Unfair Competition & Trade Secrets Counsel - The latest news and innovative strategies for protecting trade secrets and preventing unfair competition

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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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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By 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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By 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.

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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