On May 10, 2019, the Delaware Chancery Court issued an opinion adopting a “narrow approach” in interpreting Section 1030(a)(2)(C) of Computer Fraud and Abuse Act (CFAA). Section 1030(a)(2)(C) imposes liability on a person who “intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains… information from any protected computer.” 18 U.S.C. § 1030(a)(2)(C).

Federal courts remain divided on the interpretation of Section 1030(a)(2)(C). For example, the First, Seventh, Fifth, and Eleventh Circuits interpret the statute broadly, finding that acts of misuse of company information “exceed[ ] authorized access,” even if the accused individual or employee had authority to access the information. The Ninth, Second, and Fourth Circuits, which have adopted a narrow approach in interpreting Section 1030(a)(2)(C), simply ask if the individual or employee had authority to access the information at issue, and do not consider a person’s misuse of accessed information.

Here, Plaintiff alleges that the Defendant copied company files from his work-issued computer onto his personal drive on two separate occasions—once before and once after the termination of his employment—and subsequently used the confidential information when he began working at a competitor. The Chancery Court noted that the ordinary meanings of the terms “without authorization” and “exceeds authorized access” do not encompass “misusing the information the employee had a right to access.” The Court also considered the rule of lenity in making its decision, which requires a court to construe criminal statutes “strictly to avoid interpretations not ‘clearly warranted by the text.’”

Because Defendant had authority to access the information at issue before his resignation, the Court found that there could be no liability under the CFAA for the first alleged instance of misappropriation. However, the court found that Plaintiff had adequately pled a CFAA violation for the second instance of misappropriation that occurred after Defendant’s resignation. The case is AlixPartners, LLP, and AlixPartners Holdings LLP vs. David Benichou, C.A. No. 2018-0600-KSJM, before the Delaware Chancery Court.

A federal district court in San Jose recently ruled, in WeRide Corp., et al. v. Kun Huang, et al., that employee non-solicitation agreements are “void” under California Business & Professions Code section 16600 because such agreements are an invalid restraint on employment. This is the second federal court opinion this year that has barred enforcement of a post-employment non-solicitation agreement.

Click here to read the full version of this alert, authored by Crowell & Moring Partner Tom Gies and Counsel Suzanne Rode.

On April 16, 2019, the EU Parliament approved a draft directive for new harmonized rules on the protection of whistleblowers. The Directive of the European Parliament and of the Council on the Protection of Persons reporting on Breaches of Union Law (the “Whistleblowing Directive”) creates EU-wide minimum standards to protect persons disclosing information to which they are privy in the context of their work and which relates to certain breaches of EU law. These include breaches of the rules on public procurement, financial services, money laundering, environmental protection and nuclear safety, EU competition law, food and product safety, consumer and data protection law.

The EU Council and the Parliament have now reached a provisional agreement on the final act. After formal approval, the Whistleblowing Directive will be published in the Official Journal of the European Union, after which Member States have two years to implement the Directive into national law. The below is based on the current version of the draft, which may of course still undergo changes before the final approval.

Click here to read the full version of this alert, authored by Crowell & Moring Partner Emmanuel Plasschaert, and Associates Evelina Roegiers and Louis Vanderdonckt.

In trade secret misappropriation cases, the scope and sufficiency of the trade secret identification are central issues. And, once resolved, plaintiffs may allege new trade secrets thefts gleaned during fact discovery, which rekindles those issues. Recently, the United States District Court, Northern District of Illinois closely scrutinized just such lately raised trade secrets in Motorola Solutions, Inc. v. Hytera Communications Corp. There, after two years in a “hard-fought, contentious case,” with just twelve days left in fact discovery, Motorola moved for an order compelling Hytera to produce documents relating to a newly alleged trade secret – related to its TETRA products. This was in addition to the 142 trade secrets related to DMR products that Motorola had previously claimed were at issue.

According to Motorola, Hytera’s TETRA products had similar functions as Hytera’s DMR products which were already part of the lawsuit, so Motorola sought “without further delay” the source code and sales data for Hytera’s TETRA products. The timeliness of this request was at the forefront of the discovery dispute. Motorola argued that it first learned of the stolen TETRA trade secrets in February 2019, when it found a document within Hytera’s December 2018 document production of nearly 3 million pages. And, Motorola went on to argue that once it learned of this new misappropriation, it promptly supplemented its prior interrogatory responses to identify the TETRA products as being misappropriated. Finally, Motorola claimed that Hytera admitted in previous pleadings that the TETRA products were part of the trade secret misappropriation and had agreed to extend the discovery period in order to produce the requested TETRA information.

Unfortunately for Motorola, the Court did not agree. First, the Court forcefully rejected Motorola’s claim that Hytera had agreed that the TETRA products were part of the case. The Court found that “context matters” and Motorola’s reliance on that single sentence was “not an approach guaranteed or even likely to arrive at a fair and accurate approximation of the truth.” The Court determined that the context showed that Hytera firmly opposed any expansion of Motorola’s trade secret claims. Second, the Court concluded that the 5-week extension of the close of discovery was clearly not done to allow Hytera time to produce TETRA documents. Instead, the Court concluded that Hytera would not have agreed to such a short continuance to deal with the unresolved discovery issues in the case (including Motorola’s late production of 37 million pages of documents) as well as Motorola’s claims of a new basis of trade secret misappropriation. Finally, the Court noted that the document which Motorola claims triggered its “epiphany” in February 2019 was similar to a document Hytera produced in January 2018. Thus, it found that Motorola had waited too long to seek discovery on the TETRA products.

In short, the Court rejected Motorola’s request to expand the litigation significantly so late in discovery. The outcome might have been different had the request came earlier in the case. However, this case highlights the difficulty practitioners may have when balancing the requirement that trade secrets be defined early on against the later discovery of other potential trade secret misappropriations.

Hourglass photo

Waiting too long to bring a trade secrets case against a defendant could be fatal.

In 2011, Alta Devices, Inc. was the world’s only known manufacturer of thin-film solar technology. LG Electronics, Inc. expressed an interest in this technology which prompted the two companies to enter into discussions about possible business opportunities and ultimately sign a mutual non-disclosure agreement. In mid-2016, Alta learned that LGE might be developing similar solar film technology in competition with Alta and requested the return of confidential information pursuant to their non-disclosure agreement. Two years later, Alta sued LGE for allegedly misappropriating its trade secrets and violating their non-disclosure agreement.

Last week, U.S. District Court Judge Lucy H. Koh of the Northern District of California dismissed trade secrets claims against LGE with prejudice on statute of limitations grounds after focusing on the terms of LGE and Alta’s non-disclosure agreement which required LGE to return Alta’s confidential information at the end of the disclosure period. The Court found that Plaintiff acknowledged the three year statute of limitations under the California Uniform Trade Secrets Act and Federal Defend Trade Secrets Act which is triggered on the date on which misappropriation was discovered (“actual notice”) or reasonably should have been discovered (“inquiry notice”). The Court found that Alta had inquiry notice that LGE had potentially misappropriated its trade secrets starting on June 13, 2012 – the end of the disclosure period under the non-disclosure agreement –when LGE failed to return immediately Alta’s confidential information and dismissed the trade secret misappropriation claims as time barred.

This case provides important reminders for companies charged with protecting trade secrets: draft your non-disclosure agreements carefully and promptly investigate claims of potential misappropriation.

On April 23rd, 2019, China’s Standing Committee on the National People’s Congress adopted amendments to the Anti-Unfair Competition Law, significantly strengthening China’s protection of trade secrets. The bolstering of intellectual property safeguards in China comes in advance of important trade negotiations between China and the international community, including the United States. The changes to the Anti-Unfair Competition Law include the following:

  • “Commercial information.” Whereas previously the definition of trade secrets was limited to “technical or operational” information, the revised definition now includes “commercial information,” which significantly increases the scope of protectable trade secrets.
  • Infringers. The amendment also broadened the definition of infringers to include not only “business operators” as before, but also “any other natural person, legal person or unincorporated organization.” The new definition clarifies the old law by expressly bringing within its ambit the individual hacker or bad actor.
  • Infringing Acts. Under the new law, “hacking” explicitly constitutes a violation of trade secrets, as does instigating, inducing, or assisting others to breach obligations of secrecy.
  • Burden of Proof. The revised rules make it easier for foreign trade secret holders to bring an action for trade secret misappropriation in China by creating a burden-shifting mechanism whereby a rights holder need only make a prima facie showing that (1) it took reasonable measures to protect confidentiality of its trade secrets, and (2) the trade secrets were misappropriated. If a rights holder can make this prima facie showing, the burden shifts to the accused infringer to prove that it acquired the trade secrets through lawful means. The presumption of infringement represents a strong shift in favor of rights holders.
  • Damages. Punitive damages increase under the new law for repeat infringers, allowing for 1-5 times the ill-gotten profits (or the right holder’s actual loss) instead of 1-3 times the same. Statutory damages top out at RMB 5 million (roughly US $738,125) rather than RMB 3 million (roughly $442,875) for violations of the law.

These amendments took immediate effect upon their adoption on April 23rd, 2019.

The Third Circuit recently held that a former employer’s alleged surreptitious monitoring of a departed employee’s Facebook messages was not enough to invoke the unclean hands doctrine in Scherer Design Grp., LLC v. Ahead Eng’g LLC, No. 18-2835, 2019 WL 937176 (3d Cir. Feb. 25, 2019). SDG, an engineering firm, became suspicious when several employees left the firm and a major client left with them. Although the firm had no specific policy informing employees that it could monitor their computers, SDG decided to look through an employee’s computer and Facebook messages for any evidence of plans to take the client from SDG. SDG actively monitored its former employee’s Facebook account for over one month after he left.

As it turns out, the former employee’s Facebook messages confirmed SDG’s suspicions. The Facebook messages revealed the former employees’ plans and actions to secure client information and other intellectual property. Armed with information from these messages, SDG then filed suit in New Jersey Superior Court for misappropriation of trade secrets and breach of duty of loyalty, among other things. SDG also sought a preliminary injunction. The employee defendants asserted that SDG had unclean hands doctrine based on the unauthorized Facebook monitoring.

The Third Circuit upheld the District Court’s grant of the preliminary injunction, holding that the unclean hand s doctrine did not apply in this case. To assert the unclean hands doctrine, the party invoking the doctrine must show that (1) the party seeking equitable relief committed an unconscionable act and (2) the act is related to the claim upon which equitable relief is sought. The Court put aside the question of whether SDG’s monitoring of its employee’s Facebook was unconscionable because it held that the act was not related to the preliminary injunction for three separate reasons:

  • First, the act of monitoring the employee’s Facebook account did not lead SDG to acquire the rights for trade secret misappropriation or breach of fiduciary duty. It simply offered evidence to support the claims. The Third Circuit compared this to a patent infringement case: “unlike a patent holder who obtains patent rights based upon a fraudulent patent application, SDG did not monitor Hernandez’s Facebook so it could obtain a right SDG did not otherwise have.”
  • Second, the Court found that SDG could prove its claim without relying on the Facebook messages. The Court emphasized that information from the messages could all be corroborated with other actions on the computer, like downloading files of intellectual property.
  • Third, the Court found that there could be other remedies for the employee for the alleged privacy violation. But, that remedy was not a bar to the preliminary injunction at issue here.

As the saying goes, two wrongs don’t make a right, but at least in this situation, one wrong doesn’t take away a right to enjoin another wrong.

On April 18, the U.S. District Court for the Northern District of New York unsealed an indictment accusing Zheng Xiaoqing, a former senior engineer for steam turbine design at GE, and Zhang Zhaoxi, a Chinese national, of conspiring to steal GE’s design data and models, engineering drawings, material specifications, configuration files, and other proprietary trade secret information related to GE’s turbine technology. The indictment provides yet another cautionary tale to companies trying to protect their trade secrets.

The indictment describes, among other things, the complexity of the theft, including the measures that GE took to protect its trade secrets, and the highly sophisticated measures that Zheng and Zhang employed to carry out the theft. For example, GE employed the following security mechanisms:

  • Maintained perimeter security and restricted access to company property.
  • Required visitors to register with security, wear badges, and be escorted by approved personnel.
  • Limited access to company computer systems, and monitored the same.
  • Limited authorization to access systems containing GE proprietary information.
  • Required employees to sign proprietary information agreements.
  • Advised employees that their inventions and innovations created while employed with GE were the property of GE.
  • Required employees to disclose inventions deriving from work at GE.
  • Informed employees of GE’s trade secret and proprietary information requirements through trainings, handbooks, oral warnings, and signs and banners posted in the workplace.
  • Prohibited the use of USB drives.

The indictment also alleges the sophisticated means that Zheng and Zhang employed to bypass GE’s security measures and to hide the theft. For example, from around June through October of 2017, Zheng allegedly:

  • Used a technique called steganography to hide GE’s trade secret information in a seemingly innocuous image of a sunset named “New Year.jpg” and sent that file to his personal Hotmail account.
  • Used steganography to hide encrypted GE design schematics in images of turbine blades.
  • Used his personal Hotmail email account to send encrypted files, using generic zip file names (e.g. “overview-zip.zip” and “test-zip.zip”) that included GE’s trade secret information regarding manufacturing methods, design schematics, and models.
  • Used encrypted text messages and audio messages to discuss the use of GE’s trade secrets with his co-defendant, Zhang.

Zheng was arrested on August 1, 2018, when he was interviewed by the FBI and admitted that he used steganography to take multiple GE files relating to turbine technology.

The current indictment includes 14 counts, including conspiracy, economic espionage, and trade secret theft, and seeks the forfeiture of property and money acquired through the alleged scheme.

Legislators at the state and federal levels have been focused on laws that, for the most part, restrict the use of non-compete agreements or modify existing trade secret provisions. Practitioners can track the progress of these proposals to stay aware of changes that may impact their clients in 2019.

Most of the recent bills being introduced focus on the legality of non-compete agreements. Of these, many of the proposals – including at the federal level – seek to restrict non-compete agreements among low wage workers. For example, bills in Hawaii prohibit non-compete agreements for those “whose earnings do not exceed the greater of the hourly rate equal to the minimum wage required by applicable federal or state law or $15 per hour.” In comparison, a bill introduced in Washington places a minimum earnings threshold on non-compete agreements – at $100,000 for employees and $250,000 for independent contractors. Other states have focused on the use of non-compete agreements in particular industries – ranging from physicians, to IT employees, as well as those in the oil and gas industry, and even broadcasters (the last of which became law in Utah last month).

While not nearly as popular as non-compete-focused legislation, a handful of states have also seen proposals related to trade secrets. A bill introduced in West Virginia, for example, would alter its version of the Uniform Trade Secrets Act, including by adding criminal penalties for trade secret theft.

A recent decision from the Eighth Circuit serves as a reminder that trade secret holders must not sleep on their rights when presented with information that would put a reasonable person on notice of potential misappropriation. See CMI Roadbuilding, Inc. v. Iowa Parts, Inc., No. 18-1075, 2019 WL 1474022 (8th Cir. Apr. 4, 2019). The Eighth Circuit affirmed the district court’s grant of summary judgment in favor of the defendant, confirming that the plaintiff’s claims under the Defend Trade Secrets Act (DTSA) and Iowa Uniform Trade Secrets Act (UTSA) were time barred, and rejecting the plaintiff’s tolling argument as a matter of law.

CMI and Iowa Parts competed in the sale of replacement parts for manufacturing asphalt and concrete plants, as well as landfill and dirt compaction equipment. CMI outsourced the sale of its replacement parts to certain vendors, and in doing so, provided these vendors with the necessary technical drawings, plans, and specifications. CMI alleged these engineering documents were its protected trade secrets.

In 2002, Iowa Parts entered the market for replacement parts, staffed with former CMI employees and former employees of various entities (including a company named Terex) that CMI had acquired over the years. To build the replacement parts, Iowa Parts approached various vendors that had received CMI’s engineering documents and asked these vendors to manufacture these parts for Iowa Parts, as well. Some of those vendors went so far as providing CMI’s engineering documents directly to Iowa Parts. Once in business, Iowa Parts sold competing products in the $50 to $250 range for many years; but, more recently, it began making competing products that sold for $300,000 to $400,000 – a change of direction that CMI claimed first put it on notice of trade secret misappropriation.

In 2016, CMI brought claims against Iowa Parts under the DTSA and UTSA, which both have three-year statute of limitations. Iowa Parts argued that the claims were time barred because CMI had notice of Iowa Parts’ alleged conduct well before 2013. In turn, CMI argued that under the discovery rule, the clock should not begin to run on the statute of limitations until 2016, when Iowa Parts first began selling these more expensive parts. According to CMI, Iowa Parts could have reverse engineered the smaller, cheaper parts – but the manufacture of the more expensive parts required Iowa Parts to use CMI’s trade secrets. CMI claimed that this discovery triggered the beginning of the limitations period.

The Eighth Circuit rejected CMI’s argument as contrary to the discovery rule, which is written into both the DTSA and UTSA. 18 U.S.C. § 1836(d); Iowa Code § 550.8. The discovery rule tolls the statute of limitations until a party has actual or inquiry notice of an injury, placing the onus on a plaintiff who has knowledge of certain facts to make an inquiry into those facts: “The ultimate focus is whether the plaintiff was aware a problem existed. Once a plaintiff is on inquiry notice, he is charged with knowledge that a reasonably diligent investigation would have disclosed, and has a duty to do such an investigation, regardless of the plaintiff’s exact knowledge.” CMI Roadbuilding, 2019 WL 1474022, at *3 (citations omitted).

Here, the Court held that certain facts put CMI on inquiry notice, thus triggering the statute of limitations as early as 2002. First, in 2002, an Iowa Parts employee received a letter from Terex (his former employer and an entity that CMI acquired) reminding him of his duty of loyalty to the company, warning him that it would be a crime to disclose its trade secrets, and stating that it knew he was trying to poach customers. Second, CMI’s employees testified that Iowa Parts was able to compete directly with CMI almost immediately after it was formed, and that Iowa Parts was able to provide customers with price quotes for replacement parts faster than CMI could provide this information about its own products. Finally, from 2002 until 2013, the parties advertised in the same magazines and attended the same trade shows, and as early as 2011, Iowa Parts’ website touted that its employees gained knowledge in this business while working for CMI or its predecessors.

After acknowledging that tolling can be an issue left to the fact finder, the Eighth Circuit nonetheless affirmed summary judgment in favor of Iowa Parts. The facts set forth above put CMI on notice that there was a problem, and thus placed the burden on CMI to make an inquiry into that problem. In other words, no reasonable jury could look at this record and conclude that a reasonably prudent person would have waited so long to discover Iowa Parts’ misappropriation.

By failing to follow through when it received information that could have led to the discovery of trade secret misappropriation, CMI was thus left with no recourse when Iowa Parts entered the big leagues of replacement parts and more money was at stake – even losing the chance to get in front of a jury that may have been more sympathetic to CMI’s story.