By Sherry Bragg
Businesses at every level – from Fortune 500 companies to solo-inventor enterprises – rely on trade secret protections to safeguard their intellectual property trade secrets. American companies and innovators now have additional protections for their valuable intellectual property assets in the newly enacted federal Defend Trade Secrets Act (DTSA). This legislation represents the most significant trade secret reform legislation in years.
Essentially, the DTSA extends the current Economic Espionage Act of 1996, which criminalizes certain trade secret misappropriations, and allows trade secret owners the opportunity to pursue claims in federal court under federal law, in addition to traditional state court claims. The new federal trade secrets law also presents some very important practical considerations for businesses.
First, the DTSA has a broad reach, and it will likely affect every aspect of a company’s operations. Trade secret issues arise every time a company hires or fires an employee; every time a company enters into a contract containing a non-disclosure or confidentiality clause; and every time an employee discusses the company’s business with a business partner, the public, or friends. All of these activities are now governed by the DTSA.
Second, the DTSA will potentially increase the legal costs associated with protecting a company’s trade secrets. Because of the overlap between the DTSA and state law, companies will need to incur additional costs in order to understand and conform their practices to accommodate both sets of laws. When dealing with trade secret litigation, companies will now have to prosecute or defend against both state and federal claims, adding to the already expensive cost of litigation.
Finally, for better or for worse, the DTSA may create greater opportunities for trade secret owners to win more cases, and to file more lawsuits. By providing plaintiffs with another set of laws and another venue in which to litigate, the DTSA creates more strategic avenues to success. The increased odds of success could spur more litigation, some of which may be for illegitimate or anti-competitive reasons. This, again, could increase litigation costs.
For these reasons, companies would be wise to educate themselves on the DTSA in order to take advantage of, and protect themselves from, the important legal and business consequences of this new federal trade secret law.
For more information about Sherry Bragg and her practice, please visit her attorney BIO: http://www.weintraub.com/attorneys/sherry-s-bragg.
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When companies sue their former employees for theft they often claim that the former employee’s new employer has conspired with the former employee to misappropriate trade secrets, or that that new employer has aided and abetted the former employee’s breach of duty he/she owed to his/her former employer.
Like Woodward and Bernstein, liability “follows the money.” Current employers are often added to trade secret and breach of duty lawsuits because they have deeper pockets than former employees. Conspiracy and aiding and abetting claims are more vague and less precise than are other business claims. Often plaintiffs need only allege that the new employer benefitted from wrongful acts. Employers should not believe that there is nothing they can do to reduce the chances of a successful conspiracy or aiding and abetting claim against them. By adopting best practice policies and procedures, an employer can do a lot to reduce the likelihood that it will be found liable on these theories. These policies and practices should be adopted well in advance of the hiring of a competitor’s employees. Although there are many policies and practices that an employer can adopt, two of the most common (and most powerful) are: (1) a policy in the employment handbook that prohibits the use or importation of third party or prior employer information. Such policies often read:
As a condition of employment, employees of the company agree and represent that during the course of their employment with the company, they will not use or disclose any confidential or proprietary information of any third party, including any prior employer, unless such third party has consented to the use or disclosure of that information in writing.
Moreover, as a condition of employment, employees of the company are required to comply with the terms of any agreements where any prior employer pertaining to confidential information, non-solicitation or non-competition to the extent that such agreements are enforceable under applicable law.
Second, employers can, in their offer letters, expressly condition employment upon the non-importation or use of any information from the former employer. Such language often provides that:
This offer of employment is conditioned upon your agreement that you will not bring any proprietary, confidential or any other business information from any place or former employment to the company. The company will provide everything you need to perform your work.
While nothing can guarantee that your company will not be named as a conspirator of abettor in a trade secret or breach of duty case, adoption of policies like this will help.
Senate and House of Representatives Pass the Defend Trade Secrets Act (DTSA). First federal trade secret bill awaiting presidential signature.
More details can be found at the following Forbes article: “The New Defend Trade Secrets Act is the Biggest IP Development in Years,” dated April 28, 2016.
California’s prohibition on non-competition agreements is less than absolute. For example, non-compete agreements may be enforced against partners or sellers of businesses. Additionally, in SingerLewak LLP v. Andrew Gantman (2015) 241 Cal.App.4th 610, a California Appellate Court affirmed an arbitration award that would be considered by most to be a misapplication of California’s non-competition law.
The underlying dispute arises from provision within a partnership agreement that imposed a cost on a departing partner (Gantman) who serviced clients of the firm after his departure. At arbitration, the former partner argued that:
- The provision was not enforceable under California law because it was a restraint on competition;
- The exception to the general prohibition of restraints on competition for agreements by partners did not apply because he was not a partner; and
- The provision was invalid because it did not contain a geographical restriction.
The arbiter disagreed and enforced the provision. The arbitrator concluded that Gantman was a partner for the purposes of Business and Professions Code section 16602 and that the provision was not a covenant not to compete but a provision allowing competition with the imposition of a cost on the departing partner. SingerLewak filed a petition to confirm the arbitration award. Gantman opposed and filed a petition to vacate the award. The trial court vacated the arbitration award after it concluded that de novo review of the evidence was required and that the provision was invalid and unenforceable because it did not contain any geographical restrictions.
The Appellate Court concluded that the general rule prohibiting review of an arbitration award applied and that the arbitrator’s award should be been affirmed. The Appellate court reasoned that judicial review of an arbitration award is only appropriate when the decision violates a party’s unwaivable statutory rights or the explicit legislative expression of public policy. The court held that while section 16600 evidences a settled legislative policy in favor of open competition and employee mobility, there is no absolute public policy against the enforcement of a covenant not to compete entered into by partners. As such, although the arbitrator may have erred in interpreting or applying section 16602, the decision did not violate an explicit legislative expression of public policy. Accordingly, the Appellate Court reversed the trial court’s order which had vacated an arbitration award.
The full implications of the decision are unknown, but as of October 21, 2015, the California Supreme Court has ordered the decision published. Businesses and employees using arbitration should ensure that they aggressively present arguments during the arbitration because it is unlikely they will have chance for review if they cannot meet this burden.
Companies and employers around the country seek to protect their intellectual property by, among other things, using non-compete provisions in employment agreements. Generally, these provisions are intended to prevent an employee from soliciting or doing business with a former employer’s customer/clients over a set period of time and/or in regard to a set geographical area. Under California law, and specifically Business and Professions Code section 16600, such provisions are unenforceable unless they fall within one of the statutory exceptions, i.e., primarily in connection with the sale of a business interest. For years, although California state courts would refuse to enforce such provisions under section 16600, federal courts in California sometimes applied a narrow court-created exception and allow such provisions to be enforced provided that they were narrowly tailored as to time and geographical area. In 2008, the California Supreme Court unequivocally ruled that such provisions were unenforceable under section 16600 and rejected the “narrowly restricted” exception used by federal courts. (See Edwards v. Arthur Andersen, LP, 44 Cal.4th 937 (2008).)
In response to the Edwards decision, many California companies and employers began to omit such provisions from their new employment agreements or re-write them with specific language restricting an employee from using trade secret information to unfairly compete. However, other companies and employers left their old agreements untouched and in place thinking merely that they would not enforce them should the need arise. A recent court decision, Couch v. Morgan Stanley & Co., Inc. (E.D. Cal. Aug. 7, 2015), reveals the risk an employer or company faces in failing to update their older employment agreements to remove or revise such provisions.
In the bustling craft brew economy brewers are faced with new issues every day. One that recently came to my attention arises when the craft brewery’s brewmaster or head brewer decides to either start his own craft brewery, or go to work for another brewery. While this may not initially seem like a big deal, it gets much more complicated when that brewmaster or brewer is responsible for the creation of your flagship brew. The question arises: who owns the intellectual property rights to that brew? Of course, the brewery is going to say that they have been selling, distributing, and promoting the brew, so it must be theirs. On the other hand, the brewer is going to say that he created it, so it must be his. The truth is that determining who owns the intellectual property rights to the brew formula can get quite complicated, encompassing numerous factors. But it does not have to be.
With a booming industry such as craft brew, it is imperative that the appropriate precautions be taken to protect the craft brewery’s most lucrative asset: the beer itself. In order to protect a brew formula from being taken from your company and utilized by a competitor when one of your brewers, the creator of the formula or not, leaves the company, the formula must be treated as a trade secret. The California Uniform Trade Secrets Act (“UTSA”) defines a trade secret as:
information, including a formula, pattern, compilation, program, device, method, or technique, or process, that:
(1) derives independent economic value, actual or potential, from not being generally known to the public, or to other persons who can obtain economic value from its disclosure or use; and
(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
The use of “No Rehire” Provisions in settlement agreements between employers and their former employees allow employers to protect themselves against “boomerang” lawsuits. For instance, a former employee who claims he/she was terminated because of discrimination would be prevented from later submitting a new job application and then suing the employer again claiming he/she was not hired because of discrimination. This common provision is basically an agreement by the employee that in exchange for consideration, usually the payment of a sum of money, he/she will dismiss their claims against the employer and will contractually agree not to seek to be rehired. A recent decision from a panel of judges in the Ninth Circuit, however, has called the “No Rehire” provisions into question as possibly violating section 16600 of the Business and Professions Code.
In Golden v. California Emergency Physicians Medical Group, the plaintiff doctor sued after he lost emergency room privileges at one of CEPMG’s facilities. Prior to trial, the plaintiff doctor agreed to settle his claim for the payment of a large sum of money and initially agreed (at least orally through counsel) not to seek employment with CEPMG again. The “No Rehire” provision that was subsequently incorporated into a written settlement agreement provided that the plaintiff doctor would not seek re-employment with CEPMG and also provided CEPMG the right to terminate the plaintiff’s employment should he be working at any facility that it subsequently acquired. (CEPMG is a large consortium that manages or staffs many emergency rooms, in-patient clinics and other facilities in California and other Western states and intends to continue expanding.)
This blog has previously reported on the anti-poaching cases involving various tech companies in Silicon Valley. The cases arise out of alleged agreements between various tech companies not to recruit each other’s employees. The U.S. Department of Justice brought antitrust actions as a result of these alleged agreements which resulted in the companies entering into settlements with the government. In addition to the government’s actions, a class action was filed on behalf of tech employees claiming these “anti-poaching” agreements harmed their earning ability and mobility.
Last year, various tech companies entered into a settlement of these claims for approximately $325 million. That settlement was rejected by U.S. District Court Judge Lucy H. Koh as not being “within the range of reasonableness.” Earlier this week, the parties to this class action announced that they had entered into a new settlement with Apple, Google, Intel and Adobe proposing to pay $415 million to settle the class action. The settlement will be submitted to Judge Koh for approval. If the settlement is not approved, the case is currently set to go to trial this spring.
More details concerning the proposed settlement can be found at the following New York Times Article, “Bigger Settlement Said to Be Reached in Silicon Valley Antitrust Case,” dated January 14, 2015.
A few months ago, this blog noted that there was press coverage about the nationwide increase in the use of noncompete agreements in various industries. A story that has made the rounds in the past week illustrates this point clearly. Jimmy Johns, a “gourmet sandwich” franchise, has apparently been inserting noncompete provisions in its employment agreements, including those employees who work on the line making sandwiches. The noncompete provision purportedly seeks to prevent employees from working for a competitor, such as Subway, for a two year period. The news reports caution that there have been no reported cases so far where Jimmy Johns has sought to enforce this noncompete restriction against a former employee.
For those California employers wishing to follow in Jimmy Johns’ footsteps, you should know that California law frowns upon such restrictions and they are permitted only in certain limited cases, primarily involving the sale of a business. A noncompete provision similar to those described as being inserted into Jimmy Johns’ employee agreements would almost certainly be held unenforceable by a California Court.
For more details concerning this issue, please see “When the Guy Making Your Sandwich Has a Noncompete Clause,” published in the New York Times on October 14, 2014.