Ninth Circuit Revives Implied Confidential Relationships in Trade Secrets Case

digital-storage-media-1444798In a decision handed down September 6, 2016, the Ninth Circuit revived the notion, long presumed dead, that an implied confidential relationship can arise from the context of a business communication or relationship.  While the Ninth Circuit declined to rule on the basis of an implied confidential relationship, it did open the door to future rulings.

Electronic Arts (EA) contracted with Direct Technology (DT) to produce a prototype of a USB flash drive shaped like an object from EA’s game The Sims.  Once DT provided EA with its prototype, EA contracted with a third-party manufacturer to produce the flash drive at a lower price.  DT subsequently sued EA, alleging copyright and trade secret claims.  EA moved for summary judgment on each claim.  The district court granted EA’s motion, and DT appealed. Continue Reading

Fox v. Netflix – Employee Mobility in a Transforming World

Career StepsAt first glance, you wouldn’t believe Netflix (formerly known as a distributor) would be a competitor of 20th Century Fox (known as a producer). If anything, they should be doing business with one another. But times change, and in this situation, the transforming entertainment industry pits Netflix (now alleged to be “an internet-based television and film producer”) against Fox (still a traditional TV and film producer). The dispute? Employee mobility and whether Netflix has violated the law by recruiting and hiring Fox employees who are alleged to have been under fixed-term employment contracts with Fox. Fox contends that Netflix intentionally interfered with these fixed-term contracts and should pay damages and be enjoined from further interfering with Fox’s fixed-term contracts. According to Variety:

Netflix vowed to fight the lawsuit “vigorously.”

“We do not believe Fox’s use of fixed term employment contracts in this manner are enforceable,” a Netflix spokesman said. “We believe in employee mobility and will fight for the right to hire great colleagues no matter where they work.”

Stay tuned…

Ask, Tell, & Do: Three Keys to using Exit Interviews to Protect Against Trade Secret Misappropriation

Departing employees  pose one of the biggest risks of misappropriation of a company’s proprietary and confidential information and trade secrets.

When a high-level employee has access to critical company information, conducting an appropriate exit interview requires more than an HR rep checking off boxes on a form. When it comes to protecting trade secrets from misappropriation, here are three keys to a successful exit interview process: Continue Reading

Three Reasons Why Employees Might Pose the Biggest Threat to a Company’s Trade Secrets

 

burglar-157142_1280For many people, “trade secret theft” evokes an image of a technological superspy, a James Bond meets Edward Snowden. But the more common, less dramatic and yet more dangerous threat to a company’s proprietary information comes from within.  Current and departing employees likely are more threatening to a company’s trade secrets than are foreign espionage agents.

First, unlike outside cyber-attackers, often a company’s employees are freely granted access to the company’s trade secrets. They don’t need to hack into the company’s system – they just log in with their user ID and password, or stroll down the hall and open a file cabinet.

Second, employees are much more likely to be able to utilize trade secrets to the company’s detriment. A departing employee is well positioned by training and experience to work for a company’s competitor.  Insiders will best understand the competitive value of a company’s confidential information, and know which competitors can most easily exploit stolen information.  In other words, unlike a foreign hacker, an employee better understands the market  for the confidential information and needs to waste little time trying to capitalize on the information.

Third, employees may falsely but genuinely believe that they own the information and aren’t doing anything wrong by taking it to a new employer. An employee who has committed his time and energy to developing information may feel that he owns it, even though he implicitly or explicitly assigned the work product to his employer.  Many departing employees who would never consider themselves thieves have no qualms about copying “their own” personal work files to take with them to the next employer.

As important as cyber- and data-security are to protecting a company’s trade secrets, it is equally or more important to assess whether departing employees are walking out the door with the company’s crown jewels. While you are guarding against a secret attack from a foreign agent in the middle of the night, your trade secrets may be carried calmly out the front door on the thumb drive of a once-trusted executive.

Does California Code of Civil Procedure 2019.210 Apply to the Defend Trade Secrets Act?

Trade secret litigators in California are familiar with California Code of Civil Procedure section 2019.210. That section requires plaintiffs to identify their alleged trade secrets with “reasonable particularity.” Critically, the section requires that plaintiffs do so “before commencing discovery relating to the trade secret.” Section 2019.210 has long been an important weapon in the arsenal of lawyers defending against claims of trade secret misappropriation.

The new Defend Trade Secrets Act of 2016 (DTSA; amending 18 U.S.C. §§ 1832–1839), by contrast, contains no such special requirement that plaintiffs identify their trade secrets.

On its face, this would seem to be a strong incentive for plaintiffs to sue under the DTSA in federal court instead of suing in California state court under California’s Uniform Trade Secret Act.

On the other hand, before the DTSA became law, some federal courts held that they were required to apply California’s section 2019.210 to trade secret claims. And some federal courts have imposed requirements analogous to section 2019.210 – that is, requiring plaintiffs to identify the alleged trade secrets with particularity – by invoking Federal Rule of Procedure 26, regardless of whether section 2019.210 technically applies.

It remains to be seen whether federal courts in California addressing claims under the DTSA will impose the familiar requirements of section 2019.210. Meanwhile, trade secret plaintiffs in California should strongly consider bringing their claims in federal court and invoking the DTSA, while trade secret defendants in California (or “plaintiffs” seeking declarations of non-misappropriation) should think hard before filing that notice of removal to federal court.

Potential Impact of the DTSA: Amending your Confidentiality and Proprietary Information Agreements

On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 into law, effective immediately (DTSA; Amending 18 U.S.C. §§ 1832–1839).

The DTSA creates a federal cause of action for trade secret misappropriation whereby aggrieved employers may now seek injunctive relief (including civil seizure orders), compensatory damages, exemplary damages, and attorneys’ fees arising from a party’s willful and malicious misappropriation of trade secrets in federal court.

The DTSA also carves out an exception to its application for whistleblowers. Specifically, immunity is provided to a worker for any confidential disclosures of an employer’s trade secrets that were made to the government or in a court filing made under seal. The workers covered by the foregoing immunity include both employees and independent contractors. In order to ensure that workers are properly notified of the foregoing exception, the government is requiring employers do so in any agreement or policy entered into with their workers that governs the use of a trade secret or other confidential information. An employer’s failure to comply with the foregoing notice requirement will result in a forfeiture of certain remedies afforded to the employer under the DTSA and a potential complete forfeiture of any contractual rights the employer may have arising from any agreement or policy which fails to contain the requisite notice.

In light of the foregoing notice requirements and in order to ensure compliance with the DTSA, employers should incorporate the immunity notice into their relevant employment agreements, services agreements, and policies, and/or implement a new “Reporting Policy” that specifically sets forth the immunity notice and references any agreement or policy affected by the same.

 

President Signs the Defend Trade Secrets Act of 2016

Obama

By The White House [Public domain], via Wikimedia Commons

As we reported over the last few weeks, the Defend Trade Secrets Act of 2016 (DTSA) was close to becoming the first civil, federal law designed to provide a remedy for the theft of trade secrets. Yesterday, as expected, President Obama signed the DTSA into law. What does this mean for companies with valuable trade secrets to protect, and how will the DTSA impact trade secret law?

The DTSA creates a private, civil cause of action that allows the owner of a stolen trade secret to bring suit in federal court, as long as the trade secret is related to a product or service used or intended to be used in interstate or foreign commerce. President Obama and Congress have emphasized the international aspect of the DTSA, speaking about the United States’ place in the global economy and foreign threats to American businesses from the theft of trade secrets. But given that the DTSA may be used whenever the trade secret at issue relates to a product or service in interstate commerce, this new law may end up being used most often by Americans suing other Americans for misappropriation that occurred in the United States.

The DTSA provides an easy way for most trade secret owners to get into federal court. But this does not necessarily mean that trade secret litigation in federal court will drastically increase. Some trade secret owners already sue in federal court if diversity or supplemental jurisdiction exists. As for those trade secret owners who would be limited to state court if not for the DTSA, it’s hard to predict whether they will now bring their actions in federal court or choose to stay in state court.

On a related note, it also remains to be seen how extensively trade secret owners will use the DTSA. The DTSA explicitly states that it does not preempt state law, so it will exist alongside states’ current trade secret laws. Trade secret owners may prefer the predictability of state trade secret law, which has been interpreted and litigated for many years, rather than take a chance and test out the DTSA. Or they may choose to bring state and federal trade secret claims simultaneously.

However, one aspect of the DTSA that differs from state trade secret laws, and that may entice trade secret owners to bring their new actions in federal court under the DTSA, is its provision for seizure of the trade secret material without notice to the defendant. Trade secret owners who can establish, among other things, that extraordinary circumstances exist, other remedies (such as an injunction) would be inadequate, and immediate and irreparable injury will otherwise occur can obtain an order providing for the seizure of property necessary to prevent the dissemination of the misappropriated trade secret. In an effort to prevent abuse, though, a trade secret owner who obtains a seizure order will not be allowed to access or copy the seized trade secret material (which will remain in the custody of the court) until both parties have been heard in court.

The civil seizure provision under the Lanham Act has been used effectively to seize counterfeit goods and is a powerful remedy for trademark owners who are fighting the proliferation of counterfeits. The DTSA’s seizure provision has similarities to this provision of the Lanham Act and could be an important tool for trade secret owners who meet the stringent requirements for a civil seizure.

This seizure provision – more than access to federal court or substantive federal law protecting trade secrets – could be the most significant feature of the DTSA.

The Defend Trade Secrets Act of 2016

Update:

Just a couple of weeks ago, we reported that the Defend Trade Secrets Act of 2016 had been passed in the Senate by a vote of 87-0. The House passed the DTSA by a vote of 410-2 on April 27, 2016. Enactment of the DTSA is a near certainty now, as President Obama has previously expressed support for the bill and is expected to sign it.

Besides allowing access to federal courts for trade secret actions, will the DTSA have any significant effect on trade secret law and practice? We’ll provide our analysis and predictions in our next update on the DTSA.

 

The Defend Trade Secrets Act of 2016

Best Internet Concept of global business from concepts seriesStates have long provided protection for trade secrets, with most having enacted a version of the Uniform Trade Secrets Act (“UTSA”). The UTSA supplies a framework for imposing liability with respect to the misappropriation of trade secrets. Now, after several years of attempts, the federal government is close to enacting its own version of civil trade secret protection: the Defend Trade Secrets Act of 2016 (“DTSA”).

The DTSA was introduced in the Senate with three considerations in mind: 1) theft of trade secrets occurs globally, including in the United States; 2) theft of trade secrets harms companies and employees; and 3) the federal Economic Espionage Act of 1996 already provides for criminal sanctions for trade secret theft.

The DTSA would amend the federal criminal code to create a civil cause of action for misappropriation of trade secrets. Under the new law, a trade secret owner could seek relief for trade secret theft related to a product or service in interstate or foreign commerce by filing a civil action in federal court. Remedies established by the DTSA would include injunctive relief, damages, and a seizure order to prevent dissemination of the stolen trade secret. A five year statute of limitations from the date of discovery of the trade secret theft would provide a long time to file an action after the damage has been done.

The DTSA just passed the Senate by a vote of 87-0, so its success or failure now depends on the House. Stayed tuned for more if the DTSA is enacted.

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