Tag: Trade Secrets

A Closer Look at the FTC’s Final Non-Compete Rule

On April 23, 2024, the Federal Trade Commission (FTC) issued its Final Non-Compete Agreement Rule (Final Rule), banning non-compete agreements between employers and their workers. The Final Rule will go into effect 120 days after being published in the Federal Register. This Final Rule will impact most US businesses, specifically those that utilize non-compete agreements to protect their trade secrets, confidential business information, goodwill, and other important intangible assets.

The Final Rule prohibits employers from entering or attempting to enter into a non-compete agreement with “workers” (employees and independent contractors). Employers are also prohibited from even representing that a worker is subject to such a clause. The Final Rule provides that it is an unfair method of competition for employers to enter into non-compete agreements with workers and is therefore a violation of Section 5 of the FTC Act.

There are few exceptions under the Final Rule. For senior executives, existing non-compete agreements can remain in force. However, employers are barred from entering or attempting to enter into a non-compete agreement with a senior executive after the effective date of the Final Rule. The Final Rule defines “senior executive” as a worker who is both (1) earning more than $151,164 annually and (2) in a “policy-making position” for the business. For workers who are not senior executives, existing non-competes are not enforceable after the effective date. If not invalidated all together, the Final Rule will likely have extensive litigation related to “policy-making position.” According to the current commentary on the Final Rule, the FTC will likely take the position that “senior executive” is a very limited definition.

Further, the Final Rule does not apply to non-competes entered into pursuant to a “bona fide sale of a business entity, of the person’s ownership interest in [a] business entity, or of all or substantially all of a business entity’s operating assets.” As a result, parties entering into transactions can continue to use non-compete agreements in the sale of a business. But transactional lawyers should note that any non-compete in a subsequent employment agreement with a seller will likely be subject to the Final Rule. The Final Rule also does not prohibit employers from enforcing non-compete clauses where the cause of action related to the non-compete clause occurred prior to the effective date of the Final Rule.

The Final Rule also states that agreements that “penalize” or “function to prevent” an employee from working for a competitor are banned and unlawful. For example, a non-disclosure agreement may be viewed as a non-compete when it is so broad that it functions to prevent workers from seeking or accepting other work or starting a business after they leave their job. Similarly, non-solicitation agreements may also be banned under the new rule “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.” The commentary makes clear that the enforceability and legality of these types of agreements will need to be analyzed on a case-by-case basis.

Under the Final Rule, employers are required to provide clear and conspicuous notice to workers who are subject to a prohibited non-compete. This notice must be sent in an individualized communication (text message, hand delivery, mailed to last known address, etc.) and indicate that the worker’s non-compete clause will not be enforced.

The Final Rule has already been challenged in at least two lawsuits, both filed in the state of Texas. The US Chamber of Commerce filed suit in the US District Court for the Eastern District of Texas seeking a declaratory judgment and an injunction to prevent the enactment of the Final Rule. A second suit, filed by Ryan, LLC, a tax services firm, was filed in the US District Court for the Northern District of Texas. Both suits raise similar arguments: (1) the FTC lacks authority to enact the rule due to the major questions doctrine; (2) the Final Rule is inconsistent with the FTC Act; (3) the retroactive nature of the Final Rule exceeds the FTC’s authority and raises Fifth Amendment concerns; and (4) the Final Rule is arbitrary and capricious. The US Chamber of Commerce has also filed a motion to stay the effective date of the Final Rule pending resolution of the lawsuit.

The very nature of how business entities protect their intangible assets is at risk, and the Final Rule will change the contractual dynamic of the employer-employee relationship.

© 2024 Jones Walker LLP
For more on the FTC Non-Compete Rule, visit the NLR Labor & Employment section.

Unfashionably Late: Seventh Circuit Rejects Misappropriation Claim Premised On Prototype Created Eleven Years Prior

The Seventh Circuit recently affirmed summary judgment in favor of a former employee and his new employer on claims for misappropriation of trade secrets relating to a prototype of an actuator created eleven years prior, holding that the inference that the defendant used his knowledge of the prototype more than a decade later was “barely conceivable” and “exceptionally unreasonable.” REXA, Inc. v. Chester, — F.4th —, 2022 WL 2981167, at *6 (7th Cir. 2022) (internal quotation marks omitted).

In 2002, Mark Chester, an engineer at Koso America, Inc. (“Koso”), participated in a project to create a new valve for a hydraulic actuator. An actuator is a component of a machine that produces motion. While the project was unsuccessful, it did produce an experimental prototype of another actuator. Koso shelved the experimental prototype due to the improbability of commercial success. The following year, Chester left Koso.

After more than a decade had passed since Chester worked on the 2002 project for Koso, Chester and his new employer, MEA Inc. (“MEA”), built a new actuator prototype, later known as the Hawk. Chester and MEA filed a related patent application, which was approved in part. REXA, Inc. (“REXA”), a company affiliated with Koso, brought suit against Chester and MEA for misappropriation of trade secrets under the Illinois Trade Secrets Act (“ITSA”), among other claims. REXA argued that Chester and MEA’s actuator incorporated and disclosed confidential designs contained within the prototype Koso developed in 2002. The district court granted summary judgment in favor of Chester and MEA. REXA appealed.

On appeal, the Seventh Circuit affirmed summary judgment in favor of defendants on the misappropriation claims. First, the Seventh Circuit agreed that REXA failed to identify a concrete trade secret, as the Court was unable to determine which aspects of the 2002 designs are known to the trade, and which are not. The Court explained that several aspects of the 2002 actuator prototype are widely known in the industry, which by definition, is not sufficiently secret to qualify for protection under the ITSA.

Second, the Seventh Circuit held that even if REXA had identified a trade secret, REXA had not established that defendants misappropriated trade secrets when MEA filed its patent application or developed the Hawk actuator. With respect to MEA’s patent application, the Court explained that REXA’s allegations “rest on a series of untenable inferences.” Id. Indeed, eleven years had passed since Chester worked on the actuator prototype, and it was undisputed that he never saw or took any documents with him when he left Koso. Additionally, REXA did not cite any case where a court “inferred” a misappropriation of trade secrets despite a lack of evidence that the defendant seized or possessed documents, nor could the Seventh Circuit find any such case. As such, the Court found the lack of evidence, coupled with the eleven-year gap, “renders the inferences that REXA asks us to draw exceptionally unreasonable.” Id.

Regarding the design of MEA’s Hawk actuator, the Seventh Circuit held that the 2002 prototype did not include features of the patent application that made the Hawk both a non-obvious improvement over prior art and commercially valuable. Thus, Chester and MEA could not have misappropriated trade secrets contained within the 2002 prototype.

REXA serves as an important reminder that trade secret claimants must identify with specificity the elements that distinguish the alleged trade secret from general knowledge in the field or public domain. Additionally, REXA confirms that, at least in the Seventh Circuit, courts are hesitant to draw inferences supporting misappropriation claims without any evidence the defendant seized or possessed documents from the plaintiff, particularly if a significant period of time passes before the alleged misappropriation occurs.

Article By Mikela T. Sutrina and Jenna G. Crawford of Sheppard, Mullin, Richter & Hampton LLP

For more intellectual property legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

The Way to Protect Your Business? What You Need to Know About Trade Secrets

What do Coca-Cola’s secret formula, McDonalds’ special sauce, and Google’s search algorithm have in common? Each is a protected trade secret. In other words, they are proprietary information vital to these companies’ survival and are among their most valuable corporate secrets.

A trade secret can be anything of value to your company that is unique and not known to persons outside the company. For example, a trade secret can be a recipe, process, formula, strategy, technique, or device that your competitors do not know, do not have, and cannot use.

Trade secret law can be less risky in some respects than other forms of intellectual property like patents, copyrights, and trademarks. The application process for a patent requires that a company disclose the secret itself. With that comes an inherent risk—should the application be denied, the secret is no longer a secret. While the protection afforded by trade secret law may be considered fragile, meaning constant vigilance is required to maintain secrecy, the secret remains a secret; while a patent, even after issuance, carries some risk of post-grant invalidation. By contrast, a trade secret owner may ultimately enjoy greater certainty by maintaining protection, potentially forever. However, a trade secret is entitled to protection only for as long as it is kept a secret. If the information is lawfully disclosed to the public, it is no longer confidential and loses its trade secret protection forever.

Governing Law: Both federal and state law recognize the time and money invested to gain competitive advantages like trade secrets and protect those advantages. Federal Law: Under the controlling federal legislation passed by Congress in 2016, the Defend Trade Secrets Act (“DTSA”) defines a trade secret as something used in a company’s business that (a) is not known or readily accessible by competitors, (b) has commercial value or that provides a competitive advantage in the marketplace, and (c) the owner of the information protects from disclosure through reasonable efforts to maintain its secrecy. Prior to the DTSA’s enactment in 2016, no federal statute promulgated a federal trade secret private right of action.

In addition to the DTSA’s rules regarding trade secrets, additional federal rules apply. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner. The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen. The Act allows the government to punish thefts of trade secrets by imprisonment up to 15 years and/or fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.

New York State Law: Prior to federal law, most states had some form of trade secret law that varied state to state. The Uniform Trade Secrets Act (“UTSA”) was published in 1979 and amended in 1985 to provide a uniform trade secret law. Many states, including Pennsylvania in 2004 and New Jersey in 2012, adopted the UTSA. Notably, New York did not adopt the UTSA and does not have its own state trade secret statute, and thus relies on the common law.

Under New York common law, “misappropriation” refers to the acquisition of a trade secret by someone who knows that the trade secret was acquired by improper means—theft, bribery, misrepresentation, breach, or inducement of a breach of duty to maintain secrecy. The New York statute of limitations requires that any action for misappropriation be filed three years from the date the misappropriation is discovered. Further, New York law requires that the use of the trade secret be continuous in the operation of a business, rather than one-time use.

Cartier v. Tiffany: Cartier recently filed suit against its luxury rival Tiffany & Co. in New York state court. Cartier v. Tiffany & Co., et al.,650925/2022 (N.Y. Sup.). Richemont-owned Cartier sets out claims against LVMH’s Tiffany & Co. for various contractual and tort claims and trade secret misappropriation against both defendants [Who is the other defendant?]. Cartier seeks preliminary and permanent injunctive relief to require defendants to refrain from using the allegedly misappropriated information and return it to Cartier, as well as a judgment for any “compensatory damages that may be caused by [Tiffany’s] wrongful conduct.”

The complaint states that Tiffany & Co. lured former Cartier employee Megan Marino away from her role as its Assistant Manager for Jewelry Merchandising to learn more about Cartier’s “High Jewelry” collection, where pieces typically cost $50,000 to $10 million.

Cartier claims Marino was bound by non-disclosure and non-solicitation agreements she had signed as part of her role at Cartier and that she breached those agreements by using Cartier’s confidential business information to benefit Tiffany. This information includes Cartier’s “very sensitive and valuable” internal company documents that Marino forwarded to her personal email. Specifically, Marino “referenced a [Cartier] Excel spreadsheet” that “detailed Cartier’s confidential, High Jewelry assortment information.” Based on that spreadsheet, Cartier alleges, Marino “created a new Excel document, derived entirely from Cartier’s confidential information,” including “the total number of High Jewelry pieces at various Cartier locations in the U.S.” Cartier maintains this information is “only accessible by a limited number of Cartier employees [and] not known outside of Cartier” and “allow[s] a sophisticated competitor to replicate key strategies and, with relative ease, to reverse engineer how Cartier allocates, merchandises, and prices its High Jewelry stock.” Cartier claims the proprietary and confidential nature of this information amounts to a trade secret-protected asset.

Cartier further claims Tiffany has a history of poaching employees and maintains a “disturbing culture of misappropriating competitive information.” Given the alleged pattern, Cartier asserts that Tiffany now possesses “a substantial amount of [its] confidential and trade secret information that it obtained from Marino and other former Cartier employees” as a result of their “unlawful taking of Cartier’s valuable confidential information and trade secrets.”

Even if Cartier successfully establishes that it maintains trade secret information that Tiffany misappropriated, the case is hardly straightforward. Establishing damages in cases like this is particularly challenging, as it is difficult to assign a dollar value to trade secret information that will compensate the plaintiff for the economic loss caused by the defendant’s misappropriation. As a result, courts generally have quite a bit of discretion in fashioning damages awards.

Article By David H. Siegel of Norris McLaughlin P.A.

For more intellectual property legal news, click here to visit the National Law Review.

©2022 Norris McLaughlin P.A., All Rights Reserved

Is A Corporation’s Address A Trade Secret?

“Cryptocurrency” is a hybrid word form from the Greek adjective, κρυπτός, meaning hidden, and the Latin participle, currens, mean running or flowing.  The word “currency” is also derived from currens, perhaps based on the idea that money flows from one person to the next in an economy.  Literally, cryptocurrency, is secret money.  But there are secrets and there a secrets.

Recently, a cryptocurrency exchange sued one of its employees for violating the Defend Trade Secrets Act of 2016, 18 U.S.C. § 1831-39.  Among other things, the company alleged that the erstwhile employee had disclosed the “physical address” of the company in a complaint filed in a state court action.  Until now, I had never considered that a company’s physical address might be a secret.  The company argued that “keeping its physical address secret serves to protect it from ‘physical security threats,’ providing as an example of such threats ‘a recent spate of kidnappings’ of persons who work for cryptocurrency exchanges”.  Payward, Inc. v. Runyon, U.S. Dist.

Judge Maxine M. Chesney ruled for the defendant, finding that the plaintiff had failed to allege how its competitors would gain an economic advantage by knowing the company’s address.  Accordingly, Judge Chesney found that the plaintiff had not pled that the address met the definition of a trade secret under the DTSA.

I was somewhat nonplussed by the idea of an office address being a secret (trade or otherwise).  After all, the plaintiff, a Delaware corporation, had filed a Statement of Information with the California Secretary of State disclosing the address of its principal executive office (which is the same as its principal executive office in California).  That filing is a readily accessible public record.  It may be, however, that the address disclosed by the defendant was for another location not disclosed in the Statement of Information.

Etymologists use the term “hybrid word” to refer to a word that is formed by the combination of words from two different languages.  Greek-Latin hybrids are the most common form of hybrids in English.  English does have hybrids formed from other languages.  For example, “chocoholic” is a hybrid formed from New and Old World languages – Nahuatl, xocolatl, and Arabic, اَلْكُحُول (al-kuḥūl).  

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP
For more articles on corporate law, visit the National Law Review Corporate & Business Organizations section.

The Wild (Kanye) West of Trade Secret Theft

Musical artist and fashion icon Kanye West is being sued by a video and ecommerce company called MyChannel Inc. (MYC) that claims he breached their mutual nondisclosure agreement and took “their proprietary and confidential technology and information to fuel the e-commerce engine” of his Yeezy brand. MYC filed its lawsuit in the US District Court for the Central District of California. The minority-owned business alleges that West made “lavish promises to MYC of millions of dollars in economic reward,” as well as the formation of a lucrative partnership providing millions more[.]” In return, MYC asserted that it agreed to provide Kanye West—and did in fact provide Kanye West—with “tens of thousands of hours of investment in Yeezy in reliance on those promises and the MYC-Kanye partnership.”

At the heart of MYC’s complaint is its allegation that it developed a unique video platform—including a unique, proprietary “shopability” function that was protected by a nondisclosure agreement—to grow the ecommerce operation of West’s Yeezy brand. According to MYC, West brazenly rebranded MYC as his own company, referring to it as “YZY Tech” to partners like Adidas. MYC claims that West and his Yeezy brand then breached their obligations to compensate MYC for its work, yet they nevertheless continued to use MYC’s ecommerce platform, including MYC’s shopability function. In fact, MYC alleges that West’s “closest confidents [sic] and business advisors reached out to MYC’s founders” noting similarities between their work and the platform West continued to use, reasonably believing that MYC was responsible for the content.

The veracity of MYC’s claims will be tested in court as it litigates its claims against Kanye West. In the meantime, this case demonstrates that theft of intellectual property does not always occur in the shadows with, for instance, employees clandestinely misappropriating trade secrets. Rather, misappropriation of intellectual property can sometimes occur in plain sight when business deals and/or partnerships deteriorate. It is important, then, to clearly delineate rights to intellectual property and carefully craft nondisclosure agreements that protect assets exchanged with prospective partners.

© 2020 Jones Walker LLP
For more articles on trade secrets, visit the National Law Review Intellectual Property section.

Texas Appeals Court Rules Private Communications with Customers Not Protected Free Speech

In a case addressing the applicability of free speech as a defense to trade secret misappropriation, the Court of Appeals for the Fifth District of Texas retracted its previous ruling, holding that communications with customers and suppliers did not involve a matter of public concern and were therefore not an exercise of free speech. Goldberg, et al. v. EMR (USA Holdings) Inc., et al., Case No. 05-18-00261-CV (Tex. App. Jan. 23, 2020) (Myers, J).

The case concerns allegations of trade secret misappropriation brought by EMR (USA Holdings) (EMR), against Kenneth Goldberg, his company Geomet Recycling (Geomet), and several Geomet employees who, like Goldberg, formerly worked for EMR. EMR and Geomet are both involved in the business of scrap metal recycling. EMR alleged that Goldberg, Geomet and the former EMR employees (collectively, “Defendants”) violated the Texas Uniform Trade Secrets Act (TUTSA), breached fiduciary duties and tortuously interfered with contracts by, among other things, using EMR’s trade secrets and confidential and proprietary information to contact purchasers and suppliers.

Defendants moved to dismiss all claims under the Texas Citizen’s Participation Act (TCPA), claiming that their contacts with purchasers and suppliers were protected free speech involving a matter of public concern. The TCPA allows litigants to seek early dismissal of a lawsuit if they prove by a preponderance of the evidence that the legal action is based on, or is in response to, a party’s exercise of the right of free speech.

The TCPA defines “exercise of the right of free speech” as “a communication made in connection with a matter of public concern.” The statute states that a “‘[m]atter of public concern’ includes an issue related to: (A) health or safety; (B) environmental, economic, or community well-being; . . . or (E) a good, product, or service in the marketplace.” Id. § 27.001(7). Additionally, under the “commercial-speech exemption,” the TCPA does not apply to a legal action brought against a person engaged in the business of selling goods or services if the conduct arises out of a commercial transaction in which the intended audience is an actual or potential buyer or customer.

After the trial court denied Defendants’ motion to dismiss without providing any reasoning, Defendants appealed.

On August 22, 2019, the Court of Appeals for the Fifth District of Texas affirmed the trial court’s decision. The Court held that the commercial-speech exemption to the TCPA applied to the Defendants’ communications with purchaser and suppliers. However, the Court also found that these communications concerned “an issue related to . . . a good, product, or service in the marketplace” and therefore involved a matter of public concern under the TCPA.

Both sides asked for rehearing. In its new ruling, the Court of Appeals reversed course and found that Defendants’ communications with purchasers and suppliers did not involve matters of public concern. Defendants argued that the business of recycling scrap metal relates to environmental, economic and community well-being, which are considered matters of public concern under the TCPA. The Court rejected this argument, noting that while scrap metal recycling may indeed relate to matters of public concern, the communications at issue “were private communications regarding private commercial transactions for the purchase and sale of a commodity.” The Court held that, because the communications themselves did not implicate matters of public concern, they were not subject to the TCPA.

Practice Note:

The new ruling significantly restricts the application of the TCPA. The holding indicates that the TCPA cannot shield defendants from trade secret claims based on communications between the defendant and potential customers or suppliers that solely relate to the purchase or sale of a commodity—even if the commodity at issue might arguably relate to matters of public concern.

© 2020 McDermott Will & Emery

For more on TCPA rule application, see the National Law Review Communications, Media & Internet law section.

Not So Fast And Furious – Executive Indicted for Stealing Self-Driving Car Trade Secrets

Back in March, 2017, we posted about a civil lawsuit against Anthony Levandowski, who allegedly sped off with a trove of trade secrets after resigning from Waymo LLC, Google’s self-driving technology company. Waymo not only sued Levandowski, but also his new employer, Uber, and another co-conspirator, Lior Ron. Since our initial post, things have gotten progressively worse for the Not So Fast and Furious trio: (1) Levandowski was fired in May, 2017; (2) Uber settled, giving up 5% of its stock, which totaled $245 million dollar;  and (3) the case against Levandowski and Ron was sent to arbitration, where the arbitration panel reportedly issued a $128 million interim award to Waymo.

Just when things couldn’t seem to get any worse, they did.

On August 15, 2019, a federal grand jury indicted Levandowski on 33 counts relating to trade secret theft. Levandowski has pled not guilty, has been released on $2 million dollars bail, and  is currently wearing an ankle monitor.

This legal saga is a reminder that trade secret theft is serious… it not only has civil consequences, but also criminal ones.  Unfortunately, trade secret theft happens every day.  And regardless of whether your company has trade secrets regarding self-driving car technology, worth hundreds of millions of dollars, or customer information worth less than a hundred thousand dollars, it’s important to make sure your company’s information is protected.

Equally important is knowing how to investigate potential trade secret theft. Some helpful tips as you launch your investigation:

1. Secure and preserve all relevant computing devices and email/file-sharing accounts.

2. Consider enlisting the help of outside computer forensic experts.

3. Analyze the employee’s computing activities on company computers and accounts.

4. Determine whether there is any abnormal file access, including during non-business hours.

5. Examine the employee’s use of external storage devices and whether those devices have been returned.

6. Review text message and call history from the employee’s company issued cell phone (and never instruct anyone to factory reset cell phones).

7. Enlist the help of outside counsel to set the parameters of the investigation.

© 2019 Jones Walker LLP
For more on trade secret law, see the National Law Review Intellectual Property law page.

A Judge’s Tips for Keeping Trade Secrets “Secret”

Just because information is sufficiently sensitive and valuable that it can qualify as a “trade secret” does not mean that it will qualify unless the owner of the information takes adequate steps to protect its secrecy.

In a recent decision, Judge John J. Tharp, Jr., of the U.S. District Court for the Northern District of Illinois explained that “there are two basic elements to the analysis” of whether information qualifies as a “trade secret”: (1) the information “must have been sufficiently secret to impart economic value because of its relative secrecy” and (2) the owner “must have made reasonable efforts to maintain the secrecy of the information” (internal quotation marks omitted).[1]

According to Judge Tharp, some of those “reasonable efforts” that a company can take to maintain the secrecy of its information include:

  • using non-disclosure and confidentiality agreements with employees;
  • enacting a policy regarding the confidentiality of business information that is more detailed than a mere “vague, generalized admonition about not discussing [company] business outside of work”;
  • training “employees as to their obligation to keep certain categories of information confidential”;
  • asking departing employees whether they possess any confidential company information, and, if they do, instructing them to return or delete it;
  • adequately training IT personnel about data security practices;
  • restricting access to sensitive information on a need-to-know basis; and
  • as appropriate, labelling documents “proprietary” or “confidential.”

As Judge Tharp made clear, companies that fail to institute reasonable measures to protect sensitive information do so at their own peril.

[1] Abrasic 90 Inc. v. Weldcote Metals, Inc., No. 1:18-cv-05376 (N.D. Ill. Mar. 3, 2019) at 11.

 

©2019 Epstein Becker & Green, P.C. All rights reserved.
This article was written by Peter A. Steinmeyer and Erica McKinney from  Epstein Becker & Green, P.C.
For more on employer/employee relations see the National Law Review Labor & Employment page.

Defendants’ Timing Defense to DTSA Claims Faces Mixed Results

With the law’s first anniversary in the rear view mirror, defendants have established a viable defense to claims arising under the Defend Trade Secrets Act (“DTSA”) – a plaintiff may be precluded from bringing a claim under DTSA if it only alleges facts that show acts of misappropriation occurring prior to May 11, 2016 (the date of DTSA’s enactment).   In the last few months, four different courts have tackled this “timing defense,” and defendants raising it in motions to dismiss DTSA claims have encountered mixed results.

In Brand Energy & Infrastructure Servs. v. Irex Contr. Grp., No. 16-cv-2499, 2017 U.S. Dist. LEXIS 43497 (E.D. Pa. Mar. 23, 2017), a Pennsylvania federal court rejected the defendants’ attempt to invoke the timing defense because the plaintiff’s amended complaint alleged various times after the enactment of the DTSA that the defendants “used” the plaintiff’s alleged trade secrets.  The court also noted the plaintiff’s inclusion of allegations in the amended complaint showing that “to this day, the defendants continue to ‘obtain access to [its] confidential and proprietary business information ….”  Based on this pleading, the court held that the plaintiff could pursue its DTSA claim.  Similarly, in AllCells, LLC v. Zhai, Case No. 16-cv-07323, 2017 U.S. Dist. LEXIS 44808 (N.D. Cal. Mar. 27, 2017), a California federal court denied the defendants’ motion to dismiss a DTSA claim because “even if [defendants] copied and thus acquired the alleged trade secrets before May 11, 2016, [the plaintiff] has sufficiently alleged that there was at least use of the trade secrets after that date.  Hence, the Act applies.”

In Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16-cv-03545, 2017 U.S. Dist. LEXIS 71700 (N.D. Ill. May 11, 2017), a plaintiff’s DTSA claim survived dismissal, overcoming the defendant’s argument that “no acts occurred after the effective date of the Act.”  The court held that the plaintiff’s allegations regarding the inevitable post-enactment disclosure of its trade secrets to the defendant by its former employee were sufficient to state a plausible DTSA claim:  “[i]f it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that [defendant] would be continuing to use them.”  The court noted, however, that further discovery would be needed to determine whether post-enactment disclosure of the trade secrets was in fact inevitable.

By contrast, a California federal court granted a defendant’s motion to dismiss where a complaint lacked sufficient allegations regarding the timing of the alleged appropriation in Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., No. 15-cv-02177, 2017 U.S. Dist. LEXIS 62109 (N.D. Cal. Apr. 24, 2017).  In Cave, the plaintiff alleged that the defendant acquired trade secrets and used them in a 2014 client meeting, but that conduct predated the enactment of the DTSA.  The court held that plaintiff had failed to make any “specific allegations that defendant used the alleged trade secrets after the DTSA’s May 11, 2016 enactment.”  Because the plaintiff failed to allege that any “postenactment use occurred,” the plaintiff had not stated a plausible DTSA claim.

These decisions illustrate that the likelihood of success of the timing defense largely is a matter of drafting, and provide an important takeaway for both sides of a trade secrets dispute. A plaintiff should be mindful in drafting its pleading to include factual allegations showing that the defendant’s misappropriation occurred (or inevitably will occur) after DTSA’s enactment.  The defendant, on the other hand, should carefully scrutinize the complaint to determine whether a timing defense applies.

This post was written by Jonathan L. Shapiro by Epstein Becker & Green, P.C..

Trade Secret Preemption: Possible Defense To Trade Secrets Claim?

trade secretTwo recent decisions by the Fifth Circuit Court of Appeals clarify the intersection between federal copyright law and state trade secret law. In GlobeRanger Corp. v. Software AG United States of America, Inc., 836 F.3d 477 (5th Cir. Sep. 7, 2016), the Fifth Circuit rejected an appeal in which the defendant argued that a plaintiff’s trade secret misappropriation claim was preempted by federal copyright law. Just four months later, in Ultraflo Corp. v. Pelican Tank Parts, Inc., No. 15-20084, 2017 U.S. App. LEXIS 509 (5th Cir. Jan. 11, 2017), the Fifth Circuit upheld a district court’s dismissal of a plaintiff’s state law claim of unfair competition by misappropriation, holding that the state law claim was preempted by federal copyright law.   What accounts for these seemingly inconsistent conclusions over two strikingly similar state law claims? The difference lies in the elements needed to establish each state law claim.

In its September 2016 GlobeRanger decision, the Fifth Circuit heard an appeal after a jury awarded plaintiff GlobeRanger a $15 million jury verdict following a trial in the United States District Court for the Northern District of Texas on its state trade secret misappropriation claim. The central allegation in that case was that competitor Software AG misappropriated GlobeRanger’s radio frequency identification (RFID) technology – most commonly used in electronic readers in tollbooths, like EZ-Pass – after it had taken over Software AG’s subcontract with the U.S. Navy to implement the technology.  Following the verdict, Software AG appealed, contending that federal copyright law preempted GlobeRanger’s state trade secret claim.

The Fifth Circuit explained in GlobeRanger that the different spheres of intellectual property can sometimes overlap and, as the software code at issue illustrates, the same intellectual property can be protectable under copyright laws or subject to trade secret protection.  If the creator of the IP seeks copyright protection, it obtains the exclusive right to make copies of the work for decades but must publicly register the work before enforcing that right through a lawsuit.  The supremacy of federal copyright law means, however, that state protection of copyrightable subject matter must sometimes defer to its federal counterpart.  As the Fifth Circuit explained, two conditions must be met in order for the Copyright Act to preempt a state law claim. First, “the work in which the right is asserted must come within the subject matter of copyright.” Second, “the right that the author seeks to protect . . . [is] equivalent to any of the exclusive rights within the general scope of copyright.”  This inquiry asks whether the state law is protecting the same rights that the Copyright Act seeks to vindicate or against other types of interference. “If state law offers the same protection, then the state law claim is preempted and must be dismissed.”

Applying this articulated two-part test to the facts in GlobeRanger, the Fifth Circuit found that the first condition was satisfied (because Software AG conceded its software code was copyrightable) but the second condition was not.  This is because while federal copyright law and Texas trade secret misappropriation both involve copying, trade secret misappropriation involves an extra element:  the state law prevents any improper acquisition through a breach of a confidential relationship or improper means.  Accordingly, the Fifth Circuit ruled that GlobeRanger’s trade secret claim was not preempted because it was required to establish an “extra element” in order to establish a copyright violation:  that its “protected information was taken via improper means or breach of a confidential relationship.”  Significantly, the Fifth Circuit noted, ten other circuit courts that have considered this issue agreed that trade secret misappropriation claims are not preempted by the Copyright Act for this same reason.

Revisiting the issue of preemption just four months later in Ultraflo, the Fifth Circuit reached the opposite result when faced with a different state law cause of action.  In this case, Ultraflo asserted an unfair competition by misappropriation claim under Texas law alleging that competitor Pelican stole its drawings showing how to design butterfly valves used in the transportation industry and then used them to make duplicate valves.  The United States District Court for the Southern District of Texas dismissed Ultraflo’s Texas state law claim, finding that the general scope of federal copyright law preempts the claim.  Ultraflo appealed, challenging the ruling.  As it did in GlobeRanger, the Fifth Circuit utilized the two-part test to determine whether the Copyright Act preempted the state law cause of action. First, it found that Ultraflo’s design drawings were “undoubtedly” within the scope of federal copyright, as were the valve designs themselves even though they were not actually protectable under the Copyright Act. Second, unlike in GlobeRanger, the Fifth Circuit found that the second condition was met because Texas’s unfair competition by misappropriation cause of action does not afford protection materially different from federal copyright law.  The elements of Texas’s unfair competition by misappropriation claim are: (1) the creation by a plaintiff of a product through extensive time, labor, skill, and money; (2) the use of that product by defendant in competition with plaintiff; and (3) commercial damage to the plaintiff. In other words, unlike the traditional trade secret misappropriation claim asserted in GlobeRanger, the unfair competition by misappropriation claim asserted in Ultraflo lacks the “extra element” necessary to bring it out of the general scope of copyright.  Therefore, the claim was preempted.

These two Fifth Circuit decisions demonstrate that parties should pay attention to the possible application of copyright preemption to claims involving alleged theft of information or unfair competition. While most such claims will not be preempted, Ultraflo illustrates that some will be.

ARTICLE BY Jonathan L. Shapiro of Epstein Becker & Green, P.C.

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