Tag Archives: Featured

Can Filing for Bankruptcy Invalidate a Noncompete?

August 9, 2018 By in Noncompete Tags: , , , , Leave a comment

Guest post by Solomon B. Genet.

Debtors and their lawyers sometimes use a bankruptcy filing as an offensive tool. In a recent case, a debtor tried to use his prior bankruptcy to shed his non-compete obligations. While this attempt was not successful, non-compete practitioners should be aware of this effort.

In In re Capps, a July 26, 2018 decision from the District of Kansas Bankruptcy Court, the individual debtor sold his company and signed an employment agreement with the buyer, agreeing to a series of non-compete, non-solicit and confidentiality obligations. The debtor later filed for bankruptcy, and the buyer fired him soon thereafter.  The buyer then discovered that the debtor was breaching his restrictive covenants and brought an action for declaratory relief in the bankruptcy court seeking a finding that the bankruptcy process and discharge did not relieve him of these obligations.

Bankruptcy Judge Nugent agreed with the plaintiff-buyer and rejected the debtor’s arguments, reasoning that: (1) the debtor’s breaches of the restrictive covenants occurred post-bankruptcy, and gave rise to “equitable” (i.e., injunctive) relief and not “a right to payment,” so the debtor did not discharge any debts arising from the agreements; and (2) the restrictive covenants were not “executory” contracts (material obligations on both sides), and therefore could not be rejected through the bankruptcy process.

The Capps debtor was unsuccessful in shedding his obligations.  But—hypothetically—a strategic legal counselor could use the Capps debtor’s arguments in a case with more favorable facts (and perhaps different applicable law) to assist a person subject to a non-compete to obtain relief long before his contracted time-period for his non-compete obligations expired.

A copy of the opinion can be downloaded here.

Federal Circuit Invalidates Financial Analysis Patent, Suggests Trade Secret Protection

May 24, 2018 By in Trade secrets Tags: , , Leave a comment

Since the Supreme Court decided Alice Corp. v. CLS Bank International in 2014, companies have had a difficult time patenting software and business methods. I am not a patent lawyer and this is not a patent blog. But a recent Federal Circuit case shows how companies with this type of IP may want to look to trade-secret laws for protection.

Last week, the Federal Circuit decided SAP America, Inc. v. InvestPic, LLC (a pdf of the opinion can be downloaded here). In this case, a judge in the Northern District of Texas granted judgment on the pleadings in favor of SAP, which filed a declaratory-judgment action seeking to invalidate InvestPic’s patent. The Federal Circuit affirmed.

InvestPic’s patent involved a technique that “utilizes resampled statistical methods for the analysis of financial data[.]” InvestPic claims this is superior to typical financial-market forecast methods that rely on the flawed assumption that “financial data follows a normal or Gaussian distribution.” (This reminds me of The Black Swan’s chapter on “The Bell Curve, That Great Intellectual Fraud.”)

Citing Alice, the Federal Circuit invalidated InvestPic’s patent, finding that it was directed to an abstract idea and did not contain an innovative concept.  This is not an uncommon post-Alice result. But at the end of its opinion, the Federal Circuit made a comment that caught my attention:

There is, in short, nothing “inventive” about any claim details, individually or in combination, that are not themselves in the realm of abstract ideas. . . . [P]atent law does not protect such claims, without more, no matter how groundbreaking the advance. An innovator who makes such an advance lacks patent protection for the advance itself. If any such protection is to be found, the innovator must look outside patent law in search of it, such as in the law of trade secrets, whose core requirement is that the idea be kept secret from the public.

Given the current state of patent law, many companies face a dilemma when trying to monetize potentially abstract ideas: make the disclosures necessary to seek a patent and risk having the patent rejected or invalidated, or adopt a business model that allows for trade-secret protection. This is a complicated analysis that involves many business and legal factors.

As the Federal Circuit noted, trade secrets cannot be publicly disclosed, and they must be reasonably protected. Business models can incorporate these restrictions. For example, it may be possible for a company to license its technology and include confidentiality obligations in the licensing agreement. Companies facing this choice need to involve trade-secret lawyers in strategy discussions and decisions.

Federal Court Addresses Defend Trade Secret Act Immunity

April 6, 2018 By in Defend Trade Secrets Act, Trade secrets, Trade Secrets in Discovery Tags: , , 1 Comment

The Defend Trade Secrets Act, 18 U.S.C. 1030, et seq., provides immunity from liability for misappropriation of trade secrets in certain circumstances, namely if the disclosure:

(A) is made–

(i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and

(ii) solely for the purpose of reporting or investigating a suspected violation of law; or

(B)  is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

Since the DTSA was enacted in May 2016, there have not been many cases analyzing this portion of the statute. The Eastern District of Pennsylvania examined it in a recent opinion, Christian v. Lannett Co., Inc., E.D. Pa. Case No. 16-963 (the opinion can be downloaded below).

Christian is an unusual trade-secret case, as it started when the plaintiff asserted claims for employment discrimination. During discovery, the defendant learned that the plaintiff had retained a company laptop, which led to the plaintiff producing 22,000 pages of documents. Per the defendant, these contained trade secrets.

The defendant then filed a counterclaim under the DTSA, as well as other related claims, based on the plaintiff’s disclosure of trade secrets. But there was apparently no evidence of disclosure to anyone except the plaintiff’s lawyer, who only received the documents to produce them in the litigation.

The court concluded that “Plaintiff’s alleged disclosure was made to Plaintiff’s counsel pursuant to a discovery Order of this Court, within the context of a lawsuit regarding violations of Title VII, the ADA, and the FMLA,” and applied the immunity provision above to bar the DTSA claim.

The court did not specifically cite the immunity provision. And a strict application of that provision would seem to exclude the plaintiff from its protection, since the disclosure was not “solely for the purpose of reporting or investigating a suspected violation of law.” But the court’s decision is well within the spirit of the DTSA, which should not be used to prevent parties in litigation from communicating freely with, and providing discoverable documents to, their counsel.

Christian v Lannett

 

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.

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.

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.

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

October 24, 2016 By in Uncategorized Tags: 1 Comment

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.

5 Warning Signs That Your Trade Secrets Have Been Stolen

September 12, 2016 By in Uncategorized Tags: Leave a comment

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.

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