Tag Archives: Uniform Trade Secrets Act

Fifth Circuit Decision Adds to Growing Body of Case Law on the Scope of Uniform Trade Secrets Act Preemption

Your New Orleans restaurant has never been more successful.  Business is booming.  People cannot get enough of your famous crawfish étouffée.  With your success, you’re planning to expand into the lucrative retail hot sauce market.  You have all the supply, manufacture, and distribution contracts lined up.  Suddenly, Judas, your trusted sous chef for ten years, quits your business, takes your secret hot sauce recipe and your business plans, and starts his own hot sauce brand.  How are you protected?

The Fifth Circuit’s recent decision in Brand Servs., L.L.C. v. Irex Corp., 909 F.3d 151 (5th Cir. 2018) addresses this issue and adds to a growing list of cases addressing whether state enactments of the Uniform Trade Secrets Act (“UTSA”) preempt common law claims for conversion of confidential business information. Continue reading Fifth Circuit Decision Adds to Growing Body of Case Law on the Scope of Uniform Trade Secrets Act Preemption

Massachusetts Is Set to Adopt the Uniform Trade Secrets Act . . . What Now?

On August 1, 2018, the Massachusetts legislature passed a bill adopting the Uniform Trade Secrets Act in Massachusetts. The bill is headed to the Governor’s desk for approval within ten days. Massachusetts adopting the UTSA will leave New York the sole jurisdiction in the United States that relies only on common law protections for trade secrets.

In large part, the UTSA is consistent with and codifies existing Massachusetts law. In some important respects, however, the new UTSA protections are different from what previously existed. As a result, some immediate questions arise with respect to trade secret litigation under the new UTSA. Until Massachusetts courts decide these issues, the answers will not be certain.

What is a Trade Secret?

Massachusetts previously followed the six-factor test in the Restatement of Torts to determine if information is a trade secret. By contrast, the UTSA defines a trade secret as “information . . . that (i) . . . provided economic advantage, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, others who might obtain economic advantage from its acquisition, disclosure or use and (ii) . . . was the subject of efforts that were reasonable under the circumstances, which may include reasonable notice, to protect against it being acquired, disclosed or used without the consent of the person properly asserting rights therein or such person’s predecessor in interest.”

While the new UTSA definition is similar to the former rule, one new development under the UTSA is that trade secrets are protectable if they have “actual or potential” economic value. Under the former definition, the trade secret had to have actual value, and had to be “used in one’s business.” The new UTSA definition will cover secret information with “potential” economic value, even if it had not being actively used by the victim of the misappropriation.

Are c. 93A Damages Still Available for Trade Secret Misappropriation?

Before enactment of the UTSA, trade secret misappropriation claims in Massachusetts would include a Chapter 93A claim as a matter of course because trade secret misappropriation can be an unfair trade practice under Chapter 93A. See Peggy Lawton Kitchens, Inc. v. Hogan, 18 Mass. App. Ct. 937, 939 (1984).

The UTSA, however, expressly “supersede[s] any conflicting laws of the commonwealth providing civil remedies for the misappropriation of a trade secret.” An open issue is whether Massachusetts courts will find that treble damages under Chapter 93A are “conflicting” with the UTSA’s damages provision that limits exemplary damages to double actual damages in the event of “willful and malicious” misappropriation.

Are Other Business Torts Superseded by the UTSA?

Massachusetts common law includes a tort for misappropriation of confidential business information, even if that information does not meet the technical definition of a trade secret. USM Corp. v. Marson Fastener Corp., 379 Mass. 90, 104 (1979).

It is not clear if the new UTSA will supersede this tort in Massachusetts going forward. Other jurisdictions are split on this issue. Some hold that UTSA preempts all causes of action related to the misappropriation of trade secrets, but others allow such claims to proceed because they are expressly based on claims other than trade secret misappropriation. See Orca Communications Unlimited, LLC v. Noder, 337 P.3d 545 (Az. 2014).

When Will Attorney’s Fees Be Recoverable?

The UTSA includes a new attorney’s fee shifting provision. As mentioned above, most trade secret plaintiffs in Massachusetts already included claims under Chapter 93A, with an accompanying attorney’s fees claim. Under the UTSA, attorney’s fees are recoverable for the plaintiff in cases of “willful and malicious misappropriation.” This may be a more restrictive standard than existed under Chapter 93A for the recovery of attorney’s fees.

The UTSA expressly allows the defendant in a trade secret misappropriation claim to recover fees if the court finds “a claim of misappropriation is made . . . in bad faith.” This fee-shifting provision liberalizes existing Massachusetts law, which would only allow a trade secret defendant to recover attorney’s fees in limited circumstances. This provision may act as a deterrent to trade secret misappropriation claims brought in “bad faith.”

Will Massachusetts Adopt the “Inevitable Disclosure” Doctrine?

The majority of existing UTSA jurisdictions have adopted “some form of the inevitable disclosure doctrine.” Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 291 (Ct. App. 2002). The “inevitable disclosure” doctrine arises out of UTSA language that empowers courts to enjoin “[a]ctual or threatened misappropriation” of trade secrets (emphasis added). In the seminal case of PepsiCo, Inc. v. Redomnd, 54 F.3d 1262 (7th Cir. 1995), a high-ranking Pepsi executive quit to work for Pepsi’s “fierce” then-competitor Quaker. Pepsi obtained an injunction against the employee’s continued employment with Quaker because the district court found that the employee’s disclosure of confidential marketing and development strategies was inevitable. The Seventh Circuit affirmed, expressly overruling common law, on the basis of the “threatened misappropriation” language of the Illinois UTSA. The “inevitable disclosure” doctrine has been applied by some courts to impose a de-facto non-competition agreement on employees who have not signed such an agreement in instances where their work for an employer would result in the “inevitable disclosure” of a prior employer’s trade secrets.

Massachusetts courts have previously resisted the application of the “inevitable disclosure” doctrine. One reason is a concern that it could jeopardize employees’ rights to future employment. With the new language of the UTSA, the question may be ripe to be re-visited by Massachusetts courts.

A Call to Arms: How Timing Matters Under the New Defend Trade Secrets Act

By Shannon Hampton Sutherland and Julian A. Jackson-Fannin

On September 27, 2016, in Adams Arms, LLC v. Unified Weapon Systems, Inc., et al.,[1] the U.S. District Court for the Middle District of Florida issued one of the first substantive opinions concerning claims brought under the new Defend Trade Secrets Act (“DTSA”).[2]

The DTSA, which became effective on May, 11, 2016, expanded the jurisdiction of federal courts by, among other things, creating a new federal civil cause of action for trade secret misappropriation when “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”[3]  Although the DTSA has been hailed as the new “national standard for trade secret misappropriation,”[4] with certain exceptions, its provisions are largely consistent with the well-known Uniform Trade Secrets Act (“UTSA”) currently adopted by 48 states, the District of Columbia and the U.S. Virgin Islands.[5]  The DTSA prohibits both the improper “acquisition” of a trade secret as well as its “disclosure.”  As the DTSA continues to make its first impressions on federal courts around the country, threshold questions have arisen concerning the timing of misappropriations and what theories of recovery apply under the freshly minted law. Continue reading A Call to Arms: How Timing Matters Under the New Defend Trade Secrets Act

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.

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

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