Trade Secret / Noncompete : Business, Employment, Intellectual Property, and Litigation Attorneys Focused on Trade Secret/Noncompete Issues

As we wind down the holiday season and prepare for next year, it's time to look forward with an eye on the past.  2009 has seen a remarkable number of decisions that chipped away at the enforceability of a company's noncompete agreements with its employees. Noncompete agreements are no longer reliable or effective measures against the loss of valuable innovations, products and services. In 2010, a company's need to protect its valuable information ("trade secrets" = formulas, devices, methods, techniques, or processes) requires a different approach. What steps are available to your company to shore up its ability to keep valuable secrets from your competitors?

An essential New Year's resolution is development and implementation of a Trade Secret Protection Program, tailored to your company's products and services. This year start a company-wide initiative that focuses on identification and protection of valuable and secret information and keep the basics in place. 

1. Review standard form agreements and policies.  Employee policy manuals regarding noncompete, non-disclosure, confidentiality, invention assignment and ownership, nonsolicitation, antiraiding, privacy, computer use provisions, and, most importantly, departing employee procedures and policies will require updates.  Are these provisions consistent?  Are they easy to understand by the employee?  Are the provisions reasonable in scope? 
2. Review existing agreements with current employees.  Do you have signatures of your key inventors, innovators and technical employees on the agreements?  Signed acknowledgments of the policy statements?  Again, updates are most likely needed, especially for long-term employees.
3. Identify each Trade Secret and its value. Make a list if you don't already have one. What are the inventions and innovations that create value for your company? What innovations are in the pipeline on the way to commercial use? Why do these innovations have value? What is the cost of development? What revenues, present or future, are derived from the innovation? What is the value to the marketplace? What about value to your competitors?
4. Confidentiality. Is each invention or innovation a secret from the marketplace? Who has access to information about the development? Is the company taking 'reasonable' steps to keep information secret? Are there multiple levels of security to limit access on a need to know basis? Are you able to document the security measures taken to protect information?
5. Record Keeping.  Where is the "vault" that tracks the trade secrets?  What information is kept in the "vault" and who has access?  How is the information identified, tracked, and updated?  How often?

Development and implementation of a Trade Secret Protection Program is a cross-disciplinary activity that involves legal, IT, HR, finance, and key technical personnel. There are good resources available to develop a trade secret protection program for your company. One such resource is the ISO/IEC 27001, an Information Security Management System with standardized protocols for information security management.

Trade secrets are often the life blood of a company and protectable with reasonable protocols and resolve.

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Cases and issues making the headlines*:

Trade Secret Verdict (December 22)
We previously reported on the Nova Biomedical Corporation trade secret litigation in “In the News…“.  The case has now gone to trial, with Nova Biomedical reportedly obtaining a verdict in its favor. Story here.

Inevitable Disclosure Doctrine (December 22)
A former Alltel Corp. employee hired by Allied Wireless Communication Corp. as its new CIO, was reportedly sued by Verizon (which had acquired Alltel) under the Arkansas Trade Secret Act.  Verizon reportedly asserts that the former employee will inevitably use and disclose confidential information and trade secrets in his new position. Story here.

Pleading Your Case (December 22)
In Bank of America N.A. v. UMB Financial Services Inc., 4:09-cv-00574 (W.D. MO), the United States District Court Judge reviewed under the new Iqbal  and Twombly standards – and found satisfactory – a complaint for, among other things, violation of a non-solicitation agreement. Story here (paid subscription).

Crimes and Punishment (December 20)
Protection of trade secrets through the criminal justice system comes to the attention of the media every now and again.  Here are some recent ones:

• A 35 year old web developer was charged with theft of trade secrets (and wire fraud) relating to how to make his former employer’s web site operate quickly and effectively.  If convicted, he will face 20 years in prison.  Story here and here.
• A former executive pleaded guilty to selling The Home Depot Inc.’s trade secrets to a vendor to give the vendor a competitive advantage over other vendors.  Story here and here. 
• A former Intel Corp. engineer, working for Advanced Micro Devices Inc., was charged with stealing trade secrets valued at $1 billion.  Story here.

Faceoff (December 20)
Facebook continues its quest against improper use of its network, including a recently-filed action against certain alleged high profile hijackers and spammers.  Story here, here, and here.

Employee Hacking (December 20)
Advertising startup Yodle, Inc. accuses former employees, now at alleged competitor, WebVisible, of stealing trade secrets through use of old usernames and passwords.  Story here.

Public Records or Trade Secrets? (December 20)
An appeals court in Iowa affirmed an order that the state’s Department of Transportation release – in response to a public records act request – documents claimed by the filer to be trade secrets. The order requires that the documents be provided to the filer’s competitor. Story here. 

Physician Noncomeptes (December 20)
In some states, physician noncompetes are unenforceable.  In other states, they are as permissible as any other noncompete. The Montana Supreme Court has recently ruled that the enforceability of physician noncompetes depend on whether a jury finds them to be fair. Story here. 

Equitable Tolling Rejected In Utah (December 20)
In some states, the term of a noncompete may be extended to offset the time that the former employee has violated the agreement. In Utah, however, that principle has just been rejected. Story here.

Trade Secrets in Construction (December 20)
Construction information provider, Reed Construction Data, reportedly amended a lawsuit against McGraw-hill Construction Dodge to allege misappropriation of trade secrets through, among other things, the use of companies to pose as fake customers to thereby obtain confidential information.  Story here.

“Instant-On” Case is On (December 20)
Phoenix Technologies Ltd. has reportedly been permitted to continue its trade secrets lawsuit against DeviceVM over alleged misappropriation of “instant-on” software. Story here and here.

Is Justice Delayed Justice Denied? (December 20)
After more than a decade of legal wrangling, a plaintiff in a trade secret dispute has reportedly been awarded almost $300,000. Story here.

Where to Shop? (December 20)
eBay and Craigslist square off over claims of trade secret misappropriation. Story here, here, and here.

*For earlier stories, go to the In the News (archives) page.

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Gene Codes Corporation, an international software firm specializing in bioinformatics software for DNA sequence analysis, filed suit on December 1 against its former Global Manager: Customer Care and Training.  The complaint includes allegations of breach of contract and misappropriation of trade secrets under MUTSA (Michigan Uniform Trade Secret Act, MCL s. 445.1901 et seq.), and requests entry of a temporary restraining order, preliminary and permanent injunction, and attorneys fees.  Among other things, MUTSA provides for injunctive relief to prevent threatened misappropriation of trade secrets.  See, MCL s. 445.1903.

According to the complaint, the manager was one of four Gene Codes employees who had access to both of two highly sensitive databases: the database of bugs, bug fixes and feature proposals, and the customer, sales and lead tracking database.  The manager submitted her resignation to Gene Codes on November 12, 2009, and indicated that she would begin a new job with CLC bio on December 1.  CLC bio is also an international company that, among other things, provides bioinformatics software for DNA sequence analysis.

The manager is alleged to have signed an employment agreement while at Gene Codes.  That agreement, attached to the complaint, prohibits solicitation of Gene Codes clients as well as competition with Gene Codes for a period of two years.  In Michigan, the validity of a noncompete agreement is governed by section 4a of the Michigan Antitrust Reform Act, and related cases.  Reasonable noncompete agreements will be enforced, and the specific facts of the case, such as the duration and geographical scope of the restriction, and the type of employment or line of business, will be analyzed to assist in the determination of reasonableness.  See MCL s. 445.774a. 

The manager has not yet filed an answer to the complaint.

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By John Zabriskie and Benno Weisberg 

Imagine the following scenario: After a bidding contest against all of its major competitors, Company X wins a contract with a small city in downstate Illinois to fill the city's need for widgets over the next 3 years. The city's RFP called for detailed information about the bidders' operations. Before the ink has dried on the contract, the city receives two Illinois Freedom of Information Act ("FOIA") requests for copies of Company X's winning bid. One is from Company Y--a losing bidder and a fierce competitor of Company X. The other is from a reporter for the local newspaper who is writing an investigative report about possible corruption in the city's procurement practices. What can Company X do to prevent release of the detailed information about its operations (which Company X considers trade secret) to Company Y and the reporter?

The answer is likely to change as of January 1, 2010, when a substantially revised version of Illinois' FOIA will take effect. FOIA will still contain an exemption for trade secrets. However, Company X's ability to claim the exemption, and the time frame in which it must do so, may be different.

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Technophiles (and their loved ones) can breathe a little easier, as Judge Ware of the Southern District of California won't be playing the part of the Grinch this year.

As we've discussed in prior posts (here, here, and in our "In the News..." posts), Barnes & Noble's hot new Nook e-reader, which has pretty much become the must-have gadget of the season (Barnes & Noble sold out their original inventory by late October, and has announced that it will be moving more product into "select stores" early next week), had also landed the bookseller in some legal hot water.  On November 2, Spring Designs, a California technology company, sued Barnes & Noble.  Spring Designs claimed that the Nook was developed from trade secrets relating to Spring's own "Alex" e-reader, which it had disclosed to Barnes & Noble under an NDA, and, not surprisingly, moved for a preliminary injunction.

Just yesterday, Judge Ware issued his order (which you can read in full by clicking on the link) on the motion.  Judge Ware ruled that, based on the evidence before him, there was "a genuine dispute over whether the nook(TM) was derived from information disclosed by Plaintiff to Defendant or was the product of earlier independent development by Defendant."  On that basis, he found that Spring Designs had not established a likelihood of success on the merits.  He also noted that, because the motion was heard while Barnes & Noble's product had already been launched while Spring Designs had not yet released its own e-reader, the requested injunction would "alter the status quo, not preserve it."

As such, he denied the injunction.  Which is good news since, if anyone was wondering, I'd love a Nook for Chanukah.

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