Protecting trade secrets in the digital age is a modern reality, with confidential information easily stored, sent, and received electronically. Nevertheless, the most significant security breaches often arise from human behavior.

Join us for a three part webinar series on how you can get ahead of the curve to safeguard your trade secrets.

Please join Crowell & Moring Counsel Julia Milewski and Raija Horstman on Tuesday, September 17th, 2019, from 12:00 to 01:00 pm (ET), for Part 1 – How to Work with Your Employees. During this webinar, our team will highlight best practices to identify and protect your trade secrets internally. We will also discuss how to use restrictive covenants or non-compete provisions in employee agreements as well as tips for drafting and enforcing Non-Disclosure Agreements (NDAs) internally. Please click here to register.

Also, please save the date for Parts 2 and 3 of this series. Click here to register for Part 2 – Reasonable Precautions to Protect Trade Secrets in The Digital Age, which will take place on Tuesday, October 8th, 2019. And click here to register for Part 3 – How To Work With Third-Parties, which will take place on Tuesday, November 12th, 2019.

After a week-long trial in June, a jury in the Southern District of Texas awarded digital marketing firm Six Dimensions, Inc. (Dimensions) $287,000 for its breach of contract claim against its former employee, Lynn Brading. However, the jury rejected Dimensions’ $50 million lawsuit against its competitor, Perficient Inc. (Perficient) for stealing its trade secrets. Continue Reading Employee Wrongdoing Does Not Guarantee Favorable Trade Secrets Verdict

The United States District Court for the Northern District of Illinois recently unsealed a December 13, 2017 indictment of Chinese national, Xudong “William” Yao, who was charged with nine counts of trade secret theft. The charges stem from Yao’s theft of more than 3,000 files between September 2014 and February 2015, including trade secret information such as source code and technical specifications, from an unnamed suburban Chicago locomotive manufacturer. The stolen documents generally pertain to the Illinois manufacturer’s train control systems. According to the indictment, Yao began downloading files just two weeks after beginning his employment with the Illinois company and continued to download files while simultaneously negotiating for and accepting a job with a Chinese “provider of automotive telematics service systems.” He began working for the Chinese company several months after being fired from the Illinois company for reasons unrelated to the theft of documents, and Yao’s employer did not discover the theft until sometime later. Continue Reading Criminal Prosecution of Chinese Trade Secret Misappropriation

On June 28, 2019, the Luxembourgish Mémorial published the Law of June 26, 2019 on the protection of undisclosed know-how and business information better known as trade secrets implementing the EU Trade Secrets Directive 2016/943 after a one year delay. The recent Luxembourgish Law is a literal transposition of the EU Directive and provides a legal definition of “trade secrets,” which was up until now only defined by the courts. The EU Directive defined “trade secret” as information that (i) is secret, i.e. not publicly known or readily accessible to persons normally dealing with this kind of information, (ii) has commercial value because it is and remains a secret, and (iii) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret. This definition thus includes any kind of sensitive business information that is kept secret by reasonable measures, such as market studies, business plans, pricing information, etc. Continue Reading Luxembourg Implements the Trade Secrets Directive

A recent International Trade Commission (ITC) case shows that, although rarely used, the ITC remains a viable option for parties pursuing trade secret misappropriation claims. Trade secret claims can be brought under Section 337(a)(1)(A)’s catch-all for other “unfair methods of competition and unfair acts in the importation of articles”—often called “non-statutory” claims—and can result in remedies that effectively bar the entry of the offending products into the U.S., or prevent their commercialization to the extent already imported.

On June 27th, 2019, about a month after a Complaint was filed by Illinois Tool Works Inc., the ITC instituted an investigation into a possible Section 337 violation based on trade secret misappropriation. Illinois Tool Works and its Guangzhou-based subsidiary, Vesta, alleged that Vesta employees left to form a new company called Rebenet, taking Vesta’s trade secrets with them. Vesta’s asserted trade secrets fall into two categories: (1) technical—relating to the materials, components, schematics, and tooling used to create Vesta’s foodservice equipment products; and (2) commercial—including Vesta’s customer list, supplier list, and commercial agreement terms. Vesta claims that its more than 20,000 products are “highly customized,” and that competitors could only achieve a similar level of customizability by relying on Vesta’s proprietary and long-developed methods of coding and tracking the various materials and parts. Under the ITC’s statutory charge to conduct investigations expeditiously, the evidentiary hearing will likely take place within about 9 months.

This new case demonstrates the ITC’s continuing broad jurisdiction. It appears from the Complaint that most, if not all, of the acts constituting the alleged trade secret misappropriation took place entirely overseas. Even so, the ITC may still find a Section 337 violation and issue the appropriate exclusionary remedies, as the Federal Circuit held in the landmark decision TianRui Grp. Co. v. Int’l Trade Comm’n, 661 F.3d 1322, 1332 (Fed. Cir. 2011).

Crowell & Moring Senior Counsel Byron Brown and Associate Robert Kornweiss contributed to the ABA Section of Intellectual Property Law, Trade Secrets and Interferences with Contracts Committee’s Annual Trade Secret Law Report 2018, which summarizes last year’s most notable trade secret cases.

To learn more about these trade secret cases and their significance, please click here to access the 2018 Report.

On June 27th, 2019, the Georgia Court of Appeals affirmed a denial of a motion to dismiss brought by a state university after finding it was not immune from trade secret claims brought under the Georgia Trade Secrets Act. Board of Regents of the University System of Georgia vs. One Sixty Over Ninety, LLC, A19A0006 A19A0007 (Ga. Ct. App.).

Plaintiff One Sixty, a creative services agency that provides “branding, strategy, design, public relations, and other services,” claimed that it submitted a variety of materials marked “Confidential & Proprietary” to University of Georgia (“UGA”) as part of a bid to work on a branding initiative for the university. Despite receiving confirmation from a UGA representative that plaintiff’s information would be kept confidential, UGA allegedly shared plaintiff’s confidential information with its direct competitor – Ologie, LLC, the creative services agency that was ultimately selected by UGA for the branding initiative – who used this information in later bids and proposals to win business from plaintiff as a result.

Plaintiff sued UGA for violations of the Georgia Trade Secrets Act. UGA moved to dismiss, arguing it was immune from these claims. The Court noted the Georgia Trade Secrets Act does not expressly waive sovereign immunity nor contain an implied waiver of sovereign immunity despite defining “person” in part as a “government [or] governmental subdivision or agency” because the Act did not “sufficiently identif[y] the state or any of its departments to waive the state’s sovereign immunity by implication.” However, the Court ultimately found that a claim could survive because a plaintiff can sue a state actor for a tort under the Tort Claims Act, which does contain an express waiver of sovereign immunity, and therefore violations of the Georgia Trade Secrets Act constitute a tort under Georgia law. Stay tuned for the potential impact of this decision on liability against state entities in cases involving trade secret claims.

What could be worse than a competitor misappropriating your trade secret? When a group of competitors conspire to misappropriate your trade secret! Especially in light of a recent decision from the Third Circuit, which held that agreeing to steal a trade secret is not automatically an antitrust violation, meaning it could be very expensive to litigate.

The antitrust laws prohibit certain types of agreements. Certain agreements are per se illegal, meaning if the defendants enter into that type of agreement, they are automatically guilty of violating the antitrust laws, regardless of any procompetitive benefits or justifications.

Agreeing to misappropriate a competitor’s trade secret might be an antitrust violation under the right circumstances. But as one company, Premier Comp Solutions, recently found out, it is not a per se violation in the Third Circuit. Premier Comp Solutions develops customized panel listings of healthcare providers to be utilized in workers’ compensation claims. Premier helps employers ensure that a healthcare provider panel is in compliance with the state workers’ compensation laws, is geographically useful to employees, and has the proper qualifications, licensing, and quality of care. Premier alleged that UPMC, one of its customers, misappropriated trade secrets including Premier’s panel listings and gave them to MCMC, one of Premier’s competitors. Premier filed suit (Premier Comp Solutions LLC v. UPMC, Case Number 2:15cv703) in the U.S. District Court for the Western District of Pennsylvania against UPMC and MCMC.

Premier tried to argue that UPMC and MCMC illegally agreed to misappropriate trade secrets from Premier, a per se antitrust violation. But a Philadelphia district court rejected this argument, holding that business torts do not create per se antitrust violations. The court did, however, seem to suggest that with the right proof, such torts could still be antitrust violations. But Premier didn’t have that here. The court granted summary judgment in favor of the defendants because Premier had not demonstrated that there were anticompetitive effects of the alleged trade secret misappropriation.

Bringing an antitrust case has multiple benefits, including automatic treble damages and attorney’s fees. But, as the Supreme Court has noted, antitrust cases can be exceptionally expensive to litigate. Per se cases are cheaper to litigate because they are easier to prove. As is apparent from this case, an agreement to steal trade secrets is not a per se violation. It is therefore important to carefully consider the evidence and potential litigation expenses before alleging an antitrust violation in a trade secrets case.

Criminal trade secret prosecutions have been on the rise nationwide. The Department of Justice (DOJ) and the FBI have been partnering with businesses to combat trade secret theft and to vindicate the rights of corporate victims of such crimes. Emerging industries are a natural arena for trade secret theft – as new technologies start to develop, no one wants to get left behind. Self-driving companies have become an automatic target for trade secret thefts. And the DOJ has started to beef up enforcement in the autonomous vehicle space.

Self-driving companies have been engaged in rapid development and innovation, have been met with fierce competition, and have a growing need to guard against theft of their developing technologies and intellectual property. These companies have also seen certain employees, engineers, and executives cross enemy lines and move over to competitors. When these moves have not been above board, the DOJ has acted swiftly to prosecute any apparent theft of trade secrets:

  • Guangzhi Cao, a former engineer at Tesla, who was later employed by a Tesla-competitor, Xiaopeng Motors, was accused of trade secrets theft and arrested by the FBI at San Jose International Airport in July 2018. Cao was accused of stealing source code from Tesla’s Autopilot technology.
  • Two former Apple employees have been charged with stealing self-driving car project secrets. One of the employees, Jizhong Chen, recently applied for a job at a China-based autonomous vehicle company that is a direct competitor of Apple’s project. The other former Apple employee, Xiaolang Zhang, was arrested by federal agents for allegedly stealing proprietary information related to Apple’s autonomous vehicle project and attempting to bring Apple’s trade secrets to China-based XMotors. Zhang was indicted by a grand jury, and faces a maximum sentence of 10 years in prison, and a fine of $250,000.
  • Judge William Alsup, after presiding over a civil suit in which Waymo claimed that its former employee, Anthony Levandowski, stole 14,000 documents about its self-driving car project (containing trade secrets) to give to Uber, referred the theft claims to the U.S. Attorney for a possible criminal investigation. The DOJ has confirmed that it opened a criminal investigation connected to these allegations. In fact, in a rare and unusual moment, the DOJ appeared in the civil case to inform Judge Alsup that there was additional evidence that Uber had not turned over in the case. The DOJ was aware of evidence from a former employee, who alleged that Uber had been secretly gathering intelligence on competitors. The civil suit ultimately settled for $245 million.

These examples confirm that the DOJ is very motivated to investigate, prosecute, and otherwise aid in the resolution of trade secret thefts, especially in the dawn of technological innovation and in the race towards car automation.

States within the Fourth Circuit vary in their enforcement of restrictive covenants. Virginia, Maryland, and South Carolina govern the use of restrictive covenants through common law while North Carolina governs through statute. Despite the variations in governing authority, many of the factors used in these states will be familiar, given the widely accepted “reasonableness” standard many jurisdictions have adopted as a metric for adjudicating the propriety of such agreements.

State
Law Governing Restrictive Covenants
Requirements for Enforcement of Restrictive Covenants
Virginia

Common Law – “Virginia, restrictive covenants, such as non-compete clauses and non-solicitation clauses, are enforceable if they are reasonable.” MicroStrategy Inc. v. Bus. Objects, S.A., 233 F. Supp. 2d 789, 794 (E.D. Va. 2002), aff’d in part, rev’d in part and remanded, 429 F.3d 1344 (Fed. Cir. 2005); Foti v. Cook, 220 Va. 800, 805, 263 S.E.2d 430, 433 (1980)

 

Employer bears the burden of proof in establishing its reasonableness of the non-compete agreement.

In determining whether an employer has carried that burden, Virginia courts focus on three factors:

(1) the duration of the restraint;

(2) the geographic scope of the restraint; and

(3) the scope and extent of the activity being restricted.

These three factors are considered together rather than separately and the clear overbreadth of any factor can defeat the enforceability of the provision, even if the other factors are narrowly drawn.

Upheld only when employees are prohibited from competing directly with the former employer.

Maryland

Common Law – Covenants not to compete may be applied and enforced generally “only against those employees who provide unique services, or to prevent the future misuse of trade secrets, routes or lists of clients, or solicitation of customers.”

Ecology Servs., Inc. v. Clym Envtl. Servs., LLC, 181 Md. App. 1, 14, 952 A.2d 999, 1006 (2008)

 

The court determines whether the restrictive covenant is reasonable in scope, both in terms of geography and duration, in the context of the employer’s business.

Next, the courts then consider the various factors in determining reasonableness:

(1) person sought to be enjoined is an unskilled worker whose services are not unique;

(2) whether the covenant is necessary to prevent the solicitation of customers or the use of trade secrets, assigned routes, or private customer lists;

(3) whether there is any exploitation of personal contacts between the employee and customer; and

(4) whether enforcement of the clause would impose an undue hardship on the employee or disregard the interests of the public.

The general rule in Maryland is that if a restrictive covenant in an employment contract is supported by adequate consideration and is ancillary to the employment contract, an employee’s agreement not to compete with his employer upon leaving the employment will be upheld ‘if the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interests of the public.

North Carolina

No contract or agreement hereafter made, limiting the rights of any person to do business anywhere in the State of North Carolina shall be enforceable unless such agreement is in writing duly signed by the party who agrees not to enter into any such business within such territory:

N.C. Gen. Stat. Ann. § 75-4

Restrictive covenants between an employer and employee are valid and enforceable if they are:

(1) in writing;

(2) made part of a contract of employment;

(3) based on valuable consideration;

(4) reasonable both as to time and territory; and

(5) not against public policy.

Restriction covenants are upheld when it is “directed at protecting a legitimate business interest” and areas where Plaintiff has connections or personal knowledge of customers.

Can enforce a restriction prohibiting a former employee from soliciting customers or clients.

South Carolina

“[A]greements not to compete, while looked upon with disfavor, critically examined, and construed against any employer, will be upheld as enforceable if such agreement is reasonable as to territorial extent of the restraint and the period for which the said restraint is to be imposed.” Team IA, Inc. v. Lucas, 395 S.C. 237, 245, 717 S.E.2d 103, 107 (Ct. App. 2011)

 

A covenant not to compete will be upheld only if it is:

(1) necessary for the protection of the legitimate interest of the employer;

(2) reasonably limited in its operation with respect to time and place;

(3) not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood;

(4) reasonable from the standpoint of sound public policy; and

(5) supported by valuable consideration.

Restrictive covenants are enforced when preventing disclosure or divulging of a trade secret. S.C. Code Ann. § 39-8-30.

When evaluating the restrictive covenants, courts look at whether the restriction is reasonable “in that it is no greater than necessary to protect the employer’s legitimate interests, and it is not unduly harsh in that it curtails the employee’s ability to earn a living.”

Subject matter is the only truly relevant factor and it must be balanced by “weighing the competing interest of employer and employee and giving full consideration to the public interest.”

“A geographic restriction is generally reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer’s customers.”