In a recent decision, the Supreme Court of Vermont affirmed its commitment to protecting commercial secrets of private companies, even if they may have been disclosed to a public agency. Long v. City of Burlington, 199 A.3d 542 (Vt. 2018). The Burlington City Council was working with its consultant, ECONorthwest, and private property owners Devonwood Investors, LLC and BTC Mall Associates LLC (collectively BTC) to redevelop several downtown city blocks. The parties entered into a Predevelopment Agreement that required BTC to provide the City with market studies and feasibility analyses, but also acknowledged that this information, if disclosed to BTC’s competitors, could harm BTC’s business. Therefore, when BTC provided its studies to the City, it redacted any commercially competitive information. But because BTC and ECONorthwest had also entered into a nondisclosure agreement, BTC provided ECONorthwest with unredacted copies. Plaintiff filed suit alleging that the City violated the Vermont Public Records Act by failing to disclose the unredacted study its consultant had received. The trial court dismissed the case, holding that the study was not a public record, and even if the study was a public record, the redacted information was exempt from disclosure as a trade secret.

On appeal, the Court assumed without deciding that the unredacted study was a public record, and focused solely on the trade secret question. The Public Records Act exempts from disclosure “trade secrets” defined as “confidential business records or information, including any … plan, … production data, or compilation of information which is not patented, which a commercial concern makes efforts that are reasonable under the circumstances to keep secret, and which gives its user or owner an opportunity to obtain business advantage over competitors who do not know it or use it.” Vt. Stat. Ann. tit. 1, § 317(c)(9) (2018). Relying on an earlier Supreme Court of Vermont decision, the Court explained that the plain language of the exemption, specifically the inclusion of “compilation of information,” indicated that the Vermont Legislature did not intend to limit the definition of trade secrets to just information in the nature of intellectual property. See Springfield Terminal Railway Company v. Agency of Transportation, 816 A.2d 448 (Vt. 2002). Here, the private corporate information at issue would give its possessor a commercial advantage. Furthermore, BTC made a reasonable effort to keep such information secret by requiring ECONorthwest to sign a nondisclosure agreement. BTC’s information therefore met the definition of a trade secret and was exempt from disclosure.

Any other finding under the Public Records Act would have led to absurd results. The exemption “promotes not only the private company’s interest in protecting its commercial secrets, but also the government’s interest in its continuing ability to secure such data on a cooperative basis … to make intelligent, well-informed decisions.” 199 A.3d at 550. The Court’s decision should provide comfort to private companies that their commercial secrets are safe from disclosure when contracting with the government.

The Freedom of Information Act (FOIA) Exemption 4 provides that “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential” can be withheld when responding to a FOIA request. But what does this exemption mean? Many district courts and circuit courts have ruled on this issue but the rulings have been inconsistent regarding the standard to justify withholding information.

On January 11, 2019, the Supreme Court granted certiorari in the case of Food Marketing Institute v. Argus Leader Media, 889 F.3rd 914 (8th Cir. 2018), cert. granted, 2019 WL 166877 (Jan. 11, 2019). The question raised is whether FOIA Exemption 4 applied to individual Supplemental Nutrition Assistance Program (SNAP) retailer redemption data. Argus Leader Media, a South Dakota newspaper, had submitted a FOIA request to the USDA for annual SNAP redemption totals for stores that participate in the SNAP program. The USDA issues SNAP participants a card (like a debit card) to use to buy food from participating retailers. When a participant buys food using their SNAP redemption, the USDA receives a record of that transaction, which is called a SNAP redemption. The USDA refused to produce the SNAP data, citing several FOIA exemptions, which includes trade secrets and commercial information.

For the first time, the Supreme Court will address when the federal government may withhold information from a FOIA request based on the contention that responsive information is confidential or a trade secret. This decision will be critical for companies who submit sensitive information to the government.

Stay tuned.

On November 2, 2017, Foltz Welding LTD filed a motion for preliminary injunction against its former employee and operations manager in the United Stated District Court Southern District of Illinois. The company filed a nine-count complaint against its former employee and requested injunctive relief and damages. Foltz Welding claimed that the former employee may have trade secrets on his personal computers or iCloud storage that could be given to his new employer.

On February 12, 2018, the Court granted Foltz’s motion for preliminary injunction, ordering that the former employee allow a computer expert that Foltz chooses. Specifically, the Court noted that the expert would be allowed to go through the former employee’s personal home computer, his daughter’s laptop, his iCloud storage, any other electronic device and any other data storage and be permitted to remove any emails or files.

The Court noted that the files being searched for could include “Foltz’s trade secrets or other proprietary data consisting of bidding strategies, bid files, project estimation files, project pricing files, project cost information, project construction specifications and as-built construction information, pricing strategies, labor or equipment rate sheets, customer lists, profit margins and financial relationships with its suppliers and customers, sales strategies and competitive bidding.strategies.”

Fera Pharmaceuticals LLC, Akorn Inc., and Perrigo Co. PLC have settled a $100 million trade secrets case three weeks before trial was set to begin in the U.S. District Court for the Southern District of New York.  The case primarily involved trade secrets related to the production of erythromycin.  In its lawsuit filed in 2012, the plaintiff, Fera, alleged that defendant Akorn misappropriated trade secrets received from Fera under the guise of needing that information to fulfill a contract between the parties, in which Akorn was a supplier and manufacturer for Fera.  The complaint further alleged that Akorn used the trade secrets to begin its own production of erythromycin and that Akorn began selling the medicine in direct competition to Fera.  In its complaint, Fera sought compensatory damages in excess of $100 million, as well as punitive damages.

In 2015, Akorn filed counterclaims against Fera as well as Perrigo, alleging that those two entities had engaged in a conspiracy to keep Akorn out of the market for a separate Bacitracin ophthalmic ointment.  Had the parties not settled the matter, trial on all claims would have begun on February 20, 2018.

According to a letter submitted to the district court by legal counsel for Perrigo, the parties “reached an agreement in principle for a global resolution of all claims,” though the terms of the settlement were not disclosed.

On January 18, 2018, a former software developer for IBM Corp. was sentenced to five years in prison after he had pleaded guilty of theft of a trade secret and economic espionage.  As part of his work for IBM, Xu Jiaquiang had access to proprietary source code which facilitates faster computer performance by coordinating work among multiple servers.  Despite IBM’s precautions in place to protect the secrecy of the code, including a firewall and express authorization required for any employee to obtain access, Xu stole and used portions of the code as part of an attempt to sell the code to undercover FBI agents.

Xu pleaded guilty to the charges on May 19, 2017.  The Department of Justice’s press release from that same day provides further details regarding the circumstances of the FBI’s investigation and the allegations against Xu.  That press release is publicly available here.

Last week, government contractor Advanced Fluid Systems Inc. wrapped up its summary judgment briefing in a case loaded with trade secrets trends.  In June, Advanced sought summary judgment in the Middle District of Pennsylvania on its claims for misappropriation of trade secrets, and aiding and abetting breach of fiduciary duty.  Advanced had sued a former employee, the company that the employee then founded, and another rival firm – arguing that the defendants had teamed up to steal and exploit Advanced’s proprietary designs for hydraulic systems.  According to Advanced, the result was a $2 million subcontract for work at a NASA launch site, which went to the employee’s new company instead of Advanced.

At the heart of Advanced’s allegations is the charge that, while still working at Advanced, the former employee downloaded “virtually all files” from Advanced’s servers, including sensitive drawings regarding its hydraulic technology.  Advanced argued that, just days later, the employee’s start-up company began attaching its name to some of those drawings and ultimately submitted them as part of their bid on the subcontract.

Whatever the court’s determination on the briefs, the underlying fact pattern is an all too common one.  The case highlights the need to remain ever-vigilant with respect to those employees who have access to a company’s crown jewels, as well as the potential benefits of data loss prevention (or “DLP”) technology.

On July 5, 2016, the Ninth Circuit affirmed the conviction of David Nosal, an ex-employee of Korn/Ferry, an executive search firm, who left to start a competing firm. With Nosal’s knowledge and encouragement, two other former employees of Korn/Ferry used a current employee’s credentials to gain access to the Korn/Ferry database and take confidential information. U.S. v. Nosal, No. 14-10037, 2016 WL 3608752 at 6 (9th Cir. July 5, 2016).

The prosecutors charged Nosal with violating section 1030 (a)(4) of the Computer Fraud and Abuse Act (“CFAA”), which criminalizes “knowingly and with intent to defraud, access[ing] a protected computer without authorization, or exceed[ing]authorized access, and by means of such conduct further[ing] the intended fraud and obtain[ing] anything of value.”1 Having failed to state an offense that Nosal “exceeded authorized access” by violating the company’s internal use restrictions (decided in Nosal I), the government filed a superseding indictment alleging Nosal violated the “without authorization” prong of the CFAA after his login credentials were revoked through his co-conspirators’ use of his former executive assistant’s login information to access Korn/Ferry’s database.

The jury convicted Nosal on all counts. On appeal, the Ninth Circuit analyzed the meaning of the words “without authorization.” The Court held that the phrase was unambiguous and its plain meaning encompassed the situation in this case where the employer rescinded permission to access a computer and the defendant accessed the computer anyway.

Continue Reading United States v. Nosal: Keep Your Friends Close, but Your Passwords Even Closer

A federal civil cause of action for trade secrets misappropriation appears to be quickly becoming reality. Following the lead of the Senate, on Wednesday, April 20, the U.S. House Judiciary Committee approved the Defend Trade Secrets Act of 2015, S. 1890, without amendment. The bipartisan bill will now head to the full House of Representatives for a vote this Wednesday, April 27. The bill is widely expected to pass the House, as a prior House version, H.R. 3326, had more than 150 co-sponsors there. What’s more, the President has already signaled that he will sign the bill should it ever make its way to the Oval Office. We will follow up with any further developments.

Capitol Dome

On Monday April 4, after remarks from the bill’s sponsors Orrin Hatch (R) Utah and Christopher Coons (D) Delaware, the Senate voted 87-0 in favor of the Defend Trade Secrets Act of 2015, S. 1890. As we have previously reported, the Act will create a federal civil cause of action for trade secrets misappropriation, which includes an ex parte seizure provision. The next hurdle for the creation of a federal civil action for trade secrets misappropriation, which as Senator Hatch pointed out is the only intellectual property tort for which there is not a federal remedy, is the House of Representatives. If the House passes its version of the bill, H.R. 3326, President Obama is expected to sign the bill into law.

Companies sometimes discover warning signs or clear activity of trade secret theft but do not know how to deal with the issue right away.  Whether it is a current employee who remotely accesses company trade secret information while on vacation, or a departing employee who conveniently failed to return a company laptop, that company may be heading toward eventual trade secret litigation. But the immediate path forward seems unclear and presents so many options of what to do. Because the hours and days after discovery of a potential trade secret theft are extremely important, we suggest a simple set of best practices for responding to that potential trade secret theft: 1) understand the issue, 2) contain the issue, 3) exhaust the issue, and 4) consider bringing the issue to court.

Continue Reading Best Practices for Responding to Potential Trade Secret Theft