Trade Secrets and Confidential Information

Plaintiff Art & Cook, Inc., a cookware and kitchenware company, brought suit in New York federal court against a former salesperson, Abraham Haber, when a search of his work computer revealed that he had emailed to his personal email account two categories of documents alleged by Art & Cook to be trade secrets: (i) its customer contact lists and (ii) its designs and branding/marketing strategies. Although the court already had issued a temporary restraining order, in Art & Cook, Inc. v. Haber, No. 17-cv-1634, 2017 U.S. Dist. LEXIS 164366 (E.D.N.Y. Oct 3, 2017), the court denied Art & Cook’s motion for a preliminary injunction brought exclusively under the Defend Trade Secrets Act (“DTSA”) because the company failed to demonstrate a likelihood of success on the merits of a DTSA cause of action.

First addressing the customer lists at issue, the court noted that the Second Circuit has long held that, under certain circumstances, a customer list may be deemed a trade secret – particularly where the customer list contains individual customer preferences or represents the list owner’s work to create a market for a new service or good. Where the list contains little more than publicly available information, even if it takes considerable effort to compile, it is not accorded protection under DTSA. The customer lists at issue in this case fell into the latter category, as they contained nothing more than a compilation of publicly available information including emails and phone numbers. The court said that that the fact that it took the company “tens if not hundreds of hours” of research to compile those lists was insufficient under DTSA.

Turning next to the company’s designs and branding/marketing strategies, the court noted that such material was exactly the kind of business information that DTSA was designed to protect because they derive independent economic value from not being generally known. However, the company failed to show that it took “reasonable measures” to keep the information secret. For example, the company’s president testified that he spoke to Haber many times about confidentiality, but the company did not require him to sign a non-disclosure agreement. In fact, the company asked him to sign a non-disclosure agreement three years into his employment and, when he refused to sign, nevertheless gave him access to what it contended was confidential information. The court found that the company’s other steps to secure its information, such as utilizing a password-protected server and folders, were inadequate given such circumstances.

Given the lack of a likelihood of success on the merits as to the DTSA claim, the court denied Art & Cook’s motion for a preliminary injunction and advised that the claim was susceptible to a motion to dismiss. The court’s decision provides companies with insight into what kinds of information are trade secrets under DTSA and how they should protect their trade secrets.

California has always been a challenging jurisdiction for employers in terms of limiting unfair competition by former employees and protecting trade secrets. However, employers in the state can significantly enhance their ability to protect their business interests in these areas with a little planning and strategic thinking.

In this issue of Take 5, we look at some proactive steps that employers can take to prevent unfair competition by departed employees and protect trade secrets from misappropriation:

Read the full Take 5 online or download the PDF.

LightsWhether you are a young child missing teeth, or a grown-up taking account of her life, or Santa Claus himself checking up on everyone else’s life, many of us make lists at holiday time.  They can be lists of gifts we want, or those we need to get, or people we wish to see or write to, or things we need or want to do before the end of the year.  Sometimes they are just lists of things that happened this year or that we want to happen next year.  Certainly there are lots of “Top Ten” holiday lists.  This one may be neither an exception nor exceptional, but here is a “Top Ten List of Holiday-Related Trade Secret/Non-Compete Cases”:

  1. “It may be better to be naughty than nice”—In Ivy Mar Co., Inc. v. CR Seasons Ltd., 907 F. Supp. 547 (EDNY 1995), the Court denied plaintiff a preliminary injunction in a non-compete/trade secret case in large part because of plaintiff’s months-long delay in bringing the action. This occurred notwithstanding plaintiff’s claim that it only delayed filing the action so as not to ruin Christmas—“they delayed bringing this motion because they feared defendant Jetmax would not ship goods to its customers during the Christmas season,” or so they claimed.
  2. “Or maybe not.”—In Agero Inc. v. Rubin et al., an appellate court in Massachusetts affirmed dismissal of plaintiff’s claims, holding that Agero failed to establish that two of the defendants, Timothy Schneider and Matthew Capozzi, owed Agero a duty of loyalty.  Though the Court when on at some length as to the reasons it had for affirming the result against Agero, what was perhaps most telling was the Court’s taking the time to express a reason that it was not relying on:
    • We need not comment on the defendants’ suggestion that Agero brought this complaint against them, despite Agero’s size and apparent lack of interest in pursuing ViewPoint, to send a message to other Agero employees who might entertain thoughts of leaving and lawfully competing. That Agero reportedly sued Schneider on Christmas Eve, when Schneider’s oldest child was five years old, might lend credence to the charge. However, we do reiterate that noncompetition agreements would be the better practice to achieve that goal. Based on the record before us, Agero’s claims were properly dismissed.
  3. “Check your list twice”—If you think departing employees had accomplices or other help, don’t just add a bunch of John Does to your complaint without defining and describing who those co-conspirators are.  Otherwise you run the risk of having those claims dismissed and those avenues of discovery shut down in your non-compete or trade secret case just as happens in other types of cases, such as Southwest Materials Handling Co. v. Nissan Motor Co., 2000 U.S. Dist. LEXIS 16275 (N.D. Tex. 2000), where the court said, with respect to civil conspiracy allegations against John Doe defendants, that “[t]his Court is not in the position of channeling or divining potential co-conspirators who are presently as tangible as Santa Claus, the Easter [B]unny or the Tooth Fairy.”  I guess the court did not find the testimony of Frank Church credible.
  4. “What is the secret to making a good snowman?”—Though there is now a patent on for an apparatus for facilitating the construction of a snow man/woman out of snow, making snowman holiday decorations has also spawned litigation like the case of  Gemmy Industries Corporation v. Chrisha Creations Limited, Dist. Court, SD New York 2004. In Gemmy, plaintiff claimed that defendant’s marketing of an inflatable snow man, among other causes of action, violated plaintiff’s trade secrets, especially after defendant hired plaintiff’s former sales representative.  But the court concluded that even plaintiff did not treat the snowman and its marketing as involving trade secrets since plaintiff “did not request and [the sales representative] did not execute any non-disclosure agreement, non-compete agreement or confidentiality agreement prior to acting as a sales representative for [plaintiff].”
  5. “‘It was always said of him, that he knew how to keep Christmas well, if any man alive possessed the knowledge.’”—Dickens’ closing words in A Christmas Carol were a celebration of the Christmas spirit, and sharing but not everyone wants to share the knowledge they have about Christmas traditions.  While some have asked, we think tongue in cheek, whether Christmas may be patented, it does appear that at least some aspects of our Christmas traditions can be protected as trade secrets.  In the case of IPI, INC. v. Monaghan, 2008 Ohio 975 (Court of Appeals, 6th Appellate Dist. 2008), an Ohio Court found that plaintiff had stated a claim for relief, and could proceed to trial, on a claim that plaintiff’s unique methods of “‘event’ photography” such as involved in its “Santa Claus programs” could involve protectable trade secrets under the Ohio Trade Secrets Act, where plaintiff had alleged that “it developed, inter alia, ‘confidential and specialized techniques for event photography, a business marketing plan for its franchisees, a training program, and proprietary and confidential software that it makes available to its franchise systems’” and that “appellees/cross-appellants misappropriated these systems, techniques, etc., that is, its alleged trade secrets. If it is shown that these are truly trade secrets and that appellees/cross-appellants misappropriated the same, IPI would be directly injured by that misappropriation.”
    • Not all courts, however, are willing to give litigants credit for the alleged uniqueness of their holiday-related ideas. This can be seen in Oxenhandler v. Dime Sav. Bank of Brooklyn, 33 Misc. 2d 626 (NY Supreme Court 1962), where plaintiff was denied relief in his trade secret/business information claims against the financial institution to which he had suggested “a ‘Chanukah Savings Plan’ which could be made available to [the bank’s] Jewish depositors in the same manner that a Christmas Club had been available to the general public.”  In fact, the Court concluded that “plaintiff’s idea was neither new, novel, original nor concrete,” and that the Court “cannot perceive how plaintiff on any theory in law can succeed in this action.”  New settings for Christmas Savings Clubs faired no better as alleged trade secrets or protectable ideas either, as seen in Moore v. Ford Motor Co., 43 F. 2d 685 (2nd Cir. 1930). There, plaintiff Moore sought to protect the idea of Christmas Club accounts as a way to save for down payments on automobiles.  The Court concluded that there was nothing secret or unique about such a plan, and that “idea was old in Christmas Savings clubs” for some time.
  6. Beware the office Christmas party.”—Normally this is a phrase you see in HR guides, but it can also hold true in the non-compete area of the law as seen in Plastic Surgery Associates Of Kingsport Inc. v. Pastrick, a 2015 decision of the Tennessee Court Of Appeals 2015. In this case, the court held that the defendant was indeed an employee and an owner of the plaintiff medical practice, and subject to the express terms of his employment agreement (including its non-compete provisions) and liable as an owner for a portion of the practice’s debts.  The court rested its conclusions of ownership on three key facts, one of which was that defendant “hosted a Christmas party at his home that was billed to the company.”  Unless that party was epic, it probably would have been cheaper to pay for the punch and appetizers out of his own pocket.  It would have eliminated that troublesome fact and helped him avoid the necessity of disgorging $246,633.00.
  7. Christmas cards, why bother?”—In Vizant Technologies, LLC v. Whitchurch, 97 F. Supp. 3d 618 (ED Pa. 2015), plaintiff brought a ten-count complaint against defendant alleging misappropriation of trade secrets in violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) as well as two violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), breach of contract, defamation, tortious interference with existing and prospective relationships, abuse of process, conversion, fraud, and civil conspiracy. Finding that defendant was using confidential information and otherwise acting tortiously in contacting plaintiff’s (i.e. her former employer’s) employees, officers, and directors, and with their family members, and in interfering with plaintiff’s business with customers.  This resulted in Whitchurch’s being enjoined from carrying through on her stated “intention to send a ‘Christmas card direct mail piece’” out further criticizing Vizant and its principals to that same audience.
  8. New Year’s resolutions should be thought out.”—Many times, employees will decide to leave for new employment after the upcoming holidays pass.  So it was in Alexander & Alexander v. Wohlman, 578 P. 2d 530 (Wash: Court of Appeals, 1st Div. 1978), where “[b]etween Christmas 1975 and New Year’s Day 1976, the defendants decided to leave the employment of A&A.”   The problem was not their resolve to leave, but the things that they did before they left:
    • On Friday afternoon, January 16, 1976, after Mr. Maier, the manager of the Seattle office, had left for the weekend, they submitted their letters of resignation and took with them personal possessions and certain schedule books for use as forms in the conduct of their business. Between January 12 and 16, 1976, each of the defendants personally contacted clients of theirs to inform them of their decision to leave A&A and the formation of the new firm, Wohlman & Sargent, Inc. On January 17 and 19 defendants sent letters to clients requesting broker-of-record letters.
    • The appeals court found that such conduct did violate their legal obligations to A&A, and found them liable for damages.
  9. Sometimes you get coal in your stocking.”—Courts often work through the holidays, despite the general impression to the contrary. For instance, in Direx Israel, Ltd. v. Breakthrough Medical Corp., 952 F. 2d 802 (4th Cir. 1991), plaintiff obtained a preliminary injunction from the District Court against the defendant who, when he was discharged, illegally appropriated and exploited the plaintiffs’ trade secrets, and were using such trade secrets to manufacture, with intent to market, a machine competitive with the plaintiffs’ product.  The 4th Circuit reversed the grant of the preliminary injunction, but did so “without prejudice to the right of the plaintiffs to renew such motion on the basis of any new or additional facts that may have occurred since the grant under review.”  The appellate court’s decision issued on December 24th.  Likewise, in Viad Corp. v. Cordial, 299 F. Supp. 2d 466 (WD Pa. 2003), the Court issued a Christmas Eve denial of a preliminary injunction request in case in which Defendants Cordial and Hellberg were alleged to have violated their employment contracts, which prohibited them from competing with plaintiff directly or indirectly, or aiding its competitors, for a period of one year following the termination of their employment, though in the holiday spirit the Court pointed out that plaintiff and defendants had been “represented by counsel who tried the matter skillfully and efficiently.”
  10. Sometimes, though, you get what you asked for.”—In Devos Ltd. v. Record, Dist. Court, ED New York 2015, on the other hand, the court issued on Christmas Eve a wide ranging injunction against defendants in a trade secret misappropriation and unfair competition case even though the plaintiff had been indicted and had been placed on a federal exclusion list that meant that no federal agency can do business with plaintiff and that any pharmaceutical distributor who receives federal funding, including Medicare and Medicaid (which includes almost every distributor of pharmaceuticals), also cannot do business with plaintiff. Concluding that an indictment was just an accusation of being naughty rather than a finding of same, the court issued the injunction.  There was no mention of where Santa had come out when double checking Devos’ placement on his list.

Happy holidays.

In a question of first impression, the Illinois Appellate Court recently addressed what constitutes “bad faith” for purposes of awarding attorneys’ fees to the prevailing party under §5 of the Illinois Trade Secret Act (ITSA). That section provides, in pertinent part, that if “a claim of [trade secret] misappropriation is made in bad faith” or “a motion to terminate an injunction is made or resisted in bad faith,” “the court may award reasonable attorney’s fees to the prevailing party.” The Illinois Appellate Court delivered a split decision on the legal standards for assessing whether a “bad faith” fee award is warranted under the statute.

Specifically at issue before the court in Conxall Corp. v. ICONN Systems, LLC, et al., 2016 IL App (1st) 10158 (Sep. 2, 2016), was “whether the trial court had applied the correct legal standard in determining whether Conxall’s claims were brought in ‘bad faith,’ as that term is used and understood in the Act.”  The sharply divided court proposed divergent standards for analyzing this question, despite reaching the same conclusion that the issue should be remanded to the lower court for consideration anew.

One of the three Justices adopted the California Court of Appeal’s approach, which found that “bad faith” under California’s version of the Uniform Trade Secrets Act consists of two components: “(1) objective speciousness and (2) subjective bad faith.” Attentive to the goal of deterring such “bad faith” claims, the resultant standard embraces “speciousness [as a] looser standard” which accomplishes that goal, paired with a finding of “subjective bad faith.”

The other two Justices criticized this two-pronged test (which they noted appears to have taken hold among a number of federal courts), and instead held that the guidepost for an award of attorneys’ fees under ITSA should be “the preexisting definition of ‘bad faith’ in this state.”  While no Illinois court has had the opportunity to define “bad faith” specifically in the context of ITSA prior to ICONN, a “bad faith” test had already been articulated by the Illinois Supreme Court in Kratsack v. Anderson, 223 Ill. 2d 541 (2006) in the context of Illinois’ Consumer Fraud and Deceptive Business Practices Act.  Construing the Kratsack opinion, the ICONN majority held that Illinois state courts should resolve the “bad faith” issue by asking “whether the pleadings, motions and other papers which were filed by the party violated Illinois Court Rule 137” or if “the party’s other conduct during the course of the litigation ran afoul of the underlying purpose of Rule 137, which is to prevent abuse of the judicial process.” Rule 137, Illinois’ frivolous pleading rule, allows for attorneys’ fees when a party interposes its pleading or motion with “any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.” Kratsack, 223 Ill. 2d at 561-62.

There are several take-aways from the ICONN Court’s debate and ultimate finding.

Ask: Has your jurisdiction already made a decision to follow California and the federal court approach to determining “bad faith” under your state’s trade secrets act? If not, has your jurisdiction defined “bad faith” under any other statute?

Whatever the answer to these questions – and regardless of picking the “fed/Cal” or “state” side of the debate as to which legal standard should apply – any such motion for “bad faith” attorneys’ fees under your trade secrets act needs to clearly articulate the applicable standard for “bad faith” and consider the facts of the case in light of that standard.

On April 29, 2014, Senators Chris Coons (D-Del.) and Orrin Hatch (R-Utah) introduced a bill which seeks to create a private right of action under federal law for theft of trade secrets. As noted in the press release accompanying the bill, the so-called “Defend Trade Secrets Act would empower companies to protect their trade secrets in federal court.”

The Defend Trade Secrets Act of 2014 echoes and amplifies a similar effort made last year, in which Representative Zoe Lofgren (D-Cal.) introduced a bill entitled the “Private Right of Action Against Theft of Trade Secrets Act of 2013.” We discussed that bill in this space last July.

Like the 2013 bill, the 2014 bill proposes amendments to the Economic Espionage Act, 18 U.S.C. § 1831 et seq. The 2014 bill, however, is more detailed and expansive in scope. The 2013 bill merely sought a two-paragraph amendment of 18 U.S.C. § 1832, adding text providing for a private right of action for compensatory damages and injunctive relief or other equitable relief, with a two-year statute of limitations.

The 2014 bill proposes an extensive amendment of 18 U.S.C. § 1836 which would not only create a private right of action, but also would:

  • Allow for courts to issue civil ex parte orders (a) “for the preservation of evidence,” including by making a copy of an electronic storage medium that contains the trade secret, and (b) providing for the seizure of any property used to commit or facilitate the commission of a violation;
  • Authorize courts to award (a) injunctive relief, (b) damages for actual loss or any unjust enrichment, (c) a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret, (d) exemplary damages (up to treble the amount of compensatory damages); and/or (e) attorneys’ fees;
  • Grant U.S. District Courts original jurisdiction of civil actions brought under the section;
  • Establish a 5 year statute of limitations period; and
  • Include definitions of “misappropriation” and “improper means” that largely track similar language in the model Uniform Trade Secret Act, which has been adopted in various forms in 48 states (with Massachusetts and New York being the two exceptions).

While there is strong support in the business community for the Defend Trade Secrets Act of 2014, only time will tell whether it actually will become the law of the land, and in what form. Nonetheless, for various reasons — including high-profile trade secret thefts and prosecutions in the news, a desire to standardize the law on trade secrets, and a perception that the U.S. economy is vulnerable to trade secret thefts from overseas — momentum does appear to be on the side of these efforts to create the elusive federal private right of action for trade secret theft.

In what turned out to be a disastrous result for defendants, a Massachusetts Court issued a default judgment against certain salespeople who left their former company to form the new competing company. The default judgment was based on the defendants’ conduct during the discovery phase of the case, in which they failed to follow the terms of the Court’s Preliminary Injunction, including misrepresenting their compliance to the Court, destroying evidence, and using confidential information to sell products to certain businesses, all of which was specifically barred by the terms of the Court’s Order.

In Pacific Packaging Products, Inc. v. Barenboim, et al., Middlesex Superior Court, C.A. No. 09-4320, plaintiff, a distributer of packaging products, sued certain individuals who had been salesmen for the company until they resigned to form Packaging Partners, LLC, a competitor. The plaintiff also sued Packaging Partners, LLC claiming that the defendants had misappropriated confidential information and used it to solicit and obtain business from plaintiff’s customers.

Upon filing the lawsuit, the plaintiff obtained an Order for Expedited Discovery and to preserve evidence. After forensic images were taken from company and personal laptops of the individuals, a large number of electronic and hard copy documents and emails were produced by the defendants. When Plaintiff did not receive all the information it demanded, it obtained a Preliminary Injunction which ordered defendants to produce additional documents, in paper or electronic form, and barred defendants from making sales for one year to any of the plaintiff’s customers for which the defendants had taken documents which plaintiff claimed were confidential. Defendants argued that the information they took was not confidential.
Thereafter, the Court held an evidentiary hearing to determine whether the defendants had violated the terms of the Preliminary Injunction. At the hearing, certain individuals testified that they had complied with the mandates included in the Preliminary Injunctions, but one of the individuals, who had earlier submitted an affidavit supporting compliance, testified that the affidavit she had submitted was not true and that she was threatened by another defendant to submit false information and not to be forthcoming in her testimony.

Ruling of the Court
Based largely on this testimony, the Court found that the defendants had violated the terms of the Preliminary Injunction by:

  • selling certain products to a customer of the plaintiff;
  • spoliating evidence which defendants knew or reasonably should have known might be relevant to the claims in this matter;
  • intentionally failing to produce certain documents;
  • deleting emails after being ordered to produce them;
  • failing to image and produce several USB drives which were used by defendants after the litigation commenced; and
  • committing fraud on the Court by falsely claiming that defendants had complied with the Injunction when the facts demonstrated that documents were withheld, electronically-stored data relating to the claims in the complaint were not preserved, emails were deleted on certain defendants’ computers, and personal computers and devices were not turned over, in spite of representations to the contrary by the defendants’ attorney to the Court.

The Court stated that defendants’ acts described above “‘set in motion [an] unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate [this] matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense.’ [citation omitted] The defendants’ actions noted above show a blatant disregard for the judicial process and a disrespect of this Court and its orders.”

Relying on its inherent power to take remedial action in response to the defendants’ deliberate violation, the Court found that sanctions were in order. The Court initially ruled that the appropriate sanctions were: 1) entry of default against the defendant company and certain individual defendants with respect to some of the claims alleged in the Complaint, 2) dismissal of the defendant’s counterclaims, and 3) attorneys’ fees and costs. See Pacific Packaging Products, Inc. v. Barenboim, et al., Middlesex Superior Court, C.A. No. 09-4320 (January 31, 2014). In a subsequent decision, the Court denied the request of the plaintiff to default the defendants on all counts of the Complaint, but issued a default against the defendants as to the plaintiff’s claims that allege that “the defendants took confidential, proprietary information with them when they left Pacific Packaging and that they used that information in seeking to attract customers that had been Pacific customers.” See Pacific Packaging Products, Inc. v. James Berenboim, et al., Middlesex Superior Court, C.A. No 09-4320 (April 1, 2014).

Although defendants’ actions in this case could be considered extraordinary, the decision is a good lesson to companies and their inside and outside attorneys about how seriously courts view their orders, and why employees, company counsel and outside counsel should diligently monitor compliance. This includes taking all reasonable measures to preserve documents and other information, both electronic and hard copies, that reasonably may be relevant to the claims alleged. This means that it is critical that counsel send litigation-hold letters to their clients and follow up to insure that this information is located and preserved properly.

This case also illustrates how judges have become savvy in understanding the technicalities of electronically stored information (ESI), which has become increasingly predominant in litigation in general and in trade secrets and non-compete cases in particular. It provides a good lesson to counsel and employees about how critical it is for companies and their attorneys to take the necessary steps immediately to inventory, analyze and preserve ESI, including taking forensic images of all relevant information that may be on company computers and USB drives, as well as employees’ personal computers.

Such measures are necessary to minimize the risks of receiving the draconian sanctions issued by the Court in this case.

On March 5, 2014, the U.S. Attorney’s Office in San Francisco secured the first-ever federal jury conviction on charges brought under the Economic Espionage Act of 1996. The defendants — two individuals (Walter Liew and Robert Maegerle) and Mr. Liew’s company USA Performance Technology Inc. — were convicted of stealing DuPont Co.’s method for making titanium dioxide, a “white pigment” chemical used to whiten various products from cars to the middle of Oreo cookies, which garners $17 billion in sales worldwide.

Prosecutors said that Liew and his wife launched their small California company in the 1990s, aimed at exploiting China’s desire to build a DuPont-like factory to make the chemical. The couple then recruited former DuPont scientists with the goal of winning Chinese contracts. Mr. Maegerle worked for DuPont as an engineer from 1956 to 1991 before joining the Liews and, according to prosecutors, providing the Liews with detailed information about DuPont’s Taiwan factory. Tze Chao, another former DuPont scientist who worked with Liews, pleaded guilty in 2012 to conspiracy to commit economic espionage, and another former DuPont engineer linked to the case, Tim Spitler, committed suicide. Mr. Liew allegedly received over $20 million from the Pangang Group (companies purportedly controlled by the government of the People’s Republic of China) for efforts to deliver the chemical recipe to China.

With a clean sweep by the prosecution of guilty findings on the verdict sheet, the defendants’ arguments that the Chinese obtained the information from public sources, such as expired patents, and that nothing was stolen from DuPont were not convincing. Mr. Liew (facing a maximum of 20 years in prison) and Mr. Maegerle (facing a maximum of 15 years) are scheduled to be sentenced on June 10.

The verdict is but the latest high-profile example of the consequences possible when trade secrets are stolen. The U.S. Attorney’s Office and other government agencies have made it a priority to fight economic espionage and trade secret theft that threaten U.S. economic and national security interests. In its current form, the Economic Espionage Act allows only federal prosecutors to bring criminal trade secrets charges against persons who have stolen trade secrets. Perhaps due to the complexities of the subject matter in trade secret cases, prosecutors have primarily pursued such charges in bench trials. Achieving a jury verdict against Mr. Liew and his co-defendants perhaps will open the door to further jury trials on such charges.

A recent federal court decision in California illustrates the care that plaintiffs should take when pleading their own claims in trade secrets cases, lest they provide defendants a ready basis for dismissal. In a January 9, 2014 decision in Jobscience, Inc. v. CV Partners, Inc., et al., the federal district court in the Northern District of California dismissed state law based trade secrets claims as pre-empted by the federal Copyright Act. Luckily for the plaintiff in that case, the plaintiff had actually obtained a copyright registration on the relevant materials and included a copyright infringement claim in the complaint. Thus, plaintiff may still obtain relief in that very action. But it may not ultimately be full relief.

Indeed, the dismissal of the trade secret claim is a cautionary tale. Another plaintiff, without the foresight to actually obtain copyright registrations on the relevant materials, could have been denied a means of achieving any relief, or at least could have had its right to such relief delayed, through the dismissal of a trade secret claim. That is because the complaint in the matter rested on a fairly narrow factual basis, albeit one not too different from that seen in many trade secret complaints:

The complaint alleges that defendant Metcalf "gained access to Plaintiff’s trade secrets consisting of software code and other proprietary information." "Plaintiff invested substantial time, money, and skill in developing its proprietary software applications, software code, methods and other trade secrets. Defendants spent very little time and effort in converting those same software applications for their own use"…Plaintiff alleges that defendants "misappropriat[ed] and conver[ted] Plaintiff’s software application for their own use" and "stole and converted Plaintiff’s proprietary software applications."

The court found that the copyrightable nature of software code and the lack of any particular specificity as to the other aspects of any claimed trade secret meant that these allegations did not sufficiently establish the existence of a trade secret under California, and instead meant that the trade secret, conversion, and unfair competition claims were pre-empted by the federal Copyright Act

One can, however, assert successfully trade secret claims alongside copyright claims, or concerning otherwise copyrightable material. One must merely do it correctly. First, the Jobscience plaintiff made allegations that “fail[ed] to show claims of unfair competition and conversion based on facts distinct from the copyright infringement claim.” (emphasis added) One makes this distinction by framing allegations so as to make clear that the state law created a right that is other than something equivalent to the rights protected by federal copyright law. This means showing that the state law claim requires an “extra element” instead of, or in addition to, the acts of reproduction, performance, distribution or display at issue under copyright law. That “extra element” should be pled to make the state law claim a qualitatively different claim than one under the federal copyright laws. Additionally, one may avoid pre-emption by making clear allegations that the trade secret claim rests on facts, items and information other than and in addition to the sort of works that fall within the protections of the Copyright Act under Sections 102 and 103.

The key then to making such trade secrets claims involves, as one court noted, “making plausible allegations that extend beyond software” or other copyrightable works. Spear Marketing, Inc. v. BancorpSouth Bank, No. 3:!2-CV-3583-B (N.D. Tex. July 1, 2013). That means making allegations not necessarily limited to specific expressions, such as is implied in referencing only software code. It means making sure that there are allegations concerning customer lists, business plans, marketing strategies, and customer preferences. These types of trade secrets do not fall under the subject matter of copyright and are therefore not preempted by the Copyright Act.

This is important because copyright law can only protect particular expressions of trade secret, while a trade secret claim can extend to the substance of the trade secret, however expressed.

When an individual threatens to disclose a company’s confidential information gained during employment at the company to a new employer, the common first reaction by the company is to send a “cease and desist” letter to the individual, and also a similar letter to the new employer. Yet before sending such a cease and desist letter to the new employer, the company may wonder whether it is opening itself up to potential liability — on a tortious interference claim by the individual — if the new employer should turn around and fire the individual on the basis of the allegations in the letter.

Companies with such concerns received a bit of reassurance in a January 21, 2014 opinion and order in Rick Bonds v. Philips Electronic North America, issued by the U.S. District Court for the Eastern District of Michigan, Southern Division. In that case, Rick Bonds had been employed with Philips Electronic North America or its predecessors (“Philips”) since 1996 as a field service engineer who maintained and repaired medical imaging equipment. He was subject to at least two confidentiality agreements concerning Philips’ confidential information. According to the opinion and order, in early 2009, Mr. Bonds surreptitiously began working for Philips’ competitor Barrington Medical Imaging, LLC as a field service engineer — while still employed by Philips! Mr. Bonds continued his dual employment until July 2009, when Philips discovered what was going on and terminated Mr. Bonds’ employment.

A month after terminating his employment, Philips sent a cease and desist letter to Mr. Bonds, reminding him of his continuing obligations to Philips with respect to its confidential information. Philips sent a copy of this letter via fax to Barrington, and less than a week later, Barrington terminated Mr. Bonds’ employment.

Over two years later, on January 27, 2012, Mr. Bonds sued Philips, asserting a single claim for tortious interference with his business relationship with Barrington. Philips asserted counterclaims for breach of the confidentiality agreements, unfair competition and misappropriation of trade secrets. After discovery, Philips moved for summary judgment dismissing Mr. Bonds’ tortious interference claim.

In granting summary judgment dismissing Mr. Bonds’ claim, the court noted that to meet the elements of a tortious interference with business relationship claim, the plaintiff must demonstrate that the defendant “acted both intentionally and either improperly or without justification.” The court held that Mr. Bonds failed to present any “specific, affirmative acts that corroborate an improper motive of interference,” and that Philips’ actions to protect its confidential information were not improper because they were motivated by legitimate business reasons. Indeed, the court went so far as stating “concern about potential disclosure is exactly the kind of legitimate business reason that insulates [Philips] from liability.”

So companies should rest easy when sending a cease and desist to an individual’s new employer, provided that letter avoids defamatory comments and is sent in furtherance of the company’s legitimate business interests (which might include confidential information and/or customer relationships) and is not a malicious attempt to get the employee fired.

Co-authored by Ted A. Gehring.  

There are three important holdings from the recent California Court of Appeal opinion in Angelica Textile Services, Inc. v. Park, 220 Cal. App. 4th 495 (2013).

First, while the California Uniform Trade Secrets Act (“CUTSA”) preempts tort claims based upon the same nucleus of operative facts as a claim for misappropriation of trade secrets, it does not preempt contract causes of action, even when based on the alleged misappropriation of trade secrets.

Second, even where tort claims may be related to an alleged claim for misappropriation of trade secrets, provided the theory of liability is independent from the claim of misappropriation of trade secrets, CUTSA will not preempt the claim.

And third, California’s broad prohibition against non-competition agreements—as codified at California Business and Professions Code Section 16600—does not apply to limitations on an employee’s conduct during the term of employment.

In Angelica, the plaintiff, Angelica Textile Services, sued its former employee, Jaye Park, and his new company on causes of action for misappropriation of trade secrets, breach of contract, conversion, breach of fiduciary duty, unfair competition, interference with business relations and conversion after Park, while still employed by Angelica, began working with Angelica’s customers using information from his employment at Angelica to create a laundry business to compete with Angelica. Park was a market vice-president at Angelica and had an agreement with Angelica that he would not, during his employment, become interested, directly or indirectly, in any business similar to Angelica’s business. On summary judgment the trial court dismissed the claims for breach of contract, conversion, breach of fiduciary duty, unfair competition, interference with business relations and conversion, holding that those claims were based upon the misappropriation of trade secrets and therefore preempted by CUTSA. At trial, a jury found against Angelica on its remaining CUTSA claim.

Angelica appealed. On appeal, the Angelica court reversed the trial court’s dismissal of the non-CUTSA claims.

As to the breach of contract claim, the Angelica court cited the language of the statute that “contractual remedies, whether or not based upon misappropriation of a trade secret,” (emphasis added) are not preempted by CUTSA. The Angelica court further held that, in any event, Angelica’s breach of contract claim was based on Park’s violation of the non-competition agreement. The Angelica court rejected Park’s claim that the non-competition agreement was invalid, holding that Section 16600 “has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends,” but does “not affect limitations on an employee’s conduct or duties while employed.”

As to the common law tort claims, the Angelica court held that none of the claims were based on the misappropriation of trade secrets and therefore, where not preempted. Citing Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210 (2010), the Angelica court held that CUTSA “does not displace noncontract claims that, although related to a trade secret misappropriation, are independent and based on facts distinct from the facts that support the misappropriation claims.” During discovery, Angelica had answered interrogatories asking the company to state all facts that supported their claims. The company had answered by stating that all of its claims were supported by the misappropriation of trade secrets. However, in response to the motion for summary judgment, Angelica produced evidence (which it claimed it learned of after responding to discovery) that provided independent bases of liability under the tort claims, including Park’s violation of his non-competition agreement and his duty of loyalty to Angelica and Park’s taking of documents that—even if not trade secrets—were still tangible property subject to a conversion claim. The Angelica court held that, based upon this new evidence of independently wrongful conduct, it was error for the trial court to conclude Angelica’s tort claims were displaced by CUTSA.