Recent Decisions and Case Developments

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.

August 27, 2013 | Appellate Division, New Jersey Superior Court
Trade Secret Laws Are Not Intended To Extend Protection After Patents Expire, Says New Jersey Court

On August 27, 2013, a three-judge panel of the New Jersey Superior Court, Appellate Division affirmed the long held notion that the content of an expired patent passes into the public domain and is thus outside the boundary of trade secret law.

In UCB Mfg, Inc. v. Tris Pharma, Inc., plaintiff employer alleged that defendant former employees used plaintiff’s confidential information to create a generic version of plaintiff’s cough medicine, Tussionex®. In addition to finding the noncompetition agreement between the parties unenforceable, the court emphasized that “all the confidential information alleged to have been divulged was in the public domain and not entitled to protection.”

On appeal, UCB dropped its trade secret misappropriation claim and pursued a theory of breach of contract and unfair competition. The court held that UCB’s breach of contract claims could not stand “[w]here trade secrets are not demonstrably involved . . .” The court found that trade secrets did not exist because after UCB’s patent had expired, “the knowledge of the invention inures to the people, who are thus enabled without restriction to practice it and profit by its use.”

August 26, 2013 | Texas Court of Appeals
Texas Appeals Court Strikes Overly Broad Trade Secret Injunction

On August 26, 2013, the Texas Court of Appeals struck down part of a temporary trade secret injunction, finding the injunction overly vague. In Ramirez v. Ignite Holdings Ltd., an energy services provider (Stream) and its marketing subsidiary (Ignite) brought several claims including breach of contract and trade secret misappropriation against four former sales associates who had started directly competing businesses, which Stream claimed was a violation of the associates’ non-compete agreements. The trial court granted a temporary injunction which, among other things, barred the sales associates from possessing, disclosing, or using any of Ignite’s or Stream’s trade secrets, “including but not limited to proprietary information, confidential information, training materials, templates, or sales or customer lists.”

On interlocutory appeal, the Texas Court of Appeals found that this provision was too vague to warrant enforcement. Specifically, the court held that terms used or cross-referenced in the provision such as “confidential information,” “proprietary information,” “techniques,” and “materials” were not well-defined enough to provide the sales associates with sufficient guidance on what acts they were restrained from doing. As a result, the court reversed this provision of the injunction and remanded for further proceedings.

August 19, 2013 | Southern Division, United States District Court for the Western District of Michigan
How One Auto Parts Company Successfully Defended a Misappropriation Suit

Dana, a maker of car parts such as axles, recently lost a trade secrets misappropriation action against American Axle, a fierce competitor in the auto-parts industry, after three Dana employees downloaded Dana’s files and then went to work for American Axle. Dana's unsuccessful attempt to protect its trade secrets provides a useful lesson to practitioners about how to defend a misappropriation case.

The court’s decision was based on the following three main criteria: (1) Dana did not make a strong enough showing that American Axle was a direct and fierce competitor and American Axle successfully argued that it targets a different market segment (Asia instead of the United States); (2) Dana failed to show that American Axle used the trade secrets, and failed to show that the employees misused them. The court made this point by saying, “the fact that [some of the defendants] copied their work files before departing their employment does not create an inference that they did so in an attempt to steal confidential information from Dana or to bring that information to American Axle. Copying work files at the conclusion of employment does not, in and of itself, support an inference of suspect behavior”; and (3) American Axle was able to show that it did not poach the employees it hired since those employees had been laid off by Dana.

Additionally, “Dana had not previously enforced any prohibition against copying Dana files for personal use.” Defendant Adelman “said he copied the files so that he could review all the projects he had worked on before he updated his resume.” To remedy what might otherwise seem like a valid reason to copy such files, a company policy that states that company property cannot be taken for personal use could have strengthened Dana’s case. Dana lacked such a policy. To that effect, a company has to enforce its policy, not just print it and distribute it. Defendant Wenstrup testified that he was accompanied by a Dana HR employee when he went to his office after he was terminated and copied the entire contents of the “My Documents” file from his office computer to his personal computer. This type of corporate behavior opens the door for defendants to successfully argue that such behavior is tolerated by the plaintiff corporation.

Lastly, Dana's lawyers failed to properly organize the large volume of data that they claimed was stolen. The court noted that “[t]he manner in which the evidence was presented tended to blur the distinctions between what was confidential and what was not, what was reasonably protected and what was not, what was used and what was merely downloaded, what was copied and what was returned.” Since the first step of a successful misappropriation claim is to establish the existence of a trade secret, practitioners should be thorough and methodical about parsing out and encapsulating the confidential information and tracing a direct connection the defendants’ use of that information.