them up front about what info they have from their prior employer. Be sure to consult with an attorney if that discussion raises concerns.

I really believe that many misappropriation cases can be avoided by simply making sure that employees understand these issues. Too often, they do not.