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

December 15, 2017 By in Case Summary, Florida Non-Compete Lawyer, Trade secrets, Trade Secrets In the News Tags: , , , Leave a comment

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

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

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

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

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

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

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

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

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

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

Florida Supreme Court Issues Landmark Noncompete Opinion

September 17, 2017 By in Case Summary, Florida Non-Compete Lawyer, Noncompete Tags: , , , , 1 Comment

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

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

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

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

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

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

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

A copy of the opinion can be downloaded here.

Bitcoin, Blockchain & Trade Secrets: An Introduction

July 15, 2017 By in Blockchain, Trade secrets Tags: , , , , , 1 Comment

I’m willing to bet that most readers of this blog have heard of Bitcoin. But I’m not sure how many know about the technology it’s based on, called blockchain. If you haven’t heard of blockchain, now’s the time to learn, since it has the potential to be the most transformative technology since the internet.

I’m going to be writing more about blockchain and the unique trade-secrets issues facing the many companies rushing to develop applications and other technology based on blockchain. But first, I want to give a primer for those who haven’t heard of it.

Blockchain is essentially a database that is distributed among a large number of computers on a network. Each computer with access to the blockchain has an identical copy of the database. Here’s a simple example to explain how it works, from this explanatory post that compares blockchain to a “record book”:

To be clear, this isn’t just one record book stored in a central location that is shared by many. There are thousands of copies of this record book, stored on computers all around the world, both home computers and business servers – hence the term “decentralised”. This record book can be used to record many kinds of things, however I’ll use sending and receiving money as the primary example, as it’s the most common one right now.

When John wants to send money to Sue, a new line item is created detailing that transaction. This line item then gets sent off to hundreds of other computers who have a copy of the record. Those computers confirm that this transaction is authorised, and ultimately they agree (or disagree) that everything about the transaction is legitimate before giving that line item a tick of approval. It has to match up perfectly on every copy of the record.

Each transaction, here John sending money to Sue, is a “block,” which when added to all the prior blocks forms a kind of “chain.” Hence, blockchain.

Since each computer with access to the blockchain has an identical copy of the database, fraudulent transactions are nearly impossible. If any one computer has a blockchain entry that all of the others don’t recognize, that entry is rejected. Entries are only added if all of the computers with access to the database agree.

The first “app” based on blockchain is Bitcoin, a cryptocurrancy. You can watch a short video that explains Bitcoin here. Bitcoin was the first truly digital currency, which allowed the transfer of money without the need for any centralized institution like a bank. Now there are a number of cryptocurrancies with names like Ether and litecoin.

But blockchain’s potential goes far beyond currencies. It can be used to streamline, simplify, and secure a wide variety of transactions, such as supply-chain management, digitial voting, collecting taxes, and recording real estate transfers and ownership. Essentially, any transaction involving value could be conducted—and improved—on the blockchain. Some think that the entire worldwide financial system will eventually move to blockchain — and I agree. Additionally, developers are using a blockchain platform called Etherium (which also underpins the Ether cryptocurrancy) to create “smart contracts” — essentially programming code that is capable of executing or enforcing contractual terms. This is a powerful, but complicated, concept that I will discuss in more detail in a future post.

Companies large and small are racing to develop new “apps” based on blockchain technologies.  This entire industry is essentially in the research-and-development phase, which means that trade-secrets issues abound. These companies can benefit from tech-savvy lawyers who understand how to protect this rapidly developing information.

This post is a very basic introduction to blockchain. I’m fascinated by the technology and see virtually limitless potential. If you want to learn more, I’d recommend The Internet of Money, an excellent book by Andreas M. Antonopoulos. And stay tuned — I intend to explore the intersection of blockchain and trade secrets here at Protecting Trade Secrets.

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

June 15, 2017 By in Advice, Case Summary, Florida Non-Compete Lawyer, Noncompete Tags: , , , , , Leave a comment

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

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

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

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

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

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

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

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

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

 

One Simple Step in Outlook to Protect Your Trade Secrets

May 28, 2017 By in Trade secrets, Trade Secrets Best Practices, Uncategorized Tags: , , Leave a comment

If you and your employees use Outlook, you can take one simple step now to dramatically reduce the risk of inadvertent sharing of confidential information: Disable email-address auto fill.

Everyone loves this feature. You type the first few letters of someone’s name, and Outlook fills in an email address. But the increased efficiency comes at a cost, as everyone occasionally sends an email to the wrong person whose name is similar to the intended recipient.

If that email contains confidential info, you’ve just compromised it. Hopefully, you sent it to someone friendly who will comply with your embarrassed request to delete the email. Even if there’s no confidential information, the recipients may question your ability to exercise discretion when necessary. (Also, imagine later trying to prosecute a trade-secrets action and having to produce in discovery an email sending the info at issue to some random guy.)

So I strongly recommend that you disable this feature. And have your IT department disable it for all employees. The relatively minor loss of efficiency is outweighed by the reduced risk of unwanted disclosure. And there’s an added benefit: not having to send sheepish apology emails to the mistaken recipients (and sometimes to the other intended recipients who now have an interloper privy to the discussion).

Here’s how you disable this feature:

File –> Options –> Mail –> Send Messages –> Deselect the radio button for “Use Auto-Complete List to suggest names when typing in the To, CC, and Bcc lines”

ABA Ethics Opinion: Trade-Secrets Lawyers Need to Encrypt Emails

May 11, 2017 By in Advice, Cybersecurity, Trade secrets, Trade Secrets Best Practices Tags: , , , , 1 Comment

By definition, lawyers working on trade-secrets issues, whether in litigation or otherwise, have access to their clients’ most confidential information. And, of course, these lawyers routinely communicate with clients via email, including about the trade secrets. Sometimes, even the trade secrets themselves are exchanged via email.

This raises ethical issues. Recently, the ABA Committee on Ethics and Professional Responsibility issued a formal opinion addressing lawyers’ ethical obligations when transmitting confidential client information. The opinion can be downloaded here.

All lawyers who deal with trade-secrets issues should read the opinion. But here are some highlights:

The opinion recognizes that law firms are hacking targets because:

(1) they obtain, store and use highly sensitive information about their clients while at times utilizing safeguards to shield that information that may be inferior to those deployed by the client, and (2) the information in their possession is more likely to be of interest to a hacker and likely less voluminous than that held by the client.

It then discusses applicable ethical rules, concluding that “lawyers must exercise reasonable efforts when using technology in communicating about client matters.” So what are reasonable efforts?

What constitutes reasonable efforts is not susceptible to a hard and fast rule, but rather is contingent upon a set of factors. In turn, those factors depend on the multitude of possible types of information being communicated (ranging along a spectrum from highly sensitive information to insignificant), the methods of  electronic communications employed, and the types of available security measures for each method.

The opinion specifically mentions lawyers who deal with trade secrets, since those matters “may present a higher risk of data theft.” The fact-based analysis is often relatively simple in trade secrets cases: if you are transmitting your client’s trade secrets or related information, you may need to use “particularly strong protective measures”:

A fact-based analysis means that particularly strong protective measures, like encryption, are warranted in some circumstances. Model Rule 1.4 may require a lawyer to discuss security safeguards with clients. Under certain circumstances, the lawyer may need to obtain informed consent from the client regarding whether to the use enhanced security measures, the costs involved, and the impact of those costs on the expense of the representation where nonstandard and not easily available or affordable security methods may be required or requested by the client. Reasonable efforts, as it pertains to certain highly sensitive information, might require avoiding the use of electronic methods or any technology to communicate with the client altogether, just as it warranted avoiding the use of the telephone, fax and mail in Formal Opinion 99-413.

There is a simple takeaway for all trade-secrets lawyers: think very carefully about how you are transmitting confidential client info. This requires an open dialogue with the client. You need to figure out how you will be protecting this data while in transit (and at rest, but that’s a separate issue). At my firm, we have the capacity to encrypt individual emails on-demand, which can allow for secure transmission of sensitive data.

But this sensitive data isn’t only shared with clients. Often, it will need to be produced in litigation. Lawyers spend a lot of time negotiating protective/confidentiality orders with attorney’s eyes only (AEO) protections. But don’t forget to securely transmit AEO documents to the other side. For example, my firm uses a secure/encrypted document sharing platform.

Trade-secrets cases often move fast. But this ABA opinion shows that regardless of how intense the litigation becomes, lawyers must be cognizant of their obligations to protect clients’ confidential information.

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

May 1, 2017 By in Case Summary, Trade secrets Tags: , Leave a comment

Guest post by Solomon B. Genet

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

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

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

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

 

 

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

April 14, 2017 By in Trade secrets, Trade Secrets Best Practices, Trade Secrets In the News, Uncategorized Tags: , , , Leave a comment

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.

The Cybersecurity Article that Every Executive Should Read Immediately

April 6, 2017 By in Advice, Cybersecurity, Trade secrets, Uncategorized Tags: , , , , , , Leave a comment

I love this article, titled Why America’s Current Approach to Cybersecurity Is So Dangerous. It should be required reading for all executives at companies at risk of a cyber attack — in other words, all companies. While the whole article is great, its core message can be reduced to a single sentence: People, not technology, are the key to reducing the risk of cyberattacks. I could not agree more, as I’ve written about before. Every company needs to ask: what can we do to create a culture of protection?

The article starts by identifying the problem:

We should be concerned that, as a society, our minds go mushy when it comes to “digital literacy,” “information security,” “online safety,” or whichever name we choose. In fact, that mushiness is a major reason why America’s current approach to cybersecurity is so dangerous. We’re ignoring the behaviors of the overwhelming majority of actual users, and therefore leaving the largest attack surface undefended. . . . To the extent we are all part of the contest in cyberspace, we’re essentially deploying our troops without armor, our submarines without sonar.

And as a result, “cybersecurity has transformed what is actually a ‘people problem with a technology component’ into its exact opposite.” Yes! Technology is not a panacea for preventing cyber attacks. Technology can’t protect your company’s biggest vulnerability: the people working there. “Until we embrace a vision of public cybersecurity that sees all people, at all ranges of skill, as essential to our collective security, there will be no widespread cybersecurity.” The same goes with your company. You can spend millions or more on tech-based protections, but if you ignore the human risk, your security is virtually certain to fail. And of course, if you are at risk of a cyberattack, you are at risk of trade-secret theft.

The article finishes with a great analogy between cybersecurity and public health:

We need to get better to increase our herd immunity against botnets. We need to see that cybersecurity—like all aspects of safety, security, and resilience—is a shared responsibility. Better devices and apps won’t save us, since there are myriad other ways that individuals—even highly trained ones—become the weak link allowing bad guys to access personal, corporate, and government information assets. And almost all efforts at online safety, while well-meaning, are so poorly designed as to preclude knowing whether they work. It’s not magic: As with health or safety education, we need to start with basic steps and repeatable behaviors—like hand-washing or looking both ways before crossing.

This is the key. In a mature organization that has fully embraced and achieved a culture of protection, the employees will treat cybersecurity as second nature. Good habits will have become routine. Unfortunately, I have yet to encounter a company that has reached this point. For a variety of reasons—dependence on technology first among them—just about all employees have a host of bad habits that put the company at risk.

Creating this culture is not easy. To the contrary, it will require repeated, sustained effort, initiated and supported from the very top of the organization down, over a long period of time. Nor will it guarantee that all cyberattacks will be thwarted. But I see no viable alternative. Any company that has not made employee-level protection a top priority is virtually certain to suffer repeated cyberattacks.

Florida’s Restrictive Covenant Statute: The Power of Presumption

March 16, 2017 By in Case Summary, Florida Non-Compete Lawyer, Noncompete, Trade secrets, Uncategorized Tags: , , Leave a comment

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

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

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

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

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

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

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

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