Federal Court Denies Expedited Discovery In Defend Trade Secret Act Case

Trade-secret-misappropriation cases can move fast. Often, the plaintiff files a motion for temporary restraining order alongside its complaint. Sometimes, the plaintiff has enough evidence already to justify a TRO. Other times, the plaintiff needs to take discovery before the TRO hearing.

But the typical discovery deadlines in the rules of civil procedure are not well suited for these TRO proceedings. Thus, plaintiffs regularly seek expedited discovery. In my experience, the parties are often able to agree to an expedited discovery schedule, since defendants usually want to take discovery as well. But when the parties cannot agree, the court needs to get involved. A recent case out of the Middle District of Florida shows the importance of narrowly tailoring expedited discovery requests, particularly when asking a judge to permit this type of discovery.

In Digital Assurance Certification, LLC v. Pendolino, the plaintiff works with municipal bond issuers to comply with various SEC regulations. The plaintiff alleges that the defendant, a former employee, left to work for a competitor. And in his final week of work, according to the plaintiff, the defendant used a USB drive to access every document on the plaintiff’s shared drive. Thus, the plaintiff brought claims for violations of the Defend Trade Secret Act and the Florida Uniform Trade Secrets Act, among others, and filed a motion for a TRO.

In advance of the TRO hearing, the plaintiff filed a motion for expedited discovery. The court denied the motion. A copy of the order can be downloaded below.

The court first set forth the standard for determining whether the plaintiff had demonstrated good cause for expedited discovery:

Factors the Court considers in deciding whether a party has shown good cause include: (1) whether a motion for preliminary injunction is pending; (2) the breadth of the requested discovery; (3) the reason(s) for requesting expedited discovery; (4) the burden on the opponent to comply with the request for discovery; and (5) how far in advance of the typical discovery process the request is made.

Here, the court focused on the second factor, the breadth of the plaintiff’s requests. The court took issue with the scope of the plaintiff’s requests, noting that “while these matters may be relevant to the issues raised in DAC’s complaint, they go far beyond what is needed for the hearing on the motion for a temporary restraining order.”

Take away: When bringing a motion for a TRO, the plaintiff’s lawyers need to figure out quickly whether the parties will be able to agree to an expedited discovery schedule. If not, the plaintiff needs to draft discovery requests that are laser focused on the issues relevant to the TRO hearing. In my experience, judges will allow this type of discovery, as long as the requests are reasonable. Conversely, judges will protect defendants from overbroad discovery.

Digital Assurance Certification, LLC v. Pendolino

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.

Federal Court: No Heightened Pleading Standard Under the Defend Trade Secrets Act

As more plaintiffs bring claims under the shiny new Defend Trade Secrets Act, we continue to learn about how courts are interpreting this statute. On Tuesday, the District of New Jersey answered an open question: whether the statute, in conjunction with Twombly/Iqbal, requires a heightened pleading standard for misappropriation. In Chubb INA Holdings, Inc. v. Chang, the DNJ declined to apply such a standard. A copy of the opinion can be downloaded below.

In this case, Chubb sued its former employee and its competitor Endurance, alleging that the former employee worked with Endurance to solicit a large number of employees from Chubb’s real estate and hospitality division. The goal was to hire enough Chubb employees to create a “turnkey” operation for Endurance. In the process, Chubb alleges, the former employees took Chubb’s confidential information. Chubb sued for, among other things, violations of the Defend Trade Secrets Act.

The defendants moved to dismiss, arguing that Chubb did not offer sufficient allegations of actual misappropriation, as opposed to inevitable disclosure. In denying this motion, the court found that Chubb alleged “more than the mere possibility of misconduct,” citing to Ashcroft v. Iqbal. The court also focused on the pleading standard:

Plaintiffs “need not make out specific allegations as to exactly how Defendants used or disclosed Plaintiff[s’] trade secrets; there is no heightened pleading standard for a misappropriation claim, and Plaintiff[s are] entitled to seek discovery to support [their] allegations setting forth a prima facie claim.”

The court was quoting from a case interpreting a New Jersey state-law claim for trade-secrets misappropriation.

This is obviously a plaintiff-friendly interpretation of the statute. It allows plaintiffs to plead misappropriation more generally, and then obtain discovery to sharpen the details.

Interestingly, the court’s approach here—relying on reasoning from a court in its state interpreting that state’s trade-secrets law—could result in state-by-state differences in how the DTSA is interpreted.

Chubb v. Chang MTD Order

The New Protecting Trade Secrets

The world is changing, and so is this blog. Some of these changes are visual — you can see our new site design. But more importantly, there will be some substantive changes as well.

This blog is not designed to be political. It exists to provide insight, advice, and timely legal updates to those interested in trade secrets and protecting proprietary information. But we’ve arrived at a place where this blog’s purpose has intersected with the political world.

I believe President Trump’s actions have put American companies’ trade secrets at risk. I’ve written about that several times, including here and here. I am going to continue to write about how the new administration’s actions affect companies looking to protect their proprietary information, for better or worse. But understand: this is not a Republican vs. Democrat issue. Here, I am concerned only with how the President is (or hopefully isn’t) a threat to your trade secrets.

And I will, of course, continue my posts about recent caselaw, trade secrets in the news, and general advice.

I welcome any feedback about the new Protecting Trade Secrets.

A Fishy Dilemma: When to Seek an Ex Parte Injunction When You Suspect Trade Secret Theft

I’ve said it before: When it comes to protecting trade secrets, time is of the essence. A recent case out of the Middle District of Florida, Primo Broodstock, Inc. v. American Manufacture, Inc., shows what happens when a company that suspects trade-secrets theft sleeps on its rights. But this case has an interesting twist: The court suggests that the plaintiff should have moved quicker, even absent sufficient evidence of misappropriation. A copy of the order can be downloaded below.

This case involves shrimp. The plaintiff genetically engineered disease-resistant shrimp, called Primo Shrimp. It contracted to use the defendant’s shrimp-growing facility to study and breed Primo Shrimp for worldwide distribution. As often happens, the relationship fell apart. This led to an initial lawsuit, which the parties settled pursuant to an executed term sheet. Later, the plaintiff suspected that the defendant was going to sell live Primo Shrimp in China, in violation of the parties’ agreement and the plaintiff’s intellectual property rights in the shrimp.

Thus, the plaintiff filed this suit, which includes claims for violations of the Defend Trade Secrets Act and the Florida Uniform Trade Secrets Act. The plaintiff sought, twice, an ex parte temporary restraining order. The court denied both requests.

This opinion deals with the second request for a TRO. The court’s decision was, in large part, based on the plaintiff’s failure to move quickly:

More importantly, even if there is an emergency, it is one Plaintiff should have sought to prevent months ago. Plaintiff knew since at least as early as mid–September that Defendants believed the live Primo Shrimp were their property to sell after being left at AMI’s facility. Plaintiff also had evidence that Defendants had been actively looking (even if not yet “attempting”) to sell Primo Shrimp breeders to the market since at least as early as July 2016. Yet Plaintiff did not act to protect any continued legal rights in the animals. Having failed to do so, Plaintiff is not now entitled to ex parte injunctive relief.

But this case is more than just another illustration of the need to move quickly. In a footnote, the court suggests that the plaintiff should have done so even absent sufficient evidence:

Plaintiff’s failure to act is particularly inexplicable in light of the parties’ contentious relationship and prior litigation history. In his affidavit, Vice President Randall Aungst explains that Primo delayed seeking injunctive relief because, until recently, there was insufficient evidence showing that AMI was attempting to sell live Primo Shrimp. Maybe so, but that does not mean Primo could not have sought declaratory relief as to the parties’ rights and obligations under the Term Sheet, after receiving the letter from AMI’s attorney.

So according to the court, the plaintiff should have, at a minimum, brought a declaratory judgment action to resolve the dispute. Or filed for an ex parte TRO earlier, even though the plaintiff did not have sufficient evidence.

I disagree with the court’s analysis. Parties should not file for an ex parte TRO unless they can offer evidence justifying that extraordinary relief. And while a party is investigating, it should not have to file a declaratory judgment action, thus tipping the defendant off to its intentions. But this case suggests otherwise.

Investigating trade-secrets theft can create a strategic dilemma. Sue too early, without sufficient evidence, and the court could deny your request for an early injunction. Wait, and the court could say that you slept on your rights. These considerations require complex analysis that must be performed extremely quickly. That’s why it is critical to work with a trade-secrets attorney before you suspect misappropriation. That way, once you discover misconduct, you have access to an expert attorney who is familiar with your business and can offer informed advice as quickly as possible.

Primo Broodstock Inc. v. American Mariculture Inc.

AIPLA Trade Secrets Summit – March 2-3 in Atlanta

The American Intellectual Property Law association will be holding its annual Trade Secrets Summit at Emory University in Atlanta, GA, on March 2-3. You can find more information about the summit here.

I highly recommend this conference for anyone who reads this blog. It is an outstanding opportunity to learn about the latest developments in trade-secrets law, while networking with some of the country’s top trade-secrets attorneys. You can also earn a boat load of CLE credits.

College Football Trade-Secrets Scandal

A scandal involving Wake Forest University’s football team offers lessons for companies protecting their trade secrets. And a phenomenal name.

The Wake Forest coaches gave one of their radio broadcasters, Tommy Elrod, full access to the football team’s game plans. And Elrod has been leaking those game plans to Wake’s opponents — for years. Thus: “WakeyLeaks.”

Since the story broke, several universities have admitted receiving game plans, and the Atlantic Coast conference has fined Louisville and Virginia Tech.

A college-football game plan can be a trade secret. After all, it is information that, if kept secret, arguably offers economic advantage. Given the amount of money at stake, it’s remarkable that college and professional teams don’t adopt the same level of protections as a company guarding its trade secrets.

This episode shows that when it comes to trade secrets, access must be on a “need to know” basis. Wake Forest had no reason to share the full details of its game plans with a  radio broadcaster. When only give your trade secrets to those who need them for their jobs, you reduce the chance of unwanted disclosure.

Also, like Louisville and West Virginia, many companies encounter a competitor’s trade secrets, most often through new hires that bring a former employer’s information with them. But using this information creates a huge risk. Here, Louisville and West Virginia are facing fines and bad PR (and, though unlikely, a possible lawsuit for trade-secrets misappropriation). Use your employee-onboarding process to ensure that new employees don’t have, and don’t use, a prior employer’s trade secrets.

Trade-secret issues arise in all businesses and industries, including college and professional sports. And all companies face the risk of unwanted theft or disclosure of their proprietary information. It is critical to work with an attorney to protect your trade secrets.

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.

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