“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.

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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.

 

First Western: A Court of Appeals Decision on the Defend Trade Secrets Act

First Western: A Court of Appeals Decision on the Defend Trade Secrets Act

TexasBarToday_TopTen_Badge_VectorGraphicAh, the fall season, it’s finally here. When the Astros win the World Series, the Cowboys win as many games as they can while Ezekiel Elliott can still play, and the sweet smell of pumpkin pie and indictments wafts through the nation’s capital. The only thing that could make fall better would be a real Court of Appeals decision applying the relatively new Defend Trade Secrets Act.

And then it appeared like the Great Pumpkin, the day before Halloween.

In one of the first Court of Appeals decisions applying the federal Defend Trade Secrets Act, the Tenth Circuit Court of Appeals recently held in First Western Capital Management Co. v. Malamed that a plaintiff must prove irreparable harm to get a preliminary injunction under the Act.

If you know anything about injunctions, that probably doesn’t surprise you. “Irreparable harm” is one of the traditional requirements for obtaining an injunction.

But it wasn’t that simple. The plaintiff made the plausible argument that, because the statute authorizes an injunction and does not expressly require proof of irreparable harm, then evidence of irreparable harm is not required. In other words, there is a presumption of irreparable harm when the plaintiff proves the statute was violated.

The Tenth Circuit rejected this argument. The Court of Appeals reconciled its prior decisions by drawing a distinction between a statute that mandates injunctive relief and a statute that merely authorizes injunctive relief. When a statute only authorizes an injunction—as the DTSA does—then the plaintiff still has to prove the “traditional” requirements for an injunction, including irreparable harm.

The district court had already found that the plaintiff did not prove irreparable harm, so the Court of Appeals reversed the preliminary injunction. (You can read more about the district court opinion here.)

So what does this case from Colorado mean for lawyers who handle trade secrets litigation in my home state of Texas?

Lessons from First Western: Plaintiffs should offer evidence of irreparable injury

As I said here, if you represent a plaintiff asking for a preliminary injunction in a Defend Trade Secrets Act case, you should offer evidence of irreparable harm. Then you can make two arguments. First, we’ve proven irreparable harm. Second, even if we haven’t proven irreparable harm, we don’t have to.

Unless and until the Fifth Circuit Court of Appeals holds that the Tenth Circuit got it wrong in First Western, you don’t want the second argument to be your only argument; you want it to be your fallback position. So come prepared with evidence of irreparable harm.

But what evidence is that?

There is no single way to show irreparable harm, but here are a few typical arguments that damages would be inadequate to compensate your client for the defendant’s use of your client’s trade secrets:

  • It will be difficult to quantify the amount of damages.
  • Loss of the trade secrets at issue will be irreversible.
  • It’s unlikely the defendant has sufficient assets to satisfy a judgment for damages.

These arguments don’t always hold up to scrutiny, but you want to have something to argue. The judge will feel more comfortable granting an injunction if you at least offer some evidence to try to show irreparable harm.

Of course, if you represent the plaintiff you can still argue that proving a violation of the statute is sufficient. There is some authority in the Fifth Circuit for the proposition that “where a statute expressly provides for injunctive relief, irreparable harm is presumed and need not be established.”[1]

You can also cite pre-DTSA case law holding that the threatened disclosure of trade secrets is presumed to cause irreparable injury.[2]

But you don’t want to put all your eggs in one basket.

Should the First Western principle apply to Texas statutes?

If you represent the defendant in a Texas trade secrets lawsuit, First Western can help you in two ways. First, and more obvious, you can cite First Western for the argument that the plaintiff still has to prove irreparable harm to get an injunction under the Defend Trade Secrets Act.

First Western isn’t binding in the Fifth Circuit, you can concede, but its reasoning is sound. When Congress passed the DTSA, it was well aware (in theory) of the long-established principle that courts require proof of irreparable injury to get an injunction. If Congress had wanted to excuse plaintiffs from that requirement, it could have expressly said so.

Second, and perhaps less obvious, defendants can argue that the principle applied in First Western should also apply to the Texas trade secrets statute and the Texas non-compete statute.

Like the Defend Trade Secrets Act, these statutes expressly authorize but do not require injunctions.

Just as the DTSA says a court “may grant” an injunction, the Texas non-compete statute says that a court “may award” injunctive relief.[3] Similarly, the Texas Uniform Trade Secrets Act says that actual or threatened misappropriation of trade secrets “may be enjoined.”[4]

The fact that these statutes do not mandate an injunction for violating the statute means that the plaintiff still has to prove the traditional equitable requirements for obtaining an injunction—including irreparable harm.

At least that’s the argument, applying the distinction from First Western.

Just keep in mind there have been some Texas cases going the other way, suggesting that proof of irreparable injury is not required because the non-compete statute preempts other law and expressly authorizes injunctions.[5]

Personally, I think that’s wrong, but until the Texas Supreme Court definitively decides the issue, if I represent the plaintiff I may at least make the argument that proof of irreparable injury isn’t required.

Now if only I could convince the Second Circuit to let Zeke play.

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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.

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, e.g., U.S. v. McMillan, 946 F. Supp. 1254, 1266 (S.D. Miss. 1995) (citing  EEOC v. Cosmair, Inc., 821 F.2d 1085, 1090 (5th Cir. 1987), and U.S. v. Hayes Int’l Corp., 415 F.2d 1038, 1045 (5th Cir. 1969)).

[2] See Heil Trailer Int’l Co. v. Kula, 542 Fed. Appx. 329, 335 (5th Cir. 2013) (citing Texas cases). Courts are a little imprecise about this. You could read the cases to say that the disclosure of trade secrets is irreparable injury, or that disclosure of trade secrets excuses the plaintiff from proving irreparable injury, but the distinction may be academic.

[3] Tex. Bus. & Com. Code § 15.51(a).

[4] Tex. Civ. Prac. & Rem. Code § 134A.003(a).

[5] Compare Sanders v. Future Com, Ltd., No. 02-15-00077-CV, 2017 WL 2180706, at *10 (Tex. App.—Fort Worth May 18, 2017, no pet.) (mem. op.) (plaintiff that proves violation of non-compete statute is entitled to permanent injunction without showing of traditional injunction elements), with Argo Group US, Inc. v. Levinson, 468 S.W.3d 698, 701-2 (Tex. App.—San Antonio 2015, no pet.) (joining courts holding that a plaintiff seeking a temporary injunction for violation of the non-compete statute still must show irreparable injury).

How Low Can You Go? Courts Set Bar for “Reasonable Measures” to Protect Trade Secrets

How Low Can You Go? Courts Set Bar for “Reasonable Measures” to Protect Trade Secrets

This is part four of my four-part series commemorating the one-year anniversary of the Defend Trade Secrets Act. The series culminates tomorrow with a live webcast from the Texas State Bar: “One Year of Defend Trade Secrets Act Litigation.”

What is the minimum it takes to meet the Defend Trade Secrets Act’s “reasonable measures” requirement?

Meet Kenny Ribler. He was a regional sales manager for Protech, a company that sells world-class perimeter security systems for sensitive sites. Protech fired Kenny on February 16. In the early morning hours of the following day, Kenny downloaded files from Protech’s customer-management database to a private drive. Then he emailed the files to his personal email account and deleted the emails from his company account.

Protech claims the downloaded files contain confidential Protech information concerning customers, products customers purchased, and profit margins. The customer information includes:

  • Product preferences
  • Buying patterns
  • Credit profiles
  • Customer invoices and pricing
  • Customer practices
  • Margins and profit variances

In other words, Protech claims that Kenny took the typical sort of customer list information at issue in “soft” trade secrets cases. As I explained here, this has been the most common type of lawsuit in the first year of the Defend Trade Secrets Act.

Protech argues that this information would give a competitor an unfair advantage. A competitor could use the information to undercut Protech’s price quotes, to offer better service, and to divert Protech’s customers.

Time out. Isn’t price competition a good thing? Don’t we want competitors to try to take business away by charging lower prices? Don’t we want competitors to divert business by offering better service? Aren’t these basic foundations of our free-market system?

Hold that thought.

Protech also claims that it took “significant” steps to protect its confidential information, including (1) requiring employees to sign confidentiality agreements, and (2) only enabling its employees to gain access to the data through “password-protected entry points.” I assume this means computer passwords.

Here’s the legal question. In a federal lawsuit under the Defend Trade Secrets Act, are these facts enough for a judge to issue a Temporary Restraining Order barring Kenny from using any of the information he downloaded or soliciting business from any Protech customer?

The judge in Protection Technologies, Inc. v. Ribler thought so. “At this stage,” the judge wrote, “the court is satisfied that the customer data that Ribler allegedly downloaded constitutes a trade secret.” “Moreover,” the judge said, “the court finds that Protech took reasonable measures to keep this information secure by requiring employees to sign confidentiality agreements and limiting access to the data to password-protected entry points.”[1]

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“Reasonable measures” is one bar that must be cleared in trade secrets litigation

Why this last part about “reasonable measures”? It has to do with the definition of “trade secrets” in the Defend Trade Secrets Act (which is roughly the same as the definition in the Uniform Trade Secrets Act). Essentially, you have to prove three things to show that a customer list, or any kind of information, is a trade secret:

  • The information has “independent economic value”
  • The information is not “readily ascertainable” by competitors
  • The company took “reasonable measures” to keep the information secret

The big fight is usually over the first two elements. The “reasonable measures” element gets relatively less attention. Perhaps that is because courts tend to set the bar low for reasonable measures. If it’s enough to show that the company requires confidentiality agreements and has password-protected computers, then most companies are going to be ok.

Can the bar go any lower? What if the company doesn’t require employees to sign confidentiality agreements? In Texas, an employee has a common-law duty of confidentiality anyway, so should the lack of a written agreement make a difference? Is it enough if the company just has a written policy that company information is to be kept confidential?

That remains to be seen. In the meantime, companies that want to protect their trade secrets should be careful not to neglect the “reasonable measures” requirement. It may be a low bar, but it’s still a bar that must be cleared.

Just ask the plaintiff in M.C. Dean v. City of Miami Beach. As I wrote here last August, in that case the federal district court dismissed a Defend Trade Secrets Act lawsuit because the plaintiff failed to plead a plausible case that it made reasonable efforts to maintain the secrecy of the information. The key fact that doomed the trade secrets claim was that the plaintiff sub-contractor signed a contract that expressly stated the information at issue could be used by the City of Miami Beach without restriction.

But in most cases, it won’t be that hard for the plaintiff to plausibly plead and prove “reasonable measures” to keep the information secret.

“Reasonable measures” in price undercutting cases

This means companies that take basic steps to protect the confidentiality of their customer information, including prices, will be able to pursue the “price undercutting” theory seen in Protection Technologies and many other soft trade secrets cases. But as I asked earlier, shouldn’t courts want to promote price competition?

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Price “undercutting” is a common theory in trade secrets cases

Well, yes, of course. We don’t want to discourage competition. On the other hand, we don’t want to allow a competitor to undercut a company’s prices by using the company’s trade secrets. Deciding whether price information is in fact a “trade secret” therefore becomes critical. It is the dividing line between fair and unfair competition.

Here the “reasonable measures” issue becomes important. If a company wants to argue that its prices are trade secrets, it must take reasonable measures to keep the prices confidential.

Wouldn’t this include requiring customers to sign confidentiality agreements barring them from disclosing the company’s prices? If Protech, for example, did not require its customers to keep its prices confidential, did it really take reasonable measures to keep those prices secret?

As in most cases addressing the price undercutting theory, this argument was not addressed in the Protection Technologies opinion. But if you represent the plaintiff in a price undercutting case, you should be ready to address it. Especially after people read my blog.

This is my 50th blog post! I want to thank some special people who helped Five Minute Law get this far: Chief of Proofreading Barbara Hoffman, Graphic Design Guru Rebecca Wolfe, Director of Small Business Mentoring Allan Wolfe, and No. 1 Fan Valerie Figone.

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IMG_4571
Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. 

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] Protection Technologies, Inc. v. Ribler, No. 3:17-cv-00144-LRH-WGC, 2017 WL 923912 (D. Nev. Mar. 8, 2017).

Location, Location, Location: It’s Important in Trade Secrets Litigation Too

Location, Location, Location: It’s Important in Trade Secrets Litigation Too

This is part three of my four-part series commemorating the one-year anniversary of the Defend Trade Secrets Act. 

How did the Defend Trade Secrets Act change where trade secrets lawsuits get filed?

TexasBarToday_TopTen_Badge_VectorGraphic

Congress passed the Defend Trade Secrets Act in May 2016. As I wrote here last week, the first year of case law seems to confirm that “the main effect of the DTSA has been to shift some typical customer list cases from state court to federal court.” Or as this recent article in Business Law Today stated, “the DTSA’s primary function to date has been to create a path for plaintiffs to litigate what historically were essentially state law trade secret claims in federal court.”

In most cases, the Defend Trade Secrets Act effectively gives the plaintiff the option to file a trade secrets lawsuit in state or federal court.  Why?  The language of the Defend Trade Secrets Act is largely—but not entirely—the same as the language of the Uniform Trade Secrets Act, which most states have enacted.

So, a plaintiff with a trade secrets claim can usually assert the same claim under both state and federal law. Usually, the plaintiff chooses from two options: (1) assert a state-law trade secrets claim in state court, or (2) assert both state-law and federal trade secrets claims in federal court.[1]

This is a significant advantage for a plaintiff. Whether a case ends up in state or federal court can be a game-changer. Litigators and their clients generally view federal courts as less hostile to big companies and state courts as friendlier to the “little guy,” although this is only a generalization.

Regardless of which you choose, it’s nice to have the choice if you’re the plaintiff.

But do you get to choose the location where you file your trade secrets lawsuit? It depends. If the suit includes a DTSA claim, then any federal court in any place in the country has jurisdiction over the subject matter of the suit. But the court must also have personal jurisdiction over the defendant. If the defendant resides in the state where he is sued, then it’s simple. If not? Then it gets messy. The defendant must have sufficient contacts with the forum state to be subject to personal jurisdiction there.

Personal jurisdiction in Defend Trade Secrets Act cases

Personal jurisdiction law is messy because it’s based on vague notions of “reasonableness.” It essentially comes down to this: Did the defendant have enough contact with the forum state that it would be reasonable for him to expect that the lawsuit at issue would be filed there?

As I wrote here, the personal jurisdiction buzzwords that lawyers learned in law school don’t give you the answer. You have to look at the “sub-rules” that have developed in the case law. The key sub-rule for trade secrets cases is this: generally, a defendant will be subject to personal jurisdiction if he was physically present in the state when he obtained or disclosed the alleged trade secrets. It’s only a general rule, but it will usually give you the right answer.

So, when a defendant’s contact with California was that he once lived there and that he received the confidential information at issue in his Gmail account, that was not enough. The fact that his Gmail account “lived” on Google’s servers in Silicon Valley? A creative argument, but it was not enough to convince the judge in OOO Brunswick Rail Management v. Sultanov, a case I wrote about here.

Gold Medal Products v. Bell Flavors & Fragrances was a closer case.[2] The question in that case was whether an Illinois company that allegedly obtained an Ohio company’s trade secrets could be sued in Ohio.

So far, most of the cases applying the Defend Trade Secrets Act have involved customer lists and other “soft” trade secrets, but Gold Medal was a good old-fashioned “secret sauce” case. The employee, Sunderhaus, was the company’s chief “food technologist” with access to the company’s secret recipes for its Glaze Pop® popcorn coatings.

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Gold Medal v. Bell Flavors shows that jurisdiction can be a sticky issue in trade secrets litigation

Gold Medal engaged an Illinois company, Bell Flavors, to help develop new flavors. Bell Flavors signed a confidentiality agreement with Gold Medal and repeatedly visited Gold Medal’s facility in Ohio. Sunderhaus later left Gold Medal and joined Bell Flavors in Illinois as a “savory flavorist.” Bell Flavors then assigned Sunderhaus to work for a Chinese company that developed a new caramel-flavored popcorn glaze to compete with Gold Medal.

I don’t make this stuff up, people.

The jurisdiction issue was whether Bell Flavors, located in Illinois, could be sued for trade secret misappropriation in Ohio, where the employee allegedly obtained the trade secrets. The federal district court said no.

The key was that Bell Flavors did not travel to Ohio to recruit Sunderhaus or misappropriate the trade secrets in Ohio. Rather, Sunderhaus lawfully obtained the alleged trade secrets in Ohio, left to work for Bell Flavors in Illinois, and then allegedly provided the trade secrets to Bell Flavors in Illinois.

So, Gold Medal‘s holding is consistent with my “sub-rule” for personal jurisdiction in trade secrets cases. Under that sub-rule, there is no question Sunderhaus would be subject to jurisdiction in Ohio; he worked for the company there and allegedly obtained the trade secrets there. But Bell Flavors was not subject to jurisdiction in Ohio because it did not obtain or use the trade secrets in Ohio.

*UPDATE: This case ended up in the Northern District of Illinois, where the Defendants moved for summary judgment on the ground that the Glaze Pop recipe and “flavor profile” was not a trade secret. The court denied the motion, finding the evidence inconclusive on trade secret status, “one of the most elusive and difficult concepts in the law.” Gold Medal Prods. Co. v. Bell Flavors & Fragrance Inc., No. 1:17-CV-4084, 2018 WL 1135629, at *3 (N.D. Ill. March 2, 2018).

Promoting uniformity in trade secrets law?

As we’ve seen, the Defend Trade Secrets Act didn’t change the fact that the defendant has to be subject to personal jurisdiction in the state where you sue him for misappropriating your trade secrets. But did it change the law that will apply to your claim?

Not really. That’s because the Defend Trade Secrets Act is largely the same as the Uniform Trade Secrets Act that most states have adopted. I have to hedge a bit, because there are some differences.

Lawyers Alex Harrell and Michael Yim wrote an excellent article in the April 2017 Texas Bar Journal called The Defend Trade Secrets Act: Comparing the New Federal Statute with the UTSA. It provides a thorough and detailed comparison with the Uniform Trade Secrets Act.

But there is one statement in the article I disagree with: “The DTSA strengthens trade secret protections by furthering nationwide uniformity in this area of law.”

Yes, uniformity was one of the purported benefits of the Defend Trade Secrets Act. But think about it. As the authors of the Texas Bar Journal article also point out, the DTSA does not preempt state trade secrets law. That means the DTSA just adds an additional layer of federal trade secrets law on top of the trade secrets laws of 50 states. How does that promote uniformity?

No, the Defend Trade Secrets Act doesn’t necessarily promote uniformity in trade secrets law. But apparently it will help the US maintain its strategic superiority over China in savory popcorn flavor technology.

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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. Rumors that he once ate an entire bag of Glaze Pop® popcorn by himself are exaggerated. 

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] Theoretically, a plaintiff could initiate a federal trade secrets claims in state court, but there would not be much point in that.

[2] Gold Medal Prods. Co. v. Bell Flavors & Fragrances, Inc., No. 1:16-CV-00365, 2017 WL 1365798 (S.D. Ohio Apr. 14, 2017).

It’s All In Your Head: Customer List Cases Under the Defend Trade Secrets Act

It’s All In Your Head: Customer List Cases Under the Defend Trade Secrets Act

TexasBarToday_TopTen_Badge_VectorGraphicThis was part two of my four-part series commemorating the one-year anniversary of the Defend Trade Secrets Act. 

Has the Defend Trade Secrets Act put a stop to corporate espionage by foreign governments and companies?

The NFL draft was last week, so it was a time for predictions. My Dallas Cowboys used their first two picks on guys named Taco and Cheeto. I predict TV commentators will have fun with that.

Speaking of predictions, back in May 2016 when the federal Defend Trade Secrets Act became law, I wrote this:

People think of a shadowy foreign company smuggling sophisticated plans for the next iPhone out of the country.  But the typical trade secrets lawsuit is more mundane.  Given the fact that a “customer list” can be a trade secret, an employer can sue for misappropriation of trade secrets just about every time a low-level sales employee leaves the company with the names and numbers of her customers on her smartphone.  Are routine customer list cases now headed for federal court?  We will see.

A customer list case is a “soft trade secrets” case. Soft trade secrets are the kind almost every company has or claims to have: customer lists, customer information, pricing, business strategies, etc.

“Hard” trade secrets are what people commonly think of as trade secrets: secret technology, secret sauce. This is the kind of thing most members of Congress probably had in mind when the Defend Trade Secrets Act passed with bipartisan support. It is probably also what the press had in mind when they hailed the DTSA as the dawn of a new era of protection of U.S. companies.

Indications from the first opinion applying the DTSA

Henry Schein, Inc. v. Cook was the first opinion I saw applying the Defend Trade Secrets Act. It augured that the typical DTSA case would be a soft trade secrets case. As I reported here, Henry Schein involved customer information in the sale of medical, dental and veterinary supplies and equipment.

Of course, that was just one case. But at that time I made this prediction:

A year from now when we look back at the cases filed in federal court under the Defend Trade Secrets Act, many more of them will be ordinary “customer list” cases like Henry Schein than complex schemes involving sophisticated secret technology. It will turn out that the first case applying the Defend Trade Secrets Act was the typical case.

So has the first year of litigation under the Defend Trade Secrets Act proven me right? Largely, yes. Judging by the opinions available on Westlaw (an admittedly unscientific sample), most Defend Trade Secrets Act lawsuits have been soft trade secrets cases like Henry Schein. I haven’t seen a single DTSA case that involved a foreign government or company stealing secret technology from a U.S. company.*

Another customer list case: First Western

Another good example is First Western Capital Management v. Malamed.[1] It was a classic customer list case.

The customer lists in trade secrets lawsuits usually fall into two categories: (1) a “big” list covering the company’s entire clientele; (2) a shorter list of the employee’s own customers.

The customer list in First Western was a big list: 130 pages, printed from the company’s “CRM” system, containing roughly 5,000 names, including 331 current company clients. The employee also printed out 22 pages of spreadsheets listing names of clients, the total market value of their holdings under management, the management fees being charged by the company, and “similarly sensitive information.”

In short, the customer list in First Western provided the identity of the customers, their specific preferences, and the prices charged to them. These are commonly the alleged trade secrets in a customer list case.

The issue in First Western was whether the company was entitled to a preliminary injunction barring the employee from using the alleged trade secrets to compete for the company’s clients. It’s a good DTSA case to study because it addresses so many interesting issues.

1. Witness credibility

First Western illustrates the paramount importance of witness credibility. The employee, Malamed, instructed his assistant by email to print three copies of the company’s “Client book” that was “on the disc.” Malamed admitted keeping a copy of the printout but said he never looked at it.

The district judge was not impressed with Malamed’s testimony at the temporary injunction hearing. Malamed said he had no idea how the last 22 pages of the printout were included, denied those pages contained highly sensitive client information, and claimed he was not sufficiently computer literate to use a disk or to “really know what a disk is.”

The judge wryly observed: “All of these examples, and others, lead this Court to conclude that Malamed has become willing to make statements or take positions with reference to what he believes will prevent liability in this case.”

Ouch. You could tell it was going to go downhill from there.

Lawyers, push hard on your clients when they plan to offer testimony that is going to raise judicial eyebrows. For example, if your client is going to deny that a customer list contains sensitive confidential information, test that assertion. If it holds up, and that’s really what the client thinks, then prepare the client to stick to his guns. But if not, persuade your client not to deny the obvious.

2. Employee intent

Malamed denied the client list contained trade secrets, claimed he could use public sources or his own memory to recreate a similar list, and did not deny his intent to go to work for a competing firm and service clients on the list. This was enough to convince the judge that Malamed would use the client information to compete with the company if not enjoined.

Again, as First Western illustrates, the lawyer representing the employee who took a customer list has a difficult choice. If you admit the customer list is a trade secret, you’ve helped the plaintiff prove half of its trade secret claim. But if your client denies the list is a trade secret, the judge may see that as evidence your client intends to use it.

3. Price undercutting

The judge in First Western saw a real threat of the employee using his knowledge of the company’s pricing to take its clients:

[W]ithout making any explicit comparison to FWCM, [Malamed] can offer management fees that are, say, a quarter of a percent lower than what he knows the individual was paying at FWCM, and thereby entice the client—who almost certainly would recognize that he or she was being offered a discount as compared to FWCM.

This is the usual “price undercutting” theory. I’ve made the same kind of argument for my clients. But this theory has some problems that the First Western opinion doesn’t address. I’ll have to save that for another blog post.

4. Is a customer list a “trade secret” in the first place?

A trade secret must have “independent economic value” to a competitor in the industry. The judge found that the company’s big customer list had value in two ways. First, the identity of the clients had value. The judge said a compilation of wealthy individuals willing to consider the financial management services the company provided was a valuable asset because it would at least save a competitor the time of identifying prospects by, for example, cold-calling individuals employed in high-paying professions.

Second, the judge found that information about the clients had value: their management fee percentages, preferences regarding risk, time horizon, communication style, etc. These were “informational assets” that a competitor would find “especially valuable.”

Ok, that sounds plausible. But riddle me this, Batman. Couldn’t Malamed just call up a client and say, “Hey, Jim Bob, it’s your buddy Kenny. Can I ask you something? What is your investment manager charging you for management fees? What’s your risk preference? What’s your time horizon?”

That’s the other side of the coin in customer list cases.

5. Does a trade secret have to be on paper, or can it be in your head?

What if the employee credibly testifies that he doesn’t have the customer list anymore and isn’t going to use it? Does that get the employee off the hook?

The judge in First Western didn’t think so. He found it sufficient that Malamed would remember the names of clients and the information about them. “Thus, the Court finds that Malamed, at a minimum, remembers trade secret information, even if he does not possess any trade secrets in physical or digital form.”

What does First Western tell us about the effect of the DTSA?

These were just some of the issues in First Western. None of these issues are unique to the Defend Trade Secrets Act. They are the same issues that would have come up under Colorado’s version of the Uniform Trade Secrets Act.

While the issues in First Western are interesting, the case is further confirmation that the main effect of the DTSA has been to shift some typical customer list cases from state court to federal court.

That is a significant change for lawyers who handle trade secret litigation, but it doesn’t show there was any compelling need to place a federal trade secrets statute on top of the trade secrets laws already found in 50 states.

The defensive line of the Dallas Cowboys generating a more disruptive pass rush next season? Now that’s a compelling need.

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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. His client list is not 130 pages long.

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] First Western Capital Mgmt. Co. v. Malamed, No. 16-cv-1961-WJM-MJW, 2016 WL 8358549 (D. Colo. Sept. 30, 2106).

*After publishing this post, I saw a case where a Chinese company allegedly received a secret recipe for caramel popcorn coating.

Seize Them! One Year of Ex Parte Seizure Orders Under the Defend Trade Secrets Act

Seize Them! One Year of Ex Parte Seizure Orders Under the Defend Trade Secrets Act

Ok, Fivers. You’ve got 21 shopping days left before the one-year anniversary of the federal Defend Trade Secrets Act (DTSA), which was signed into law on May 11, 2016. Do you know what you’re getting me? I for one plan to celebrate by buying a new USB drive, plugging it into my MacBook, and transferring copies of my confidential client list.

I’m also celebrating with special DTSA Anniversary editions of Five Minute Law over the next four weeks. This first installment tackles the part of the DTSA that attracted more attention than any other.

Did the federal trade secret statute’s new ex parte seizure remedy live up to the hype?

There was a lot of talk last May about the Defend Trade Secrets Act’s ex parte seizure provisions. The DTSA allows a federal judge in a trade secrets case to order federal marshals to seize a defendant’s property—usually a computer or smartphone—without notice to the defendant. Critics worried about the potential for abuse of this extraordinary remedy.

I worried too, but not that much. The statutory requirements for getting an ex parte seizure order are strict, and last May I predicted here that “most federal judges are going to set the bar very high for obtaining such unusual ex parte relief.”

Has the first year of litigation under the DTSA proven me right on this point? Well, yes. But honestly, it wasn’t that difficult a prediction.

I haven’t done any comprehensive survey, but trade secrets litigator Paul Mersino recently wrote a nice summary of all the ex parte seizure cases he could find. He only knew of two cases that granted an ex parte seizure remedy under the DTSA, and one of them was so secret, he’d have to kill you if he told you about it.

So, the only case I have read that granted ex parte seizure under the DTSA is Mission Capital Advisors v. Romaka from the Southern District of New York.[1] The court first issued an order requiring the defendant to appear at a hearing to show cause why he should not be restrained from accessing, disclosing, or copying the employer’s client and contacts lists. When the defendant failed to appear, the court found that a Rule 65 order would be inadequate and issued an order directing the U.S. Marshal to seize the defendant’s contacts list from his computer (by copying them to a storage medium and deleting them from defendant’s computer).

Is this it? Is this all you can conjure, Saruman? After all the hand-wringing about federal marshals busting down doors and seizing iPhones from renegade insurance salesmen, we only get one or two ex parte seizure orders in a year? What gives?

There are many reasons ex parte seizure orders have been rare, but the most fundamental reason is this: federal judges can already do a lot with an “ordinary” Temporary Restraining Order under Rule 65 of the Federal Rules of Civil Procedure, and the DTSA itself says that an ex parte seizure order is only allowed when a Rule 65 order would be inadequate. See 18 U.S.C. § 1836(b)(2)(A)(ii)(I). 

Most federal courts addressing ex parte seizure requests have found an ordinary extraordinary remedy would be adequate

Balearia Caribbean v. Calvo, a case in the Southern District of Florida, was one of the first to address an application for an ex parte seizure order under the Defend Trade Secrets Act.[2] A ferry company called BCL sued its former CEO, Calvo, claiming that he hijacked the company’s negotiations to provide ferry service to a Bahamas casino. Before leaving, Calvo allegedly bought a Mac laptop, had it reconfigured to access the company’s electronic information systems, and forwarded confidential emails to his private Gmail account.

Now, I’m all for using a MacBook (which I typed this post on) and a personal Gmail account (which I also have). But come on, man. You just can’t do that stuff.

BCL sued Calvo in federal court under the DTSA and sought ex parte seizure of Calvo’s Mac laptop so that a forensic expert retained by BCL could image the hard drive. But the court found that the risk of Calvo improperly using or destroying the confidential information was not the kind of “extraordinary circumstances” required for ex parte seizure. Instead, the court granted a TRO requiring Calvo to preserve evidence and to appear at a hearing where the court would appoint a special master to take temporary custody of the Mac to have a forensic expert image the hard drive.

Magnesita Refractories v. Mishra, a case in the Northern District of Indiana, was similar.[3] It was another case of a rogue employee with confidential information on his personal laptop (allegedly). Magnesita, the employer, presented emails suggesting that the employee, Mishra, was in talks with a competitor about pursuing potential business ventures in competition with Magnesita.

At the initial ex parte hearing, the judge considered several options to deal with the laptop:

  • Alow Magensita to confiscate the laptop and have it imaged
  • Send the U.S. Marhsal to seize the laptop to be placed in custody
  • Order Mishra not to disseminate or destroy any material on the laptop and to bring the laptop to a hearing a couple days later.

The judge found that Magnesita met the requirements for an ex parte TRO under Rule 65 but declined to order seizure under the DTSA. The judge wrote:

Rather than involve the U.S. Marshal Service, and the potential reputational damage caused by them seizing Mishra’s personal property at his place of employment, I ordered Mishra to turn over to Magnesita’s counsel his personal laptop, which Magnesita would immediately deliver to the Clerk of Court to be secured. To ensure the protection of Mishra’s privacy, I ordered that “Magnesita shall not review any of the contents of the laptop prior to delivering it to the Clerk of Court.” In order to provide Mishra a way to expeditiously address any issues regarding the ex parte TRO, discuss the disposition of the laptop and potential appointment of a Special Master to image the laptop, and set a date for a preliminary injunction, I ordered the parties to appear at an in person hearing two days after I issued the ex parte TRO.

Mishra appeared and testified at the hearing two days later, but the judge found his testimony “far from persuasive” and denied his motion to dissolve the injunction. Mishra would suffer no damages if it was found that his laptop was improperly seized or imaged, the judge found, because the laptop would be returned to him as soon as it was imaged.

Lessons learned from one year under the DTSA’s ex parte seizure provisions

So what can we learn from the cases in the last year addressing the ex parte seizure provisions of the Defend Trade Secrets Act?

First, lawyers seeking to preserve their client’s confidential information or prevent it from being disclosed should usually opt for seeking a Temporary Restraining Order under Rule 65. There is no need to take on the higher burden of obtaining an ex parte seizure order if a TRO would be adequate.

Second, most federal judges are rightly hesitant to order a defendant’s property seized without giving the defendant some chance to respond to the plaintiff’s allegations. A TRO issued without notice is still an extraordinary remedy, but when a judge enters an ex parte TRO requiring the defendant to come to a hearing to turn over his computer for imaging of the hard drive, the defendant at least has some opportunity to respond before turning over his property.

In contrast, when a federal marshal shows up at the defendant’s door and says “I have a court order to seize your MacBook,” the defendant doesn’t have a lot of options.

Of course, the disadvantage of serving the defendant with a TRO first is that the defendant—who presumably already violated some duty of confidentiality—will ignore the commands of the TRO and conceal, delete, or transmit confidential information before turning over his devices. But this risk can be mitigated. Conduct like that almost always leaves some electronic trail, and judges have options like spoliation sanctions for dealing with disobedient litigants.

Agree? Disagree? Post your comments here.

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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.

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] Mission Capital Advisors, LLC v. Ramaka, No. 1:16-cv-05878-LLS (S.D.N.Y. July 29, 2016).

[2] Balearia Caribbean v. Calvo, No. 16-23300 (S.D. Fla. Aug. 5, 2016).

[3] Magnesita Refractories Co. v. Mishra, No. 2:16-CV-524, 2017 WL 655860 (N.D. Ind. Feb. 17, 2017).

 

From Russia with Love: A New Defend Trade Secrets Act Case

From Russia with Love: A New Defend Trade Secrets Act Case

Do Northern California federal courts have jurisdiction over every Gmail user who emails confidential information?

The answer is no, but give points for creativity to the plaintiff in OOO Brunswick Rail Management v. Sultanov, who at least made the argument.  More about that later.

If you like trade secrets cases, you’ve got to love the recent Brunswick case. It has everything. A Russian company. A renegade employee emailing confidential company documents to his personal Gmail account (allegedly). And something every trade secret litigation nerd has been waiting for: an application for an ex parte seizure order under the new federal Defend Trade Secrets Act.

Back in May 2016, then-President Obama signed the Defend Trade Secrets Act (DTSA). As I reported here, the chief practical effect of the DTSA was to give plaintiffs in trade secrets cases the option of suing in federal or state court. Unless you’re a trade secrets litigator like me, that’s pretty boring.

But the sexy part of the DTSA was the new ex parte seizure remedy. “Ex parte” is a Latin phrase that means “you don’t have to tell the judge how crappy your case is.” But seriously, it means only one side presents its case to the judge. The DTSA allows a judge to order federal marshals to seize a person’s property—typically we’re talking about a computer or smartphone—without notice to that person.

This caused some serious handwringing in the legal community. We have an “adversary” system of justice that guarantees due process—at least for now—so lawyers worried about potential abuse of the ex parte seizure remedy.

I agreed with critics who saw no real need for a federal trade secrets statute, but I wasn’t too concerned about a wave of ex parte seizure orders. The DTSA has strict requirements for such orders, and I predicted most federal judges would not grant such an extreme remedy when an ordinary temporary restraining order would do.

A test case for the DTSA’s ex parte seizure remedy

Brunswick is one of the first cases to test my theory. The complaint presented a fairly ordinary misappropriation of trade secrets case, but with a Russian twist:

  • Brunswick is a Russian company that leases railcars to large corporate clients in Russia. After beginning a process to restructure its debt, Brunswick sued its former CEO in a confidential arbitration.
  • A Russian-American named Sultanov went to work for Brunswick and signed a typical confidentiality agreement. Essentially, Sultanov agreed not to disclose Brunswick’s confidential information, that all of Brunswick’s internal information is confidential, and that he would return all Brunswick confidential information on request.
  • Sultanov started acting suspiciously: taking calls one floor up from his office, asking a lot of questions about the debt restructuring, and even coming to work on the weekends. (Big law firm associates take note.)
  • Sultanov emailed confidential Brunswick documents from his work email to his personal Gmail account. He then deleted the emails from his Brunswick account and emptied his “trash” folder. The emailed information could be highly damaging to Brunswick’s debt restructuring negotiations with its creditors.
  • Phone records showed Sultanov repeatedly calling a Brunswick creditor involved in the restructuring.
  • When confronted, Sultanov admitted sending the emails but refused to return his company-issued mobile phone and laptop.

And my favorite allegation from the complaint:

highlighted-brunswick-security-measures

“Extraordinary steps” including “locking its doors.” Wow. I knew Russia had nuclear weapons, but I didn’t realize it now has access to modern door-locking technology.[1]

So far, these facts present an interesting, but typical, trade secrets case against a former employee.[2] Emailing company files to your personal Gmail account on the sly? Come on, man! That’s so last decade. It’s more obvious than getting down on the floor and sticking a USB drive in your PC tower.

But if you’re Brunswick’s lawyer, where do you sue Sultanov? How can you get his computer and phone back quickly? And how can you do it without giving him a chance to tell his side of the story?

It’s time to get creative.

Recent trade secrets case tests two novel theories

First, a little background for my non-lawyer readers. To sue someone in federal court, you need both “subject matter” jurisdiction and “personal” jurisdiction. Subject matter jurisdiction means the court has jurisdiction to hear the type of claim you’re making. Personal jurisdiction means that the court has jurisdiction over the person you’re suing.

Personal jurisdiction is complicated, but in a trade secrets case, it boils down to this: you need to show that the person you’re suing took or received the alleged trade secrets in the state where you’re suing him (as I explained here).

Brunswick came up with the brilliant idea of suing Sultanov in federal court in California for violating the Defend Trade Secrets Act. Subject matter jurisdiction? Check.[3]

Personal jurisdiction? That was a little harder. Sultanov’s sneaky shenanigans all took place in Russia, right?

Not exactly. If you had Encyclopedia Brown on the case, he’d spot a detail you might have missed: Sultanov emailed Brunswick’s confidential information to his Gmail account. And where is his gmail account located? You guessed it: Google headquarters in Silicon Valley.

google-laptop-and-phone

Brunswick argued in its brief that Sultanov was subject to personal jurisdiction in the Northern District of California because he emailed the trade secrets at issue to his Gmail account hosted by Google. Not only that, Sultanov went to high school and college in California and “certainly would be aware that Google is based in California and that his intentional use of Gmail would have effects in California.”

Like I said, points for creativity.

Judge denies ex parte seizure order and rejects creative jurisdiction argument

Brunswick filed suit on January 4, 2017 asking for an ex parte seizure order against Sultanov under the Defend Trade Secrets Act. Two days later, U.S. District Judge Edward J. Avila issued this opinion denying a seizure order but granting a temporary restraining order (TRO).

Judge Davila cited the DTSA provision that a court can grant an ex parte seizure order only if it finds that another form of equitable relief would be inadequate. “Here, the Court finds that seizure under the DTSA is unnecessary because the Court will order that Sultanov must deliver these devices to the Court at the time of the hearing scheduled below, and in the meantime, the devices may not be accessed or modified.”

This seems like the sensible ruling, and the one you would expect most federal judges to make in this situation. It’s the reason I expected that granting an ex parte seizure order would be very rare.

So what happened when Sultanov’s lawyer got a chance to respond? If you’re a litigator, or if you’ve watched a lot of episodes of Law and Order, you know what’s coming.

First, would you believe there was another side to the story? Sultanov’s response painted a very different picture than Brunswick’s complaint. Far from a dishonest employee stealing the company’s trade secrets for personal gain, Sultanov portrayed himself as a conscientious whistleblower exposing corporate fraud, even against his own interest.

I would share more details, but most of Sultanov’s publicly available response looked like this:

sultanov-redacted

Second, Sultanov attacked Brunswick’s creative “Gmail” theory of personal jurisdiction. After hearing arguments from both sides on the personal jurisdiction issue, the judge issued this order siding with Sultanov and rejecting the Gmail theory:

brunswick-excerpt

As a lawyer who has read literally hundreds of personal jurisdiction cases, I can tell you the judge was on solid legal ground.[4] Plus, the Gmail argument would make the Northern District of California to trade secrets litigation what the Eastern District of Texas has been to patent litigation.

That would be bad. I’ve traveled to both Silicon Valley and the Eastern District of Texas for litigation matters. I had some great Korean food in Palo Alto, but California is just too expensive. Tyler and Marshall, on the other hand, are much cheaper and have better BBQ joints.

But I digress.

A lesson about the adversary system

The Brunswick case provides a great lesson about the adversary system, due process, and the reason people got so worked up about the ex parte seizure remedy in the Defend Trade Secrets Act.

First, even when the lawyer asking for an ex parte order is totally honest, he’s unlikely to volunteer any important reasons not to grant the relief. The judge is only going to get one side of the story.

A related problem is that when the judge only hears from one side, no one involved has a strong personal incentive to test the underlying assumptions of the lawsuit. For example, does the court even have personal jurisdiction over the defendant?

So, when the judge in Brunswick issued a 2000-word order granting a TRO against Sultanov, the word “jurisdiction” appeared exactly zero times.

I wasn’t there, but I’m guessing when Judge Davila issued the ex parte order two days after the suit was filed, there wasn’t a robust discussion about whether Sultanov was subject to personal jurisdiction. I’m wondering if the judge was a little ticked off when he later realized that the jurisdictional basis for the TRO he signed was the Gmail theory.

*UPDATE: After allowing limited jurisdictional discovery, Judge Davila granted Sultanov’s motion to dismiss the case for lack of personal jurisdiction. The judge again rejected Brunswick’s Gmail jurisdiction theory. You can read that opinion here.  

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands.

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] In fairness to Brunswick, the Complaint also alleged some pretty extensive additional efforts to protect confidential information.

[2] For simplicity, I’m leaving out facts about Brunswick’s claim against another employee, its former CEO Paul Ostling. Adding those facts would turn this into “Ten Minute Law.”

[3] Federal courts have original but not exclusive jurisdiction over DTSA claims. 18 U.S.C. § 1836(c).

[4] The judge also found that the evidence did not support Brunswick’s additional allegation that Sultanov maintained a personal residence in California. The judge cited Sultanov’s testimony that the address at issue was a family friend’s property that he sometimes used as a mailing address.