Will Two Lawyers Go to Jail for Asserting Trade Secrets in Bad Faith?

Two South Florida lawyers are facing possible jail time, in part because of allegedly asserting in bad faith that documents contained trade secrets. They supposedly wanted to prevent disclosure of documents that proved their witness testified inaccurately. In a case pending in Miami-Dade County Circuit Court, Green Tree Servicing v. Sibon, the judge decided yesterday to go forward with an arraignment for the two lawyers representing the plaintiff, a large loan servicer, on charges of indirect criminal contempt.

This started as a mortgage foreclosure case. The defendants asserted defenses relating to the plaintiff’s “loan boarding” process, i.e., how the plaintiff uploads information from prior servicers’ records, including borrowers’ payment history.

During a deposition, the plaintiff’s representative testified that the company’s training manuals included protocols for verifying this information, including a flow chart showing the process. But the plaintiff had not previously produced those manuals. Not surprisingly, the defendants’ lawyers demanded their production.

The court entered an order requiring production of the manuals and a further deposition of the plaintiff. Three days before the deposition, the plaintiff filed an emergency motion, asserting that the manuals contained trade secrets and work product. The next day, the court entered an order ruling that the motion was not an emergency and directed the plaintiff to set the motion for a hearing (the usual protocol in Miami-Dade Circuit Court for having a judge rule on a motion).

The deposition went forward without production of the manuals. But the plaintiff never set its emergency motion for hearing. Several months later, the court entered an order requiring production of the manuals by noon that day. At 11:59, the plaintiff produced them.

Apparently, the manuals contradict the witness’s testimony. According to the judge, “the document does not contain any ‘flow chart’ that mentions ‘red flags’ that prevent loans from boarding as Mr. Ogden testified he reviewed. To the contrary, it appears from the document produced that [the plaintiff] boards the prior servicer’s records . . . and makes the loan live on its system before any verification process would even begin.”

And then it got interesting. The judge entered an order to show cause, which can be downloaded here. That order informs both the witness and the plaintiff’s attorneys that “this is now a criminal matter” and directs them to appear to show cause why they should not be held in indirect criminal contempt:

It appears that [the plaintiff] and its counsel willfully and contumaciously ignored this Court’s order by refusing to turn over the training materials. Moreover, it appears [the plaintiff] and its counsel improperly sought to have the records deemed confidential to avoid disclosure of the fact that its witness gave grossly inaccurate testimony[.]

According to an article in the Daily Business Review, yesterday, the new judge handling the case (the prior judge recused himself) “ruled that [the witness] was ‘operating at the will of the lawyers’ and dismissed him from the criminal contempt proceedings.” But she will be going forward with the criminal case against the lawyers, pending an appeal.

If true, this is an egregious abuse of the trade-secrets laws. It’s one thing to be over broad when asserting trade-secret protection. It’s another thing entirely to assert trade secrets when none exist, solely to hide a witness’s inaccurate testimony. It will be interesting to see whether these lawyers are sanctioned, and if so, how harshly.

Florida Supreme Court Issues Landmark Noncompete Opinion

It’s been a difficult week in Florida, as the state recovers from Hurricane Irma. But the storm did not deter the Florida Supreme Court from issuing what could be one of the most important opinions in the state’s history regarding Section 542.335, Florida Statutes, the statute governing restrictive covenants. I’m still dealing with hurricane-related issues as my office in Miami prepares to re-open tomorrow, which prevents me from relaying an in-depth analysis. But I wanted to pass along some key takeaways. A more comprehensive analysis will follow in the coming weeks.

This opinion, White v. Mederi Caretenders Visitng Services of Southeast Florida, LLC, resolves a District split on the issue of whether referral sources can constitute a legitimate business interest, a prerequisite under the statute. Referral sources are not included in the statute’s list of protectable business interests, but the statute prefaces that list with the words “includes, but is not limited to.”

I previously wrote about the divergent holdings on this issue. I argued that the Florida Supreme Court should give life to the statute’s “includes, but is not limited to” provision by ruling that referral sources can be a legitimate business interest. The opinion ended up mirroring my analysis, holding that “the subject statute protects a plethora of protected legitimate interests far beyond those listed in the subject statute.” Here are a few key points:

  • This opinion has far-reaching implications beyond cases involving referral sources. It makes clear that courts should engage in industry-specific, context-based analysis to determine whether the plaintiff has a legitimate business interest, regardless of whether that interest is listed in the statute:

The illustrative list guides courts in their interpretation of what types of non-enumerated business interests qualify as legitimate under Section 542.335. However, because the statue protects more business interests than those specifically listed, courts must necessarily engage in fact- and industry-specific determinations when construing non-enumerated interests.

  • The opinion repeatedly references industry-specific determinations. Lawyers attempting to enforce a restrictive covenant should consider what types of industry-specific evidence is necessary to justify the restrictive covenant.
  • The Court also emphasized the purpose of the statute: “preventing unfair competition by protecting critical business interests.” This focus on unfair competition may shift courts’ analysis towards a determination of the unfair advantage provided to the new employer. This was always a consideration on some level, but it may rise in prominence.
  • The opinion also contains language that will likely be cited by defendants: “For an employer to be entitled to protection, there must be special facts present over and above ordinary competition such that, absent a non-competition agreement, the employee will gain an unfair advantage in future competition with the employer.”
  • Lawyers drafting restrictive covenants under Florida law should consider whether it makes sense to include language in which the employee acknowledges the importance of the business interest at issue to the company, particularly when that interest is not enumerated in the statute.

This opinion may embolden companies looking to enforce restrictive covenants. I would not be surprised if this case leads to increased litigation involving alleged business interests outside those listed in the statute. More analysis to come.

A copy of the opinion can be downloaded here.

Florida Companies: Are Your Non-Competes Missing This Critical Provision?

Under Florida’s restrictive-covenant statute, Section 542.335(f), a restrictive covenant is only enforceable by a successor entity or third-party beneficiary if the agreement so provides. This provision can become very important following corporate merger or sale transactions. Or in the due-diligence period leading up to those transactions.

In a recent Florida case, Collier HMA Physician Mgmt, LLC v. Menichello, the plaintiff almost fell victim to this statutory requirement. A copy of the opinion can be downloaded here.

In this case, the plaintiff owns a healthcare business employing approximately 40 doctors. It also operates two hospitals and clinics. The defendant, a physician, previously worked for the plaintiff, where he signed a non-compete agreement prohibiting him from working for certain of the plaintiff’s competitors. After his departure, he accepted a position with one of those competitors, and the plaintiff filed suit.

The physician argued that a merger transaction involving the plaintiff’s corporate parent triggered the statutory provision above. Per the physician, since the agreement did not expressly provide for enforcement by successors, the merger invalidated the non-compete. The trial court agreed and granted summary judgment in the defendant’s favor.

The appellate court reversed. To reach that conclusion, it interpreted the term “successor” in the statute as “a corporation that, through amalgamation, consolidation, or other assumption of interests, is vested with the rights and duties of an earlier corporation.”

The court found that “the status of [the plaintiff] after the merger does not comport with the standard definition of a successor as it relates to corporations or other business entities.” In particular, there were several tiers of corporate entities between the plaintiff and the parent company that was subject to the merger. While the ownership of the ultimate parent company changed, “nothing about the corporate structure or ownership of [the plaintiff] was different after the merger”; it “continued in existence as a single member limited liability company.”

In the end, the plaintiff here was able to enforce its non-compete agreement. But all of this trouble could have been avoided. This leads to a very simple takeaway: when drafting restrictive covenants in Florida, include a provision allowing their enforcement by successors and assigns. Florida companies with existing restrictive-covenants should have a lawyer review them for compliance with this statute.

Similarly, anyone considering acquiring or merging with a company with Florida employees/independent contractors needs to have a lawyer review any restrictive covenants for this purpose.

The failure to include this provision could lead to all sorts of problems. For example, it could impede a later merger or sale of the company. But any Florida company can avoid these problems by having a lawyer conduct a simple review.

 

Damages for Misappropriation of Trade Secrets Found Non-Dischargeable In Bankruptcy

Guest post by Solomon B. Genet

As Eric’s law partner, from time to time I “guest post” on trade secret issues in the insolvency / bankruptcy context.  One important issue involves the dischargeability of pre-bankruptcy misappropriation claims. The March 31, 2017 In re Mandel decision out of the Eastern District of Texas addresses this issue.  There, claimants filed proofs of claim in Mandel’s bankruptcy case alleging that the debtor violated the Texas Civil Theft Liability Act (“TCTLA”) by misappropriating trade secrets. The debtor objected to these claims. On September 30, 2011, the bankruptcy court tried the matter and found that the debtor violated the TCTLA and awarded the claimants damages and attorney’s fees. Years later, the issue before the bankruptcy court was whether these claims (arising from conduct prior to the bankruptcy filing) could be discharged in the bankruptcy case.

The claimants asserted that the damages for violation of the TCTLA were non-dischargeable on a variety of bases, and the bankruptcy court ruled in favor of the claimants on some theories and against the claimant on others.  To narrow the issues for purposes of this post, the bankruptcy court determined that its previous decision finding (as a matter of fact and law) that the debtor misappropriated trade secrets was sufficient to also prove that the debtor committed: (1) fraud; (2) larceny (fraudulent and wrongful taking of the property of another with intent to convert such property to the taker’s use without the consent of the owner); and (3) embezzlement (fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come).  Each of these bases gave rise to the misappropriation of trade secret claims being non-dischargeable.  Therefore, the bankruptcy court did not require re-litigation of the issues and found in favor of the claimants.

Practice Pointer:    When litigating a claim for misappropriation of trade secrets, make sure your strategy includes collection of the debt arising from that claim.  If there is a possibility that the wrongdoer may file for bankruptcy, consider the elements of a claim for non-dischargeablity when presenting and proving your case.

The case is In re Mandel, No. 12-4128, 2017 WL 1207503 (E.D. Tx. March 31, 2017).

 

 

Florida’s Restrictive Covenant Statute: The Power of Presumption

Florida has one of the most employer-friendly restrictive-covenant statutes in the country, Section 542.335, Fla. Stat. For example, the statute prohibits judges from considering any hardship suffered by the person against whom enforcement is sought. The statute also contains a rebuttable presumption that a violation of an enforceable restrictive covenant creates irreparable injury. Yesterday, Florida’s Third District Court of Appeal (which covers Miami-Dade County) issued an opinion showing the power of this presumption. The opinion, in Allied Universal Corp. v. Given, can be downloaded here.

Allied manufactures and distributes water-treatment chemicals. Defendant Given worked as a regional sales manger for Allied and signed a non-compete agreement. As part of his employment, he received training regarding various aspects of Allied’s business. Given resigned from Allied to work for Univar, a company that competes with Allied. Allied filed suit and sought a temporary injunction, which the trial court denied on the grounds that Allied failed to show irreparable harm.

The appellate court focused on the rebuttable presumption of irreparable injury and described the evidence offered by Allied:

At the evidentiary hearing on the motion for temporary injunction, Allied presented unrebutted evidence of the existence of statutorily legitimate business interests to be protected and evidence that Given had substantial relationships with specific prospective or existing Allied customers. Allied’s president, Mr. Palmer, testified that his company had trained Given, over the course of Given’s six-year employment, in its manufacturing and production techniques, marketing strategies, and confidential pricing strategies. In addition, Given had knowledge of existing and prospective customers, and had been sent to several trade meetings to cultivate these contacts.

Thus, the court concluded that Allied had successfully shifted the burden to Given to establish the absence of irreparable injury. But Given “failed to present any such evidence.”

Interestingly, Given argued that because he had not yet begun actively working for Univar, he had not breached the noncompete and no damages were incurred. But he admitted that if he were not enjoined, he would start working for Univar. The court rejected this argument, noting that “the only focus at the preliminary injunction stage is to maintain longstanding relationships and preserve the company’s goodwill.” In the future, plaintiffs can use this language to highlight the need to maintain the status quo.

Given Florida’s employer-friendly restrictive-covenant statute, noncompete and related agreements are powerful tools for Florida companies seeking to protect trade secrets and proprietary information. Cases like Allied show how this statute makes it easier for an employer to obtain an injunction prohibiting violations of a restrictive covenant.

Another Federal Court: No Heightened Pleading Standard in Defend Trade Secret Act Cases

Previously, I wrote about a decision from the District of New Jersey that declined to apply a heightened pleading standard to Defend Trade Secret Act claims. Now, another federal court has reached the same conclusion. A copy of the opinion can be downloaded below.

In Aggreko, LLC v. Barreto, pending in the District of North Dakota, the plaintiff and one of the defendants, Elite Power, are competitors in the generator-renting industry. Defendant Barreto previously worked as Aggreko’s sales manager. Aggreko alleges that Barreto resigned under false pretenses, thereby hiding his intention to work for Elite Power. And on the way out, Barreto allegedly downloaded Aggreko’s trade secrets and confidential information. Aggreko sued Elite Power and Barreto for violations of the Defend Trade Secret Act, among other claims.

The defendants moved to dismiss, arguing that Aggreko failed to plead its misappropriation claims with sufficient particularity. The court rejected this argument:

All that is required at this stage of the proceedings is an allegation that Barreto misappropriated Aggreko’s trade secrets sufficient to put the defense on notice as to the nature of the claim. Aggreko has alleged Barreto wrongfully acquired its trade secrets and provided them to Elite Power. Aggreko describes its trade secrets as including customer lists and information regarding Aggreko’s operations, customers, business proposals, pricing strategy, client preference and history, and proprietary pricing models known only to Aggreko; a description which the Court finds is clearly adequate under Rule 8. The discovery process will provide the parties with the details relevant to the claims, most of which are known to Barreto.

In this case, it sounds like the plaintiff only offered high-level allegations of the trade secrets at issue. And those allegations survived a motion to dismiss. This, along with the case discussed in my prior post, should be encouraging to trade-secret plaintiffs who are leery of a possible heightened pleading standard in federal court.

Aggreko v. Barreto Order

Federal Court Denies Expedited Discovery In Defend Trade Secret Act Case

Trade-secret-misappropriation cases can move fast. Often, the plaintiff files a motion for temporary restraining order alongside its complaint. Sometimes, the plaintiff has enough evidence already to justify a TRO. Other times, the plaintiff needs to take discovery before the TRO hearing.

But the typical discovery deadlines in the rules of civil procedure are not well suited for these TRO proceedings. Thus, plaintiffs regularly seek expedited discovery. In my experience, the parties are often able to agree to an expedited discovery schedule, since defendants usually want to take discovery as well. But when the parties cannot agree, the court needs to get involved. A recent case out of the Middle District of Florida shows the importance of narrowly tailoring expedited discovery requests, particularly when asking a judge to permit this type of discovery.

In Digital Assurance Certification, LLC v. Pendolino, the plaintiff works with municipal bond issuers to comply with various SEC regulations. The plaintiff alleges that the defendant, a former employee, left to work for a competitor. And in his final week of work, according to the plaintiff, the defendant used a USB drive to access every document on the plaintiff’s shared drive. Thus, the plaintiff brought claims for violations of the Defend Trade Secret Act and the Florida Uniform Trade Secrets Act, among others, and filed a motion for a TRO.

In advance of the TRO hearing, the plaintiff filed a motion for expedited discovery. The court denied the motion. A copy of the order can be downloaded below.

The court first set forth the standard for determining whether the plaintiff had demonstrated good cause for expedited discovery:

Factors the Court considers in deciding whether a party has shown good cause include: (1) whether a motion for preliminary injunction is pending; (2) the breadth of the requested discovery; (3) the reason(s) for requesting expedited discovery; (4) the burden on the opponent to comply with the request for discovery; and (5) how far in advance of the typical discovery process the request is made.

Here, the court focused on the second factor, the breadth of the plaintiff’s requests. The court took issue with the scope of the plaintiff’s requests, noting that “while these matters may be relevant to the issues raised in DAC’s complaint, they go far beyond what is needed for the hearing on the motion for a temporary restraining order.”

Take away: When bringing a motion for a TRO, the plaintiff’s lawyers need to figure out quickly whether the parties will be able to agree to an expedited discovery schedule. If not, the plaintiff needs to draft discovery requests that are laser focused on the issues relevant to the TRO hearing. In my experience, judges will allow this type of discovery, as long as the requests are reasonable. Conversely, judges will protect defendants from overbroad discovery.

Digital Assurance Certification, LLC v. Pendolino

Federal Court: No Heightened Pleading Standard Under the Defend Trade Secrets Act

As more plaintiffs bring claims under the shiny new Defend Trade Secrets Act, we continue to learn about how courts are interpreting this statute. On Tuesday, the District of New Jersey answered an open question: whether the statute, in conjunction with Twombly/Iqbal, requires a heightened pleading standard for misappropriation. In Chubb INA Holdings, Inc. v. Chang, the DNJ declined to apply such a standard. A copy of the opinion can be downloaded below.

In this case, Chubb sued its former employee and its competitor Endurance, alleging that the former employee worked with Endurance to solicit a large number of employees from Chubb’s real estate and hospitality division. The goal was to hire enough Chubb employees to create a “turnkey” operation for Endurance. In the process, Chubb alleges, the former employees took Chubb’s confidential information. Chubb sued for, among other things, violations of the Defend Trade Secrets Act.

The defendants moved to dismiss, arguing that Chubb did not offer sufficient allegations of actual misappropriation, as opposed to inevitable disclosure. In denying this motion, the court found that Chubb alleged “more than the mere possibility of misconduct,” citing to Ashcroft v. Iqbal. The court also focused on the pleading standard:

Plaintiffs “need not make out specific allegations as to exactly how Defendants used or disclosed Plaintiff[s’] trade secrets; there is no heightened pleading standard for a misappropriation claim, and Plaintiff[s are] entitled to seek discovery to support [their] allegations setting forth a prima facie claim.”

The court was quoting from a case interpreting a New Jersey state-law claim for trade-secrets misappropriation.

This is obviously a plaintiff-friendly interpretation of the statute. It allows plaintiffs to plead misappropriation more generally, and then obtain discovery to sharpen the details.

Interestingly, the court’s approach here—relying on reasoning from a court in its state interpreting that state’s trade-secrets law—could result in state-by-state differences in how the DTSA is interpreted.

Chubb v. Chang MTD Order

Are We Headed for a Landmark Florida Supreme Court Non-Compete Case?

A few months ago, I wrote about a Florida appellate case holding that referral sources qualify as legitimate business interests under Florida’s restrictive covenant statute (Section 542.335, Fla. Stat.). On New Year’s Eve, a different Florida appellate court disagreed, setting up a possible appeal to Florida’s Supreme Court.

In Hiles v. Americare Home Therapy, Inc.Florida’s 5th District Court of Appeals overturned in part a temporary injunction entered against the former employee of a home healthcare company, who had allegedly violated a non-compete agreement. (The case I discussed in my earlier post also involved the home healthcare industry.) The injunction was based on the company’s claimed need to prevent the former employee from soliciting referral sources.

Under the Florida statue, a restrictive covenant is only enforceable if supported by a legitimate business interest. Here, the appellate court held that referral sources are not legitimate business interests.

The court relied on one of the legitimate business interests listed in the statute: “substantial relationships with specific prospective or existing customers, patients, or clients.” Since referral sources are not specific customers or potential customers, this court found that they are not legitimate business interests.

This is faulty logic, since the statute makes clear that the list of legitimate business interests in non-exclusive: “The term ‘legitimate business interest’ includes, but is not limited to” the enumerated items, including substantial relationships with customers.

In the home healthcare industry, it certainly sounds like referral sources are very important to business success. This is likely the case in a number of industries, where business is primarily generated through referral sources. In those industries, a company should be able to protect its referral sources through restrictive covenants.

Given the appellate-court split, there is at least a chance that the Florida Supreme Court will address this issue. If it does, the case could have far-reaching effects. The Florida Supreme Court could take this opportunity to address the definition of “legitimate business interest” under the statute, and clarify what types of legitimate business interests beyond those listed in the statute justify restrictive covenants. This could dramatically alter the way Florida treats restrictive covenants. Stay tuned.

Florida Loves Non-Compete Agreements

Florida’s restrictive-covenant statute, Section 542.335, is one of the most employer-friendly in the country. A recent case from Florida’s Fourth District Court of Appeal, Transunion Risk and Alternative Data Solutions, Inc. v. Reilly, shows how this statute favors an employer trying to enforce a restrictive covenant against a former employee. A copy of the opinion can be downloaded below.

This opinion is short on facts, but the plaintiff sued the defendant for violating a non-compete agreement and sought a temporary injunction. At the injunction hearing, the trial court ruled in the defendant’s favor after the plaintiff finished its case in chief, before the defendant put on any evidence.

The appellate court reversed. First, it looked at the likelihood of irreparable injury, citing the statute’s presumption of irreparable injury that arises when the plaintiff shows a violation of an enforceable restrictive covenant. Here, the appellate court reversed because the defendant did not present evidence:

As the trial court’s ruling was issued before Reilly presented any evidence, Reilly could not have met his burden of presenting evidence overcoming the presumption.

This doesn’t sound right. A defendant should have the right to rebut this presumption simply by cross-examining the plaintiff’s witnesses. That’s what the trial court apparently thought happened here. But the presumption so strongly favors the plaintiff that this appellate court was unwilling to allow the defendant to rebut it without putting on affirmative evidence.

The trial court also concluded that the plaintiff had an adequate remedy at law. But the appellate court reversed this finding, noting that even when a plaintiff has suffered actual money damages,

the continued breach of a non-compete agreement threatens a former employer’s goodwill and relationships with its customers, and nothing short of an injunction would prevent this loss.

This finding essentially eliminates the adequate-remedy-at-law prong of the injunction analysis in restrictive-covenant cases.

Finally, the appellate court reversed the trial court’s finding that the plaintiff had not demonstrated a substantial likelihood of success on the merits. On this point, the appellate court relied on the trial court’s “implied finding” that the defendant violated a restrictive covenant. So once a court finds that the defendant breached, the plaintiff has automatically shown a substantial likelihood of success.

This case shows how Florida’s restrictive-covenant statute provides employers with the upper hand in litigation. As a result, these agreements are a very effective tool for protecting proprietary information and trade secrets. All Florida companies should consult with an attorney to determine whether to implement these types of agreements.

Transunion Risk and Alternative Data Solutions, Inc. v. Reilly

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