As in most states, the enforceability of restrictive covenants or non-compete clauses in the Fifth Circuit turns primarily on the reasonableness of the restriction’s geographic and temporal scope. Louisiana and Texas have enacted statutes explaining when non-competes may be enforced. But in Mississippi, enforcement is determined entirely by common law, and courts will consider the public interest in addition to the interests of the parties involved.

State
Law governing restrictive covenants
Restrictive covenants in employment agreements may be enforced if:
Louisiana La. Stat. Ann. § 23:921.

1.       It prevents the employee from engaging in a competing or similar business.

2.       It is for a period of, at most, two years after the individual’s termination date.

3.       It specifies the geographic scope by identifying the covered parishes and municipalities.

4.       The geographic scope is limited to areas where the employer conducts business.

Texas Tex. Bus. & Com. Code Ann. §§ 15.50; 15.52.

1.       It is ancillary to or part of an otherwise enforceable agreement when the agreement is made.

2.       It is reasonable concerning time, geographical area, and scope of activity to be restrained.

3.       It imposes no greater restraint than necessary to protect the employer’s (or promisee’s) goodwill or other business interest.

Mississippi

Common law

Redd Pest Control Co. v. Heatherly, 157 So.2d 133 (Miss. 1963).

It is reasonable considering the following factors:

1.       The duration of the restraint.

2.       The geographic scope of the restraint.

More generally, courts will consider the rights of the employer, the rights of the employee, and the rights of the public when weighing these factors.

On Wednesday, May 15th, President Trump declared a national emergency via executive order over threats against American technology. The order authorized Department of Commerce Secretary Wilbur Ross, in consultation with various other agency heads to block transactions involving information or communications technology posing an “unacceptable risk to the national security of the United States.”

The Department of Commerce subsequently added Huawei Technologies Company Ltd. (“Huawei”) and 68 of its non-U.S. affiliates to the Bureau of Industry and Security (“BIS”) Entity List, which restricts U.S. companies from selling or transferring technology to Huawei without a BIS-issued license. The move effectively prevents Huawei from acquiring parts from its U.S. suppliers, and prevents certain telecommunications companies from using Huawei equipment for critical services. While many larger telecommunications companies have moved away from using Huawei technology, some smaller companies still depend on Huawei to provide service in rural areas.

BIS announced on May 20th, however, that it would be issuing a 90-day Temporary General License (“TGL”) to small rural telecommunication companies to make other arrangements to replace Huawei equipment. Specifically, the TGL authorizes activities necessary to the continued operations of existing networks and to support existing mobile services.

These actions taken against Huawei are part of a long series of confrontations between the Trump administration and Huawei. Earlier this year, the Department of Justice (“DOJ”) charged Huawei Device Co. Ltd. and Huawei Device USA Inc., two units of Huawei, with trade secrets conspiracy, wire fraud, and obstruction of justice. The two Huawei units pled not guilty and trial is set for March 2nd, 2020. The trade secret charges date back to 2014, when T-Mobile sued Huawei for stealing designs and parts of the company’s testing robot, “Tappy.” In that case, the jury found that Huawei had misappropriated Tappy, but declined to award the punitive damages that T-Mobile was seeking.

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.