Fifth Circuit Rules Louisiana Trade Secret Claim Does Not Preempt Claim For Conversion Of Confidential Info

The Louisiana Supreme Court has not addressed whether a claim under the Louisiana Uniform Trade Secrets Act (LUTSA) precludes a claim for conversion of confidential information. But the U.S. Fifth Circuit recently did in  Brad Services, LLC v. Irex Corporation, No. 17-30660 (October 17, 2018), finding that these conversion claims are not preempted.

Factual Background. Brad Services is an industrial scaffolding company who sued its director competitor Irex after it hired one of Brand Services’ former employees. Brand Services alleged that prior to leaving, its former employee misappropriated Brand Services’ trade secrets and confidential information and transferred that information to Irex. Brand Services asserted that Irex violated LUTSA by knowingly accepting its trade secrets and was also liable under the tort theory of conversion.

Trial Court Decision. Irex filed a motion for summary judgment, arguing that the LUTSA preempted Brand Services’ claim for conversion of confidential information.  The trial court agreed. It ruled that LUTSA preempts claims for conversion of trade secrets as well as claims confidential information.

On Appeal. The Fifth Circuit first recognized that the Louisiana Supreme Court had not addressed this issue and that it, therefore, must determine how Louisiana’s high court would rule if the issue was before that court. The court then turned to the relevant language of LUTSA, which provides that it “displaces conflicting tort, restitutionary, and other laws of [Louisiana] pertaining to civil liability for misappropriation of a trade secret.” The court noted that LUTSA does not affect “civil liability or relief that is not based upon the misappropriation of a trade secret.” Based on the statute’s plain language, the acknowledged that LUTSA preempts claims for conversion of “trade secrets,” but ruled the statute has no effect on a claim for conversion of confidential information. The court reasoned that trade secrets and confidential information are separate and distinct concepts, with LUTSA only protecting the former, more valuable trade secrets, and thus reversed the trial court and reinstated Brand Services’ claim for conversion of confidential information.

The Take Away. Unless the Louisiana Supreme Court rules otherwise, federal courts within the Fifth Circuit will allow claims for conversion of confidential information to proceed along with LUTSA claims. The ruling gives companies seeking to protect trade secrets and confidential information backup recovery to protect stolen confidential information that may not rise to the level of a trade secret. Moving forward, companies should bring both claims when appropriate.

US Fifth Circuit Affirms Judgment on CFAA Violation

The U.S. Fifth Circuit recently affirmed a trial court’s verdict that a former bank officer violated the Computer Fraud and Abuse Act (CFAA) when he mass deleted thousand of files from his work computer shortly before departing. Iberiabank v. Broussard, Case No. 17-30662 (5th Cir. 10/25/2018).

Background.  In early 2013, IberiaBank announced a merger with a smaller regional bank, Teche Federal Bank of New Iberia. Several months later, after the merger was complete, IberiaBank discovered that a former senior Teche bank officer deleted thousands of computer files in the lead-up to the merger. At the time, the bank officer was pursuing employment with an IberiaBank competitor for himself and several other bankers whom he supervised, a scheme that IberiaBank later pieced together with the help of forensics on the bankers’ computers.

Trial Court Decision. IberiaBank brought suit against the bank officer, claiming that he violated the CFAA by unlawfully deleting data from Teche and IberiaBank servers and bringing state law claims based on fiduciary duty breaches and trade secret theft. On the CFAA claim, the trial court found that the bank officer violated the CFAA because he lacked authority to delete files from the bank’s network drives and caused damages that exceeded the CFAA-threshold of $5,000.

Fifth Circuit Decision. The Fifth Circuit affirmed the trial court’s decision, applying Section 1030(a)(5)(A) of CFAA that, according to the Fifth Circuit,  “prohibits intentionally damaging a computer system when there was no permission to engage in that particular act of damage.” The Fifth Circuit held that a mass deletion of data can legally qualify as “damaging a computer system” and emphasized that the question of authorization is a factual one, best left for the trial court to decide. Because there was sufficient evidence to support the trial court’s decision and the law was correctly applied, the Fifth Circuit left the trial court’s decision intact.

Jones Walker, LLP represented IberiaBank at trial and on appeal. 

Federal Courts in Louisiana Recognize Trend in Trade Secret Cases

Lawsuits alleging trade secret theft raise challenging discovery concerns, as they almost always arise in the context of an employee leaving to work for a direct competitor. Courts have struggled to balance a trade secret plaintiff’s right to obtain discovery with a competitor’s interest in protecting its own confidential business information.

This balancing is particularly difficult when trade secret plaintiffs allege that broad, non-descriptive categories of information — sometimes seemingly every piece of information a former employee was provided — have been taken. It becomes even more problematic when trade secret plaintiffs do not allege specific acts of misappropriation, but instead rely on the mere fact that a former employee left to compete and therefore will inevitably disclose information.

Two recent decisions from federal courts in Louisiana—Kalencom Corp. v. Shulman, No. 17-5453 (E.D. La. Apr. 17, 2018)  and J.J. Plank Co., LLC v. Bowman, No. 18-00789 (W.D. La. July 23, 2018)—recognized and followed an emerging discovery trend in these types of trade secret cases.

Kalencom v. Shulman. The Eastern District of Louisiana recognized a trend in federal jurisprudence requiring trade secret plaintiffs to identify “with reasonably particularity” the information that forms the basis of a misappropriation claim before allowing discovery into a competitor’s business dealings. The plaintiff, for instance, was ordered to produce “a list identifying the allegedly misappropriated confidential and proprietary information and trade secrets with reasonable particularity and for each item of allegedly misappropriated confidential and proprietary information, describing the basis for its expectation of confidentiality as to that specific piece of information.” That is, meaningful discovery could not proceed until the plaintiff undertook this step.

J.J. Plank Co. v. Bowman. The Western District of Louisiana cited the decision in Kalencom and likewise looked favorably on the trend requiring “pre-discovery identification” of trade secrets. But it cautioned that a fact-intensive inquiry must be undertaken: “[t]he balance of authorities seem to favor the former set of policy considerations [favoring pre-discovery identification of trade secrets]. Thus, requiring pre-discovery identification seems to be the predominate trend. But while a strong consensus may be growing, a mandate has not arisen. This area of litigation is complex, contentious, and fact-intensive. Therefore, a mandate may long elude us. And perhaps it should.”

Take Away. Compelling pre-discovery identification of trade secrets with reasonable particularity is an important step for trade secret defendants to take early in litigation. As this discovery trend continues, trade secret defendants should also consider seeking dismissal of lawsuits that vaguely allege the existence of trade secrets and acts of actual misappropriation. Though courts have yet to squarely adopt a heightened pleading standard for trade secret claims, an argument can be made that trade secret plaintiffs cannot plausibly allege the existence of a trade secret without reasonably identifying it, and there is no reason to delay such identification if discovery cannot proceed without doing so.

New White Paper on Maritime Cybersecurity

A contributor to the Trade Secret Insider, Andy Lee has co-authored a white paper concerning the findings of a recently conducted Maritime Cybersecurity Survey.

The survey polled 126 senior executives, chief information and technology officers, and key managers across the U.S. maritime industry, with four key findings on the state of cybersecurity across various industry sectors.

The U.S. maritime industry is being targeted. Nearly 80% of large U.S. maritime industry companies (more than 400 employees), and 38% of all industry respondents reported that cyber attackers targeted their companies within the past year. 10% of survey respondents reported that the data breach was successful, while 28% reported a thwarted attempt.

There is a false sense of preparedness in the U.S. maritime industry. 69% of respondents expressed confidence in the maritime industry’s overall cybersecurity readiness, yet 64% indicated that their own companies are unprepared to handle the far-reaching business, financial, regulatory, and public relations consequences of a data breach.

Small and mid-size companies are far less prepared than larger companies to respond to a cybersecurity breach. 100% of respondents from large organizations indicated they are prepared to prevent a data breach, while only 6% of small company (1 to 49 employees) respondents and 19% of mid-size company (50 to 400 employees) respondents indicated preparedness.

Small and mid-size companies lack even the most fundamental protections, exposing them to huge potential losses. 92% of small company and 69% of mid-size company respondents confirmed they have no cyber insurance. In contrast, 97% of large company respondents have cyber insurance coverage.

The white paper also outlines best practices for well-prepared companies and offers guidance on how maritime companies can evaluate and improve cyber readiness.

Louisiana Appellate Court Addresses Customer Lists and Irreparable Harm In Trade Secret Case

A recent Louisiana court of appeal decision provides guidance on two issues that frequently arise in trade secret cases. Southern Marsh Collection, LLC v. State Traditions, LLC, 2017 WL 4985217 (La. App. 1st Cir. 2017) addresses the recurring question of when customer lists qualify as trade secrets and—somewhat surprisingly—holds the Louisiana Uniform Trade Secrets Act does not require a showing of irreparable harm for injunctive relief.

Factual Background. In Southern Marsh Collection, a Louisiana company sold casual clothing to retail outlets. The Louisiana company maintained electronically-stored contact information, including email addresses for individual decision makers, for over 500 different customers in 15 states. In violation of a confidentiality agreement, an employee of the Louisiana company supplied this information via email to a competing Alabama company. The Louisiana company sued for and obtained a preliminary injunction that prohibited the Alabama company from using the customer list or contacting any of the customers on the list with whom the Alabama company did not have a preexisting relationship.

On Appeal.  The Alabama company in Southern Marsh Collection argued that the customer list did not qualify as a trade secret because most of the information was publicly available. In fact, a competitor could obtain most of the information by using the “store locator” feature on the Louisiana company’s own website. In many cases, courts have refused to treat customer lists as trade secrets when the information can be obtained through proper channels.

The appellate court acknowledged all this, but nevertheless affirmed the injunction. The court held that the Louisiana company had proved that the customer list qualified as a trade secret even though much of the information was readily ascertainable. The real value in the list lay in the email addresses. Many buyers or store owners have multiple email addresses, with one being a “public facing” address, while the other is a “private” address where people expect to get “real” information that is not unsolicited mail (i.e. “spam” email). The Louisiana company had accumulated valuable private addresses for its customer contacts that the Alabama company could not readily obtain through proper means.

The Alabama company also argued that the trial court had improperly granted the injunction because the Louisiana company failed to prove that use of the list would cause it irreparable harm; the harm to the Louisiana company, supposedly, could be measured in the form of lost profits. Louisiana’s Code of Civil Procedure, in its article 3601, says that an injunction “shall be issued in cases where irreparable injury, loss, or damage may otherwise result to the applicant.” “Irreparable” harm is that which may not be remedied with a damage award.

Some Louisiana cases before Southern Marsh Collection have suggested that a plaintiff in a trade secret case must prove irreparable harm to obtain an injunction. However, article 3601 also says that a court may issue an injunction “in other cases specifically provided by law.” The court of appeal in Southern Marsh Collection pointed out that the Louisiana Uniform Trade Secrets Act specifically provides for injunctions against “actual or threatened misappropriations,” without saying anything about irreparable harm. In fact, the Trade Secrets Act says that plaintiff may recover damage awards “in addition to or in lieu of injunctive relief.” Thus, according to the court in Southern Marsh Collections, “the possible existence of a damage claim does not preclude the granting of injunctive relief as to a trade secret.”

Take Away. The appellate court’s decision in Southern Marsh Collection diverges from other Louisiana jurisprudence and could provide a useful weapon in the arsenal of businesses who need to protect protect trade secrets. Customer lists represent one of the most frequently litigated types of business information, and this case offers new avenues to demonstrate the independent economic value of these lists—without the need to demonstrate irreparable harm.

 

 

 

Louisiana Court Treats Inevitable Disclosure Provision as Non-Compete Clause Subject to Geographic Restrictions

May an employer enforce a contract provision that forbids an employee to leave and take another job that would require him to use or reveal the employer’s confidential information? In Louisiana, maybe not, unless the agreement complies with Louisiana’s non-compete statute, La. Rev. Stat. § 23:921.

In O’Sullivan v. Sunil Gupta, M.D., LLC, 2017 WL 3438349 (E.D. La. 2017), a federal district judge in Louisiana invalidated such a clause because the contract did not list geographic restrictions required by La. Rev. Stat. § 23:921. That statute nullifies “[e]very contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business of any kind,” unless the agreement meets certain criteria. Among other things, the agreement must be limited in duration to no more than two years after employment ends, and it may apply only to specified parishes (counties) and municipalities in which the employer “carries on a like business.” The confidentiality agreement in O’Sullivan did not restrict the application of the clause to any particular parishes or cities. Continue Reading

Google vs. Uber: Tech Giants Square Off Over Driverless IP

uber-serp-logo-f6e7549c89Waymo LLC — formerly Google’s self-driving car program and currently a stand-alone company owned by Google’s parent company — is now in fierce competition with Uber to develop and capitalize on driverless technology. This battle intensified on February 23, 2017, when Waymo filed a lawsuit against Uber Technologies, Inc., Ottomotto LLC, and Otto Trucking LLC.

Trade Secret Claims. Waymo’s lawsuit focuses on the actions of one former employee, Anthony Levandowski, who was a manager at Waymo and now leads a parallel self-driving car program for Uber. Mr. Levandowski resigned from Waymo in January 2016, but Waymo alleges that in December 2015 he downloaded more than 14,000 highly confidential business files, which included information on Waymo’s new and unique radar system. To add to the suspicious downloading activity, Waymo alleges that Mr. Levandowski met with Uber executives shortly after acquiring the files.

Waymo’s lawsuit further alleges that Mr. Levandowski went to great lengths to conceal the downloading. According to Waymo, he attached an external hard drive to his laptop and installed a new operating system “to erase any forensic fingerprints that would show” that he copied Waymo’s confidential information. Waymo also alleges that Mr. Lewandowski set up a competing company prior to his departure that later became Otto, and that he told coworkers of his plan. When Mr. Lewandowski resigned, Waymo alleges, other employees joined his new venture and took with them confidential supplier lists, manufacturing details, and highly technical information.

Within months after Mr. Levandowski started his competing business, Uber purchased it for $680 million. Waymo asserts that Uber’s self-driving car program had stalled before its acquisition of Otto, and that shortly after the acquisition, Uber represented to regulatory authorities that it was using an in-house custom built radar system. A Waymo employee was inadvertently copied on an email to Uber employees from a vendor of one of its radar system components. The email included an attachment of an Otto radar system that was similar to Waymo’s design. Waymo’s lawsuit followed.

Uber has not had an opportunity to respond to the allegations, but Waymo’s complaint paints a compelling story that we will continue to monitor and report on.

Take Away. It is no surprise that Uber wants to be on the cutting edge of self-driving car technology: a future with self-driving cars poses a significant challenge to Uber’s current business model. But this case stands as a cautionary tale that competitors — both big and small — can rely on state and federal laws to protect confidential and proprietary information from being exploited by their competitors.

Employers who rely on confidential information to compete should take steps, like Waymo alleges it took, to protect proprietary information. Laws that prohibit trade secrets theft are often unavailable when employers fail to take reasonable measures to protect their secrecy. Some fairly easy steps can be taken, such as restricting access to confidential information accessible to only high-level employees on a “need to know” basis and requiring and enforcing confidentiality and non-compete agreements. On the other hand, employers planning to hire an employee of a competitor (or acquire a business owned by a competitor’s former employee) should be highly vigilant about enforceable non-compete agreements and potential trade secret theft.

Trade Secret Dispute Brewing In Minnesota

beer clashThe popularity of craft beers has skyrocketed.  A report cited in Fortune claims that microbreweries’ market share increased from 5.7 percent in 2011 to 12 percent in 2015. This growth has led to competition as microbreweries capitalize on the growing appetite for their product. Unsurprisingly, competition has led to allegations of unlawful conduct.

Summit Brewing Company, one of the oldest microbreweries in the United States, recently filed a lawsuit alleging that its former VP of Sales coordinated with a Sales Market Manager to disclose trade secrets to a direct competitor. Summit alleges that the VP entered into an independent consulting agreement with a direct competitor within months of ending his employment. Summit further alleges that the Market Manager then emailed the former VP trade secrets that were passed on to high-level executives of the direct competitor. The allegedly stolen trade secrets included: (1) propriety sales and marketing plans, tools, strategies, and programs; (2) pricing and distribution plans, tools, strategies, and programs; (3) production goals; (4) growth strategies; (5) distributor relationship information; and (6) management systems and techniques.

At first glance, one might expect the recipe of Summit’s beers to be the subject of this brouhaha. But Summit’s claims reveal how state laws can protect proprietary information that falls outside a rigid concept of trade secrets. Strategic goals and distribution and marketing plans can qualify as protected trade secrets if they are valuable and not publicly known. When employees leave to work for a competitor, employers should take prompt action to investigate whether any trade secrets have possibly left the company as well.

Update Your Confidentiality Agreements and Policies *Now*

Tidea netheft of trade secrets by rogue employees is frighteningly common. When employees leave or lose their jobs, about half “steal corporate data and don’t believe it’s wrong” and forty percent “plan to use the data in their new jobs,” according to a 2012 global survey published by Symantec, a security firm. The survey was based on responses from thousands of employees in the United States, United Kingdom, France, Brazil, China, and Korea.

To help businesses crack down on trade secret theft, on Wednesday President Obama signed the Defend Trade Secrets Act of 2016. When someone willfully and maliciously steals another’s trade secrets, the Act gives the trade secret owner a powerful weapon: a right to seek exemplary damages and attorney’s fees. Exemplary damages may be up to twice the amount of the damages that may be awarded under the Act.

But if the trade secret owner is an employer and the thief is an employee, contractor, or consultant, there is a special requirement to preserve the employer’s right to exemplary damages and attorney’s fees. The employer must have given them notice of a subsection of the Act relating to immunity. Continue Reading

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