The Boston Celtics Show Employers How to Leverage a Noncompete

protecting trade secrets noncompete

As you may have noticed, I live in Miami. And I’m a huge Miami Heat fan (and have been since long before LeBron James came to town). So my mind is squarely on tonight’s game 7. But the news coming out of the NBA isn’t all about the Heat and the Spurs. There’s also been a lot of chatter about the Boston Celtics’ head coach, Doc Rivers, being “traded” to the LA Clippers. Some of the news reports have mentioned that Doc’s contract contains a noncompete clause.

Ken Vanko has a very good blog post about Doc’s noncompete. I want to examine in more depth one point Ken makes: Leverage.

What’s happening between the Celtics and the Clippers is a great example of how having key employees execute a noncompete can benefit the company in unexpected ways. The Clippers want to hire Doc as their head coach. But they need to get the Celtics to waive the noncompete. In exchange, they are offering players like DeAndre Jordan, an up-and-coming young center. Essentially, because the Celtics must consent to Doc coaching for another team, they are in a position to demand valuable compensation.

The same can happen in other industries. I’ve seen situations where a competitor was willing to agree to refrain from competing in certain geographic markets, or not to target certain key clients, in exchange for allowing an executive with a noncompete to work for the competitor.

Of course, before waiving a noncompete, a company must be very comfortable that allowing the departing employee to work for the competitor will not damage the company. For example, this may work where the departing employee was likely to leave anyway, and she is leaving for a company that doesn’t present a real threat. Here, the Celtics seem to be entering a rebuilding phase, so it’s unlikely that they will be facing the Clippers—a team that’s not in their conference—in the playoffs anytime soon.

If a company is going to waive a noncompete, it is important to enter into a new contract with the departing employee and the company where she will be working that sets forth the conditions of the waiver. At a minimum, the contract should include strict nonsolicit and nondisclosure obligations and an acknowledgement that the departing employee returned all company property (including documents and electronically stored information).

It will be interesting to see how it plays out with the Celtics and Clippers. In the meantime, let’s go Heat!

5-Hour Energy Files Lawsuit to Protect Its Secret Formula

protecting trade secrets proprietary information

The classic example of a trade secret is the Coca-Cola formula, which has been the subject of urban myths for decades. A more modern version of this story is playing out in Oregon, where the Oregon Department of Justice wants to know the exact formula for the popular 5-Hour Energy drinks. If you watch any amount of television, you’ve certainly heard about 5-Hour Energy, whose commercials are ubiquitous.

A number of  states, including Oregon, are investigating 5-Hour Energy’s advertising. As part of this investigation, 5-Hour Energy provided the Oregon DOJ with a “scientific literature review that contained the amounts of ingredients used in 5-hour ENERGY products,” which only showed the ingredients and had the amount of each ingredient redacted.

After the Oregon DOJ demanded an unredacted version, 5-Hour Energy filed a complaint claiming that the formula is a trade secret. Apparently, if the information is turned over to the Oregon DOJ, it will also be shared with the 33 other states investigating 5-Hour Energy.

This case presents a difficult situation. Certainly, 5-Hour Energy’s formula is likely a trade secret, assuming that it was reasonably protected. And because the requesting parties are governmental entities, subject to FOIA requests and public-records laws, I can understand why 5-Hour Energy would fight this disclosure. At the same time, it seems very difficult to investigate 5-Hour Energy’s advertising practices without knowing what’s in the drink.

Oregon will likely need to demonstrate its need for the exact formula and why the previously provided information is insufficient. If it can, I don’t see an easy solution. Perhaps 5-Hour Energy and the states could negotiate a confidentiality agreement, under which the information provided would be destroyed once the investigation is complete. But 5-Hour Energy would likely be concerned about a leak, with good reason, given the number of states involved.

As an aside, any time a company is litigating with a governmental entity. it must be very careful about what materials are turned over during litigation, since these documents often become public records once the litigation ends.

Computer Fraud and Abuse Act Applied Narrowly In AMD Case

In Advanced Micro Devices, Inc. v. Feldstein, currently pending in the District of Massachusetts, AMD brought claims against former employees who copied large volumes of confidential files before leaving to work for a competitor. The court previously entered an injunction against the defendants. For a good discussion of the case background and the injunction order, see John Marsh’s post on his Trade Secrets Litigator Blog.

AMD’s complaint included a claim for violating the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030, among others. On June 10, the court entered an order on the defendants’ motion to dismiss.

This is the first time I’ve addressed the CFAA on this blog. The CFAA bars, among other things, “intentionally access[ing] a computer without authorization or exceed[ing] authorized access and thereby obtain[ing] . . . information from any protected computer,” and

knowingly and with intent to defraud, access[ing] a protected computer without authorization, or exceed[ing] authorized access, and by means of such conduct further[ing] the intended fraud and obtain[ing] anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.

Courts have adopted two different interpretations of the CFAA. The AMD court does a good job describing these two interpretations, one broad and the other narrow. In a nutshell, under the broad interpretation, an employee violates the CFAA by using a computer/server/system he is authorized to use in a manner that exceeds his authority. In contrast, under the narrow interpretation, an employee would only violate the CFAA by accessing a computer/server/system he is not authorized to access. 

Here, AMD alleged that the defendants logged in to AMD’s systems with valid credentials, but used the systems to download confidential information in violation of their contractual obligations and duties of loyalty. Thus, it needed the court to adopt the broad interpretation.

The First Circuit has not yet addressed this issue, thus leaving the court to evaluate the two positions. The court applied the narrow interpretation, reasoning that Congress did not intend to supplement state trade-secret misappropriation laws, and that the broad interpretation could convert benign and common conduct like checking personal email at work into a federal crime.

But the court did not dismiss AMD’s CFAA claim. Instead, it noted that this is an unsettled area of law and gave AMD a chance to plead into the narrow standard:

If AMD can plead specific details indicating that some or all of the defendants used fraudulent or deceptive means to obtain confidential AMD information, and/or that they intentionally defeated or circumvented technologically implemented restrictions to obtain confidential AMD information, than the CFAA claims will surpass the Twombly/Iqbal standard.

While I think that the narrow interpretation is more logical and practical, it is hard to reconcile with the “exceeding authorized access” language in the statute. Regardless, bringing a CFAA claim requires a careful analysis of the relevant circuit’s precedent and the facts at issue.

Here is a link to the court’s opinion:

AMD v Feldstein Order on Motion to Dismiss

Damages for Trade-Secret Misappropriation: Unjust Enrichment

In many commercial cases, damages models begin and end with a loss-profits analysis. But in trade-secrets cases, a plaintiff can go one step further.

Under the Uniform Trade Secrets Act, “Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.”

Thus, in addition to lost profits (and injunctive relief, which I’m not addressing in this post), the plaintiff can also recover damages to the extent the defendant was unjustly enriched, as long as those amounts aren’t included in the lost-profits model. This provision is particularly helpful where the plaintiff has difficulty quantifying its loss.

To lay the foundation for unjust-enrichment damages, a plaintiff’s discovery plan should include seeking documents and information that show how the defendant benefited by using the plaintiff’s trade secrets. This discovery will necessarily involve financial information. While defendants may object to providing financial information absent a judgment, courts should permit it, given the statute’s plain language.

Seeking financial information early in a trade-secrets case can also create leverage for a settlement, as most companies have no interest in sharing financial information with a competitor. These concerns can be mitigated somewhat with a protective order, as I discussed in a prior post. When representing a defendant, consider moving to bifurcate the trial into liability and damages phases, with the financial discovery delayed until after a finding of liability.

But unjust-enrichment damages can be hard to prove, particularly where it is difficult to link the misappropriation to the defendant’s profits. To overcome these issues, or to identify when unjust enrichment is not worth pursuing, the plaintiff should consider hiring a consulting damages expert early in the case. This expert can help formulate discovery requests and analyze the information produced, as well as help prepare for depositions on this issue.

At trial, expert testimony will likely be needed to show how the defendant’s profits flowed from the misappropriation and to quantify these damages.

In sum, a trade-secrets plaintiff should focus on damages early in the case. As part of this process, consider whether the damages model should include unjust enrichment.

Can Business Relationships Be Trade Secrets? VA Federal Court Says No.

Business relationships are certainly valuable. But can they be trade secrets? In Cablecom Tax Services, Inc. v. Shenandoah Telecommunications Co., 2013 WL 2382969 (W.D. Va. May 30, 2013), the court said no.

Here, the plaintiff offered services designed to reduce its clients’ ad valorem and sales tax liability. The defendants, cable companies, contracted with the plaintiff for this purpose. After the plaintiff apparently obtained tax reductions, the defendants allegedly did not pay amounts owed to the plaintiff. The plaintiff sued for misappropriation of trade secrets under Virginia’s Uniform Trade Secrets Act, among other claims.

The plaintiff identified two trade secrets allegedly misappropriated, including its “valuable relationships with taxing authorities.” (The case does not explain how the defendants used these relationships, but that’s not important for our purposes.) Essentially, the plaintiff is saying that it spent time and money developing these relationships, which offered it economic value.

The court spent little time flatly rejecting this theory:

The court cannot fathom how Cablecom’s alleged ‘valuable relationships’ with taxing authorities could conceivably fall under the definition of a trade secret. Simply put, such a relationship is not information that derives independent economic value from not being generally known and which could be the subject of reasonable efforts to maintain secrecy.

This is the right result. A relationship exists between people; it is not possible for another person to misappropriate a relationship.

But this got me thinking. Perhaps there is a way to protect business relationships as trade secrets, the same way customer information can become a trade secret. If a company invests time and money creating and reasonably protecting a database containing information about its business relationships, there’s certainly an argument that the database—as opposed to the relationship itself—could be a trade secret. But as I’ve discussed in prior posts, it can be difficult to convince courts to treat customer information as trade secrets. It would likely be even more difficult to do so with business relationships.

Protecting Trade Secrets During Litigation With A Protective Order

Even when trade secrets are not at issue in a litigation, companies and their lawyers need to be vigilant about protecting their proprietary information. When litigating with a competitor—or, under certain circumstances, a customer—this becomes even more important.

One of the most effective tools for protecting trade secrets in litigation is a protective order governing confidential information. In any case where there’s a chance that discovery will involve confidential or proprietary information, a protective order should be entered. To be effective, a protective order should include the following:

  • what information and documents are considered confidential,
  • how confidential information/documents are designated as such,
  • how to deal with inadvertent production of confidential information without the proper designation,
  • how to challenge a designation,
  • to whom confidential information can be disclosed,
  • the requirement that any third parties, such as experts, who receive confidential information acknowledge in writing that they are bound by the order’s terms,
  • how confidential information and documents can be used during litigation (e.g., filed under seal),
  • how to respond to a third-party subpoena seeking confidential information, and
  • what happens to confidential information after the litigation ends.

In addition to documents, the parties should be able to designate portions of deposition transcripts and other discovery responses as confidential. For deposition transcripts, the order should specify that the entire transcript is designated as confidential for a set period (say 30 days), during which time the parties can designate specific portions of the transcript as confidential.

When there is a chance that discovery will involve proprietary information, and the litigants are competitors or could otherwise benefit from having the proprietary information, it is critical to include an additional tier of confidentiality protection: the “attorneys’ eyes only” designation. Documents or information designated as “attorneys’ eyes only” can only be viewed by the parties’ attorneys — not the parties themselves.

Of course, if the information is going to be used at trial, it will become necessary for it to be disclosed in some form. I have had success including provisions requiring the parties to meet and confer on how information will be used at trial, with the court obviously having the ultimate say.

Most times, the parties are able to submit an agreed order. But where opposing counsel is unwilling to agree to material terms, such as the inclusion of an attorneys’ eyes only provision, it is worth litigating the issue.

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