Tag Archives: Litigation

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

February 9, 2017 By in Case Summary, Defend Trade Secrets Act, Trade secrets Tags: , , 2 Comments

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

Shark Tank and College Football Non-Competes

December 17, 2015 By in Florida Non-Compete Lawyer, Noncompete, Trade Secrets In the News, Uncategorized Tags: , , , , , , , , , , , , Leave a comment

Two recent stories show why all companies should at least consider implementing non-compete agreements or other restrictive covenants.

First, here’s a link to a short interview with Shark Tank’s Robert Herjavec, talking about his first company. Unbeknown to Robert, his sales manager had set up a side business, to which he funneled half of Robert’s customers. Robert only found out because another employee broke down and told him during her exit interview.

Robert finishes the interview with good advice: “The minute you hire the first employee, you have to be careful.”

We don’t know if the sales manager had signed a non-compete or non-solicitation agreement. Such an agreement could have given Robert far better legal options.

Also, Robert trusted that his employees would be loyal. While it’s obviously good to trust your employees, it’s far better to trust and also have them sign appropriate restrictive covenants.

I also read about how an assistant coach of the Arkansas Razorbacks football team left for the University of Georgia. Bret Bielema, Arkansas’ head coach, was not happy. Apparently, his recently hired coaches signed non-compete agreements that prohibited them for coaching for other SEC schools. But the coach who had left had been hired earlier, and he did not have a non-compete.

Of course, Arkansas should have had its coaches sign non-competes from the outset. And once they decided to require new coaches to sign one, they should have at least attempted to have the older coaches sign as well.

These stories show how non-compete agreements can have value across diverse industries. It’s worth speaking with an attorney to figure out whether your company can benefit from implementing restrictive covenants, or improving existing agreements.

 

Florida Loves Non-Compete Agreements

December 3, 2015 By in Advice, Case Summary, Noncompete, Trade secrets, Uncategorized Tags: , , , , , , , , , , , , , , Leave a comment

Florida’s restrictive-covenant statute, Section 542.335, is one of the most employer-friendly in the country. A recent case from Florida’s Fourth District Court of Appeal, Transunion Risk and Alternative Data Solutions, Inc. v. Reilly, shows how this statute favors an employer trying to enforce a restrictive covenant against a former employee. A copy of the opinion can be downloaded below.

This opinion is short on facts, but the plaintiff sued the defendant for violating a non-compete agreement and sought a temporary injunction. At the injunction hearing, the trial court ruled in the defendant’s favor after the plaintiff finished its case in chief, before the defendant put on any evidence.

The appellate court reversed. First, it looked at the likelihood of irreparable injury, citing the statute’s presumption of irreparable injury that arises when the plaintiff shows a violation of an enforceable restrictive covenant. Here, the appellate court reversed because the defendant did not present evidence:

As the trial court’s ruling was issued before Reilly presented any evidence, Reilly could not have met his burden of presenting evidence overcoming the presumption.

This doesn’t sound right. A defendant should have the right to rebut this presumption simply by cross-examining the plaintiff’s witnesses. That’s what the trial court apparently thought happened here. But the presumption so strongly favors the plaintiff that this appellate court was unwilling to allow the defendant to rebut it without putting on affirmative evidence.

The trial court also concluded that the plaintiff had an adequate remedy at law. But the appellate court reversed this finding, noting that even when a plaintiff has suffered actual money damages,

the continued breach of a non-compete agreement threatens a former employer’s goodwill and relationships with its customers, and nothing short of an injunction would prevent this loss.

This finding essentially eliminates the adequate-remedy-at-law prong of the injunction analysis in restrictive-covenant cases.

Finally, the appellate court reversed the trial court’s finding that the plaintiff had not demonstrated a substantial likelihood of success on the merits. On this point, the appellate court relied on the trial court’s “implied finding” that the defendant violated a restrictive covenant. So once a court finds that the defendant breached, the plaintiff has automatically shown a substantial likelihood of success.

This case shows how Florida’s restrictive-covenant statute provides employers with the upper hand in litigation. As a result, these agreements are a very effective tool for protecting proprietary information and trade secrets. All Florida companies should consult with an attorney to determine whether to implement these types of agreements.

Transunion Risk and Alternative Data Solutions, Inc. v. Reilly

“Just Doin Blow and Erasing Evidence”

November 20, 2015 By in Case Summary, Noncompete, Trade secrets, Trade Secrets In the News, Uncategorized Tags: , , , , , , , , , , , , , , Leave a comment

As the Defend Trade Secrets Act—which would create a federal cause of action for trade-secrets theft—makes its way through Congress, critics have focused on the proposed statute’s ex parte seizure provision. In a nutshell, the statute would allow for the entry of ex parte orders to seize specifically identified repositories of evidence that are at risk of destruction.

I’ve responded to these criticisms multiple times before (see here, here, and here). The statutory protections (e.g., the party subject to the order is entitled to a hearing within 7 days) combined with federal judges’ reluctance to issue ex parte orders are, in my view, sufficient to prevent abuse.

Meanwhile, the threat of evidence destruction is real. A recent case shows how far defendants can go to allegedly destroy evidence of trade-secrets theft.

As described in Law360, a radio-controlled-vehicle company sued several former employees for violating restrictive covenants and misappropriating trade secrets, among other claims. The plaintiff filed a motion seeking sanctions against the defendants for destroying evidence.

According to the plaintiff, the defendants destroyed “scores of emails, texts, and documents that described their scheme to start at least one rival toy car and boat business.”

One of the defendants—who sounds like a real winner—apparently sent a text message talking about how he expected to get served with the complaint, saying “That’s what I’m trying to deal with now so I can’t go out, just doin blow and erasing evidence.”

In misappropriation cases, the evidence is almost always in electronic form. And it’s way too easy for defendants to destroy this evidence. While a plaintiff could seek sanctions (as the plaintiff here is seeking against the guy “doin blow”), a plaintiff would almost always rather have the actual smoking gun proving misappropriation.

The ex parte seizure provision is a powerful tool that may allow companies to preserve critical evidence.

The DOJ Announced Another Trade-Secrets Prosecution. What Does That Mean For Your Company?

May 22, 2015 By in Advice, Trade secrets, Trade Secrets Best Practices, Trade Secrets In the News Tags: , , , , , , , , Leave a comment

There has been a lot of news coverage of the DOJ’s charges against Chinese professors for trade-secrets theft and violations of the Economic Espionage Act. Stories like this have become more common, as the DOJ has increased its focus on prosecuting trade-secrets theft. Often, these cases involve defendants with connections to foreign governments, and China in particular. As these cases have become more prevalent, the federal government has dedicated more resources to combating them.

Unfortunately, this will have little effect on most companies that fall victim to trade-secrets theft. The DOJ appears to have little interest in prosecuting run-of-the-mill trade-secrets theft, even though there may have been violations of a federal statute like the Economic Espionage Act. The DOJ simply does not have the resources to deal with the huge number of these cases. Thus, the vast majority of trade-secret misappropriation cases will be handled through civil lawsuits.

So what should you do if you believe your company has been the victim of trade-secrets theft? The answer is simple: you need to consult with an attorney specializing in this area of the law as soon as possible. Time is of the essence, and even a delay of a day or two could cause serious problems. Your attorney can advise you of your options. If your case is a good candidate for federal prosecution, your attorney should let you know. More likely, your options will involve civil remedies. Either way, you will need to make important decisions very quickly.

When It Comes to Trade Secrets, Ignorance Is Not Bliss

April 24, 2015 By in Advice, Trade secrets, Trade Secrets Best Practices Tags: , , , , , , , , , , Leave a comment

Trade-secret misappropriation cases often involve bad actors who deliberately steal trade secrets. But perhaps just as frequently, trade-secrets are misappropriated by people who simply don’t know better. Many don’t even understand what a trade secret is, let alone that there are laws or other obligations prohibiting inappropriate use or disclosure of trade secrets.

I’ve personally seen this happen over and over. An employee leaves one company to join another in the same industry. He takes many of the documents he created at his old job. These documents contain trade secrets. In his mind, they are his documents. He created them, after all! And at his new job, he uses those documents on behalf of his new employer.

Now both companies have a problem. The former employer’s trade secrets are in a competitor’s hands. And the new employer has unwittingly exposed itself to significant liability.

Both companies are to blame for their problems. The first company did not educate its employees about their responsibilities and legal obligations regarding trade secrets and proprietary information, both while working for the company and after they leave. The second company failed to make sure that the new employee did not bring his prior employer’s trade secrets with him.

There are three primary tools for preventing this situation: contracts, training, and exit/intake interviews. Employees with access to proprietary information should sign a non-disclosure agreement that requires them to keep the information confidential. The agreement should provide that all information belongs to the company even if created by the employee, and must be returned upon termination of employment. And the contract should acknowledge that the employee is not bringing any proprietary info or trade secrets from her prior job.

But employees too often don’t read contracts before signing them. That’s where training comes in. During the on-boarding process, and periodically thereafter, use training sessions to reiterate your trade-secret policy.

Finally, use exit interviews to again instruct the departing employee about his post-employment obligations. Consider having him sign an acknowledgement that he has returned all info and is aware of these obligations. When hiring a new employee, talk with them up front about what info they have from their prior employer. Be sure to consult with an attorney if that discussion raises concerns.

I really believe that many misappropriation cases can be avoided by simply making sure that employees understand these issues. Too often, they do not.

 

Professors Invent Threat of “Trade Secret Trolls”

January 29, 2015 By in General, Trade secrets, Trade Secrets In the News Tags: , , , , , , , , , 8 Comments

I’ve written several times in the past about the proposed legislation to create a federal cause of action for trade-secrets misappropriation (see here, here, and here). I also wrote a response to a letter signed by a number of professors who opposed this legislation. Now, Professors David S. Levine and Sharon K. Sandeen have written a law review article titled “Here Come the Trade Secret Trolls.” This article misses the mark by a mile.

Here is the article’s core argument:

The [proposed federal] Acts are most likely to spawn a new intellectual property predator: the heretofore unknown “trade secret troll,” an alleged trade secret owning entity that uses broad trade secret law to exact rents via dubious threats of litigation directed at unsuspecting defendants.

The use of the term “troll” is meant to evoke patent trolls, who have been the subject of much scorn. But the so-called “trade secret troll” is far different than a patent troll. The latter actually own patent rights, which they wield to seek licensing fees. The article’s mythical trade-secret troll is simply someone willing to bring a frivolous lawsuit to extort an undeserved settlement. I suspect the authors chose this term to piggyback on the negative attention heaped on patent trolls, thereby arming the legislation’s opponents with a pejorative term that may scare legislators or their constituents.

Putting titles aside, the article can’t reconcile its core argument with the fact that, as the authors acknowledge, “trade secrecy has been generally free of similar trolling behavior.” In other words, there is no epidemic of frivolous trade-secret lawsuits under the current state-law framework. (Certainly, there are weak misappropriation cases, just like with any cause of action. But I haven’t seen any evidence to suggest that such cases are disproportionately filed.)

The authors try to make the point that the proposed federal acts would transform trade-secrets law such that threatening and filing frivolous lawsuits would become commonplace. Yet the article does not really explain why this is so. It gets closest when discussing the proposed ex parte seizure provisions. But as I mentioned in my response to the professors’ letter, this risk is highly overblown. Convincing a federal judge to enter ex parte relief is no simple matter. And the defendant will have the right to challenge any seizure order very soon after its entry. Federal judges will not be amused if they have been manipulated into entering unnecessary ex parte orders.

The article fears that “trolls” will be able to threaten an ex parte seizure, which will be sufficient to scare a defendant into paying up before the suit is filed. Yet any innocent defendant will know that the likelihood of such an order being entered is slim. Further, simply sending the letter would undermine an attempt to get an ex parte seizure order. If the plaintiff was able to send a demand letter, thereby putting the defendant on notice of the possible claim, then a judge would be highly skeptical of a claimed need for an ex parte order.

The article also argues that unsettled interpretative questions relating to the acts will fuel frivolous lawsuits. But the article forgets that creating a federal cause of action will quickly lead to a much more robust body of published caselaw interpreting the statute. While there are very few published trial-court-level decisions in state courts, U.S. district court orders are widely available.

Frankly, state courts are much more susceptible to frivolous trade-secrets suits than federal courts. Take Florida, for example. Here, state court judges have to deal with remarkably bloated dockets. In fact, I’ve had multiple cases where it took months to get an emergency injunction hearing. State-court judges generally don’t have law clerks. And in Florida, judges often rotate between civil, criminal, family, and dependency divisions. This latter point is critical: judges often don’t spend enough time in the civil division to develop a familiarity with trade-secrets law. All of these issues lead to uncertainty, which would seemingly aid the unscrupulous litigant looking to extort a settlement. Yet, as the authors themselves acknowledge, we simply have not seen this so-called trolling.

There’s no question that frivolous lawsuits would be filed under the proposed federal legislation, just as like every other cause of action. But there is absolutely no credible reason to believe that such suits can’t be remedied with the typical mechanisms deigned to ferret out meritless claims, like Rule 11 motions.

As I’ve argued in the past, the proposed legislation has tangible benefits that aid trade-secrets owners in protecting their critical proprietary information. The arguments lobbed up in opposition—including the manufactured risk of “trolling”—don’t hold up to careful scrutiny.

Guest Post: Proving Damages in Trade-Secrets Cases

December 23, 2014 By in Advice, Case Summary, Trade secrets Tags: , , , , , , Leave a comment

By Solomon Genet

Proving damages can be difficult in a wide range of cases, often especially so in a trade-secrets case. In a recent Federal appellate decision, the 5th Circuit (painfully for the plaintiffs) identified some of the risks involved. A link to the decision, In re Mandel, 2014 WL 3973479 (5th Cir. Aug. 15, 2014), is below.

Here, two individuals, an IP lawyer and a database expert, came together through a joint-venture entity to develop what they conceived to be a new type of search-engine. This JV hired personnel, retained a development team, and searched for investors.  The relationship then went sour, with misrepresentations made, one partner forming a competing company without disclosing it to the other partner, and that new company raising investor funds.  Suits, counter-suits, and a bankruptcy petition followed.

Later, the bankruptcy court presided over a trial as to whether the chapter 11 debtor (before filing for bankruptcy) misappropriated trade secrets under Texas law.  While finding that the debtor-defendant was liable, the court rejected each of the plaintiffs’ damages theories (they proposed a number of them).  But then, the bankruptcy court awarded damages—$1 Million to one plaintiff and $400k to another—“without explaining the damages theory on which it relied or identifying the evidence that supported these awards.”

Although the Fifth Circuit stated that in trade-secret misappropriation cases: (1) damages need not be proved with great specificity; (2) a flexible damages approach is appropriate; (3) uncertainty as to damages does not preclude recovery; and (4) only an approximation is needed, as long as there is a just and reasonable inference in support; it held that since the trial / bankruptcy court neither identified the theory of damages nor explained the evidentiary support for the amounts awarded, even this relaxed standard was not satisfied. The Fifth Circuit remanded back to the bankruptcy court to clarify the damages issue.

Accordingly, as a practice pointer, a plaintiff harmed by trade-secret misappropriation should ensure that the court identifies how it arrived to the amount of damage suffered, and not just identify the amount of monetary damage.

Note: this decision applied Texas common law, which has since been superseded by Texas’ adoption of the Uniform Trade Secrets Act.

Solomon Genet is a partner at Meland Russin & Budwick, P.A. in Miami, FL. He specializes in complex commercial litigation, business insolvency, and financial-fraud-related matters in the State and Federal courts.

In re: Mandel

AZ Supreme Court: Trade Secrets Act Does Not Preempt Claims for Misappropriation of Confidential Info

November 20, 2014 By in Case Summary, Trade secrets Tags: , , , , , , , Leave a comment

I’ve previously written about the Uniform Trade Secrets Act’s (UTSA) preemption provision, which preempts tort and other claims providing civil remedies for trade-secret misappropriation. Yesterday, the Arizona Supreme Court held that the Arizona Trade Secrets Act (ATSA), which is based on the UTSA, does not preempt common-law claims for misappropriation of information that is not a trade secret.

In this case, the former president of a public relations firm was sued by that firm when she left to start a competing PR firm. The plaintiff PR firm brought a claim for unfair competition, which was based on the use of confidential information the defendant learned while working for the plaintiff. The trial court dismissed the claim, finding that the ATSA preempts claims arising from the misuse of confidential information, even where the information does not rise to the level of a trade secret.

The Arizona Supreme Court disagreed, relying primarily on the plain language of the ATSA. The court did acknowledge the fact that other states have held that these types of claims are preempted. In states where misappropriation claims based on non-trade-secret confidential information are viable, it is often advisable to bring both a trade-secrets misappropriation claim and an alternative (or independent) claim for misappropriation or conversion of confidential information.

This case contains one other point of note. The defendant argued that allowing claims for misappropriation of confidential information would result in an “absurd” result. She noted that a plaintiff could obtain more in punitive damages on the misappropriation claim than it could on an ATSA claim, which allows for exemplary damages of twice actual damages where the misappropriation is willful and malicious.

In response, the court offered very helpful language to a plaintiff seeking to prove exemplary damages under the ATSA:

That AUTSA authorizes a trial court, rather than a jury, to award exemplary damages of no more than twice the amount of actual damages . . . is not necessarily anomalous. In cases of willful and malicious misappropriation, punitive damages might be easier to obtain under AUTSA than under our common law, which requires clear and convincing evidence of a defendant’s “evil mind” for a punitive damages.

Since many misappropriation of trade secrets are based on willful conduct, this case may be worth citing when seeking exemplary damages.

 

Will the “Internet of Things” Be A Nightmare for Trade Secrets?

September 22, 2014 By in Advice, Trade secrets, Trade Secrets in the Cloud, Trade Secrets In the News Tags: , , , , , , , 3 Comments

I’ve been on a bit of a hiatus from posting over the past couple of weeks, during which I had a bench trial on a trade-secrets injunction. Since that case is still pending, I’m not going to write about it just yet.

Today, let’s look at the so-called “internet of things” — the increasing number of household, business, and other objects that are now internet enabled. I love being able to access things like my home alarm and thermostat remotely via my iPhone. And there’s no question that the “internet of things” will be growing exponentially in the near future. But does this present a threat to trade secrets and proprietary information?

A recent blog post by Michael Jordon shows the risks. He exposed security weaknesses in internet-enabled printers by getting a Cannon Pixma wireless printer to run the classic video game “Doom.”

The post contains a lot of technical details. But most importantly, his exercise shows that internet-enabled printers lag far behind traditional network devices when it comes to security. This is critical: if someone can hack into your company’s printers, they could have access to all of the documents that were printed.

Jordon’s organization recommends avoiding the internet of things entirely:

Context recommends that you do not put your wireless printers on the Internet, or any other ‘Internet of Things’ device.  To defend against the CRSF [cross-site request forgery] attack, well don’t follow any dodgy links is the best advice I can come up with.  Context is not aware of anyone in the wild actively using this type of attack, but hopefully we can increase the security of these types of devices before the bad guys start to. Finally, make sure that you always apply the latest available firmware to your devices. This is often not an automatic process and may require checking on the manufacturer’s website for updates.

As time goes on, it will be very difficult, if not impossible, to avoid using the “internet of things” in a business context. When you do connect devices to the internet, assume that they have security vulnerabilities. Thus, before connecting the device to the internet, you need to work with your IT department/consultants to make sure that it has adequate security features.

 

%d bloggers like this: