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

Cases and issues making the headlines*:

More Noncompetes and Celebrities (January 25)
CBS’s radio morning personality in DC, Donnie Simpson, is reportedly leaving CBS. According to the story in the Washington Post (here), Simpson will be prevented from joining a competitive station for 13 and ½ months as a result of a noncompete agreement with CBS.

Fashion and the Computer Fraud & Abuse Act (January 25)
Magazine publisher Conde Nast is reportedly pursuing information from third-party providers about unknown individuals who have allegedly improperly used other people’s usernames and passwords to access and obtain files from Conde Nast’s computers. Story here.

China Prosecuting Alleged Trade Secret Theft (January 23)
Chinese police have reportedly arrested four employees of Australian company Rio Tinto Ltd on charges of, among other things, trade secret infringement. Story here.

Cloud Computing and the CFAA – a Call to Arms (January 23)
As more people are cloud computing, Microsoft has reportedly called on the federal government to “modernize the laws” (including the Computer Fraud and Abuse Act) to ensure greater security. Stories here, here, and here.

Trade Secret Settlement (January 23)
The trade secret lawsuit between semiconductor competitors, Applied Materials Inc. and Advanced Micro-Fabrication Equipment Inc. (founded by former Apple employees), has reportedly been settled. Story here (paid subscription).

MA Noncompete Bill (January 23)
The Massachusetts Bar Association will be holding a roundtable on the proposed MA Noncompete legislation. Speakers are the bill’s sponsors, State Representative Lori Ehrlich and State Representative Will Brownsberger; lawyer and lead author/advisor on the bill, Russell Beck, and lawyer Andrea Kramer. Information here.

Conan O’Brien’s Noncompete Resolved (January 23)
Almost as quickly as it started, Conan O’Brien is reportedly leaving The Tonight Show and, as a result of a noncompete agreement, off the air until September 2010. Of course, he did reportedly receive $45 million for the trouble – of which he is said to be giving $12 million to his staff. Stories here, here, and here. 

The Muffin Man (or Woman) and Trade Secrets (January 23)
Bimbo Bakeries USA Inc. has reportedly sued a former executive who left for competitor Hostess Brands Inc. The case was brought in Pennsylvania and seems to rely on the inevitable disclosure doctrine as the basis for a request to enjoin the former executive – who is supposedly one of the few people in the world who knows the recipe for Thomas’ English Muffins. Story here (paid subscription).

No Heart When it Comes to Trade Secrets (January 23)
Berkeley Heartlab Inc. has reportedly filed a lawsuit alleging trade secret misappropriation (among other things) by its former employees and their new employer. Story here (paid subscription).

Motorola Sues Former Exec (January 23)
Motorola has reportedly sued a former executive who left to join Nokia. The reported basis for the lawsuit is the protection of Motorola’s trade secrets. Story here.

Foley’s 5 Part Trade Secret Series (January 23)
Foley & Lardner’s Trade Secret / Noncompete Practice just completed a 5-part web conference series on trade secret protection. The series will be available here. Each part is a “stand alone” topic, but all 5 combine together for a comprehensive overview of trade secret / noncompete issues. Enjoy!

Noncompetes and Newscasters (January 3)
In a recent example of noncompetes applied in the broadcast industry, former ABC News correspondent Jan Crawford was reportedly prevented, until now, from joining “Face the Nation with Bob Schieffer.” Story here and Ms. Crawfod’s initial blog post for CBS News here.

Communion and Trade Secrets (January 3)
A manufacturer of a “‘rapidly reloading’ communion host dispenser” is reported to have sued a former employee, claiming that the employee is unlawfully using the company’s trade secrets to make a competitive communion host dispenser. Story here and here.

Trade Secret Misappropriation without the Trade Secrets (January 3)
The Court of Appeals of California, reversing a decision by a trial court, permitted a party who no longer possessed a trade secret to continue its lawsuit against the party who had allegedly misappropriated the trade secret. Court of Appeals decision here.

35 Years of Trade Secret Theft (January 3)
A former plan manager of a manufacturing company was reportedly accused of having stolen trade secrets from his former employer over the course of 35 years and providing the stolen trade secrets to a company in India.

CFAA Used for Original Purpose (January 3)
The Computer Fraud and Abuse Act, which was originally designed to target computer hackers, was subsequently amended to reach well beyond its original purpose. Recently, however, a publisher reportedly sued unknown hackers for allegedly hacking into the publisher’s computers and posting articles online before the publisher published them. Story here and here.

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

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By Jeffrey S. Kopp and Scott R. Kaspar

In non-compete cases, often the most powerful evidence that will convince a judge to enter an injunction is computer records and files showing that an employee or former employee has illegally downloaded confidential or trade secret information on his or her way out the door.  For instance, three employees of one of our clients recently quit to go work for a competitor, and on the eve of their departure they downloaded spreadsheets, cost models, forms, and customer proposals - most likely so that they could use them under their new employment.  Proving what these employees were up to was critical for our client's ability to show the judge that this conduct warranted an injunction.

Often, companies do not have the capability to analyze computer data in-house, so they need to retain a forensic specialist to examine laptops, look for hidden metadata, and see whether files have been altered, copied, or deleted.  Under some state private investigator licensing laws, such computer forensic examiners must be licensed as private investigators.  Some state statutes, including Michigan's, go so far as to expressly include a licensing requirement for anyone who conducts "computer forensics," which is defined as the "collection, investigation, analysis, and scientific examination of data held on, or retrieved from, computers, computer networks, computer storage media, electronic devices, electronic storage media, or electronic networks, or any combination thereof."  MCL § 338.822.  While certain categories of people are excluded from the definition, such as in-house IT professionals, attorneys licensed in the state, and CPAs who conduct financial investigations, the majority of computer consultants that would be retained to examine a hard drive likely fall within the definition of the Act.  Other states, including Florida, South Carolina, Texas, and others also either have express licensing statutes or have broad Private Investigator licensing statutes that also can be interpreted to cover computer forensic examiners.

Violation of a licensing statute at a minimum will subject the forensic examiner to a fine from the licensing state.  However, the implications could be more severe, including an order from a court or from the state prohibiting the forensic examiner from testifying before a court or even possibly the exclusion of evidence.  Considering these risks, it is prudent to make sure that any computer forensic examiner retained in non-compete cases is properly licensed in the state where the examination is being conducted.

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A common debate in noncompete drafting circles is whether to define the prescribed "business" or refer to the "business being conducted by the Company," or words to that effect. In a nutshell, those in favor of defining the business tend to believe that instructing the employee (and eventually the court) with specificity as to which lines of business are within the scope of the noncompete is preferable, whereas the folks choosing to refer to the "business being conducted by the Company" may be concerned that defining the business specifically may preclude application of a noncompete to new product lines that emerge following the execution of the noncompete.

Drafting decisions made on this issue can have far-ranging effects, causing the trier of fact to determine what a competing business is. Note the case of Luminar Laval Ignite Limited v. Mama Group PLC and Mean Fiddler Holdings Limited, in the First Division, Inner House, Court of Session in Edinburgh, Scotland (http://www.scotcourts.gov.uk/opinions/2010CSIH01.html), which involves a noncompete in which a music venue was sold by one group to another. The selling group operated a nearby music venue and, in the purchase and sale agreement, restricted the purchasing group from operating a music venue that engages in "late night entertainment in direct competition on a like for like basis with the discotheque business" of the selling group, although the purchasing group was specifically permitted to operate the purchase property "as live music venue, or a bar at which music is played."

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Before we get too far into 2010, let's take stock of the most important developments in trade secrets and noncompete law in 2009. Whether they represent a new trend or a reinforcement of existing law, these developments had a big impacted in this area of practice last year and likely will continue to during this year.

10. A splitting headache: Courts continue to disagree over the meaning of "unauthorized access" under CFAA. In the absence of a federal civil trade secrets act (see #9), the Computer Fraud and Abuse Act ("CFAA") has become the avenue of choice to federal court for companies victimized by disloyal employees' digital misconduct. The principal civil remedies under CFAA require that the defendant have accessed a protected computer without authorization or by exceeding authorized access. Yet federal courts cannot agree on whether a disloyal employee, who otherwise was permitted to use the employer's computer system, violates the CFAA by downloading or destroying digitally stored trade secrets and other sensitive employer information to further the disloyal purpose. In 2006, the Seventh Circuit handed down Int'l Airport Centers, L.L.C. v. Citrin, 440 F.3d 418 (7th Cir. 2006), which held that an employee is stripped of access as far as the CFAA is concerned when the employee acts contrary to the employer's interest. In 2009, the Ninth Circuit weighed in with LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), which held that a person does not violate the CFAA when the person has permission to use the computer even if that use was contrary to the interests of the person's employer. This split needs to be resolved soon because clients need another webinar or update on this topic like a hole in the head.

9. Federalization of trade secret protection? Trade secrets are the only major type of intellectual property law governed primarily by state law. Previous attempts to achieve uniformity, including adoption (with some variation) of the Uniform Trade Secrets Act by 46 states has not eliminated the need for trade secret owners to learn (or pay for their lawyers to teach them) the legal idiosyncrasies of each state in which the owner would like to do business. In light of the increased (and possibly growing; see # 8 below) reliance on trade secret protection, will a serious effort to enact a federal trade secrets act emerge in 2010?

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A great deal of discussion has taken place in the legal press recently about the use of the Computer Fraud and Abuse Act as a cause of action against those who take with them information from their former employers for use in subsequent competitive activities.  And rightly so, given the explosion in the number of civil claims brought pursuant to the statute in recent months.  Much less discussion has been heard, however, about a long-recognized cause of action - breach of the duty of loyalty - that can be a crucial component of a well-thought-out attack against the misuse of confidential information by a former employee and his/her new employer.  The importance of this cause of action was highlighted in a recent decision of the Wisconsin Court of Appeals, InfoCorp, LLC v. Hunt, Case No. 2007AP2887, 2009 WL 4800140 (Wis. Ct. App. Dec. 8, 2009).

InfoCorp, LLC (d/b/a "InfoCor") is a reseller of so-called "SMART Boards," interactive whiteboards that combine the functions of an overhead projector, computer projector and a chalkboard.  Hunt started work at InfoCor in 2005.  Before that, he worked for 2 InfoCor competitors selling the same product and had developed a particularly strong relationship with a customer ("CESA 2") that, among other things had a cooperative purchasing program representing a number of Wisconsin school districts.  Hunt was employed by InfoCor for a year.  During that time, CESA 2 entered into an agreement with the manufacturer of the SMART Boards to purchase its products at reduced prices and InfoCor was the only reseller authorized by CESA 2 to provide those products to its member school districts.

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The Toxic Substances Control Act (TSCA) was enacted by Congress and signed into law by President Gerald Ford in 1976, in response to concerns that there was no comprehensive framework for the prevention of risks that might be posed by the approximately 60,000 chemical substances in commercial use at that time. 

The TSCA addressed three policy goals: (1) the manufacturers of chemicals should develop data about the effect of those chemicals on health and the environment, (2) the government should have authority to regulate chemicals to prevent "an unreasonable risk of injury to health or the environment" and (3) the government's authority should be exercised in a way that does not "unduly impede or create unnecessary economic barriers to technological innovation."  The EPA was given the power to track, test and regulate chemicals used in the U.S.

Under the TSCA, manufacturers are required to file a report with the federal government disclosing the new chemicals they intend to market.  The report is called a pre-manufacture notice.  The form on which the notice is submitted contains a box that can be checked to claim competitive business information.  The ability to claim that the notice contains confidential business information was intended to balance the goal of preventing unreasonable risk of injury to health or the environment with the goal of not impeding or creating unnecessary economic barriers to technological innovation.  The TSCA prohibits the EPA from sharing confidential business information with states or other governmental entities, including state health regulators, environmental regulators, emergency responders and foreign governments.

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