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Brown Resurrects Civility in Litigation

Posted in Civil Litigation, New Legislation

By:  Shauna N. Correia

Gov. Jerry Brown has resurrected an expired law, Cal. Code of Civil Procedure section 128.5. This is a positive development for ethical lawyers and their clients, who find themselves dealing with bad-faith litigation tactics coming from another other party or attorney, but without a meaningful way to combat it.  This law restores trial courts’ authority to award sanctions, including attorney’s fees, to a party if the other side engages in bad-faith tactics in litigation.

An almost identical version of Cal. Code of Civil Procedure section 128.5 had been in effect until December 31, 1994, but expired in 1995, leaving only its companion, Cal. Code of Civil Procedure section 128.7, in effect. That “watered down” statute was narrower, allowing sanctions for filing meritless and frivolous complaints, motions, or other pleadings, but not for other bad faith litigation tactics and conduct.  Now, lawyers and parties will once again be subject to sanctions for conduct that is “totally and completely without merit” or done “for the sole purpose of harassing an opposing party.”  Cal. Code of Civil Procedure section 128.7 will also remain effective.

“Prior to this bill, courts had tools to sanction lawyers who brought frivolous lawsuits but not sanctions if they behaved badly,” said Kim Stone, president of the Civil Justice Association of California. “Now, if the filing is legit, but the lawyer is behaving like a jerk, the court can smack them with the other side’s legal fees.”

The new law is in effect from January 1, 2015 until January 1, 2018, when the California Research Bureau will determine if the law was a demonstrable deterrent on bad-faith litigation conduct.

“No-Poaching” Lawsuits Come to Hollywood

Posted in Covenants Not to Compete in California, Hiring a Competitor’s Employees, Protecting Trade Secrets and Other Business Information, Unfair Competition

Readers of this blog are familiar with our coverage of the various cases involving high tech firms in Silicon Valley such as Google and Adobe involving alleged “no poaching” agreements that they would not solicit each other’s employees for possible employment.  Both the U.S. Government and plaintiff class action attorneys have alleged that such conduct violates anti-trust laws and/or constitutes unfair competition under California law for violating the provisions of Business and Professions Code section 16600 regarding the prohibitions on non-compete agreements.

Earlier this week, a similar class action lawsuit was filed against various entertainment companies, including DreamWorks Animation SKG and the Walt Disney Co., accusing these companies of agreeing not to “poach” each other’s animation and visual effect artists.  The suit also alleges that the defendants agreed to fix wages and salary ranges for these employees.  The plaintiffs in this new action will likely follow the “roadmap” set forth in the Silicon Valley litigation.  It remains to be seen what other industries may be targeted with similar lawsuits in the near future.

For more details concerning this latest lawsuit, please see “DreamWorks Animation, Disney sued over alleged no-poaching scheme,” Los Angeles Times, September 8, 2014.

California Businessman Sentenced to 15 Years for Trade Secret Theft

Posted in Protecting Trade Secrets and Other Business Information, Unfair Competition

A California businessman, Walter Liew, was recently sentenced to 15 years in federal prison after being found guilty by a jury on charges of trade secret theft, economic espionage, witness tampering and making false statements.  Mr. Liew, who had contracts with a Chinese company Pangang Group, was charged with stealing trade secrets from DuPont that included plans and information regarding a manufacturing plant.  The prosecutors allege that Mr. Liew helped the Pangang Group obtain these trade secrets to develop a manufacturing plant in China that would produce titanium dioxide, a white pigment.

Mr. Liew’s prosecution is another example of ongoing efforts by U.S. prosecutors to deter China from engaging in economic espionage and trade secret theft.  For more details about this case, please see http://www.bloomberg.com/news/2014-07-10/man-gets-15-years-prison-for-stealing-dupont-secrets.html.

New York Times Article: Noncompete Clauses Increasingly Pop Up in Array of Jobs

Posted in Covenants Not to Compete in California, Covenants Not to Compete in Other Jurisdictions

What do yoga instructors, event planners and exterminators have in common?  These are fields that are reportedly witnessing an increase in the use of noncompete provisions in employment agreements.  Details of this increase in the use of noncompete provisions were reported in a New York Times article this Sunday.  Click here to view article.

While the article makes clear that such provisions are generally illegal in California, it observes that there is a large variation between other states’ laws, from states having some restrictions on the use of noncompetes to Texas and Florida which place relatively few limits on them.  These variations can raise significant issues for California employers who are in the process of hiring or recruiting employees who either work outside California or work for non-California based companies.  In making such decisions, employers are advised to determine whether potential employees are subject to a noncompete provision and obtain legal advice as to the enforceability of such provision under the applicable state law.

Non-Competes and the “Trade Secret Exception” Revisited

Posted in Covenants Not to Compete in California, Covenants Not to Compete in Other Jurisdictions, Hiring a Competitor’s Employees, Unfair Competition

We periodically discuss California law regarding non-compete provisions in this Blog. The California Supreme Court has made clear that non-compete provisions are unenforceable unless they fall within one of the statutory exceptions set out in sections 16601 et seq. (i.e., in connection with the sale of a business, goodwill, etc.).  Over the years, courts have observed a so-called “trade secret exception” to the general rule that non-competes are unenforceable, holding that non-compete provisions may be enforced to the extent necessary to protect a company’s trade secret information.  The U.S. District Court for the Northern District of California recently revisited this issue in, Arthur J. Gallagher & Co. v. Lang.  Its ruling suggests that the “trade secret exception” is on shakier ground.

Arthur J. Gallagher & Co. (“Gallagher”) is an insurance brokerage firm headquartered in Illinois that acquired a California insurance broker in September 2008.  The employees of the California agency signed employment agreements in connection with the acquisition that contained various non-compete and non-solicitation provisions.  These provisions included: (1) a provision barring employees from soliciting any “insurance related business with any individual partnership, corporation, association or other entity … about which [the employee] received trade secrets of [Gallagher] or any of its affiliates;” and (2) a provision that the employees would not “directly solicit, induce or recruit any employee of [Gallagher] or its affiliates to leave the employ of [Gallagher] or its affiliates.”

Defendant Lang submitted his resignation in January 2014 so that he could start a new insurance brokerage firm with two of his former coworkers.  Shortly thereafter, Gallagher clients began taking their business to Lang’s new company.   Gallagher sued Lang and claimed he breached the non-competition and non-solicitation provisions of his employment agreement, among other claims. Long moved to dismiss the breach of contract claims.  Although the employment contract had a choice of law provision identifying Illinois law as applying, the Court agreed with Lang that California law would apply to the interpretation of the non-competition provisions because of California’s “strong interest in protecting its employees from non-competition agreements under [Business and Professions Code] section 16600.”

The Court next recognized the well-established rule that “[u]nder California law, to the extent that the provisions of the agreement preclude Lang from soliciting business from Gallagher’s clients, they are void,” citing the California Supreme Court’s decision in Edwards v. Arthur Andersen, LLP.  During argument on Lang’s motion to dismiss, Gallagher argued that the non-compete provision should be enforceable because it protected its trade secret information.  The court seemingly rejected this argument and noted that the so-called “trade secret exception” to section 16600 was of doubtful “continued viability.”  The Court concluded that even if the exception was viable, it would not save the provision at issue  because it was simply too broad because it barred Lang from soliciting Gallagher’s customers regardless of whether or not he used Gallagher’s trade secret information.

Although the Court concluded that the non-compete provision was unenforceable under section 16600, it held that the non-solicitation of former employee’s provision was enforceable.  The Court reasoned: “Although California courts recognize that an employer may not prohibit its former employee’s from hiring the employer’s current employees, an employer may lawfully prohibit its former employees from actively recruiting or soliciting its current employees.”

The Court granted Lang’s motion to dismiss in part but allowed Gallagher to file an amended complaint to see if it could allege facts that Lang breached the non-compete provision in a manner consistent with section 16600 [unlikely given the fact pattern] and assert a trade secret misappropriation claim if possible.

The Gallagher decision is a reminder to employers that non-compete provisions will be heavily scrutinized by courts and likely to be struck down unless they fall within the narrow confines of the statutory exceptions.  Although the Gallagher Court was leery of the so-called “trade secret exception” to section 16600, it is possible that had the employment agreement been more narrowly drafted to tie the solicitation to the actual use of Gallagher’s trade secrets, it is possible the Court could have been persuaded to reach a different conclusion.  Employers should consult with legal counsel to see whether a non-compete provision can be crafted in a manner to comply with California law.

Court of Appeal Affirms Trial Court Award of “Bad Faith” Attorney’s Fees

Posted in Protecting Trade Secrets and Other Business Information

Readers of this blog may recall our discussion of a “bad faith” attorney’s fees award made by the trial court in the Aerotek v. The Johnson Group case.   To view a copy of our previous post, click here.  As a refresher, Aerotek sued its former employee and that former employer’s new employer claiming misappropriation of trade secrets.  Aerotek lost.  The trial court awarded $735,781.27 in attorney’s fees to defendants under Cal. Civil Code section 3426.4.  That section provides attorney’s fees to a prevailing party in a Uniform Trade Secrets Action “if a claim of misappropriation is made in bad faith.”  Aerotek appealed, challenging the attorney’s fee award on the grounds that the action was neither (1) objectively specious nor brought in subjective bad faith as required for fees awarded under Cal. Civil Code section 3426.4; and (2) the lodestar multiplier used by the trial court was based on the misrepresentation by the law firm.

In a decision that contains lots of useful insights into how trial courts and courts of appeal view such “bad faith” attorney’s fees awards, the court of appeal affirmed the trial court.  The decision is unpublished.  That means that regardless of the value of the insights contained in the decision, it cannot be cited as precedent in future cases.   To read a fully copy of the decision, click on this link: Aerotek v The Johnson Group.

Attorney Fee Awards in Trade Secret Cases and “Local Community” Rates

Posted in Protecting Trade Secrets and Other Business Information

As readers of this blog may know, a party prevailing in a trade secret misappropriation case may be entitled to reasonable attorney’s fees if that party can show either that the claim was brought by the plaintiff in bad faith or that the defendant was guilty of willful and malicious misappropriation. The award of attorney’s fees in such cases can sometimes be significant, even exceeding the amount of damages awarded for the actual misappropriation.

In a recent decision, Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., 2014 Cal.App. LEXIS 409, a California appellate court addressed the issue as to what local community rates would apply in awarding attorney’s fees to the prevailing party.  Altavion, was the inventor of technology that would allow for the self-authentication of digital and paper documents.  It later entered into negotiations with the defendant, a subsidiary of a parent company that, among other thing, manufactures scanners and printers.  After the negotiations failed, plaintiff learned that the defendant had patented technology that seemed to be based on the technology that plaintiff had developed and discussed with defendant during their negotiations.  Plaintiff brought a claim for, among other things, trade secret misappropriation.  Plaintiff won and was awarded $1 million in damages and $3.2 million in attorney’s fees.  The case was venued in San Mateo County, but the plaintiff’s attorneys were  from Sacramento.  In making its attorney’s fee award, the trial court awarded plaintiff its “reasonable attorney’s fees” based on hourly rates that were reasonable in the local San Mateo community – not Sacramento.  On appeal, the defendant argued that the Court should have used the “reasonable hourly rates for the Sacramento attorneys where plaintiff’s attorneys were based,” which would be somewhat lower.

The appellate court rejected this argument.  It found that “the reasonable hourly rate is that prevailing in the community for similar work” and that for purposes of this analysis, “the relevant `community’ is that where the Court is located.”  Because an award of attorney’s fees is “committed to the discretion of the trial court”, the appellate court held that the trial court did not err in awarding attorney’s fees based on the local community rate (i.e., San Mateo) as opposed to the lower Sacramento rate.

The Altavion decision is a reminder that the cost of litigating a trade secret claim can be quite high, especially when the risk of an award of attorney’s fees is factored in.  It also raises the implication that a party who hires attorneys from a big city to litigate these claims in a smaller jurisdiction may find its attorney’s fee award capped by that community’s lower local rates.

High Stakes High Tech Drama: Why Companies with Millions of Users Are Concerned About A Class Action Lawsuit By Thousands of Workers

Posted in Hiring a Competitor’s Employees, Other Restrictive Covenants

As you will recall from previous posts, a large high tech antitrust class action is being waged in California that has major implications for employer non-solicitation agreements.  Questions regarding agreements between employers that impact employee mobility are being addressed in this lawsuit against the backdrop of antitrust allegations.

High-Tech Employee Mobility Antitrust Class Action: Background Developments

On October 24, 2013, U.S. District Court Judge Lucy H. Koh granted plaintiffs’ motion for certification in a class action alleging that Adobe, Apple, Google, Intel, and other large tech companies worked together from approximately 2005 to 2009 to negatively impact the pay of valuable employees by, among other things, agreeing not to actively recruit each other’s employees. The complaint seeks lost compensation and treble damages for the alleged antitrust violative employment practices of Adobe, Apple, Google, Intel Corporation, Intuit, Lucasfilm, and Pixar. The complaint states the tech companies formed agreements to (1) not recruit each other’s employees; (2) provide notification when making an offer to another’s employee (without the knowledge or consent of that employee); and (3) cap pay packages offered to prospective employees at the initial offer.  The allegations are an interesting twist on previous employee mobility cases.

On January 14, 2014, the U.S. Court of Appeals for the Ninth Circuit denied defendants’ petition to appeal the district court’s order granting class certification.  Now past the certification process, the individual plaintiffs that filed the antitrust lawsuit can now represent all class members in claims that Adobe, Apple, Google, Intel and other tech companies violated federal antitrust laws.

Trial of the class action is set to begin on May 27, 2014.

Latest Pre-Trial Developments: Documents Show Not Everyone Joined 

As the parties prepare for trial next month, documents show that the companies that are accused of creating a system to prevent employee mobility were unable to pull another tech giant into the group.  Facebook declined the other companies’ friend request.  Facebook would not agree to not poach other’s employees, share salary information or agree to cap technical workers pay.

Today, these companies vigorously compete for talent.  However, pretrial documents seem to show that in the 2000s, executives of various tech companies frequently had conversations with one another before recruiting each others’ technical workers or making strategic moves in hiring and setting of salaries.

The failed effort to bring Facebook into the group was revealed in recently released pretrial documents, which include emails and depositions filed with the court.  In a March 28 ruling allowing the case to go to trial, U.S. District Judge Lucy Koh stated that an executive from one of the Defendant Companies “unsuccessfully sought to expand Google’s anti-solicitation agreements to Facebook.”

Waiting for Trial

If this matter proceeds to trial, it has the potential to captivate the world like no other trial since the Lindberg Baby Trial.  Tech’s glitterati will parade through the courtroom with court reporters and the press hanging on every word.  If the reports are correct, a potential mediated settlement may deny us the opportunity to see this spectacle.  More importantly for other companies, we will not get an answer to the vexing question of what mobility agreements can companies agree to between themselves when they potentially have an impact on employees.

We will continue to monitor this case here at the blog.  In the meantime, if you are currently considering employee mobility questions, please contact your Weintraub Tobin attorney to discuss.

The Truth About the “Exceptional” Remedy

Posted in Injunctions, Protecting Trade Secrets and Other Business Information, Unfair Competition

It is a truism that preliminary injunctions are “rare” and “exceptional” remedies.  But rarity is context specific.  As a percentage of cars made, Cobra GTs are rare.  If you are standing in the plant where they are made, however, they are anything but rare.  So, while it may well be true that preliminary injunctions, as a percentage of all cases filed are “rarely granted,” that does not mean that most preliminary injunctions are denied.   Although I have no numbers, my experience is that most preliminary injunctions that are brought before a court are likely granted.  That is because attorneys who prepare such applications go through a fairly rigorous self-selection.

Attorneys do not like to lose and they rarely try to bring a preliminary injunction if they don’t think they can satisfy a court that the facts necessitate its issuance.  The same is true of temporary restraining orders which, after all, are only a short term preliminary injunction which can be acquired on shortened (and sometimes no) notice.  When an attorney runs into court with a stack of papers screaming that his client’s hair is on fire and that the defendant is lighting the matches, most judges will, just out of caution and prudence, be inclined to order the defendant to stop playing with matches.  This is especially so in trade secret misappropriation and unfair competition cases.  A plaintiff company runs into court essentially asserting that it will be destroyed or irreparably injured unless the court issues an injunction.  It claims that its customer lists or information associated with customer lists known by former employees is being used to destroy or injure it.  On those facts, many judges will issue a preliminary injunction.  The truth in trade secret and business unfair competition cases is that preliminary injunctions are common.

It may also be less of a big deal than everybody thinks.  Such orders will typically say something like: “don’t use your former employer’s trade secrets.”  Orders in excess of that injunction, or that prohibit contact with particular customers, may be subject to a writ of supersedeas or expedited appellate court review.  While some trade secret and unfair competition cases settle after the preliminary injunction issues, increasingly we see cases where the preliminary injunction is put into place will proceed to trial or disposition by later motion.  On motions for preliminary injunction or application for TRO, the defendant has all the disadvantages.  Plaintiff has had substantial time (or at least more time than defendant) to develop evidence, prepare declarations, obtain computer forensics and the like in advance of filing the motion.  Defendant is on, well, the defense and must hurriedly prepare declarations, computer forensics.  This rush often puts defendants at an extreme disadvantage.

Cautionary note:  Many defendants will rush to prepare declarations which commits them to statements that they may later regret.  Very few individuals remember with any accuracy the content of email communications, or what stored documents or computer forensics will actually show when they are examined.  It is all too common an experience that a party will assert that they have never had any contact with X, Y or Z only to find several emails contradicting that assertion in later discovery.  Counsel must take great care not to let defendants overcommit factually in declarations filed in response to a preliminary injunction in advance of electronic communications and documents being collected and reviewed.

Downloading is Not Necessarily Misappropriating

Posted in Computer "Crimes", Protecting Trade Secrets and Other Business Information, Unfair Competition

One of the key pieces of evidence a plaintiff in a trade secret case usually looks for is the downloading of company information from its computers prior to a former employee departing and joining a competitor.  Generally, this “smoking gun” type of evidence shows that the employee on his or her last day accesses and downloads a bunch of proprietary company information that is then used at his or her new place of business to compete with the former employer.  This key evidence can be used to support an application for a TRO/preliminary injunction early in the case to give the employer a litigation advantage.  However, merely finding evidence of the downloading may not be sufficient to establish trade secret misappropriation should the case go forward.  This was one of the issues that faced the Court in in Integral Development Corp. v Tolat, a recent decision rendered by the U.S. District Court for the Northern District of California.

Dr. Viral Tolat was one of the co-founders of Integral, a software development company and service provider in the area of online trading on foreign exchange markets.  From 1993 to December 2012, Dr. Tolat served as Integral’s Chief Technology Officer and Head of Integral Products and Services.  In December 2012, Dr. Tolat left Integral and joined one of its competitors.

Integral sued Dr. Tolat for trade secret misappropriation, among other claims.  Dr. Tolat moved for summary judgment and the Court granted it as to Integral’s trade secret misappropriation claim against him.

In addition to finding that Integral failed to identify the information it claimed to be trade secret with sufficient particularity, as well as a failure to establish damages, the Court concluded that Integral had not established that Dr. Tolat had misappropriated its alleged trade secrets.  Integral offered evidence that Dr. Tolat had downloaded a copy of Integral’s source code while still employed there and while he was engaging in negotiations to join the competitor.  Integral also argued that there was the short period of time for the competitor to bring its product to market, which showed that Dr. Tolat must have misappropriated Integral’s trade secrets.  The Court found that this “evidence” was insufficient to show that Dr. Tolat misappropriated the information, i.e., used the information he downloaded improperly.

Dr. Tolat was able to offer evidence that he deleted the information he downloaded prior to beginning his work at the competitor.  Further, there was no evidence that he had accessed or used the information after leaving Integral.

The Integral decision reminds plaintiff employers that their burden of establishing trade secret misappropriation is not met simply by showing that a former employee has downloaded or copied company information.  Rather, to prevail on a claim of trade secret misappropriation, the plaintiff employer must obtain evidence that the former employee has in fact used that information for improper purposes.  Otherwise, a plaintiff employer is at risk of losing its trade secret misappropriation claim.