“Just Doin Blow and Erasing Evidence”

As the Defend Trade Secrets Act—which would create a federal cause of action for trade-secrets theft—makes its way through Congress, critics have focused on the proposed statute’s ex parte seizure provision. In a nutshell, the statute would allow for the entry of ex parte orders to seize specifically identified repositories of evidence that are at risk of destruction.

I’ve responded to these criticisms multiple times before (see here, here, and here). The statutory protections (e.g., the party subject to the order is entitled to a hearing within 7 days) combined with federal judges’ reluctance to issue ex parte orders are, in my view, sufficient to prevent abuse.

Meanwhile, the threat of evidence destruction is real. A recent case shows how far defendants can go to allegedly destroy evidence of trade-secrets theft.

As described in Law360, a radio-controlled-vehicle company sued several former employees for violating restrictive covenants and misappropriating trade secrets, among other claims. The plaintiff filed a motion seeking sanctions against the defendants for destroying evidence.

According to the plaintiff, the defendants destroyed “scores of emails, texts, and documents that described their scheme to start at least one rival toy car and boat business.”

One of the defendants—who sounds like a real winner—apparently sent a text message talking about how he expected to get served with the complaint, saying “That’s what I’m trying to deal with now so I can’t go out, just doin blow and erasing evidence.”

In misappropriation cases, the evidence is almost always in electronic form. And it’s way too easy for defendants to destroy this evidence. While a plaintiff could seek sanctions (as the plaintiff here is seeking against the guy “doin blow”), a plaintiff would almost always rather have the actual smoking gun proving misappropriation.

The ex parte seizure provision is a powerful tool that may allow companies to preserve critical evidence.

What’s Worse Than Having Trade Secrets Stolen? Waiting Too Long to Do Something About It.

If you discover that your trade secrets have been stolen, you must act immediately. That’s the lesson from a recent case in the Middle District of Florida, Dyncorp International LLC v. AAR Airlift Group, Inc. A copy of the order can be downloaded below.

The Plaintiff, Dyncorp, has been providing aviation services to the State Department under a contract going back more than 20 years. Apparently, the State Department is now re-bidding that contract. The Defendant, AAR, is one of the bidders. Dyncorp alleges that AAR hired former Dyncorp employees and “coerced” those employees into disclosing Dyncorp’s trade secrets, which AAR used in its bid.

Dyncorp filed suit for, among other things, violating the Florida Uniform Trade Secrets Act. About three weeks later, Dyncorp filed a motion for preliminary injunction that sought to enjoin AAR from using Dyncorp’s trade secrets.

The district court denied the motion, finding that Dyncorp did not satisfy any of the injunction prerequisites. Of particular note, the court found that Dyncorp’s delay in filing suit showed that it had not suffered irreparable injury:

Dyncorp admits that it was notified of AAR’s alleged misappropriation of trade secrets in April 2015 but let more than four months pass without filing suit. Dyncorp attempts to explain the delay away by arguing that it complained to the State Department and AAR and conducted its own investigation during this time, but offers no explanation as to why those undertakings and this suit could not proceed simultaneously – particularly if, as Dyncorp asserts, it was facing the prospect of irreparable injury.

This case shows that once you discover—or even suspect—that your trade secrets are being improperly used, you must act fast. Any delay can be cited by a defendant as a reason for denying injunctive relief, just as AAR did here. While not every case will demand the immediate filing of a lawsuit, you need to at least consult with an attorney right away. Then, your attorney can advise you of your various legal options, and the risks and benefits of each.

Dyncorp v. AAR — Order Denying Preliminary Injunction

Guest Post: Proving Damages in Trade-Secrets Cases

By Solomon Genet

Proving damages can be difficult in a wide range of cases, often especially so in a trade-secrets case. In a recent Federal appellate decision, the 5th Circuit (painfully for the plaintiffs) identified some of the risks involved. A link to the decision, In re Mandel, 2014 WL 3973479 (5th Cir. Aug. 15, 2014), is below.

Here, two individuals, an IP lawyer and a database expert, came together through a joint-venture entity to develop what they conceived to be a new type of search-engine. This JV hired personnel, retained a development team, and searched for investors.  The relationship then went sour, with misrepresentations made, one partner forming a competing company without disclosing it to the other partner, and that new company raising investor funds.  Suits, counter-suits, and a bankruptcy petition followed.

Later, the bankruptcy court presided over a trial as to whether the chapter 11 debtor (before filing for bankruptcy) misappropriated trade secrets under Texas law.  While finding that the debtor-defendant was liable, the court rejected each of the plaintiffs’ damages theories (they proposed a number of them).  But then, the bankruptcy court awarded damages—$1 Million to one plaintiff and $400k to another—“without explaining the damages theory on which it relied or identifying the evidence that supported these awards.”

Although the Fifth Circuit stated that in trade-secret misappropriation cases: (1) damages need not be proved with great specificity; (2) a flexible damages approach is appropriate; (3) uncertainty as to damages does not preclude recovery; and (4) only an approximation is needed, as long as there is a just and reasonable inference in support; it held that since the trial / bankruptcy court neither identified the theory of damages nor explained the evidentiary support for the amounts awarded, even this relaxed standard was not satisfied. The Fifth Circuit remanded back to the bankruptcy court to clarify the damages issue.

Accordingly, as a practice pointer, a plaintiff harmed by trade-secret misappropriation should ensure that the court identifies how it arrived to the amount of damage suffered, and not just identify the amount of monetary damage.

Note: this decision applied Texas common law, which has since been superseded by Texas’ adoption of the Uniform Trade Secrets Act.

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.

In re: Mandel

AZ Supreme Court: Trade Secrets Act Does Not Preempt Claims for Misappropriation of Confidential Info

I’ve previously written about the Uniform Trade Secrets Act’s (UTSA) preemption provision, which preempts tort and other claims providing civil remedies for trade-secret misappropriation. Yesterday, the Arizona Supreme Court held that the Arizona Trade Secrets Act (ATSA), which is based on the UTSA, does not preempt common-law claims for misappropriation of information that is not a trade secret.

In this case, the former president of a public relations firm was sued by that firm when she left to start a competing PR firm. The plaintiff PR firm brought a claim for unfair competition, which was based on the use of confidential information the defendant learned while working for the plaintiff. The trial court dismissed the claim, finding that the ATSA preempts claims arising from the misuse of confidential information, even where the information does not rise to the level of a trade secret.

The Arizona Supreme Court disagreed, relying primarily on the plain language of the ATSA. The court did acknowledge the fact that other states have held that these types of claims are preempted. In states where misappropriation claims based on non-trade-secret confidential information are viable, it is often advisable to bring both a trade-secrets misappropriation claim and an alternative (or independent) claim for misappropriation or conversion of confidential information.

This case contains one other point of note. The defendant argued that allowing claims for misappropriation of confidential information would result in an “absurd” result. She noted that a plaintiff could obtain more in punitive damages on the misappropriation claim than it could on an ATSA claim, which allows for exemplary damages of twice actual damages where the misappropriation is willful and malicious.

In response, the court offered very helpful language to a plaintiff seeking to prove exemplary damages under the ATSA:

That AUTSA authorizes a trial court, rather than a jury, to award exemplary damages of no more than twice the amount of actual damages . . . is not necessarily anomalous. In cases of willful and malicious misappropriation, punitive damages might be easier to obtain under AUTSA than under our common law, which requires clear and convincing evidence of a defendant’s “evil mind” for a punitive damages.

Since many misappropriation of trade secrets are based on willful conduct, this case may be worth citing when seeking exemplary damages.

 

Trade Secrets and Public Records

Companies performing municipal or government work face unique challenges when they need to share their confidential or proprietary information with public agencies. These companies must be wary of state public records laws and the Freedom of Information Act. A recent case, All Aboard Florida — Operations, LLC v. State of Florida, et al., filed in Leon County, Florida, illustrates this.

All Aboard Florida is attempting to develop passenger rail service between Miami and Orlando. It is doing so in partnership with various governmental entities. Recently, Orlando developer Matthew Falconer served various Florida agencies with requests under Florida’s Public Records Act for various documents relating to All Aboard Florida’s efforts.

According to the complaint, these agencies told All Aboard Florida that they intended to provide Falconer with All Aboard Florida’s Florida Ridership and Revenue Study. In response, All Aboard Florida filed this complaint for declaratory and injunctive relief, seeking protection under Florida’s Trade Secrets Act. According to All Aboard Florida, this study is a trade secret:

The Ridership Study analyzes expected market share for AAF’s service, including the effects of various pricing and travel time scenarios on AAF ridership. As such, the Ridership Study is an extremely sensitive and commercially valuable document, the disclosure of which to the public could place AAF at an unfair competitive disadvantage vis-à-vis airlines and other transportation alternatives.

Under Florida’s Public Records Act, trade secrets are exempt from disclosure.

When All Aboard Florida provided this study to the government, it marked each page as proprietary and confidential. For companies facing this situation who have no choice but to provide proprietary information to a government agency, I would recommend going one step further: Label each page of any proprietary document as “Trade Secret Information Protected From Disclosure By Section 815.045, Florida Statutes” (or the relevant statute in the state at issue).

The goal is to make it as simple as possible for the government employees responding to a public-records request to recognize that the document at issue should not be disclosed.

 

Novel Legal Strategy Deflates Employer’s Trade-Secrets Case

Recently, in Putters v. Rmax Operating, LLC, 2014 WL 1466902 (N.D. Ga. April 15, 2014) (opinion linked below), the court dismissed a counterclaim for trade-secrets misappropriation, brought in response to a declaratory judgment action filed by the defendant’s former employee. When I first read this opinion, I thought that the defendant did not move fast enough, thereby allowing the plaintiff to select the forum. When I dug further, however, I found out I was wrong.

In this case, the defendant is a Texas company that manufacturers insulation materials. The plaintiff worked for the defendant for 26 years in Georgia as a sales manager, and had access to the defendant’s confidential information. After the plaintiff left the defendant to work for a competitor, the defendant discovered that the plaintiff “had downloaded documents containing proprietary and confidential information to an external hard drive.”

While not clear from this opinion, the complaint gives the back story. A copy is linked below. The defendant originally filed suit in Texas state court and obtained an ex parte temporary restraining order prohibiting the plaintiff from working for his new employer.

After that, the plaintiff made an interesting legal maneuver. He filed this lawsuit in Georgia state court, seeking a declaration that he is permitted to continue working for his new employer, and an injunction prohibiting the defendant from prosecuting the Texas action, since Texas courts did not have personal jurisdiction over him.

This maneuver worked. The case (after being removed to federal court) is proceeding in Georgia federal court, where the court dismissed the defendant’s counterclaim and denied the defendant’s request for a TRO.

Normally, when a defendant believes that there is no personal jurisdiction over him, he will simply litigate that issue in front of the court where the plaintiff filed the lawsuit. Here, the employee took an entirely different course and successfully redirected the litigation to a different forum. And he was able to get the case in front of a judge with much more favorable views of his case.

Takeaway: Companies should be wary of personal-jurisdiction issues when filing trade-secrets lawsuits. The last thing you want is to be bogged down in a personal jurisdiction fight before the court will even hear a temporary injunction motion. Or, even worse, you could end up like the employer in this case, who spent time and money getting a TRO, only to be whisked away to a Georgia court with a very different view of the employer’s arguments.

Also, had this company simply had its employees sign restrictive covenants (including a venue and jurisdiction clause), they would be in a far better legal position.

Order

Complaint

9th Circuit Affirms Attorney Sanctions in Trade-Secrets Case

In Heller v. Cepia, Judge Jeffrey White sanctioned the plaintiff’s attorney under Rule 11 and ordered him to pay the defendant $5,000. This week, the 9th Circuit affirmed. Both the district court’s and 9th Circuit’s opinions are linked below.

The plaintiff designed a toy hamster and shared a prototype with one of the defendants. While the opinion below doesn’t discuss the facts in detail, apparently the defendants allegedly stole the plaintiff’s toy hamster design. Trade secrets come in all shapes and sizes.

The court found that two allegations in the complaint lacked a factual basis: (1) sign-in sheets produced by a defendant (The Bean) appeared to confirm that representatives of another defendant (Cepia) were at The Bean’s offices at a time when The Bean had the hamster prototype, and (2) when confronted with information suggesting Cepia was given access to the plaintiff’s trade secrets, the other defendants refused to provide information about their relationship with Cepia.

Regarding the sign-in sheets, the evidence showed that The Bean simply did not produce any sign in sheets for the week in question. Per the court, the plaintiff went too far when it alleged that the sign-in sheets confirmed Cepia’s presence: “contrary to the implication of Heller’s allegation, The Bean’s sign in sheets do not confirm anything.” (emphasis in original).

Regarding the defendants’ refusal to provide information, the court found that “there is no credible evidence to support Heller’s allegation.”

When imposing sanctions, the court found that “the nature of these unsupported allegations stem from exaggerations for which Heller’s counsel is culpable. He is the one who drafted the complaint and the allegations at issue.”

Lawyers sometimes get carried away when drafting a complaint. Obviously, everyone wants their case to sound as strong as possible. But this case shows the value of being conservative when describing the facts in a pleading.

Heller v. Cepia, N.D. Cal.

Heller v. Cepia, 9th Circuit

Trade Secrets and the First Amendment

Before this week, I had never thought much about trade-secrets issues intersecting with the First Amendment. But then I read the complaint in a lawsuit filed by hedge fund Greenlight Capital Inc. against the owner of a website called seekingalpha.com, which published a post disclosing Greenlight’s then-confidential investment strategy. The suit seeks to compel the website owner to disclose the writer’s identity so that Greenlight can sue for trade-secret misappropriation. A copy of the complaint is linked below.

Greenlight Capital, led by David Einhorn, is a hedge fund whose “activity in the investment markets is well known and closely watched by other traders and investment advisors.” In the complaint, Greenlight describes how it develops its investment strategies “at considerable expense,” and how it must keep this information confidential, since disclosure of its investment strategies could move the market.

In November 2013, Greenlight was building an equity position in Micron Technologies. This information was not public knowledge. On November 14, 2013, a writer on the seekingalpha.com website, writing under a pseudonym, disclosed Greenlight’s intentions regarding Micron. As a result, Micron’s share prices rose immediately. Greenlight now needs the writer’s identity, so that it can sue him or her for misappropriating trade secrets.

In a New York Times article discussing this lawsuit, high-profile First Amendment lawyer Floyd Abrams offered thoughts on how the suit implicated constitutional issues:

Floyd Abrams, a First Amendment lawyer with Cahill Gordon & Reindel, said there might be reasons for a judge to compel an anonymous blogger to be identified in a libel case. But he said there weren’t many good reasons for doing so in what would appear to be a largely commercial dispute. “There is a serious First Amendment issue here,” Mr. Abrams said. “He will have a pretty tough job persuading a judge.”

While Floyd Abrams has forgotten more about the First Amendment than I’ve ever known, his position strikes me as off point. Laws prohibiting trade-secret misappropriation by definition restrict speech. Essentially, the Uniform Trade Secrets Act* recognizes that, for example, if you obtain a trade secret you know was acquired by improper means, you are not permitted to disclose that information. Allowing someone to hide behind an online pseudonym could render these laws ineffective.

There are other interesting issues in this case. For example, Greenlight says it takes the following measures to protect this confidential information:

Greenlight’s employees are required pursuant to both firm policy and their employment agreements to keep information regarding Greenlight’s non-public investment strategies confidential. In addition, Greenlight’s prime brokers and custodians are required by confidentiality agreements and other duties to Greenlight to keep non-public information concerning Greenlight’s securities positions confidential.

Later, it notes that at the time seekingalpha.com published the post, “the only persons who lawfully possessed information regarding Greenlight’s position in Micron were persons with a contractual, fiduciary, or other duty to maintain the confidentiality of Greenlight’s position: Greenlight’s employees, counsel, prime and executing brokers and other agents.”

It’s not possible to tell from the complaint whether all of Greenlight’s employees, brokers, and agents are required to sign a confidentiality agreement. If not, Greenlight has a major gap in its confidentiality protections that could undermine its misappropriation claims — the defendant could argue that Greenlight did not reasonably protect its proprietary information. As I’ve discussed often before, it is critical to make sure that all employees, vendors, etc. with access to confidential or proprietary information sign agreements that, at a minimum, require them to keep this information confidential.

*Greenlight filed the case in New York, which is one of the few states that has not adopted some form of the UTSA.

Greenlight Complaint

Sixth Circuit Rejects Dubious Trade Secret Claim

If you are thinking about bringing a trade-secret-misappropriation suit, do not take a ready-fire-aim approach. Before filing the lawsuit, you need to be able to articulate the precise trade secret at issue and how it was misappropriated. A recent case decided by the Sixth Circuit, Dice Corp. v. Bold Tech., 2014 WL 260094 (6th Cir. Jan. 24, 2014) gives an example of a trade-secrets claim that probably never should have been filed. A link to the opinion is below.

This case involved a dispute between two competitors who provide services and software to alarm companies. An alarm company using the plaintiff’s software decided to change to the defendant’s. In this circumstance, there needs to be a transition period, during which the alarm company is still using the plaintiff’s software, while running the defendant’s software in parallel on other servers. This ensures that the new software is properly monitoring the alarm signals before it goes live.

The plaintiff, perhaps angry over the loss of a client, accused the defendant of accessing and using its proprietary information during the transition process. It brought claims under the Michigan Uniform Trade Secrets Act, among others.

The trade-secrets claim was based on supposed misappropriation of (1) a file containing a master list of alarm codes, and (2) “receiver drivers” software that takes incoming signals and converts the data to the plaintiff’s standard. The Sixth Circuit rejected both. As to the list of codes, the court said:

The plaintiff fails to explain how this information, even if uniquely coded, is a trade secret. The [file] is a compilation of labeling codes created by manufacturers, not the plaintiff. The codes were collected by the plaintiff’s customers, not the Plaintiff. The plaintiff has not put forward an explanation of how the value of its unique labeling is derived from it not being readily ascertainable by proper means.

Regarding the software, the Sixth Circuit noted that “neither in the operative complaint nor in the plaintiff’s response to the defendant’s motion for summary judgment can we find a trade secret claim based on receiver drivers or software that performs that function.” Even if the plaintiff had properly pleaded a claim on this basis, the court still would reject it since “other than a generalized explanation of what the receiver drivers do, the plaintiff has failed to explain whether the receiver drivers derive economic value from their secrecy.”

Takeaway: This seems like the latest in a long line of trade-secrets cases that never should have been brought in the first place. Filing a lawsuit and litigating it through appeal is not cheap. Before doing so, make sure you can (1) explain what trade secret(s) were actually misappropriated, and (2) plead and prove the misappropraition (or at least feel comfortable that discovery is likely to lead to the evidence necessary to prove your claim). If you have difficulty doing either, think very carefully whether the suit should be filed. As the (overused) saying goes, sometimes discretion is the better part of valor.

Dice Corp. v. Bold Tech.

Discovery: Keeping Trade Secrets Secret

All litigators need to be familiar with trade-secrets law, since discovery requests often seek  proprietary information. When this happens, you need to protect your clients’ trade secrets in the discovery process. Last week, Florida’s Second District Court of Appeal addressed this issue in Bright House Networks, LLC v. Cassidy, 2014 WL 84237 (Fla. 2d DCA Jan. 10 2014) (opinion linked below). This case offers multiple takeaways for lawyers when your clients are faced with discovery requests calling for production of trade secrets.

In this case, the plaintiffs had a contract with their cable company that entitled them to perpetual free cable. After the defendant, Bright House Networks, purchased the cable company, it terminated the plaintiffs’  free services. The plaintiffs sued Bright House and won — a court ruled that they were entitled to lifetime free cable. In response, Bright House started issuing 1099s to the the plaintiffs for the free cable’s value. (Aside: cable companies are the worst.) The plaintiffs sued again, arguing that the 1099s violated the previous judgment, and that Bright House does not issue 1099s to other customers receiving free services.

In discovery, the plaintiffs sought information about all customers receiving free services. Bright House objected, arguing that this information was confidential and proprietary. The lower court overruled this objection, leading to this appeal.

The appellate court reversed, noting that

The Florida Evidence Code contains a privilege against the disclosure of trade secrets. . . . When a party objects to the disclosure of a trade secret, first a court must determine whether the requested information is, in fact, a trade secret. . . . Usually this determination requires the trial court to perform an in camera review of the information. . . . Second, if the trial court determines that the information is a trade secret, then the court must determine if the party requesting the information has shown a reasonable necessity for the information. . . . If the court orders disclosure, it must make findings to support its determination. . . . [T]he trial court may need to order safeguards to prevent the unnecessary dissemination of the information.

Here, the trial court never made an in camera review. The appellate court ordered the trial court to conduct this review and, if necessary, conduct a hearing to determine whether Bright House’s customer information is a trade secret.

There are several takeaways from this case. Carefully review all discovery requests to determine whether they call for the production of proprietary information. If so, timely object and be prepared to have the court review the material in camera.

If the court orders production, the company should avail itself of an immediate appeal if possible. In Florida, that is done through a petition for writ of certiorari, which allows interlocutory review of orders compelling discovery where compliance could cause irreparable harm.

Also, here Bright House conceded that it had offered free services to other customers but had not issued 1099s. In this opinion, the appellate court noted that “In determining necessity for the information, the trial court should consider the significance of Bright House’s stipulation.” Bright House knew what the information sought would show, and tried to prevent disclosure by conceding the point. This may prove successful. When faced with the possibility of producing trade secrets, you should balance the risk of disclosure with the effect a concession of the relevant point will have on the litigation.

Bright House Networks LLV v. Cassidy

%d bloggers like this: