Trade Secret / Noncompete Blog

Before we get too far into 2010, let’s take stock of the most important developments in trade secrets and noncompete law in 2009. Whether they represent a new trend or a reinforcement of existing law, these developments had a big impacted in this area of practice last year and likely will continue to during this year.

10. A splitting headache: Courts continue to disagree over the meaning of “unauthorized access” under CFAA. In the absence of a federal civil trade secrets act (see #9), the Computer Fraud and Abuse Act (“CFAA”) has become the avenue of choice to federal court for companies victimized by disloyal employees’ digital misconduct. The principal civil remedies under CFAA require that the defendant have accessed a protected computer without authorization or by exceeding authorized access. Yet federal courts cannot agree on whether a disloyal employee, who otherwise was permitted to use the employer’s computer system, violates the CFAA by downloading or destroying digitally stored trade secrets and other sensitive employer information to further the disloyal purpose. In 2006, the Seventh Circuit handed down Int’l Airport Centers, L.L.C. v. Citrin, 440 F.3d 418 (7th Cir. 2006), which held that an employee is stripped of access as far as the CFAA is concerned when the employee acts contrary to the employer’s interest. In 2009, the Ninth Circuit weighed in with LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), which held that a person does not violate the CFAA when the person has permission to use the computer even if that use was contrary to the interests of the person’s employer. This split needs to be resolved soon because clients need another webinar or update on this topic like a hole in the head.
9. Federalization of trade secret protection? Trade secrets are the only major type of intellectual property law governed primarily by state law. Previous attempts to achieve uniformity, including adoption (with some variation) of the Uniform Trade Secrets Act by 46 states has not eliminated the need for trade secret owners to learn (or pay for their lawyers to teach them) the legal idiosyncrasies of each state in which the owner would like to do business. In light of the increased (and possibly growing; see # 8 below) reliance on trade secret protection, will a serious effort to enact a federal trade secrets act emerge in 2010?
8. Bilski v. Kappos: This closely-watched patent case was argued to the Supreme Court in November, 2009 and is awaiting a decision. Even though it is a patent case, everybody should be watching it because the decision could impact the patentability of all business methods and other processes, which probably explains why more than 70 amicus briefs were submitted. A decision significantly limiting the patentability of methods and processes could increase reliance on trade secret protection
7. Right without a remedy? Blockowitz v. Williams, No. 09-C-3955 (N.D. Ill. Dec. 12, 2009), also does not directly involve trade secrets; instead, it is a case under the federal Communications Deceny Act case. Nonetheless, it could be a big problem for trade secrets owners who find their secrets posted on the internet. In this case, defendants posted defamatory statements to several web sites, including one called Ripoff Report. Defendants defaulted, and the court entered a default judgment in plaintiffs’ favor, as well as an injunction requiring take down of the offending posts. The defendants could not be found, however, and Ripoff Report refused to voluntarily remove the posts at issue. So the plaintiffs filed a motion under Fed. R. Civ. P. 65(d), which extends injunctions to “nonparties who act with the named party,” to enforce the injunction against Ripoff Report. The court, however, found that that there was no evidence that the web site had acted in concert with the defendants. Thus, the plaintiffs were left with no ability to have the comments adjudged to be defamatory removed from the internet.
6. Increase in trade secrets theft. Although hard numbers are difficult to come by, the combination of tough economic times and the increased portability of electronically stored trade secrets appears to have lead to an increase in trade secrets theft by people who have left their previous employer, whether involuntarily or not. In turn, companies increasingly are turning to trade secret misappropriation claims (and CFAA claims, see #10), particularly in states like California in which post-employment noncompetes essentially cannot be enforced. Since the economy appears to be improving slowly at best, this trend may well continue.
5. Noncompetes, Part I: Statehouse efforts to “reform” noncompetes. In 2009, legislatures in at least 3 states were at work to change the law regarding enforceability of noncompetes. It should come as no surprise in this area where unpredictability reigns that this proposed “reform” took different approaches. In Massachusetts, venture capitalists looking for ways to help Boston’s 128 high-tech corridor emulate the success of Silicon Valley in California where noncompetes are effectively unenforceable pressed the Legislature to enact an outright ban of noncompetes. A competing bill was proposed, and the pending “compromise” bill would not prohibit noncompetes, but would limit their use, such as by requiring that an employee receive additional compensation beyond being permitted to continue to work for entering into a noncompete while employed, limiting noncompete terms to one year, and exempting employees earning less than $75,000 per year from noncompetes. Oregon recently adopted similar changes. In contrast, Georgia is considering strengthening its noncompete laws to permit greater enforcement of noncompetes.
4. Noncompetes, Part II: judicial enforcement of noncompetes harder to predict: For decades, the law in Illinois was pretty clear as to the enforceability of post-employment noncompetes ancillary to an employment agreement. To enforce one that is reasonable in scope and duration, an employer needed to demonstrate a legitimate interest, either in the form of a long-standing customer relationship or protection of confidential information. In Sunbelt Rentals, Inc. v. Ehlers, 915 N.E.2d 862 (Ill. App. Ct. 2009), however, the Illinois Fourth District Appellate Court cast aside that precedent in holding that only reasonable duration and territory terms are needed to enforce a noncompete in Illinois. While it is far from clear whether the other four appellate districts in Illinois will choose to reconsider their precedent in light of Sunbelt Rentals, this decision clearly injects additional uncertainty into an arena in which it already was difficult to predict whether a particular noncompete would be enforced. Moreover, the decision may provide an incentive for employers to seek enforcement of noncompetes, and possibly to expand the types of employees from whom they seek noncompetes to those that typically do not come into contact with customers or confidential information.
3. Noncompetes, Part III: Is there life after the noncompete? Lots of factors have conspired to make post-employment noncompete agreements harder to enforce, among them legislative efforts to limit noncompetes and judicial reluctance to deny a person an actual employment opportunity in a dismal job market. As a result, companies have begun supplementing noncompetes with other types of restrictive covenants. These include, among others: (1) “garden leave clauses” in which an employee is compensated during the period when competitive activities are restricted; (2) forfeiture (or pay) for competition agreements in which an employee forfeits certain benefits (or pays his former employer) for engaging in competition with the former employer; (3) non-disclosure and confidentiality agreements; (4) assignment clauses for inventions disclosed post-employment but conceived during the course of the previous employment; and (5) agreements not to solicit customers or employees of the former employer. While each of these provisions restrict post-employment conduct, they do not directly prevent taking a job with a competitor and thus may be more likely to be enforced. For a fuller discussion, see here an excellent article by my partner Russell Beck.
2. California Dreamin’: California courts used 2009 to remind everyone that there are many obstacles in that state to enforcing trade secret protection in cases involving mobile employees, and that trying to enforce a noncompete—even one involving trade secrets—may be a fool’s errand. FLIR Sys., Inc. v. Parrish, 95 Cal. Rptr. 3d 307, (Cal. Ct. App. 2009), which not only denied the requested injunction but awarded over $1.6 million in fees for pursuing injunctive relief in bad faith, teaches that it is not enough that a former employee had access to your trade secrets and now has gone to work for an actual or potential competitor: you must have a sound basis for asserting that misuse of the trade secrets is actually threatened. Perlan Therapeutics v. Superior Court of San Diego Cty, 101 Cal. Rptr. 3d 211(Cal. Ct. App. 2009), is a reminder that plaintiffs suing in state court there for trade secrets misappropriation have to describe the alleged trade secrets with reasonable particularity—not evasiveness—before being permitted to conduct discovery. The Retirement Group, Inc. v. Galante, 98 Cal. Rptr. 3d 585 (Cal. Ct. App. 2009), reminds that even if one succeeds in obtaining a preliminary injunction barring an ex-employee from one’s trade secrets, one should not overreach by trying to leverage that success into a broader prohibition against soliciting one’s customers when the identity of each of those customers is not itself a trade secret. In Galante, the plaintiff persuaded the trial court to enter a broader injunction, but the appellate court reversed because of what it characterized as the injunction’s overbreadth.
1. The more things change, the more they stay the same: Everyone knows that to protect your trade secrets, you’ve got to take reasonable steps to keep them secret. So why do companies persist in failing to plug leaks in their trade secret protection programs? Southwest Stainless, LP v. Sappington, 582 F.3d 1176 (10th Cir. 2009), is a case in point. It involves a common scenario: a group of employees, in this case senior sales staff, left the plaintiff to join a rival metals manufacturer. After the rival began winning business from the plaintiff’s customers, the plaintiff sued, claiming (among other things) misappropriation of trade secrets, including bid prices. The district court found misappropriation, but the Tenth Circuit (applying Oklahoma law) reversed. The Tenth Circuit had no trouble concluding that pricing could constitute trade secrets. However, it also held that the plaintiff simply had not done enough to keep its pricing, including prices in submitted bids, confidential. According to the court, the plaintiff’s biggest problem was that it submitted the bid to the customer without any restriction on the customer’s ability to disseminate it. That holding is as good a reminder as any as we head into the new year (and decade): although you have to be mindful of developments in trade secrets law, you can’t lose sight of the basics.