Recent Study Reveals Troubling Amount of Employee Misuse and Theft of Company Data

By Harry Jones 

DataSecurityIII.jpgA recent study by independent data privacy research firm Ponemon Institute of 3,317 individuals in six industrialized countries found that employees are moving intellectual property, including trade secrets, outside their companies in all directions. 

Over half of those surveyed admitted they had emailed business documents to their personal email accounts; 41% said they do this at least once a week. The same percentage of respondents confessed they downloaded company IP to personally-owned tablets or smartphones. A majority of those surveyed did not believe this was “wrong.” The most common justification for data misuse was that “it’s not hurting the company.” 59% of U.S. survey respondents believed it would be fine for a software developer to re-use source code he created for a prior employer, even without permission (a higher percentage than in the U.K., France, China, or South Korea). Furthermore, 37% of the employees polled reported they use file-sharing apps (such as Google Docs™ or Dropbox™) in the cloud, without permission from their employers. The majority of survey respondents admitted they did not take any steps to delete the data after transferring it. Thus, when employees leave, they may retain confidential information, without malice or even forethought. Half of the survey respondents admit they left employment with portions of their former employer’s confidential information, and 40% say they will use it in their new jobs.

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Texas May Become 48th State to Adopt the Uniform Trade Secrets Act

By Allan Neighbors and Scott McDonald 

Since being approved in 1979, the Uniform Trade Secrets Act has been adopted, in some form or fashion, by 47 states. At least one Texas lawmaker hopes to make Texas the 48th to do so. With S.B. 953, a Dallas lawmaker seeks to codify existing Texas common law relating to misappropriation of trade secrets and expand available remedies to a “claimant” seeking to stop and remedy a misappropriation. If enacted, the Texas Uniform Trade Secrets Act would go into effect on September 1, 2013. 

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Federal Court Finds Choice of Law that Permits Blue Penciling Does Not Violate Virginia Public Policy

By Paul Kennedy 

Non-compete restrictions are creations of state law, which can sometimes vary on key aspects of contract formation and enforceability. One of those aspects is the extent to which states will reform or "blue pencil" the language of the restrictions. In many states a court will rewrite the terms of the restrictions to make them reasonable, thus fulfilling the parties' contractual intent. Courts in other states refuse to tamper with a restriction's language, requiring the non-competes to rise or fall on their literal terms.   

One means of avoiding state-specific nuances that might otherwise threaten enforceability is a choice-of-law provision that designates the law of an enforcement-friendly jurisdiction to apply to the agreement's interpretation. While states often honor the contracting parties' intent to apply another state's law, a potential problem arises when the chosen state's law violates a fundamental public policy of the state where enforcement is sought. To that point, the Restatement (Second) of Conflict of Laws, Section 18, provides that parties' choice of law will not apply if "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue." Hence, in a lawsuit brought outside a home jurisdiction, one argument to avoid enforceability of a non-compete is that the chosen law violates the policy of the forum state.

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Court Finds Common Law Causes of Action Not Preempted by New Jersey Trade Secrets Act

By I. Michael Kessel

GavelIIII.jpgIn January 2012, New Jersey enacted its version of the Uniform Trade Secrets Act (UTSA). On December 7, 2012, in SCS Healthcare Marketing, LLC v. Allergan USA, Inc., a New Jersey Superior Court recognized that the New Jersey Trade Secrets Act (NJTSA) modifies the Uniform Trade Secrets Act to preserve New Jersey’s non-conflicting common law relating to trade secrets.

In the case, SCS entered into a contract to provide marketing services to Allergan. When Allergan’s contract with SCS expired, SCS’s direct competitor Medforce entered into a contract with Allergan to perform the same services. SCS contended that, despite its request that Allergan maintain the confidentiality of its systems during the transition process, Allergan provided Medforce with its administrator access information and Medforce subsequently used SCS’s proprietary marketing system in its work for Allergan. 

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Understanding the New Theft of Trade Secrets Clarification Act of 2012

DataSecurityIII.jpgBy Dylan Wiseman

On December 28, 2012, President Obama enacted the Theft of Trade Secrets Clarification Act of 2012, which clarifies the scope of the Economic Espionage Act of 1996 (18 U.S.C. §§ 1831-39). The newly enacted amendments are intended to reverse the recent Second Circuit decision in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012). 

In the heavily-criticized Aleynikov decision, the Second Circuit overturned a conviction against a former employee accused of stealing trade secret computer source code under the Economic Espionage Act. To understand purpose of the Theft of Trade Secrets Clarification Act, it is necessary to review the facts of the Aleynikov ruling. 

In Aleynikov, the defendant was previously employed by Goldman Sachs & Co. as a computer programmer. He helped develop source code for the company’s proprietary high-frequency trading (HFT) system that was used in securities and commodities trading for making large volumes of trades within fractions of a second. On the last day of his employment in June 2009, he encrypted and uploaded more than 500,000 lines of source code for the HFT system to a server in Germany. After uploading the source code, the defendant deleted the encryption program and his history of computer commands. When he returned to his home in New Jersey, he then downloaded the encrypted source code for use at his new employment with a Chicago-based startup that sought to create its own HFT system. In July 2009, after returning from Chicago following a meeting with his new employer’s principals with a flash drive and a laptop containing portions of the Goldman HFT source code, he was arrested by the FBI. 

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Virginia High Court Defines How Damages Calculated for Breach of Noncompete

In Preferred Systems Solutions, Inc. v. GP Consulting, LLC, Nos. 11906, 11907 (Sept. 14, 2012), the Supreme Court of Virginia, for the first time, defined how to calculate  damages for the breach of a noncompete provision where the breach resulted in the loss of an expected contract. The court found that damages calculated as the lost profits for the contract expectancy are appropriate even if there is no "guarantee" that the future contract would have been awarded, and the measure of lost profits can be determined by applying the profit margin of the losing party to the time billed by the benefitting party. To learn more about the decision, please see Littler's ASAP, Supreme Court of Virginia Defines Damages Calculation for Breach of Noncompete, by Linda Jackson.

Ohio Court Reverses Position on Post-Merger Noncompete Enforceability

In a rare procedural move, the Ohio Supreme Court reconsidered and reversed its May 24, 2012 decision in Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 ("Fishel I"). At issue was the enforceability of restrictive covenants in employee noncompete agreements subsequent to a  merger. In Fishel I, affirming the decisions of the lower courts, the Ohio Supreme Court held that all assets and property, including employment contracts and agreements, transferred through operation of law to the resulting company post-merger. The merged company, however, was precluded from enforcing its predecessor's noncompete agreements because the agreements did not contain language that extends to others, such as the company's "successors or assigns," and the noncompete agreements had expired as to all the employees involved.  

On October 11, 2012, the Ohio Supreme Court reversed its position in a 6-1 ruling (Pfeifer dissenting), holding that the surviving company could enforce the agreements as if it had stepped into the shoes of the original contracting company. See Acordia of Ohio, L.L.C. v. Fishel, 2012 Ohio LEXIS 2454 ("Fishel II"). 

To learn more about the decision, please continue reading Littler's ASAP, The Ohio Supreme Court Reverses Its Position on the Enforceability of Noncompete Agreements after a Merger, by Thomas Metzger and Melanie Houghton.

Cloud Computing Protections for Employers in New Bipartisan Bill?

By Harry Jones

Who says D.C. is completely gridlocked?

In September, Senators Amy Klobuchar (D–Minn.) and John Hoeven (R–N.D.) introduced the Cloud Computing Act of 2012 (S.3569) as a proposed amendment to the Computer Fraud and Abuse Act (CFAA). 

The CFAA is a hybrid criminal-civil law, passed originally as a purely anti-hacker criminal statute, which prohibits wrongful access to computers. It has been used with varying success by employers to deal with internal data breaches and misappropriation by employees.

This bipartisan tweak to the CFAA would specify that each instance of “unauthorized access” (the lynchpin of liability under the CFAA) of a cloud computing account is a separate offense. Loss is presumed to be the greater of the value of the loss of use or information, or a minimum of $500 multiplied by the number of cloud computing accounts accessed. 

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20-Year Worldwide Injunction Protecting Bullet-Proof Kevlar Trade Secrets Stayed Pending Appeal

By Dylan Wiseman and Tomomi Glover

The battle continues in the trade secret misappropriation dispute between DuPont Co. and competitor Kolon Industries over para-aramid fibers, often used to strengthen military or police gear.  Eastern District of Virginia Judge Payne issued a staggering 20-year worldwide injunction prohibiting Kolon from producing its Heracron fibers, which is significant not only for the duration and scope of the injunction, but for the 70-page opinion analyzing the standard and basis for issuing the permanent, post-verdict injunction. There may be more to come on appeal, but, as it stands, the opinion provides significant ammunition for trade secret owners seeking an injunction in cases of misappropriation.

After lengthy analysis, the court held that the eBay standard, which requires irreparable harm and unavailability of an adequate remedy of law for an injunction in patent cases, does not apply for a violation of the Virginia Uniform Trade Secrets Act (VUTSA). The court instead applied Virginia state law, holding that because DuPont had proved a violation of the VUTSA, it need not prove irreparable harm or the lack of an adequate remedy at law. Since nearly all states have adopted some version of the Uniform Trade Secrets Act, DuPont will be useful to trade secret owners outside of Virginia and across most of the United States.

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California Court Limits Application of Sale of Business Non-Compete Exception to Seller/Employee

By Margaret Keane

California’s statutory ban on non-competes contains an exception for covenants given in connection with the sale of a business and its goodwill. The exception in California Business and Professions Code section 16601 (the “16601 exception”) was created to protect a buyer’s interest in enjoying the goodwill it purchased free from competition by the seller. With limited case law interpreting the exception, buyers often struggle with the question of how to best protect themselves against later competition from a seller who initially accepts post-closing employment with the buyer – must the restriction be tied to the closing date and the products and customers in place on that date or can it be tied to the employee’s later departure from the new entity and include post-closing products and customers? A recent decision from the California Court of Appeal, Fourth District, provides some guidance for those trying to draft enforceable covenants.

In Fillpoint, LLC v. Maas, No. G045057 (Cal. Ct. App. Aug. 24, 2012), the court analyzed two separate restrictive covenants given in connection with the sale of an ownership interest accompanied by an agreement to continue employment with the buyer. The former owner/employee agreed to two restrictive covenants:  a three-year covenant not to compete running from the date of sale (contained in the stock purchase agreement); and a broader, one-year non-compete, non-solicit restriction running from the date of termination (contained in the employment agreement). The owner/employee resigned from the new entity three years from the date of sale and commenced work for a competitor six months thereafter. 

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