The coronavirus has had an incredible negative impact across the globe. Besides the obvious medical issues, the virus has multiple side effects: closed schools, devastated the economy, multiple “stay at home” orders across the country, etc. In order to continue to do business and comply with the stay at home orders, many employers are allowing employees to work from home. While this is likely a necessary move for many companies to continue to operate, it does raise added concerns for protecting trade secrets and other confidential information.
A Louisiana appeals court in New Orleans recently overturned a trial court’s refusal to enforce a non-competition agreement. The appellate court’s decision instructs employers on the need to define the scope of their businesses for an enforceable agreement. Environmental Safety & Health Consulting Services, Inc. v. Fowler, 2019-CA-813 (La. 4 Cir. 3/11/20).
The FBI and other government agencies are reporting a significant increase in COVID-19-specific cyberfraud schemes. According to reports, hackers have impersonated the World Health Organization, the Centers for Disease Control and Prevention, NATO, and even UNICEF and other charitable organizations. These bad actors have used phishing emails intended to spread malware and ransomware and have targeted multiple industries, including hospitality, government, education and research, transportation, and healthcare.
This month’s cyberfraud activity increase has been reported as four- to sevenfold over February. Among other scams, the emails purport to ask for charitable contributions and offer fake stimulus checks, testing kits, cures, and vaccines, and general information about the impact of the pandemic.
College students have also been victimized, as hackers have targeted them with faux administration announcements — ostensibly about campus closings and “virtual” class arrangements.
Especially since “work from home” is becoming the norm, organizations should warn their employees about such scams and follow standard cyber hygiene and cybersecurity precautions. Such measures include safeguarding login credentials and other sensitive information — especially in response to an email, verifying links to web addresses (by manually typing them in a web browser if at all suspicious), and looking closely for mis- or deceptive spellings and incorrect domains.
Certain telltale indicators signal an email’s lack of authenticity: It originates from an unusual sender and the link in the email looks suspicious (try hovering over the link to see whether it is familiar).
For further information, review this March 20 public service announcement from the FBI’s Internet Crime Complaint Center.
*This post was originally published on Jones Walker’s Disaster Prep & Recovery blog, www.disasterprepandrecovery.com
After a trial that lasted more than three months, the eight-person jury empaneled by the Chicago-based court took only two and a half hours to deliberate, siding with Motorola and awarding them everything their attorneys had asked for in damages. The verdict came out to a shocking $764.6 million, or just under $350 million in compensatory damages, representing all of Hytera’s worldwide profits from selling the radios, and over $400 million in punitive damages, designed to deter trade secret misappropriation in the future. The verdict was one of the largest awarded under the relatively new Defend Trade Secrets Act, signed into law by President Obama in 2016. One particular aspect of the decision may prove very significant for employers striving to protect their confidential information.
The Defend Trade Secrets Act was passed by Congress with overwhelming bipartisan support. The intent behind the Act was to provide uniform federal protections for companies’ confidential information. The Defend Trade Secrets Act directly adopts much of its language from the Uniform Trade Secrets Act, a model statute adopted in some form by most states including Louisiana and Texas. While it is clear that the Defend Trade Secrets Act was designed to protect confidential information and contemplated businesses whose dealings occur across state lines, no federal courts had yet given a detailed look at whether companies can sue competitors and be awarded damages for misappropriation of trade secrets that occur outside the United States.
In a high-profile trade secret case, a federal court in Chicago ruled that the federal Defend Trade Secrets Act (DTSA) extends beyond the U.S. and covers actions and damages that occur in other countries.
Background. Back in 2017, telecommunications and technology conglomerate Motorola Solutions, Inc. brought a lawsuit against rival radio manufacturer Hytera Communicatoins Corporation, Ltd. in the federal district court for the Northern District of Illinois. Motorola claimed that Hytera hired three of Motorola’s former engineers who brought thousands of Motorola’s confidential documents and trade secrets with them to Hytera, which used those documents to make a digital radio that was an exact copy of Motorola’s digital radio.
After a trial that lasted more than three months, an eight-person jury took only two and a half hours to award Motorolla $764.6 million in damages. It compromised just under $350 million in compensatory damages, representing all of Hytera’s worldwide profits from selling the radios, and over $400 million in punitive damages, designed to deter trade secret misappropriation in the future. The verdict was one of the largest awarded under the relatively new Defend Trade Secrets Act (DTSA), signed into law by President Obama in 2016.
One particular aspect of the decision may prove very significant for employers striving to protect their confidential information. While it was clear that the DTSA applies across state lines, no federal courts had yet given a detailed look at whether companies can sue competitors and be awarded damages for trade secret theft that occurs outside the U.S.
Before the Motorola and Hytera jury began deliberations, the court had to answer that exact question. The engineers Motorola accused of stealing its trade secrets were all based in Motorola’s Malaysia offices. Because Motorola sued in the U.S. seeking worldwide damages, Hytera filed a motion to exclude damages other than U.S.-based profits from the jury’s damages calculation.
Ruling. The court initially noted that most federal civil statutes are not extraterritorial in their reach, that is, they don’t extend to allow damages for actions that occur outside the U.S. But the court reasoned that Congress clearly intended the language of the DTSA to allow lawsuits against companies who have stolen trade secrets in a foreign jurisdiction. Given a verdict of this size, Hytera will likely appeal, but the court’s reasoning seems sound and extraterritorial application of the DTSA is likely here to stay.
Take Away. This ruling is important for companies who seek to protect their trade secrets beyond the U.S. If your company does business in a foreign jurisdiction, particularly one that does not have the U.S.’s robust intellectual property protections, the DTSA may provide a remedy in the event of foreign trade secret theft. Likewise, it is important to ensure that your company has strong policies in place against trade secret theft among your own employees, as well as onboarding requirements designed to prevent theft of confidential information from competitors. Even if your company is doing business in jurisdictions without significant trade secret protections, this ruling may open it up to liability here in the U.S.
A California jury recently concluded that an inventor timely filed a trade secret lawsuit against Uber seeking $1 billion in damages. The inventor’s lawsuit claims that Uber and its founder stole his business concept, which the inventor alleges he shared sometime in 2006 under a promise that Uber’s founder would keep the concept confidential. Around four years later, Uber launched its now popular ride-sharing application, yet the inventor claimed he did not learn about the Uber founder’s involvement with it until several years later.
The California trial addressed only the discrete issue of the timeliness of the inventor’s lawsuit. Uber and its founder argued that had the inventor engaged in a reasonable investigation into Uber in 2010, he would have learned about its founder’s involvement. In contrast, the inventor claimed, among other things, that when he researched Uber—then known as UberCab—online in 2010, its website did not list the founder as a team member.
This case illustrates the importance of timely investigating potential misconduct related to the theft of information, i.e. misconduct which perpetrators often go to great lengths to hide. The period to bring a misappropriation claim can—at least under some circumstances—be lengthened when a victim is unaware of misconduct and that ignorance is excusable. In short, at the very least, trade secret plaintiffs must engage is a “reasonable inquiry” to determine whether wrongful conduct has taken place. What is “reasonable” under the circumstances is a fact-intensive inquiry that—as the Uber case demonstrates—might even require its own trial.
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.
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.
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.
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.