General – Page 5 – Trade Secrets & Non-Compete Law

May 23, 2016 by Shannon Hampton Sutherland

Texas Supreme Court Holds that a Trial Court Must Balance the Parties’ Competing Interests Before Deciding Whether a Corporate Representative Should be Excluded from an Injunction Hearing Involving Trade Secrets under the Texas Uniform Trade Secrets Act

By
Shannon Hampton Sutherland, Co-Chair, Duane Morris Non-Compete and Trade Secrets Practice, http://www.duanemorris.com/attorneys/shannonhamptonsutherland.html, and
Corey M. Weideman, Duane Morris Associate, http://www.duanemorris.com/attorneys/coreymweideman.html

On May 20, 2016, in In re: M-I, LLC, d/b/a M-I Swaco, No. 14-1045, 2016 Tex. LEXIS 389 (Tex. May 20, 2016), the Texas Supreme Court issued its much anticipated first decision involving the Texas Uniform Trade Secrets Act (“TUTSA”). TUTSA, which became effective on September 1, 2013, updated Texas law governing trade secret matters by, among other things, providing an unambiguous definition of a “trade secret”, expanding injunctive relief, and authorizing recovery of attorneys’ fees for willful and malicious activity. TUTSA also includes a specific provision requiring trial courts to protect the secrecy of a trade secret through reasonable means. See TEX. CIV. PRAC. & REM. CODE § 134A.006. This section of TUTSA, and the extent to which a trial court must protect the secrecy of an alleged trade secret during an injunction hearing, was the focus of the Court’s attention in In re: M-I, LLC.

In In re: M-I, LLC, the Texas Supreme Court held that the due-process right of a party to have a designated representative present at an injunction hearing involving alleged trade secrets is not absolute, and the trial court abused its discretion when it summarily concluded – without first balancing the competing interests at stake – that excluding the defendant’s corporate witness from portions of the injunction hearing involving trade secrets would violate due process.

The basic facts of the trade secret case underlying the mandamus proceeding in In re: M-I, LLC are typical: an employee with a signed non-compete and confidentiality agreement left his job to work for one of his former employer’s competitors, and a dispute ensued shortly thereafter. The former employer, M-I, filed suit for trade secret misappropriation and sought injunctive relief against its former employee and his new employer, National Oilwell Varco, L.P. (“NOV”). Relying on Section 134A.006 of TUTSA, M-I requested that NOV’s corporate representative be excluded from the courtroom during a portion of the hearing on M-I’s application for temporary injunction. The trial court summarily denied M-I’s request, however, concluding that the exclusion of NOV’s designated representative would be a “total violation of due process.” Instead, the trial court admonished NOV’s representative not to disclose or use anything he heard in the courtroom. Concerned about disclosing testimony regarding its trade secrets to NOV and placing the secrecy of the alleged trade secrets at risk by doing so, M-I postponed the injunction hearing to file a mandamus request with an intermediate appellate court. The intermediate appellate court denied the mandamus request and M-I filed a new mandamus request to the Texas Supreme Court.

Mandamus relief is available, the Court noted, when the trial court abuses its discretion and no adequate appellate remedy exists. The Court first explained that there is no adequate appellate remedy for an erroneous order to disclose a trade secret before examining whether the trial court abused its discretion.

In conditionally granting M-I’s request for mandamus relief, the Texas Supreme Court held that the trial court abused its discretion by summarily refusing M-I’s request to conduct portions of the temporary injunction hearing outside the presence of the NOV’s designated representative. The Court explained that courts have discretion to exclude parties and their representatives in limited circumstances when “countervailing interests overcome [the] presumption” in favor of participation. Rather than summarily denying M-I’s request, the Court explained, the trial court was required, at a minimum, to balance the parties’ competing interests.

First, the trial court was required to determine the degree of competitive harm M-I would have suffered from the dissemination of its alleged trade secrets to NOV’s corporate representative, including by considering the relative value of the alleged trade secrets and whether the NOV corporate representative was a competitive decision-maker.
Second, the court was required to determine the degree to which NOV’s defense of M-I’s claims would be impaired by the representative’s exclusion at such a preliminary stage of the proceeding.

Importantly, the Court noted that, “[i]f the trial court conducted the required balancing, it may have been within its discretion to decide that due process required NOV’s designated representative to be present.” The trial court’s error was failing to conduct the balancing at all.

In short, TUTSA plaintiffs should not assume that the court will exclude the other side’s representative when alleged trade secrets are disclosed, and TUTSA defendants should not assume that the court will permit their representatives to participate in all phases of a TUTSA case. The trial court must develop a factual record to balance the parties’ countervailing interests before deciding whether to exclude a witness.

May 6, 2016May 6, 2016 by Duane Morris

Lawrence Pockers Moderated a Panel at the DRI Business Litigation Seminar

Lawrence H. Pockers, co-chair of Duane Morris’ Non-Compete and Trade Secrets Practice Group, moderated a panel discussion at the DRI Business Litigation Seminar in Nashville, Tennessee, on May 5, 2016.

The panel was titled “Restrictive Covenants Enforcement Realities Around the Country: The In-House Perspective on Chasing the Departed,” and the panelists were Kelly Grace Huller, Globus Medical Inc.; Jennifer A. McGlinn, Ricoh Americas Corp.; and Stacey N. Schmidt, Fidelity Investments.

May 2, 2016 by Lawrence H. Pockers

Federal Defend Trade Secrets Act Necessitates Changes to Form Employment Agreements

By Lawrence H. Pockers, Co-Chair, Duane Morris Non-Compete and Trade Secrets practice

Following passage by the House of Representatives on April 27, 2016, President Obama is expected to sign the Defend Trade Secrets Act of 2016 into law any day. Once signed into law, the Defend Trade Secrets Act will amend Chapter 90, Title 18 of the United State Code (The Economic Espionage Act of 1996) to create a federal, private cause of action for trade secret misappropriation where “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” The Defend Trade Secrets Act will apply with respect to any misappropriation of a trade secret “for which any act [of misappropriation] occurs on or after the date of the enactment of the Act.” Much of the early commentary surrounding the Defend Trade Secrets Act has focused on the fact that employers will now be able to rely on federal law instead of navigating the sometimes subtle differences in state laws concerning claims for trade secret misappropriation, and the provisions of the Defend Trade Secrets Act which permit the civil seizure “of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”

One aspect of the Defend Trade Secrets Act that has received little attention, but that should be top of mind for employers, is a provision buried at the end of the Act that will necessitate a change in the form of employment agreements many employers use in order to maintain maximum leverage over employees and ex-employees who misappropriate trade secrets. More specifically, Section 7 – the very last section – of the Act, amends the Economic Espionage Act to create immunity from liability where an individual (for example, an employee or ex-employee) confidentially discloses a trade secret to a government official, an attorney or in a court filing. This Section of the Act requires that “[a]n employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” An employer that fails to comply may not be awarded exemplary damages or attorneys’ fees in an action under the Act unless the employee was provided with this form of notice.

Continue reading “Federal Defend Trade Secrets Act Necessitates Changes to Form Employment Agreements”

April 8, 2016 by Shannon Hampton Sutherland

STRONG NON-COMPETE AND CONFIDENTIALITY AGREEMENTS AND PRACTICES ARE CRITICAL TO ACQUISITION

By: Shannon Hampton Sutherland[1]

Experts predicted that strong M&A activity would continue from 2015 into 2016.[2] So far, that prediction appears to hold true, particularly in the biotech sector. If you want to position your company for potential acquisition under attractive terms, either in 2016 or down the road, are you ready? Locking down the company’s “non-compete” and confidentiality agreements and practices early is mission-critical.

These agreements (including confidentiality and invention agreements, non-compete agreements, and non-solicit agreements) help the company protect legitimate business interests, like the benefit of its investment in its technology, confidential information, and trade secrets, goodwill with its customers, and training of its employees. If your company doesn’t have strong programs and agreements in place with its employees, independent contractors, and consultants to protect these important assets, it might lose value in the eyes of a potential acquirer.

This lesson holds especially true in industries that are heavily-reliant on sensitive technological innovation or field-based sales organizations. One of your highest priorities should be making sure that the company has strong and enforceable confidentiality and non-compete agreements (if permissible in your jurisdiction) with these individuals and programs in place to protect the company’s interests.

Identify and Address Gaps in the Protection of Confidential Information. The company should work with legal counsel to identify potential gaps in its programs and procedures designed to protect its confidential information. For instance, how strong is the company’s network security? Does the company have strong policies and procedures in place concerning access to data that resides outside of the network? Are the company’s written policies being followed in practice? Does the company only grant access to such information on a need-to-know basis, or is information too readily available or left unprotected? Are sensitive materials identified as such? Does the company take reasonable steps to ensure that departing employees return, and do not retain access to, confidential information? A potential acquirer will want to see strong and consistent policies and procedures in place – and followed – to protect the assets it is acquiring.
Address Agreements With New Employees on the Front-End. Although not required in all jurisdictions, it’s good practice to let a new candidate know that he or she will need to sign a confidentiality or non-compete agreement as a condition of employment (if appropriate for the position and permissible in your jurisdiction). Indeed, some jurisdictions have special rules about whether the employee must receive a copy of the agreement in advance, and when the new employee must sign the agreement. The company can work with HR and legal counsel with expertise in this area to ensure that the company is complying with any necessary requirements for new employees.
Identify and Address Individuals Without Existing Agreements. HR and legal counsel should identify employees (and independent contractors and consultants) who have not signed confidentiality, invention, non-compete, and non-solicit agreements. For individuals who don’t have an agreement, but who have access to the company’s confidential information or goodwill, the company can work closely with legal counsel well-versed in this area to consider whether an agreement is appropriate and craft an agreement that will stand muster for position at issue and in the jurisdictions that might be implicated. For instance, in some jurisdictions, for an agreement signed after the commencement of employment to be enforceable, the company must provide additional consideration to the employee (such as a promotion, payment, or increased compensation).
Consider Assignment and Successor Clauses. The company should consider with legal counsel whether to include provisions providing that the employee expressly consents to the assignment of the restrictive covenants by the company at any time, and that the restrictive covenants are enforceable by the company’s successors and assigns. That type of language isn’t required in all jurisdictions, but, in some jurisdictions, it may bolster a successor company’s or assignee’s ability to enforce the agreements – something a potential acquirer will look for when considering your company for potential acquisition.
Identify and Remediate Potential Holes in Existing Agreements. Experienced legal counsel should also review existing agreements to determine any potential holes in those documents and whether adjustments can or should be made to both meet the company’s business needs and comply with any applicable law. For example, sometimes agreements in the employee’s file pre-date important clarifications in the law that must be addressed. Or, perhaps the existing agreement is written too narrowly so that it doesn’t protect the full extent of the company’s interests or current or planned business model. On the flip side, the agreement may be too heavy-handed or written so broadly that it won’t be enforceable at all under the law of a state that won’t reasonably modify an overly broad agreement. Counsel well-versed in non-competes can help the company identify and suggest ways to remediate these (and other) potential deficiencies before it’s too late.

Bottom line: Early and regular review of the company’s non-compete and confidentiality agreements and practices is an important piece of positioning the company for favorable acquisition. Counsel well-versed in this area can help the company navigate the complex issues that come into play.

Nothing contained in this blog is intended to or does create an attorney-client relationship or provide legal advice.

[1] Shannon Hampton Sutherland is the Co-Chair of the Duane Morris Non-Compete and Trade Secrets practice and a nationally-known non-compete, trade secrets, and litigation attorney. See http://www.duanemorris.com/attorneys/shannonhamptonsutherland.html.

[2] See, e.g., http://www.forbes.com/sites/jeffgolman/2016/01/11/four-reasons-2016-will-be-a-strong-year-for-ma/#27221a634d49 (last accessed Apr. 8, 2016); http://info.kpmg.us/ma-survey/index.html (last accessed Apr. 8, 2016).

March 4, 2016March 4, 2016 by Duane Morris

The Long Smoldering Debate About Noncompetition Reform in Massachusetts Is Re-Ignited by House Speaker

By Bronwyn L. Roberts and Gregory S. Bombard

On March 2, 2016, Massachusetts House Speaker Robert A. DeLeo promised to put new legislative limits on noncompetition agreements, reigniting the debate over non-compete reform legislation that has continued since at least 2009. In a speech to the Greater Boston Chamber of Commerce’s annual Government Affairs Forum, DeLeo said that he would push legislative reform with the following restrictions for enforceability of noncompetition agreements:

noncompetition agreements would be limited to one year;
noncompetition agreements would not apply to lower-wage workers; and
workers must be clearly informed that a noncompetition agreement is required before taking a job, including a “stated right to counsel.”

Continue reading “The Long Smoldering Debate About Noncompetition Reform in Massachusetts Is Re-Ignited by House Speaker”

December 7, 2015December 8, 2015 by Lawrence H. Pockers

New Sixth Circuit Decision on Uniform Trade Secrets Act Underscores Importance of Proving Lost Profits In Trade Secrets Cases

Lawrence H. Pockers and Gregory S. Bombard

Trade secret plaintiffs have a bevy of remedies available. On the monetary remedies side, plaintiffs often choose to measure their damages based on the profits realized by their competitor. Focusing on the defendant’s wrongfully-gained profits is in many cases easier than proving that the plaintiff’s profits diminished as a result of the theft. Plaintiffs are often also skittish about revealing the amount of their own losses to their competitors.

But a new case from the Sixth Circuit — Allied Erecting & Dismantling Co. v. Genesis Equip. & Mfg., Inc., No. 14-3563, 2015 WL 6685380, at *1 (6th Cir. Nov. 3, 2015) — demonstrates why proving the plaintiff’s “actual loss” at trial is an important part of protecting a plaintiff’s business from further harm. Continue reading “New Sixth Circuit Decision on Uniform Trade Secrets Act Underscores Importance of Proving Lost Profits In Trade Secrets Cases”

December 7, 2015January 5, 2016 by Shannon Hampton Sutherland

New Sixth Circuit Case Imposes Liability For Theft Of Confidential Information That Does Not Qualify For Trade Secrets Protection

Michael R. Gottfried, Shannon Hampton Sutherland, and Gregory S. Bombard

Orthofix, Inc. v. Hunter, —- Fed. Appx. —–, 2015 WL 7252996, at *1 (6th Cir. Nov. 17, 2015).

The Sixth Circuit recently ruled, in an unpublished opinion, that a former employer could recover against a former employee for breach of a confidentiality agreement, even if the information the former employee took, used, or disclosed did not qualify for trade secret protection.

In Orthofix, the plaintiff company was a medical device company that markets bone growth stimulators to health care providers. The defendant employee was a sales person for the plaintiff for twelve years. At the time of his hiring, the defendant employee signed a nondisclosure agreement, which he reviewed with an attorney and on which he specifically underlined the definition of “confidential information.” Continue reading “New Sixth Circuit Case Imposes Liability For Theft Of Confidential Information That Does Not Qualify For Trade Secrets Protection”

November 23, 2015December 8, 2015 by Lawrence H. Pockers

“Intent to be Legally Bound” Insufficient Consideration for Non-Compete in Pennsylvania

Lawrence H. Pockers

Read Lawrence's bio.

On November 18, 2015, a 4-1 majority of the Pennsylvania Supreme Court (Justice Eakin, dissenting) held in Socko v. Mid-Atlantic Systems of CPA, Inc., No. 142 MAP 2014, that a post-employment covenant not to compete entered into by an employee after the start of his employment was void for lack of consideration, despite the fact that the agreement containing the non-competition covenant included language that the parties “intend to be legally bound.” In so doing, the Court affirmed the Pennsylvania Superior Court’s May 13, 2014 order which, in turn, had affirmed the trial court’s grant of partial summary judgment to the plaintiff/employee. Socko v. Mid-Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa. Super. 2014). Continue reading

May 20, 2013September 9, 2014 by Lawrence H. Pockers

The Continuing Split of Authority in the Interpretation of the Computer Fraud and Abuse Act

One of my recent blog posts highlighted how the United States Supreme Court’s dismissal of the petition for writ of certiorari seeking review of the Fourth Circuit’s opinion in WEC Carolina Energy Solutions, LLC v. Miller, 687 F.3d 199 (4th Cir. 2012), dashed the latest hope for the resolution of the Circuit split over the scope of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030. Click here to read prior blog entry. A recent decision out of the United States District Court for the Southern District of New York demonstrates that differing opinions on the scope of the CFAA continue to exist even, in some cases, within the same federal judicial district.

Continue reading “The Continuing Split of Authority in the Interpretation of the Computer Fraud and Abuse Act”

April 8, 2013September 9, 2014 by Duane Morris

Duane Morris Partner Lawrence Pockers Honored by Support Center for Child Advocates

Duane Morris is pleased to congratulate partner Lawrence Pockers, who has been selected by the Support Center for Child Advocates as a Distinguished Advocate for 2013. The award celebrates the extraordinary efforts of individuals who help children in Philadelphia. Pockers has been a longtime pro bono child advocate, representing many abused and neglected children in Philadelphia in addition to serving on the Child Advocates’ Volunteer Committee. He will receive the award at the Child Advocates 2013 Annual Benefit Reception & Auction on April 10 at the Crystal Tea Room (Wanamaker Building) in Philadelphia.

Click here to read the press release.