Recent Decisions and Case Developments

December 26, 2013 | United States District Court for the District of Minnesota
Court Suggests Lenient Pleading Standard for Trade Secret Claims Surviving a Motion to Dismiss

Plaintiff TE Connectivity Networks, Inc. (TE) develops and sells fiber connectivity products. Defendant All Systems Broadband, Inc. (ASB), after hiring a number of TE’s past employees, began marketing products in direct competition with TE. TE alleged in its complaint that in developing these competing products, ASB had misappropriated numerous TE trade secrets in violation of the Minnesota Uniform Trade Secrets Act (MUTSA). ASB filed a motion to dismiss, arguing that in light of the heightened pleading standards established in cases like Iqbal, TE had not pled facts with sufficient particularity to survive a motion to dismiss. In denying the motion to dismiss, the court explained that a trade secret plaintiff is “understandably hesitant” when it comes to revealing particular details of a trade secret claim, and seemed to suggest that a more lax pleading standard may apply to trade secret misappropriation claims facing a motion to dismiss.

December 17, 2013 | Eastern District of Pennsylania, U.S. District Court
Consulting Group Sues Former Employees and Competitor for Violation of Restrictive Covenant with Partial Success

Capsicum Group, LLC - a legal services consulting group - brought this action against against two former employees and a competitor - "SSR" - to prevent those employees from working for SSR . Capsicum relied on a restrictive covenant entered into by the two employees which restricted their ability to compete with Capsicum for a period of two years following the end of their employment relationship. Believing that certain provisions of this covenant were unenforceable, SSR nevertheless hired the two employees. The Hon. William H. Yohn, Jr., U.S.D.J. held that SSR did not possess the requisite mens rea but nevertheless enforced certain provisions of the covenant.

December 17, 2013 | Federal District Court for the District of Arizona
Court Declines to Require Highly Particularized Identification of Misappropriated Trade Secrets

Plaintiff Modus, LLC (Modus) hired a number of Defendant Encore Legal Solutions, Inc. (Encore)’s former employees, all of whom had signed a non-compete agreement while working for Encore. Modus brought this action seeking a declaratory judgment invalidating the non-compete agreement, and Encore counterclaimed for, among other things, misappropriation of trade secrets in violation of the Arizona Trade Secrets Act. In response, Modus filed a motion to dismiss, arguing with respect to the trade secrets claim that Encore had failed to identify with particularity what trade secrets had been misappropriated.

In denying the motion to dismiss, the United States District Court for the District of Arizona agreed that a plaintiff must identify the trade secret “with sufficient particularity to separate it from matters of general knowledge in the trade.” The court went on to hold that Encore had been sufficiently particular by pointing to a huge library of software scripts that the former employees had access to. Despite not identifying the exact scripts misappropriated from the library, the court held that Encore had been sufficiently particular to defeat a motion to dismiss.

October 15, 2013 | Court of Appeal of California, Division One, Fourth District
Angelica Case Discusses California State Laws

The plaintiff, Angelica Textile Services (Angelica), sued Jay Park, its employee since 1982, who helped found Emerald Textiles (Emerald) beginning in 2008 and left Angelica in 2010. Emerald won the business of two key Angelica customers, Sharp Healthcare and Scripps Health. The trial court dismissed the case, and the appellate court remanded non-trade secrets claims on appeal, awarding costs to Angelica. This case is important to practitioners in California because of its discussion of state law claims.

First, it found that California's Business and Professions Code section 16600, which forbids restrictive covenants (subject to enumerated exceptions), did not apply where the employee violated the employer's trust during employment instead of after employment.

Second, it found that California's Uniform Trade Secrets Act (CUTSA) did not pre-empt claims that were based on contract, not trade secrets. Thus, the lower court was wrong to dismiss Angelica's claims for breach of contract, breach of fiduciary duty, unfair competition, interference with business relations, and conversion because they "each have a basis independent of any misappropriation of a trade secret." In footnote three, the appellate court admitted that Angelica initially only asserted trade secret claims but noted that after Emerald filed a motion for summary judgment, Angelica asserted additional claims about Park's conduct while Park was still an employee of Angelica. The appellate court said that the trial court was wrong to "simply ignore the additional theories of liability advanced by Angelica and the additional evidence it produced."

September 26, 2013 | 7th Cir.
Judge Posner Upholds Trade Secret Conviction for Theft from Motorola

Hanjuan Jin lost the appeal of her conviction under the Economic Espionage Act for theft of trade secrets. She worked for Motorola from 1998 to 2007, when she was apprehended by customs with $31,000 in her luggage, a one-way ticket to China, and thousands of Motorola documents that she had downloaded. The documents described Motorola’s dated iDEN mobile communications system, which Judge Posner said is still used by “law enforcement, emergency responders, taxicab dispatchers, and the like” as well as “the Israeli and South Korean armed forces.”

Posner upheld her sentence of 48 months and said that she was lucky that the lower court gave her a “surprising break” for “acceptance of responsibility” even though she pled not guilty and went to trial. Posner believes in trade secret protection. He once said, “trade secret protection is an important part of intellectual property, a form of property that is of growing importance to the competitiveness of American industry.” Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174, 180 (7th Cir. 1991).

Posner criticized the definition of “trade secret” in the Economic Espionage Act (at 18 U.S.C. § 1839(3)(B)) as being an “elaborate” definition that permitted the defendant to challenge whether the documents that she had stolen were in fact trade secrets. He implied that the common law definition (Restatement (Third) of Unfair Competition § 39), which is a single sentence, is better.

In affirming Hanjuan Jin’s conviction, Posner emphasized that “potential value” is sufficient to a finding of trade secrets and that actual value is not a requirement, providing an analogy that may be useful to practitioners: if “a company in New Orleans had stolen the iDEN technology and was about to sell its first subscription to its brand-new iDEN network when Hurricane Katrina destroyed the company,” Motorola would still have experienced harm because Motorola would have had to upgrade its security and its reputation would have been harmed.

September 26, 2013 | District Court of Oregon
Ninth Circuit Continues Narrow Interpretation of CFAA

Plaintiffs in the Ninth Circuit may want to avoid claims that an employee violated the CFAA after a court rejected a principal’s lawsuit against an online student prank. In Matot v. CH, the District Court of Oregon dismissed the suit, finding that the students’ use of the principal’s name and likeness gave no standing for a suit against the student perpetrators or their parents.

The court cited the Ninth Circuit’s decisions in LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009) and United States v. Nosal, 676 F.3d 854, 862 (9th Cir. 2012), which held that claims under the CFAA fail where the court can “construe criminal statutes narrowly so that Congress will not unintentionally turn ordinary citizens into criminals.” Citing numerous press reports, the court held that lying on social media is common and can serve the purpose of law enforcement.

The court did admit that lying on social media can have serious consequences. Perhaps the most famous example of such consequences arose in United States v. Drew, 259 F.R.D. 449 (C.D. Cal. 2009), in which a mother posed as a teenage boy in order to cyber-bully her daughter's classmate, who ultimately committed suicide.

For more on this case, see Creating Parody Social Media Accounts Doesn't Violate Computer Fraud & Abuse Act – Matot v. CH on the blog of Eric Goldman, Professor of Law at Santa Clara University School of Law and director of the school’s High Tech Law Institute.

September 25, 2013 | Appellate Court of Illinois, First District, First Division
Illinois Court Finds Lack of Consideration to Support Non-Compete Agreement

Plaintiff Eric Fifield, an insurance administrator, began working for Defendant Premier Services, Inc. (Premier) after Premier acquired Fifield’s former employer in 2009 and offered Fifield employment. As a condition of employment with Premier, Fifield was required to sign a nonsolicitiation/noncompetition agreement that prevented him from soliciting Premier’s customers anywhere in the US for a period of two years following employment. In February 2010, Fifield resigned from Premier and began working for Enterprise Financial Group (EFG). Fifield and EFG filed this action seeking a declaratory judgment invalidating certain provisions of the contract, and Premier filed an answer, as well as a counterclaim for injunctive relief. The lower court ruled in favor of Fifield, holding that the non-solicitation portions of the contract were void for lack of consideration.

On June 24, 2013, the Appellate Court of Illinois confirmed the lower court’s decision, explaining that under Illinois case law, an employee must be continuously employed pursuant to a noncompetition/nonsolicitation agreement for a period of two years before the court will recognize adequate consideration in exchange for a non-compete agreement. Because Fifield left Premier after only 3 months, there was not adequate consideration and the contract was unenforceable.

On September 25, 2013, the Supreme Court of Illinois denied appeal in the case.

September 4, 2013 | United States District Court N.D. Georgia (Atlanta Division)
Software Experience as a Trade Secret Claim Survived a Motion to Dismiss

The Northern District court of Georgia (Atlanta Division) denied a motion to dismiss a trade secret claim based on an end user license agreement (EULA). Plaintiff AirWatch provided sufficient evidence (for the purpose of defeating a motion to dismiss) that defendants, employees of Mobile Iron, had electronically signed a contract for a free trial that incorporated the EULA by reference. The EULA said, “the Software is provided to User for evaluation purposes,” that it was a “license to use the software solely for the purposes of testing and evaluating the software,” and that the user “shall not engage in competitive analysis.”

The court refused to dismiss all of plaintiff’s five claims. In addition to the breach of contract claim concerning the EULA, plaintiff brought claims under the Computer Fraud and Abuse Act (CFAA), under the Georgia Trade Secrets Act, under the California Unfair Competition Law, and a tort claim for fraudulent misrepresentation.

August 29, 2013 | S.D.N.Y.
New York Court Dismisses Inevitable Disclosure Claim

Alleging a stand-alone claim under the inevitable disclosure doctrine, plaintiff sued a former a sales associate and sought permanent injunctive relief barring the former employee from disclosing any of plaintiff's trade secrets or confidential information, and from working for its competitor. There were no allegations that the former employee breached a non-disclosure agreement, disclosed or misappropriated any trade secrets, or was subject to a non-compete agreement. The court granted defendant's motion to dismiss and declined to expand New York's application of the inevitable disclosure doctrine under this set of facts and outside of the preliminary injunction context.

August 27, 2013 | Eighth Circuit
8th Circuit Questions Award of Attorney’s Fees in Mayo Clinic Case

The Eighth Circuit affirmed a district court judgment against Dr. Peter Elkin (Elkin) a clinician and researcher formerly employed by the Mayo Clinic (Mayo), while calling into question the district court’s award of attorneys’ fees. Mayo originally brought ten causes of action against Elkin relating to Elkin’s misappropriation of natural language processing software that Elkin developed during his employment with Mayo.

While overruling a number of Elkin’s objections and affirming the judgment against Elkin, the unanimous Eighth Circuit panel took issue with the district court’s award of $1,900,139.90 in attorneys’ fees. Only one of the ten claims brought against Elkin, the Minnesota trade secret claim, provided a statutory basis for recovering attorneys’ fees. Despite this, Mayo asserted and the district court agreed that $1,900,139.90 of $2,447,058.36 (78%) in total attorneys’ fees were attributable to the trade secret claim.

The Eighth Circuit found that Mayo’s broad monthly summaries of litigation expense did not provide a sufficiently detailed basis for the district court’s award, and found that rather than performing a proper Lodestar analysis, the district court had spent its time “lambasting Elkin for his employment of time-consuming litigation strategies.” The panel remanded the case for a new determination of attorneys’ fees, and ordered Mayo to “strike an appropriate balance between the 4,000 pages [of total documentation] and the 5-page chart provided” in its original request.