Judge allows Chinese Company to view American Company’s Trade Secrets in Hong Kong as Part of Groundbreaking DOJ Litigation

A federal judge in the Northern District of California ruled that Chinese state-owned Fujian Jinhua Integrated Circuit Co. and their Taiwanese partners United Microelectronics Corp. were legally entitled to review trade secret information they allegedly misappropriated from Idaho-based Micron Technology Inc. U.S. v. United Microelectronics Corp., No. 18-CR-465 (N.D. Cal.).  The ruling came as part of a DOJ criminal prosecution of Fujian and UMC alleging that the companies stole the technology they have been using to manufacture dynamic random access memory chips from Micron.

Prosecutors and Micron stringently objected that review of the information in Hong Kong, even by Fujian and UMC’s attorneys, would lead to a significant risk of the technology falling directly into the hands of the Chinese government. Despite these concerns, Judge Maxine Chesney ruled on Wednesday that reviewing the information they are accused of stealing is essential to the companies’ legal defense. She also noted that security concerns from reviewing the information in Hong Kong do not match those from reviewing the information on the Chinese mainland.

Against the backdrop of an ongoing trade war between the United States and China, the Department of Justice announced its “China Initiative” in late 2018. A main goal of the initiative is to “[i]dentify priority trade secret theft cases, ensure that investigations are adequately resourced; and work to bring them to fruition in a timely manner and according to the facts and applicable law[.]” The program has been presented by the DOJ as a crucial part of President Trump’s national security plan as it relates to China and, in particular, Chinese theft of American information.

The ongoing case against Fujian and UMC is the first criminal prosecution under the China Initiative  and could be a benchmark for the continuing success of the DOJ’s attempt to rein in Chinese intellectual property theft. In announcing the Initiative, then-Attorney General Jeff Sessions stated, “Chinese economic espionage against the United States has been increasing—and it has been increasing rapidly…. This Initiative will identify priority Chinese trade theft cases, ensure that we have enough resources dedicated to them, and make sure that we bring them to an appropriate conclusion quickly and effectively.” FBI Director Christopher Wray went on to contextualize the effects of China’s actions on American businesses: “If China acquires an American company’s most important technology – the very technology that makes it the leader in a field – that company will suffer severe loses, and our national security could even be impacted.”

It remains to see what effect, if any, the District Court’s ruling this week will have on Chinese government access to American companies’ trade secrets. If though, as Micron worried, their trade secrets fall into the hands to the Chinese government during this court-ordered inspection, it could spell disaster for future criminal prosecutions under the China Initiative. Assuming future judges faced with this question agree that defendants have a legal right to review this evidence against them, these prosecutions may ultimately backfire.

Competing Views on Non-Compete Agreements: Changes May be Coming Across the Nation to Employers’ and Business Purchasers’ Ability to Limit Competition

Employers often place limitations on their employees’ ability to compete following the termination of the employment relationship. The justification for restraints on trade is that employers have a protectable interest in their customer and vendor relationships, the goodwill associated with their brand, and their confidential information and trade secrets.

Purchasers of businesses likewise often place limitations on sellers’ ability to compete in the same industry after an acquisition. These limitations can be critical to ensure the purchasers’ investment is not devalued by a seller’s use of prior relationships and knowhow to compete in the same market.

Though common, non-competition provisions in employment agreements and, to a lesser extent, in business purchase agreements, have long been the target of state regulation. The rationale for regulation is that restraints on trade remove employees from the job market, and, in the acquisition context, may remove property from commerce.

Louisiana, for example, has long placed strict form requirements and substantive requirements on non-competition provisions in employment agreements. They must be limited to two years in duration, must specifically list parishes or municipalities where competitive activity is restricted, and must limit competition only in places where the former employer actually does business. Other states, most recently Washington, Maryland, and Massachusetts, have begun to follow Louisiana’s more employee-friendly approach to non-competition agreements by limiting situations in which an employer may legally restrain the trade of a former employee.

Under Washington’s new rules, non-competition agreements are enforceable only against employees who earn more than $100,000 a year and independent contractors who earn more than $250,000 a year. Washington employers must also compensate employees who are laid off but are still subject to non-competition agreements, and such agreements must not last longer than eighteen months. Maryland has similarly created an income floor below which non-competition agreements are unenforceable–employers are forbidden from requiring employees who make less than $15.00 per hour or $31,200 per year from signing non-competition agreements. Massachusetts’s new law provides, among other things, that non-competition agreements entered into during employment must now be supported by independent consideration beyond continued employment. Finally, the Supreme Court of California will decide whether that state’s near ban on non-competit

ion restrictions also applies to agreements between two businesses exiting a joint venture.

State laws that apply strict requirements to non-competition agreements are designed in part to slow their expanding use in fields that do not require particular technical expertise and skills, i.e. fields where such agreements were once uncommon. The discrete differences that have resulted between laws in each state make it difficult for employers with regional or national reach to implement uniform non-competition policies. These state law differences can frequently lead to complicated conflict-of-law issues, especially when employees move between states or work in different states for the same employer. This often leads to the courts of one state applying the law of another and can sometimes bring about unpredictable results. For example, a Delaware Chancery Court recently declined to enforce a Delaware choice-of-law provision in a non-competition agreement that involved a California manufacturer because of California’s strong public policy against restraints on trade.

A uniform approach, however, may be found in the not-too-distant future. While differing state regulation in the field of non-competition agreements is by no means a new phenomenon, there is now reason to believe the federal government may begin to legislate in this area in an attempt to promote uniformity. According to its website, on January 9, 2020, the Federal Trade Commission held a public workshop to examine whether there is a sufficient legal basis and empirical economic support to promulgate a Commission Rule that would restrict the use of non-competition clauses in employer-employee employment contracts and apply to employers throughout the United States. At this time though, it is unclear how the federal government could harmonize different state approaches on the permissible scope of restraints on trade under one national and comprehensive rule and whether such a rule would withstand judicial scrutiny.

Louisiana Appellate Court: Time Limit on Non-Compete Runs From Termination, Not Judgement.

An employee’s termination date – that is, the date the employee quits or is fired – may be critical to determining when his non-competition obligations expire. Under Louisiana law, a non-competition agreement may not “exceed a period of two years from termination of employment.” La. R.S. 23:921(C).

This rule was recently applied by the Louisiana 4th Circuit Court of Appeal in Smith v. Commercial Flooring Gulf Coast, L.L.C., 2019-0502 (La. App. 4 Cir 10/09/19). In Smith, an employee at a flooring company quit to work for a local competitor as their Vice-President of Operations. After he sued his former employer for a declaration that his non-competition agreement was invalid, the former employer counter-sued, seeking damages and an order enjoining him from working at the competing flooring company. The trial court ruled in favor of the former employer and granted a preliminary injunction enjoining the employee from working for the competitor “for a period not to exceed two years from the date of the judgment.” On appeal, the Fourth Circuit generally affirmed the trial court’s ruling, except to modify its duration to run from the employee’s date of termination, not the judgment. The Court held:

[A] preliminary injunction that extends for up to two years from the date of judgment impermissibly extends the time period to restrict competition allowed by law that Mr. Smith [the employee] and Priority [the former employer] contracted for in the non-compete agreement. … Therefore, although we find no manifest error in the district court’s grant of the preliminary injunction, we do find the district court erred as a matter of law in extending the preliminary injunction for a period not to exceed two years from the date of judgment. Accordingly, we amend the district court’s judgment to limit the duration of the preliminary injunction to two years from December 15, 2017, Mr. Smith’s last employment date with Priority.

In other words, because the plaintiff was apparently an at-will employee, he could quit at any time (or be fired) and thereby start the clock on the two year non-competition period.

Practice Tip: In one strategy for maximizing the duration of a non-competition agreement – for example, for highly skilled employees or executives – an employer may strategically use term employment contracts. For example, an employment agreement may be drafted such that notice of termination of the employment agreement triggers a “transition period” before the employment relationship actually ends during which the employee may be entitled to some fraction of his or her regular pay. While the employer may have to pay the employee through such period, the non-competition obligation would be enforceable during such period and two years thereafter. Before executing such agreements, employers should weigh whether the additional payments would be worth extending the non-competition obligation by delaying the employee’s termination date.

U.S./China Trade “Deal” Short on IP/Trade Secret Specifics

With the announcement last week of a tentative partial trade agreement with China, the U.S. appears to be headed to a somewhat easing of tensions between the two superpowers.  Terms of the agreement are vague, with references to a reduction in tariffs, increase in agricultural purchases by China, and agreements to return to the bargaining table.

What is missing, though, are references to increases in protection of U.S. intellectual property: trade secrets, patents, copyrights, and trademarks, long espoused by the U.S.  This silence is in stark contrast to the stated goal of the U.S. that protection of U.S. intellectual property in China is among the key components to a successful and permanent trade deal.

The importance of such protection has been made manifest in several recent events.  The National Association of Manufacturers was hacked over the summer and blame was placed by investigators on Chinese nationals.  Earlier in the year, a former employee of a U.S. cast iron plant was sentenced to one year in prison after being arrested at the airport, en route to China with files of confidential information of his former employer.  Furthermore, China’s trademark register is full of foreign trademarks registered in China by its citizens.

China apparently has verbally committed as a part of an overall trade package to tighten up enforcement efforts in the IP arena.  But how does China quantify that commitment?  Such requires a change in the Chinese government’s mindset, its enforcement policies, and its recognition of the protectability of foreign trade secrets and other IP rights.  None of these can be reduced to tariff percentages, bushels or other common trade terms.  What can China offer in the way of a concrete plan to bolster protection of foreign confidential information?  Indeed, the silence of the parties as to this important issue is probably an indication of the difficulty the parties are having in reaching a verifiable agreement on IP.  With trust levels between the nations at their nadir, one can easily see how resolution of the IP protection issue may be a major stumbling block to a lasting trade agreement.  Will it become prohibitive?  Time will tell.

A Recent Trend In Louisiana Non-Compete Cases?

A trend may be developing in favor of non-compete agreements in Louisiana. Two recent appellate court decisions enforced their terms, even though they contained either overly broad or ambiguous language. The first is from the Louisiana Supreme Court, Causin, L.L.C. v. Pace Safety Consultants, LLC, which we have previously discussed. The second is from the U.S. Fifth Circuit, Brock Services, L.L.C. v. Rogillio, 19-30363 (Aug. 27, 2019).

Louisiana Supreme Court. The non-compete at issue included language that was overly broad. In the description of the parties to the non-compete, it included not only the former employee’s employer but also the employers “subsidiaries” and “affiliates.” The former employee argued that the inclusion of this language rendered the agreement overly broad and thus enforceable. The intermediate appellate court rejected this argument based on the general rules of contract interpretation. Specifically, the court stated that this language was “merely an accessory clause” and that “the reference is not needed for the existence of the agreement.” The Louisiana Supreme Court allowed the opinion to stand.

U.S. Fifth Circuit. The federal trial court found that the non-compete’s terms were ambiguous but ultimately issued a preliminary injunction enforcing the agreement after hearing parol evidence to resolve the ambiguity. The former employee appealed and argued, among other things, that the trial court erred by admitting evidence on the parties’ intent concerning the non-compete’s scope. If a non-compete contains an ambiguity, the former employee argued, then a court should refuse to enforce it because Louisiana law requires such agreements to be strictly construed. The Fifth Circuit rejected that argument and ultimately affirmed the preliminary injunction. The court wrote: “Even though restrictive covenants ‘must be strictly construed against the party seeking their enforcement,’ SWAT 24, 808 So. 2d at 288, the district court properly considered parol evidence to determine the parties’ intent.”

*  *  *

One take away is that non-competes can still be enforced, even though their language may not be sufficiently concise to satisfy the requirements of Louisiana’s non-compete statute. But employers should still try to remove as much ambiguity and overly broad language from their non-competes as possible.

Editors’ note: Jones Walker represented Brock Services, L.L.C. at the trial and appellate courts. 

Not So Fast And Furious – Executive Indicted for Stealing Self-Driving Car Trade Secrets

Back in March, 2017, we posted about a civil lawsuit against Anthony Levandowski, who allegedly sped off with a trove of trade secrets after resigning from Waymo LLC, Google’s self-driving technology company. Waymo not only sued Levandowski, but also his new employer, Uber, and another co-conspirator, Lior Ron. Since our initial post, things have gotten progressively worse for the Not So Fast and Furious trio: (1) Levandowski was fired in May, 2017; (2) Uber settled, giving up 5% of its stock, which totaled $245 million dollar;  and (3) the case against Levandowski and Ron was sent to arbitration, where the arbitration panel reportedly issued a $128 million interim award to Waymo.

Just when things couldn’t seem to get any worse, they did.

On August 15, 2019, a federal grand jury indicted Levandowski on 33 counts relating to trade secret theft. Levandowski has pled not guilty, has been released on $2 million dollars bail, and  is currently wearing an ankle monitor.

This legal saga is a reminder that trade secret theft is serious … it not only has civil consequences, but also criminal ones.  Unfortunately, trade secret theft happens every day.  And regardless of whether your company has trade secrets regarding self-driving car technology, worth hundreds of millions of dollars, or customer information worth less than a hundred thousand dollars, it’s important to make sure your company’s information is protected.

Equally important is knowing how to investigate potential trade secret theft. Our Trade Secret Team has over 50 years of cumulative experience in this space and can pass along some helpful tips as you launch your investigation:

1. Secure and preserve all relevant computing devices and email/file-sharing accounts.

2. Consider enlisting the help of outside computer forensic experts.

3. Analyze the employee’s computing activities on company computers and accounts.

4. Determine whether there is any abnormal file access, including during non-business hours.

5. Examine the employee’s use of external storage devices and whether those devices have been returned.

6. Review text message and call history from the employee’s company issued cell phone (and never instruct anyone to factory reset cell phones).

7. Enlist the help of outside counsel to set the parameters of the investigation.

The timing of these investigations is critical. Jones Walker’s Trade Secret Team has assisted numerous companies with these investigations and can help strengthen how your company protects its trade secrets. Please contact me, Tom Hubert, or P.J. Kee if your company finds itself in a potential trade secret dispute.

Hacked? Compromised Employee Data May Trigger Duty for Employer to Notify Affected Employees

Hackers are getting creative. As they gather information about potential targets for identify theft and other cybercrimes, they increasingly target companies’ human resources departments. Employee records often contain troves of sensitive personal information sought by such criminals – from original employee applications with social security numbers and driver’s license numbers, bank draft forms with bank account information, W2 forms and other tax documents, and even health insurance and medical information. And when employee data is compromised, employers may be responsible for notifying them.

Duty to Notify. Louisiana law generally requires notification to Louisiana residents when their computerized personal information is acquired and accessed without authorization. Yet notification is not required if it is determined that, “after a reasonable investigation,” there “is no reasonable likelihood of harm” to Louisiana residents. If notification is required, the “owner” or “licensee” of the compromised data – such as an employer with hacked HR records – must notify affected Louisiana residents – including affected employees- “in the most expedient time possible and without unreasonable delay but not later than sixty days from the discovery of the breach.” (If the breach is discovered by a third party – such as outsourced service provider, cloud vendor, or other data processor – it must notify the data owner, which in turn must notify affected individuals.) Within 10 days of notifying Louisiana residents, the law also requires separate notice to the Louisiana Attorney General; failure to timely notify the Attorney General may result in fines of up to $5,000 per day.

Securing Personal Information. Louisiana law also generally requires businesses to protect Louisiana residents’ digital personal information. Businesses must “implement and maintain reasonable security procedures and practices appropriate to the nature of the information to protect the personal information from unauthorized access, destruction, use, modification, or disclosure.” And when disposing of computerized data that includes Louisiana residents’ personal information, businesses must “take all reasonable steps to destroy or arrange for the destruction of the records … by shredding, erasing, or otherwise modifying the personal information in the records to make it unreadable or undecipherable through any means.” Failure to implement, maintain, and follow such requirements is deemed an unfair act or practice.

The Take Away. Thorough preparation is the best way to quickly contain a data breach. Employees with access to records containing personal information should participate in a semi-annual review of the company’s incident response plan. And because HR records often contain digital personal information of employees, employers should ensure that their HR professionals are familiar with the company’s security procedures and practices, too. Employers should also take care that they are properly disposing of digital HR records in accordance with their document destruction policies and the law.

For more on Louisiana’s Breach Notification Law, see Micah Fincher and Jessica Engler, One Year Later: Louisiana’s Database Security Breach Notification Law 2.0, Louisiana Bar Journal, Vol. 67, No. 2 (August/ September 2019).

Louisiana Supreme Court Allows Employer-Friendly Decision in Non-Compete Case to Stand

Drafting an enforceable (and meaningful) non-compete provision in an employment agreement can be difficult. Many states, like Louisiana, recognize that non-compete provisions in employment agreements raise a serious public policy concern. In Louisiana, this public policy is set forth in La. Rev. Stat. 23:921. It requires non-compete provisions to set forth specific parishes or municipalities in which competition is restricted and limits their duration to two years.

Generally, courts strictly construe non-compete provisions and will often strike provisions that may otherwise comply with the statute. But the Louisiana Supreme Court recently allowed a decision to stand from the Louisiana Fourth Circuit Court of Appeal that took a more flexible approach. In Causin, L.L.C. v. Pace Safety Consultants, LLC, 2018-0706 (La. App. 4 Cir. 01/30/18), the employee tried to invalidate his non-compete obligation by arguing that the following language related to the non-compete’s geographic scope was overbroad:

“Employee recognizes that from time to time, the Company’s business may expand to other parishes within Louisiana and/or other counties or municipalities in other states and Employee agrees that Company may amend Exhibit ‘A’ and append it to this agreement with the same force and effect as the original Exhibit ‘A.’ Company will provide Employee with any and all amendments. Employee and the Employer acknowledge and agree that the Company does business in all of the parishes contained in Exhibit ‘A.’ Employee agrees that if the Company provides him with an amendment to Exhibit ‘A’ that it will represent as fact that the Company does business in all of the geographical areas identified in such an exhibit unless the Employee provides the Company with written notice disputing that fact within seven days of his receipt of the amendment.”

The court could have reasoned that restricting an employee’s right to work in yet-to-be identified parishes violates that plain language of La. Rev. Stat. 23:921. But the court ultimately held that the naming of the parishes and counties where the employer does business, together with an avenue for the employee to contest any expansion, operated to satisfy the statutory requirements.

This employer-friendly decision gives employers guidance, and some leeway, when drafting non-competes that seek to provide protections as the company grows.

AT&T Sues Consulting Firm for Trade Secret Theft and Breach of Contract

AT&T Services, Inc. and its subsidiary, DirectTV, LLC (collectively, “AT&T”) sued Max Retrans, LLC (“Max Retrans”), a consulting company that works with local broadcasting companies to sell their content to Pay-TV service providers for re-broadcast.

Background. Local broadcasting companies—like the local affiliates of ABC, FOX, CBS, and NBC—are licensed by the FCC to broadcast their television signals over the air for free. In order for Pay-TV service providers—like AT&T, Cox, Comcast, etc.—to re-broadcast the signals of local broadcasting companies as part of their package, they need express consent in the form of a retransmission consent agreement (“RCA”).

Recently, there has been an increase in the amount of Pay-TV service providers, which local broadcasting companies have used to leverage higher prices for their RCAs. The increased competition has also created a cottage industry for consultants to negotiate higher RCA fees for several local broadcasting companies at the same time. As a result, AT&T requires all third-party consultants involved in negotiations to enter into Non-Disclosure Agreements (“NDAs”) that prohibit the consultants from sharing confidential rates and other RCA terms with their other clients.

The Lawsuit. The heavily-redacted Complaint filed in Missouri federal court last week alleges that the Max Retrans executed an NDA with AT&T as a consultant for a local broadcasting company negotiating a new RCA. Under the NDA, AT&T alleges Max Retrans was given restricted access to AT&T’s confidential pricing information and trade secrets. AT&T claims that Max Retrans misappropriated its trade secrets when consulting past clients and that Max Retrans has used and will continue to use these trade secrets when consulting other clients negotiating with AT&T.

What to Watch For. AT&T Services, Inc. et al. v. Max Retrans LLC, No. 4:19-cv-01925, in the U.S. District Court for the Eastern District of Missouri, presents some interesting trade secret issues that are worth monitoring. We will track the progress of this case and keep you informed.

Supreme Court Expands Confidentiality Protections for Private Companies

In Food Marketing Institute v. Argus Leader Media, the U.S. Supreme Court held that government agencies can withhold a private company’s records from public disclosure under Exemption 4 of the Freedom of Information Act (“FOIA”) if the company has treated the information as confidential and also received promises from the government agency to maintain the information’s confidentiality.

The Dispute. The case began with a simple FOIA request sent by a local newspaper in South Dakota to the United States Department of Agriculture (“USDA”). The newspaper wanted to know the names, addresses, and annual sales data for every retail store participating in the Supplemental Nutrition Assistance Program. The USDA released the names and addresses of all participating stores but withheld the annual sales data under FOIA’s Exemption 4, which protects  from disclosure “trade secrets and commercial or financial information obtained from a person and privileged or confidential.” The South Dakota newspaper was not satisfied with the USDA’s FOIA response and filed suit to compel disclosure of each participating store’s annual sales data.

The Decision. Previously, lower federal courts had created a hurdle for FOIA’s Exemption to apply. A private company would need to show that disclosure of information through a FOIA request would cause “substantial competitive harm.” Both the trial and appellate courts followed this line of cases. They ruled that the USDA must disclose the annual sales data for participating stores. The Supreme Court, however, refused to impose the additional judge-made burden of proving “substantial competitive harm.” Instead, it relied solely on the words of the statute. It found that Exemption 4 protects confidential, commercial, or financial information, and that the ordinary meaning of “confidential” is anything kept private or secret. The Supreme Court concluded that a private company’s information will remain “confidential” and protected from disclosure under Exemption 4, so long as the private company customarily and actually treats the information as private and has received assurance from the government that it will maintain the information’s confidentiality.

The Take Away. The Supreme Court’s ruling adds significant protections for private companies. Companies must be sure to clearly designate information as confidential as well as receive assurances from the government before disclosing it. If the private company does these two simple things, its confidential information is not at risk of being disclosed through a FOIA request.