FBI Nabs Apple Trade Secrets Thief

FBI Nabs Apple Trade Secrets Thief

You may have read about Xiaolang Zhang recently. He’s the Apple engineer who was about to board a plane to China before being arrested by FBI agents and charged with theft of trade secrets under Title 18, United States Code, Section 1832. His new employer, Xpeng Motors, denied any knowledge of trade secret theft.

Rather than recount the details reported by the press, this week on Five Minute Law we’re traveling into the future to hear opening statements in the civil lawsuit to be filed in federal court under the Defend Trade Secrets Act.

SCENE: Courtroom, Robert F. Peckham Federal Building & United States Courthouse, San Jose, California, USA.

THE COURT: Ok, we’re on the record on July 14, 2020, in Case No. 18-CV-78745, Apple, Inc. v. Xpeng Motors. Ladies and gentlemen of the jury, we are now going to hear opening statements from the lawyers. Ms. Cunningham, are you ready to proceed?

MS. CUNNINGHAM: Yes, Your Honor.

Ladies and gentlemen, this is a case about cheating. Not cheating at sports or cheating on your spouse, but cheating at business. Specifically, the business of self-driving car technology. You all know my client, Apple. It’s the best-known technology company in the world. It got there through hard work and innovation.

But some companies want to take shortcuts. Rather than doing the hard work to develop their own technology, they want to cheat and ride the coattails of others. The evidence will show that the defendant, Xpeng Motors, is one of those companies.

Xpeng was founded in 2014 in Guangzhou, China to develop electric self-driving vehicles. It is backed by some of the biggest Chinese companies in the world. It has a lot of smart people working for it, but in 2016 Xpeng decided that wasn’t enough. They needed a boost.

Now you all know about the iPhone and the MacBook, but that’s not all that Apple does. Apple also has a division working round the clock to develop software and hardware for autonomous vehicles. That means self-driving cars.

Back in 2016, Apple had made general statements to the press about self-driving car technology, but the details were a closely guarded secret. The code name was Project Golden Delicious.

This project involved thousands of engineers. One of those engineers was Mr. Xiaolang Zhang. Apple hired Mr. Zhang in December 2015 as a hardware engineer on the Compute Team, where he designed and tested circuit boards to analyze sensor data for the project.

Apple is very serious about making sure people like Mr. Zhang don’t publicize Apple’s secret technology and future product plans. The evidence will show that Apple takes extensive efforts to protect its trade secrets.

Before starting, corporate employees must sign an Intellectual Property Agreement that prohibits any unauthorized use or transmission of Apple’s intellectual property. Apple provides employees annual training on the importance of protecting its confidential information. Mr. Zhang signed one of these agreements and attended the annual training, so he was fully aware of his obligations to protect Apple’s intellectual property.

Apple was especially serious about protecting the secret technology it was developing in Project Golden Delicious.

Apple had several layers of access control for project information. First, Mr. Zhang had to log in to the company’s virtual private network, which they call the “VPN.” Next, another employee had to grant him disclosure rights for the project.

Then, Apple used an internal software tool to manage requests for project disclosure and maintain a record of all disclosures. For Mr. Zhang to get access to the project, another employee had to “sponsor” him and give a business justification. A manager had to review and approve that request. So, access was strictly on a “need to know” basis.

After granting Mr. Zhang general access to the project, Apple then gave him even higher access to the secret project database. He worked on the project for about a year and a half, learning about Apple’s secret autonomous vehicle technology the whole time.

This was a huge privilege for Mr. Zhang. Just imagine having the keys to the vault where you could find top-secret technology for the most cutting-edge industry in the world.

But what did Mr. Zhang do with this privilege? The evidence will show that he betrayed Apple. And he did not act alone.

Sometime prior to April 2018, Mr. Zhang got in touch with Xpeng Motors. We don’t know exactly when or where, because Mr. Zhang pled the Fifth.

MR. CROCKETT: Objection! Your Honor, may we approach? [bench conference ensues with animated body language]

MS. CUNNINGHAM: As I was saying, we know Mr. Zhang got in touch with Xpeng Motors at some time before April 2018. You see, Mr. Zhang took advantage of Apple’s generous paternity leave policy from April 1 to April 28, 2018. While on paternity leave, he traveled to China. Funny thing is, that’s where Xpeng Motors has its headquarters.

Then on April 30, 2018, shortly after returning from China, Mr. Zhang suddenly announced—these announcements are always “sudden”—that he was moving back to China to be with his mother who was in poor health. Oh, and one more thing. He told his immediate supervisor at Apple he was going to work for Xpeng Motors.

You can imagine the alarm bells this set off at Apple. Mr. Zhang’s supervisor called in Apple’s New Product Security Division, who met with Mr. Zhang and took custody of his two iPhones and his MacBook laptop. Apple then immediately disabled his access to Apple’s network and offices.

Apple did a forensic analysis of Mr. Zhang’s devices, and guess what they found? Just days before Mr. Zhang announced he was leaving, his Apple network activity increased exponentially. It included both bulk searches of the secret project database and targeted downloading of specific files.

These files included technical documents on Apple prototypes and prototype requirements, such as power requirements, low voltage requirements, battery system, and drivetrain suspension mounts. You will hear Apple’s expert witness testify that these secret technical documents would have great independent economic value for a competitor in the self-driving car field.

But that’s not all. You will see security camera video showing Mr. Zhang on Apple’s campus at 9:14 p.m. on the evening of Saturday, April 28, 2018. You’ll see him enter Apple’s autonomous vehicle software and hardware labs and leave the building less than an hour later carrying a computer keyboard, some cables, and a large box.

Was he just working late, just burning the midnight oil? Keep in mind he was on paternity leave at this time, and he announced his resignation just two days later. The evidence will make it pretty obvious what he was doing.

But don’t take my word for it. You will hear testimony that Mr. Zhang was interviewed both by Apple security and the FBI. And he admitted it. He admitted pursuing employment with Xpeng Motors while still employed by Apple. After initially denying it, he admitted being on the Apple campus on April 28. He admitted taking online data from the secret project database while on paternity leave.

It gets worse. Mr. Zhang admitted “air-dropping” the data he took from Apple’s system on to his wife’s laptop computer. When Apple examined that computer, it found that a folder titled “RECENT” contained about 40 Gigabytes worth of data, and the laptop’s system event logs reflected “Air Drop” activity on April 29 and 30. Apple found that approximately 60 percent of the data on the computer came from Apple.

One of the files Mr. Zhang put on his wife’s laptop was especially important. We call it the “X-File.” The X-File contained top-secret electrical schematics for one of the circuit boards Apple was developing for the project.

Now, why do you think Mr. Zhang was doing all this? Was he going to use all this secret technology by himself? That doesn’t make any sense.

The evidence will show that immediately after leaving Apple, Mr. Zhang went to work for Xpeng Motors at its headquarters in Palo Alto. Then on July 7, he bought a last-minute round-trip ticket to China. And he might have gotten there, if FBI agents hadn’t arrested him just after he got through the security checkpoint at Terminal B.

After you hear all the evidence, the inescapable conclusion will be that Mr. Zhang was working with Xpeng Motors to take Apple’s secret technology.

And that’s cheating. Thank you.

THE COURT: Thank you, Mr. Cunningham. Mr. Crockett, are you ready to proceed? . . . Mr. Crockett?

MR. CROCKETT: Oh, sorry. Yes, Your Honor.

Ladies and gentlemen of the jury, I’m impressed. That was quite an opening by Ms. Cunningham. I don’t know if I can compete with that. I mean, I didn’t go to Harvard like she did. I’m just an old trial lawyer.

But I tell you what. These old hearing aids still work pretty good, and I was using them while Ms. Cunningham was talkin’. And it’s not what I heard that’s important, it’s what I didn’t hear.

Let me give y’all an example. I didn’t hear her say anything about having any evidence that Xpeng Motors was in cahoots with Mr. Zhang when he did all that sneaky stuff during his paternity leave. Did you hear her say anything about any evidence that anybody at Xpeng Motors put Mr. Zhang up to it? I didn’t.

You know what else I didn’t hear? I didn’t hear anything about any evidence that Mr. Zhang ever—ever—gave any of those top-secret Apple documents to anyone at Xpeng Motors.

Now, when we get to the end of this trial, you’re going to get some papers from the judge that we call a charge. And that charge is going to have a lot of complicated instructions about stuff like “misappropriation.”

Now, back when I was flying helicopters in Vietnam, we didn’t use a lot of fancy words like “misappropriation,” but I know what stealing is. And that’s basically what misappropriation means: stealing. And I’ll make you a bet. I bet during this whole trial you won’t hear any evidence that my client, Xpeng Motors, stole anything from Apple.

You know what else you’re not going to hear? I’ll bet you dollars to donuts you won’t hear any evidence that Apple lost any money because of anything Xpeng Motors did. Now they’ve got this man with Ph.D who’s going to come in and say there’s no way Xpeng could have developed its self-driving car technology without Apple’s schematics. So when they don’t have any real evidence, they’re going to rely on some professor getting paid $750 an hour. Well, we have a saying back in Texas where I grew up: that dog won’t hunt.

Now, I’ll level with you on something. You’re going to see some internal emails from Xpeng Motors talking about how they’re going to make their self-driving car technology more like Apple’s and beat Apple at its own game. But that’s not stealing, that’s competition. That’s the American way. If you can build a better mouse trap, you get the cheese.

Or the apple. [wink]

THE COURT: Thank you, Mr. Crockett. Ms. Cunningham, call your first witness.

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

He made up the names “Project Golden Delicious” and “X-File,” and the stuff about what Xpeng Motors did. The rest of the facts are taken from press reports and the FBI agent affidavit attached to the Criminal Complaint in U.S. v. Xiaolang Zhang, No. CR-18-70919, U.S. District Court for the Northern District of California.

 

Are “Aggressive” Litigators More Effective?

Are “Aggressive” Litigators More Effective?

Lawyers, especially litigators, apparently have anger issues. Read a dozen profiles of litigators on law firm websites, and you’re sure to see many describe themselves as “aggressive.”

Just once it would be refreshing for a litigator’s profile to say something like “Hailey’s clients appreciate her passive approach to litigation.”

But no, lawyers apparently believe that clients want litigators who are aggressive (whatever that means). I’ve always wondered about this, but it’s been on my mind more than usual because I recently got a good result for a client by taking a passive approach.

This raises an important question: are “aggressive” litigators actually better for clients? Do they get better results? After accumulating 20+ years of anecdotal evidence, I think I have some answers.

But first we must define what it means for a lawyer to be “aggressive.”

Aggressive lawyer personalities

It could just mean an aggressive personality. You know the type because you’ve seen it in TV shows and movies. Pounds the table. Raises his voice. Won’t back down from any confrontation. “We’ll see you in court!”

This type has become even more prominent because it’s the kind of lawyer favored by a certain very famous client. Lawyers Michael Cohen and Marc Kasowitz are two obvious examples.

Here’s Cohen talking to a journalist who was about to publish a story unfavorable to his client: “Tread very f***ing lightly because what I’m going to do to you is going to be f***ing disgusting. Do you understand me? Don’t think you can hide behind your pen because it’s not going to happen. I’m more than happy to discuss it with your attorney . . . because, mother***er, you’re going to need it.”

Kasowitz is also a tough talker. When a stranger sent him a critical email, Kasowitz responded with these choice words: “I’m on you now. You are f***ing with me now. Let’s see who you are. Watch your back, b**ch. . . . You are such a piece of s**t. Call me. Don’t be afraid, you piece of s**t. Stand up. If you don’t call, you’re just afraid.”

I’d say those two are pretty “aggressive” (at least by phone and email).

But when lawyers market themselves as “aggressive,” they’re not just saying “I know how to act like a jerk.” They’re also talking about tactics, especially when their targets are more genteel and “sophisticated” clients, like big companies that have their own in-house lawyers. These clients want—or think they want—a lawyer who will take an aggressive approach to a lawsuit.

Of course, an aggressive personality does not necessarily mean an aggressive approach. There are plenty of litigators who have aggressive personalities but demure when it comes to taking action.

For example, remember all those F-bombs Michael Cohen dropped to pressure a journalist not to publish a story? The story was published. There was no lawsuit. And when Kasowitz fired off a confrontational letter to the New York Times threatening a defamation lawsuit, I waited eagerly to see what the lawsuit would say. I’m still waiting.

No, an aggressive personality doesn’t necessarily mean aggressive tactics. And the converse is also true. A lawyer can have the personality of Mr. Rogers and pursue aggressive tactics, smiling politely the whole time.

I imagine the notoriously button-downed Bob Mueller is one of these types: a mild-mannered gentleman who will gut you like a fish in court. (Just ask Paul Manafort if he misses his Persian rugs sitting in a jail cell.)

On the other hand, there does seem to be some connection between an aggressive personality and an aggressive approach. For starters, people with more aggressive personalities are probably more likely to pick litigation as a practice area. And I would be willing to bet that all else being equal, a litigator with a more aggressive personality is a little more likely to favor aggressive tactics.

But here again, it depends on how we define aggressive. I say an “aggressive” approach to litigation essentially means two things: having courage and being proactive.

The aggressive approach to litigation

Courage in litigation translates to a willingness to assert “creative” factual or legal theories and a willingness to fight out disputes in court, even if there’s a decent chance you’re going to lose.

But does it really take courage to do these things? The lawyer is trying to make money, and if anything, taking these risks means more billable hours.

True, but if there’s one thing that motivates lawyers more than money, it’s fear. Specifically, it’s the fear of losing, fear of getting embarrassed in the courtroom, even the plain-old fear of looking like you don’t know what you’re doing. These fears are what will stop litigators from taking a stand for their clients.

The second part of an aggressive approach is being proactive. This is the opposite of being reactive. You won’t find the adjective “reactive” in any lawyer profiles, but the reactive approach to litigation is common. A reactive litigator just reacts to events in the lawsuit, particularly deadlines and actions taken by opposing counsel.

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Litigation requires courage

Unfortunately, you often see lawyers who combine a reactive approach with an aggressive personality. They lurch from one crisis to another. They may go weeks without devoting any attention to the case, and then when a deadline is a few days away, they suddenly go on the warpath.

Many litigators get by and make a good living with this approach, especially if they master the art of appearing “aggressive,” managing client expectations, and taking credit when good results happen.

But this “aggressive-reactive” combination is not optimal for getting good results.

Fewer litigators are genuinely proactive, because being proactive requires discipline, and discipline is well, you know, boring. Being proactive requires a plan, a methodology. “I love it when a plan comes together.” Otherwise you’re just bouncing from one crisis to another. “Putting out fires” is not being proactive.

In short, I define an aggressive approach to litigation as being courageous and proactive. But we still haven’t answered the question: is an aggressive litigator better for the client?

Pros and cons of the “aggressive” litigator

Here we must be careful to correct for our biases. Lawyers with aggressive personalities are likely to believe that having an aggressive personality makes a lawyer more effective, and vice-versa.

What type am I? A guy with a highly aggressive personality is not going to sit down and write an article over-analyzing the concept of aggressiveness, so you already know the answer. Don’t get me wrong, I like to duke it out in court. But that’s because I like competing and, honestly, “performing” for a crowd, not because I like personal confrontation.

So, I want to adjust for my own bias and give aggressive personalities their due. I’ll acknowledge three main advantages to an aggressive personality in litigation.

First is the simple fact that aggressive people often get their way—especially with little things—simply because dealing with them is a pain in the ass. If you know opposing counsel is a jerk, you’re more likely to say “ok, fine, we’ll do the deposition at your office.”

Second is the fact that appearance can be reality in litigation. The vast majority of cases settle, and settlement expectations can be shaped by personalities. A lawyer with a genuinely aggressive personality is probably better at putting on a show that conveys the appearance that “we’re not afraid to fight this out in court.”

Third, there is some connection between anger and courage. Maybe anger is the wrong word. I’m thinking of what the Greeks called thumos, which might be translated as “spiritedness.” It’s the feeling that takes over when someone has physically threatened your loved ones or, in this case, financially threatened your client. Generally, a more spirited lawyer will be more willing to take a risk to defend a client.

Yes, in some ways an aggressive personality can make a litigator more effective, but overall, I think the benefits are minor. And there are drawbacks.

The biggest problem with lawyers who have “aggressive” personalities is that they’re not in control of their emotions. They let pride and anger cloud their judgment, and that causes mistakes. An angry lawyer can do OK if he’s just blocking and tackling. But do you want your quarterback to be angry? Or do you want a Joe Montana with ice in his veins?

On the whole, I think it’s a wash. An aggressive personality will be a benefit in some litigation situations and a hindrance in others. If anything, it’s a slight negative. In any case, I tend to favor lawyers just being themselves. If there’s one personality trait that will make you unpersuasive in litigation, it’s being a fake.

But what about aggressive litigation tactics? Regardless of personality, will a lawyer who takes an aggressive approach to litigation get better results?

If we stick with my definition of aggressive as being courageous and proactive, then I think the answer is a tentative yes. (How’s that for a non-aggressive answer?)

Litigation is not a tennis match (no offense to tennis). It’s more like tackle football. A lawyer who isn’t willing to get his nose bloodied is less likely to get good results. You need the courage to take the risk of losing. And proactive lawyers who push a lawsuit forward are usually going to get better results than those who just react to what others do.

Being aggressive in the right way at the right time

But what about the recent experience I mentioned? Does my successful experiment with  a “passive” approach call into question the aggressive approach to litigation?

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Litigation is not tennis

To some extent, yes. Here was the situation. My client was a business that got dragged into a lawsuit with multiple defendants. The plaintiff’s damage theory against my client was fundamentally flawed. We pointed that out early in the case, and the plaintiff indicated he might just voluntarily dismiss my client from the case.

So I waited. The last thing I wanted to do was bill my client a lot of money for taking discovery that could end up being unnecessary.

But you have to understand. This was hard for me. I wanted to do something.

Weeks went by with no activity. I couldn’t stand it. I suggested asking for the plaintiff’s deposition to try to prompt some action. But my client wanted to sit tight and wait. So I waited some more.

A couple weeks later the plaintiff dismissed my client from the case. It was over. Naturally, I took credit for our wise strategy of doing nothing.

But seriously, in hindsight my client made the right call. If I had been aggressive, it would have cost the client more money, and who knows, it might have irritated the plaintiff to the point of keeping my client in the lawsuit just to be difficult.

That got me thinking. Truth is, an effective litigator is aggressive about the right things, for the right reason, at the right time.

That reminded me of something I read in college. This is precisely what Aristotle said about the virtue of bravery.

You know Aristotle. He’s the guy who said: “We are what we repeatedly do. Excellence, then, is not an act, but a habit.”[1] This is the most popular philosophical quote in pop culture outside of Nietzche’s “that which does not kill me makes me stronger.”

But I digress. Aristotle had a lot to say about bravery in his Nichomachean Ethics, including this: “Whoever stands firm against the right things and fears the right things, for the right end, in the right way, at the right time, and is correspondingly confident, is the brave person; for the brave person’s actions and feelings reflect what something is worth and what reason [prescribes].”

This is a strikingly sober definition of a brave person. One might even object that this takes all the zing out of bravery. Imagine Mel Gibson in Braveheart exhorting his men to “stand firm for the right end, in the right way!” It doesn’t exactly get the blood boiling.

But Aristotle understood this. He did not want to reduce bravery to just another form of knowledge, as he said Socrates did. Instead he tried to strike a balance. He wanted to distinguish the virtue of bravery from raw emotion, but without denying the physical and emotional nature of bravery.

“Brave people act because of what is fine,” Aristotle said, “and their emotion cooperates with them.” In contrast, people who “fight because of their feelings, not because of what is fine or as reason [prescribes]” have “something similar” to bravery. This bravery caused by emotion is “the most natural sort,” but it is not true bravery until “decision and the goal have been added to it.”

In other words, the right kind of brave person doesn’t seek out danger just for the thrill of it, but when achieving the right goal requires bravery, the brave person’s emotions cooperate.

I think that’s a pretty good definition of the kind of “aggressive” litigator a client should want. If I have to take an aggressive position or take a risk in court to defend a client’s interests, I want my emotions to cooperate. But I want reason, not emotion, to drive the decision and the goal.

Because losing in court may not kill me, but it doesn’t make my client stronger.

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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 uses *** for bad words because hey, this is a family blog.

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] This quote is actually misattributed to Aristotle, as explained here, but it’s close enough to the point Aristotle was making.

 

 

Orbison Case Shows Need for Texas Courts to Limit Employee “Fiduciary” Duties

Orbison Case Shows Need for Texas Courts to Limit Employee “Fiduciary” Duties

Meet Sammy Orbison. For years he managed the wireline recertification business for Ma-Tex Rope Company. Trouble is, he started competing with Ma-Tex while still on the payroll, spending about 10% of his time helping competitor American Pipe Inspections (API) set up its own wireline recertification business. Then he left Ma-Tex and went to work for API, where he used Ma-Tex’s confidential customer and price information to solicit business from Ma-Tex’s customers.

As a result, in his first two weeks at API, Sammy made sales to two Ma-Tex customers totaling (imagine voice of Dr. Evil from Austin Powers) over THREE THOUSAND DOLLARS!

Naturally, Ma-Tex sued Sammy and API for Sammy’s breach of his non-compete and confidentiality agreement, misappropriation of trade secrets, and breach of fiduciary duty. At trial, Ma-Tex’s owner testified—without explanation—that if Ma-Tex had made those two sales, it would have profited $2,300.

The evidence also showed that Sammy received salaries from Ma-Tex and API but did not receive any commissions for the two disputed sales.

You be the judge

Let’s say you’re the judge in this case. What damages would you award to Ma-Tex?

Before you answer, let me give you two important pieces of information about Texas law on departing employees:

(1) Breach of contract and misappropriation of trade secrets require proof of actual damages; breach of fiduciary duty does not. The court can order forfeiture of benefits as a remedy for breach of fiduciary duty, regardless of actual damages.

(2) An employee owes a sort of limited “fiduciary” duty to an employer. I’ve called this Fiduciary Duty Lite. In the simplest terms, it’s a breach of this duty for an employee to actively compete with his own employer while still employed, or to use the employer’s confidential information to compete at any time.

Knowing that, what damages would you order Sammy to pay?

A. Nothing. The lost profits evidence was insufficient, and there was no other evidence of actual damages.

B. Order Sammy to forfeit 10% of his Ma-Tex salary for breach of fiduciary duty for competing with Ma-Tex while employed by Ma-Tex.

C. Order Sammy to forfeit two weeks of his salary at API for breach of fiduciary duty for the use of Ma-Tex’s confidential information at API.

D. B and C.

If you answered D, you are not alone. In a case with roughly these facts (I have simplified, of course), that’s what the Texarkana Court of Appeals recently ruled in Orbison v. Ma-Tex Rope Company.[1]

But the correct answer is B. In my view, ordering forfeiture of benefits an employee receives after leaving the first employer stretches the employer’s “fiduciary” duty too far. I’ll explain.

But first, let’s look at the reasoning of Orbison. The evidence was insufficient to support any award of lost profits as actual damages. An owner of a business can testify to the amount of lost profits, but he has to give some explanation of how the number was calculated. In Orbison, the owner literally said nothing more than “Yes, it was close to $2,300” (and then repeated the figure). That doesn’t cut it.

This defect in the evidence killed Ma-Tex’s claim for actual damages for breach of contract and misappropriation of trade secrets. Both of those causes of action require proof of actual damages. And for both of these claims, the purpose of actual damages is to compensate the plaintiff, not to punish the defendant.[2] So if the evidence isn’t sufficient to prove actual damages, you don’t get any damages for breach of contract or misappropriation of trade secrets.

A different animal

Breach of fiduciary duty is a different animal. A fiduciary duty arises from certain relationships where a person is entrusted with responsibility for guarding the interests of another person. The classic examples are lawyers and trustees. The core of the fiduciary duty is a duty of loyalty, i.e. the fiduciary’s duty to put the other person’s interests ahead of his own.

You can already see that fiduciary duty has a certain moral element. It’s not just against the law to violate a fiduciary duty, it’s wrong.

Most people probably feel the same about breaking a contract. After all, a contract is a covenant—could there be a more morally charged obligation?

But the law doesn’t see it that way. Contract law is basically amoral; its job is to regulate commerce and keep the marketplace running efficiently, not to make moral judgments. Contract law embraces the notion of “efficient” breach, the idea that a breach is fine, even to be encouraged, as long as the breaching party is willing to make the other party whole by paying actual damages.

You might say contract law is cold-blooded, while fiduciary duty law is warm-blooded.

And because of the unique nature of a fiduciary duty, a claim for breach of fiduciary duty has certain special advantages, including: (1) the availability of forfeiture or “disgorgement” of benefits as an alternative remedy to actual damages; (2) shifting the burden of proof to the fiduciary to prove he didn’t breach his duty; and (3) the ability to pursue a third party with deeper pockets for “knowing participation” in the breach of fiduciary duty. These three things are not available for a breach of contract.

Fiduciary duty applied to employees

Now that you know the special advantages of a breach of fiduciary duty, you can see why it matters whether an employee’s duty to an employer is called a “fiduciary” duty. It’s not just semantics.

In Orbison, the employee argued that the forfeiture remedy for breach of fiduciary duty should not be available against an employee who merely receives a salary, and that it should not apply to compensation the employee receives from his new employer. But the Texarkana Court of Appeals rejected both arguments. In both cases, the court reasoned, the fiduciary received compensation for “breaching the trust of his principal.”

But this shows why I suggested in Fiduciary Duty Lite that it was a mistake for Texas courts to label the employee’s duty a “fiduciary” duty. It’s a mistake for two reasons, one descriptive and one normative.

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Does Ma-Tex Rope Company set a precedent that will go too far?

The descriptive reason is that fiduciary duty is a misnomer in this context. Whatever policy preferences you have, the employee’s duty just isn’t a “fiduciary” duty in the full sense of the word. Nobody seriously thinks that an employee owes an employer the same level of duties owed by a lawyer or a trustee. And the Texas cases acknowledge this, expressly stating that it’s not a breach of fiduciary duty for an employee to actively make plans to compete with her employer and even to conceal those plans.

The normative reason is that the legal deck is already substantially stacked against employees.

Think about it. Employers have no legal duty of loyalty to employees. Quite the opposite: under the at-will employment doctrine, the employer can fire the employee any time, for any reason (with some narrow exceptions), or for no reason. Imposing a one-way duty of loyalty on employees just doesn’t seem fair.

On the other hand, it’s not fair for an employee to actively compete with his employer while the employer is paying the employee. You could argue this is just an application of the traditional principle that an agent owes his principal a fiduciary duty as to matters within the scope of his agency.

But if we must use the term “fiduciary” for employees, we should limit the scope of that duty appropriately.

Where to draw the (wire)line

Here’s where I would draw the line. As Texas courts have already said, it should be a breach of the employee’s limited fiduciary duty to compete with the employer (as opposed to preparing to compete) while still employed. And forfeiture of benefits should be an available remedy for that kind of breach.

I don’t see this as unduly punitive. Employees who compete with their current employers should be expected to know they are doing something wrong.

On the other hand, Texas courts should stop classifying an employee’s post-employment use of confidential information or trade secrets as a breach of fiduciary duty. That means forfeiture of benefits the employee receives after leaving the employer should not be an available remedy.

I say this for several reasons.

First, this rule would not leave the employer without a remedy. The employer would still have the remedy of actual damages for an employee’s post-employment breach of contract or misappropriation of trade secrets.

Second, Texas courts are already holding that the Texas Uniform Trade Secrets Act preempts a common-law claim for breach of fiduciary duty based on misappropriation of trade secrets.[3] So any claim for breach of fiduciary duty based on trade secrets should be off the table anyway.

The third reason is prudential. Almost any time an employee who has customer relationships leaves a company to work for a competitor, there is a plausible basis for the first company to claim the employee is using company trade secrets, which can include customer lists and prices. See The Price Undercutting Theory in Trade Secrets Litigation. In Orbison, the forfeited salary from the new employer was only about $2,300, but in future cases it could be a lot more. If we let employers hold the club of salary forfeiture over every departing employee’s head, it could chill competition and tilt the balance of power too much against the employee.

And then employees will really be at the end of their rope.

Rope. Get it? Ma-Tex Rope Company?

Oh, never mind.

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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. This post is dedicated to Roy Orbison.

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] Orbison v. Ma-Tex Rope Co., No. 06-17-00112-CV, 2018 WL 2993012 (Tex. App.–Texarkana June 15, 2018).

[2] On the trade secrets claim, the plaintiff can get punitive damages for proving a “willful” violation by “clear and convincing” evidence, Tex. Civ. Prac. & Rem. Code § 134A.004(b), but that’s not part of “actual” damages.

[3] 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.). 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).

The Price Undercutting Theory in Trade Secrets Litigation

The Price Undercutting Theory in Trade Secrets Litigation

You can’t take him anywhere: Five Minute Law goes to a cocktail party

Hi, I’m Zach Wolfe.

Good to meet you Zach, I’m Travis Austin. So what do you do?

I’m a lawyer. I do business litigation.

Oh, my cousin’s a lawyer. I think he does corporate law. What kind of litigation do you do?

Mostly non-compete and trade secrets cases.

Trade secrets? That sounds interesting. Like patents?

Not really. [Wolfe pauses to think about whether he can explain without sounding pedantic.] Actually, a patent is kind of the opposite of a trade secret.

Oh, I didn’t know that.

Yeah, like if you file a patent on some new technology you invented, the patent filing makes it public to the world. 

Ok, I see. So if you keep the technology inside the company, it can be a trade secret?

Exactly.

So is that the kind of trade secret litigation you do?

Well, not that much. [Wolfe pauses again to decide whether to explain or change the subject to something less boring.] Most of my trade secret cases involve things like customer lists and prices.

Really? I didn’t think prices were trade secrets.

[Wolfe smiles, sensing an opportunity] They can be. I actually just wrote a blog post about that.

Oh, you have a blog? . . . [now all is lost]

A typical price undercutting scenario

So what’s the answer? Are prices really trade secrets?

It depends. Let’s consider a hypothetical.

Paula Payne Windows orders windows from manufacturers and sells them to residential and commercial builders. The profit is the spread between the cost of buying and shipping the windows and the price charged to the customer.

Dawn Davis is the most experienced sales person at Paula Payne Windows. One day Dawn meets the owner of Real Cheap Windows for margaritas. A month later, Dawn suddenly announces to Paula Payne—these announcements are always “sudden”—that she’s leaving the company to go to work for Real Cheap.

And here’s the hard part for Paula Payne: Dawn never signed any non-compete. In fact, she never even signed a routine confidentiality agreement. “When Dawn started, our whole company was just a little office with three phones and some computers,” the founder of Paula Payne Windows explains. “The last thing I was thinking about was legal documents.”

A few weeks later, it becomes obvious that Dawn’s customers have stopped placing orders with Paula Payne. And that’s not all. Paula Payne discovers that the day before leaving, Dawn emailed herself an Excel spreadsheet containing all of her sales for the previous 90 days, including (1) the name of the customer contact, (2) the window model numbers, (3) the price paid to the manufacturer, (4) the shipping cost, and (5) the price charged to the customer.

Paula Payne Windows sues Dawn Davis and Real Cheap, claiming misappropriation of Paula Payne’s trade secrets under the federal Defend Trade Secrets Act and the state Uniform Trade Secrets Act.

Specifically, Paula Payne claims that after joining Real Cheap, Dawn started selling to her previous customers at prices slightly lower than what customers were paying Paula Payne. “Dawn Davis is using the confidential pricing information in the spreadsheet to undercut Plaintiff and steal its customers,” Paula Payne alleges.

This is the common “price undercutting” theory in trade secrets litigation. It is common because while not every company has secret technology or a “secret sauce,” every business has customers and prices.

So, even if a company doesn’t require its employees to sign non-competes, the company can use trade secret law to try to stop a departing employee from competing, as long as it has customers and prices that are arguably confidential.

When are prices trade secrets?

Returning to the initial question, is that kind of information actually a trade secret?

Like any kind of information, prices charged to customers can be trade secrets, if:

(1) the price information has “independent economic value”

(2) the prices are not “readily ascertainable” by competitors

(3) the company took “reasonable measures” to keep the prices secret

These are the three essential elements of a “trade secret” under both the Texas and federal statutes. Like any type of information, price information that meets these elements can be a trade secret.[1]

carrots-cooking-food-40790
Lower prices. They cut like a knife.

But prices are not just any kind of information. Price competition is at the core of the free competition the law should encourage. We want businesses to “undercut” their competitors on price. We just don’t want them to use another company’s trade secrets to do it.

So it’s important for judges to hold companies to their burden of proving their price information meets the three elements needed for trade secret protection.

Let’s apply this to the Paula Payne Windows case. Paula Payne would argue that the detailed price information in the spreadsheet has “independent economic value” because Dawn can use it to undercut Paula Payne.

But Paula Payne Windows also has to prove the price information is “not readily ascertainable.” In this case, the spreadsheet contains prices charged to Paula Payne and prices charge by Paula Payne. Is it really that hard for a competitor to find out those prices?

To show the information is not a trade secret, Dawn’s lawyer will want to establish that:

– Paula Payne Windows has no agreements with the window manufacturers requiring the manufacturer prices to be kept confidential

– Prices charged by the manufacturers are available in industry publications, on the Internet, or simply by asking the manufacturer

– Paula Payne Windows has no agreements with its own customers requiring its prices to be kept confidential

– Paula Payne’s customers are willing to tell other window companies how much Paula Payne is charging them

These questions go to the heart of the elements of a trade secret. If Paula Payne doesn’t require its customers to sign confidentiality agreements, has it really taken “reasonable measures” to keep the prices secret? If manufacturers and customers are willing to disclose their prices, isn’t the information “readily ascertainable”?

Companies always want to say their prices are highly confidential and valuable, but that claim often doesn’t hold up to scrutiny.

And that’s not the only problem with the price undercutting theory.

Causation rears its ugly head

Let’s say Paula Payne Windows persuades a judge or a jury that the pricing information is a trade secret. That’s not the end of the story. Paula Payne also needs to prove that Dawn Davis used the information to make the sales to the customers. In other words, Paula Payne still has to prove causation.

Ah, causation. The bane of plaintiff’s lawyers everywhere.

You see, it’s not enough to prove the price information was a trade secret and that Dawn Davis sold windows to Paula Payne’s customers. Paula Payne must prove it was Davis’s use of the information—and not something else—that caused Paula Payne to lose the sales.

This requires a counterfactual: imagine that Dawn Davis never took the spreadsheet with the prices. Would she have still made the sales?

To prove Dawn would have made the sales anyway, her lawyer will want to show:

– Dawn has longstanding personal relationships with her customers

– Dawn could have undercut Paula Payne Windows simply by asking the customers what Paula Payne Windows was charging them

– Price is not the only factor for the customers, or even the most important factor

– The customers ordered from Dawn because of their personal relationships

– Prices change daily or weekly, making the numbers in the spreadsheet quickly obsolete

– Dawn didn’t even look at the spreadsheet in making the sales

– In short, Dawn would have made the sales even if she hadn’t taken the spreadsheet.

Proving these points could negate the causation element of Paula Payne’s trade secrets claim.

Wait a minute, you might say. This isn’t fair. Dawn Davis developed goodwill with her customers on Paula Payne’s dime. That goodwill belongs to Paula Payne. Dawn shouldn’t be allowed to exploit it for the benefit of a competitor.

You would have a point. But goodwill is not a trade secret. And there is really only one legal mechanism to protect goodwill: an enforceable non-compete.

But if there isn’t a non-compete, and the employee takes confidential information about the company’s prices, how do you sort out whether the employee made the sales because she had the price information, or because she had relationships with the customers?

Ask me next time you see me at a party.

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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.

[1] See Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 859 (Tex. App.—Fort Worth 2003, no pet.) (a pre-TUTSA case citing price lists and customer lists as information entitled to trade secret protection until trial); T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 24 (Tex. App.—Houston [1st Dist.] 1998, pet dism’d) (same). See also SP Midtown, Ltd. v. Urban Storage, L.P., No. 14-07-00717-CV, 2008 WL 1991747, at *6 (Tex. App.—Houston [14th Dist.] May 8, 2008, pet. denied) (mem. op.) (evidence that customer and price information would allow competitors to slightly undercut plaintiff’s prices and take its business raised a fact issue on whether the information was a trade secret); In re Desa Heating, L.L.C., No. 2-06-088-CV, 2006 WL 1713489, at *2 (Tex. App.—Fort Worth June 22, 2006, orig. proceeding) (mem. op.) (affidavit testimony that competitors could use financial information to undercut company’s pricing to obtain its customers, while “somewhat conclusory and lacking in detail,” was sufficient to establish that information was entitled to trade secret protection in discovery).

The Plain-Language NDA

The Plain-Language NDA

TexasBarToday_TopTen_Badge_VectorGraphicNDAs—also known as Non-Disclosure Agreements or Confidentiality Agreements—have been in the news a lot lately. At the same time, people have been asking me for a form NDA. I wasn’t thrilled with the barnacle-encrusted forms I’d collected, so I figured it was time to write my own NDA from scratch.

NDAs come in all shapes and sizes, but they all have four basic components:

  1. An agreement not to disclose or use the confidential information
  2. A definition of confidential information
  3. Exceptions
  4. Other stuff

And usually the NDA is written with a lot of unnecessary legalese.

That’s not a big problem. When I have a case involving a confidentiality agreement, I’m going to read the agreement—of course—but I’m not going to get too hung up on its specific language.

Don’t get me wrong, the language of the NDA does matter. But regardless of how an NDA is worded, if a dispute about it goes to court, the judge or jury is going to ask themselves the same basic question: did the person who signed the NDA use the company’s confidential information in a way they weren’t supposed to?

The definition of confidential information is the part lawyers tend to make more complicated than it needs to be. You might even question whether any definition is needed at all.

The definition is the first thing I look for when an employee asks for my advice on an NDA proposed by the employer. The most common problem I encounter is that the NDA defines virtually all of the company’s information—confidential or not—as confidential. The problem is that this turns the confidentiality agreement into a de facto non-compete.

Think about it. If, for example, the employee can’t use any information about her customers, then she can’t continue doing business with those customers after leaving.

Sometimes an overbroad definition of confidential information can be fixed simply by inserting the adjective “confidential” before the long laundry list of things the agreement includes in the definition of confidential information.

Another quick fix is to add a simple carve-out: “Confidential information does not include information that is readily available outside the company,” or something like that.

But what if my client is the employer? In that case, I should draft the definition of confidential information as broadly as possible, right?

balance-macro-ocean-235990
You must unlearn what you have learned. About NDAs. Om.

Not necessarily. I view this from the perspective of a trial lawyer. Let’s say there’s a dispute about the employee violating the NDA. The employee is going to have three kinds of information: (1) confidential information, (2) “confidential” information that isn’t really confidential, and (3) information that the employer argues is confidential—but the employee argues is readily available.

If the NDA defines everything as confidential, it’s going to cloud the issue. The employee’s lawyer is going to point out all the non-confidential information the employee has and say “this is ridiculous, how can they argue all this information is confidential?” And that  argument will have some appeal to a judge and a jury.

So whether I represent the employer or the employee, I favor a form of NDA that limits the definition of confidential information to information that is actually, well, confidential.

I also favor plain language. And mainly for the same reason: I’m thinking about how the NDA is going to look to a judge or jury, and there is no good reason not to write it in plain language.

Some of my Fivers may be thinking “isn’t this the same point you already made when you wrote about your Plain-Language Non-Compete?”

Guilty as charged.

But sometimes people just need an NDA, not a non-compete. So here it is: the Plain-Language NDA.

*MASSIVE LAWYER DISCLAIMER* I offer the Plain-Language NDA merely for your consideration. It may or may not be appropriate for your particular situation. And if you are not a lawyer, don’t even think about using it without getting advice from a lawyer.

Also note there is one thing conspicuously absent from my form NDA: a liquidated damages clause, e.g. a requirement that the employee pay $1 million in damages per violation.

You can add one if you want, but liquidated damages clauses are tricky, for reasons I covered in Liquidated Damages Lessons from the Stormy Daniels Settlement. I prefer to avoid that complication.

As with my Plain-Language Non-Compete, some of you may think the Plain-Language NDA doesn’t sound “legal” enough. Others may think it’s not “plain” enough. And some of you may even take issue with some of the substance of it. In any case, let me know. I’d love to hear from you.

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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. By clicking on the link to the Plain-Language NDA, you agree to arbitrate any dispute about it. 

Just kidding.

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.

 

Decisions, Decisions. How Should Employees “Return” Electronic Files?

Decisions, Decisions. How Should Employees “Return” Electronic Files?

TexasBarToday_TopTen_Badge_VectorGraphicRecent press reports like this one say that IBM has a new policy banning its employees from using USB drives. The apparent purpose is to prevent the loss of IBM’s confidential information and trade secrets, whether it’s an employee intentionally taking company files to a competitor or accidentally leaving a USB drive in an airport lounge.

This policy brings to mind that workplace sign, “The floggings will continue until morale improves.”

But I understand where IBM is coming from. Transferring files to a USB drive is the most common way that employees take company files right before walking out the door. With the possible exception of emailing company files to a personal email address. And don’t forget copying files to Dropbox or Google Drive.

Employees do these things all the time, and not necessarily for nefarious reasons. When you need to work at home or on the road, you need some way to get files from Point A to Point B, especially if you use personal devices to do company work. But when a key employee jumps to a competitor, the timing, volume, and content of the copied files can raise suspicion.

A familiar scenario

Let’s consider my favorite hypothetical departing employee case: Paula Payne Windows v. Dawn Davis. As the top sales person for Paula Payne, Dawn Davis routinely emailed herself PowerPoint presentations before hitting the road to pitch to potential customers. These files would include company information on prices and customer preferences.

That was fine with Paula Payne Windows, but things went south when Dawn suddenly announced she was leaving the company—these announcements are always “sudden”—and turned in her company laptop.

Sensing something fishy, Paula Payne had its “IT guy” check Dawn’s laptop for suspicious activity. He found that the day before leaving, Dawn transferred 117 files from the company server to a USB drive connected to her laptop.

Next thing you know, Paula Payne’s lawyer, John Laurens, fires off a letter to Dawn Davis. The letter demands she cease and desist using any of Paula Payne’s confidential information, and that she immediately return all company documents as expressly required by the Non-Competition and Confidentiality Agreement she signed when she joined Paula Payne.

Dawn emails the letter to her lawyer, Maria Reynolds, and asks what she should do.

“Is it true that you transferred company files to a USB drive the day before you left?” Reynolds asks Dawn. “It’s true,” Dawn says. “I needed those documents to prove that Paula Payne owed me $26,000 in commissions,” she adds. “I knew they would stiff me as soon as they found out I went to Real Cheap Windows.”

“And I was right,” Dawn says. “When I asked the CFO about my commissions, she said ‘what commissions?’”

Screen Shot 2018-05-28 at 9.28.43 PM

“Ok,” Reynolds says, “but the letter says one of those files was a complete customer list for the entire company.” “Why did you need that?”

“It doesn’t matter,” Dawn says. “The only thing I’ve done with that drive is copy the files to my personal laptop. I haven’t opened a single one of those files since leaving.”

This is a common scenario. I’ve seen multiple variations on this theme in my own cases and in opinions I’ve read.

A multiple choice test

So what should Dawn’s lawyer do in this situation?

A. Physically deliver the USB drive to opposing counsel and have Dawn delete the files from her laptop. This is the best way to comply with Dawn’s agreement.

B. Have an expert make forensic copies of the USB drive and Dawn’s hard drive, and produce copies of the company documents to opposing counsel. This is the best way to comply with both the agreement and the duty to preserve evidence.

C. Email copies of the documents to opposing counsel and tell Dawn—in writing—not to open any of the files. Even if this is a technical breach of the contractual duty to “return” the files, it is not a breach that causes any damages.

You can make a plausible case for each of these answers, but I think (B) is the safest.

It’s not an easy question, because there are several competing considerations:

– the contractual duty to “return” the company documents

– the duty to preserve relevant evidence, including relevant metadata, when litigation is reasonably anticipated

– the need to preserve evidence to prove the client’s claim to commissions

– avoiding unnecessary expense to the client

Let’s break down how each answer deals with these factors.

Go ahead and give it to me

The first part of Answer (A) is physically delivering the USB drive to opposing counsel. This has the benefit of complying with the contractual duty to return company documents.

But there’s a problem: you can’t be assured opposing counsel will properly preserve the metadata on the USB drive. It may be important later to determine when the USB drive was plugged in, what was transferred from it, etc.

The second problem raised by (A) is what to do with the files copied to the employee’s laptop. The employer may argue the employee has the same duty to return these files as if they were on paper. But “returning” copied electronic files is really a non sequitur.

So maybe you can accomplish the purpose of returning the files by deleting them?

The problem is that the employee has a duty to preserve evidence, including potentially relevant metadata. If the employee deletes the files, the employer could seek sanctions for spoliation of evidence.

The other side of the coin is that the employee may want the files to prove they were not opened. For these reasons, deleting relevant files is generally a bad idea, and (A) is not the best answer.

Answer (B) is safer because it preserves all the electronic evidence, including metadata. You may not always need the metadata, but at least this approach leaves your options open.

But is it enough to produce copies of the files to the employer’s lawyer? The agreement says the employee must return the files. If the employee keeps copies, the employer can argue that the employee breached the contract.

Are you experienced?

This came up in a case I had where an employee kept company documents needed to prove he earned a promised performance bonus. Opposing counsel told me the company was upset when they found out he had the documents. I explained that he kept the documents because he feared (correctly) the company would refuse to pay his bonus, and the documents proved he was entitled to it. “Well he could have returned the documents and then asked for them in discovery,” he said.

Yeah, right.

As this experience illustrates, sometimes you have to make a judgment call and keep copies of the documents, even if it may give the company the argument that your client breached the contract.

Ok, you say, but if you’re going to accept this risk anyway, then what’s wrong with Answer (C), just telling the client not to use the documents?

Here’s the problem. If your client has taken company documents, then opposing counsel, the judge, and the jury (if you get that far) will probably already be suspicious. You don’t want to compound that suspicion. It’s usually better if your client can say—truthfully—“as soon as I found out a lawsuit was likely, I turned everything over to my lawyer and didn’t touch it.”

But I wouldn’t say Answer (C) is always wrong. Sometimes, the expense of making forensic copies may not be justified. The former employer’s demand letter may just be a “shot across the bow” to get the employee to back off a little. In some cases a suit may never get filed.

So there is no one-size-fits-all solution to the problem of “returning” electronic files taken by a departing employee. But if you’re the lawyer representing the employee who took the documents, you should at least discuss the options.

If you’re the employee, consider not taking any documents in the first place.

And if you’re the employer? I hear IBM has some ideas.

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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.