A Series of Unfortunate Trade Secrets

A Series of Unfortunate Trade Secrets

Prologue: Look Away

If you are interested in stories with happy endings, then you would be better off somewhere else. My name is Zach Wolfe, and it is my solemn duty to bring you the sordid tale of the Flaubert orphans, three children who inherited the old Real Cheap Windows factory when their parents died in a mysterious mansion fire.

As minors, the children had to rely on Mr. Edgar, the company’s lawyer, to guide them. “I have bad news for you,” Mr. Edgar said in his first meeting with the children. “Just before your parents perished, Real Cheap Windows hired Dawn Davis, the star salesperson for our most ruthless competitor, Paula Payne Windows.”

“Did Dawn have a non-compete?” young Rose Flaubert asked. “Oh, it’s worse than that,” Mr. Edgar replied as he coughed into his handkerchief. “Much, much worse.”

“You see, before leaving Paula Payne Windows, Dawn downloaded ­7,500 confidential company documents to a portable hard drive,” Mr. Edgar said. “Paula Payne has now sued us,” he explained, “claiming those files contained its most closely guarded trade secrets.”

“A trade secret,” he continued, “is information that derives independent economic value from not being known or . . .”

“We know what a trade secret is,” Karl Flaubert interrupted. “But I’ve spent hours reading an award-winning legal blog by a very handsome young lawyer,” Karl said, “and it says that companies often claim that things like ordinary lists of customers are trade secrets, even when that information is readily ascertainable.”

Karl continued. “If we think the trade secrets claim is contrived, can’t we just make Paula Payne Windows specifically identify what the alleged trade secrets are?” he asked. “Otherwise, we’re just flying blind.”

Here, “flying blind” is an expression that means engaging in some action with little or no knowledge of the facts of the situation, such that you are likely to crash or collide with a metaphorical obstacle because you lack knowledge of certain crucial information.

Karl was right. If you had to defend a trade secrets claim without knowing specifically what the alleged trade secrets are, you would be flying blind. But I am sorry to say the rest of this story is rife with misfortune and despair. You should probably stop reading now.

Chapter One: The Pleadings

That night, Rose and Karl read the pleadings. Paula Payne Windows had filed a Complaint in federal court claiming that Dawn Davis violated the federal Defend Trade Secrets Act by transferring the files to the portable hard drive.

But the Complaint was quite vague about what the alleged trade secrets were: “confidential company information, including without limitation customer lists, vendor information, prices, information about business plans, and methods of doing business.”

Here, “vague” is a word used to refer to allegations that are “fuzzy,” or not sufficiently definite. Vague should not be confused with “ambiguous,” which means a statement that can be reasonably interpreted to have two or more distinctly different meanings.

Karl also reviewed the Federal Rules of Civil Procedure, which provide that a defendant can file a “Motion for More Definite Statement” when the plaintiff’s pleading is “so vague or ambiguous that the party cannot reasonably prepare a response.” Fed. R. Civ. P. 12(e). “That’s it,” Rose said, “we’ll tell Mr. Edgar to file a motion for more definite statement.”

But Mr. Edgar laughed when the children came to him with the idea. “Flauberts, nobody really files a motion for more definite statement,” he said. “Now, children, if we were in state court we could file ‘special exceptions,’ which are kind of the same thing, and still popular with some older lawyers.”

“But even then,” Mr. Edgar said after another fit of coughing, “the judge would probably just say ‘serve some interrogatories instead—that’s what discovery is for.'”

Sweety Flaubert, the youngest of the children, responded with baby talk that was incomprehensible to Mr. Edgar. But her siblings understood: “Shouldn’t a litigant be required to state sufficiently specific allegations to give the opposing party fair notice, before the powerful engine of discovery is invoked?”

Interrogatories are written questions that can be served in the discovery process in civil litigation. The party receiving the interrogatories must serve signed answers within 30 days, but the responding party also has the right to make objections. I can assure you that the Flaubert children were about to discover just how frustrating the responding party’s interrogatory answers can be.

Chapter Two: Interrogatories

At the urging of the Flaubert children, Mr. Edgar sent an interrogatory to the lawyer for Paula Payne Windows, asking him to “identify each alleged trade secret with reasonable particularity.” After 30 days, Paula Payne Windows responded by objecting and saying: “Subject to the objections, see the 7,500 files Dawn Davis downloaded to a portable hard drive on or about September 1, 2017.”

“Those documents are 170,000 pages long,” Rose fumed. Tying her hair back, she banged out a “Motion to Compel” on an old typewriter she found. She then presented the Motion to Compel to Mr. Edgar.

“Flauberts, I’m sorry,” Mr. Edgar said, “but we can’t just haul off and file a Motion to Compel.” He explained that under Rule 26 of the Federal Rules of Civil Procedure, first he would have to “confer” with opposing counsel about the Motion. “So confer,” Karl said. “But it’s not that simple,” Mr. Edgar responded, “and I don’t like confrontation.”

Mr. Edgar went on to explain that there were also Local Rules and “Standing Orders” designed to discourage motions to compel. “The judge’s standing order says the lead lawyers must confer in person, [cough] so first we have to confer about the location of the conference.”

I know what you’re thinking. “Confer about where to confer? What a sorry state of affairs.” But I can assure you I have seen this very thing happen. Literally.

Sixty days later, Mr. Edgar filed the Motion to Compel, which the judge denied at a hearing five months later. “There must be something we can do to make them tell us what the trade secrets are,” Rose protested. “I mean, they’re the ones trying to get our fortune by claiming our company stole trade secrets.”

Chapter Three: Mandamus

“Well, there is one thing,” Mr. Edgar said, his voice trailing off. “But it will never work,” he said. “We could try filing a petition for writ of mandamus in the Court of Appeals.”

“Mandamus” is a Latin word that means “throw a Hail Mary.” The term “Hail Mary” refers to a prayer traditionally recited in the Roman Catholic church, or a football play where the quarterback throws the ball as hard as he can into the end zone in a last-second effort to win the game. The phrase now figuratively refers to any last-ditch strategy for victory that has a low chance of success.

“We understand the risk,” Karl said, “but we’re willing to try it.” Karl spent that night in the library researching case law on identification of trade secrets. “Rose, I think I’ve found something!” “It’s a Petition for Mandamus to the Texas Supreme Court in a similar case called In re Terra Energy Partners, LLC.”

The Terra Energy petition was a goldmine of helpful case law. Here, “goldmine” is used figuratively. A literal goldmine is an underground cavern where underpaid workers dig up a precious metal used in wedding bands. A figurative goldmine is a source of abundant helpful information.

“It turns out that many federal district courts across the nation have required plaintiffs to disclose the alleged trade secrets with specificity even before discovery starts,” Karl told Rose. He rattled off several examples cited in the Terra Energy Petition:

  • United Serv. Auto. Ass’n v. Mitek Sys., Inc., 289 F.R.D. 244, 248 (W.D. Tex. 2013)
  • StoneEagle Servs., Inc. v. Valentine, No. 12-1687, 2013 WL 9554563, at *5 (N.D. Tex. June 5, 2013)
  • Big Vision Private, Ltd. v. E.I. duPont de Nemours & Co., 1 F. Supp. 3d 224, 258-59 (S.D.N.Y. 2014)
  • Zenimax Media, Inc. v. Oculus Vr, Inc., No. 3:14-CV-1849-P (BF), 2015 WL 11120582, at *3 (N.D. Tex. Feb. 13, 2015)

“If we can just cite these cases, the judge will have to order Paula Payne Windows to identify the trade secrets,” Karl said.

If this were an ordinary children’s story with a happy ending, I would report to you that Karl provided these cases to Mr. Edgar, who triumphantly cited them to the judge and obtained an order requiring specific identification of the trade secrets. But this story has no happy ending. You may want to avert your eyes as the rest of the tale unfolds.

The Flaubert children soon learned that the Petition for Writ of Mandamus in the Terra Energy case was denied, not once, but twice. First by the Houston Court of Appeals, second by the Texas Supreme Court.

“You see, Flauberts,” Mr. Edgar explained, “the very reasoning of the cases you found shows why mandamus won’t work.” “These cases reason that the trial court judge has broad discretion to order the plaintiff to identify the alleged trade secrets,” he said. “But obtaining a writ of mandamus requires showing the judge abused her discretion. It’s not enough to say the judge made the wrong decision.”

Chapter Four: The Corporate Rep Deposition

Now Rose was really angry. “Can’t we turn this around on Paula Payne Windows?” she asked. “If they’re going to claim that there are 170,000 pages of trade secrets, haven’t they opened the door to extensive discovery on all of those pages?” “You’re right,” Karl said. “And while I was researching mandamus, I saw something about Federal Rule of Civil Procedure 30(b)(6).”

“Yes, we call that a ‘corporate rep’ deposition,” Mr. Edgar said. He reluctantly agreed to serve a Rule 30(b)(6) notice of deposition requiring a representative of Paula Payne Windows to testify regarding all 170,000 pages of documents containing the alleged trade secrets.

A “corporate rep” deposition is a common discovery procedure used when one of the parties is a business such as a corporation or LLC. The party taking the deposition identifies the topics, and the responding company must prepare a representative to testify,. The procedure is designed to prevent a company from hiding the ball about relevant information and who knows it. Here, “hiding the ball” is an expression that means . . . well, you get the idea.

Paula Payne Windows designated Mr. Sir as its representative. Through my investigation I have obtained this portion of the deposition transcript:

Screen Shot 2018-04-15 at 9.40.49 PM

“A lot of good that deposition did us for $37,000 in legal fees,” Rose said later. “I guess we’ll never find out what the trade secrets are. We’re doomed to be surprised at trial.”

Chapter Five: Motion for Summary Judgment

Sweety Flaubert then gurgled something Mr. Edgar could not understand, but Rose and Karl could: “Just force the issue by filing a motion for summary judgment on the ground that there is no evidence that the information is a trade secret.”

A motion for summary judgment asks the judge to rule on an issue as a matter of law. In this context, it would say that the trade secrets claim should be dismissed because there is no evidence that the information is actually a trade secret, and therefore no factual dispute for the jury to decide. In Texas state court procedure, the technical term for this kind of motion is a “no evidence” motion.

The Flaubert children asked Mr. Edgar about filing a motion for summary judgment to force the issue. “In theory, that could work,” he said. “Sometimes a no evidence motion for summary judgment is useful to force the opposing party to put his cards on the table.”

“Put his cards on the table” is an expression that . . . Ok, I know. You’re getting sick of this.

“The problem with that kind of motion,” Mr. Edgar continued, “is that you’re not supposed to file it until the plaintiff has had an adequate time for discovery.” “If we file it now, Paula Payne Windows will just say it needs more time for discovery.”

The Flauberts were crestfallen. “Litigation really is a conundrum of esoterica,” Karl said.

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He really doesn’t watch that much TV.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

Guest Post by Business Development Expert Maria Granovsky

Guest Post by Business Development Expert Maria Granovsky

This week we’re thrilled to have a guest post from Maria Granovsky, who works with lawyers to help them generate business. She provides some great insight on not missing the “gold bricks” that are sometimes right at our feet. – Five Minute Law

Are you stumbling on gold bricks in your search for copper deposits?

“No one is litigating!” My friend, Emma, declared during a recent coffee chat I had with her. “I’m so sick of marketing, and networking, and keeping in touch, and being top-of-mind.  All people want is compliance training.”

“Are you going to offer them compliance training?” I asked.

Emma harrumphed in irritation. “Maria. I. Am. A. Li-ti-ga-tor,” she enunciated each syllable.

“I know you’re a litigator,” I responded, fighting the urge to mimic her. “But I also know that, for most of your potential clients, litigation is a rare event. Which means that, if you’re going to stay wedded to being a pure litigator, you do have to keep marketing and doing all these other things you don’t much like in order to catch them at the precise moment when your services will be needed.”

I could see I had her attention now, so I continued. “Your potential clients are offering you an alternative – a way to get paid and become a trusted advisor at the same time. If you offer compliance training, you’ll showcase your expertise in this area, and you’ll be able to sprinkle your training with references to your litigation successes, all while getting paid! And it’s almost always easier to expand your service offerings for an existing client than acquiring a new client.”

Emma said nothing for a while. She squinted in concentration, and I could imagine the cogs whirring in her brain as she considered this new angle.

“You’re right!” she said at last. “This could be a very lucrative opportunity, and I’ve been throwing it away for months now.”

***

Emma is a good example of a blindness we all experience from time to time. It’s not a visual blindness, but rather it’s our inability to perceive new ideas or opportunities because they don’t fit with what we’re concentrating on at that moment.

If we’re prone to this perception deficit, we can miss what our market is telling us, to our business’s detriment.

An easy way to overcome this perception deficit is to practice asking open-ended questions and listening to the answers. For example, if you know that new regulations will soon be imposed on the industry you serve, ask industry people what challenges they think they’ll be facing in implementing these new regs.

As an experienced professional, you probably already know some of the challenges that industry will be facing, but the people in the trenches may have a very different view of that pain that’s coming their way – a view that may afford you an opportunity to provide a service you didn’t know was needed.

There’s an added bonus to this strategy: by asking and being genuinely interested, you’ll leave your conversation partners knowing that they were heard and understood. And in today’s shouty world, where many of us feel like no one is listening, that’s a surefire way to make a lasting impression and keep yourself top-of-mind.

********

Maria Granovsky, Ph.D., J.D., helps lawyers generate new business and get more clients with innovative business development strategies and high-impact copywriting.

In her work, she relies on her background as a scientist, a lawyer, a writing teacher, and an author. She has a Ph.D. in medical and molecular genetics from the University of Toronto and a law degree from Georgetown. While at Georgetown, she taught legal research and writing to J.D. and foreign L.L.M. students. A decade-long patent-litigation practice followed.

Maria has written scientific papers and book chapters, law review articles, and general interest articles (which appeared in HuffPo, Ladders, and Fast Company). She has written the copy for the websites of several law firms, and has advised many lawyers on content development. And she wrote and published a legal thriller.

Download her free guide, titled The One Thing That Will Transform Your Legal News Alerts Into New-Business Magnets here.

All the Legal News You Need

All the Legal News You Need

Wish you had more time to read the latest in the legal press? I have the solution. Read these five stories now, and they will cover 90% of the legal industry news that will come out the rest of the year.

What can I say, except “you’re welcome.”

1. Lateral Partner Moves

BigLaw Partner Frank Whitebread Leaves Smith, Jones & Davis to Join Jones & Smith

WorldLaw 100 firm Jones & Smith announced this week that Frank Whitebread is joining the firm as a shareholder. Whitebread, a well-known transactional lawyer who does M&A deals in the energy industry, was formerly the head of the Corporate section at the AmLaw 500 firm Smith, Jones & Davis.

Whitebread expressed enthusiasm for the new opportunity. “This move to Jones & Smith will give my team the platform to provide even better service to our multinational corporate clients everywhere they do business.” He noted that Jones & Smith has offices in 35 cities throughout the world. “Plus,” he said, “I’m going to make a shitload of money.”

Whitebread got the idea for the move after meeting Bruce Whiteshoe, the head of Jones & Smith’s local office, at their sons’ lacrosse game. That led to spending a week with their families together at Whiteshoe’s ski lodge in Vail, where Whitebread says he was impressed by Jones & Smith’s commitment to pro bono causes and diversity.

Two junior partners and three associates who work with Whitebread will make the move with him. One of those associates, Elizabeth Hailey, expressed excitement about the change. “Jones & Smith is known for matching Cravath’s associate bonus scale,” she said, “and their new quality of life initiative reduces their billables requirement to 2300 hours.”

Fred Rogers, managing partner at Whitebread’s current firm, Smith, Jones & Davis, says the parting will be amicable. “Honestly, I don’t know why Frank was hanging around here so long,” he said. “This place sucks.”

2. Law Firm Mergers

Jones & Smith Announces Merger with Smith, Jones & Davis

The international law firm Jones & Smith announced this week that it will merge with Smith, Jones & Davis, currently the third largest Texas-based firm.

The new firm will be known as Jones Smith | Smith Jones. Attempts to brand the new global juggernaut as “Smith Jones Squared” failed when the Business Development director couldn’t get Microsoft Word to make that “squared” symbol that looks like a little 2.

Jones & Smith’s worldwide managing partner Nigel Kennsington-St. James praised the deal. “Joining forces with our American friends at Smith, Jones will create a synergy that will serve our international clients well,” he said. “I mean, I’m talking a lot of synergy, it’s going to be really synergistic, you’ve never seen so much synergy.”

Some of the partners at Smith, Jones & Davis will not be making the move. Jim Bob Bowie, head of the firm’s venerable Insurance Defense section, said the higher rates and overhead at the London-based Jones & Smith did not make sense for his group. Instead, he said they will spin off to form a small firm that will office “behind that dental practice by the IHOP near my house.”

The merger comes just six months after rainmaker Frank Whitebread jumped ship at Smith, Jones & Davis to move to Jones & Smith. Asked for his comment on the new mega-firm, Whitebread said “I’m looking forward to rejoining some old colleagues, like . . . oh, who was that balding guy on 47 who does estate planning . . . well actually, never mind.”

3. Appellate Rulings

Court of Appeals Reverses Questionable Jury Verdict Against Big Company

Today the Court of Appeals of a big city ruled in favor of a large corporation, reversing a small-town jury’s verdict awarding many millions of dollars in damages to the blue-collar family of a man who was killed in a really horrible industrial accident. The court based its ruling on a technical legal issue.

In a 2-1 decision, two justices from one political party voted to reverse the judgment, while the dissenting justice from the other political party voted to affirm it. The majority’s painstaking opinion cited at least eleven prior court cases, sometimes even citing to specific page numbers.

The dissent was scathing. “Today the majority picks one of two reasonable interpretations of the case law to reach the result the majority considers fair,” the dissenting justice wrote. “I dissent,” he concluded, pointedly leaving out “respectfully.”

The corporation’s lead lawyer was pleased with the decision. “We’re very pleased with the decision,” she said.

The plaintiff’s lawyer was not so happy. “We worked hard to get the jury to ignore the lack of evidence of causation, and to focus on sympathy for the victims,” he said. “We’re not giving up now.” He vowed to make campaign contributions to the Tea Party-backed candidates challenging the two majority justices in their upcoming primaries.

A professor at a local law school who followed the case said the result was not unexpected. “This continues a trend of the Court of Appeals reversing judgments that it finds are not supported by the evidence,” she said. “I expect we will see more cases like this,” she added. “More and more big companies are hiring expensive lawyers to try to overturn judgments that order them to pay large amounts of money.”

4. End of the Billable Hour

Speaker Touts Alternative Billing Arrangements at Legal Conference

While traditional lawyers took family vacations or worked quietly at their offices during Spring Break, the legal industry’s boldest and brightest flocked to Austin for the 7th annual Legal Disrupterz Conference, held in conjunction with SXSW. And RazorWire’s correspondent was there to witness the sparks flying.

Keynote speaker Dallas Houston kicked off the conference at the W Hotel with his provocative presentation “Shattering the Billable Hour Paradigm.” He advocated alternative billing arrangements such as “value-based billing.” And for the fourth year in a row, Houston predicted that billing by the hour would be obsolete by the time of next year’s conference.

RazorWire caught up with Houston as he got into his Tesla in the hip 2nd Street District. “I’m so turnt to be here again during South By,” he said. “Did you notice I called it South By, not South By Southwest?” he added. “That’s how you can tell I’ve been here a lot.”

Still, Houston said, his dad told him Austin just hasn’t been the same since the Armadillo closed.

Organizers said they were pleased to have the conference sponsored by e-™. That’s not a typo. The name of the company is “e-”.

VP of Business Development Austin Travis explained that “e- delivers cutting-edge deliverables for its stakeholders in the digital space.” Asked to explain what that means, Travis said “we host cloud-based solutions for law firms looking for best practices.” “So you’re an e-discovery vendor?” the reporter pressed. “Ok, yeah, we’re an e-discovery vendor,” Travis replied sheepishly.

He added that e- still bills by the hour.

5. Bar Association Charitable Events

Local Bar Association Raises Money for the Poor at Exclusive Country Club

Heard that joke about the greedy lawyer? Well raising money for a good cause is no joke for the Springfield Bar Association. Last month, the SBA’s Community Affairs, Youth, Mental Health, Elderly Support, and Antitrust Litigation Committee (CAYMHESALC) held its annual “Bakin’ and Eggs” breakfast and baked goods silent auction to raise money for a great cause: the Springfield Heights Association for Disadvantaged Youth.

The event was held at the prestigious Shady Oaks Country Club. Known for its progressive stance on social issues, the club sparked controversy when it opened its membership to women and minorities in 2009.

“We thought it was important to partner with a venue that shares our commitment to helping the disadvantaged,” committee co-chair Buffy Van Pelt said. “Also, they make the strongest mimosas you’ve ever had, so that’s a plus.”

At the breakfast, Van Pelt and the committee’s nine other co-chairs received the President’s Chalice for excellence in bar leadership. They welcomed County commissioner Rick Gordon as the featured speaker. “We had to do some negotiating with Commissioner Gordon’s office,” Van Pelt said, “but once we agreed that his name and photo would appear on the front and back cover of the program, he was behind us 100%.”

And the best part: it was all for a good cause. Sponsors chose from three different levels: Baconator ($100), Ham Hock ($500), and Whole Hog ($1,000). With so many local firms sponsoring tables, Van Pelt said the event brought in over $65,000. “After paying for valet parking, the rental fee, and $37 per plate for breakfast,” she added, “we netted $478, and 100% of that goes to charity!”

Keeping with tradition, the committee invited three disadvantaged youth from J. Danforth Quayle Middle School to attend the breakfast. “This place is sick,” 8th grader Bobby Garza said approvingly. “I mean, I can’t afford to play golf, and the guard wouldn’t let my mom through the gate in her beat-up Corolla, but once I got in, it was cool.” His favorite part? “Those mimosas!”

___________________________________________________________________

IMG_4571 Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

Any opinions expressed are his own, not the opinions of his firm or clients. This is a work of fiction. Any resemblance to any actual person, living or dead, is purely coincidental.

 

The Matrix: Making Sense of the Patchwork of Employee Confidentiality Duties

The Matrix: Making Sense of the Patchwork of Employee Confidentiality Duties

What if I told you that to understand an employee’s confidentiality duties, you need to understand there are three kinds of confidential information covered by at least four different areas of law?

You see, employers have three kinds of confidential information:

  1. Trade secrets
  2. Confidential information that is not a trade secret
  3. “Confidential” information that is not actually confidential

A trade secret is confidential information that has “independent economic value” and is “not readily ascertainable” by competitors. Secret technology, secret business plans, the literal secret sauce—these are obvious trade secrets. Less obvious things like customer lists and company prices can be trade secrets if they have independent economic value and are not readily ascertainable. In other words, you can tell that information is a trade secret if obtaining the information gives a company a competitive advantage.[1]

A typical employer is going to have a lot of confidential information that is not a trade secret. For example, a social security number or other personal identifying information of an employee is highly confidential. Same for an employee’s personal healthcare history. But information like that is typically not going to give the company any competitive advantage.

Of course, employees learn all kinds of information about the company that is not confidential at all. People outside the company may not know how to get to the company cafeteria, but that information isn’t really confidential. (Think Tom Cruise pointing out that the location of the mess hall is not in the Marine manual in A Few Good Men.)

So why do I include non-confidential information in the list of types of confidential information? Because many companies define virtually all company information as “confidential” in their employment agreements or employee policies. I’ve seen a lot of employment agreements like this, and you’ve probably seen the same thing.

So what does the law say about an employee using these three types of confidential information after leaving the company? There are four key areas of law that govern an employee’s duties concerning confidential information.[2]

Four areas of law. Three types of information. I feel a matrix coming.

And here it is. This chart shows which areas of law cover which types of information:

Screen Shot 2018-03-25 at 9.11.57 PM

Don’t worry, I’ll explain.

Trade Secrets Law

Most states, like Texas where I practice, have some version of the Uniform Trade Secrets Act, affectionately known as UTSA. Then there is a federal statutory overlay called the Defend Trade Secrets Act (DTSA). These statutes provide civil remedies for “misappropriation” of trade secrets, including injunctions, actual damages, and, in some cases, punitive damages and attorneys’ fees. See Trade Secrets 101.

But the trade secrets statutes do not apply to misappropriation of confidential information that is not a trade secret. And whether the information at issue is actually a trade secret is often a major point of contention. So employers don’t want to limit themselves to protecting trade secrets.

Confidentiality Agreements

Enter the confidentiality agreement. Almost every employment agreement is going to have some kind of confidentiality clause. And while the definitions of confidential information vary, the tendency is to define confidential information very broadly. As a result, most confidentiality agreements are not limited to trade secrets.

Heck, most confidentiality agreements are not even limited to confidential information. And thus the question mark in the “Non-Confidential Information” column above. Is it really a breach if the employee uses or discloses information that is not actually confidential?

To make this less abstract, let’s say while working for Paula Payne Windows, Dawn Davis learns the name and phone number of the right person to contact at a window manufacturer to check prices and place orders. Dawn quits and goes to work for Real Cheap Windows. Does she violate her agreement if she uses her knowledge to place a call to the guy she knows at the window manufacturer?

This may be a technical breach, but it is unlikely to give Paula Payne a solid claim for damages, for at least two reasons.

First, it would be hard for Paula Payne to prove that the breach caused damages, especially if Dawn Davis could have found the same person simply by calling up the manufacturer and asking who to talk to. (It would become more complicated if the agreement also has a liquidated damages clause, which to the delight of Contracts professors has been in the news lately.)

Second, defining confidential information to include virtually everything is arguably an illegal restraint of trade or commerce. It is a restraint of trade because, if applied literally, it would effectively prevent an employee from doing anything in the same industry after leaving the company.

So, disclosure of non-confidential information probably isn’t an actionable breach of a confidentiality agreement. But it’s still a question mark.

Fiduciary Duty Lite

Fiduciary Duty Lite is the term I use for the limited kind of “fiduciary” duty that employees owe employers. An employee’s Fiduciary Duty Lite includes a duty not to use the employer’s confidential information or trade secrets in competition with the employer.

So why no check mark for Fiduciary Duty Lite under the Trade Secrets column? In a word: preemption. The Texas Uniform Trade Secrets Act expressly states that it displaces any conflicting law providing civil remedies for misappropriation of a trade secret.[3] Texas courts have interpreted this to mean that TUTSA preempts a breach of fiduciary duty claim that is based on alleged misappropriation of a trade secret.[4] Thus, no check mark.

But what about a breach of fiduciary duty claim that is based on an employee’s use of confidential information that is not a trade secret? Does the trade secrets statute displace that claim?

Courts are split on this question. The “majority” rule seems to be that the trade secrets statute preempts this type of claim, even though the claim does not require proof of a trade secret.[5]

This rule should bother advocates of textualism. The plain language of the trade secrets statute says it displaces “conflicting” law providing civil remedies for misappropriation of a trade secret. A claim for breach of Fiduciary Duty Lite that is based on information that is not a trade secret does not conflict with the statute.

But I get it. The rationale is that allowing an employer to characterize what is really a trade secrets claim as a claim for breach of fiduciary duty would conflict with the preemptive purpose of the trade secrets statute.

Anti-Hacking Statutes

The relevant statutes are not limited to trade secrets. Consider also the federal anti-hacking statute, the Computer Fraud and Abuse Act (CFAA).[6] The Texas version is the Breach of Computer Security and Harmful Access by Computer Act (BCS).[7]

College football fans know that BCS also stands for Bowl Championship Series, but that is probably just a coincidence.

I would summarize these statutes, but I really can’t improve on the article here by Texas lawyer and cybersecurity expert Shawn Tuma. Bottom line: these statutes prohibit “unauthorized access” to computers and provide civil remedies for knowing and intentional violations.

I will use the BCS as an example. If a company hacks into a competitor’s server and steals confidential information, that is an obvious violation. But the BCS is not limited to hacking by outsiders. An insider who accesses the company computer system for an improper purpose or exceeds the scope of his authorized access can also violate the statute, because the statute prohibits access without the company’s “effective consent.”

The picture gets fuzzier when an employee’s access was authorized at the time. Let’s take the typical departing employee scenario where an employee legitimately obtains confidential information from the employer’s computer system in the course of employment for a legitimate purpose, but the employee later misuses the information for the improper purpose of competing with the employer. Whether that conduct violates the statute is a more difficult question.

Another tricky question is whether the employer could have a claim under the anti-hacking statute for an employee obtaining non-confidential information from the company’s computer system. The BCS is not limited to confidential information, but it does require proof of “damages as a result” of the unauthorized access, i.e. causation. As with confidentiality agreements, it may be difficult to prove a violation caused damages if the accessed information was not really confidential.

Oh, one more thing just to add another layer of complexity. As with fiduciary duty, a claim under the anti-hacking statute that is based on misappropriation of trade secrets is preempted by the trade secrets statute.[8]

Are we clear?

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He has watched A Few Good Men multiple times but has actually never seen The Matrix.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] The words “competitive advantage” don’t appear in the statutes that now define trade secrets in most states and under federal law, but you see the phrase in the common-law case law, e.g. In re Bass, 113 S.W.3d 735, 739 (Tex. 2003), and it is useful for understanding what is and is not a trade secret.

[2] I can’t wait for one of my Fivers to point out I have left out some crucial additional source of employee confidentiality duties, like HIPPA.

[3] Tex. Civ. Prac. & Rem. Code § 134A.007(a). But note the statute does not preempt a breach of contract claim.

[4] E.g. Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, 531 S.W.3d 829, 843 (Tex. App.—Corpus Christi 2017, no pet.).

[5] See discussion in Embarcadero Technologies, Inc. v. Redgate Software, Inc., No. 1:17-cv-444-RP, 2018 WL 315753, at *2-4 (W.D. Tex. Jan. 5, 2018).

[6] 18 U.S.C. § 1030. USC also stands for University of Southern California, a traditional college football power. Noticing a pattern here?

[7] Tex. Penal Code § 33.02; Tex. Civ. Prac. & Rem. Code § 143.001.

[8] Embarcadero, 2018 WL 315753 at *5.

Liquidated Damages Lessons from the Stormy Daniels Settlement

Liquidated Damages Lessons from the Stormy Daniels Settlement

Five Minute Law has obtained a top secret legal memo prepared for Donald Trump’s personal lawyer, Michael Cohen, shortly before the 2016 presidential election. The memo provides valuable lessons on the use of “liquidated damages” clauses in confidentiality agreements and other contracts, e.g. non-competes. The memo also reveals that, unlike the author of the Stormy Daniels settlement agreement, Cohen’s associate writes memos in plain English. Enjoy.

CONFIDENTIAL ATTORNEY WORK PRODUCT MEMORANDUM

TO:                  Michael Cohen

FROM:            Alex Associate

RE:                  Enforceability of Liquidated Damages Clause

DATE:             October 15, 2016

Facts

Our client, “David Dennison,” is a public figure concerned with protecting his reputation.  An “adult film” star named “Peggy Peterson” claims she had a sexual relationship with Dennison.  Peterson has offered to sign a strict confidentiality agreement in exchange for a one-time payment of $130,000.

Dennison says that disclosure of the relationship with Peterson will cause severe damage to his relationship with his third wife. He also fears the damage it will cause to his public reputation and the resulting effect on an upcoming public event of some importance to him. Dennison has also implied that disclosure could be embarrassing for additional unidentified reasons.

Dennison has tasked us with preparing “the greatest non-disclosure agreement you’ve ever seen, with real teeth.” In the event that Peterson violates the agreement by disclosing information about the affair, he wants the ability to “sue the pants off her.”

You have prepared a non-disclosure agreement with a liquidated damages clause, i.e. a provision specifying in advance the amount of damages Dennison gets if Peterson breaks the agreement. The clause states that in the event of a breach by Peterson, Dennison can choose to recover either his actual damages or liquidated damages in the amount of $1 million per violation.

The draft agreement also says that a violation will cause Dennison “irreparable injury,” and that Dennison therefore can get a temporary restraining order or injunction to bar disclosure of information about the alleged affair.

Issues Presented

1. Is the $1 million per violation liquidated damages clause enforceable, or will it be considered an unenforceable penalty?

2. Does it make any difference if news of the alleged affair is already public?

3. Does Dennison’s right to elect actual damages or liquidated damages affect enforceability of the liquidated damages clause?

4. Does the liquidated damages clause undermine Dennison’s right to get an injunction to prevent disclosure of the confidential information?

Short Answers

1. The liquidated damages clause is likely enforceable if Dennison can show that $1 million per violation is a reasonable forecast of his actual damages resulting from disclosure of the affair.

2. It may be harder for Dennison to argue that $1 million per violation is a reasonable forecast of actual damages if the affair has already become public information.

3. The fact that Dennison can elect actual damages could support an argument that the liquidated damages clause is an unenforceable penalty.

4. The liquidated damages clause could undermine Dennison’s right to get an injunction because it implies that damages are adequate compensation.

Analysis

1. Reasonable forecast?

A liquidated damages clause that functions as a “penalty” is unenforceable.  This is consistent with the fundamental principle of contract law that the remedy for a breach should put the non-breaching party in the same position as if the breaching party had performed the contract.

Remember, contract law is essentially amoral. Students arrive at law school with quaint moral notions about keeping one’s word, that a covenant is sacred, etc. The goal of the first-year Contracts course is to beat this moral sense out of the students. Contract law is supposed to compensate for actual loss, not punish wrongdoing.

This is why a contractual penalty is unenforceable. Different states formulate the test for liquidated damages differently, but the Texas version is typical. A liquidated damages clause is enforceable if (1) the harm caused by the breach is “incapable or difficult of estimation” and (2) the amount of liquidated damages is a “reasonable forecast” of just compensation. Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1992).

Courts have applied this standard to various types of contracts, including non-competes. Sometimes a non-compete will have a liquidated damages clause stating that, because actual damages from the employee competing are difficult to measure, the employer can recover a set amount of liquidated damages.

For example, in Nacogdoches Heart Clinic, P.A. v. Pokala (it’s pronounced “Nak-uh-doach-us”), a doctor agreed to pay liquidated damages of $100,000 per month for each month he violated the non-compete. This amount was based on his earnings while working for the clinic, not the actual loss the clinic expected to suffer if he left. The clause therefore was unenforceable because it was not a reasonable forecast of just compensation.[1]

We can draw two lessons from Nacogdoches Heart Clinic. First, maybe I should have picked medical school over law school. Second, a liquidated damages clause in a non-compete should not be based on the amount the employee earns at the company.

Another problem with a liquidated damages clause in a non-compete is that actual damages for breach of a non-compete are usually not that difficult to measure. The typical measure is lost profits. While calculating lost profits is not necessarily easy, it’s not exceedingly difficult either, especially if you hire a good CPA as an expert witness on damages.

Damages for harm to reputation, on the other hand, are more difficult to measure. It won’t be hard for Dennison to argue that damages from Peterson revealing information about the alleged affair are “incapable or difficult of estimation.”

It’s the second prong of the liquidated damages test that will be more of a challenge for Dennison: showing that $1 million per violation is a reasonable forecast of actual damages.

One million per violation does not appear to be a reasonable forecast of the actual damage. It’s almost eight times the amount of consideration Dennison will pay to obtain Peterson’s commitment to non-disclosure. Presumably, $130,000 is a reasonable estimate of what it is worth to Dennison to keep Peterson’s information from becoming public.

2. What if the information is already public?

If information about the alleged affair is already public, it may become more difficult to argue that $1 million per violation is a reasonable forecast of actual damages.

If the public had no inkling about the alleged affair, Dennison could argue that any public disclosure of the information would cause great harm to his reputation.

But what if facts about the alleged affair—including details shared in a 2011 tabloid interview—are already public knowledge? In that case, Dennison would have to make the difficult argument that $1 million is a reasonable forecast of the additional harm to his reputation that the additional disclosure would cause.

And proving additional harm to his reputation would become even more difficult if, hypothetically, it is well known that Dennison has a history of adultery, or if multiple women have accused him of sexual harassment or assault.

3. Election of actual damages

You have advised me that our client likes to have his cake and eat it too. Accordingly, the draft settlement agreement says that if Peterson violates the non-disclosure agreement, Dennison gets to choose between recovering actual damages or liquidated damages.

This is problematic. First, the fact that Dennison can recover actual damages could weaken the argument that actual damages are “incapable or difficult of estimation.” If recovering actual damages is an option, that implies that actual damages can be reasonably calculated, making enforceability of the liquidated damages clause less likely.

To illustrate, one Virginia case said that allowing a party to choose between actual damages and liquidated damages suggested that the liquidated damages clause was an unenforceable penalty.

Second, the ability to elect between actual or liquidated damages could render the agreement “unconscionable.”

Courts generally don’t second-guess whether a contract is fair. In the absence of fraud or duress, private parties are generally free to enter into unfair contracts. But this freedom is not without limits. At some point, a contract provision can be so fundamentally unfair that a court will rule the contract unconscionable and unenforceable.

In this case, a judge or arbitrator might think giving Dennison the right to choose between actual damages and liquidated damages is just too much.

4. Can Dennison have liquidated damages and an injunction too?

Not only does the draft agreement allow Dennison to elect whether to recover actual or liquidated damages, it also expressly gives him the right to get a temporary restraining order or injunction to prevent threatened disclosure of the confidential information, i.e. a “gag order.”

But would the liquidated damages clause undermine Dennison’s ability to get an injunction?

It is typical for a confidentiality agreement to recite that disclosure of the information would cause “irreparable injury” and entitle the non-breaching party to get an injunction. This type of clause is also found in non-competes and other employment-related agreements.

There are essentially three views of these “irreparable injury” clauses:

(1) They have no legal effect whatsoever, because private parties don’t get to tell courts how to decide whether to grant an injunction.

(2) They conclusively establish that the non-breaching party is entitled to an injunction.

(3) They are not dispositive but are a factor to be considered.

Courts tend to sidestep the issue by choosing option (3). So, let’s assume the irreparable injury clause will not necessarily relieve Dennison of the burden of showing that a threatened violation would cause him irreparable harm.

The problem is that the liquidated damages clause weakens the claim of irreparable injury. Irreparable injury means harm that cannot be adequately compensated by damages. But if $1 million is a reasonable forecast of actual damages, that suggests that $1 million is adequate to compensate Dennison.

On the other hand, Dennison could argue that the liquidated damages clause is inadequate if Peterson lacks sufficient assets to satisfy a judgment of $1 million or more.

Perhaps the solution is to add a clause to the agreement allowing Dennison to obtain a confidential ex parte temporary restraining order from an arbitrator without notice to Peterson. This will give Dennison the relief he needs, and no one will ever know.

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

Any opinions expressed are his own, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] Nacogdoches Heart Clinic, P.A. v. Pokala No. 12-11-00133-CV, 2013 WL 451810, at *7 (Tex. App.—Tyler Feb. 6, 2013, pet. denied) (mem. op.) (citing Phillips v. Phillips).

“You Like-a-the-Juice, Eh?” Lessons from the Greek Yogurt Wars

“You Like-a-the-Juice, Eh?” Lessons from the Greek Yogurt Wars

I have to admit it. When I saw the headline Dannon Defector to Chobani Ignites Yogurt Trade Secrets Battle, I laughed. Trade secrets? In the Greek yogurt business?

But trade secrets lawsuits are no laughing matter, whether you’re the employer trying to protect your business, the employee trying to start a new job, or the competitor who just hired the new employee. And thanks to the 2016 Defend Trade Secrets Act, the company claiming theft of trade secrets can now make a federal case out of it.

So I’m sure Federico Muyshondt, a former Senior Sales VP at Dannon and current Senior VP at Chobani, is not laughing about getting sued by Dannon in the U.S. District Court for the Southern District of New York.

And once you dig into the allegations in Dannon’s complaint, you can see that the claim is not as silly as it may sound. If the evidence backs up Dannon’s assertions, Dannon has a real case for trade secrets misappropriation.

In fact, the Dannon complaint reads like an all-too-typical script for how these departing employee scenarios usually go down.

1. Employer adopts ordinary “reasonable measures” to protect confidential info

Both federal and state trade secrets law require an employer to take reasonable measures to protect the secrecy of its alleged trade secrets. Fortunately for employers, most courts set the bar pretty low for “reasonable measures.” It is usually enough for an employer to do the basics: have employees sign confidentiality agreements, require protection of confidential information in the employee manual, and have password-protected computers. The Dannon complaint alleged each of these basics. (¶¶ 18, 22)

2. Employer adopts additional measures to protect confidential info

There are additional measures employers can—but are not required—to take to protect trade secrets. Imagination is the only limit to how far you can go to protect confidential company information. According to the Dannon complaint:

  • Dannon requires outside agencies, consultants, and brokers to sign non-disclosure agreements (¶ 21)
  • The confidentiality policy requires employees to take various precautions including:
    • using privacy screens for laptops
    • not viewing highly sensitive company information in public places
    • keeping mobile devices secure and password protected
    • never using Dannon’s name when speaking about Dannon in public places
    • reporting lost or stolen devices to IT immediately
    • using only encrypted USB devices (¶ 24)
  • Employees must follow a “Clean Desk Policy” of locking confidential documents in a desk drawer and only printing documents using a “secure print” option requiring an employee PIN (¶ 26)
  • The company conducts random, periodic sweeps of work areas to verify adherence to the “Clean Desk Policy” (¶ 27)
  • Dannon does company-wide compliance training on protecting company information (¶ 28), including a training course that required test-taker to certify compliance with the company’s information security policies (¶ 29)

You’d expect this kind of thing from, say, a defense contractor working on a next-generation fighter jet. It’s pretty strong stuff for a yogurt company.

Of course, it’s possible that a company could adopt a written policy that requires jumping through all kinds of hoops to protect company information and then not actually follow the policy. But any company that makes a good faith effort to follow policies like this probably won’t have much trouble clearing the “reasonable measures” hurdle for trade secret protection.

3. Employee signs non-compete and confidentiality agreement

Trade secret issues often intersect with non-compete issues. Like many employees, Muyshondt signed a non-competition and confidentiality agreement with Dannon

4. Employee meets with competitor

According the Dannon complaint, Muyshondt attended a seminar on August 2, 2017 where Chobani’s COO was speaking. Less than two weeks later, Muyshondt forwarded his resume to his personal email account.

So far, this doesn’t allege anything unlawful. Generally employees are allowed to make plans to leave to work for a competitor. But employees often go wrong by doing more than this.

5. Employee forwards company documents to his personal email account

Employees planning to leave a company—and competitors looking to hire them—should use common sense to avoid becoming an episode of Employees Behaving Badly.

On my YouTube channel That Non-Compete Lawyer, I recently posted a video on the Top 5 Dumb Things Employees Do Before Leaving, like forwarding company documents to your personal email account. These things are pretty obvious, but apparently Muyshondt doesn’t watch my videos.

After attending the seminar, Muyshondt allegedly forwarded several confidential Dannon documents to his personal email account, including his non-compete, the non-competes of members of his sales team, contact information for his sales team, confidential information about Dannon’s advertising and promotional spending, and an email laying out Dannon’s strengths and weaknesses, potential strategies, and plans for certain products. (¶¶ 31, 34, 36)

Ok, but at least he didn’t download thousands of company files right before leaving, like the key employee in the Waymo v. Uber case, right?

Well, actually . . .

6. Employee downloads thousands of company files right before leaving

Dannon claims that Muyshondt downloaded thousands of Dannon files to a USB device, including confidential salary information and “merch calendars” containing confidential plans for pricing promotions and other sales strategies. He also allegedly removed the SIM card from his company-issued mobile phone and substituting a new SIM card without telling Dannon. (¶ 31)

Downloading company files was no. 4 on my Top 5.

7. Employee deletes documents from his computer and resigns

Finally, Dannon also alleges Made a “massive effort” to delete documents from his work computer. (¶ 31) That was no. 2 on my list.

8. Employer conducts exit interview, employee isn’t completely honest

Dannon alleges that it held an exit interview with Muyshondt. This is generally a good practice for employers. It’s an opportunity to ask the employee what he plans to do and to remind the employee of his confidentiality and, if applicable, non-competition or non-solicitation obligations.

It’s also an opportunity for the employee to dig a deeper hole by not being completely honest, which is what Dannon claims Muyshondt did.

9. Employer conducts forensic examination, finds bad stuff

If the employer suspects something fishy, a forensic examination of the employee’s computer and phone is usually the next logical step. Dannon claims that it did just that, uncovering the evidence of email forwarding, file downloading, and file deleting described above.

10. Employer alleges misappropriation of soft trade secrets

Even when the employer discovers an employee behaving badly, stating a trade secrets claim still requires showing that the information at issue is a trade secret.

“Hard” trade secrets—like the literal or figurative “secret sauce”—are the easiest to understand.

To obtain trade secret status, confidential information must have “independent economic value” and be “not readily ascertainable” to competitors. It’s easy to see how hard trade secrets meet these requirements. For example, if Dannon has a secret recipe or ingredient that makes its Greek yogurt tastier and creamier than Chobani’s, that’s a trade secret. Similarly, if Dannon has a secret technology for making Greek yogurt better than everyone else’s, that’s a trade secret.

But the Dannon complaint—like most—focuses on a different kind of information.

Most trade secrets lawsuits do not involve secret sauce or secret technology. Instead, the typical trade secrets lawsuit alleges misappropriation of the kind of customer information almost every company has.

The Dannon complaint, for example, alleges misappropriation of:

  • research and development information
  • strategic growth plans
  • customer pricing information
  • long term and short-term business strategies
  • future product plans and launches, innovations, sales strategies, market trends
  • customer lists
  • customer and other third-party contacts
  • an email laying out Dannon’s strengths and weaknesses, potential strategies, and plans for certain products
  • confidential salary information
  • “merch calendars” containing confidential plans for pricing promotions and other sales strategies

These “soft” trade secrets are more common. Whether they are actually trade secrets is usually a fact-intensive question.

11. Employer takes advantage of the Defend Trade Secrets Act and picks federal court

Now, if you’re in Dannon’s position and you want to sue, where are you going to do it?

Before the DTSA, many trade secrets lawsuits had to be filed in state court. The federal Defend Trade Secrets Act effectively gives employers the option to file trade secrets lawsuits in state court or federal court. Federal district court judges are still looking for a way to punish Congress for this.

But note that the DTSA does not preempt state trade secrets law. There was a lot of talk about the DTSA encouraging “uniformity” in U.S. trade secrets law, but that was just talk. The DTSA does not replace state trade secrets laws, so rather than establishing uniformity, it adds a federal overlay to the trade secrets laws of the 50 states.

This is apparent in the Dannon complaint, which states both a federal trade secrets claim under the DTSA and a claim under New York common law (New York being one of the few states that has not adopted the Uniform Trade Secrets Act). While federal and state trade secrets laws are fairly consistent, there are differences. See “inevitable disclosure” below.

12. Employer doesn’t ask for ex parte seizure order

The DTSA’s ex parte seizure remedy received a lot of attention when the statute was passed, but use of this procedure has been—and will continue to be—very rare. Like most trade secrets lawsuits, the Dannon complaint asks for an injunction but does not request an ex parte seizure order.

13. Employer asserts “price undercutting” theory

Dannon claims the information in the merch calendars is highly sensitive because a competitor, such as Chobani, “could use the information to time its own promotions and other sales activity to go into effect just before Dannon’s planned dates.” (¶ 39)

This is a version of the “price undercutting” theory commonly asserted in trade secrets cases. Whether the prices are actually trade secrets is another fact-intensive issue. It depends on multiple factors, including whether prices are widely publicized and how often prices change.

14. Employer asserts “inevitable disclosure” doctrine

The first thing an employer wants in a trade secrets suit is an injunction. But the employer has to show “imminent harm” to get an injunction against a former employee using the employer’s trade secrets. Often the problem for the employer is that it has evidence the employee took the information but no evidence that the employee has used—or is about to use—the information.

The “inevitable disclosure” doctrine fills this gap by allowing a court to enjoin an employee from working for a competitor, even without such evidence, on the theory that the employee will inevitably use or disclose the trade secrets learned from the prior employer. But the status of the doctrine is unclear in Texas, and the DTSA curbs the use of the doctrine by providing that the court cannot “prevent a person from entering into an employment relationship.”

One thing you sometimes see in a trade secrets lawsuit that is lacking in the Dannon complaint is a litany of “bad” emails, like emails between Muyshondt and Chobani talking about their plans for Muyshondt to jump ship and compete with Dannon. Emails like that can help prove the employee’s intent to cause imminent harm to the employer. Without that kind of evidence, the employer usually has to argue inevitable disclosure.

Lessons from the Greek Yogurt Wars

The lessons for an employer: take basic precautions to protect company information, consider taking additional security measures, do an exit interview, and promptly do a forensic exam if you smell a rat.

The lesson for an employee: use common sense (and subscribe to my YouTube channel). Assume that everything you do electronically will leave a trail (because it will). Don’t forward company documents to your personal email account. Don’t download thousands of company files shortly before leaving. Don’t try to cover up the trail by deleting documents; that will leave a trail of its own.

The lesson for a competitor planning to hire away a key employees: tell the employee early and often not to do the things he shouldn’t do.

Because if the employee you hire behaves badly, the joke may be on you.

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

Witness Preparation Lessons from the Waymo v. Uber Trial

Witness Preparation Lessons from the Waymo v. Uber Trial

On February 5, 2018, the day after the real Super Bowl, the Super Bowl of trade secrets trials started in federal court in San Francisco. You might have heard of some of the parties. The defendant was Uber—perhaps the most controversial startup of the last decade. You may not have heard of the plaintiff, Waymo, but you probably know Waymo’s owner, a little company called Google.

The issue in a nutshell: did Google engineer Anthony Levandowski steal Google’s confidential self-driving car technology—they call it “LiDAR”—and take it to Uber?

This is the type of “departing employee” case I like to handle (usually on a slightly smaller scale), so it would have been fun to take the week off just to follow the trial, but alas, I had work to do for my own clients.

Fortunately, I was able to get the flavor of the trial by periodically checking my Twitter feed. Sarah Jeong, Senior Writer at The Verge, live-tweeted the trial and, after the case suddenly settled in the middle of trial, wrote this helpful wrap-up Who blinked first in Waymo v. Uber?

I bet the trial transcript—or even the tweet-stream—is a goldmine of lessons for lawyers who handle departing employee cases, and trial lawyers in general. But for now I’ll just share a little nugget about how to prepare witnesses to answer argumentative questions.

Laser is the Sauce

But first, in case you don’t know the back story, Fortune has a good timeline here. I’ll give you the simplified version:

  • The amount of money to be made from self-driving car technology is roughly equivalent to the GDP of France
  • Google spun out Waymo to develop this technology
  • Levandowski left Google/Waymo to start “Otto” (which apparently rhymes with “Auto” – get it?)
  • Uber CEO Travis Kalanick decided it would be cool to back his bro Levandowski and acquire Otto
  • Waymo sued Otto and Uber for patent infringement and misappropriation of trade secrets

The case was unusual for several reasons: the net worth and public stature of the household-name parties, the high profile of the executives involved, the amount of alleged damages (close to $2 billion), the importance of the technology involved, and the Silicon Valley culture from which all of this emerged, to name a few.

But at its root, Waymo v. Uber was a fairly typical departing employee case: key employee does suspicious things, leaves first company, and goes to second company. First company sues second company for trade secrets misappropriation.

I haven’t studied the allegations in detail, but the picture that emerges from press coverage is bad “liability facts” for Uber—like some bad text messages and Levandowski downloading 14,000 proprietary Google documents shortly before leaving—but a weak damages case for Waymo. Apparently Waymo’s problem was that it couldn’t prove Uber actually received or did anything with the stolen files.

This is common. There are many trade secrets cases where the key employee is caught doing sneaky underhanded things he shouldn’t have done, but where it’s not clear whether those bad things actually caused damage to the employer.

My Witness Preparation Jam Sesh

That leads to my little lesson on witness preparation. Uber’s key trial theme was that it never received and used the alleged trade secrets. Specifically, Uber argued that the 14,000 files never got transferred to Uber. So, when Uber’s lawyer had Waymo’s expert witness on the stand, he zeroed in on that gap in Waymo’s evidence:

Screen Shot 2018-02-10 at 2.58.03 PM

This is a good example of using cross-examination to make your argument. Uber’s lawyer is effectively standing before the jury and saying “ladies and gentlemen, there is no evidence the 14,000 files taken by Mr. Levandowski were ever transferred to Uber.” He’s just doing it in the form of a question to Waymo’s witness.

You can bet that Uber’s lawyer already knew the answer was no (probably from taking the witness’s deposition). So it was a good way to emphasize Uber’s key theme.

But of course, the question was a little misleading. This witness never examined Uber’s computers (assuming he was being truthful). That wasn’t his role. The fact that this witness didn’t find any evidence that the files got to Uber’s computers didn’t really mean a lot.

Still, I like the question. Part of the point of cross examination is to emphasize the points the witness has to concede that help your client’s case.

I also like the answer (at least on paper—it’s harder to say how it came off in person). Crain admitted the answer was no but got his little counter-jabs in at the same time. And that’s usually a good way to answer this kind of question, if you don’t take it too far.

Three Ways to Answer Argumentative Questions

There are basically three ways to answer this kind of argumentative question:

(1) The Just Answer the Question approach

(2) The Dog With a Bone approach

(3) The You Get to Argue Once approach

The first two approaches have some merit, but overall I like the third. Let’s break these down.

Just Answer the Question

The Just Answer the Question approach is just like it sounds. Let’s say the question is “did you take your employer’s customer list when you left?” If the answer is yes, then the witness just answers, “Yes.”

There are two main advantages to this approach. First, it is simple and easy to remember. As I explained in my post What the Ken Starr Interview Can Teach Lawyers About Witness Preparation—and Golf, a lot of witness preparation advice, even from professionals, is too complicated. It’s like telling a golfer to think about a dozen different things when swinging the club. Most witnesses are just not skilled enough to follow so many tips, especially under stress. So, there is some advantage to the simplicity of Just Answer the Question.

The second advantage of just answering the question is that the witness avoids looking evasive, arrogant, or overly defensive. That’s obvious. To avoid this risk, lawyers will sometimes coach the witness just to answer the question and not to throw in their counter-argument. “Save that point,” the lawyer will tell the witness, “and I’ll bring it up on re-direct.”

But there is a disadvantage to this approach. It makes it too easy for the questioning lawyer to get on a roll. Remember, what the cross-examining lawyer is really doing is making her argument in the form of questions to an adverse witness. If all the witness does is play along, he’s making it too easy. Maybe the witness will get a chance to bring up the point on re-direct, but the moment has passed. The damage has been done.

So there is something to be said for taking a more argumentative approach. When asked “did you take the customer list,” you can say “yes, but I never used it or gave it my new employer.”

Just don’t take this too far.

Dog With a Bone

For example, I worked on a case involving a real estate deal gone bad. Our client was seeking millions in lost profits damages resulting from another real estate developer effectively “stealing” the deal. The defense lawyer’s key theme was that his client couldn’t steal any deal because the deal hadn’t been finalized.

That led to the defense lawyer asking the plaintiff a series of questions that looked kind of like this:

Screen Shot 2018-02-10 at 5.55.59 PM

You can see the problem here. While the witness does a good job of making his point, he takes it too far. This makes him look stubborn and defensive. The jury may start thinking, “this guy seems really difficult, maybe he never would have gotten approval from the City.”

That leads me to the You Get to Argue Once approach.

You Get to Argue Once

This is a middle ground. When the opposing lawyer asks an argumentative question that could give the jury a misleading impression, the witness makes the point he wants to make—but only once. If pressed after that, he just answers the question.

In the real estate case, it would go something like this in the courtroom:

Screen Shot 2018-02-10 at 6.30.16 PM

Point made, but not overdone. And this is pretty similar to what Waymo’s witness did when asked if he found any evidence the 14,000 files were transferred to Uber’s computers.

Different Strokes for Different Folks

In general, I think the You Get to Argue Once approach is superior to the Just Answer the Question approach, and it is certainly better than the overly stubborn approach.

But of course, like everything in the law, it depends.

It depends in part on the personality of the witness. You tend to get two types: Nervous Ned and Alpha Dog.

Everybody gets a little nervous about testifying under oath, but Nervous Ned gets really nervous. This type just wants it all to be over as soon as possible. If just answering the question will end the ordeal faster, then this type is fine with just answering the question.

Alpha Dog is almost the opposite. This kind of witness relishes going toe-to-toe with the opposing lawyer. The witness can’t wait to unleash the counter-arguments when asked the tough questions. You know the type. Often this kind of witness is a CEO, executive, or self-made entrepreneur. And—let’s just be real about it—this type tends to be a certain gender.

If you’re the lawyer, you’ve got to coach Nervous Ned to stick up for himself a little more, and coach Alpha Dog to dial it down a notch or two. For the first type, the You Get to Argue Once approach means arguing a little more (unless that’s just too difficult, and then you may have to stick with baby steps and Just Answer the Question). For the second type, it means arguing less. In either case, you have to adjust for the personality.

And in both cases, the cardinal rules remain the same: listen carefully to the question, and always tell the truth.

Even if that means admitting you took the 14,000 files.

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head-shot-photo-of-zach-wolfeZach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He has never used Uber, but he has Googled stuff before.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.