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

By Harry Jones 

A 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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By I. Michael Kessel

In 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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By Harry D. Jones

In a recent Virginia trade secrets case, the appellate court’s ruling illustrates that in any case for damages, the manner and measure of valuation is paramount. In 21st Century Systems, Inc. v. Perot Systems Government Services, Inc., a Virginia jury awarded Perot Systems Government Services, Inc. (Perot) $3,743,843 in damages for lost goodwill from actions by 21st Century Systems, Inc. (21CSI) and former Perot employees that Perot characterized as tortious interference with contract, breach of fiduciary duty, and misuse of confidential information. The goodwill award was trebled to $11,228,529.  

Perot’s expert business valuation witness relied solely on the price of the actual sale of Perot to Dell, rather than comparing the value of Perot to other comparable businesses. 21CSI appealed the verdict, arguing that Perot’s expert should have demonstrated that the actual sale price reflected a loss of goodwill, and that loss was caused by the misconduct of the defendants. 

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By Harry D. Jones

On April 25, 2012, a Connecticut federal district court resolved an unfair competition discovery dispute concerning an alleged April Fool’s Day website post and bulk e-mail that the plaintiff claimed decreased attendance at a competitor’s conference.  U.S. Magistrate Judge Joan Margolis ruled HR consulting firm SharedExpertise Media, LLC’s motion for an “attorneys’ eyes only” protective order to safeguard the identity of certain customers and prospects should only be granted [pdf] as to “customers, registrants, or e-mail recipients who have not been openly identified through resort to defendant’s websites.” 

Just over a year earlier, SharedExpertise sent a mock press release in an April Fool’s Day e-mail and posted it on its website, joking that SharedExpertise had acquired a competitor, LRP Publications, Inc.  The plaintiff is a consultant for LRP.  In his lawsuit alleging unfair competition under 15 U.S.C. § 1125(a), violation of a common law right to privacy, and violation of the Connecticut Unfair Trade Practices Act, the plaintiff asserted the result of the phony press release was that vendors, customers, and prospects were unfairly persuaded to sign up for SharedExpertise’s May 2011 conference rather than LRP’s event in October 2011.  SharedExpertise maintains that not even one person or entity has been identified as being truly confused by the April Fool’s communiqué, and that the plaintiff could easily identify expected customers who failed to attend the LRP conference and discern whether the joke press release was the reason.

The plaintiff served interrogatories and requests for production, including three of each that sought the identity of attendees and vendors at SharedExpertise’s conference.  SharedExpertise asked the court for “attorney’s eyes only” protection, characterizing consultant-plaintiff as the “chief architect” of the LRP conference and “akin to a vice-president of LRP,” which defendant argued created a need for enhanced security.  According to SharedXpertise, the only legitimate use of the information was to facilitate a comparison of the names on the list with the names of persons and entities expected to attend, but not attending, the LRP conference; and argued counsel could make this comparison.  

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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 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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By Douglas A. Wickham

A federal court in Los Angeles dismissed the plaintiff’s trade secrets claims in Aqua Connection Inc. v. Code Rebel, LLC [pdf], despite the fact that the plaintiff (Aqua Connect) alleged that its trade secrets were improperly obtained through reverse engineering in violation of a user agreement. 

In this lawsuit, Aqua Connect alleged that the defendants downloaded a trial version of the plaintiff’s Aqua Connect Terminal Server software (ACTS) and subsequently reverse engineered ACTS in violation of the End User License Agreement (EULA), which prohibited the user from reverse engineering the software in order to obtain the underlying code.  Aqua Connect claimed that the defendants used the trial version of the ACTS software to obtain the code and then created and distributed a competing software product, which Aqua Connect claimed violated California’s Uniform Trade Secrets Act.

The court disagreed and granted the defendants’ motion to dismiss the trade secrets claim. The court noted that under California law: “to state a cause of action for misappropriation of a trade secret . . . a plaintiff must plead that (1) the plaintiff owned a trade secret, (2) the defendant acquired, disclosed, or used the plaintiff's trade secret through improper means, and (3) the defendant's actions damaged the plaintiff.  Civ. Code § 3426.1; Cytodyn, Inc. v. Amerimmune Pharm., Inc., 160 Cal. App. 4th 288, 297 (Ct. App. 2008).”  The court explained that “[i]mproper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means,” but “[r]everse engineering or independent derivation alone shall not be considered improper means.” Civ. Code. § 3426.1(a); Sargent Fletcher, Inc. v. Able Corp., 110 Cal. App. 4th 1658, 1666 (Ct. App. 2003).  

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By Jeremy Hawpe and Jacqueline Johnson Lichty

While undoubtedly lawyers are players in every misappropriation and unfair competition lawsuit, they are rarely parties to this type of litigation.  However, with facts that sound like a fictionalized legal thriller, a Texas toxic tort firm has sued its former office manager and a rival law firm for misappropriation of trade secrets, unfair competition, breach of computer security, conspiracy, and breach of fiduciary duty.

Shrader & Associates is a national plaintiffs’ toxic tort firm.  In August 2011, the firm contends that it learned that its office manager had “embezzled substantial funds”–to the tune of $200,000.  According to the lawsuit filed in Texas state court on January 30, 2012 [pdf], the office manager is also under indictment for felony theft.  The petition alleges that the office manager was introduced to a rival law firm’s named partner after her employment with Shrader ended.  The lawsuit further alleges that the office manager explained to the rival firm’s partner that she had experience with asbestos litigation by virtue of her employment with Shrader and she would “teach” the rival firm how to prosecute asbestos cases in exchange for the new firm’s agreement to split the proceeds from prosecution of such cases on a fifty-fifty basis.

The wife of a partner at the rival firm told an attorney at Shrader that she saw files on her husband’s computer that appeared to be the confidential work product of Shrader, including a file named “Shrader & Associates Strategic Marketing Plan,” presentations regarding asbestos cases that appeared to be generated by Shrader, and spreadsheets that appeared to be related to Shrader’s cases and/or clients.  Finally, Shrader contends that these documents, files and other materials contain trial, discovery and settlement strategies that Shrader developed, that the materials gave Shrader a competitive advantage in litigating toxic tort cases, and that the rival firm used this information to begin a joint venture with an Illinois law firm that Shrader previously had worked with. 

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By Matthew J. Hank

Many states applying the Uniform Trade Secrets Act recognize the “inevitable disclosure doctrine,” under which an individual may be precluded from working for another employer because the new position would inevitably (or, in some states, likely) lead the individual to disclose his former employer’s trade secrets.  Because of the doctrine’s novelty in many states, difficulty in articulating why the defendant is likely (at some point in the future) to misappropriate the former employer’s secrets, and recent tightening of federal pleading standards, employers sometimes struggle to plead an inevitable-disclosure claim.  In Mobile Mark, Inc. v. Pakosz [pdf], the district court provided a blueprint for such employers. 

Mobile Mark, an antenna manufacturer, based its inevitable-disclosure claim on the allegations that one of its engineers transferred proprietary data to himself shortly before ceasing employment, ran a “Window Washer” program on his computer to cover his tracks, and then went to work for a competitor.  According to the complaint, the employee then turned over the information to the competitor, which used the data to manufacture knock-offs of Mobile Mark’s antennas.

The decision in Mobile Mark teaches that, to plead inevitable disclosure, the former employer should, where possible, plead facts establishing that (1) there is a high level of competition between the former employer and new employer; (2) the employee’s position with the new employer is similar to the job he held with the former employer; (3) the new employer did not try to prevent the new employee from using or disclosing the former employer’s trade secrets; and (4) the employee or new employer, if not enjoined, would intentionally use the trade secrets to the plaintiff’s detriment.  Although not all of these elements are necessary to plead an inevitable-disclosure claim, Mobile Mark’s claim survived a motion to dismiss, in part, because Mobile Mark alleged each of these elements.  In addition to setting forth the elements of an inevitable-disclosure claim, two other aspects of Mobile Mark provide guidance for employers contemplating an inevitable-disclosure theory. 

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By Dylan W. Wiseman and Tomomi Glover

Social media sites like LinkedIn, Facebook, and Twitter are changing the ground rules for managing confidential information at work.  As an employer—whether you encourage employees to use social media for your business, or whether you do not address how your employees are using social media at work—the potential for confidential information to appear publicly online is very real. 

Consider the sales employee whose public LinkedIn contact list effectively publishes your business’s confidential client list.  Or the employee that leaves and takes all of the contacts they developed at your company in their private social media account, locking you out of your customer’s contact information. 

Without your approval, an employee cannot lawfully download an employer’s confidential customer list or other trade secrets onto a hard drive and deliver it to your competitor.  But what about customer information that appears on your employee’s LinkedIn account?  Facebook page?  From a legal standpoint, copying a customer list to an employee’s hard drive is no different than taking the same customer list information in an employee’s LinkedIn account.

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By Kristy Peters

When an inventive employee develops a business tool or system, does that resource become a company trade secret that his employer owns once that employee goes to work for a competitor?  The Arizona court of appeals recently grappled with this issue, and ultimately ruled that a spreadsheet a former employee created for his former employer was not a trade secret.  

In Arizona Office Technologies, Inc. v. Infincom, Inc. [pdf], a former employee had developed and maintained a spreadsheet-based sales system known as “ELITE” for his former employer.  ELITE was designed to streamline the sales force’s paperwork.  Later, the employee went to work for a competitor, for whom he developed HELIX, also a spreadsheet-based tool designed to streamline the sales process.  The employee considered HELIX to be the “next generation” of ELITE.  The former employer sued, alleging both the employee and his new employer violated Arizona’s Uniform Trade Secrets Act by misappropriating the ELITE spreadsheet.  

The question at issue was whether ELITE qualified as a trade secret.  The court held there was insufficient evidence that ELITE derived economic value from not being generally known and from not being readily ascertainable by proper means.  ELITE was simply an application of an Excel spreadsheet, and the employee plaintiff testified that before developing ELITE, he had created “probably hundreds” of Excel spreadsheets to improve organizational efficiency for other companies.  Further, after leaving his former employer, plaintiff continued creating similar spreadsheets.  The court held he “had neither the ability nor the legal duty to erase from his memory skills he had acquired in creating effective spreadsheets.”  Accordingly, the ELITE spreadsheet did not qualify as a trade secret. 

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