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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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] 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

TexasBarToday_TopTen_Badge_VectorGraphicThis is part three of my four-part series commemorating the one-year anniversary of the Defend Trade Secrets Act. The series culminates with a live webcast from the Texas State Bar on May 16: “One Year of Defend Trade Secrets Act Litigation.”

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

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.

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.[3]

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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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. 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).

[3] Houston litigator Jason Sharp informed me there is a bill pending in the Texas legislature that would change the Texas statute. We’ll talk about that in our upcoming webcast.

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 is part two of my four-part series commemorating the one-year anniversary of the Defend Trade Secrets Act. The series will culminate with a live webcast from the Texas State Bar on May 16: “One Year of Defend Trade Secrets Act Litigation.”

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.

There was one issue in First Western that was particular to the DTSA, but you’ll have to tune in to our May 16 webcast to hear about that.

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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head-shot-photo-of-zach-wolfeZach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands. 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. I’m not kidding.

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.

But seriously, I do have some special plans for this occasion. On May 16, 2017, I will host a live webcast at 12:30 Central from Texas State Bar headquarters called “One Year of Defend Trade Secrets Act Litigation.” With special guests: Jason Sharp, who recently joined Gardere as Senior Attorney, and Leiza Dolghih, Shareholder with Godwin Bowman & Martinez and publisher of the excellent blog North Texas Legal News. Texas lawyers can find registration information here.

If you can’t watch the webcast, don’t worry. 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, and Texas lawyers be sure to register for our live webcast on May 16.

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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. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, 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] 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.

Call Crockett and Tubbs: Three Lessons from the Recent Miami Case on the Defend Trade Secrets Act

Call Crockett and Tubbs: Three Lessons from the Recent Miami Case on the Defend Trade Secrets Act

Last week I learned from Houston litigator Jason Sharp that a federal court in Florida recently issued an opinion concerning the new federal Defend Trade Secrets Act (DTSA). This is a big deal if you are a trade secrets litigation nerd. It’s probably kind of like how my mom felt as a teenager when a new Beatles record came out.

In M.C. Dean, Inc. v. City of Miami Beach, the federal district court dismissed a trade secrets lawsuit because the plaintiff failed to plead a plausible case that it made reasonable efforts to maintain the secrecy of the information and that the information was “misappropriated” by the defendants.[1]

This new case teaches us some important things about federal trade secrets litigation:

  1. It’s good to know people who keep up with new DTSA cases so you don’t have to.
  1. For Texas lawyers, who now have the option to file trade secrets lawsuits in state or federal court, the higher pleading standard in federal court is a factor to consider, but not that big a deal (as I will explain).
  1. No one should file a trade secrets case in federal court without using my essential checklist for properly pleading a DTSA claim.

Let’s break this down.

Lesson 1: Follow people who follow recent trade secret cases.

This one is self-evident.

Lesson 2: Federal pleading standards are a factor, but not a big factor, in deciding where to file a trade secrets lawsuit.

Lesson 2 arises from the difference in pleading standards between Texas state court and federal court. Most lawyers learned in law school that both state and federal courts allow “notice pleading,” meaning that it is sufficient to file a pleading that gives the other side “fair notice” of your claim. However, in the famous pair of cases Twombly and Iqbal, the U.S. Supreme Court held that what law school professors had been teaching all those years was wrong. It turns out that in federal court you have to plead specific facts sufficient to establish a “plausible” basis for your claims. The defendants in M.C. Dean used this principle to their advantage by arguing the plaintiff failed to plead a “plausible” trade secrets claim.

Beach
The City of Miami Beach argued the plaintiff failed to plead a plausible trade secrets claim

Texas state courts, in contrast, still allow notice pleading. Or do they? As hypothesized in this interesting post on a recent Texas Supreme Court case, Texas courts may be moving towards the higher “factual plausibility” standard of federal court. But for now it is probably safe to assume that pleading standards are higher in federal court.

Why does the difference in pleading standards matter for trade secrets cases? As I wrote in this earlier post, the Defend Trade Secrets Act is very similar to the Uniform Trade Secrets Act that most states have adopted, but it does not preempt state trade secrets law. Thus, as Sharp and I discussed in a webcast for TexasBarCLE, the primary practical effect of the DTSA is to give plaintiffs the option to file trade secrets lawsuits in federal court (as long as there is a sufficient connection to interstate or foreign commerce).

So when deciding whether to file a trade secrets claim in state or federal court, the M.C. Dean case shows that the higher pleading standard in federal court favors filing in state court, right?

Well, not so much. M.C. Dean was an unusual case in two ways. First, it was not the typical trade secrets case where an employee leaves a company and goes to work for a competitor, taking alleged trade secrets with him. Rather, it was a case where the plaintiff voluntarily provided the alleged trade secrets to another party pursuant to a contract. In the more typical case, it is easier to allege misappropriation.

Trade Secret File
Does M.C. Dean, Inc. v. City of Miami Beach show that it is better to file a trade secrets lawsuit in state court?

Second, the reason for dismissal in M.C. Dean was not that the plaintiff failed to plead sufficient facts to support the trade secrets claim. The problem was that undisputed facts—namely, the contract at issue—affirmatively negated the plaintiff’s trade secrets allegations. Specifically, the key fact that doomed the plaintiff’s trade secrets claim was that the plaintiff, a sub-contractor on a City construction project, signed a contract providing that the information at issue was the property of the City and could be used by the City without restriction. It is hard to see how pleading more facts would have saved the case from this fundamental defect.

In most cases, it’s really not that hard to plead a plausible trade secrets claim. So, if filing in federal court is otherwise a good strategy for your trade secrets case, the higher pleading standard in federal court is unlikely to change your decision.

M.C. Dean does provide a good reminder that lawyers who file trade secrets claims in federal court need to be careful to plead enough specific facts to state a plausible basis for the essential elements of the claim. If you find yourself struggling to plead facts establishing a plausible claim, that is a good sign that maybe you shouldn’t be filing the lawsuit in the first place.

Lesson 3: Use a checklist to make sure you adequately plead your federal trade secrets claim.

So, if you are filing a lawsuit in federal court under the Defend Trade Secrets Act, how can you make sure that you are alleging facts sufficient to avoid having your case dismissed? The only way to be certain is to use my special checklist, available for free here.

I’m kidding, of course (sort of). You can get the same points by reading the key provisions of the statute and making your own checklist.

But hey, like the Beatles said, “I need a job, and I want to be a paperback writer.”

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cropped-head-shot-photo-of-zach-wolfe.jpg

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. His wife does the graphics (at least the good ones).

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] M.C. Dean, Inc. v. City of Miami Beach, 2016 WL 4179807, at *7-8 (S.D. Fla. Aug. 8, 2016).

Landmark Case Applying Defend Trade Secrets Act Ensures America’s Dental Trade Secrets Will Be Safe For Future Generations

Landmark Case Applying Defend Trade Secrets Act Ensures America’s Dental Trade Secrets Will Be Safe For Future Generations

There is perhaps nothing more irritating than someone saying “I told you so.”  And yet, it must be done.

Back in May, shortly after the new federal Defend Trade Secrets Act was signed into law, I said in a blog post:

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.

A few weeks later, the first court opinion citing the Defend Trade Secrets Act came out of the Northern District of California.[1] Litigators everywhere relished the chance to see how courts would apply this sweeping new federal statute that promised to move complex trade secrets from provincial state courts to the lofty halls of the federal judiciary, where the majestic courtrooms look like a set from JFK rather than Night Court.

Curiosity raged. Would it be a case of foreign intrigue, cyber-hacking, and sophisticated corporate espionage in Cupertino? Would the judge use the controversial new ex parte seizure remedy to have federal marshals swoop in to intercept a shadowy Jason Bourne-like character riding a motorcycle over the Golden Gate Bridge—the wrong way—smuggling a tiny USB drive hidden in a fake shaving cream can?

Actually, what was notable about Henry Schein, Inc. v. Cook, the first court opinion I’m aware of that cites the Defend Trade Secrets Act, was how ordinary it was. This was a typical “soft” trade secrets case involving allegations that a sales employee took confidential customer information from the company to a competitor.

The employer’s business—and I don’t mean this as an insult—could not have been more ordinary: “marketing, distributing, and selling medical, dental and veterinary supplies and equipment, and other healthcare products, to medical, dental, and veterinary practitioners, and other healthcare professionals and organizations.”

Veterinary supplies! It’s good to know that Congress acted just in time to make sure the nation’s top-secret veterinary and dental technology does not fall into the wrong hands.

The basic facts were also fairly ordinary:

  • Henry Schein, Inc. (HSI) hired Cook to work in sales.
  • Cook signed a confidentiality agreement that required her to hold “in strictest confidence” any confidential information “concerning the products, processes, services, business, suppliers, and customers of HSI.”
  • Cook resigned from HSI and—get this—went to work for one of HSI’s competitors.
  • Shortly before leaving, Cook allegedly forwarded confidential files to her personal email and saved company files on her laptop.
  • Shortly after resigning, Cook allegedly accessed the HSI computer system using a web-based iPad app and her company credentials.

The relief HSI sought was also typical. HSI did not invoke the ex parte seizure provisions of the Defend Trade Secrets Act. Instead, it filed a typical application for TRO to bar Cook from using or disclosing confidential information or soliciting customers assigned to her while she was an HSI employee, which the court granted in large part.

What were the trade secrets that required this extraordinary relief? Again, the alleged trade secrets could not have been more ordinary:

  • “several comprehensive, confidential HSI customer practice reports that were produced using HSI’s proprietary software”
  • “numerous additional customer-related reports, including an equipment inventory report, price quotations for prospective customers, and equipment proposals on which HSI was working”
  • “information related to HSI’s customers, products, margins, profit percentages, credit profiles, preferences and markets, particularly with respect to the customers assigned to her”
  • “Customer information such as sales history and customer needs and preferences”

Don’t get me wrong. I’m not belittling this kind of typical case. I have represented clients in trade secrets cases involving “boring” industries like wholesale lumber and home and auto insurance. Even if the case wouldn’t make an exciting John Grisham novel, it is usually a very serious matter for the participants.

My point is that this first case citing the Defend Trade Secrets Act tends to support my view that the need for a federal trade secret cause of action in federal court was probably overstated, especially considering 48 states already had some version of the Uniform Trade Secrets Act.

At the same time, I think the new federal statute will probably not do much harm. As Henry Schein illustrates, the types of trade secrets cases that will be filed probably won’t change much. What will change is where they get filed, i.e. more of them will be in federal court.

You may object that I’m attaching too much significance to one little federal district court opinion, and you would have a point. Henry Schein, Inc. v. Cook is just one case, and it may tell us very little about what federal litigation under the Defend Trade Secrets Act is going to look like.

But I will make 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.

And then it will be even more annoying when I say, “I hate to say I told you so . . .”

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cropped-head-shot-photo-of-zach-wolfe.jpg

Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn 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] Henry Schein, Inc. v. Cook, 191 F.Supp.3d 1072 (N.D. Cal. 2016).