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.

Alley-Oops: The Orlando Magic Tweeted a Picture Showing Team Trade Secrets

Sometimes companies forget about even the most obvious protections for their trade secrets. For example, “don’t tweet out a picture of your secret business strategies.” The Orlando Magic recently did just that.

Earlier this month, a player’s agent tweeted a picture of the player signing a new contract with the Magic. But the picture also showed a dry-erase board listing the Magic’s off-season free-agent targets and trade possibilities. Now there are reports that the Magic’s general manager, who has since been fired, took the picture.

It goes without saying that the Magic don’t want the rest of the league knowing about their off-season personnel plans, which are arguably trade secrets if appropriately protected. But for some reason, they left those plans on a dry-erase board and then let an agent—who could potentially benefit from knowing that information—into the room. And then they allowed the contents of the board to be shared with the rest of the world. Not particularly savvy.

The lesson here is simple, and seemingly obvious: trade secrets need to be secret. They shouldn’t be left up on a dry-erase board. Or in papers on someone’s desk. This episode shows that even intelligent people can have a lapse of judgment. If you implement and enforce a trade-secrets policy that only allows storage of trade secrets in secure media, and limits disclosure of trade secrets to those who need them to do their jobs, you can minimize the “human error” element that led to this embarrassing gaffe.

Trump and Trade Secrets: Signs of Encourgagement?

I’ve written several times about how Donald Trump’s rhetoric suggesting radical foreign-policy changes could threaten US companies’ trade secrets. See here and here. In particular, I’ve been concerned about Trump’s aggressive stance towards China, including statements about upending the “One China” policy.

Now that we’re several weeks into Trump’s presidency, we are seeing signs that his foreign policy won’t be so radical after all.

This New York Times Article, titled Trump Foreign Policy Quickly Loses its Sharp Edge, explains:

As Mr. Trump begins to shape his foreign policy, he is proving to be less of a radical than either his campaign statements or his tempestuous early phone calls with foreign leaders would suggest.

The article discusses how Trump’s actions as president differ from his campaign statements, including his recent affirmation of the One China policy. It also talks about how Cabinet members like Secretary of State Rex Tillerson and Defense Secretary Jim Mattis have emerged as persuasive voices, advocating for a more stable approach to geopolitical issues.

This is encouraging. I have been very concerned that Trump’s volatile, unpredictable style, combined with his lack of experience, would strain the relationships between the US and countries like China that have a history of state-sponsored trade-secrets theft. For now, it seems like there are voices of reason within his administration who have Trump’s ear. But at this very early stage of Trump’s presidency, substantial uncertainty remains.

Note: This is not a political blog, and I am not commenting on the more controversial issues discussed in the NY Times article. Here, I am solely focused on how the Trump administration’s actions impact companies’ trade secrets.

Shark Tank and College Football Non-Competes

Two recent stories show why all companies should at least consider implementing non-compete agreements or other restrictive covenants.

First, here’s a link to a short interview with Shark Tank’s Robert Herjavec, talking about his first company. Unbeknown to Robert, his sales manager had set up a side business, to which he funneled half of Robert’s customers. Robert only found out because another employee broke down and told him during her exit interview.

Robert finishes the interview with good advice: “The minute you hire the first employee, you have to be careful.”

We don’t know if the sales manager had signed a non-compete or non-solicitation agreement. Such an agreement could have given Robert far better legal options.

Also, Robert trusted that his employees would be loyal. While it’s obviously good to trust your employees, it’s far better to trust and also have them sign appropriate restrictive covenants.

I also read about how an assistant coach of the Arkansas Razorbacks football team left for the University of Georgia. Bret Bielema, Arkansas’ head coach, was not happy. Apparently, his recently hired coaches signed non-compete agreements that prohibited them for coaching for other SEC schools. But the coach who had left had been hired earlier, and he did not have a non-compete.

Of course, Arkansas should have had its coaches sign non-competes from the outset. And once they decided to require new coaches to sign one, they should have at least attempted to have the older coaches sign as well.

These stories show how non-compete agreements can have value across diverse industries. It’s worth speaking with an attorney to figure out whether your company can benefit from implementing restrictive covenants, or improving existing agreements.

 

“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.

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

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

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

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

Professors Invent Threat of “Trade Secret Trolls”

I’ve written several times in the past about the proposed legislation to create a federal cause of action for trade-secrets misappropriation (see herehere, and here). I also wrote a response to a letter signed by a number of professors who opposed this legislation. Now, Professors David S. Levine and Sharon K. Sandeen have written a law review article titled “Here Come the Trade Secret Trolls.” This article misses the mark by a mile.

Here is the article’s core argument:

The [proposed federal] Acts are most likely to spawn a new intellectual property predator: the heretofore unknown “trade secret troll,” an alleged trade secret owning entity that uses broad trade secret law to exact rents via dubious threats of litigation directed at unsuspecting defendants.

The use of the term “troll” is meant to evoke patent trolls, who have been the subject of much scorn. But the so-called “trade secret troll” is far different than a patent troll. The latter actually own patent rights, which they wield to seek licensing fees. The article’s mythical trade-secret troll is simply someone willing to bring a frivolous lawsuit to extort an undeserved settlement. I suspect the authors chose this term to piggyback on the negative attention heaped on patent trolls, thereby arming the legislation’s opponents with a pejorative term that may scare legislators or their constituents.

Putting titles aside, the article can’t reconcile its core argument with the fact that, as the authors acknowledge, “trade secrecy has been generally free of similar trolling behavior.” In other words, there is no epidemic of frivolous trade-secret lawsuits under the current state-law framework. (Certainly, there are weak misappropriation cases, just like with any cause of action. But I haven’t seen any evidence to suggest that such cases are disproportionately filed.)

The authors try to make the point that the proposed federal acts would transform trade-secrets law such that threatening and filing frivolous lawsuits would become commonplace. Yet the article does not really explain why this is so. It gets closest when discussing the proposed ex parte seizure provisions. But as I mentioned in my response to the professors’ letter, this risk is highly overblown. Convincing a federal judge to enter ex parte relief is no simple matter. And the defendant will have the right to challenge any seizure order very soon after its entry. Federal judges will not be amused if they have been manipulated into entering unnecessary ex parte orders.

The article fears that “trolls” will be able to threaten an ex parte seizure, which will be sufficient to scare a defendant into paying up before the suit is filed. Yet any innocent defendant will know that the likelihood of such an order being entered is slim. Further, simply sending the letter would undermine an attempt to get an ex parte seizure order. If the plaintiff was able to send a demand letter, thereby putting the defendant on notice of the possible claim, then a judge would be highly skeptical of a claimed need for an ex parte order.

The article also argues that unsettled interpretative questions relating to the acts will fuel frivolous lawsuits. But the article forgets that creating a federal cause of action will quickly lead to a much more robust body of published caselaw interpreting the statute. While there are very few published trial-court-level decisions in state courts, U.S. district court orders are widely available.

Frankly, state courts are much more susceptible to frivolous trade-secrets suits than federal courts. Take Florida, for example. Here, state court judges have to deal with remarkably bloated dockets. In fact, I’ve had multiple cases where it took months to get an emergency injunction hearing. State-court judges generally don’t have law clerks. And in Florida, judges often rotate between civil, criminal, family, and dependency divisions. This latter point is critical: judges often don’t spend enough time in the civil division to develop a familiarity with trade-secrets law. All of these issues lead to uncertainty, which would seemingly aid the unscrupulous litigant looking to extort a settlement. Yet, as the authors themselves acknowledge, we simply have not seen this so-called trolling.

There’s no question that frivolous lawsuits would be filed under the proposed federal legislation, just as like every other cause of action. But there is absolutely no credible reason to believe that such suits can’t be remedied with the typical mechanisms deigned to ferret out meritless claims, like Rule 11 motions.

As I’ve argued in the past, the proposed legislation has tangible benefits that aid trade-secrets owners in protecting their critical proprietary information. The arguments lobbed up in opposition—including the manufactured risk of “trolling”—don’t hold up to careful scrutiny.

2-Minute Jimmy Kimmel Clip Shows Our Cybersecurity Culture Crisis

This video speaks volumes about our country’s attitudes towards cybersecurity:

Last week, I wrote about the importance of creating a culture that makes protection of trade secrets a top-line priority. This video shows why this culture is so important. Your employees need to be constantly aware of surreptitious attempts to get passwords. Spear phishing attacks are becoming more and more sophisticated; your employees need to be immediately suspicious of any attempt to get personal information, particularly passwords.

In the real world, bad actors are far more subtle than a Jimmy Kimmel reporter with a microphone and a video camera. The fact that people are willing to turn over their passwords on TV shows—particularly now, when cybersecurity issues have never been more visible—is depressing. Make sure your employees know better.

Data Breaches Increase Seven-Fold In One Year

According to a report by California’s attorney general, 18.5 million Californians were victims of cyber intrusions or data breaches in 2013. Remarkably, this was up from 2.5 million in 2012, a seven-fold increase. (Note that two major data breaches at Target and LivingSocial account for much of the increase.) A copy of the report is linked below, and this article summarizes the report.

The study breaks down the cause of the various breaches, with 53% caused by cyber incursions (e.g., hacking and malware), 26% arising from physical loss or theft, and the remainder coming from unintentional errors or deliberate misuse.

This report is yet another sign that the threat of data loss continues to increase dramatically. While the report focuses on breaches affecting consumer information, it has broader application to companies seeking to protect their proprietary information. Measures necessary to enhance data security and protect trade secrets overlap. Network security is at the heart of these efforts, and companies need to be willing to invest significant resources to keep their networks safe.

But network security is not the only area of concern. This report shows that the loss or theft of computers and other storage media presents another significant risk. For companies seeking to protect their trade secrets, this problem presents on various fronts. For example, companies need to make sure that company-issued computers, smartphones, and media have sufficient protections in case they are lost or stolen. Also, and more problematic, companies need to understand how their employees are using company documents and information on their personal devices. Similarly, companies need to keep tabs on how third parties, like vendors and consultants, are protecting shared proprietary documents.

I have frequently written about the need for companies to implement a trade-secrets policy. This policy would address these issues. For example, it could require that all proprietary documents are encrypted. And it could make sure that these documents are disseminated narrowly, to those employees who need them to do their jobs. For those companies that fail to implement and enforce necessary restrictions, the loss of proprietary information may be inevitable.

2014 California Data Breach Report

Recycled Passwords Can Trash Your Trade Secrets

Recently, a hacker posted a number of usernames and passwords for Dropbox. Considering how many companies are now using Dropbox and other cloud-based providers to share documents, this is obviously a problem. But it does not appear that Dropbox itself was hacked. Instead, as noted by this Slate article, the hacker likely targeted smaller sites with weaker security:

The most likely source of the information is a third-party site that had poor security. Hackers know that most internet users re-use their passwords, so they often target smaller apps made by amateur developers. These easy targets have poor security — so usernames, passwords or files may be stored in a way that’s easy for hackers to steal them.

In other words, most people use the same passwords across multiple sites. Including your employees. This is a BIG problem. Forgive the cliché, but password protection is only as good as the weakest link in the chain. You can spend millions of dollars protecting your network and proprietary information. But if another site where your employees have accounts is hacked, and your employees use the exact same passwords there as they use for your network, your network and information is at risk.

I cannot overstate the importance of making sure that your employees don’t use the same password for your system that they use for other sites. You need to make employees aware of this rule, and strictly enforce it. One option is to create passwords for your employees instead of allowing them to create their own. And change the passwords routinely. Also, as biometric technology develops and becomes more affordable, it presents another option.

There’s a reason we all use the same passwords across multiple sites: it makes life easier. But you need to ensure that your employees don’t allow their convenience to threaten your company.

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