Case Report: United States v. Aleynikov

On April 11, 2012, Sergei Aleynikov was acquitted by the Second Circuit court of Appeals of violating § 1832 of the Economic Espionage Act of 1996 (EEA). Following the court's invitation to amend the wording of the interstate commerce requirement in the statute, Congress amended the EEA.

Facts:

Goldman Sachs ("Goldman") employed Aleynikov in the New York area from May 2007 through June 2009 to develop key high frequency trading ("HFT") source code. HFT software executes a large number of trades in a fraction of a second, generating substantial revenue: just three of Goldman's HFT groups generated a combined $300 million in revenue in 2009. Aleynikov was paid an annual salary of $400,000, the highest salary of the twenty-five programmers in his group.

In April of 2009, he accepted the position of Executive Vice President of Teza Technologies LLC in Chicago at an annual salary of $1.15 million. Teza's founder told Aleynikov that Teza expected to develop an HFT system in six months, whereas the court found that it usually takes years to develop an HFT system.

Over a period of several months, Aleynikov transferred files from his work computer to his home computer. The FBI arrested Aleynikov at Newark Liberty International Airport on July 3, 2009 when he returned from a trip to Teza in Chicago, where he had brought a laptop and flash drive containing Goldman source code. Aleynikov claimed that he had not given the data in the laptop and flash drive to Teva.

District Court:

Aleynikov was indicted on three counts:

  • Count one: three counts of theft of trade secrets in violation of 18 U.S.C. §§ 1832(a)(2) of the Economic Espionage Act of 1996 (EEA).
  • Count two: transportation of stolen property in interstate commerce, in violation of 18 U.S.C. § 2314 of the National Stolen Property Act (NSPA).
  • Count three: unauthorized computer access and exceeding authorized access in violation of 18 U.S.C. §§ 1030(a)(2)(C) and 1030(c)(2)(B)(i)-(iii) of the Computer Fraud and Abuse Act (CFAA).

The district court (Judge Denise Cote) dismissed count three. A jury found Aleynikov guilty on counts one and two and he was sentenced to 97 months of imprisonment followed by a three-year term of supervised release, and fined $12,500. Bail pending appeal was denied because Aleynikov, a dual citizen of the United States and Russia, was feared to be a flight risk. Aleynikov appealed.

Court of Appeals:

The Court of Appeals dismissed both remaining counts.

The court found that the NSPA did not criminalize the taking of intellectual property, citing numerous cases, of which Bottone and Dowling were the most important. In United States v. Bottone, 365 F.2d 389 (2d Cir.1966) (Friendly, J.), the court held that photocopied documents describing a valuable manufacturing process were tangible goods, but noted in dicta that had no photocopies been physically transported across state lines, there would have been no violation of the NSPA. In Dowling v. United States, 473 U.S. 207 (1985), the Supreme Court held in a 6-3 decision that the NSPA did not apply to a bootleg music business because the NSPA was designed to cover theft of physical goods, and the Court refused to extend the NSPA to cover patent and copyright infringement.

More controversially, the court found that the EEA did not cover the theft of source code that was never "produced for" or "placed in" interstate commerce. Under 18 U.S.C. § 1832, Aleynikov was charged with taking a trade secret "that is related to or included in a product that is produced for or placed in interstate or foreign commerce." The court noted that the language of § 1832 was narrower than the language of § 1831 (covering foreign espionage), and held that the court therefore had to construe § 1832 as protecting only those trade secrets that were placed in or were to be placed in interstate commerce. The Goldman Sachs source code, while perhaps used to conduct interstate commerce, was never intended to be placed in interstate commerce.

Thus, the court held that while what Aleynikov did was morally wrong; Aleynikov did not commit a federal crime.

Judge Guido Calabresi concurred, but asked Congress to "state, in appropriate language, what I believe they meant to make criminal in the EEA."

Trade Secrets Clarification Act of 2012

The Theft of Trade Secrets Clarification Act was signed into law by President Obama on December 28, 2012 (Pub. L. 112-236, 126 Stat. 1627 (2012)). It rewrites the EEA as follows:

Section 1832(a) of title 18, United States Code, is amended in the matter preceding paragraph (1), by striking "or included in a product that is produced for or placed in" and inserting "a product or service used in or intended for use in".

Case Report: WebMD Health Corp. v. Anthony T. Dale

Facts

Plaintiff, WebMD, is a Delaware corporation with its principle place of business in New York. It provides health information to consumers and healthcare professionals through websites and mobile device applications, and derives its revenue from advertising on its websites, sponsorships, and services on its websites.

The defendant, Anthony T. Dale, worked for WebMD from 2000 to 2011. Throughout his employment, Dale worked in sales and, in the last year of his employment, was promoted to Sales Group Vice President. In the position, Dale was exposed to significant amounts of confidential information, such as confidential market research about WebMD’s websites; strategies for sales, marketing, and product development; and pricing strategies.

Dale also signed a restrictive covenant in July 2011, in which he agreed to not work for any competitive business, anywhere in the world, for a period of one year after the end of his employment with WebMD. It went on to define “competitive businesses” broadly as:

"(i) any enterprise engaged in developing, selling or providing (via the internet or other means) health or wellness information, decision support tools or services or application and/or communication services, directly or indirectly, to consumers, health and/or benefit plan members or employees or healthcare professionals, including but not limited to products or services that provide information on diseases, conditions or treatments, store health care information, assess personal health status, and/or assist in making informed benefit, provider or treatment choices; and (ii) any enterprise engaged in any other type of business in which the Company or one of its Affiliates is also engaged, or plans to be engaged, so long as I am directly involved in such business or planned business on behalf of the Company or one of its Affiliates."

In September 2011, Dale left WebMD to work at Health Grades, Inc., which runs two websites: www.HealthGrades.com and www.BetterMedicine.com. The first provides consumers with information about healthcare providers, while the second provides them with information on diseases and conditions. Health Grades generates most of its revenue from products it sells to hospitals that are meant to connect them to patients, such as online appointment making and physician profiles, but also generates revenue from selling advertising on BetterMedicine. As Senior Vice President of Client Development for the Hospital Division, Dale’s duties included selling these products to hospitals and direct mail campaigns, and Dale avoided interaction with the advertising sales division, although on one occasion, he negotiated a contract where he sold both products and advertising.

Procedural Background

WebMD sued Dale in the Eastern District of Pennsylvania based on diversity of citizenship, alleging four counts: breach of contract, inevitable disclosure of trade secrets, unfair competition, and conversion. Shortly after filing its complaint, plaintiff moved for an injunction to enjoin Dale from working at Health Grades under the “inevitable disclosure” doctrine, which allows for such enjoinment when there is a “substantial likelihood” that the party will inevitably disclose the original employer’s confidential information as part of its new employment.

Conclusions of Law

In ruling on WebMD’s motion, the court may grant a preliminary injunction only if (1) the plaintiff is likely to succeed on the merits, (2) denial will result in irreparable harm to the plaintiff, (3) granting the injunction will not result in irreparable harm to the defendant, and (4) granting the injunction is in the public interest.

To determine the likelihood of success on the merits, the court first determined that the agreement met the basic contract law requirements of mutual assent and consideration. Next, it found that one year was a reasonable period of time and the worldwide scope of the agreement was reasonable because of the internet-based nature of WebMD. Third, the court determined that WebMD has a legitimate economic interest in preventing competitors from learning information such as pricing strategies, product development, and market research. However, the court found that WebMD would be unlikely to prove that protection of these interests required the broad definition of “competitive businesses” in the restrictive covenant, because the “definition could describe nearly any business that provides its employees with . . . detailed information about health care benefits.” Thus, the court invoked its power under Delaware law to “blue pencil” the covenant to make it enforceable and limited its reach to only companies that actually compete with WebMD. Finally, in balancing the equities of the parties, it determined the modified covenant, limiting restrictions on Dale to a small portion of his duties at Health Grades, would protect WebMD’s interests, without unduly harming Dale.

Next, the court determined that not granting the preliminary injunction would result in irreparable harm to WebMD, stating several reasons. First, Dale stipulated in the agreement that his competition would result in such harm. Next, Health Grades would not monitor Dale’s compliance. Last, quantifying the effects of a breach would be “exceedingly difficult.”
Further, it determined that granting the injunction, as modified, would not result in irreparable harm to Dale, because he would still be permitted to perform the majority of his duties at Health Grades.

Finally, the court found that the injunction would serve the public interest because it would discourage unfair competition, misappropriation of confidential information and trade secrets, and preserve the sanctity of freely contracted obligations.

Significance of Decision

Although the court found that the restrictive covenant in this case was drastically overbroad, Delaware’s allowance of the Blue Pencil rule permitted the court to substantially edit the language of the covenant. Thus, the overbroad covenant was saved and enforceable, albeit to a limited degree.

Case Report: Christou v. Beatport, LLC

Case Report

On December 1, 2010, Regas Christou, along with Plaintiffs cumulatively known as “SOCO”, filed a nine-part complaint against defendants Beatport, Roulier, Beta, and AM Only. Defendant AM Only was later dropped from the suit. The sixth claim of the complaint was for misappropriation of trade secrets by the remaining defendants. The trial is set to begin on June 24, 2013 in the U.S. District Court for the District of Colorado in front of Judge R. Brooke Jackson. At a status conference, on February 21, 2013 Judge Jackson suggested that the parties discuss settlement discussions at their next conference.

Relevant Facts

Regas Christou, a nightclub owner, employed Bradley Roulier as a talent buyer to help Christou book DJ’s. While employed for Christou, Roulier formed “Beatport,” an “online marketplace for downloading music that catered to consumers and producers of Electronic Dance Music." Christou initially helped fund Roulier and promote the company. However, Christou claimed that Roulier eventually opened a competing club, and that Roulier used his ability to promote DJ’s success through Beatport as a tool to squeeze Christou’s clubs out of the market. Christou brought various claims against Roulier, including for multiple types of antitrust violations. The most relevant claim was for misappropriation of trade secrets, “including login information for [Christou’s] profiles on MySpace, lists of MySpace ‘friends,’ confidential lists of personal cell phone numbers and email addresses for DJs, agents, and promoters, and customer lists.”

Motion Practice and Orders

The parties’ motion practice in this litigation was so extensive that Judge Jackson was prompted to go against his general stance of “avoid[ing] artificial restrictions on briefs” and limiting all future parties’ motions and briefs to 20 pages. Amongst the motions submitted prior to the Judge’s restriction was a 22-page motion to dismiss pursuant to F.R.C.P. 12(b)(6) by Defendant Beatport. The crux of Defendant’s argument in the motion is twofold: (1) Plaintiff’s allegations that their MySpace lists and web profiles are trade secrets are insufficient under the pleading standard imposed by Bell Atlantic Corp. v. Twombly[1] ; and, (2) even if the lists constitute trade secrets, plaintiffs fail to allege defendants knew or should have know that the secrets were misappropriated, as required under C.R.S. § 7-74-101, et seq..

Defendant’s cited to the eight factors for assessing an alleged trade secret’s status, as laid out in Hertz v. Luzenac Group[2]. The defendants concluded that protecting the MySpace web profiles as trade secrets “finds no support in any of the Colorado Supply factors.” Unfortunately for Defendants, they did not analyze the factors individually. The Court evaluated the eight Colorado factors, and found that the fifth and sixth factors[3] are at the root of the trade secrets issue, and that “the trade secret [involved] is not merely [a] list of names”, as the defendant contends, but rather “their email and contact information as well as the ability to notify them and promote directly to them via their MySpace accounts.” Christou, 849 F.Supp.2d at 1075-76. The court found that “[w]hether plaintiff’s MySpace friends list is a trade secret is a question of fact. However, given the weight of the Colorado Supply factors, the Court [found] that plaintiffs have alleged sufficient facts to maintain their trade secret claim at the motion to dismiss stage.” Id. at 1076.

Defendant’s second argument: that even if the lists constitute trade secrets, plaintiffs have failed to allege that defendant Beatport misappropriated them; rather plaintiffs merely asserted “that Beatport can be held strictly liable for Mr. Roulier’s alleged misappropriation … by simply employing a person who allegedly possesses Plaintiff’s trade secrets …” was similarly rejected by the Court. Id. at 1077. The Court found that defendant was mistaken in relying on Ciena Communications, Inc. v. Nachazel[4] and refused to extend Ciena to apply to situations where there are allegations that plaintiff’s trade secrets were misappropriated by a co-founder and officer (as opposed to merely an employee) of the defendant during his employment with the defendant.

Significance of Decision

In allowing the case to proceed the court highlighted that trades secrets law is about balancing and there are often issues of disputed fact that must be resolved by the finder of fact, which cannot be decided on a motion to dismiss. Additionally, the Court’s order extends the realm of possible trade secrets by holding that consumer lists on social media sites could indeed amount to trade secrets. If the final resolution of this case holds that the MySpace lists are in fact protectable trade secrets it would be extending the realm of trade secrets to consumer lists that are essentially entirely within the public eye. Additionally, a decision to categorize the lists as trade secrets would imply that the real issue in the case is that fact that Beatport used Christou’s password to access the list, because presumably Beatport would be free to simply mimic the consumer list by requesting the same “friends”, especially since the “friends” list is available for public view.

[1] 550 U.S. 544 (2007)

[2] 576 F.3d 1103, 1115 (10th Cir. 2009) (citing Colorado Supply Co. v. Stewart, 797 P.2d 1303, 1306 (Colo. App. 1990))

[3] “(5) whether customer information could be readily obtained from public directories; (6) whether customer information is readily ascertainable from sources outside the owner's business…” Christou v. Beatport, LLC, 849 F. Supp. 2d 1055, 1075 (D. Colo. 2012) (citing Hertz v. Luzenac Group, 576 F.3d 1103, 1115 (10th Cir. 2009) (citing Colorado Supply Co. v. Stewart, 797 P.2d 1303, 1306 (Colo. App. 1990)).

[4] No. 09-CV-02845-MSK-MJW, 2010 WL 3489915 (D. Colo. Aug. 31, 2010)

Case Report: SunPower v. SolarCity

Factual Background – Defendants’ Employment History and Alleged Misappropriation

The individual defendants were employed in sales positions at SunPower before being recruited by SolarCity, and signed agreements at SunPower agreeing not to disclose “confidential or proprietary information” to third parties and to return such information to SunPower at the end of their employment. In December 2011 SunPower discovered that one of the defendants had accessed his company email after he was terminated and had forwarded emails containing customer information, price lists, and market reports to his personal email address. SunPower launched an investigation and computer forensic analysis that revealed that, shortly before leaving SunPower, each of the defendants had used USBs and external hard drives to store SunPower files containing contact information, sales histories, potential new sales, status, market and business analysis, quotes, forecast analysis, cash flow analysis, and project economics. SunPower alleged that this information was delivered to defendant SolarCity and that defendants benefitted from the data. SunPower’s resulting complaint asserted causes of action for both misappropriation of trade secrets and misappropriation of “non-trade secret proprietary information,” listed above.

Defendants’ Partial Motion to Dismiss

On August 2, 2012, Defendants moved to dismiss the claims for misappropriation of “non-trade secret proprietary information,” arguing that these claims are preempted by the California Uniform Trade Secrets Act (CUTSA). CUTSA includes a savings clause (Section 3426.7) that preempts claims based on the same nucleus of facts as trade secret misappropriation. The preemption inquiry looks at whether the non-trade secret claims “are not more than a restatement of the same operative facts supporting trade secret misappropriation,” and whether there is any “material distinction between the wrongdoing alleged in a [C]UTSA claim and that alleged in a different claim.” Convolve, Inc. v. Compaq Comp. Corp., No. 00 CV 5141 (GBD) 2006 WL 839022, at 6 (S.D.N.Y. Mar. 31, 2006) (applying California law).

District Court Dismissal

On December 11, 2012, the Court granted defendants’ partial motion to dismiss and held that SunPower’s non-trade secret claims were preempted by CUTSA. The Court cited Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210 (2010), which held that the UTSA superseded claims for conversion, common law unfair business practices, and intentional and negligent misrepresentation where such claims were based on the misappropriation of trade secrets. The Court agreed with the rationale in Silvaco, stating that “in order to state a claim based on the taking of information, a plaintiff must show that he has some property right in such information… If the basis of the alleged property right is in essence that the information is… ‘not… generally known to the public,’ (Cal. Civ. Code § 3426.1(d)(1)) then the claim is sufficiently close to a trade secret claim that it should be superseded notwithstanding the fact that the information fails to meet the definition of a trade secret. To permit otherwise would allow plaintiffs to avoid the preclusive effect of CUTSA (and thereby plead potentially more favorable common-law claims) by simply failing to allege one of the elements necessary for information to qualify as a trade secret.”

The Court refused to follow the Southern District of California’s reading of Silvaco in Leatt Corp. v. Innovative Safety Tech., LLC, 09-CV-1301-IEG (POR), 2010 WL 2803947, at *6 n. 5 (S.D. Cal. 2010) (holding that Silvaco stands for the notion that the UTSA only preempts additional claims that depend on the misappropriation of a trade secret, and not otherwise confidential or proprietary information). The Court also held that the Ninth Circuit’s rulings in Imax Corp. v. Cinema Technologies, Inc. and City Solutions, Inc. v. Clear Channel Communications, which suggested that a plaintiff who fails to show that information constitutes a legally protectable trade secret may nevertheless prevail on non-trade secret claims based on the misappropriation of the same information, predate Silvaco and failed to consider the question of preemption, and should not be followed to the extent that they conflict with Silvaco’s holding that plaintiffs may not bring claims based on confidential or proprietary information that does not satisfy the definition of trade secret and is not made property by “some provision of positive law.”

Applying the Silvaco rationale to SunPower’s claims, the Court found that SunPower failed to show it had property rights in its non-trade secret information. The Court noted that SunPower never defined the term “non-trade secret proprietary information;” and that it used the terms “confidential information” and “non-confidential proprietary information” in its complaint to refer to the same computer files, indicating that the distinction SunPower was attempting to draw was merely superficial. The Court found that there was “no material difference between the wrongdoing alleged in support of SunPower’s Trade Secret Claim and the wrongdoing alleged in support of SunPower’s Non Trade Secret Claims.” The Court dismissed SunPower’s non-trade secret claims, and granted it leave to amend its complaint to show that it has some property interest in the non-trade secret information by virtue of some “positive law,” and that that interest is qualitatively different from any property interest conferred by CUTSA. The parties settled shortly after the dismissal.

The Court’s decision clarified the law on preemption in California and set a strict standard for avoiding CUTSA preemption. Plaintiffs bringing claims based on confidential or proprietary information must be able to show that the information either constitutes a trade secret or is protected by a distinct property right granted by statutory or common law. Plaintiffs seeking to bring both trade secret claims and non-trade secret claims based on the same information must be able to show that the non-trade secret claims allege wrongdoing that is materially distinct from the wrongdoing alleged in the CUTSA claim in order to survive preemption.

Case Report: Phonedog v. Kravitz

I . FACTS

PhoneDog is an interactive mobile news and reviews web resource. PhoneDog employed Noah Kravitz as a product reviewer and video blogger. Pursuant to his employment, Kravitz submitted written and video content to PhoneDog, which was then transmitted to its users via a variety of mediums, including PhoneDog's website and the Twitter Account. Kravitz used the Twitter account “@PhoneDog_Noah” to disseminate information and promote PhoneDog's services. PhoneDog alleged that all employee Twitter accounts follow the same naming convention (i.e. “@PhoneDog_Name”), and that these accounts, as well as the passwords to such accounts, constitute proprietary, confidential information.

In Octoboer 2010, Kravitz quit PhoneDog after generating approximately 17,000 Twitter followers for @PhoneDog_Noah. At that time, PhoneDog requested that he relinquish use of the Twitter Account. In response, Mr. Kravitz changed the Account handle to ‘@noahkravitz,’ and continues to use the Account. As a result, PhoneDog alleges that it has suffered at least $340,000 in damages.

PhoneDog brought a number of claims against Kravtiz, most relevantly for misappropriation of a trade secret and conversion.

II. CALIFORNIA UNIFORM TRADE SECRETS ACT

The claim for misappropriation of trade secrets is governed by the California Uniform Trade Secrets Act (CUTSA). CUTSA defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value . . . from not being generally known to the public . . . ; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” CUTSA defines misappropriation as “[a]cquisition of a trade secret of another by a person who knows or has reason to know [it] was acquired by improper means” or unauthorized “[d]isclosure or use of a [another’s] trade secret.” CUTSA has a rather unique “negative preemption clause” – most states adopted UTSA’s with positive preemption clauses. However, California courts have nonetheless interpreted CUTSA to preempt all common law torts based on misappropriation of trade secrets.

III. COMPLAINT AND MOTION TO DISMISS

As part of its amended complaint, PhoneDog identified its trade secret as confidential information such as the passwords to PhoneDog's Twitter accounts, including all @PhoneDog__NAME Twitter accounts used by PhoneDog's agents. PhoneDog further alleged that Kravitz misappropriated the secret by making “improper use of [his] knowledge of the [secret] to access the Account to compete unfairly against PhoneDog for PhoneDog's existing customers.”

Kravitz moved to dismiss the misappropriation claim, arguing first that PhoneDog had not stated a trade secret within the meaning of CUTSA. He further argued that the claim should fail because: passwords to twitter accounts have “no independent economic value”; “PhoneDog did not make any reasonable efforts to maintain the secrecy of the password”; and that his alleged conduct did not fall within the definition of misappropriation.

The District Court denied Kravitz’s motion to dismiss. It held that “PhoneDog [had] sufficiently described the subject matter of the trade secret with sufficient particularity,” and averred that Kravitz’s refusal to “relinquish use of the password and [a]ccount” could constitute misappropriation. The court noted that a final determination on the issues “require[] consideration of evidence beyond the scope of the pleading.”

IV. ANALYSIS OF CLAIM

Various commentators have stated that this case will determine who “owns” a Twitter account and/or its followers.[1] Although PhoneDog asserted ownership of the Twitter account as part of its conversion claim, the trade secrets issue does not necessarily hinge upon ownership. Phonedog has not asserted that its Twitter account or followers constitute a trade secret, but rather the log-in information. This case thus differs from a typical customer list misappropriation claim.[2]

A. Trade Secrets and Value
PhoneDog’s claim is more akin to a situation where Kravitz used his knowledge of a secret pin code (obtained based on his employment with PhoneDog) to gain access to a customer list, and PhoneDog asserted a trade secret in the code (and not list). Moreover, the value of the trade secret would not be in the names on the list, but rather that the information enabled the holder to instantaneously convert the customers to their own.

Recent cases (such as TMX Funding, Inc. v. Impero Technologies. Inc.) indicate that log-in information can constitute a trade secret, provided the claimant can prove it derived independent economic value from keeping the information secret. In this regard, a case involving a “hijacked” Twitter account is distinguishable from Eagle v. Morgan, which involving a hijacked LinkedIn account. In the latter case, the court determined that the LinkedIn account merely provided access to a customer list that was otherwise readily available. Even obtaining “links” to potential clients does not guarantee a sale. Thus, while companies use LinkedIn to increase online presence in order to find a potential sales partner or new employer, Twitter is used for the sole purpose of increasing online presence. In this regard, obtaining access to Twitter users that have already agreed to follow your account may in fact be more valuable than obtaining a confidential customer list: even after obtaining the list, the misappropriator must still solicit the customer to leave the plaintiff in favor of its competing venture. What differentiates the present case is that Kravitz used the login information to disassociate the account with PhoneDog, going beyond simply stealing a list of customers, and essentially stealing the sales without the customers even consenting.

B. Reasonable Efforts and Misappropriation
Assuming that log-in information can constitute a trade secret and provides PhoneDog with a competitive economic advantage based on its secrecy, PhoneDog still has the burden of: 1) proving that it took reasonable efforts to maintain secrecy under the circumstances, and 2) that Kravitz misappropriated the secret. Although these are two separate analyses, under the particular circumstances of the case, both hinge on the nature of PhoneDog’s relationship with Kravitz, and the circumstances under which the Twitter account was created.

This analysis is heavily factual, and the record was never fully developed. Certainly the existence of some sort of agreement regarding the account (or lackthereof) between the two parties would be vital. The parties have competing interpretations on that fact, as Kravitz claims “that he – not PhoneDog – initially created the password,” while PhoneDog responds that “even if Mr. Kravitz created the Account, he did so at PhoneDog's request and for its benefit and in the course and scope of his employment with PhoneDog.” The court may also be influenced by the extent to which Kravitz personalized his tweets and Twitter handle, which on one hand contained his name, but also seem to follow PhoneDog’s standardized business format (making them seem more similar to a business e-mail address).

The court could use this opportunity to analyze each party’s property interest in the Twitter account. However, the court could alternatively opt to forgo this analysis and instead rely more heavily on a relational theory to determine the validity of PhoneDog’s trade secret claim. If the court were to determine the ownership rights of an online social media profile, the analysis would be more appropriate as part of PhoneDog’s conversion claim, which directly asserts the account is company property.
However, the court may not even consider the conversion claim if PhoneDog’s trade secret claim is successful. As noted earlier, federal courts have interpreted CUTSA to preempt common law claims – including conversion – if both claims “are based entirely on the same factual allegations that form the basis of its trade secrets claim.”

Although the claims technically differ as to what Kravitz took (login password vs. the account itself), PhoneDog’s conversion claim is “based on the same nucleus of facts as its claim for misappropriation of trade secrets,” and thus is likely to be preempted.

C. Damages

The final prominent issue is damages. Although PhoneDog claims to be using “industry standard” when it calculated that each twitter follower was worth $2.50/month, it failed to cite to any relevant authority. As Kravitz contends, the value should be based on multiple factors, including: “(1) the number of followers; (2) the number of tweets; (3) the content of the tweets; (4) the person publishing the tweets; and (5) the person placing the value of the account.” If the court is forced to determine actual damages, it will be interesting to see if it incorporates a “network effects” theory into its analysis, whereas the value of each Twitter follower increases as the total number of followers increases. If the court chooses a much lower figure for damages, it could establish precedent that would discourage future litigation, since it may not be cost-effective.

V. SETTLEMENT

On or around December 19, 2012, the parties settled. Although the actual details of the settlement were confidential, it appears Kravitz has been permitted to retain ownership of the twitter account. Although none of the issues outlined above were entertained by the court, a good takeaway from this case is that companies should clearly define social media policies in employment contracts.

[1] See Tyson Snow, Who Owns Your Twitter Account – the PhoneDog Case, SOCIAL MEDIA ESQ. (Jan. 8, 2012), www.socialmediaesq.com/2012/01/08/phonedog-who-owns-your-twitter-account/; John Biggs, Lawsuit May Determine Who Owns a Twitter Account, N.Y. TIMES, Dec. 25, 2011, http://www.nytimes.com/2011/12/26/technology/lawsuit-may-determine-who-o....

[2] California Courts refer to a typical trade secret misappropriation of a customer lists as “route cases,” which “derive their name from cases involving businesses whose employees engaged in business by following particular routes to solicit business from a regular group of customers.” Although industry evolved such that customer lists can have value beyond simply the customer’s physical delivery routes, the basic principles still apply.

J. Crew Complaint Illustrates Issues with Litigating Misappropriation Cases Under New York Law

By Robert A. Levine, '13

In a recently filed case, the popular clothing brand J. Crew Group, Inc, accused an ex-designer of stealing confidential information his new job at Bonobos, a competing clothing line. J. Crew claims its “confidential and proprietary information [includes] product designs, . . . productions schedules, manufacturing resources, and other information concerning [its] business operations,” such as budgets and marketing strategies. At first glance, this would appear to be a typical case of an employee leaving one company for its competitor (and taking the former’s trade secrets with it). Indeed, Law360’s headline for the case reads, “J. Crew says Designer Lifted Trade Secrets for New Gig.” However, J. Crew’s complaint notably lacks any mention of the actual term “trade secret.” The complaint illustrates the unique considerations for lawyers that litigate misappropriation cases under New York law.

New York is one of three states that has yet to adopt a Uniform Trade Secrets Act. A claim for trade secret misappropriation in New York relies on common law. New York courts have adopted the definition of trade secret from Section 757 of the Restatement of Torts. Per comment b of the Restatement, “A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” Unlike the Uniform Trade Secrets Act, the Restatement has a “use” requirement – the secret must be deployed “for continuous use in the operation of the [claimant's] business.”

Analysts, included noted trade secrets Professor Eric Claeys, have questioned the vitality of the “use” requirement beyond specific, sub-sets of facts. However, it is by all accounts still “good law” in New York. For example, in Massachusetts (which, along with Texas, has also not adopted a Uniform Trade Secrets Act), courts have spent some time specifically discussing the “use” requirement. In Portfolioscope, Inc. v. I-Flex Solutions Ltd., 473 F. Supp. 2d 252 (D. Mass. 2007), the District Court of Massachusetts noted that, although “one District of Massachusetts judge [had] questioned the vitality of this continuous use requirement,” the requirement is nonetheless “part of Massachusetts law and this court is powerless to remove it.”

New York also recognizes a claim for misappropriation of a plaintiff’s property where defendant improperly acquired the property in order to compete with plaintiff. This “unfair competition” claim is broader, and can be applied to both real and intangible property, such as “ideas.” Like traditional trade secret cases, these claims involve analysis of the “commercial advantage” afforded to the defendant by the misappropriated property. However, they have a heavier focus on whether the property (or idea) is “unique” and/or “novel.” In Daou v. Huffington, No. 651997/2010 (N.Y. Sup. Ct. Oct. 25, 2011) -- a case involving an “idea” for a blog -- the New York Supreme Court held that “New York law recognizes the tort of misappropriation of ideas when a plaintiff’s factual assertions establish that the misappropriated ideas were both novel and concrete.”

So is J. Crew’s claim merely one for misappropriation of its property and ideas? Maybe. However, J. Crew’s legal team included a separate claim for unfair competition. That claim (in paragraphs 18 and 19 of the complaint) alleges that Defendant “engaged in unfair competition by, among other things, unlawfully misappropriating and using J. Crew’s confidential information for the benefit of J. Crew’s competitor, Bonobos . . . .” This claim seems to be more aligned with the second type of misappropriation claim discussed above.

Ultimately, this case will likely come down to whether and to what extent Defendant was bound by a non-disclosure agreement (described in paragraph 8). J. Crew will also need to persuade a jury that Defendant’s act of sending J. Crew’s confidential information to his personal computer evidences intent to use that information against J. Crew, and for Bonobos. However, it provides a good example of the “legal tightrope” that New York litigators may need to walk in order to avoid having to prove that their client’s pre-commercial ideas, designs, etc., are “trade secrets” and “continuously used” in their business.


(3/5/13 update: On February 1, 2013 TSI filed a version of the this Commentary in reaction to the filing of J. Crew's complaint in this case. It is has been edited to reflect a later settlement between the parties and stipulated dismissal. The original Commentary's substantive analysis of J. Crew's claim has been preserved to the extent possible.)

Is there a "Secret" to Success in Reality TV Formatting?

By Robert A. Levine, '13

When one network attempts to rip-off another network’s program, the aggrieved party may turn to its legal counsel to see if there are any claims against the perceived “copycat” show and its producers. While a written expression of ideas such as scripts are copyrightable intellectual property, see 17 U.S.C. § 101 (2010), some entertainment industry executives and lawyers argue there is a “gap” in protection in regards to “entertainment formats,” and specifically in the context of reality television programming. See generally Edwin Komen, Are Formats the Floormats Of Copyright?, Law360 (Jul. 10, 2012), http://www.law360.com/articles/358214/are-formats-the-floor-mats-of-copy... (hereinafter Komen). As a result, rights holders have attempted to bring causes of action based on other legal theories, such as trade secrets. This circumstance recently played out in the Central District of California, where ABC allegedly copied one of CBS’ reality TV shows, and CBS attempted to frame the conduct as an act of trade secret misappropriation.

On May 10, 2012, CBS Broadcasting, Inc. (“CBS”) filed suit against ABC, Inc. and the Walt Disney Co. (“ABC) in the Central District of California, alleging ten causes of action, including trade secrets misappropriation. Complaint at 1-2 CBS Broadcasting Inc. v. American Broadcasting Companies, Inc. (“CBS Broadcasting”) (C.D. Cal. 2012) (No. 12-04073) (“Compl.”). CBS airs a popular reality television show Big Brother. Id. The network claimed that ABC misappropriated several of CBS’ trade secrets -- including production processes for Big Brother -- in developing a new reality series Life in a Glass House (“Glass House”). Id. at 15-16. CBS argued that these processes were unique in the industry and made Big Brother successful by enabling the show’s staff to “prep, produce, edit and deliver each episode in two and a half days.” Id. at 16. CBS believed that ABC improperly acquired knowledge about these processes from former Big Brother producers and staff whom ABC hired to work on Glass House. Id. at 16-17. The workers all had non-disclosure agreements with CBS. Id.

CBS later filed a Temporary Restraining Order (TRO) with the Court to enjoin ABC from airing its program. See generally Application for a Temporary Restraining Order CBS Broadcasting Inc. v. American Broadcasting Companies, Inc. (C.D. Cal. 2012) (No. 12-04073) (“TRO”). However, the Honorable Gary A. Feess denied the TRO, expressing “serious doubts as to CBS’s ability to demonstrate either [1] that the purported trade secrets listed qualify for protection; or [2] that Defendants are actively misappropriating any such trade secrets.” Order Re: Application for Temporary Restraining order at 13 CBS Broadcasting Inc. v. American Broadcasting Companies, Inc. (C.D. Cal. June 21, 2012) (No. 12-04073) (“Order ”).

One party alleging that another stole an idea for a TV show (or movie, for the matter) is by no means uncommon. See, e.g., Kenneth Basin & Tina Rad, "I Could Have Been A Fragrance Millionaire": Toward A Federal Idea Protection Act, 56 J. Copyright Soc'y U.S.A. 731, 732-33 (2009) (listing “idea . . . litigation” cases in the entertainment industry, and noting that “the still growing field of reality television may prove the most lawsuit-prone genre yet” (internal citation omitted)). The Ninth Circuit has a particular expertise in dealing with these types of cases, as “Hollywood” falls within the Circuit’s jurisdictional borders. Claims for stolen “ideas” – whether it be in the entertainment industry or otherwise -- are typically brought through a breach of contract cause of action. E.g. Basin & Rad, 56 J. Copyright Soc'y U.S.A. at 734 (“The majority of idea theft law claims are brought under the theory of an express or implied contract.”); see also Grosso v. Miramax Film Corp., 383 F.3d 965, 968 (9th Cir. 2004) opinion amended on denial of reh'g, 400 F.3d 658 (9th Cir. 2005) (holding that a breach of an implied contract claim alleging theft of a movie idea is not preempted by the Copyright Act).

However, these claims typically stem from a “pitch meeting” gone awry: a writer shares a “brilliant idea for a new film or television program,” and the producer rejects the idea, only to later use it without compensating the “idea purveryor.” See Aileen Brophy, Whose Idea Is It Anyway? Protecting Idea Purveyors and Media Producers After Grosso v. Miramax, 23 Cardozo Arts & Ent. L.J. 507, 524 (2005). In CBS, there was no meeting or pitch: CBS’ claim is essentially one of a copycat television show format. Parties generally face an uphill battle when attempting to assert their television format as protectable intellectual property, see generally Jonathan Coad, TV Format Rights Owners Face Large Reality Cheque, The Guardian (Apr. 24, 6:59 EDT), http://www.guardian.co.uk/media-network/media-network-blog/2012/apr/24/t..., and “format wars have had a long history with no clear-cut victor . . . .” Komen (citing K. Raygor and E. Komen, Limitations On Copyright Protection For Format Ideas In Reality Television Programming, 2009 MEDIA LAW RESOURCE CENTER BULLETIN, Issue No. 4, at 97-121 (December 2009)). As such, CBS attempted to combine various causes of action to stop ABC from airing its show, focusing mainly on copyright infringement and trade secret misappropriation. However, as Judge Ness noted in his order denying the TRO, CBS not only conflated the copyright and Trade Secret issues, but most of CBS’ alleged intellectual property may simply be unprotectable.

CBS’ copyright infringement claim boiled down to “whether there [was] substantial similarity between Big Brother’s protected elements and elements of Glass House.” Order at 5. Copyright law protects the “concrete expression of . . . ideas,” but not “general plot ideas” or “procedure[s], process[es], system[s], or method[s] of operation.” Id. 6-7 (internal citation and quotation marks omitted); see also 17 U.S.C. § 102(b). Nor does it aim at rewarding one’s labor in the interest of fairness. Id. at 7 (citing Feist Publications, Inc., v. Rural Tele. Serv. Co., 499 U.S. 340, 350 (1991)). “CBS cannot merely cobble together a series of structural and conceptual reality television ‘elements’ having little, if anything to do with ‘specific details’ or ‘concrete elements’ of the artwork, and then claim the combination of these vague elements substantiate a substantial similarity finding . . . .” Id. at 11. Indeed, Judge Ness goes as far as to suggest that the nature of reality-based television shows – i.e. that their “the fundamental premise is . . . to let ‘reality’ play its course” – may take the form outside the gamut of copyright protection all together. See id. at 12 (noting that reality television shows do not “entail a ‘plot as that term is normally used’ in the context of copyright law, and that “[r]eality . . . is hard to copy” (internal citation omitted)).

This was not the first time CBS had been unsuccessful at utilizing copyright law to protect its television formats. Indeed, the network had previously tried (and failed) to gain a TRO against ABC on a similar copyright infringement legal theory regarding ABC’s show “I’m a Celebrity… Get Me Out of Here.” See CBS Loses Fight to Stop US Version of 'I'm a Celebrity...', Brand Republic (Jan. 14, 2003 4:00 PM), http://www.brandrepublic.com/news/168059/CBS-loses-fight-stop-US-version.... Thus, CBS added a rather novel trade secret claim to the TRO, which essentially framed ABC’s copycat programming as an act of corporate espionage. In cases of stolen ideas that do not involve submissions -- and rather “dueling pairs of conspicuous projects” – trade secret claims may be actionable “to the extent they involve corporate espionage . . . .” Basin & Rad, 56 J. Copyright Soc'y U.S.A. at 759 n.129.

The Court held that CBS had failed to present enough evidence to warrant a TRO. While the specifics of CBS’ alleged trade secrets were redacted from their motion, see TRO at 18 and Appendix A, the Court nonetheless deemed the information “generic material,” and refused CBS’ carte blanche claim that the “[unique] combination of characteristics and components” created a “unified process” that was both confidential, and “afford[ed] a competitive advantage . . . .” Order at 13 and n.8 (citing Vermont Microsystems, Inc. v. Autodesk, Inc., 88 F.3d 142 (2d. Cir. 1996); O2 Micro Intern. Ltd. v. Monolithic Power Systems, Inc., 420 F.Supp.2d 1070 (N.D. Cal. 2006)).

Although CBS presented some viable circumstantial evidence misappropriation (i.e. ABC did in fact hire former Big Brother employees with non-disclosure agreements), the Court noted the lack of direct evidence of misappropriation. Order at 13-14. While direct evidence is not necessarily required, the Court refused to let CBS rely on the inevitable disclosure doctrine and other indirect evidence to completely halt a multi-million dollar television production. Order at 13-14.

Although unsuccessful in this instance, I do not believe that Judge Ness’ ruling forecloses the possibility that a network can have viable trade secrets in the processes used to create forms of entertainment. The existence and protection of such a secret could make the threat of a misappropriation claim a valuable tool to help fill in the current gap in protection. While at least one author has campaigned for a “Federal Idea Protection Act,” see generally Basin & Rad, 56 J. Copyright Soc'y U.S.A. at 758-66, and other aggrieved parties have attempted to use creative ways to bring claims for idea theft, see, e.g., Eriq Gardner, NBCU, BBC Win ‘Stolen’ TV Idea Case, THR, Esq. (Oct. 4, 2010 8:59 AM), http://reporter.blogs.com/thresq/2010/10/judge-rules-stolen-tv-idea-does... (describing Christopher Cardillo’s “legal theory” that NBCU and BBC engaged in “criminal racketeering by running a website that allowed people to submit ideas for new TV shows” after the networks allegedly stole his idea for a reality show about a “family of four that travel around the nation in a Winnebago”), formats appear to at least be “floor mats [of] copyright.” Komen. Moreover, given the propensity for American based networks to import foreign reality programming formats, the issue has become global. See International Format Lawyers Association, http://www.ifla.tv/ (last visited Sep. 14, 2012) (describing the need for an “international network of . . . [television] format lawyers” (emphasis added).

As parties generally lack the ability to stop others from simply replicating their success in the entertainment industry, the threat of trade secrets claims (framed as acts of corporate espionage) appears to be a novel approach and could offer additional protection. It would also influence networks to beef up security measures surrounding productions in order to prove they took reasonable precautions to protect their information, and preserve a claim for trade secret misappropriation. That being said, while “‘reality’ fare have become [a] source of the [television] industry's success,” Arthur R. Miller, Common Law Protection for Products of the Mind: An "Idea" Whose Time Has Come, 119 Harv. L. Rev. 703, 711-12 (2006) (internal citation omitted), property is only worth protecting so long as it remains valuable. As was the case with the ill-fated Glass House, networks may lose “interest[] in pursuing . . . case[s] against . . . show[s] [that] no one is watching anyway.” Sean O’Neal, CBS Decides that ABC's Big Brother Rip-Off Isn't Even Worth Dignifying with a Lawsuit, A.V. Club (Aug. 17, 2012) (noting CBS had dropped its suit, and released a statement that “[t]he viewers had spoken and delivered the ultimate form of justice against The Glass House”).

Oklahoma Supreme Court holds that an agreement to arbitrate does not prohibit judicial review of agreements containing competitive restrictions

An agreement to arbitrate does not prohibit judicial review of a non-competition agreement

On November 22, 2011, the Supreme Court of the State of Oklahoma held on appeal that an arbitration provision intended to hear all disputes in an employment agreement containing restraints of trade did not prohibit judicial review of those provisions where Oklahoma adopted a public policy against such restraints. Howard v. Nitro-Lift Technologies, LLC, 2011 OK 98 (2011).

While the holding may appear in harmony with past decisions, the Oklahoma Supreme Court took an unusual turn in Howard by reviewing the non-competition agreement as a gateway matter. Generally, a Federal or State court will enforce a parties’ agreement to arbitrate and submit all appropriate disputes to arbitration. But a court has primary jurisdiction to determine the validity of an arbitration agreement as a gateway matter before arbitration. Accordingly, the Oklahoma Supreme Court established in previous cases that an Oklahoma court may again review the validity of a non-competition agreement after it was already resolved in arbitration. See, e.g., Cardiovascular Surgical Specialists, Corp. v. Mammana, 2002 OK 27 (2002) (holding that an arbitrator’s decision on the validity of a non-competition agreement did not prevent a subsequent judicial review of the same); see also Wyatt-Doyle & Butler Engineers, Inc. v. City of Eufaula, 2000 OK 74 (2000). But in Howard, it suggested that the Oklahoma judiciary had primary authority over the question of enforceability of an agreement to restrain freedom of trade, not the arbitrator.

Relevant Facts

Nitro-Lift produces nitrogen for use on oil and gas well sites (i.e., “nitrogen generation”). Between 2008 and 2010, it employed Plaintiffs Eddie Lee Howard and Shane Schneider as field workers. During that time, the employees signed identical employment agreements that prohibited them, if they left Nitro-Lift, from 1) working for two years for any company in the United States, which made at least 5% of its revenue from nitrogen generation (a field in which Nitro-Lift specialized); and 2) soliciting Nitro-Lift’s employees or customers for a competitor (collectively, “Competitive Restrictions”). The employment agreements also provided that any disputes would be resolved by arbitration in Houston, Texas and according to Louisiana law, which gives more favorable treatment than Oklahoma law to enforcing non-competition agreements. See, e.g., Ticheli v. John H. Carter Co., 996 So. 2d 437 (La. App. 2d Cir. 2008) (finding a non-competition agreement enforceable even though it was not defined in geography or time). In 2010, each employee quit Nitro-Lift after a dispute over the long hours worked and lack of overtime compensation, and each began work for an Arkansan competitor.

In July 2010, Nitro-Lift filed a demand for arbitration in Houston, alleging that the employees had breached the Competitive Restrictions. It also sought to enjoin the former employees from disclosing or using its trade secrets about nitrogen-generation.

On October 14, 2010, the employees filed a declaratory judgment action in the District Court of Johnston County, Oklahoma seeking the court to declare the Competitive Restrictions void under Oklahoma public policy and to enjoin enforcement of the Competitive Restrictions. The employees also asserted that they never acquired any of Nitro-Lift’s trade secrets as “manual laborers” in the field working on truck gauges, and rarely dealt with the company’s customers. Nitro-Lift, however, countered that employees were “thoroughly trained technicians” who obtained a “significant amount of confidential information and training concerning the implementation of specialized, [proprietary] equipment and procedures.”
On November 9, 2010, Nitro-Lift filed a motion to dismiss, arguing that: 1) the arbitration clause was valid and 2) the enforceability of the Competitive Restrictions should be submitted to the arbitrator in Houston.

On November 23, 2010, the district court issued a final order dismissing the employees’ motion for a TRO and granting Nitro-Lift’s motion to dismiss. Acknowledging that the enforceability of an arbitration clause (i.e., “arbitrability”) was a “gateway” matter for the judiciary, the court found that the arbitration agreement in the employment agreements was valid on its face and reasonable in its terms. Therefore, it said any dispute between the employees and Nitro-Lift, including enforceability of the Competitive Restrictions, should proceed in the arbitration Nitro-Lift had filed in Houston. The court further found the Competitive Restrictions were temporally reasonable in light of Nitro-Lift’s “legitimate interest in the protection of its confidentialities and proprietary matters.”

Parties’ arguments on appeal to the Supreme Court of the State of Oklahoma

On December 14, 2010, the employees appealed to the Oklahoma Supreme Court asking it to decide whether an employer could avoid Oklahoma’s public policy against restraints of trade by providing in the employment agreements that disputes regarding Competitive Restrictions would be resolved through arbitration applying a foreign State’s law. They argued that the Competitive Restrictions could not be enforced because they were contrary to Oklahoma’s public policy against restraints of trade as provided in 15 Okl. St. §§217 and 219A. See, e.g., Oliver v. Omnicare, Inc., 2004 Ok. Civ. App. 93, 5-7 (Ok. Civ. App., Div. 1 2004) (holding that a choice of law provision will be upheld only if the underlying agreement does not violate Oklahoma public policy).

15 Okl. St. §217 provides that “[e]very contract by which any one is restrained from exercising a lawful profession, trade or business of any kind, [except as otherwise provided in this title or act], is…void.” 15 Okl. St. §219A further provides that that:

A former employee shall be permitted to "engage in the same business as that conducted by the former employer or in a similar business,” notwithstanding any non-competition agreement, as long as the former employee does not directly solicit goods and services from the former employer’s established customers. “Any provision in a contract between an employer and an employee in conflict with the provisions of this section shall be void and unenforceable.”

The employees further argued that Nitro-Lift could not skirt Oklahoma’s policy against enforcing non-competition agreements by a choice of law provision applying Louisiana’s law.

Nitro-Lift pointed out in response that the only issue in the case was the validity of the arbitration clause in the employment agreements and argued that the enforceability of the Competitive Restrictions should be reserved for the arbitrator. They so argued on the basis of Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) and its progeny, in which the U.S. Supreme Court held that a federal court may only consider issues relating to the making and performance of the arbitration agreement. Id. at 404. As a result, absent an invalid arbitration clause, the enforceability, validity or legality of an agreement as a whole must go to arbitration as provided by the arbitration agreement. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 449 (2006). Nitro-Lift further argued that the district court appropriately found the arbitration clause to be valid because the employees did not show that the arbitration clause was a product of fraud in the inducement or duress. It therefore concluded that the employment agreements and the Competitive Restrictions should be submitted to arbitration.

Decision of the Supreme Court of the State of Oklahoma

On November 22, 2011, the Court reversed the district court’s final order and remanded the case. It held that the arbitration agreement did not prohibit judicial review of the Competitive Restrictions, relying on a principle in Oklahoma law that allowed specific state statutes, namely 15 Okl. St. §§217 and 219A, to govern over a more general statute favoring arbitration, such as the Federal Arbitration Act, 9 U.S.C. §§1 et seq., and the Oklahoma Uniform Arbitration Act, 15 Ok. St. §§801 et seq. and 12 Ok. St. Supp. §§1851 et seq. See Bruner v. Timberlane Manor Ltd. Partnership, 2006 OK 90 (2006) (holding that a specific statute in Oklahoma’s Nursing Home Care Act addressing the right to commence an action and to have a jury trial governs over the more general statute favoring arbitration). Here, 15 Okl. St. §§217 and 219A generally voided non-competition agreements and, in effect, removed the enforceability of such agreements from arbitration as a matter of public policy. Howard, 2011 OK at fn.21.

The Oklahoma Supreme Court also found the Competitive Restrictions void and unenforceable under 15 Ok. St. §219A. It declared that the “unmistakable, unambiguous” language of §219A “prohibit[ed] employers from binding employees to agreements which bar their ability to find gainful employment in the same business or industry as that of the employer.” Applying §219A to the Competitive Restrictions, the Oklahoma Supreme Court concluded that the Competitive Restrictions “[went] well beyond the bounds of what is allowable under §219A and violat[ed] the legislatively expressed public policy.” The Competitive Restrictions could plausibly prevent the employees from taking any jobs in any directly or indirectly competing business and from soliciting not only Nitro-Lift’s established customers and clients, but also the company’s past customers and clients. It also conceivably prevented the employees from employing or engaging other Nitro-Lift employees seeking employment elsewhere on their own initiative. The Oklahoma Supreme Court further concluded that judicial modification of the Competitive Restrictions would be inappropriate because the provisions would have to be “substantially excised, leaving only a shell of the original agreement.”

The Court’s opinion was unanimous.

Impact of the decision on protection of employer’s trade secrets

Two lessons emerge from Howard for an employer seeking to protect its trade secrets in Oklahoma courts.

First, the action and reasoning of the Oklahoma Supreme Court suggest that an employer cannot compel a former employee to adhere to Competitive Restrictions through a claim in an arbitration proceeding based on vague allegations of trade secrets misappropriation, which does not fall under an exception to Oklahoma’s public policy against restraints of trade. A claim for trade secrets misappropriation and a violation of the Competitive Restrictions stands or falls on its own. The Court in Howard fleetingly noted that Nitro-Lift believed the Competitive Restrictions were necessary to protect its trade secrets but did not discuss any of (a) what was the substance of NL’s alleged trade secrets, (b) what efforts did NL exercise to keep them secret, (c) what evidence was there that the employees had either misappropriated the trade secrets or were about to do so, or (d) whether, even assuming reasonable efforts had been taken to preserve their secrecy, those alleged trade secrets were protectable or were generally known or readily ascertainable. See 78 Okl. St. §85 et seq. The Court held that the Competitive Restrictions were void as a matter of legislative policy expressed in 15 Okl. St. §§217 and 219A, and the protection of an employer’s trade secrets is not a recognized exception to the general prohibition against restraints of trade in §217. In short, Nitro-Lift’s failure to pursue a claim for trade secret misappropriation against the employees in either the Houston arbitration or the Oklahoma litigation no doubt added to the skepticism of the Supreme Court as to whether Nitro-Lift actually believed its trade secrets had been or were clearly about to be misappropriated.

Second, an employer seeking to protect trade secrets in a situation such as in this case should not rely on its ability to bring an preemptive action for trade secret misappropriation. Instead, it should ensure, in the conduct of its business, that if it such a claim arises someday under Oklahoma’s Uniform Trade Secrets Act, 78 Okl. St. §85 et seq., it has taken the appropriate steps long beforehand to protect those secrets. Otherwise, it will lose the case for its failure to meet a fundamental rule of trade secret law, that the owner of a trade secret has exercised reasonable care to present the misappropriation of that secret. Nitro-Lift’s apparent silence on the substance of the misappropriation claim it included in its arbitration demand appears to be a tacit admission that this claim was for color only and had no substance.

Generally, federal and state courts enforce arbitration provisions in agreements within the courts’ jurisdiction unless the courts find that the arbitration provision is invalid. However, despite the fact that Nitro-Lift resisted submitting the question of whether the restraints of trade were valid to arbitration, the Oklahoma Supreme Court held that the Oklahoma judiciary had primary authority over the question and not the arbitrator.

Case Report: Jardin v. DATAllegro, Inc.

Background:

     Plaintiff Cary Jardin (“Jardin”) is the founder of XPrime, Inc., a database technology company. Jardin developed a technology for XPrime that facilitates scalable high-performance computing and XPrime assigned to Jardin all of the rights in this intellectual property. In March 2003, defendant Stuart Frost (“Frost”) was hired by XPrime as its CEO. Frost’s employment lasted for merely one month yet, for unknown reasons, he retained access to XPrime’s confidential information until August 2003, when his parting from XPrime apparently reached a more formal conclusion. In June 2003, Frost founded his own company, DATAllegro, Inc (“DATAllegro”), which is also a defendant in the instant case. Soon afterward, Frost filed a patent application for a computing technology, identifying himself as the sole inventor; the patent was eventually issued in 2010 and assigned to DATAllegro (U.S. Patent Number 7,818,349). In 2008, Microsoft Corporation acquired DATAllegro, and Frost and other DATAllegro investors received compensation for the acquisition, which Jardin believed was based in part on the value of the patent. Jardin then filed suit against DATAllegro for patent infringement (the “2008 case”). The instant case is an action to correct inventorship, inter alia, in which Jardin alleges that DATAllegro’s patent is based on two patent applications to which Frost had access during his relationship with XPrime (the “2010 case”).

Procedural History:

     In the 2008 case, the court issued a protective order, which limited the use of any protected information produced during the case to that case alone. Due to the factual overlap in the 2008 case and the 2010 case, the parties sought to revise the 2008 protective order to allow information produced during the 2008 case to be used in the 2010 case, thereby eliminating needless duplication of discovery. However, DATAllegro asked the Court to specifically exclude certain confidential information that Jardin’s attorneys had learned during discovery in the 2008 case. DATAllegro believed that viewing this knowledge prior to commencing discovery in the 2010 case would unfairly influence Jardin’s claims and discovery requests, with the 2008 case acting as a vehicle for premature discovery in the 2010 case. DATAllegro asked the Court to temporarily wall off the attorneys who had represented Jardin in the 2008 case until Jardin identified with reasonable particularity the information that was allegedly misappropriated by Frost in his patent application, pursuant to §2019.210, California’s pre-discovery trade secret identification requirement. DATAllegro argued that Jardin’s patent claims in the instant case were merely thinly-veiled trade secret misappropriation claims and, therefore, §2019.210 should govern discovery.

Magistrate Judge Gallo’s Order:

     On June 27, 2011, Magistrate Judge Gallo held a telephonic discovery hearing, after which he found DATAllegro’s concerns to be valid. Although he declined to apply §2019.210 in federal court, he noted that the policy concerns underlying §2019.210 were still relevant to the case. As first stated in Computer Economics, Inc. v. Gartner Group, Inc., §2019.210 serves four purposes:

“First, it promotes well-investigated claims and dissuades the filing of meritless trade secret complaints. Second, it prevents plaintiffs from using the discovery process as a means to obtain the defendant's trade secrets.... Third, the rule assists the court in framing the appropriate scope of discovery and in determining whether plaintiff's discovery requests fall within that scope.... Fourth, it enables defendants to form complete and well-reasoned defenses, ensuring that they need not wait until the eve of trial to effectively defend against charges of trade secret misappropriation.”

50 F. Supp. 2d 980, 985 (S.D. Cal. 1999). After considering these policy concerns as well as DATAllegro’s specific concerns, Judge Gallo issued a Minute Order (“the Order”) which required Jardin, prior to any other discovery, to identify the allegedly misappropriated information in response to a specific interrogatory from DATAllegro that sought such information. Judge Gallo also ordered preclusion of any attorneys who worked on Jardin’s 2008 case from drafting the response to the interrogatory and he directed the parties to revise the 2008 protective order accordingly.

     In turn, Jardin objected to the Order and requested an independent review by the District Court to correct certain alleged errors. Jardin argued that §2019.210 was not applicable, stating that an action brought pursuant to a federal question (i.e., the patent claims) should be governed by Rule 26, which does not require a plaintiff to identify its trade secrets before discovery commences. Jardin further argued that to the extent that any trade secrets existed with respect to the 2008 case, they were lost once the DATAllegro patent was published. Thus, he argued that DATAllegro’s demand for a statement delineating the intellectual property allegedly misappropriated by Frost could be satisfied simply by reviewing the public records on file with the USPTO. Jardin also argued that he would be significantly prejudiced if the Court disqualified any of his attorneys from participating in any part of the 2010 case.

District Judge Gonzalez’s Opinion:

     On July 29, 2011, District Judge Irma Gonzalez overruled Jardin’s objections and upheld the Order. Judge Gonzalez held that nothing in the Order was clearly erroneous; the procedures ordered by Judge Gallo were consistent with his responsibilities and discretion under Rule 26. Judge Gonzalez also stated that the Order did not constitute an application of §2019.210 in federal court. Judge Gallo had merely “considered the parties’ concerns, which happened to coincide with some of the policy concerns underlying §2019.210.” Judge Gonzalez noted that the Federal Rules “provide magistrate judges with broad discretion to manage discovery based on the particular facts of the cases before them.”

Significance of Jardin:

a) Jardin may indicate a possible trend towards requiring pre-discovery identification of trade secrets in California federal courts, even when §2019.210 is not expressly applied

     This is not the first time that the California district courts have considered the applicability of §2019.210; however, they have not reached the same results. In 1999, the Southern District, after conducting an extensive Erie analysis, held that §2019.210 was part of the substantive trade secret law and applicable in federal court. Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980 (S.D. Cal. 1999). A 2004 case from the Northern District also held that §2019.210 was applicable. Neothermia Corp. v. Rubicor Med., Inc., 345 F. Supp. 2d 1042 (N.D. Cal. 2004). However, more recent cases concluded that §2910.210 is a rule of procedure that conflicts with the Federal Rules and thus is not applicable in federal court. Funcat Leisure Craft, Inc. v. Johnson Outdoors, Inc., CIV. NO. S-06-0533 GEB GGH, 2007 WL 273949 (E.D. Cal. Jan. 29, 2007); Hilderman v. Enea TekSci, Inc., No. 05cv1049 BTM(AJB), 2010 WL 143440 (S.D. Cal. Jan. 8, 2010). Nevertheless, in Hilderman v. Enea TekSci, Inc., on a motion in limine, the Court warned that the plaintiff may still be barred from presenting trade secret claims at trial for which the defendants had not received “fair notice.” Furthermore, the Northern District has required a plaintiff to disclose allegedly misappropriated trade secrets even when declining to rule on the applicability of §2019.210 in federal court, citing policy concerns and imposing the requirement "as a matter of case management." Applied Materials, Inc. v. Advanced Micro-Fabrication Equip. (Shanghai) Co., Ltd., C 07-5248 JW PVT, 2008 WL 183520 (N.D. Cal. Jan. 18, 2008). This willingness to take policy considerations into account is also evident in Jardin. The Jardin decision may be part of a trend, within the California federal courts, of requiring plaintiffs to identify trade secrets with reasonable particularity before commencing discovery, even if the courts do not expressly apply §2019.210. The Ninth Circuit has yet to make a determination concerning the applicability of §2910.210 in federal court.

b) How Jardin might affect litigants

     1) Trade secret plaintiffs in California federal courts should anticipate pre-discovery identification of trade secrets even as part of their Rule 26 disclosure. Knowing that a California federal court might require this disclosure may influence choice of forum for trade secrets plaintiffs.

     2) Patent litigants should be aware of the Jardin decision’s imposition of trade secrets discovery requirements to a patent plaintiff. The Court appears to accept DATAllegro’s argument that Jardin had asserted a thinly-veiled trade secrets claim. This is likely due to the allegation of theft of nonpublic information in the context of an employment relationship. Patent plaintiffs in California who are presented with a similar set of facts should know that pre-discovery disclosure is at least a possibility.

     3) Litigants should keep in mind that other jurisdictions require or have required similar pre-discovery identification of trade secrets. The state of Delaware imposes an almost identical requirement on trade secret plaintiffs as does California. However, Delaware’s requirement is imposed through well-established common law rather than by statute. Additionally, district courts in Florida, Illinois, Minnesota, and Virginia have, citing to California or Delaware law, also imposed an early disclosure requirement in several cases. Thus, even plaintiffs in these jurisdictions should anticipate potential pre-discovery disclosure of trade secrets. Additionally, perhaps California and Delaware law will become increasingly influential across jurisdictions.

c) Jardin also provides guidance concerning the nature of “reasonable particularity”

     After Judge Gonzalez upheld Judge Gallo’s order, Jardin was required to furnish DATAllegro with its trade secret identification statement in response to a special interrogatory to be prepared by DATAllegro. The court left the format of the interrogatory and response to the parties’ discretion. On January 11, 2012, after several insufficient responses were submitted by Jardin – each of which were determined during discovery hearings to be vastly overbroad – Judge Gallo ordered Jardin to rewrite his response to include certain information. If the allegedly misappropriated information was in the form of source code, Jardin was required to identify the specific lines of code, either by reproducing the code verbatim in his response or by referencing specific Bates-numbered documents (but only to specific pages and lines of code within those pages). If the information was contained in a document, Jardin was required to either reproduce the information directly in his response or cite to specific, individual Bates-numbered documents. Furthermore, if a specific page contained lines of text (as opposed to charts or photographs), Jardin was required to designate which specific lines of text contained the allegedly misappropriated information and/or data. If Jardin claimed all information within a specific identified page was misappropriated, then he was required to indicate such. Finally, if the information was not contained in document form at all, Jardin was required to reproduce the information verbatim in his response.

     Additionally, Judge Gallo ordered that the information be presented in a chart formatted and organized in a specific manner. Judge Gallo also noted that due to the complexity of the technology at the heart of the dispute, a higher level of specificity was necessary in order to identify what was misappropriated. This January 11, 2012 order can serve as guidance for plaintiffs regarding what they might be expected to allege when making trade secrets claims, as well as for defendants when crafting interrogatories.

United States v. Nosal Case Report

Case Report: United States v. Nosal

On October 27, 2011, the United States Court of Appeals for the Ninth Circuit granted a rehearing en banc of the appellate decision in United States v. Nosal, 642 F.3d 781 (9th Cir. 2011), and on April 10, 2012, a decision was rendered in favor of Nosal.

This case centered on the scope of the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030 et seq, specifically the construction of the statutory phrase “exceeds authorized access.” Although primarily a criminal anti-hacking statute, the CFAA also created a private right of action under § 1030(g). Nosal concerned a prosecution under § 1030(a)(4), however considering the implications for the civil as well as criminal contexts, the legal discussion necessarily looked beyond the specific facts of the case at hand.

Factual Background – Indictment Allegations Against Nosal

Defendant David Nosal was employed by executive search firm Korn/Ferry International from approximately April 1996 until October 2004. Upon his departure, Nosal agreed to work as an independent contractor for Korn/Ferry, and as a condition of his employment, executed a one-year non-compete agreement. Notwithstanding this contract, Nosal started a rival business shortly thereafter and solicited current Korn/Ferry employees to aid him in his competitive business efforts.

In June 2008 the government filed a twenty-count superseding indictment against Nosal, charging in part that Nosal, as an aider and abettor, violated § 1030(a)(4). That section provides that anyone who “knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value” is subject to criminal punishment as outlined in subsection (c). The allegations against Nosal stemmed from confidential information Korn/Ferry employees transmitted to him, which they had gathered from an exclusive computer database developed and maintained by their employer. Specifically, the indictment alleged that for the purpose of defrauding Korn/Ferry and assisting Nosal to develop a competing business, his co-conspirators exceeded their authorized access to Korn/Ferry’s database when they transferred confidential and proprietary information to Nosal, including source lists, names, and contact information.

District Court Reconsideration and Dismissal

Nosal moved to dismiss the indictment, arguing that the CFAA was not intended to prosecute employees who misappropriate information or violate contractual obligations, but rather was targeted at computer hackers. Nosal further asserted that the Korn/Ferry employees had permission to access the company computer and the information therein and thus could not have acted “without authorization” nor could they have “exceeded authorized access.” Nosal, 642 F.3d at 783.

In deciding Nosal’s motion, the district court identified two divergent lines of case law that had emerged on the subject. Id. at 784. An approach taken by some courts broadly construed the CFAA to encompass employees who “acted with adverse or nefarious interests,” such that their once “authorized” access was rendered ineffectual by their disloyal actions. Id. (internal citation omitted). Other courts have constrained the inquiry to whether access was authorized in the first place, and thus restricted the applicability of the CFAA to “outsiders” such as computer hackers and electronic trespassers. Id. The first, fifth, seventh and eleventh circuits have addressed the question of authorization under the CFAA and have all reached different conclusions over what the source of authorization should be, yet all still err on the side of broad construction.

Initially, the district court took the inclusive approach, reasoning that the Korn/Ferry employees’ fraudulent intent rendered their access unauthorized. Soon after denying Nosal’s motion, however, the Ninth Circuit Court of Appeals decided a case that contemplated the statutory significance of the phrase “without authorization.” In light of the holding in that case, LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), the district court granted Nosal’s motion to reconsider and, citing Brekka, later dismissed multiple counts of the indictment against him. The district court retreated from its earlier stance on the importance of “intent” to the CFAA; upon reconsideration, the court deemed intent irrelevant for determining whether someone “exceeds authorized access.” 642 F.3d at 784-85.

The United States Appeals to the Ninth Circuit Court of Appeals

The first issue the Court of Appeals tackled in its de novo review was a matter of statutory interpretation. Starting with the plain language of § 1030, the court identified that subsection (e) defines “exceeds authorized access” to mean “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” Nosal, 642 F.3d at 785 (quoting 18 U.S.C. § 1030(e)(6)) (emphasis in opinion). The government asserted that Nosal’s interpretation of the statute was illogical since it would have effectively “render[ed] superfluous the word ‘so’ in the statutory definition.” 642 F.3d at 785. The court agreed that it was unwilling to disregard Congressional action by not giving effect to the “full” definition. Id. at 786. Therefore, the focus of the statute is on the specific access limitations and whether a person is authorized to access certain information will depend on the specific manner in which they do so.

The government also argued on appeal that Brekka actually counseled in its favor. The court agreed that, contrary to the position taken by the lower court, Brekka was not dispositive of the issue in Nosal, and if anything, supported the government’s contentions. The court framed its ultimate decision as “simply an application of Brekka’s reasoning”: “[W]e held that ‘an employer gives an employee authorization to access a company computer when the employer gives the employee permission to use it.’ Therefore, the only logical interpretation of ‘exceeds authorized access’ is that the employer has placed limitations.” 642 F.3d at 787. (internal citation omitted) (emphasis in original). The factual distinctions between the present case and Brekka—namely, in the latter case the employee had unrestricted access to the company computer and was also not constrained by any written employment agreements or employer policies that would have prohibited his actions—provided sufficient ground to hold Nosal accountable where Brekka was not.

Rehearing En Banc

With the support of amicus briefs from interested organizations such as the Electronic Frontier Foundation, Nosal petitioned the circuit for rehearing en banc. Nosal’s petition argued that the majority’s definition of “exceeds authorized access” misconstrued the statutory definition by importing elements of misappropriation theory. Nosal further advocated for restricting the scope of § 1030 to its original anti-hacker focus.

Even prior to the decision to grant rehearing, this case had already garnered atypical amounts of attention from the legal community, academic commenters, and had even spurred Congressional action to redefine provisions in the Act. However the court interpreted “exceeds authorized access” in (a)(4) would necessarily apply to the rest of the statute, including those provisions lacking a specific intent requirement. Thus, circuits embracing the broad construction advocated by the government would risk criminalizing millions of Americans’ online activities for mere violations of a website’s Terms of Service.

The importance of this case did not escape the circuit’s attention—en banc review was granted on October 27, 2011. Chief Judge Alex Kozinski’s order clarified that the previous three-judge panel opinion would not hold precedential value for any court in the circuit and should not be cited. Oral arguments commenced December 15, 2011, and a final decision was rendered April 10, 2012. Chief Judge Kozinski affirmed the district court’s dismissal of criminal counts against Nosal, expressing disbelief that Congress would have intended to criminalize such innocuous behavior as violating a site’s Terms of Service. His narrower interpretation restricts “exceeds authorized access” to restrictions on access of information to which one is not entitled, instead of blanket restrictions on use.

This Ninth Circuit decision creates a pretty clear division among the circuits over the interpretation of the CFAA, and thus it would not be surprising to see this case go all the way up to the Supreme Court of the United States.

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