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Legislation recently introduced in the United States Senate to protect low-wage workers could roll back the use of non-compete agreements, a common tool companies use to protect their trade secrets.

Florida Senator Marco Rubio introduced the “Freedom to Compete Act,” which aims to protect low-wage and entry-level employees from non-compete agreements, which generally restrict former employees from working at or starting competing businesses. Under this proposed legislation, employers would be prohibited from entering into, enforcing, or threatening to enforce non-compete agreements against workers considered “non-exempt” under the Fair Labor Standards Act (FLSA). Unlike certain executive and administrative employees, “non-exempt” workers must be paid at least the federal minimum wage and are entitled to overtime pay.

Proponents of this legislation argue that non-compete agreements unfairly restrict employment opportunities for low-wage and entry-level workers by limiting their economic mobility and their ability to negotiate for higher wages and training, which is compounded by the fact that many of these workers may already face limited employment opportunities in the current economy. In addition, proponents point out that these workers are less likely to have access to confidential information and trade secrets in the first place. Companies have long turned to non-compete agreements to ensure their trade secrets are protected, and studies indicate that about 18% of all U.S. workers are subject to non-compete agreements. If this legislation passes, companies may be forced to reevaluate what level of disclosure risk low-wage employees pose to their trade secrets and how best to protect those trade secrets without the benefit of routine non-compete agreements.

In Dunster Live, LLC v. LoneStar Logos Mgmt. Co., LLC, 17-50873, 2018 WL 5916486 (5th Cir. Nov. 13, 2018), the United States Court of Appeals for the Fifth Circuit recently dealt a blow to parties seeking to recover attorneys’ fees under the fee shifting provision of the Defend Trade Secrets Act (“DTSA”). In the underlying case, plaintiff sued defendants, a competitor company and its owner who was formerly a member of the same LLC, for winning state contracts to construct and install road signs formerly held by the LLC after purportedly stealing proprietary software in violation of the DTSA. Defendant spent over $600,000 in out-of-pocket litigation costs defending against this “baseless” lawsuit and ultimately plaintiff agreed to voluntarily dismiss the case without prejudice. Defendant moved for attorneys’ fees under § 1836(b)(3)(D) of the DTSA which states “[a court may] award reasonable attorney’s fees to the prevailing party” where “a claim of… misappropriation is made in bad faith.” The District Court refused to award fees, and the Fifth Circuit agreed, finding where a party is free to refile a case, there is no material change in the “legal relationship of the parties,” and therefore no prevailing party. Id. at *1 (citing Buchananon Bd. and Care Home, Inc. v. W.V. Dept.of Health and Human Res. 532 U.S. 598, 604 (2001)). The Fifth Circuit reasoned “[any] dismissal without prejudice thus does not make any party a prevailing one.” Id.

LoneStar provides a few lessons for other DTSA defendants, namely that securing a voluntary dismissal without prejudice may not be enough to warrant fee shifting and encouraging them to pursue other independent bases for protection beyond the DTSA including Fed. R. Civ. P. 41 which permits a court to refuse to grant a motion to dismiss that was made in bad faith and Fed. R. Civ. P. 11 which permits sanctions for violations of pleading standards which would apply regardless of whether the defendant “prevail[ed].” Id.

It remains to be seen how other circuits will interpret this DTSA provision.

Two New England craft beer companies are dealing with a hangover from a contentious trade secret dispute. Massachusetts-based franchisor Craft Beer Stellar, LLC recently filed a complaint in Massachusetts federal court against Maine-based franchisee Hoppy Days, LLC. Plaintiff brought breach of contract claims in addition to alleging violations of the Defend Trade Secrets Act, the Computer Fraud and Abuse Act, Massachusetts trade secret law under M.G.L. C. 93, §§ 42 & 42A, and the Massachusetts Consumer Protection Act under M.G.L. c. 93A §§ 2 and 11. The parties executed a franchise agreement in 2015 and defendant’s franchisee store opened its doors in early 2016. Plaintiff sent a notice of default for failure to comply with the franchise agreement to Defendants in October 2017. However, after sending the notice of default, according to Plaintiff, Defendants started posting Plaintiff’s trade secrets and confidential and proprietary information including secret formulas, patterns, and compilations of information used to operate its franchise on Glassdoor.com – a public job recruitment forum. Plaintiff seeks monetary and punitive damages as well as injunctive relief.

However, this is not the only trade secret litigation spawned by this franchisor-franchisee relationship. Plaintiff also brought suit – unsuccessfully – against Glassdoor for Defend Trade Secrets Act violations. The U.S. District Court for the District of Massachusetts dismissed Plaintiff’s Defend Trade Secrets Act claims after finding that Section 230 of the Communications Decency Act (“CDA”) protects website operators from lawsuits relating to a third party’s publication of defamatory content. See Craft Beer Stellar, LLC v. Glassdoor, Inc., 2018 WL 5505247 (D. Mass. Oct. 17, 2018) (finding “[a]lthough § 230(e)(2) of the CDA provides an exclusion for “intellectual property” laws, the Defend Trade Secrets Act expressly provides that it “shall not be construed to be a law pertaining to intellectual property for purposes of any other Act of Congress”) (citing Defend Trade Secrets Act, §2(g)).

One can only hope that hoppier days are ahead for future franchisors and franchisees facing trade secret disputes.

It is a long standing principle in trade secret law that “[a] trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation … [makes it] a protectable secret.” Imperial Chem. Indus. v. Nat’l Distillers & Chem. Corp., 342 F.2d 737, 742 (2d Cir. 1965).

In a recent decision, the United States Court of Appeals for the Fourth Circuit reaffirmed protection of combination trade secrets in a case brought by software company AirFacts Inc., a developer and licensor of software around ticket price algorithms and audits, against a former employee for breach of contract and trade secret misappropriation. The trade secrets at issue involved two flowcharts displaying ticket prices rules derived from information in the public domain. In a bench trial, the Maryland district court ruled that the flowcharts contained public information and were widely available to AirFacts’ employees, and thus, these documents were not trade secrets under the Maryland Uniform Trade Secret Act (“MUTSA”).  The Fourth Circuit disagreed, ruling that the flowcharts were protectable trade secrets and remanded the case back to the lower court to determine if the defendant misappropriated those documents. AirFacts Inc. v. Amezaga, No. 17-2092 (4th Cir. 2018).

The Fourth Circuit’s decision rested on three key points:

 

  • The evidence at trial demonstrated that the information was not readily ascertainable to outsiders because defendant compiled the information in particular groupings and applied his expertise to create the flowcharts.
  • The defendant’s painstaking, expert arrangement of the data made the flowcharts inherently valuable separate and apart from the publicly available contents.
  • Plaintiff took reasonable steps to protect the flowcharts’ “confidential status outside of the normal scope of their restricted use within AirFacts’ business” and granted only “a few” employees access to the flowcharts. This case is a valuable reminder that trade secret protections can extend to a combination of information that is itself in the public domain.

Last week, airplane manufacturer Bombardier filed a complaint against Mitsubishi Aircraft Corporation and former Bombardier employees in the Western District of Washington alleging violations of the federal Defend Trade Secrets Act and the Washington Uniform Trade Secrets Act, tortious interference, and breach of contract. Bombardier claims as trade secrets its designs, testing, and regulatory “certification approach” for obtaining approval from aviation safety agencies, as well as the underlying regulations themselves, which it claims are identified “only after an aircraft manufacturer meets in confidence with certifying authority representatives… to reach agreement on which specific subset of regulations must be satisfied.”

Bombardier alleges its employees were actively recruited to help the defendants obtain regulatory approval for a new line of regional jets, and that several engineers sent confidential Bombardier documents and regulatory certification reports to their personal email accounts in the weeks preceding their departure. Bombardier claims that this information provides invaluable guidance in meeting “innumerable exacting” regulatory standards.

The complaint seeks monetary and punitive damages, as well as injunctions preventing the defendants from using proprietary Bombardier information or recruiting Bombardier personnel.

Noncompete agreements are nothing new, in fact, 18% of all U.S. workers are subject to noncompetes while an estimated 70% of senior executives and 43% of engineers are bound by noncompetes. Employers frequently use noncompetes—which may restrict former employees from working for or starting competing businesses for a set period of time—to protect a company’s goodwill and trade secret information and as an effective tool for retaining talented employees from making a move to a competitor. Employees subject to these agreements may also be subject to a provision that provides for “garden leave,” which requires that an employee who is in the process of terminating their employment stay away from the workplace or work from home or another location during their notice period. In some cases, such “garden time” may not be paid. Recently, Massachusetts weighed in on the issue of “garden leave.” In first-of-its-kind legislation, Massachusetts signed into law House Bill No. 4714 stating that former employees in Massachusetts serving required “garden time” under noncompete agreements may be entitled to pay. Under this legislation, employers are required to pay former workers serving out their “garden leave” at least 50% of the workers’ base salary or, alternatively, provide “mutually-agreed upon consideration.” This reflects a compromise between opponents of noncompete agreements, who argue that they restrict economic growth, and the business community, which views noncompete agreements as necessary to protect legitimate business interests. In addition, this new legislation places Massachusetts squarely in the middle of a divide between states like California, which prohibits noncompete agreements except in certain limited contexts, and the many states that allow for their enforcement. However, as a practical matter, it remains to be seen how frequently former employees on “garden leave” will actually receive compensation since the bill does not define or restrict adequate consideration. Stay tuned…

On September 14, 2018, a former scientist at GlaxoSmithKline (“GSK”) pled guilty to conspiring to steal trade secrets from his former employer. Dr. Tao Li was accused of stealing confidential information about anti-cancer drugs from a GSK facility in Upper Merion, Pennsylvania after conspiring with other GSK employees who provided information to him via email, in person, and on a thumb drive. Dr. Li had established a rival company in Nanjing, China with financial backing from the Chinese government. The trade secrets allegedly stolen from GSK included detailed information about multiple products under development and information about manufacturing these products. This case is part of a larger trend, as federal authorities seek to crack down on the theft of trade secrets used to establish competitor companies in China. The United States Attorney for the Eastern District of Pennsylvania, William McSwain, commented “[n]ot only is this a serious crime, but it is literally a form of economic warfare against American interests. Such criminal behavior must be prosecuted to the fullest extent of the law.” Dr. Li will be sentenced on January 4, 2019 and faces up to 10 years in federal prison.

In May 2018, U.S. District Judge Katherine B. Forrest of the Southern District of New York granted PepsiCo, Inc.’s (“Pepsi”) summary judgment motion against ScentSational Technologies, LLC (“ScentSational”).

ScentSational, a company that develops methods of delivering scents in food and beverage packaging to alter a consumer’s taste perception, alleged that Pepsi learned its trade secrets in the course of their business relationship that it included in a patent application that caused Coca-Cola (“Coke”) to terminate a $70 million dollar project with ScentSational. Pepsi argued it was actively pursuing parallel in-house development at the same time it was in discussions to use ScentSational’s aroma release technology.

The court granted Pepsi’s summary judgment motion on trade secret misappropriation and breach of contract claims because there was no causation where ScentSational and Coke’s lone statement of work had already expired and chances of commercializing the project were “well below 50%” such that no reasonable juror could conclude that Pepsi’s patent application caused Coke to terminate its project with ScentSational, and no damages where ScentSational failed to put forward sufficient record evidence to support its $70 million dollars in alleged lost profit damages.

On August 1, 2018, Xiaoqing Zheng was arrested for alleged theft of trade secrets belonging to General Electric (“GE”). Mr. Zheng, a graduate of MIT and an engineer who worked in the Power division of GE, is accused of stealing dozens of encrypted computer files related to turbine operation. In order to get the files out of the building, Mr. Zheng allegedly hid the data in the code for a picture of an “innocuous looking” sunset, which he then emailed to his personal email address. However, GE had been monitoring Mr. Zheng’s computer activity after it learned that he had downloaded 19,000 other files to an external hard drive. According to a company statement, GE had been in “close cooperation with the FBI for some time on this matter.” The statement continued, “At GE, we aggressively protect and defend our intellectual property and have strict processes in place for identifying these issues and partnering with law enforcement.” The FBI complaint alleges that Mr. Zheng was using the trade secrets to benefit an aeronautical company he owns in China. This isn’t an isolated incident. Just last month, China-based Sinovel Wind Group paid a $57.5 million dollar settlement related to stolen data regarding wind turbine technology that it took from Massachusetts-based technology company American Superconductor Inc.

On March 15, 2018, HouseCanary, a data-analytics startup, was awarded $706 million in damages by a jury in Texas in its lawsuit against Title Source, an affiliate of Quicken Loans. The jury found Title Source misappropriated trade secrets including HouseCanary’s technology and appraisal analytics and breached both confidentiality and other agreements between the parties. While Title Source engineers were building the automated valuation model (“AVM”), HouseCanary alleged they helped themselves to other intellectual property, algorithms, analytics, and proprietary data without paying for it. In fact, an email from a Title Source employee encouraged colleagues to “think big and wide about how to maximize the value of the HouseCanary data to our business.” The jury found that a combination of lost profits and the benefit that Title Source obtained from the trade secrets misappropriation warranted $235 million in damages but tripled the damages due to a finding of deliberate conduct resulting in a final damages award to over $700 million. A big number indeed.