The Importance of Pleading Actual Harm in Trade Secret Misappropriation Cases

botox.jpgBy Harry D. Jones

In an April 25, 2012 ruling [pdf] a Middle District of North Carolina court clearly illustrated the importance of pleading actual harm in an unfair competition case.  By dismissing parts of a dispute between River’s Edge Pharmaceuticals, a discount pharmaceutical product distributor, and Gorbec Pharmaceutical Services, Inc., a pharmaceutical manufacturer, the court ruled that speculation about potential harm  is not enough to sustain a litigant’s burden.

In 2003, River’s Edge first developed products through an FDA-sanctioned program.  River’s Edge sought help from Gorbec in 2007 to manufacture and test generic drugs under an Abbreviated New Drug Application (ANDA) process.  The parties contemplated preparing a written contract to memorialize their agreement, but never completed one.  River’s Edge submitted purchase orders to Gorbec to manufacture drugs to River’s Edge’s specifications. 

In 2010, the relationship soured.  River’s Edge claimed Gorbec executives boasted of having the “know-how, intellectual property, and regulatory approvals,” threatened to stop work, and made plans to compete.  Gorbec claimed River’s Edge failed to pay Gorbec in full, and hid a warning letter from the FDA asking River’s Edge to cease sales.  Both sued.  River’s Edge’s complaint alleged breaches of contract and fiduciary duty, fraud, promissory estoppel, unjust enrichment, conversion, and misappropriation of trade secrets; and sought declaratory relief.  Gorbec’s counterclaim was almost a mirror image, alleging breach of contract, unjust enrichment, negligent misrepresentation, fraud, and deceptive trade practices.

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New York Court: Plaintiff Must Identify Trade Secrets

By Harry D. Jones

A conundrum employers face when protecting trade secrets is the obligation to identify the very secrets to be protected in litigation.  A critical issue in the context of discovery is the extent to which trade secrets must be disclosed and identified by the plaintiff.  When the secret is something as technical and unique as a computer source code alleged to have been used to augment a competitor’s source code library, the requirement to identify the misappropriated secret with “reasonable particularity” early in the case may become the “case within the case.”

A recent example of a fight not to be the first party to identify source code in discovery is the New York state court case of MSCI, Inc. v. Jacob and Axioma, Inc. [pdf], where Supreme Court Judge Shirley Kornreich ruled the plaintiffs had to identify the components and sequencing of both the secret and the publicly known source code to the defendants, before discovery could proceed.

The plaintiffs claimed their former employee (who was not subject to a non-compete clause) had taken, used, and disclosed portions of source code to his new employer Axioma, who had embedded parts of that secret source code in its own financial market software.  The plaintiffs first characterized the entire source code “reference library” as a trade secret, even though parts of that code are in the public domain or licensed.  Their backup argument was that “certain details of the specific implementation” of even the publicly known code were trade secrets.  The plaintiffs proposed to only identify which parts of its source code were not trade secrets, and maintained this was a more practical and cost-efficient, yet legally sufficient way to meet its burden of trade secret identification.  An earlier preliminary ruling by the court affirmed that approach.

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Can "Friends" Be Trade Secrets?

SocialMediaII.jpgBy Corinne K. Hays and William J. Leahy

Unfair competition litigation frequently involves disputes over whether information actually constitutes a trade secret.  Given the prevalent use of social media by both businesses and individuals, it is not surprising that courts have begun to address whether such information can be a trade secret.  In November, a California federal court refused to dismiss a claim that Twitter account information was protected as a trade secret.  A recent decision from the District of Colorado opened the door to allowing businesses to protect their Facebook and MySpace “friends” list as a possible trade secret.

In Christou v. Beatport, LLC [pdf], the plaintiffs, including several Denver area night clubs, brought numerous claims against a former employee and the companies that he founded.  The claims included an allegation of misappropriation of trade secrets.  Specifically, the plaintiffs alleged that the defendants misappropriated their login information to access profiles on MySpace and lists of MySpace “friends.”  The defendants moved to dismiss this claim, arguing that the plaintiffs failed to allege sufficient facts to demonstrate that their MySpace profile and “friends” list qualify as trade secrets. 

Colorado has adopted the Uniform Trade Secrets Act and defines a trade secret as the “whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, list of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.”  C.R.S. § 7-74-102(4).  Additionally, the owner of a trade secret must have “taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.”

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Should Courts Revisit the Rule Limiting a Non-Competition Injunction to the Term Provided in an Employment Contract?

By Shannon Morales

It is well-established that an injunction to enforce a non-compete provision should not extend beyond the period set forth in the non-compete agreement.  Whether based on the belief that a contract should be enforced as written or because restrictive covenants are generally not favored by law, the majority of courts have declined to enforce a non-compete provision beyond the expiration of the period set forth in the agreement.  In its March 1, 2012 decision in Finkel v. Cashman Prof. [pdf], the Nevada Supreme Court reinforced this rule.  The New Jersey Supreme Court has reached the same conclusion.  See Community Hospital Group v. More, 183 N.J. 36, 63 (2005).   But have the courts considered whether this solution is sufficient?  In an effort to enforce the plain terms of the contract, are courts depriving employers of the benefit of their bargain?  Some argue that in limiting a non-competition injunction to the period provided for in the non-compete agreement, courts have largely failed to award the relief necessary to fully compensate employers for the injuries incurred by a breached non-compete provision. 

In New Jersey, courts follow the rule that non-competes should not extend beyond the period set forth in the non-compete agreement with one catch: a non-compete provision may be enforced beyond the expiration of the term in the agreement if no other relief (i.e. monetary damages) is available.  In Jackson Hewitt, Inc. v. Childress, 2008 U.S. Dist. LEXIS 4640 (D.N.J. 2008), the district court issued a twenty-four month injunction, prohibiting the defendant from competing with the company, but only because it was evident monetary damages were not available.  In Childress, the defendant, who had “openly refused to comply” with his non-compete obligations, filed for bankruptcy two days after the company brought suit seeking a preliminary injunction.  By the time the district court addressed the issue, the twenty-four month non-compete period had expired.  At that point, because the defendant filed for bankruptcy (discharging the plaintiff’s claim), issuing a new twenty-four month injunction, based on the non-compete period in the contract, was the only remedy for the plaintiff’s injury. 

The question is whether a non-compete provision should be enforced as written, and expire at the end of the period specified by the contract, as in More and Finkel, or whether the injured party is entitled to an injunction prohibiting the breaching party from competing for the full period set forth in the agreement, as done in Childress.  While the Childress court prohibited the defendant’s competitive behavior for an extended twenty-four month period, the court explained that this remedy was issued only because a monetary remedy was not available.  To remedy wrongful competitive behavior, an injunction should issue prohibiting competitive behavior for the full non-compete period set forth in the contract.  This is not to say that the injured party should not be entitled to damages; rather, an injunction reflecting the duration anticipated by the non-compete provision should issue separate and apart from a monetary award to compensate the injured party for damages incurred. 

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Ninth Circuit Rules the CFAA Requires Proof of Hacking

Locked Keyboard.jpgBy Lena K. Sims

Last week, the Ninth Circuit published its long awaited en banc decision, authored by Chief Judge Alex Kozinski, in United States v. Nosal [pdf].  The 9-2 reversal of the 3-judge appellate decision holds that the Computer Fraud and Abuse Act's phrase “exceeds authorized access” is limited to violations of restrictions on physical access to information and does not extend to violations of restrictions on the use of information.  Prosecution under the CFAA thus requires proof of “hacking” and employers will not be able to bring a claim for violation of the CFAA based on a violation of a computer use policy.    

The decision calls out for United States Supreme Court review.  It departs from the Fifth, Seventh and Eleventh Circuit decisions concerning interpretation of the same statutory language and criticizes those courts for taking a short-sighted approach that focused on the facts of the cases before them while criminalizing acts that are wide-spread, commonplace and trivial.  

Unlike those cases, the Nosal decision makes only a quick introductory recitation of the facts of the case.  Those following the case will recall that Nosal persuaded his former colleagues still working for his former employer to help him start a competing business by accessing information from the company’s database and then transferring that information to Nosal.  The employees had access to the database, but use of the information was restricted by policy:  “This product is intended to be used by Korn/Ferry employees for work on Korn/Ferry business only.”  Nosal was criminally prosecuted for aiding and abetting the employees in “exceeding their authorized access” with intent to defraud the employer.       

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Seventh Circuit Case Highlights Importance of Documenting Steps to Maintain Privacy of Trade Secrets

law books.JPGBy Matthew J. Hank

Under the Uniform Trade Secrets Act, a “trade secret” is information that (1) derives independent economic value by virtue of its being secret; and (2) is the subject of reasonable efforts by the plaintiff to maintain its secrecy.  Although the first criterion is often discussed in judicial opinions, the second is not. The recent Seventh Circuit Court of Appeals case Fail-Safe, LLC v. A.O. Smith Corporation [pdf], No. 11-1354 (Mar. 29, 2012) is among the few reported cases that turn on the second prong of analysis.

Fail-Safe, LLC and A.O. Smith Corporation (AOS) held a series of discussions over the course of two years concerning a possible joint project to develop technology to make swimming pool drains safer.  Throughout these meetings and conversations, Fail-Safe shared with AOS sensitive technical information.  Yet Fail-Safe never entered an agreement requiring AOS to keep that information confidential, nor did Fail-Safe even identify the information it provided to AOS as confidential.  (AOS, by contrast, required Fail-Safe to sign a one-way confidentiality agreement.)  After the two companies decided not to pursue the joint development project, Fail-Safe alleged AOS introduced two pump motors incorporating Fail-Safe’s trade secrets.  Fail-Safe then filed a complaint alleging, among other things, that AOS thus violated the Uniform Trade Secrets Act.

The district court granted summary judgment in favor of AOS, reasoning (in relevant part) that, because Fail-Safe failed to take reasonable steps to protect the secrecy of its data, the information that AOS allegedly incorporated into its pump motors was not a trade secret.  The Seventh Circuit affirmed on the ground that, because Fail-Safe “failed to take any steps” to maintain the secrecy required for trade secret protection, its claim failed as a matter of law. 

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Employee Handbook Provision Not Enough for Enforceable Confidentiality Agreement

By I. Michael Kessel

A New Jersey district court recently held that an employee handbook provision could not be enforced as a valid confidentiality agreement between a company and a former employee.  Metropolitan Foods, Inc. d/b/a Driscoll Foods v. Kelsch [pdf] involved a former employee of Driscoll Foods (Kelsch), who was accused of soliciting orders for his new employer while still working for Driscoll.  Driscoll sued Kelsch under a number of causes of action, including breach of contract.  This claim was based upon a provision in the Driscoll employee handbook which stated that employees may “not disclose to unauthorized persons, including subsequent employers, Driscoll Foods’ confidential information.”

Usually, it is a plaintiff-employee replying upon an employee handbook as a basis for suing an employer for breach of contract, e.g., the employer did not follow proper procedures in the handbook when discharging the employee.  Woolley v. Hoffman-LaRoche, Inc., 99 N.J. 284 (1985).  In this case, the employer tried to use the provisions of the handbook as a basis to sue the employee.

However, as with most handbooks that were drafted with the advice of counsel, the Driscoll handbook was “rife with” disclaimers and statements that the handbook was “not a contract.”  Therefore, while Driscoll had other valid causes of action to sue Kelsch, namely, breach of the duty of loyalty, the court held that the handbook provision concerning confidentiality could not be enforced as a valid contractual provision.

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District Court Shows Way to Obtain Non-Solicitation Injunction in California

businesspeople.jpgBy Stephen C. Tedesco

Companies seeking to prohibit unlawful solicitation of customers should be encouraged by a recent federal court decision.  In the U.S. District Court for the Eastern District of California, Magistrate Judge Hollows issued an injunction that prohibited the defendant from directly or indirectly initiating any contact with any current Northern California or Hawaii customer of the plaintiff with whom he had contact or for whose accounts he had responsibility while employed by the plaintiff, for the purpose of encouraging, inviting, suggesting or requesting transfer of their business from plaintiff.  The Pyro Spectaculars North, Inc. v. Steven Souza [pdf] court distinguished its case from the decision in Retirement Group v. Galante 176 Cal. App. 4th 226 (2009), finding that California Business and Professions Code section 16600 does not constrain a court in equity from fashioning an appropriate remedy for tortious conduct in violation of the California Uniform Trade Secret Act.  The case provides a clear rebuke to the now common argument that Galante prohibits non-solicitation restraints.

The defendant in Pyro Spectaculars North, Inc. downloaded and retained detailed information on the plaintiff's customers. The court found that the information downloaded provided "a virtual encyclopedia of specific PSI customer, operator and vendor information at a competitor’s fingertips, allowing the competitor to solicit both more selectively and more effectively without having to expend effort to compile the data."  The evidence also showed that the defendant solicited numerous customers of the plaintiff using the stolen information.  The court also found that the conduct explicitly targeted the plaintiff’s customer goodwill and therefore supported the existence of irreparable harm for preliminary injunction.

The court declined to adopt a narrow reading of Galante that would effectively bar any non-solicitation restrictions under Business and Professions Code section 16600. The court noted that the paramount issue is how a court might fashion an appropriate relief via injunction.  While a court should be cognizant of the policies embodied in section 16600, that section does not constrain a court in equity from fashioning an appropriate remedy to prevent the misappropriation of trade secrets.  The court concluded "that a narrow, time-limited non-solicitation restriction is necessary to prevent defendant's misuse of PSI trade secret information in competing with PSI.”

For those practitioners attempting to prevent someone who stole trade secrets from soliciting customers, this case provides clear guidance of the evidence needed to support a non-solicitation injunction and how to fashion such an injunction. The case provides a much needed counterpoint and balanced view as to the scope of remedies available to a court to prevent the misappropriation of trade secrets.

Computer Forensics Fill in Wrinkles in Botox Trade Secrets Dispute

botox.jpgBy Dylan W. Wiseman and Todd M. Ratshin

In the ongoing battle between competitors in the aesthetics field, the court in Allergan, Inc. v. Merz Pharmaceuticals, LLC, et al. recently completed a nine-day bench trial resulting in an injunction [pdf] against the defendants to prevent the actual or threatened misappropriation of Plaintiff Allergan, Inc.’s (Allergan) trade secrets.

Allergan produces several different prescription medicines, including Botox Cosmetics and Juvederm, which are injectable treatments used to correct facial wrinkles and folds.   Merz Aesthetics also had for years been in the facial aesthetics market, and had a product that competed with Allergan’s Juvederm product.

In July of 2010, Merz Aesthetics announced that it received FDA approval for a new product to compete with Allergan’s Botox Cosmetic product.  A related company, Merz Pharma, announced that it too would begin selling a product to compete with Cosmetic Botox by the end of the year.

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Minnesota Court Narrowly Interprets the Computer Fraud and Abuse Act

By Kerry L. Middleton

Recently, a Minnesota federal district court construed the federal Computer Fraud and Abuse Act narrowly and dismissed an employer’s CFAA claim against three former high-level employees.   In Walsh Bishop Associates, Inc. v. O’Brien, et al. [pdf], the court held that civil liability under the CFAA does not extend to an employee’s alleged later misuse of information that the employee was authorized to access.  Thus, the court concluded that civil liability under the statute turns on whether the former employees were authorized to access the data at issue, not on whether the former employees allegedly misused the data after accessing it. 

The CFAA makes it unlawful for any person to obtain information from a computer by intentionally accessing the computer without authorization or by exceeding authorized access.  Employers frequently include a CFAA claim in suits against former employees for trade secret misappropriation.    

In Walsh Bishop, the defendants were former executive-level employees.  Among other things, the employer alleged that the defendants accessed documents the employer claimed were confidential and took those documents with them after leaving the employer’s employ.    

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