Trade-secret misappropriation actions, not surprisingly, require discovery into the trade secrets at issue. This can create problems, particularly when the action is being litigated between competitors. In a recent case out of Nebraska, the plaintiff appears to be facing a pretty terrible choice: either disclose its proprietary information to a competitor, risk discovery sanctions, or walk away from its claims. Even worse, some simple proactive thinking could have prevented this problem.

In McDonald Apiary, LLC v. Starrh Bees, Inc., 201 WL 299014 (D. Neb. 1/25/16), the plaintiff and defendant are competitors in the beekeeping and honey production industry, with the plaintiff based in Nebraska and the defendant in California. They entered into an oral agreement under which the plaintiff would place a number of the defendant’s bee hives in Oklahoma and Nebraska.

The plaintiff now accuses the defendant of breaching the contract and has sued for misappropriation of trade secrets and other claims. Of course, the defendant has sought discovery into the alleged trade secrets, including information about the locations where the plaintiff places beehives.

As happens routinely in these cases, the plaintiff is only willing to produce its claimed trade-secret documents on an “attorney’s eyes only” (AEO) basis. The defendant objected, leading to this particular order.

The court rejected the AEO designation, focusing on the plaintiff’s failure to protect this information. Including when the plaintiff shared some location information with the defendant and other competitors:

Plaintiff has failed to explain how it can share certain location information with a competitor and simultaneously claim its location information is held strictly confidential. . . . The parties apparently did not enter into any type of confidentiality agreement as part of their oral contract. And this type of undocumented business arrangement does not appear to be unusual for the Plaintiff: McDonald Apiary has entered into similar contracts with other competitors and has not provided evidence it demands a confidentiality agreement in those contracts.

So the plaintiff has spent time and money developing certain information about the best places to locate bee hives. There’s no reason why this information couldn’t be a trade secret — it certainly appears to give the plaintiff benefits by virtue of being unknown to others. But the plaintiff didn’t adequately protect the information when it shared portions of it with third parties under oral contracts with no confidentiality restrictions.

Here, the lesson is simple: First, never enter into oral contracts. Second, any time you are sharing proprietary information with a third party, the contract must include confidentiality/non-disclosure obligations. While this may seem obvious, this case (and many others I’ve seen) show that companies far too often focus on “business” terms, without regard for protecting proprietary information.

If you’ve even glanced at a TV in the last few weeks, you’ve likely seen ads for daily fantasy sports sites Fan Duel or Draft Kings. These websites allow users to enter daily or weekly fantasy sports contests to risk and possibly win real money. Business appears to be booming. But today brought news of a possible scandal in this new industry.

Via the New York Times:

A major scandal is erupting in the multibillion-dollar industry of fantasy sports, the online and unregulated business in which players assemble their fantasy teams with real athletes. On Monday, the two major fantasy companies were forced to release statements defending their businesses’ integrity after what amounted to allegations of insider trading, that employees were placing bets using information not generally available to the public.

Fan Duel’s employees have apparently been entering and winning contests on Draft Kings, and vice versa. Today’s story includes allegations that a Draft Kings employee had access to non-public information about the entries in Draft Kings’ biggest contest and used that information to enter and win money in Fan Duel’s largest contest. Without getting too deep into the strategy involved in these contests, knowing which players and lineups have been selected by other entrants can provide a huge advantage. This information is not released publicly until everyone’s lineups lock and no further changes can be made.

This raises a number of interesting legal issues. But for our purposes, this episode provides lessons to companies who have non-public information that their employees could use for personal gain. It could be argued that the lineup data being used by the employees is a trade secret, at least until all lineups are publicly released. Thus, it could also be argued that the employees are misappropriating the companies’ trade secrets.

Regardless, both Draft Kings and Fan Duel are facing potential liability and regulatory risk as a result of their employees’ alleged conduct. I’d expect lawsuits to be filed within days. And there’s talk of Congressional hearings to determine whether the industry needs further regulation.

Many companies have information that their employees could use for personal benefit at the companies’ expense, just like Fan Duel and Draft Kings. The lesson here is that companies need to think proactively about how to minimize the risk that employees actually use this information improperly. Today, Fan Duel and Draft Kings announced that they are prohibiting their employees from entering daily/weekly fantasy sports contests. This policy probably should have been implemented long ago. Companies need to think about how to protect this information before it is used improperly, not after, once the damage is done.

In most cases, a policy against personal use does not go far enough. Employees with access to company information that could be used for personal benefit should, at a minimum, sign a non-disclosure agreement.

Now is the time to address whether your company is doing all it can to protect information that your employees could use for their personal benefit. If you don’t know where to start, consult with an attorney who can guide you in the right direction.

Trade-secrets cases present a unique set of challenges in the discovery process. In particular, many of these cases are litigated between competitors. Thus, issues arise when producing competitively sensitive documents. Almost always, the parties agree to (or the court enters) some sort of protective order that allows the producing party to designate highly sensitive documents as “attorney’s eyes only” (AEO). In other words, those documents can only be reviewed by the receiving party’s attorneys, not the representatives/employees of the party itself.

But as is the case in many aspects of discovery, this process is subject to abuse. Invariably, producing parties over-designate documents as AEO. This can lead to various problems, as it is difficult to litigate a case without sharing with your client the nature of documents produced by the other side.

Recently, a magistrate judge in the Northern District of Illinois addressed this issue in the case of Global Material Technologies, Inc. v. Dazheng Metal Fibre, Co. The full opinion is worth a read, as it gives a comprehensive discussion of the law applicable to these situations. There’s a link to download the opinion below.

This case involves a trade-secrets misappropriation claim brought by a metal fiber manufacturer against a company to whom it previously outsourced manufacturing operations. Allegedly, the defendant gained access to the plaintiff’s proprietary customer information and pricing strategies and used that information to compete with the plaintiff.

Both the defendant and a non-party produced a number of documents designated as AEO, and the plaintiff filed a motion to challenge these designations.

The court went through the law applicable to these situations:

[T]he party seeking to protect documents . . . must continue to show good cause for confidentiality when challenged. . . . To make that showing, the designating party must show that disclosure will result in a clearly defined and serious injury, by pointing to specific demonstrations of fact. . . . The harm must be significant, not a mere trifle. Conclusory statements—including broad allegations of potential harm or competitive injury—are insufficient to meet the good cause standard. . . . If there is any doubt as to whether the material should be sealed, it is resolved in favor of disclosure.

The court also explained how the AEO designation should be used sparingly:

[T]he AEO designation should only be used on a relatively small and select group of documents where a genuine threat of competitive or other injury dictates such extreme measures. . . . The AEO designation must be used selectively because discovery and trial preparation are made significantly more difficult and expensive when an attorney cannot make a complete disclosure of relevant facts to a client[.]

After reviewing the documents at issue, the court sustained the designations in part and overruled them in part. In particular, the court focused on whether documents produced had become stale — i.e., the passage of time had mooted the documents’ sensitive nature. The court rejected broad allegations of harm, and only sustained those designations that were supported by an affidavit articulating the specific damage that would flow from disclosure.

The court also distinguished between the defendant and a non-party, noting that the non-party bears a lower burden in establishing a right to the AEO designation.

I can’t recall a trade-secrets case that I’ve litigated that did not touch on these issues. The issues presented are far too varied and complex to discuss in a single blog post. But at a high level, lawyers need to start thinking about discovery prior to filing the lawsuit, including what documents will likely be produced by both sides and how those documents will need to be protected.

These issues add a layer of complexity and strategy to discovery, and proactive thinking is necessary to protect your client and prevent/challenge abusive designation by the other side. This starts with the terms of the negotiated (or ordered) protective order, and continues as documents are produced and as litigation strategies shift over time.

GMT v. DMF

It’s been a while since I’ve posted, as I was in trial and then on vacation. But I’m back and will endeavor to post regularly.

Employee mobility cases often involve the use of customer information or relationships. Many companies try to protect these relationships with restrictive covenants that prohibit competition or solicitation, or both. In Florida, restrictive covenants are governed by statute, Section 542.335, Florida Statutes.

Under this statute, a person trying to enforce a restrictive covenant must plead and prove one or more legitimate business interests. A recent Florida appellate decision, Infinity Home Care, LLC v. Amedisys Holding, LLC, addressed a twist on the typical non-solicitation case: can referral sources be a legitimate business interest? The opinion can be downloaded here.

In this case, a home healthcare company (Amedisys) sued its former employee and her new company, one of Amedisys’s competitors. The employee had signed a non-compete and non-solicitation agreement, which specifically prohibited solicitation of Amedisys’s referral sources.

While at Amedisys, the defendant’s primary job was to develop relationships with case managers at heath care facilities, who could then refer patients to Amedisys for home-care services. After leaving Amedisys, the defendant immediately started soliciting those same case managers to refer business to her new employer.

The lower court ruled that these referral sources were a legitimate business interest. Florida’s Fourth District Court of Appeal agreed. The appellate court noted that the statute lists “substantial relationships with specific prospective or existing customers, patients, or clients.” But the court found that the statute reaches beyond just these specific customer relationships:

Section 542.335, however, clearly states that the legitimate business interests listed in the statute are not exclusive. This allows the court to examine the particular business plans, strategies, and relationships of a company in determining whether they qualify as a business interest worthy of protection. . . . Here, it is undisputed that the relationships Amedisys is trying to protect are its referral sources. As the record shows, these doctors and clinics with whom it has developed substantial relationships are the “lifeblood” of its home health care business.

The appellate court acknowledged conflicting holdings among other Florida District Courts of Appeal on the issue of whether referral sources can be a legitimate business interest. But this result strikes me as the correct one. Plenty of companies rely heavily on referral sources to generate business. Given Florida’s broad restrictive-covenant statute, a company should be able to protect these types of relationships.

But given the divergent holdings, this issue is by no means settled. Any company operating in Florida that wants to protect its referral sources needs to consult with an attorney who can help make sense of the somewhat confusing law in this area.

In Florida, restrictive covenants are governed by Section 542.335, Florida Statutes. Plaintiffs bringing claims under this statute often seek emergency injunctive relief. As a recent case illustrated, the standard for an injunction in a restrictive-covenant case is slightly different from the standard in a typical case.

In Florida Digestive Health Specialists, LLP v. Colina (download a pdf of the opinion here), a medical practice sued one of its former partners, a physician, for breaching a non-compete and non-disclosure agreement that he signed when he joined the practice. The medical practice sought a temporary injunction.

There is case law in Florida holding that when deciding whether to issue a temporary injunction, a trial court should consider whether the threatened injury to the plaintiff outweighs the harm to the defendant if an injunction is issued. The lower court here found that the restrictive covenants were enforceable and that the physician violated them. But it applied this benefit-versus-burden test, along with the other injunction prerequisites, and denied the temporary injunction.

Florida’s Second District Court of Appeal looked at the restrictive covenant statute, which provides that the court “[s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.” Thus, the appellate court found that the trial court abused its discretion by applying the above test.

Interestingly, the appellate court did not remand so that the trial court could apply the proper standard. Instead, it instructed the trial court to enter the temporary injunction.

Takeaway: Florida’s restrictive-covenant statute is one of the strongest in the country. But attorneys bringing claims under this statute need to be very familiar with its terms, particularly during an evidentiary injunction hearing. I’ve often seen defendants try to offer evidence of the hardship they will suffer if the injunction is entered. When that happens, the plaintiff’s attorney needs to be ready to object and cite to the statutory prohibition on this type of evidence. More often than not, judges will follow the statute’s plain language and sustain the objection.

It’s been a busy week for corporate espionage. Planned Parenthood is under fire for a video in which its employees were discussing the sale of fetal tissue. Now, Planned Parenthood’s senior counsel is warning that they expect more videos will be released in the coming weeks. These videos were apparently secretly recorded by an organization called The Center for Medical Progress, which opposes abortion.

Separately, Ashley Madison, an online dating website that targets married people looking to have affairs, had all of its customer information stolen. This information has obvious value — the site’s 37 million (!!!) users certainly don’t want their identities revealed. (This information could easily qualify as a trade secret, assuming that the company took reasonable measures to protect it.) The hackers have threatened to release the customer information if Ashley Madison doesn’t shut down its website.

It’s safe to say that you aren’t reading this blog for opinions on abortion or the moral issues surrounding the Ashley Madison website. Which is good, since I have zero interest in getting involved in the underlying debates. But I am interested in what these two stories say about the risks companies face from corporate espionage and trade-secrets theft.

Certainly, Planned Parenthood and Ashley Madison are highly visible targets, which must have been aware that they were susceptible to corporate espionage/hacking. But corporate espionage and trade-secrets theft isn’t limited to controversial or high-profile companies.

All companies need to examine their risk. Most have some type of information that would be valuable in a competitors’ hands. This information could, for example, be taken by a departing employee who is going to work for a competing company. Similarly, companies with robust consumer data are targets for hackers.

I say this often, but it can’t be emphasized enough: Companies must focus on the legal and technical protections necessary to minimize their risk. If you are not identifying your key information, assessing your vulnerabilities, and taking proactive steps to shore them up, you are much more likely to be the victim of corporate espionage or trade-secrets theft. Addressing these issues can seem overwhelming, but that’s no reason to ignore them. If you don’t know where to start, speak with an attorney who specializes in this area of the law.

Trade secrets are not the exclusive dominion of big business. Virtually all companies have, or at least could have, trade secrets. And all companies face serious risks if they don’t protect their trade secrets. A recent case from the Idaho Supreme Court gives a good example of how even the smallest companies need to focus on trade-secret protection.

La Bella Vita v. Shuler (download here) involves a trade-secrets dispute between two competing hair salons in a small town in Idaho. After a number of employees left the Plaintiff (La Bella Vita) to open a competing salon (Eikova) around the corner, La Bella Vita sued the departing employees, Eikova, and Eikova’s owner (Amanda Schuler). Schuler was La Bella Vita’s former manager. La Bella Vita alleged that the defendants violated their confidentiality agreements and misappropriated trade secrets, including La Bella Vita’s customer information.

The lower court granted summary judgment in the defendants favor, finding no evidence of trade secrets, no misappropriation, and no violation of the agreements. The Idaho Supreme Court reversed, finding a number of genuine issues of material fact.

For a hair salon in small-town Idaho, La Bella Vida was at least somewhat proactive about protecting its confidential information. For example, all employees were required to sign confidentiality agreements. Like many businesses, La Bella Vida was most concerned about protecting its customer information. Over time, it had accumulated a valuable proprietary database about its customers, including each customer’s order history and preferences.

This case centers around whether the customer list was a trade secret, including whether it contained confidential information, and whether La Bella Vida protected it. For example, when Schuler was La Bella Vita’s manager, she used the customer list to create an invite list for her baby shower. When she left, she used the baby-shower list to create Eikova’s customer list. The parties disagree as to whether La Bella Vita’s owner authorized her to use the list for her shower.

La Bella Vita required that all employees sign confidentiality agreements. And all parties testified that they understood that the list needed to be kept confidential. But La Bella Vita could have gone further. Schuler was obviously a key employee. La Bella Vita should have considered having her sign a noncompete or nonsolicitation agreement. And it could have password protected the customer list so that each stylist could only see their own clients, and so that no one could export the entire list. If no one could export the list, it would have been very difficult to create the baby-shower list without the owner’s authorization.

Those relatively minor steps could have saved a lot of money, not to mention heartache. Regardless of how this lawsuit turns out, both sides will likely have spent huge amounts of money litigating. I have no idea what it costs to litigate a case to the Idaho Supreme Court. Nor do I know anything about how much revenue an Idaho salon could generate. But I’m comfortable saying that both La Bella Vida and Eikova will have spent a material amount of their revenue, and suffered through a lot of mental anguish, litigating this case.

All businesses should speak with an attorney who can help them identify their trade secrets and take steps to protect them. A modest investment in protection now can prevent a disaster later.