Below are the latest issues and cases making trade secrets | noncompete news since our last update.
Remember that the Changing Trade Secrets | Noncompete Laws is updated regularly to reflect (in as close to real time as possible) the changes and proposed changes to trade secrets laws and noncompete laws around the country.
Also remember that charts reflecting the differences among how each of the 50 states handle noncompetes and trade secrets are available here (noncompetes) and here (trade secrets). Note that these charts are updated as new developments arise.
Federal (6th Circuit): On November 8, 2016, the 6th Circuit affirmed a jury verdict effectively imposing a perpetual noncompete in Bar’s Products Inc. v. Bars Products International, Inc., 2016 WL 6471760 (6th Cir. 2016). For more reading, see Jonathan Pollard‘s post, 6th Circuit Upholds Jury Verdict on Forever Non-Compete Under Ohio Law.
Federal (9th Circuit): On December 8, the 9th Circuit, in U.S. v. Nosal, honed its position on the breadth of the Computer Fraud and Abuse Act. The Court set the stage as follows:
Only the first prong of the section is before us in this appeal: “knowingly and with intent to defraud” accessing a computer “without authorization.” Embracing our earlier precedent and joining our sister circuits, we conclude that “without authorization” is an unambiguous, non-technical term that, given its plain and ordinary meaning, means accessing a protected computer without permission. Further, we have held that authorization is not pegged to website terms and conditions. This definition has a simple corollary: once authorization to access a computer has been affirmatively revoked, the user cannot sidestep the statute by going through the back door and accessing the computer through a third party. Unequivocal revocation of computer access closes both the front door and the back door. This provision, coupled with the requirement that access be “knowingly and with intent to defraud,” means that the statute will not sweep in innocent conduct, such as family password sharing.
U.S. v. Nosal, 2016 WL 7190670, *2 (9th Cir. 2016).
The Court then summarized the issue as follows: “[W]e are asked to decide whether the “without authorization” prohibition of the CFAA extends to a former employee whose computer access credentials have been rescinded but who, disregarding the revocation, accesses the computer by other means.” Id.
In answering the question, the Court quoted its holding in LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1135 (9th Cir. 2009): “[A] person uses a computer ‘without authorization’ under [the CFAA] … when the employer has rescinded permission to access the computer and the defendant uses the computer anyway.”
The Court was quick to note: “This appeal is not about password sharing. Nor is it about violating a company’s internal computer-use policies.” The Court then added,
Nosal is charged with conspiring with former Korn/Ferry employees whose user accounts had been terminated, but who nonetheless accessed trade secrets in a proprietary database through the back door when the front door had been firmly closed. Nosal knowingly and with intent to defraud Korn/Ferry blatantly circumvented the affirmative revocation of his computer system access. This access falls squarely within the CFAA’s prohibition on “knowingly and with intent to defraud” accessing a computer “without authorization,” and thus we affirm Nosal’s conviction for violations of § 1030(a)(4) of the CFAA.
This approach is also consistent with the Court’s other recent December 9 decision, Facebook, Inc. v. Power Ventures, Inc., 2016 WL 7190690 (9th Cir. 2016).
Federal (ITC): The ITC has increasingly become the venue of choice for certain trade secrets disputes. However, limited circumstantial evidence and resulting surmise may not be enough: Jawbone Fails to Prove Trade Secret Misappropriation by Fitbit at ITC.
Federal (Colorado): On December 2, 2016, the United States District Court for the District of Colorado issued an injunction in Engility Corp. v. Daniels under the newly-enacted Defend Trade Secrets Act of 2016. The case provides a very thorough analysis.
Federal (Missouri): On November 15, 2016, the United States District Court for the District of Missouri issued a decision in Durrell v. Tech Electronics, Inc., in which the court held that continued employment is not sufficient consideration. Although citing to earlier decisions making clear that continued access to trade secrets or customer relationships, as well as other aspects of the continued employment, might provide the necessary consideration, the court dismissed the complaint focused only on the lack of consideration arising from continued employment. Hat tip to Bob Ortbals for identifying the case.
California: As noted in last month’s Trade Secret | Noncompete Issues in the News, effective January 1, 2017, California will have a new law purporting to prohibit the litigation outside of California of most employment-related issues affecting California-based employees. This post adds some details. First, although not specifically focused on noncompete agreements or nondisclosure agreements, the law would cover such agreements. Second, the new law, added as section 925 to California’s Labor Code, provides:
925. (a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:
(1) Require the employee to adjudicate outside of California a claim arising in California.
(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.
(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.
(d) For purposes of this section, adjudication includes litigation and arbitration.
(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.
(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.
California: On October 18, 2016, the California Court of Appeal for the First Appellate District, Division Four (Solano County), Robinson v. U-Haul Company of California affirmed a lower court decision imposing a permanent injunction and awarding substantial attorneys’ fees against U-Haul and in favor of a former U-Haul independent dealer. The basis for the Court’s decision was that noncompetes are illegal in California – even in a context such as this – and that U-Haul knowingly and repeatedly violated the law. Hat tip to Glenn Dassoff and Michelle Van Oppen for identifying this case and providing a link to the case (see above).
Indiana: On November 30, the Court of Appeals of Indiana addressed, in Hannum Wagle & Cline Engineering, Inc. v. American Consulting, Inc., some of the questions that frequently arise in cases involving noncompete agreements and nonsolicitation agreements, specifically, among others, what constitutes solicitation and how to handle tolling/extension provisions in restrictive covenants. Hat tip to John Drake for identifying this case.
Massachusetts: On December 6, 2016, the United States for the District of Massachusetts issued a decision in Unum Group v. Loftus rejecting the defendant’s efforts to dismiss a claim under the Defend Trade Secrets Act based on the whistleblower exception. See Whistleblower status nixed early in trade secrets case.
Pennsylvania: A recent case in Pennsylvania, B.G. Balmer & Co., Inc. v. Frank Crystal & Co., Inc., provides a cautionary tale for employees and their would-be employers where employees engage in a coordinated en masse resignation, violate their nonsolicitation covenants, use their former employer’s trade secret customer information, and are indemnified by the new employer. Hat tip to Martin Saunders for identifying this case.
Pennsylvania: Pennsylvania has taken a step toward eliminating trade secret protection for certain fracking-related information: Fracking Fluid Dynamics: New Trade Secrets Movements.
Other Noteworthy News…
David Lucas wrote a nice summary of the International Harmonization of Trade Secret Rights and Remedies, focusing on the timing and substance of the enactment of the Defend Trade Secrets Act in May and the passage of the European Union Directive on the Protection of Trade Secrets in June.
The MIT Technology Review wrote an interesting piece on the perceived decline in Chinese hacking: The Decline in Chinese Cyberattacks: The Story Behind the Numbers.
David Henderson, a research fellow with Stanford University’s Hoover Institution and economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California, provided a nice summary of an example of why noncompete agreements are enforceable in certain circumstances: Why Non-Compete Agreements Make Sense.
CREATE.org issued a white paper on reasonable measures to protect trade secrets: The Importance of Cybersecurity for Trade Secret Protection.
The musch-reported use by Jimmy John’s of noncompetes for low-level employees came to a conclusion in early December with a settlement with the Illinois Attorney General in which Jimmy John’s paid $100,000.
The potential for conflicts of interest to arise in noncompete cases are manifold. See, for example, Metz Lewis Disqualified in Noncompete Case Against Ex-Client, involving an example of when a firm represents the employee on his way in, but later tries to represent the employer on the employee’s way out.
Ken Vanko, who always has a very thoughtful analysis of the topics he discusses, has a nice piece on the legislative efforts at noncompete reform: A Response to the Jackson Lewis White Paper on Non-Compete Reform.
Erik W. Weibust and Andrew T. Stark wrote a nice piece on a regulation proposed by the Commodities Futures Trading Commission that would allow the CFTC to obtain trading firm’s algorithms.
Terrific advice on law firm security: Client Data Security Obligations Begin With the Law Firm. For more (on insurance-related issues), see Law firms playing catchup covering cybersecurity risks. And, on the subject of keeping what matters in perspective, see Cybersecurity Madness: 3 Things that Really Matter and 3 That Don’t.
Ropes & Gray recently posted on the growing pool of potential defendants in the cybersecurity breaches: Recent Decisions Highlight Legal Risks Associated with Product Cybersecurity Vulnerabilities.
Fish & Richardson released some interesting results of a survey on cybersecurity.
Please note that the most current version of both the 50 State Noncompete Chart and 50 state and federal survey chart of trade secret laws can always be found on my firm’s resources page.