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.

Legislators at the state and federal levels have been focused on laws that, for the most part, restrict the use of non-compete agreements or modify existing trade secret provisions. Practitioners can track the progress of these proposals to stay aware of changes that may impact their clients in 2019.

Most of the recent bills being introduced focus on the legality of non-compete agreements. Of these, many of the proposals – including at the federal level – seek to restrict non-compete agreements among low wage workers. For example, bills in Hawaii prohibit non-compete agreements for those “whose earnings do not exceed the greater of the hourly rate equal to the minimum wage required by applicable federal or state law or $15 per hour.” In comparison, a bill introduced in Washington places a minimum earnings threshold on non-compete agreements – at $100,000 for employees and $250,000 for independent contractors. Other states have focused on the use of non-compete agreements in particular industries – ranging from physicians, to IT employees, as well as those in the oil and gas industry, and even broadcasters (the last of which became law in Utah last month).

While not nearly as popular as non-compete-focused legislation, a handful of states have also seen proposals related to trade secrets. A bill introduced in West Virginia, for example, would alter its version of the Uniform Trade Secrets Act, including by adding criminal penalties for trade secret theft.

A recent decision from the Eighth Circuit serves as a reminder that trade secret holders must not sleep on their rights when presented with information that would put a reasonable person on notice of potential misappropriation. See CMI Roadbuilding, Inc. v. Iowa Parts, Inc., No. 18-1075, 2019 WL 1474022 (8th Cir. Apr. 4, 2019). The Eighth Circuit affirmed the district court’s grant of summary judgment in favor of the defendant, confirming that the plaintiff’s claims under the Defend Trade Secrets Act (DTSA) and Iowa Uniform Trade Secrets Act (UTSA) were time barred, and rejecting the plaintiff’s tolling argument as a matter of law.

CMI and Iowa Parts competed in the sale of replacement parts for manufacturing asphalt and concrete plants, as well as landfill and dirt compaction equipment. CMI outsourced the sale of its replacement parts to certain vendors, and in doing so, provided these vendors with the necessary technical drawings, plans, and specifications. CMI alleged these engineering documents were its protected trade secrets.

In 2002, Iowa Parts entered the market for replacement parts, staffed with former CMI employees and former employees of various entities (including a company named Terex) that CMI had acquired over the years. To build the replacement parts, Iowa Parts approached various vendors that had received CMI’s engineering documents and asked these vendors to manufacture these parts for Iowa Parts, as well. Some of those vendors went so far as providing CMI’s engineering documents directly to Iowa Parts. Once in business, Iowa Parts sold competing products in the $50 to $250 range for many years; but, more recently, it began making competing products that sold for $300,000 to $400,000 – a change of direction that CMI claimed first put it on notice of trade secret misappropriation.

In 2016, CMI brought claims against Iowa Parts under the DTSA and UTSA, which both have three-year statute of limitations. Iowa Parts argued that the claims were time barred because CMI had notice of Iowa Parts’ alleged conduct well before 2013. In turn, CMI argued that under the discovery rule, the clock should not begin to run on the statute of limitations until 2016, when Iowa Parts first began selling these more expensive parts. According to CMI, Iowa Parts could have reverse engineered the smaller, cheaper parts – but the manufacture of the more expensive parts required Iowa Parts to use CMI’s trade secrets. CMI claimed that this discovery triggered the beginning of the limitations period.

The Eighth Circuit rejected CMI’s argument as contrary to the discovery rule, which is written into both the DTSA and UTSA. 18 U.S.C. § 1836(d); Iowa Code § 550.8. The discovery rule tolls the statute of limitations until a party has actual or inquiry notice of an injury, placing the onus on a plaintiff who has knowledge of certain facts to make an inquiry into those facts: “The ultimate focus is whether the plaintiff was aware a problem existed. Once a plaintiff is on inquiry notice, he is charged with knowledge that a reasonably diligent investigation would have disclosed, and has a duty to do such an investigation, regardless of the plaintiff’s exact knowledge.” CMI Roadbuilding, 2019 WL 1474022, at *3 (citations omitted).

Here, the Court held that certain facts put CMI on inquiry notice, thus triggering the statute of limitations as early as 2002. First, in 2002, an Iowa Parts employee received a letter from Terex (his former employer and an entity that CMI acquired) reminding him of his duty of loyalty to the company, warning him that it would be a crime to disclose its trade secrets, and stating that it knew he was trying to poach customers. Second, CMI’s employees testified that Iowa Parts was able to compete directly with CMI almost immediately after it was formed, and that Iowa Parts was able to provide customers with price quotes for replacement parts faster than CMI could provide this information about its own products. Finally, from 2002 until 2013, the parties advertised in the same magazines and attended the same trade shows, and as early as 2011, Iowa Parts’ website touted that its employees gained knowledge in this business while working for CMI or its predecessors.

After acknowledging that tolling can be an issue left to the fact finder, the Eighth Circuit nonetheless affirmed summary judgment in favor of Iowa Parts. The facts set forth above put CMI on notice that there was a problem, and thus placed the burden on CMI to make an inquiry into that problem. In other words, no reasonable jury could look at this record and conclude that a reasonably prudent person would have waited so long to discover Iowa Parts’ misappropriation.

By failing to follow through when it received information that could have led to the discovery of trade secret misappropriation, CMI was thus left with no recourse when Iowa Parts entered the big leagues of replacement parts and more money was at stake – even losing the chance to get in front of a jury that may have been more sympathetic to CMI’s story.

Autonomous vehicle technology, while still young, is already a major catalyst of trade secrets-related litigation. In 2018, Uber settled a lawsuit alleging theft of self-driving technology trade secrets from Waymo (Google’s self-driving car spinoff) for $245 million. With the future of the automotive market (and trillions of dollars) at stake, self-driving technology trade secrets are increasingly targets of theft.

2019 has already seen a string of trade secrets litigation related to self-driving technology. Tesla filed suit in March 2019 alleging a former employee stole source code related to Tesla’s self-driving technology—characterized in the complaint as “a crown jewel of Tesla’s intellectual property portfolio.” Defendant Guangzhi Cao, a member of Tesla’s elite team of autopilot engineers, quit his job on January 3rd after accepting a position with Xiaopeng Motors, a Chinese electric automaker, but not before uploading complete copies of Tesla’s autopilot-related source code to his personal iCloud account. Xiaopeng Motors is a destination employer for engineers formerly associated with self-driving research teams at American tech companies. Xiaopeng Motors employs at least five former Tesla employees. An engineer employed by a Tesla-competitor was accused of trade secrets theft and arrested by the FBI at San Jose International Airport in July 2018. The engineer had accepted employment with Xiaopeng Motors.

Most recently, in April 2019, autonomous vehicle company WeRide brought suit under the Defend Trade Secrets Act and California’s Uniform Trade Secrets Act against its former CEO, former Director of Hardware, and two associated companies. WeRide alleged former Director of Hardware Kun Huang copied company files onto a USB and shortly after his departure founded a competing autonomous vehicle company, also a named defendant. All of the parties were engaged with developing autonomous vehicles for the Chinese market. The U.S. District Court for the Northern District of California granted WeRide’s request for a preliminary injunction as to Huang and the two defendant companies.

An April 2019 investigation by NPR and Frontline found that the White House estimates such practices cost the U.S. economy more than $57 billion a year. As reported by Forbes, the Chinese Foreign Ministry stated that the “Chinese government has never participated in or supported any theft of trade secrets. We do not accept and are firmly opposed to such accusations.”

The referenced cases are Tesla, Inc. v. Cao, No. 3:19-cv-01463-VC, U.S. District Court for the Northern District of California; and, WeRide Corp. v. Kun Huang, et al., No. 5:18-cv-07233-EJD, U.S. District Court for the Northern District of California. Stay tuned for updates on self-driving technology related trade secrets litigation.

In the Third Circuit, common law generally governs the use of restrictive covenants. States in this Circuit employ a reasonability standard to determine whether a restrictive covenant is enforceable. In New Jersey, even if a covenant is found to be reasonable, it may be limited in its application by: geographical area, period of enforceability or its scope of activity. Pennsylvania also uses common law to determine if a restrictive covenant is enforceable but restrictive covenants are generally disfavored.

State
Law governing restrictive covenants
Restrictive covenants in employment agreements will be enforced:
Delaware

Common Law

 

See TP Group CI, Inc. v. Vetecnik, 2016 WL 5864030 (D.Del. Apr. 14, 2016).

 Delaware law recognizes employment restrictive covenants when such covenants:

  1. Adhere to general principles of contract;
  2. Are reasonable in scope and duration;
  3. Advance the legitimate economic interests of the party enforcing the covenant; and
  4. Survive balance of the equities.
New Jersey

Common Law

 

See Jiffy Lube Intern., v. Weiss Bros.,Inc., 834 F.Supp. 683 (D.N.J. 1993).

 A restrictive covenant will generally be found reasonable where it:

  1. Protects the legitimate interest of the employer;
  2. Imposes no undue hardship on the employee; and
  3. Is not injurious to the public.
Pennsylvania

Common Law

 

See Freedom Medical Inc. v. Whitman, 343 F.Supp.3d 509 (E.D.Pa. 2018).

 Restrictive covenants are permitted under Pennsylvania, if:

  1. They relate to a contract for employment;
  2. Are supported by adequate consideration; and
  3. The application of the covenant is reasonably limited in both time and territory.

States within the Seventh Circuit employ the reasonability standard used in many other circuits to determine whether a restrictive covenant is enforceable. Two of these states, Illinois and Indiana, apply a common law framework but largely disfavor such covenants as a restraint on trade. Wisconsin’s restrictive covenant statute focuses on the reasonableness of the agreement as well, but will void the entire agreement if even a portion of the agreement is “illegal, void and unenforceable” – even if the remaining portions of the agreement are otherwise enforceable.

State
Law governing restrictive covenants
Restrictive covenants in employment agreements will be enforced:
Illinois

Common Law

See Lawrence & Allen v. Cambridge Human Resource Group, 292 Ill. App. 3d 131 (1997).
  • A restrictive covenant will be enforced only if the terms of the agreement are reasonable and necessary to protect a legitimate business interest.
  • A restrictive covenant’s reasonableness is measured by its hardship to the employee; its effect upon the general public; and the reasonableness of the time, territory, and activity restrictions.
  • Before considering whether a restrictive covenant is reasonable, however, the court must make two determinations:
    1. whether the restrictive covenant is ancillary to a valid contract; and
    2. whether the restrictive covenant is supported by adequate consideration.
Indiana

Common Law

See Grand Union Tea Co. v. Walker, 208 Ind. 245 (1935); Zimmer, Inc. v. Howmedica Osteonics Corp., 2018 U.S. Dist. LEXIS 31294, (N.D. Ind. Feb. 27, 2018); Pathfinder Communications Corp. v. Macy, 795 N.E.2d 1103 (Ind. Ct. App. 2003); MacGill v. Reid, 850 N.E.2d 926 (Ind. Ct. App. 2006).
  • In Indiana, to be enforceable, the employer must prove that a restrictive covenant is reasonable with respect to the legitimate interests of the employer, restrictions on the employee, and the public interest.
  • The agreement must be reasonable in scope as to the time, activity, and geographic area restricted, such that it restricts an employee only so far as necessary to protect the employer’s legitimate interests.
Wisconsin Wis. Stat. § 103.465; see also Star Direct Inc. v. Dal Pra, 319 Wis. 2d 274 (2009).
  • Wis. Stat. § 103.465 provides that a covenant not to compete is lawful and enforceable “only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.”
  • Pre- and post-termination non-compete agreements are lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer.
  • Wisconsin courts have interpreted Wis. Stat. § 103.465 as requiring that the employer prove the following five prerequisites: a restrictive covenant
    1. is necessary for the protection of the employer, i.e., the employer must have a protectable interest justifying the restriction imposed on the activity of the employee;
    2. provides a reasonable time limit;
    3. provides a reasonable territorial limit;
    4. is not harsh or oppressive as to the employee; and
    5. is not contrary to public policy.

 

On March 22, 2019, the State of Utah amended its non-compete statute for the third time in only three years.

“Strike One” came in 2016, when the State of Utah enacted Utah Code Annotated 34-51-201 et seq.to restrict the validity of post-employment restrict covenants to no more than one year from the date on which an employee is no longer employed by the employer. (But it only applied to covenants entered into on or after May 10, 2016).

Two years later in 2018, “Strike Two” placed conditions on when and where the amended statute applies, in response to lobbying by the broadcasting industry. For example, employers could not limit competition if the employee leaves the employer before contract expiration and an employer could only enforce a non-compete if the employment contract did not exceed four years. Additionally, an employer could only enforce a non-compete if the employer terminated the employee for cause or the employee breached the employment contract that results in his or her separation from the employer.

But, just a year later, the state of Utah took another swing and removed the four-year limit, and replaced it with new language permitting the application of a non-compete in any written contract of “reasonable duration, based on industry standards, the position, the broadcasting employee’s experience, geography, and the parties’ unique circumstances.”

With these changes, employers in Utah must keep in mind the shifting laws on the applicability and enforcement of non-competes. Time will tell if Utah hit it out of the park with these new requirements.

Each of the states within the Eleventh Circuit governs the use of restrictive covenants through statutes. Generally, both Florida and Alabama permit the use of restrictive covenants where the restrictive covenant is “reasonably necessary” to protect a legitimate business interest, but the legitimate business interest requirement is applied differently in both jurisdictions. Alabama law prohibits any contract that prevents an individual from exercising a lawful profession, trade, or business of any kind, unless it falls within one of the 6 restrictive covenant exceptions specified in the statute. Florida, however, permits the enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, provided that such contracts are reasonable in time, area, and line of business. Georgia, which recently amended its statute, used to be one of the most difficult states in which to enforce restrictive covenants against employees. It now permits Georgia courts to partially enforce overbroad restrictive covenants.

State
Statutes Governing Restrictive Covenants
Requirements for Enforcement of Restrictive Covenants
Alabama AL ST § § 8-1-190 to 8-1-197
  • Agreement must be in writing, signed by all parties, and supported by adequate consideration.
  • The party resisting enforcement of the covenant has the burden of proving the existence of undue hardship, if raised as a defense.
  • Does not eliminate professional exemptions recognized by Alabama law.
  • Where restrictive covenant is “overly broad” or “unreasonable in its duration,” court may void the restraint in part and reform it to preserve the protectable interest.
  • If restrictive covenant does not come within the 6 restrictive covenant exceptions (including non-solicitation and non-competition agreements), court may void restraint “in its entirety.”
Florida FL ST § 542.335
  • Reasonable in time, area, and line of business.
  • Agreement must be in writing, signed by all parties.
  • Must be “reasonably necessary” to protect a “legitimate business interest” justifying restrictive covenant. Otherwise covenant is unlawful, void, and unenforceable.
  • Duration of more than 2-10 years, depending on whom the restrictive covenant is being enforced against, implies a rebuttable presumption of unreasonableness.
Georgia GA ST § § 13-8-50 to 13-8-59
  • Non-compete must have a geographical limitation. A customer non-solicit need not.
  • In some cases, courts can consider the economic hardship imposed on employee by enforcement of covenant in determining its reasonableness.
  • Duration of more than 2-5 years, depending on whom the restrictive covenant is being enforced against implies a rebuttable presumption of unreasonableness.
  • Court may “modify” an overbroad restrictive covenant provision. Court may strike out or remove language that renders covenant unenforceable, but it cannot rewrite or otherwise add language.
  • A non-compete provision may only be enforced against an employee who:
    1. customarily and regularly solicits customers or prospective customers;
    2. customarily and regularly engages in making sales;
    3. has a primary duty of managing a company, or one of its departments or subdivisions, directs the work of two or more employees and has the authority to hire or fire other employees; or
    4. performs the duties of a “key employee” or a “professional” as defined by the RCA.