Source: https://www.faircompetitionlaw.com/2014/01/11/trade-secrets-and-noncompetes-year-in-review-2013/
Timestamp: 2019-04-24 22:09:46+00:00

Document:
In February 2013, the Obama Administration issued “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets.” Part of its strategy included the Administration’s solicitation of public comment. Thirteen entities and individuals (including John Marsh (submission), Dean Pelletier (submission), Peter Toren (submission), and me (submission)) submitted comments.
. . . A hacker in China can acquire source code from a software company in Virginia without leaving his or her desk. With a few keystrokes, a terminated or simply unhappy employee of a defense contractor can misappropriate designs, processes, and formulas worth billions of dollars.
The focus seems to be on pushing trading partners to increase their trade secrets enforcement efforts, working with the private sector for them to take the lead, and beefing up trade secrets-related legislation.
The Economic Espionage Act of 1996 (the “EEA”), 18 U.S.C. §§ 1831-1839, was enacted in 1996 to criminalize the misappropriation of trade secrets. It has two operative parts: Section 1831(a) covering “economic espionage” (i.e., theft of trade to benefit a foreign power) and section 1832(a), covering “theft of trade secrets” (i.e., the theft of trade secrets to benefit someone other than the owner of the secrets). 2013 saw a focus on the EEA.
On January 14, 2013, President Obama signed the Foreign and Economic Espionage Penalty Enhancement Act of 2012. In addition to requiring a review of sentencing guidelines, the Act increased fines for foreign espionage under section 1831.
(c) Any person who suffers injury by reason of a violation of this section may maintain a civil action against the violator to obtain appropriate compensatory damages and injunctive relief or other equitable relief. No action may be brought under this subsection unless such action is begun within 2 years of the date of the act complained of or the date of the discovery of the damage.
(d) For purposes of this section, the term without authorization shall not mean independent derivation or working backwards from a lawfully obtained known product or service to divine the process which aided its development or manufacture.
On the criminal side, not only was David Nosal (the subject of the 9th Circuit’s high-profile decision (U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012 (en banc)) narrowly interpreting the CFAA) convicted by a jury, but a firestorm was set off when activist Aaron Swartz, who was being prosecuted under the CFAA for accessing and downloading millions of documents from the online archive (JSTOR), committed suicide. Swartz’s suicide resulted in a bill (“Aaron’s Law Act of 2013”) introduced by Representatives Zoe Lofgren (D-CA), James Sensenbrenner (R-WI), Mike Doyle (D-PA), Yvette Clarke (D-NY), and Jared Polis (D-CO) to narrow the reach of the CFAA.
Aaron’s Law has received significant attention and if passed in one form or another, could have profound implications for the scope of the CFAA.
Effective September 1, 2013, Texas became the 48th state to adopt some version of the Uniform Trade Secrets Act, leaving Massachusetts and New York as the only two hold-outs.
Massachusetts continued to pursue adoption of its own version of the Uniform Trade Secrets Act (H.27 and H. 1225) and continued considering changes to its noncompete laws. The two most significant were H.1225, which appended a California model (i.e., a ban on most employee noncompetes) endorsed by Governor Deval Patrick, and the “Noncompete Agreement Duration Act” (H. 1715/S. 846), which was the culmination of earlier efforts of Representative Lori Ehrlich and Senator William Brownsberger to overhaul Massachusetts noncompete law and leaves most existing Massachusetts noncompete law in tact, and, as its name suggests, focuses on the duration of noncompetes (creating a presumption that noncompetes longer than 6 months are unreasonable and 6 months or less are reasonable).
Other states have similarly considered laws to modify their own noncompete laws. For example, Connecticut considered (but the Governor vetoed) a bill (Substitute H.B. No. 6658) that would have imposed certain requirements on the assignability of noncompete agreements in the context of mergers and acquisitions; Minnesota considered a bill (H.F. No. 506) to ban employee noncompetes; Illinois considered a bill (HB 2782) that, while stating it permits noncompetes, would permit only nonsnolicitation and no raid agreements (subject to various requirements) and imposing legal fees in favor of the prevailing party in any litigation; Maryland considered a bill (S.B. 51, which received an unfavorable report from the Finance Committee) to render noncompetes unenforceable against terminated employees who were eligible for unemployment benefits; and the New Jersey Assembly introduced a bill (A3970) that would render not just noncompetes unenforceable against terminated employees who were eligible for unemployment benefits, but agreements not to solicit and nondisclosure agreements.
Section 4 of the Uniform Trade Secret Act provides that “[i]f . . . a claim of misappropriation is made in bad faith, . . . the court may award reasonable attorney’s fees to the prevailing party.” Each year, more and more are cases doing precisely that.
But what about whether Section 4 applies to a trade secret misappropriation claim maintained in bad faith? According to the Seventh Circuit, it is a matter of “common sense” – it does apply.
[W]e we conclude that “made in bad faith” is correctly interpreted as either bringing or maintaining a suit in bad faith. In addition to the California case law, common sense supports such an interpretation. Regardless of her intentions at the time of filing, surely a plaintiff makes a claim in bad faith if she continues to pursue a lawsuit—even after it becomes clear that she has no chance to win the lawsuit—in order to cause harm to the defendant.
Consequently, we find that the district court erred in determining that a claim “made in bad faith” must be “initiated in bad faith.” A claim is made in bad faith when it is initiated in bad faith, maintained in bad faith, or both.
While neither Massachusetts nor New York has adopted the Uniform Trade Secrets Act, the Seventh Circuit’s decision will likely have broad persuasive authority in the rest of the country.
Trade secrets litigation often involves interstate disputes. Sometimes there is an applicable contract that includes a forum selection clause and sometimes there is not. And, oftentimes, even when there is a contract with such a provision, there is a question about its enforceability. This year, there were two cases of particular note: An eye-opening decision from the United States District Court for the Southern District of California where there was no contract and a decision from the United States Supreme Court where there was a contract. Both, at least as a preliminary matter, found jurisdiction.
In Integrated Practice Solutions, Inc. v. Wilson, 2013 WL 3946061 (S.D. Cal. July 31, 2013), the plaintiff, Integrated Practice Solutions, Inc. (“IPS”) provides practice management computer software for healthcare professionals. Id. at * 1. Defendant Wilson worked for IPS until August 20, 2012, as a sales representative and Vice President of Sales. Id. Later, he went to work for IPS competitor, Future Health Acquisition, Inc. (“Future Health”). IPS claimed that Wilson misappropriated its customer list and provided the information to Future Health. Id.
The only contacts that Future Health, a South Dakota corporation, had with California were “a lone salesman . . . and the occasional trade show,” which the court held were insufficient to establish personal jurisdiction. Id. at *2. However, the court allowed discovery to proceed on the issue of specific jurisdiction, noting that, “that hinges on Future Health’s involvement, or lack thereof, with the alleged actions of Defendant Wilson in misappropriating IPS’s customer list.” Id.
As the court explained, “Misappropriation of trade secrets is an intentional tort,” and, as such, “the defendant must be alleged to have (1) committed an intentional act, (2) expressly aimed at the forum state, (3) causing harm that the defendant knows is likely to be suffered in the forum state. Id. (citing Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984)). Thus, the court reasoned, “if Defendant Wilson did misappropriate the customer list and Future Health did somehow take advantage of that, then Future Health would have purposely availed itself of doing activities in or directed towards California.” Id. at *3. Accordingly, the court retained jurisdiction over Future Health and permitted IPS to take discovery concerning facts relevant to jurisdiction – including, therefore, facts concerning Future Health’s involvement in the alleged misappropriation (which effectively opens the door to extensive discovery).
First, the plaintiff’s choice of forum merits no weight. . . .
Second, a court evaluating a defendant’s § 1404(a) motion to transfer based on a forum-selection clause should not consider arguments about the parties’ private interests. . . .
Third, when a party bound by a forum-selection clause flouts its contractual obligation and files suit in a different forum, a § 1404(a) transfer of venue will not carry with it the original venue’s choice-of-law rules—a factor that in some circumstances may affect public-interest considerations.
The impact of the decision on cases involving the attempted enforcement of forum selection clauses in noncompetition agreements arising from an employer-employee relationship will likely be seen in the not-to-distant future.
Noncompetition agreements, like all contracts, require consideration. It is generally accepted that when an employment agreement is signed in connection with the commencement of employment, the new job provides the consideration necessary to support the noncompete.
The Appellate Court of Illinois for the First District, First Division, has, however, challenged that view in a decision that the Illinois Supreme Court refused to accept on appeal: Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013). Specifically, the court held that, if a new job (i.e., employment) is the purported consideration for a restrictive covenant, then the employment must last at least two years to suffice – even if the employee terminates the employment.
Accordingly, companies hiring in Illinois will, in light of this decision, be well-advised to consider providing additional consideration to employees upon their hiring. What additional consideration will suffice remains to be seen.
It is rare for restrictive covenant cases – especially nonsoliciation cases – to proceed beyond the preliminary injunction stage. And, it’s even more rare for them to make it to an appellate court – especially a federal court of appeals. But, that is precisely what happened in Corporate Technologies, Inc. v. Harnett, 731 F.3d 6 (1st Cir. 2013).
The case involved the question of what constitutes solicitation, an issue that has resulted in many varying decisions over the years.
Businesses commonly try to protect their good will by asking key employees to sign agreements that prohibit them from soliciting existing customers for a reasonable period of time after joining a rival firm. When a valid non-solicitation covenant is in place and an employee departs for greener pastures, the employer ordinarily has the right to enforce the covenant according to its tenor. That right cannot be thwarted by easy evasions, such as piquing customers’ curiosity and inciting them to make the initial contact with the employee’s new firm. As we shall explain, this is such a case.
The First Circuit’s decision is a significant addition to the body of case law interpreting what constitutes solicitation in the context of nonsolicitation agreements.
LightLab Imaging, Inc. v. Axsun Technologies, Inc., SJC-11374, is awaiting decision by the SJC. The key issue (disputed by the parties) is whether a court can permanently enjoin the use of trade secrets where the defendant has not used them (and is not likely to use them in future).
Hydraulic fracking has been unavoidable in the news. From a trade secrets standpoint, the tension is the oil companies’ desire to keep their processes secret and conservation and environmental groups’ (among others’) desire to know what is being put into the water supply. Litigation has recently started over whether the fracking fluids are trade secrets.
Continued evolution of the material change doctrine. It has long been established that a change in position within a company may constitute “a new relationship” necessitating the renewal or replacement of any restrictive covenants entered into in connection with a prior position. The watershed case on this issue is F.A. Bartlett Tree Expert v. Barrington, 353 Mass. 585, 587 (1968). However, there has been a recent spate of cases involving the doctrine reaching results that are sometimes hard to reconcile. See, e.g., A.R.S. Servs. v. Morse, 2013 WL 2152181 (Mass. Super. Ct. April 5, 2013) (Leibensperger, J.); AthenaHealth, Inc. v. Cady, 2013 WL 4008198 (Mass. Super. Ct. May 2, 2013); Intepros Inc. v. Athy, 2013 WL 2181650 (Mass. Super. Ct. May 5, 2013) (Curran, J.); Akibia, Inc. v. Hood, 2012 WL 10094508 (Mass. Super. Ct. Oct. 9, 2012) (Locke, J.). Perhaps most interesting among them is Interpros, which held that terminating an employee voided the noncompetition agreement (based on the material change doctrine).

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