Donald Trump: Unprecedented Threat to U.S. Companies’ Trade Secrets?

Last week, I wrote about how state-sponsored cyber attacks could increase dramatically under President Trump. As a result, U.S. businesses, and our overall economy, are facing substantial risks that very few are talking about. Now is the time to take action. Below are five steps you should consider now to protect your trade secrets.

Since my last post, the anti-China rhetoric emanating from President Elect Trump’s circle has escalated. For example, just today, Carly Fiorina had the following comments after meeting with Trump:

We then got down to more serious business, and spent a fair amount of time talking about China as probably our most important adversary and a rising adversary. We talked about hacking, whether it’s Chinese hacking or purported Russian hacking.

Assuming she is accurately conveying Trump’s comments, this is a remarkable statement. It speaks to Trump’s hostile attitude towards China. As I’ve mentioned previously, I am not a geopolitics expert. But all U.S. companies need to be very concerned about the possibility of a breakdown in U.S.-China relations. China almost certainly has the capacity to initiate cyber attacks against the U.S.’s internet infrastructure. And China has proven its ability to successfully steal trade secrets from U.S. companies.

All companies, regardless of size, need to be prepared. Given the uncertainty, I recommend the following steps to protect your trade secrets:

  1. Determine whether any of your trade secrets can be maintained offline, even at the cost of organizational efficiency. In the past, most companies I’ve encountered strongly resist this type of protection. But given the unprecedented risk, companies need to at least explore offline storage of trade secrets.
  2. At a minimum, securely maintain offline copies of all trade-secret documents that can be accessed if a cyber attack disrupts internet access.
  3. Invest in backup solutions that will allow you to restore lost data.
  4. Implement a disaster plan that can be initiated in the event of widespread loss of internet connectivity.
  5. Work with an attorney specializing in trade secrets to make sure you are taking all reasonable efforts to protect your trade secrets and to prepare for the possibility of misappropriation.

We are entering a highly unpredictable period in foreign relations. And with unpredictability comes risk. This risk is on top of the already business-critical threats of cyber attacks and trade-secret theft that have accompanied our increasingly interconnected world. Companies need to act immediately to secure their information assets.


Florida Appellate Court Limits Damages for Wrongful Injunction in Non-Compete Case

Under Florida law, an injunction cannot issue unless the movant first posts a bond. See Fla. R. Civ. P. 1.610(b). This week, in Vital Pharmaceuticals Inc. v. Professional Supplements, LLC, et al., Florida’s Fourth District Court of Appeal addressed a situation where the trial court did not require the movant to post a bond when it enjoined the defendants from violating their non-compete agreements. A copy of the opinion can be downloaded here.

In this case, the plaintiff sued its former employees and their new employer for tortious interference and breaching restrictive covenants. The plaintiff also sought, and obtained, an injunction, though the court did not require a bond. Later, the court dissolved the injunction for reasons unknown to the appellate court. The court awarded the defendants damages resulting from the injunction.

The appellate court reversed the damages award. The court first held that the injunction was never effective, since no bond was posted.

Next, the court ruled that any damages for a wrongful injunction are limited to the amount of the bond. So since there was no bond, the defendants were not entitled to any damages.

This case offers lessons to plaintiffs and defendants alike. If you are representing a party that has obtained an injunction in a Florida case, make sure the injunction order requires a bond — and be prepared to post the bond immediately. Similarly, both parties need to be prepared to offer evidence at the injunction hearing about the proper amount of a bond. This sometimes becomes an afterthought, with both sides focusing instead on the evidence needed to obtain/defeat the injunction.


Trade Secrets Under Donald Trump: Prepare for Cyber War?

Once Donald Trump takes office, dramatic policy changes will reverberate throughout our economy. Trade secrets are no different. While the Trump administration’s policy objectives remain largely unknown in this area, it’s worth considering how companies should prepare to protect their trade secrets during the Trump presidency.

To start, I expect President-Elect Trump to, at a minimum, back off of President Obama’s call for a dramatic reduction in the use of noncompete agreements. While President Obama took a pro-employee viewpoint, Trump seems more inclined to favor the employer’s perspective. But since noncompetes are legislated at the state level, this policy change will not have immediate results. At most, the pace of noncompete reform may slow. Companies still need to carefully consider their use of noncompete agreements, as I discussed in a previous post.

In the short term, however, Trump’s policies may impact the frequency and scope of state-sponsored trade-secret theft and cyber attacks. Already, Trump is making waves by communicating with Taiwan’s president. If Trump rejects the U.S.’s longstanding “One China” policy (i.e., no direct contact with Taiwan’s government), China may retaliate — including by increasing its efforts to raid U.S. companies’ intellectual property.

I’m no expert in geopolitics, but it seems obvious that Trump’s election has added substantial uncertainty to the U.S.’s foreign policy. Trump’s statements thus far suggest that he will abandon, or at least dramatically reduce, multinational treaty efforts in favor of direct negotiation between the U.S. and other nations. And he has already said that he wants to bolster the U.S.’s capacity to initiate cyber attacks.

It wouldn’t surprise me if Trump follows the old advice you hear in the movies about prison: as soon as you get there, find the biggest, meanest guy and punch him in the face. Should President Trump take this attitude towards a nation like China, such as by establishing direct diplomacy with Taiwan, cyber warfare is not out of the question. At a minimum, I see an increased likelihood of state-sponsored cyber attacks and trade-secret theft during the Trump Administration. This creates risks for businesses of all sizes, not just large corporations.

But this is all just conjecture. We will all find out together how President Trump’s policies impact companies trying to protect their trade secrets. While it’s not time to start stockpiling canned goods, the increased uncertainty justifies even greater urgency for companies—regardless of size—to invest in IT solutions to protect against hacking, legal solutions that address theft or improper disclosure of trade secrets, and backup/redundancy systems that minimize damage in the event of a hack.

Eleventh Circuit: When It Comes to Injunctions, It’s Now or Never

Guest post by Solomon B. Genet

Recently, on October 28, the 11th Circuit Court of Appeals in Wreal, LLC v., Inc. affirmed the time-honored principle of “you snooze, you lose.”  In summary, a plaintiff believed that his trademark was being infringed upon, but waited 5 months after filing suit to seek a preliminary injunction. The 11th Circuit affirmed the district court’s denial of that request, finding that the delay undermined any showing of irreparable injury.

Seemingly having fun with the decision, the 11th Circuit explained:  “The district court denied the injunction because, among other reasons, the plaintiff pursued its preliminary injunction motion with the urgency of someone out on a meandering evening stroll rather than someone in a race against time.”  A PDF of the opinion can be downloaded below.

Practice tip: don’t stroll but RUN to the court to seek an injunction. This is particularly important in trade-secret cases, where judges will be very skeptical of a plaintiff who knowingly delayed in pursing an injunction.

Wreal, LLC v., Inc.

President Obama: Most Workers Should Not Sign Non-Compete Agreements

Yesterday, the White House issued a State Call to Action on Non-Compete Agreements. This follows the President’s April 15, 2016 Executive Order that addressed steps to protect workers and increase competition.  The President’s position is clear: “Most workers should not be covered by a non-compete agreement.” Instead, non-competes should be “the exception rather than the rule.” Meanwhile, “there is gross overuse of non-compete clauses today.”

This Call to Action encourages states to implement certain policy objectives regarding non-competes, including:

  1. Banning non-competes for workers (a) under a certain wage threshold, (b) in occupations that promote public health and safety, (c) unlikely to possess trade secrets, or (d) laid off or terminated without cause.
  2. Increasing the transparency and fairness of non-competes such as by requiring disclosure of the agreement prior to acceptance of a job or promotion and mandating consideration in addition to continued employment.
  3. Encouraging employers to write enforceable contracts, such as by promoting the “red pencil doctrine,” under which non-compete agreements with unenforceable provisions are void in their entirety.

President Obama is right: non-compete agreements are overused. For example, as noted in this article discussing the Call to Action, 20% of U.S. workers are bound by non-competes, including 14% of workers earning less than $40,000 per year. While there may be exceptions, most of these lower-income workers should never have been required to sign a non-compete.

At the same time, companies need to be able to protect their trade secrets and proprietary information. Thus, non-compete agreements are absolutely appropriate in many circumstances. This requires a case-by-case analysis. The more senior the employee, and the more access the employee has to proprietary information, the more likely a non-compete is appropriate. When making this determination, companies need to resist using a one-size-fits-all approach to restrictive covenants. Often, less onerous measures like non-solicitation and non-disclosure agreements will be sufficient to protect the company. Particularly for lower-level employees.

There is room for common-sense legislation to protect vulnerable workers from non-compete agreements. Too many companies force non-competes on lower-level workers, without regard for whether the company needs that level of protection. But I would not go as far as the Call to Action suggests. Instead, I favor implementing a rebuttable presumption that an employer does not have a legitimate business interest justifying a non-compete agreement when the employee makes under a certain amount per year, say $40,000. I would not apply this presumption to non-solicitation or non-disclosure agreements.

Almost 6 Months In, What Have We Learned About the Defend Trade Secrets Act?

Now that almost six months have passed since President Obama signed the Defend Trade Secrets Act (DTSA) into law, let’s take a look at what we’ve learned about the statute thus far.

  1. The fuss about ex parte seizures was overblown. Prior to the statute’s enactment, opponents were concerned about misuse of the DTSA’s ex parte seizure remedy. But so far, problems have not materialized. There have not been any reports, at least to my knowledge, of an ex parte seizure being reversed once the defendant had an opportunity to respond. In fact, I’m only aware of one case involving an ex parte seizure order, discussed here, and the judge denied that request.
  2. The DTSA can apply to misappropriation that stared pre-enactment. Even though the statute expressly applies solely to actions occurring after enactment, several courts have interpreted the act to cover pre-DTSA misappropriation. But only if the misappropriation continued after the statute’s enactment. I wrote about one such case from the S.D.N.Y. here. The Middle District of Florida reached the same conclusion in Adams Arms, LLC v. Unified Weapon Systems, Inc., Case No. 8:16-cv-1503-T-33AEP.
  3. Courts analyze DTSA and state-law trade-secrets claims together. Both types of claims are grounded in similar concepts, so it is hardly surprising that courts analyze the claims together, while applying similar reasoning to the two statutes. For example, in M.C. Dean, Inc. v. City of Miami Beach, Florida, Case No. 16-21731-CIV-ALTONAGA, the Southern District of Florida dismissed claims under both the DTSA and Florida’s Uniform Trade Secret Act, after discussing the two claims together.

So far, there have not been many reported decisions interpreting the act. A Westlaw search for “Defend Trade Secrets Act” yields only 14 results. I will continue to monitor decisions addressing the DTSA and provide regular updates as the statute matures.

S.D.N.Y. Applies Defend Trade Secrets Act to Conduct Predating the Statute

The Defend Trade Secrets Act (DTSA), signed into law by President Obama on May 11, 2016, applies “to any misappropriation of a trade secret . . . for which any act occurs on or after the date of the enactment of this Act.” 18 U.S.C. 1836(e). On its face, this would seem to preclude actions based on misappropriation that occurred prior to the DTSA’s enactment. But a recent case from the Southern District of New York shows that it’s possible to sue under the DTSA based on conduct predating the statute’s enactment.

In Syntel Sterling Best Shores Mauritius Limited v. TriZetto Group, Inc., the plaintiff, a healthcare software company, sued a company that previously contracted with the plaintiff to provide software development and other services. According to the plaintiff, after the defendant terminated the parties’ master services agreement, the defendant accessed and downloaded the plaintiff’s confidential documents and used that information to pitch clients. The plaintiff sued for violations of the DTSA, among other claims.

The defendant moved to dismiss, arguing that the amended complaint alleged pre-DTSA conduct. The court rejected this argument:

The plain language of the Act defines misappropriation to include “disclosure or use of a trade secret without the consent of another.” 18 U.S.C. 1839(5) (emphasis added). Accordingly, as Defendants allege that Syntel continues to use its Intellectual Property to directly compete with Trizetto, the wrongful act continues to occur after the date of the enactment of DTSA.

Thus, according to the Southern District of New York, a plaintiff can bring a claim under the DTSA for using a trade secret prior to the DTSA’s enactment, as long as the use continues post-enactment.

Takeaway: Companies who discover misappropriation that began before May 11, 2016 need to investigate whether the defendant continues to use the trade secrets at issue. If continued use can be alleged in good faith, consider bringing a claim under the DTSA.

Syntel v. TriZetto

Protecting Trade Secrets Following an M&A Transaction

Many M&A transactions are motivated by a desire to acquire another company’s trade secrets. But the unique nature of trade secrets, as compared to other types of intellectual property, creates risks for the acquiring company.

For example, a company doesn’t know if its proprietary information is a trade secret until a judge says so, usually in the context of a misappropriation claim. If the acquired trade secrets are stolen after the M&A transaction, this determination will involve a judge’s analysis of how the target company protected the information at issue prior to the transaction.

I recently came across a case from the Northern District of Georgia, DS Waters of America, Inc. v. Fontis Water, Inc., that shows how this can play out. A copy of the opinion is linked below. DS Waters, the company behind Crystal Springs bottled water, acquired the assets of a bankrupt water company, including its customer list. In this case, DS Waters brought a claim under the Georgia Trade Secrets Act alleging misappropriation of the customer list.

The defendants argued that because the bankrupt company did not reasonably protect the customer list, the list is not a trade secret. The case ultimately settled. But if it hadn’t, a jury would have decided whether the bankrupt company took appropriate protections. If not, then DS Waters would have paid for a customer list that it cannot protect as a trade secret.

This highlights the need for in-depth due diligence into the target company’s trade secrets, with a focus on the protections used. These tasks are often farmed out to junior lawyers, who may not have sufficient familiarity with the way courts analyze reasonable protections in misappropriation cases. Resist the temptation to reduce costs by having inexperienced lawyers handle this aspect of the due diligence.

Instead, whenever you are involved in an M&A transaction in which there is value assigned to trade secrets, you should engage an attorney who is an expert in this area who can determine whether the target company’s protection efforts are likely to survive judicial scrutiny. Otherwise, you are taking a substantial risk that the assets you are purchasing cannot be protected as trade secrets.

DS Waters v. Fontis Water

5 Warning Signs That Your Trade Secrets Have Been Stolen

Many companies that suffer trade-secret theft have no idea for months, if not longer. In the meantime, these companies often suffer substantial damage. Effective trade-secrets protection thus requires more than just proactive measures, such as restrictive covenants. Active monitoring is necessary to determine whether former employees, business partners, etc. are engaged in misappropriation.

Obviously, someone who is illegally using your trade secrets will try to keep their activity hidden. As a result, misappropriation can be difficult to detect. But there are warning signs. Here are five common red flags:

  1. A new competitor emerges. If a new competitor appears in your industry, investigate whether any of your former employees or business partners is involved. Particularly if there are high barriers to entry in your industry. This usually requires in-depth investigative work, which may require outside counsel, since the bad actors will try to hide their involvement.
  2. Your former employee lied. Hopefully, you’re conducting exit interviews when  employees leave your company. During that interview, ask where the employee will be working next. If he or she ends up at a competitor instead, there’s reason for concern.
  3. Data was downloaded. Whenever an employee with access to your proprietary information and trade secrets leaves, work with your IT department to determine whether there was any unusual downloading or exporting of key documents or information leading up to the employee’s departure.
  4. A business partner terminates an agreement unexpectedly. If your business partner had access to your trade secrets, be wary if they unexpectedly terminate what seemed like a mutually beneficial relationship.
  5. Clients leave suddenly. If one of your key sales/customer-relations employees leaves, keep an eye on the clients they worked with. If those customers take their business to your former employee’s new company, you have a problem.

Some of these may seem obvious, but companies are often so focused on their day-to-day business that they miss these warning signs. If you encounter any of the above, or there’s something else that makes you suspect trade-secrets theft,  contact an attorney who specializes in trade-secrets law immediately. Time is always of the essence in these situations.

Panera Case Gives an Early Interpretation of the Defend Trade Secrets Act

Panera, LLC v. Nettles and Papa John’s International, Inc., 2016 WL 4124114 (E.D. Mo. Aug. 3, 2016) is one of the first cases under the Defend Trade Secrets Act (DTSA). It both answers and raises questions about how the statute will be interpreted.

Here, Panera sued a former senior IT employee who left to work for Papa John’s, allegedly in violation of a noncompete/nondisclosure agreement. Panera brings claims for breach of contract, violations of the DTSA, and violations of the Missouri Trade Secrets Act. A copy of the order is linked below.

18 U.S.C. 1836(b)(3)(A)(i)(I) provides that any injunction entered under the DTSA cannot “prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information that the person knows[.]”

This raised a question that would need to be answered by the courts: if a plaintiff sues for breaching a restrictive covenant and violating the DTSA, can the court enter an injunction based on the restrictive covenant, or would that injunction violate the provision above?

Since the court here entered an injunction, this case suggests that the provision above does not preclude injunctions in restrictive-covenant cases that also include DTSA claims. (Which strikes me as the obviously correct result.)

Interestingly, the court entered an injunction precluding the defendant from working for Papa John’s based on violations of the DTSA, not only breaches of the restrictive covenant. This at least arguably violates the DTSA prohibition on such injunctions. It will be interesting to see if this issue is addressed on appeal.

The provision above was also intended to preclude arguments based on inevitable disclosure, since the DTSA provides that an injunction setting forth employment conditions could not be based solely on information known by the former employee. But here, the Court explicitly considered, and at least partially relied upon, the inevitable-disclosure doctrine:

Although Missouri has not formally adopted the doctrine of inevitable disclosure–and neither has the Eighth Circuit, with regard to federal trade secrets claims–the Court finds the rationale underpinning such a theory helpful to understanding why Nettles’ performance of his new role would almost certainly require him to draw upon and use trade secrets and the confidential strategic planning to which he was privy at Panera.

Again, this at least arguably violates the DTSA.

Perhaps these apparent contradictions will be addressed if the case progresses, particularly if it reaches the Eighth Circuit. I will also continue to keep my eye out for other cases under the DTSA that address these and other open issues.

Panera v. Papa John’s

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