House Passes Federal Trade Secrets Bill

downloadWe recently reported that the U.S. Senate passed the Defend Trade Secret Act (“DTSA”), which would create a federal private cause of action for trade secret theft.

This week was the U.S. House of Representatives turn. The House overwhelmingly voted to approve the DTSA by a margin of 410-2. The bill is now headed to President Obama, whose administration has indicated strong approval.

And the Obama administration is not alone in voicing support. The Under Secretary of Commerce for Intellectual Property was vocal in praising the bill, as were corporations like Microsoft and General Electric and lobbying groups like the U.S. Chamber of Commerce, who issued a statement “urg[ing] President Obama to sign this legislation into law as soon as possible.”

We will continue to update you with any new developments and will also begin a new series of posts analyzing important aspects of the new legislation.

Federal Trade Secrets Bill Passes Senate

200px-US_senate_sealOn Monday, the Senate unanimously passed the Defend Trade Secrets Act (“DTSA”) — a bill that would allow companies to pursue trade secret theft through civil litigation in federal court. This long-awaited measure is a major step towards elevating trade secrets to the level of federal protection enjoyed by the other intellectual property, such as patents, copyrights, and trademarks. Currently, if companies want to sue for trade secret theft, they are generally relegated to state courts where there is a patchwork of inconsistent laws modeled after the Uniform Trade Secrets Act (“UTSA”). The DTSA would create a uniform standard for trade secret misappropriation and provide companies with pathways to injunctive relief and monetary damages to preserve evidence, prevent disclosure, and account for economic harm suffered from misappropriation.

The Legislation.  The DTSA would authorize a private civil action in federal court for the misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce. The proposed legislation defines “misappropriation” consistently with the UTSA, and provides for similar remedies, including injunctive relief, compensatory damages, exemplary damages and attorneys’ fees for willful or malicious cases of misappropriation. But the DTSA also differs from the UTSA in several important aspects that could greatly assist companies.  Most importantly, the DTSA provides a direct avenue for companies to use the federal court system to protect trade secrets. The DTSA also provides preemptive measures that companies may utilize to preserve evidence, and to thwart dissemination or theft before it occurs. For instance, companies who suspect that the confidentiality of their trade secrets may be compromised could apply for an ex parte order that allows the government to seize its trade secrets before giving any notice of the lawsuit to the defendant. This seizure protection goes well beyond what courts are typically willing to order under existing state and federal law. The DTSA’s statute of limitations period is also five years, as compared to just three under the UTSA. Additionally, the DTSA allows for treble exemplary damages and, unlike the UTSA, contains no language preempting other causes of action that arise under the same common nucleus of facts.

The Implications. Of the four types of intellectual-property rights — copyrights, trademarks, trade secrets, and patents — trade secrets are unique. Trade secrets are not registered with any federal agency, and companies currently have no direct avenue to protect them under federal law through civil litigation. The DTSA addresses these unique qualities by opening the doors of federal courts to companies looking to protect what they consider to be valuable trade secrets. If the House and Senate come together on final legislation, it would be the federal government’s most aggressive response to trade secret theft. We will keep you updated as the DTSA moves to through Congress and the White House.

“Cannibal Cop” Decision Deepens Circuit Split On Federal Hacking Statute

imagesProsecutors and employers take notice — one of the most robust, wide-reaching tools against computer fraud and abuse could be blunted. The Second Circuit recently joined the Fourth and Ninth circuits in narrowly interpreting the Computer Fraud and Abuse Act (CFAA) in United States v. Valle, 807 F.3d 508 (2d Cir. 2015). Valle, an ex-cop, was convicted of using his access to police databases to aid his gruesome plot to kidnap, torture, and eat a woman, but the Second Circuit overturned that conviction based on its reading of the CFAA. While the Valle case made lurid headlines in the New York press, it has further reaching consequences for the CFAA. The decision deepens the circuit split against the First, Fifth, Seventh, and Eleventh circuits, which give prosecutors and employers more room to bring claims under the CFAA with a broader interpretation of the act.

At stake is the ability of prosecutors and employers to use the CFAA for a common fact pattern in both criminal and civil actions under the statute — when an employee uses his work computer to access information that he is otherwise permitted to access for a non-work purpose in contravention of company policy. The Second Circuit’s Valle decision joins the Fourth and Ninth circuits to say that the CFAA cannot be used for this purpose and is actually meant to only cover traditional hacking activity. On the other side, the First, Fifth, Seventh, and Eleventh circuits still permit a prosecutor, or an employer in a civil CFAA case, to use the act when an employee improperly uses his company access for a non-work purpose.

With a 4-3 circuit split, the stage is set for a potential review by the U.S. Supreme Court. Internet scholars, criminal defense lawyers, and employers have already been filing amicus briefs at the appellate level, arguing both sides of the issue. And all of it turns on the interpretation of a single phrase – what does “exceeds authorized access” mean under the CFAA?

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Sixth Circuit Highlights Importance of Non-Disclosure Agreements

confidentialThe Sixth Circuit recently held that an employer’s “playbook” was protected from disclosure and use, even if the business information was not a “trade secret.” (Orthofix, Inc. v. Hunter, No. 15-3216 (Nov. 17, 2015))  Fortunately for Orthofix, its employment agreements included non-disclosure provisions. The Sixth Circuit found that those provisions protected more than just “trade secrets” and that the former employee breached his contractual obligations by disclosing Orthofix’s confidential business information to a competitor.

Background. Orthofix sells medical devices and hired Eric Hunter as a salesman for its bone growth simulators. Hunter signed an employment agreement that included non-compete and non-disclosure provisions. Orthofix assigned Hunter to a specific territory, where he developed customers and acquired detailed information about doctors’ schedules, idiosyncrasies, and medical device preferences. After nearly 12 years of employment, Hunter and another Orthofix employee (Bob Lemanski) began to negotiate employment with an Orthofix competitor. A plan was developed for Hunter and Lemanski to work for the competitor while avoiding non-competed issues: Hunter would stop selling devices to customers he previously serviced after introducing them to Lemanski, and Lemanski would do the same with his customers. Hunter also disclosed Orthofix’s “playbook” to the competitor — including Orthofix’s customer lists, wholesale price information, sales data, staff contacts, physician schedules and preferences, and physicians’ prescribing habits. Hunter also drew on his “knowledge” about customers’ prescribing habits, schedules, and contact information when introducing the competitors’ representatives to these customers.

District Court Decision. Orthofix sued Hunter for misappropriating trade secrets and breaching his employment agreement’s non-disclosure provisions. The suit was pending in the U.S. District Court for the Northern District of Ohio, where a bench trial was eventually held. The district court dismissed the claims, finding that Hunter was not liable because Orthofix did not protect its trade secrets with reasonable measures and because the non-disclosure provision was an unenforceable non-compete agreement that prohibited Hunter from using general skills and knowledge.

Sixth Circuit Decision. The Sixth Circuit overturned the district court’s decision. Its opinion began with a discussion about the “three separate categories of business information” — trade secrets; contractually protected information; and general skills and knowledge. The Sixth Circuit ultimately held that the district court erred by confusing “Orthofix’s contract claim against Hunter for disclosure of ‘confidential information’ with a claim for misappropriation of trade secrets.” The Sixth Circuit held that Orthofix’s non-disclosure provision protected information that may not qualify as a trade secret and that went beyond Hunter’s “general skills and knowledge.” In holding that Hunter breached his employment agreement, the Sixth Circuit also held that the non-disclosure provision’s scope did not transform it into an unenforceable non-compete agreement, as Hunter did not rely on his “general skills and knowledge” when using and disclosing Orthofix’s “playbook.” The Sixth Circuit remanded the case for the district court to calculate damages, which Orthofix’s expert valued at $1,623,877 in lost profits.

Take-Away. This decision should prompt all employers to confirm that they have non-disclosure agreements in place. If drafted properly, these agreements can provide substantial protection, even if the business information does not technically qualify as a trade secret.


The Donald Offers A Lesson To Trade Secret Litigators

This may come as a shock. But Donald Trump has unwittingly offered trade secret litigators a teachable moment. It arose in his recent squabble with fellow presidential hopeful Senator Lindsey Graham. After Trump mocked Senator John McCain for being a POW, Graham told CNN that Trump was “becoming a jackass” and later called Trump “the world’s biggest jackass” on “CBS This Morning.” Trump unsurprisingly escalated the bickering. During a campaign speech, Trump called Graham a “lightweight” and an “idiot”—and then disclosed Graham’s personal cell phone number, encouraging his supporters to “give it a shot.” After the phone was inundated with calls and texts, Graham responded by letting us know what he planned to do with the phone (my personal favorite is the Red Bull shake):

So what does this have to do with trade secret cases? Defendants may experience a Grahamesque reaction when they suspect that a trade secret case is brewing. That is, get rid of the phones—or computers, flash drives, email accounts, etc.—as soon as possible and before we’re sued. But litigators on both sides of a trade secret dispute must ensure that Graham’s instructional video is not followed. Especially since these devices and accounts often hold the central evidence for the plaintiffs and defense.

Counsel for trade secret plaintiffs need to act immediately. As soon as a client alerts you to potential trade secret concerns, you should notify the potential defendants and their counsel about not only your client’s underlying trade secret concerns but also the obligation to preserve their devices and accounts and the information stored on them. You don’t want defendants to claim that they discarded devices without realizing the need to preserve them. The notification letter should trigger their obligation to preserve evidence and will be exceedingly helpful if they don’t. A court considering a spoliation motion can rely on your notification letter to determine when the obligation to preserve evidence arose and whether the evidence was destroyed intentionally.

And this is exactly what you don’t want to face as defense counsel. A plaintiff’s successful spoliation motion will often lead to a victory on the underlying claim. So you don’t want your client accused of spoliation or to be faced with the challenge of trying to convince a judge or jury that the destruction of evidence was accidental, understandable, or not as bad as it seems. It’s thus imperative to instruct your clients as soon, as clearly, and as often as you can. They can’t take Senator Graham’s lead. Meat cleavers, blenders, golf clubs, lighter fluid, samurai swords, and baking ovens are off limits. The devices, accounts, and information stored on them must be preserved. If not, the likely consequence is that—unlike Senator Graham—your clients won’t have the last word—and may in fact be deprived of the right to defend themselves entirely.

The Donald has given us a chance to revisit how important it is to communicate early and often about preserving evidence in trade secret disputes. Just as he intended.

Time To Review Your Non-Competes

timeCompanies with employees across multiple states face an administrative challenge. How do they ensure that their non-compete programs remain up to date with the various states law requirements for enforcement? Four states have recently passed legislation that reinforces the importance of addressing this question. The highlights below from the changing non-compete landscape should prompt companies to review their current non-compete programs and discuss strategies for ensuring that their non-competes comply with any new state laws that may affect their enforcement.

Arkansas Reforms. Arkansas’s new non-compete law takes effect on August 6, 2015, and provides non-compete drafters with some stress relief. Previously, Arkansas courts refused to reform non-competes that were overly broad. But now, the Arkansas legislature has stepped in, specifically instructing that courts “shall reform” overly broad non-competes so that they are reasonable with restraints “not greater than necessary to protect the protectable business interest.” Arkansas employers can now be more aggressive when drafting their non-compete’s geographic scope.

Hawaii Bans. Hawaii recently passed legislation banning non-competes and non-recruitment agreements within “technology businesses”— essentially, for software developers. This new law took effect on July 1, 2015, and unlike the Arkansas law that requires courts to enforce more non-competes, the Hawaii legislature found that these agreements do more harm than good within the software space. And it turned to academic studies as support: “Hawaii has a strong public policy to promote the growth of new businesses in the economy, and academic studies have concluded that embracing employee mobility is a superior strategy for nurturing an innovation-based economy. In contrast, a noncompete atmosphere hinders innovation, creates a restrictive work environment for technology employees in the State, and forces spin-offs of existing technology companies to choose places other than Hawaii to establish their businesses.” The Hawaii legislature also noted that technology businesses already receive trade secret protections through other state laws and that enforcing non-competes would allow duplicative relief. Many Hawaiian employers would likely disagree–but the act is now law.

New Mexico Aids. New Mexico’s new law became effective July 1, 2015, and allows doctors and healthcare practitioners to avoid non-compete restraints in employment contracts. But the New Mexico legislature pointed out that the law does not affect other clauses in these types of employment contracts, including non-disclosure covenants; liquidated damage clauses; and requirements to repay a loan, relocation expenses, signing bonuses, or educational expenses for doctors and practitioners who resign within three years of employment. So while doctors may not be restricted from competing, they still can be required to pay to compete.

Alabama Clarifies. Alabama repealed its old non-compete law and replaced it with a new one that will become effective January 1, 2016. Like the old law, the new one prohibits non-competes that do not preserve a “protectable interest.” But unlike the old law, the new law defines the types of interests that a non-compete can protect. The act limits the potential “protectable interests” to the following five categories: trade secrets; confidential information; commercial/customer relationships; good will; or specialized and expensive employee training. But the new law not only provides employers with some clarity on what is required, it also alleviates previous burdens of proof. Whereas employers were required to prove that the non-compete would not cause undue harm—now—the employee must prove undue harm before that affirmative defense will be applied. Not all aspects changed, though. The new law, for instance, still bans non-competes for professionals like doctors, lawyers, and accountants.

*             *            *            *           *

These brief highlights demonstrate that non-compete laws remain fluid. Whether through court decisions or state legislatures, these laws are subject to change—which can cause unexpected consequences for employers overly confident in their non-compete’s validity. Companies should, at least, implement a policy to routinely confer with their counsel about whether their current non-competes still comply with current state laws.

A Trade Secret Reminder — Take “Reasonable Steps”

White PaperThe Center for Responsible Enterprise and Trade ( just released a new White Paper“Reasonable Steps” To Protect Trade Secrets: Leading Practices in an Evolving Legal Landscape. It’s a must read for companies grappling with how best to protect and manage their trade secrets.

We have discussed a previous CREATe report that discussed the devastating economic effect that trade secret theft and misuse can have on a company’s profits, market share, and reputation. But this new White Paper provides concrete, practical advice on how companies can protect their trade secrets and potentially prevent trade secret theft.

In the US, a company must take “reasonable steps” to protect the secrecy of their business information for it to qualify as a “trade secret.” CREATe succinctly summarizes the consequences if “reasonable steps” are not implemented:

Aside from the practical usefulness of implementing “reasonable steps” to prevent trade secret theft and misuse, taking such steps can also have crucial legal significance. Where the legal definition of trade secrets includes a “reasonable steps” or similar requirement, a court can find that a company’s information is not a trade secret if such steps are not taken. Failing to take adequate precautions to protect such information can preclude a company from getting any legal redress if the worst happens and unauthorized disclosure or use of the information takes place.

And that’s where this paper offers value. It recommends an eight-part strategy of leading practices to ensure that companies are taking “reasonable steps” to protect their trade secrets. We have highlighted some of the most salient recommendations for each category:

Policies, Procedures, and RecordsIt should go without saying that companies should have confidentiality policies to protect information. But CREATe recommends that companies should also institute procedures to ensure the policies are being disseminated and followed—and that there are records to demonstrate this compliance. This can include using confidentiality clauses in contracts with employees, contractors, vendors, etc.; using NDAs with customers or potential business partners; and creating inventory of trade secret activity.

Security and Confidentiality Management. Companies should limit trade secret access on a “need to know” basis and should design “reasonable” ways to restrict this access. IT personnel should be involved in the strategy to ensure that information is stored on a company’s computer networks with the appropriate database and shared-drive restrictions.

Risk Assessment. Before companies can assess their “reasonable steps,” they must first identify what their trade secrets are, where the trade secrets are located, and who has access to the trade secrets.  Essentially, CREATe recommends that companies should conduct a trade secret audit so that a “risk mitigation plan” can be implemented to hopefully prevent trade secret theft.

Third Party ManagementBefore disclosing trade secrets to a contractor, client, or customer, companies need to make their policies known—”upfront and regularly”—and require NDAs and confidentiality terms where possible.

Information Protection TeamCREATe recommends that companies should consider developing a committee with oversight responsibilities for the company’s trade secret protections.

Training and Capacity BuildingCompanies need to create a corporate culture that emphasizes the importance of trade secret protections. This should begin during on-boarding and continue throughout the employees’ tenures, with specialized training for IT personnel and other executives with access to the most valuable business information.

Monitoring and MeasurementCREATe recommends annual or even more regular reviews of the company’s trade secret protection program, which should include a rating system to assess the effectiveness of the program and to address potential weaknesses.

Corrective Actions and ImprovementsCompanies must have a rapid response when it learns about potential trade secret theft. This should include a response plan that not only addresses the immediate theft or disclosure but also identifies the root cause, so that strategies can be developed—and added to the trade secret protection program—to prevent similar breaches from reoccurring.

U.S. Supreme Court To Review Fifth Circuit CFAA Decision

US Supreme CourtWe frequently discuss the Computer Fraud and Abuse Act (“CFAA”), which prohibits obtaining information from protected computers through unauthorized access or access that exceeds such authorization. Violating the CFAA can have serious consequences, as the statute carries both criminal and civil penalties. But must a defendant obtain information through unauthorized access and exceed authorized access? Ordinarily not. Yet the U.S. Supreme Court will soon consider this question. On June 29, 2015, the Court agreed to hear a criminal defendant’s appeal, in which he argues that federal prosecutors were required to prove both elements for his CFAA conviction.

The Conviction. Michael Musacchio was the president of Exel Transportation Services (ETS), a transportation brokerage company, until he resigned in 2004.  In 2005, Musacchio founded a competing company, Total Transportation Services (TTS), and then used independent agents to access ETS’s computer servers to obtain proprietary information. ETS’s new president began hearing rumors about a data breach and hired a forensic investigator, who uncovered what Musacchio was up to. ETS sued Musacchio, TTS, and others, and the parties ultimately settled the civil dispute for $10 million. But in 2010, the federal government indicted Musacchio for violating and conspiring to violate the CFAA the CFAA. The jury returned a guilty verdict, and Musacchio filed an appeal with the United States Court of Appeals for the Fifth Circuit.

The Conviction Affirmed. On appeal, Musacchio did not attack CFAA’s language, which is fairly clear: 18 U.S.C. § 1030(A)(2) prohibits one from obtaining information from a protected computer by accessing this computer without authorization or exceeding such authorization. Instead, Musacchio’s question was this. What happens when the trial court erroneously instructs the jury (without objection) that the underlying CFAA offense is defined as “to intentionally access a protected computer without authorization and exceed authorized access”?  Ordinarily, “an instruction that increases the government’s burden and to which the government does not object becomes law of the case.”  United States v. Jokel, 969 F.2d 132, 136 (5th Cir. 1992).  However, under Fifth Circuit procedure, that rule does not apply where (1) “the jury instruction…is patently erroneous and (2) the issue is not misstated in the indictment.”  United States v. Guevara, 408 F.3rd 252, 258 (5th Cir. 2005). On Musacchio’s appeal, the Fifth Circuit held that the indictment correctly set forth the standard and that the jury instruction was patently erroneous.  Musacchio v United States, No. 13-11294, slip op. at 5 (5th Cir. Nov. 10, 2014).

Before The Supreme Court. The Supreme Court likely agreed to hear Musacchio’s appeal to resolve a circuit split. Unlike the Fifth and First Circuits, the Eight and Tenth Circuits require the government to meet any standard imposed by a jury instruction when the government fails to make an objection. Though the Supreme Court likely will not resolve differing interpretations of the CFAA itself—such as the conflicting views on what it means to “exceed authorized access”—the Court will consider an interesting question that highlights the importance of the CFAA in modern trade secret cases and will likely resolve the circuit split on whether an erroneous jury instruction can become the standard when an the government fails to object.  Argument on this case is expected during the Supreme Court’s October term, and we will continue to monitor and report on any new developments in the case.

Hulk Hogan, Sex Tapes, And The FBI: Lesson Learned

FBIWhen the celebrity gossip blog Gawker decided to post highlights from a sex tape starring Hulk Hogan, it never thought that decision would lead to suing the FBI. But that’s what happened—and just recently, Gawker prevailed. A federal judge in Florida ordered that the FBI and the Executive Office of United States Attorneys (EOUSA) must respond to Gawker’s FOIA request—even though the agencies argued that the requested evidence related to an ongoing investigation. The case between Gawker and the FBI had nothing to do with alleged trade secret theft or federal hacking violations. But the judge’s decision underscores an important risk that companies should consider before contacting law enforcement about potential trade secret theft or computer security breaches: What is exchanged with law enforcement may become public record—which could have the unintended consequence of stripping an otherwise protectable trade secret of its “secrecy.”

From Hulk Hogan v. Gawker To Gawker v.  FBI. The case between Gawker and the FBI arose from Hulk Hogan’s suit against Gawker. Hogan sued Gawker in Florida state court over an October 2012 post that published a highlight reel from an anonymously received sex tape. Hogan claims that Gawker invaded his privacy by posting the video footage and seeks $100 million in damages.

14-GAWKER-JP4-blog427Hogan’s counsel also contacted the FBI and requested a criminal investigation regarding the creation and attempted sale of the sex tape. The FBI uncovered a large volume of evidence about the sex tape, and in November 2013, Gawker filed a FOIA request with the FBI, seeking “[a]ll documents relating to an investigation, or a request for an investigation, in October 2012 regarding allegations of illegal recording(s) of Terry Bollea a/k/a Hulk Hogan engaged in sexual relations.”

Initially, the FBI denied the request due to privacy concerns, but in the meantime, Gawker convinced the Florida state court judge to compel Hogan and the female in the video to sign privacy waivers because Gawker needed the FBI’s evidence for its defense. Gawker then updated the FBI in November 2014 about the signed privacy waivers and that Hogan had agreed on a specific method that the FBI should use when producing responsive evidence. Hogan agreed that the FBI should produce all responsive documents directly to Gawker and that any responsive video footage must first be produced to the Special Discovery Magistrate in the Florida state court case.

But in January 2015, the FBI refused to produce 1,168 responsive documents and two CDs of video material because they related to an “ongoing investigation.” Gawker ultimately sued both the FBI and the EOUSA in a Florida federal court, seeking an order to compel the production of documents and video footage. Gawker argued that the documents and video were essential to its defense and that the FBI and EOUSA had not provided a sufficient reason to withhold them. Gawker noted that their investigation had concluded several months earlier.

The Federal Court Decision. The federal judge agreed with Gawker. The judge ordered the FBI and EOUSA to produce all documents that did not fall within FOIA’s “law enforcement exception” (5 U.S.C. § 552(b)(7)(A)) and to produce the video footage to the state court’s Special Discovery Magistrate. She also seemed wary of the government’s exemption claims. She ordered that the FBI and EOUSA  must file a “categorical index” of all responsive documents that includes “general categories of documents, the number of pages pertaining to each category, the claimed exemption, and the reason why disclosure of the documents could reasonably be expected to interfere with law enforcement proceedings.” She also ordered that the FBI and EOUSA must “submit a declaration in support of the categorical index” that “shall provide a more particularized explanation as to why the law enforcement exemption applies to each category of documents and why disclosure of each category could reasonably be expected to interfere with law enforcement proceedings.” And it seems that the FBI and EOUSA will fight an uphill battle in trying to persuade her that the “law enforcement proceeding” exemption actually applies. That is, Gawker will likely receive all the requested evidence.

Lesson Learned. The cases between Hulk Hogan and Gawker and Gawker and the FBI do not involve trade secret theft or computer security breaches. But the judge’s ruling against the FBI should give companies pause before contacting law enforcement about potential trade secret theft or federal hacking violations. It’s not uncommon for law enforcement to investigate and gather evidence but, in the end, decline to pursue formal charges. Law enforcement may thus not be able to rely on the “law enforcement proceeding” exemption to withhold information that a competitor seeks through a FOIA request. Companies should keep this in mind when deciding what to provide to law enforcement and how to provide it. We have previously written about precautionary steps to take when disclosing information to a public entity—and this a good opportunity to revisit those suggestions.

Clearly Mark Trade Secrets. Conspicuously identify what documents or information are trade secrets by marking them accordingly. Though a “law enforcement proceeding” may no longer be available, law enforcement agencies can rely, for instance, on FOIA exemptions that protect trade secrets from public disclosure.

Limit What Is Provided. Consider how much information law enforcement needs to start its investigation—and gauge how receptive law enforcement is to pursuing the investigation—before disclosing the actual trade secrets that may have been misappropriated.

Request FOIA Notification. Ask the law enforcement agency for formal written notice of any FOIA-type request for documents or information concerning the investigation.

Consider The Impact. Weigh the potential harm that public disclosure could cause against the benefit of having law enforcement involved. The risk of disclosure may be small—but companies must consider the nightmare scenario of losing potential trade secret protections by involving law enforcement to help protect those same trade secrets. Companies should rely on counsel to guide them on whether and how to involve law enforcement so that their information is best protected.

Tennessee Federal Court Refuses To Apply Inevitable Disclosure Doctrine

sealWilliams-Sonoma is embroiled in a contentious trade secret theft case with its former executive and direct competitor. On June 18, 2015, a federal district court in Tennessee granted a preliminary injunction motion to enjoin Williams-Sonoma’s former vice president and direct competitor from using confidential business information, soliciting Williams-Sonoma employees, and destroying electronic evidence. But the federal court refused to give Williams-Sonoma everything it requested.  It stopped short of prohibiting Williams-Sonoma’s former senior vice president from working for a competitor. And in doing so, the federal court rejected an invitation to adopt the inevitable disclosure doctrine in this trade secret theft case.

The Background. The facts in Williams Sonoma, Inc. v. Arhaus, LLC, echo those in most trade secret cases. An employee is contacted by a competing company with a lucrative offer. The employee accepts — but before leaving, accesses confidential business information on the company’s databases and saves that information onto external storage devices. Then, after leaving, the employee recruits former co-workers to join the competitor and encourages more trade secret theft.

Williams-Sonoma implemented measures to protect its confidential business information relating to its supply chain and distribution channels. The furniture giant required log-in credentials for and restricted access to its network and databases. It distributed employee handbooks and acknowledgment forms explaining the importance of confidential information. The company also forced employees to abide by a code of ethics detailing the ongoing obligations of employees to protect confidential information. Williams-Sonoma even required employees to take a quiz each year on the contents of the code of ethics.

Williams-Sonoma alleged that it employed these preventive measures because its supply chain and distribution channels represented a huge competitive advantage—one that resulted in tens of millions in savings and allowed Williams-Sonoma to have lower retail prices than most of its competitors.

So when Williams-Sonoma’s Senior Vice President of Transportation took a similar position for a competitor—Arhaus, LLC—the company wanted to ensure that information was not stolen. An extensive forensic investigation revealed the executive had downloaded large amounts of confidential business information to external storage devices immediately after announcing his departure. The executive also solicited two of his co-workers and encouraged additional trade secret theft.

As a result, Williams-Sonoma filed suit against Arhaus and its former employee for trade secret theft, breach of contract, breach of the fiduciary duty, tortious interference with contract, and violations of the Computer Fraud and Abuse Act.

The Inevitable Disclosure Doctrine. Williams-Sonoma also sought to immediately prevent the use and disclosure of trade secrets by preventing its former employee from continuing his employment with the competitor. Though Arhaus argued that all trade secrets and information had been returned—Williams-Sonoma argued that the former executive would inevitably disclose or use Williams-Sonoma’s information if he were allowed to continue working for Arhaus.

The Inevitable Disclosure Doctrine provides equitable relief in the absence of an enforceable non-competition agreement. The principle behind the doctrine is that knowledge and skill obtained through employment qualify the employee for a similar position at a competing company, and thus, the employee will have to rely on this knowledge and skill, which include trade secrets, to successfully perform her duties for the competitor. Ultimately, the doctrine presumes that it’s unfair to force an employer to wait for relief until the former employee and competitor misappropriate trade secrets. It allows the employer to prevent the inevitable disclosure of the confidential business information on the front end through injunctive relief.

Acceptance of the doctrine has varied. For instance, Louisiana courts have rejected the doctrine, whereas Texas courts have applied it in certain circumstances. Compare Tubular Threading, Inc. v. Scandaliato, 443 So. 2d 712, 715 (La. Ct. App. 1983) (finding that an injunction is a harsh remedy when based solely on speculation) with Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548, 551 (Tex. App. 1993) (finding that a former employee in possession of trade secrets and in position to use those secrets should not be able to use them to the detriment of the former employer).

The Court Declined Adopting The Doctrine. The Tennessee federal court declined the opportunity to adopt the Inevitable Disclosure Doctrine. But the court didn’t close the door entirely either. The court found that the knowledge and information remaining in the former employee’s head didn’t rise to the level necessary to invoke the doctrine. The court noted that it wasn’t a secret formula from Coca-Cola or highly specialized information used by only a few obscure companies. The court ruled that much of the information remaining in the former employee’s head “is of the type that one would find in any business school class.” Because the knowledge wasn’t sufficiently specialized, the court denied Williams-Sonoma’s request to enjoin its former employee from competing.

The Take Away. Companies should use non-compete and non-disclosure agreements to ensure confidential business information is protected. Relying on the Inevitable Disclosure Doctrine is unreliable at best.