District of Connecticut Addresses Trade Secret Act Preemption

The Uniform Trade Secrets Act preempts tort and other claims providing civil remedies for trade-secret misappropriation. But it does not preempt breach-of-contract claims (whether or not based on misappropriation) or other civil remedies not based on misappropriation. Essentially, the UTSA and the parties’ contracts are the only mechanisms for remedying trade-secret misappropriation.

This preemption issue often becomes tricky, as it’s not easy to determine whether another claim is truly based on misappropriation. In Allstate Ins. Co. v. Sawicki, 2013 WL 2300757 (D. Conn. May 23, 2013), the court dealt with UTSA preemption.

Here, the defendants included individuals who worked for Allstate as exclusive agents and agreed not to disclose Allstate’s confidential information. Allstate alleged that these defendants transferred “an ownership interest or operating authority of their Exclusive Allstate Agencies” to another defendant, who operated a competing insurance agency. Allegedly, the defendant agents also gave the competing agency their login info, which provided unfettered access to Allstate’s confidential databases and servers.

Allstate brought claims for violations of Connecticut’s Uniform Trade Secret Act and Unfair Trade Practices Act, and for civil conspiracy. The defendants moved to dismiss the unfair-practices and conspiracy claims, arguing that they were preempted by the UTSA.

The court denied the motion to dismiss, noting that facts unrelated to the UTSA claim support the unfair-practices and civil conspiracy claims. Specifically, the unfair-practices claim is based on the competitor defendant requiring the agents to provide it with their login info. And the conspiracy claim is based on an agreement to conceal the agents’ relationship with the competitor, and an agreement to cause the agents to breach their exclusive agent agreement.

This case is a good example of how tricky the preemption issue can be. At their core, the trade-practices act and conspiracy claims are based on providing access to Allstate’s proprietary systems and client relationships, yet they still survived a motion to dismiss.

Before bringing other non-contractual claims alongside a UTSA claim, make sure that you can plead—and prove—that those claims are based on conduct independent of  the misappropriation. Here, even though Allstate got past a motion to dismiss, it may have difficulty distinguishing the factual basis for the various claims.

Be particularly careful about unfair-trade-practices claims under state statutes. There is often a willingness to “throw in” such a claim. But think twice before doing so, particularly if the statute at issue provides for prevailing-party attorney’s fees.

Announcement: The Trade Secrets Law Blog Is Now Called “Protecting Trade Secrets”

I’m making some changes around here, starting with the blog’s new title: Protecting Trade Secrets. That’s the blog’s purpose, and now that’s the blog’s title.

Also, the blog can now be found at www.protectingtradesecrets.com, as well as the old url of www.tradesecretslaw.wordpress.com. In the near future, I’m going to be transitioning the blog entirely to the protectingtradesecrets.com url. Say tuned!

Major League Baseball Employee Handbook: Trade Secrets An Afterthought

Trade secrets law protecting trade secrets

Major League Baseball’s employee handbook was leaked to the sports blog Deadspin. While this is not so great for MLB, it’s nice for us, since we get an inside look at how a high-profile company handles a variety of employement-related issues. It’s an interesting read on a lot of levels, but I’m going to focus on how MLB uses—and fails to use—its employee handbook to protect its trade secrets and proprietary information. I’m not going to quote directly from or post the handbook. If you want to read it, go here.

The 162-page handbook gives an in-depth discussion of a number of issues. But MLB doesn’t do a great job of implementing policies (at least in the handbook) to protect its proprietary information.

There is a general description of employees’ obligation not to disclose confidential information. And under an Intellectual Property heading, the handbook mentions trade secrets in passing, but focuses much more on copyrights and trademarks (a significant revenue driver for MLB). MLB also instructs its employees not to post confidential information on a personal blog. Interestingly, when discussing electronic data, the handbook describes documents labeled as confidential, which cannot be removed from MLB’s offices. But it doesn’t give any more details about when and how documents should be marked confidential.

I see several key ways MLB could improve its employee handbook to better protect its proprietary information. Most importantly, MLB should include a formal confidential-documents policy, which describes what types of documents are confidential, how to mark electronic and hard-copy documents as confidential, and how these documents must be handled.

MLB could also include a formal trade-secrets policy. This would make clear that MLB has trade secrets, give examples of the trade secrets, and explain, in plain English, MLB’s legal obligation to take reasonable steps to protect its trade secrets. It would also instruct employees about how all of MLB’s trade secrets must be handled.  In a future post, I’ll talk about confidential-documents and trade-secrets policies in more depth.

To the extent MLB uses cloud services to store and share documents, the handbook should address how to handle confidential information in the cloud.

The handbook doesn’t discuss whether employees must sign a confidentiality agreement. Whoever has access to confidential or proprietary information should be required to sign such an agreement at the start of their employment. And the handbook should reference these agreements when discussing confidential information.

Employee handbooks need to cover a lot of ground. Unfortunately, companies—like MLB—often gloss over confidentiality and instead focus on other aspects of the employer/employee relationship.  These companies are missing a prime opportunity to protect their trade secrets and proprietary information.

Customer Lists as Trade Secrets: What Protections Are Sufficient?

Customer lists are frequently a source of trade-secret-misappropriation litigation. Under the Uniform Trade Secrets Act, a plaintiff must establish that it took reasonable efforts to protect its customer list. In Farmers Ins. Exchange v. Steele Ins. Agency, Inc., 2013 WL 2151553 (E.D. Ca. May 16, 2013), the court found that Farmers reasonably protected its customer list.

Here, Farmers sued several of its former agents, who were working for a new insurance agency started by one of the former agents. Farmers maintained a customer database that contained identifying information about its current and former policyholders, along with “policy expiration date, insured property, claims history, financial and other information.”

Farmers presented evidence that the defendants improperly accessed Farmers’ database and downloaded huge amounts of data regarding customers the defendants serviced while at Farmers. Farmers sought, and the court granted, a preliminary injunction barring use of this information.

After the court determined that the customer database contained information that could be protected as a trade secret (another critical issue surrounding customer lists and trade secrets, which I am not discussing in this post), it examined whether Farmers took reasonable steps to protect this information.

Farmers did an excellent job explaining how it protected its customer database. Farmers used the following protective measures:

  • Maintained the database on a password and user-ID protected system;
  • Solely provided each agent with information about that agent’s clients, not the entire customer database;
  • Implemented company policies regarding access to the database;
  • Periodically reminded employees about Farmers’ confidentiality policies via bulletins, yearly compliance memoranda, and other communications;
  • Required employees to acknowledge that they were accessing confidential information each time they logged on to the database; and
  • Immediately disabled access at the end of an agent’s employment with Farmers.

Given these steps, the court concluded that Farmers reasonably protected its customer database.

A customer database is often one of a company’s most valuable intangible assets. It is worth spending the time and money to implement protections like those listed above to reduce the likelihood of misappropriation and put the company in the best possible position should litigation become necessary.

A Cautionary Tale About Sharing Trade Secrets With Consultants — Fifth Circuit Affirms $44 Million Verdict

Last week, the Fifth Circuit affirmed a Texas jury verdict awarding the plaintiff, Wellogix, Inc, $26.2 million in compensatory damages and $18.2 million in punitive damages on its claim against Accenture, LLP for misappropriation of trade secrets.

This case was decided under Texas law. Because Texas just adopted the Uniform Trade Secrets Act, I’m not going to focus on the substantive law applied. Instead, I want to take a look at how this case arose, and what companies can learn about protecting their trade secrets when dealing with consultants and business partners.

Wellogix developed software that allowed oil companies to estimate oil well construction costs called “complex services.” Between 2000 and 2005, it was the only company offering complex-services software.

This software did not perform core accounting functions. Instead, Wellogix contracted with SAP to integrate Wellogix’s specialized software with SAP’s general accounting software. In connection with this agreement, Wellogix gave its source code to SAP.

Wellogix also entered into marketing agreements with Accenture, which was responsible for promoting the software. As part of this arrangement, Wellogix gave its source code to Accenture, subject to a confidentiality agreement.

Wellogix and Accenture worked together to provide BP with a pilot project. After BP discontinued the project, it sought to implement global software, including complex services. SAP and Wellogix pitched their integrated software to BP.

Soon after, Accenture and SAP worked together to develop the complex services component of BP’s global software — without telling Wellogix. As part of this process, they accessed and used Wellogix’s critical source code. Wellogix sued Accenture, BP (found in arbitration to have breached a confidentiality agreement), and SAP (dismissed for lack of venue).

Wellogix, like many companies, needed to partner with outside companies to make its product viable. Without SAP’s accounting software, or Accenture’s marketing capabilities, it may not have been able to bring its software to market. But this case shows the risk of divulging critical proprietary information to outside consultants.

To avoid ending up in the same situation as Wellogix, companies need to choose their consultants and business partners wisely. Evaluate whether the proposed business partner could use the proprietary information to its advantage. The more valuable this information, the more tempting it is for the business partner to put it to its own use. Ideally, a company should only share its proprietary information with consultants/business partners who have no use for this information.

When that is not possible, very strong confidentiality agreements need to be in place. Consider including significant liquidated damages provisions. And also consider including contract provisions that only permit listed employees to have access to the data. If possible, negotiate the right to audit or search the consultant’s IT systems to see where the proprietary information is located. Finally, as always, the company needs to make sure it is reasonably protecting its proprietary information, so that it can get the benefit of trade-secrets laws.

Kentucky Court Finds No Insurance Coverage for Trade-Secrets Claim

When a company faces a lawsuit, often one of the first questions asked is whether the company’s insurance policies cover the suit. In Liberty Corp. Capital Ltd. v. Security Safe Outlet, Inc., 2013 WL 1311231 (E.D. Ky. March 27, 2013), the court found that a commercial general liability policy did not cover a claim for misappropriation of trade secrets.

To make a long story short, a company that sold firearms online brought the underlying suit against a competitor. The defendant had hired the plaintiff’s former IT specialist, who signed a noncompete while working for the plaintiff. The plaintiff alleged that the IT specialist gave the defendant the plaintiff’s customer database, which the defendant used to send email marketing blasts  to the plaintiff’s customers.

The defendant had a commercial general liability policy with Liberty, which filed this suit seeking a declaratory judgment that there was no coverage. For our purposes, the central questions involved whether the customer list was “tangible property” and whether the underlying violation was based on a breach of contract.

Under the insurance policy, “property damage” was limited to tangible property. When determining whether the electronic customer database was tangible property, the court looked to Black’s Law Dictionary, which defined that term as “property that has physical form and characteristics.” The court concluded that a computer database “has no physical form or characteristics,” and thus was not tangible property.

The policy also covered personal and advertising injury. While the court found that the email blasts were advertisements, the policy excluded injuries arising out of a breach of contract. Because the defendant’s use of the database flowed from the IT specialist’s breach of his noncompete, the court found no coverage for personal and advertising injury.

The takeaway from this case is that companies that faces a real threat of a trade-secrets or noncompete lawsuit should find out from their insurance professionals whether they have coverage for such suits, and if not, what products are available that provide coverage.

Trade Secrets/IP Theft In China: How Bad Is It?

trade secrets law protecting trade secrets

Trade secrets and IP theft in China has been all over the news, with the Obama administration taking an aggressive stance. There is no question that companies doing business in China must deal with the issue. But how widespread is the problem?

A recent report by the American Chamber of Commerce in China (AmCham China), which represents more than 1000 businesses there, sheds some light. Each year, AmCham China surveys its members and offers “a valuable snapshot of member concerns on China’s regulatory and policy environment.”

Of the 325 survey participants, 26% experienced data breaches or thefts. According to the report,

This poses a substantial obstacle for business in China, especially when considered alongside the concerns over intellectual-property rights enforcement and de facto transfer requirements.

Additionally, 42% believe the risk of a data breach is increasing. Only 5% believe the risk is decreasing.

The report also addresses issues with IP rights enforcement, noting that

For the third straight year in a row, the survey data reflected an increase in the percentage of respondents who listed China’s enforcement of IP rights as ineffective.

On the bright side, however, 47% believe that China’s IP rights enforcement improved over the past five years.

This report supports the perception that trade secrets and IP theft is a real, immediate concern for companies doing business in China. All such businesses absolutely must implement a comprehensive approach for protecting their proprietary information, including consulting with IT and legal professionals. 

Guest Post: Florida Court Discusses Trade Secrets in Discovery

By Solomon Genet

Trade-secrets issues often arise in cases that have nothing to do with misappropriation. Thus, all litigators need to know how to protect their clients’ trade secrets in discovery.

In a very recent Florida appellate court decision, Cooper Tire & Rubber Co. v. Cabrera et al., (Fla. 3d DCA May 8, 2013),  the plaintiff sued a tire company for negligent design and manufacture of tires, after the plaintiff’s car was involved in an accident. The defendant objected to certain discovery based on the “trade secret privilege,” and provided the documents at issue to the court for an in camera inspection. The court then entered an order that, among other things, directed production of the documents, but—noting that certain documents contained trade secret information—limited disclosure to only those persons “in connection with trial preparation in the case.”

The defendant sought appellate review under a petition for writ of certiorari, which the appellate court granted, quashing the trial court order. The appellate court found that prior to ordering production of the documents, the trial court had to make findings  (i) of expressly what documents contain trade secret information; and (ii) that, as to those, there is a “reasonable necessity” for production of those documents.

Parties and non-parties need to be aware of possible trade secrets or proprietary information in documents sought in discovery. These issues can often be resolved through an agreed protective order, including perhaps “attorney’s eyes only” designations.

When the parties cannot agree and litigation is necessary, the party seeking discovery needs to make sure that the judge makes specific findings. And the producing party should first try to establish that the documents contain trade secrets and are not needed in the case. If that doesn’t work, make sure that the order limits disclosure. The order in this case left way too much wiggle room that could have led to inappropriate disclosure.

Solomon Genet is a partner at Meland Russin & Budwick, P.A. in Miami, FL. He specializes in complex commercial litigation, business insolvency, and financial-fraud-related matters in the State and Federal courts.

How Often Are Innovative Products Patented?

It’s easy to assume that most important new products are patented. Turns out that may not be the case.

Recently, a study by the Technical University of Lisbon’s Department of Economics examined this issue in more detail. Its findings surprised me.

This study looked at the “R&D 100 Awards” given out by the journal Research and Development, “one of the most authoritative regular publications for R&D practitioners.” For decades, the journal has been giving out this prize to the “100 most technologically significant new products available for sale or licensing” in the preceding year. The study authors searched the USPTO to see whether the award-winning products had been patented.

Of the 2802 innovations examined, almost 91% were not patented. Eliminating those innovations owned or created by non-corporate entities does not change the result much, as only 87% of corporate innovations were patented.

I’m not going to analyze the reasons why so few innovative products were patented. For our purposes, this study simply highlights the importance of trade-secrets laws and protections. Certainly, all companies offering products that are not patented need to make sure they are taking the necessary steps under the applicable trade-secrets laws to protect proprietary aspects of design, production, distribution, sales, and so on.

(h/t: Orrick’s new Trade Secrets Watch blog tweeted an article discussing this study.)

Georgia Supreme Court Rejects Independent Claim for Inevitable Disclosure of Trade Secrets

Under the inevitable-disclosure doctrine, a plaintiff can prove trade-secret misappropriation by showing that the defendant is now working for a competitor in a capacity that will require him or her to rely on the plaintiff’s trade secrets. Essentially, this doctrine allows a plaintiff to impose a noncompete in the absence of a signed agreement. There are broad discrepancies in whether, and how, this doctrine is applied in different states. Often, there is confusion surrounding these issues.

In Holton v. Physician Oncology Serv., LP, 2013 WL 1859294 (Ga. May 6, 2013), the Georgia Supreme Court clarified the applicability of this doctrine in Georgia and held that there is no independent cause of action for inevitable disclosure.

Here, the plaintiff operated facilities providing radiation therapy services. The defendant worked as an executive for the plaintiff, with oversight over facilities in Georgia. He signed a one-year noncompete agreement. One month after the plaintiff terminated him in October 2011, the defendant started working for one of the plaintiff’s direct competitors, which had four operating centers within the geographic scope of the defendant’s noncompete.

The plaintiff brought suit and sought a temporary restraining order based on violations of the noncompete, misappropriation of trade secrets under the Georgia Trade Secrets Act, and an independent claim based on the inevitable-disclosure doctrine. The lower court granted the injunction based on the inevitable disclosure of trade secrets.

By the time the appeal was heard, the one-year noncompete period had expired. Thus, the primary issue on appeal involved whether Georgia recognizes an independent cause of action for inevitable disclosure of trade secrets.

The Georgia Supreme Court reversed, holding “that the inevitable disclosure doctrine is not an independent claim under which a trial court may enjoin an employee from working for an employer or disclosing trade secrets.”

While this specific issue has now been resolved in Georgia, it remains unsettled in other states. To deal with this uncertainty when bringing a claim based on inevitable disclosure, it is important to present any evidence of actual misappropriation. That way, the court may have an independent basis to find for the plaintiff.

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