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.

On January 25, 2019, the Illinois Supreme Court in Rosenbach v. Six Flags Entertainment Corp. ruled unanimously that plaintiffs do not need to allege “some actual injury or adverse effect” in order to challenge alleged violations of Illinois’ Biometric Information Privacy Act (BIPA). In so doing, the Supreme Court expressly held that the loss of an individual’s right to control her “biometric privacy” is a “real and significant” injury on its own – whether or not that loss has any real-world effect.

What might the decision’s far-reaching implications for companies that collect and retain biometric data from their consumer or employees be?

Click here to read the full version of this alert, authored by Crowell & Moring Partner Jeff Poston, Counsel Josh Foust, and Associate Brandon Ge.

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.

A California federal court recently called into question the enforceability of employee non-solicitation clauses within the state.

In Barker v. Insight Global, LLC, et al., Case No. 5:16-cv-07186-BLF, the United States District Court for the Northern District of California reconsidered its position regarding the legality of an employee non-solicitation clause in plaintiff’s employment agreement, reversing its decision to dismiss a putative class action claim for failure to state a claim. Plaintiff Jonathan Barker, a former executive at Insight Global, brought this action alleging that the non-solicitation clause found in his contract violated California’s Unfair Competition Law. While Barker worked in the employee recruiting business, none of his job duties as a high-level manager/executive with Insight Global caused him to focus on or have responsibilities for the actual recruiting functions performed by other executives at Insight Global. After initially dismissing these claims in summer 2018, the Court reversed course, upon Barker’s motion to reconsider, finding that non-solicitation clauses are presumptively invalid under §16600 of the Cal. Bus. & Prof. Code, unless they fall within an exception to that section. Barker brought a motion for reconsideration after the California Court of Appeals issued the decision in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (Ct. App. 2018), published on November 1, 2018, holding that the plain meaning of §16600 applied to a non-solicitation clause found in defendant-corporation’s Confidentiality and Non-Disclosure Agreement (“CNDA”) and in turn that the non-solicitation agreement restrained former employees from engaging in their chosen profession in violation of §16600.

But context is sometimes very fundamental to understanding what effect a ruling may have on employers going forward. AMN Healthcare involved two companies who made their business recruiting temporary nursing workers. Several executives of AMN left to join AYA – AMN’s competitor – but were subject to a one-year restraint against directly or indirectly soliciting or inducing, or causing others to solicit or induce any employee of AMN to leave the service of AMN. AMN sued the departing executives who had joined AYA for breach of the non-solicit provision. On summary judgment on defendants’ cross-claim seeking to void the non-solicit agreement under §16600, the trial court agreed with defendants, granting summary judgement and issuing an injunction against further enforcement of the non-solicit provision. In so doing, the AMN court relied on the 2008 decision in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), which found unenforceable an agreement that purported to restrict a former accountant’s ability to serve clients, but which, arguably, did not address the viability of a non-solicit provision of an employee covenant. What is potentially troubling for employers operating in California is that the Barker court categorically rejected non-solicitation agreements: “the Court is convinced by the reasoning in AMN that California law is properly interpreted post-Edwards to invalidate employee non-solicitation provisions.” The Barker court further rejected the former employer’s argument that AMN should be limited to the particular context of that case – those involving employee recruiting companies – even though the employees at the center of the AMN dispute were recruiting specialists with a focus on healthcare professionals. Moreover, the Barker court so opined even though it provided little reasoning for its conclusion that all non-solicitation provisions of employee agreements are, in that Court’s view, void under §16600.

It remains to be seen whether other courts will choose to adopt Barker’s logic and signal further departure from the longstanding precedent of Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985), which determined the validity of non-solicitation clauses on the familiar reasonableness standard courts around the country have long used to evaluate such provisions.

Crowell & Moring has issued its seventh-annual “Litigation Forecast 2019: What Corporate Counsel Need to Know for the Coming Year.” This year, we take a deep dive into how technology is increasingly having a profound impact on the practice of law, and in particular on litigation case strategy.

The Forecast cover story, “Welcome to Your New War Room: How Technology Is Finding Its Way into Litigation Case Strategy,” explores how companies and law firms are leveraging technology to improve their legal operations and litigation strategy. From analytics, e-discovery, jury selection, and the promise of virtual reality mock trial experiences, litigation strategies now leverage bytes not books to better arm litigators to win the toughest, most complex courtroom battles.

Be sure to follow the conversation on social media with #LitigationForecast.

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.

In an indictment unsealed last week, the U.S. Department of Justice charged two companies – one based in China and the other in Taiwan – as well as three individuals, with trade secret theft, conspiracy to commit trade secret theft, economic espionage, and other related crimes. These charges are the latest in a recent string of similar prosecutions, as U.S. officials have sought to combat the threat of Chinese economic espionage against American technology companies, defense contractors, and other entities.

The indictment claims that defendants stole trade secrets from U.S.-based Micron Technologies, Inc., relating to the research and development of dynamic random-access memory (DRAM), a technology used to store data in electronic devices. DRAM had been identified by the Department of Commerce as an “essential component of U.S. military systems.” According to the indictment, the People’s Republic of China (PRC) has “publicly identified the development of DRAM technology as a national economic priority because PRC companies had not been able to develop technologically advanced DRAM production capabilities, and PRC electronics manufacturers relied on producers outside the PRC to supply DRAM.”

The indictment claims that United Microelectronics Corporation (UMC) (a semiconductor company headquartered in Taiwan) and Fujian Jinhua Integrated Circuit, Co., Ltd. (a PRC-funded company dedicated to the development and manufacture of DRAM) entered into a technology cooperation agreement to develop DRAM for a product described as “32nm and 32Snm DRAM.” The companies subsequently recruited three former Micron employees, including the former head and two former employees of Micron’s Taiwan subsidiary responsible for making DRAM, all of whom left Micron to work for UMC in 2015 and/or 2016. The indictment further claims that prior to leaving Micron, the former employees downloaded and took Micron information pertaining to at least eight different trade secrets, totaling nearly 1,000 files.

According to the indictment, the defendants used the numerous Micron trade secrets to “advance the development of UMC’s F32 DRAM technology,” including filing five patents and a patent application concerning DRAM technology that “contained information that was the same or very similar to technology described in Micron’s trade secrets.”

The indictment follows the recent addition of Jinhua to the Department of Commerce’s “Entity List,” which the Secretary of Commerce stated will limit Jinhua’s “ability to threaten the supply chain for essential components in our military systems.” Notably, the DOJ also filed a civil action seeking an injunction preventing UMC and Jinhua from exporting, selling, or importing to the U.S. any product containing DRAM manufactured by either Jinhua or UMC.

The indictment is the fourth case brought by the DOJ relating to Chinese economic espionage in the last three months. The three other cases are the following:

  • Charges against ten defendants working for the Jiangsu Ministry of State Security (JSSD), alleging conspiracy to steal information from U.S. and European defense contractors relating to aerospace technology (Oct. 30, 2018);
  • Charges against Ji Chaoqun, a Chicago resident, for allegedly assisting JSSD to recruit U.S. engineers and scientists, including U.S. defense contractors (Sept. 25, 2018); and
  • Charges against Xiaoqing Zheng, a GE engineer residing in New York, alleging theft of GE trade secrets relating to turbine technology (Aug. 1, 2018).

In noting that Chinese economic espionage against the U.S. is “increasing rapidly,” Attorney General Sessions has announced a new initiative dedicated to curtailing Chinese theft of U.S. trade secrets. A video of the DOJ’s announcement of the indictment is available here. The flurry of recent activity clearly demonstrates that the DOJ is continuing to increase its policing efforts.