A Series of Unfortunate Trade Secrets

A Series of Unfortunate Trade Secrets

Prologue: Look Away

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

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

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

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

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

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

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

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

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

Chapter One: The Pleadings

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

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

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

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

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

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

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

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

Chapter Two: Interrogatories

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

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

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

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

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

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

Chapter Three: Mandamus

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

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

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

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

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

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

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

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

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

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

Chapter Four: The Corporate Rep Deposition

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

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

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

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

Screen Shot 2018-04-15 at 9.40.49 PM

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

Chapter Five: Motion for Summary Judgment

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

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

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

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

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

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

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

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

 

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

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

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

You see, employers have three kinds of confidential information:

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

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

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

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

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

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

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

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

Screen Shot 2018-03-25 at 9.11.57 PM

Don’t worry, I’ll explain.

Trade Secrets Law

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

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

Confidentiality Agreements

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

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

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

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

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

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

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

Fiduciary Duty Lite

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

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

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

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

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

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

Anti-Hacking Statutes

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

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

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

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

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

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

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

Are we clear?

___________________________________________________________________

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

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

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

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

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

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

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

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

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

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

“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.

 

Witness Preparation Lessons from the Waymo v. Uber Trial

Witness Preparation Lessons from the Waymo v. Uber Trial

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

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

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

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

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

Laser is the Sauce

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

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

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

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

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

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

My Witness Preparation Jam Sesh

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

Screen Shot 2018-02-10 at 2.58.03 PM

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

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

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

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

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

Three Ways to Answer Argumentative Questions

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

(1) The Just Answer the Question approach

(2) The Dog With a Bone approach

(3) The You Get to Argue Once approach

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

Just Answer the Question

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

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

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

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

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

Just don’t take this too far.

Dog With a Bone

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

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

Screen Shot 2018-02-10 at 5.55.59 PM

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

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

You Get to Argue Once

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

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

Screen Shot 2018-02-10 at 6.30.16 PM

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

Different Strokes for Different Folks

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

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

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

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

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

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

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

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

___________________________________________________________________

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

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

 

Trade Secrets 101 – What Texas Businesses and Lawyers Need to Know

Trade Secrets 101 – What Texas Businesses and Lawyers Need to Know

I was listening to Huey Lewis in my garage recently and started singing to myself, I Want a New Goal.

See, I often write about issues of trade secrets law that come up in new cases or that I find interesting, but I got to thinking that people who don’t regularly deal with trade secrets litigation might just want to know the basics. So, I made an ambitious goal for myself: write a memo that talks, right down to earth, in language everyone can easily understand, about the basics of trade secrets law.

Easy, right? But here’s the catch: it has to be 5,000 words or less.[1]

After accomplishing this goal, I wondered if anyone would really care about my memo. But then the drumbeat started. I kept seeing tweets about “Release the Memo,” and then even the President weighed in.

After careful consideration, I have decided to de-classify and release my memo: “Trade Secrets 101” – Texas Trade Secrets Law in 5,000 Words or Less.

Please let me know what you think of it. Did I leave out something important? If so, what would you delete to make room for what I left out? Is it too technical for non-lawyers? Too superficial for practicing lawyers? I want to know.

And here is a little background to the memo, to give you some context.

Is trade secrets law hard to understand? 

Let’s back up and look at trade secrets law in general. Is it hard to understand?

Not especially. The good news is that trade secrets law is fairly intuitive, at least compared to other areas of intellectual property law.

For example, take the question “can a plaintiff claim trade secret protection for information that it did not keep secret?” If a company publicizes information, you wouldn’t think it can claim the information is a trade secret. On the other hand, you wouldn’t think the mere fact that confidential information escaped from the company would be sufficient to destroy the information’s trade secret status.

Your intuitions on this issue would be correct. The company is required to show that it took “reasonable measures”—not perfect measures—to maintain the confidentiality of the alleged trade secrets. That’s just common sense.

The “bad” news—at least for business people who want certainty—is that trade secrets issues tend to be fact-intensive, making it difficult to give categorical answers to client questions.

Where do the statutes define “hard” and “soft” trade secrets?

They don’t.  This is terminology I made up (although I’m sure I wasn’t the first) to help make sense of a basic factual distinction in trade secret cases.

“Hard” trade secrets are the kinds of things you traditionally think of as trade secrets.  The paradigm of hard trade secrets is the “secret sauce,” e.g. the formula for Coke, the Colonel’s secret herbs and spices, the recipe for the creamy jalapeño dip at Chuy’s, etc.

Secret technology is another obvious type of hard trade secret.  If you come up with a new secret technology that allows you to drill an oil well sideways, for example, that’s obviously a trade secret. If competitors can’t readily figure out your technology, it gives you a competitive advantage.

Secret business plans—when truly valuable to know—are the third thing I think of as a “hard” trade secret.  Let’s say you’re buying up land in the middle of nowhere in Florida because you’re secretly planning to build a massive theme park.  That would obviously be an extremely valuable thing for a real estate speculator to know.

“Soft” trade secrets, on the other hand, are the kind of confidential information that almost every business has: things like customer lists, vendor lists, pricing information, and financial information about the company.

I don’t mean to suggest that soft trade secrets aren’t really trade secrets.  If the information meets the statutory definition (discussed in the memo), it’s a trade secret, regardless of whether it is hard or soft.

But from both a practitioner’s and a public policy perspective, we should be a little more skeptical about soft trade secrets.  The company is almost always going to claim that its customer lists and prices are trade secrets.  Whether you’re the plaintiff’s lawyer, the defense lawyer, or the judge, you should always ask “why?”

More than a feeling, that’s the Power of Law.

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

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] I realize that “5,000 words or fewer” might be more grammatically correct, but it just doesn’t have the right ring to it.

Texas Supreme Court Raises the Bar for Trade Secrets Damages–Again

Texas Supreme Court Raises the Bar for Trade Secrets Damages–Again

Horizon v. Acadia finds expert’s assumptions too speculative to support lost profits verdict

Mamas, don’t let your babies grow up to be damages experts in Texas.

That’s the refrain CPAs may feel like singing after the Texas Supreme Court recently raised the bar for proving lost profits damages in trade secrets lawsuits—again.

It started in 2016 with Southwest Energy v. Berry-Helfand, where the damages expert calculated lost profits for misappropriation of oilfield trade secrets by assuming a flat reasonable royalty rate of 3%, which was consistent with industry standards. As I reported here, the Texas Supreme Court said this opinion was faulty because the information available to the expert would have allowed for a more precise calculation.[1]

More recently, the Texas Supreme Court addressed trade secrets damages again in Horizon Healthcare v. Acadia Healthcare. The court rejected the expert’s calculation of lost profits damages because it was based on assumptions about causation and profitability of contracts that were not supported by the evidence.[2]

Horizon had somewhat complicated facts, but in essence it was a typical departing employee case where a management group left a company to work for a competitor:

  • Horizon provided contract management services to healthcare providers
  • Four Horizon executives, the “Saul group,” signed non-competes with Horizon.
  • The Saul group began negotiating to join Acadia, a Horizon competitor.
  • The Saul group solicited Piechocki, a successful Horizon salesman, to join them in moving to Acadia.
  • Shortly before leaving, Saul secretly copied a “massive amount” of Horizon documents to an external hard drive.
  • The copied documents included contracts, financial models, and lists of Horizon’s sales leads.
  • After leaving Horizon to join Acadia, the former Horizon employees began competing with Acadia and soliciting Acadia’s clients.

If you think these facts are bad, you should read some of the emails recounted in the Court of Appeals opinion. But bad facts don’t necessarily make a good damage model.

The facts concerning damages were a mixed bag. Here is what Horizon’s damages expert had to work with:

  • After leaving Horizon, Piechocki used Horizon’s financial models to win a contract from Westlake.
  • Westlake was on Horizon’s “lead list” but was not a Horizon client.
  • Horizon did not lose any existing clients to Acadia.
  • Piechocki was an at-will employee without a non-compete who could have left Horizon at any time.
  • Piechocki was Horizon’s best salesperson.

So, if you represent Horizon, how do you work with your expert to construct a defensible damages theory?

Keep in mind that Texas law does not require lost profits damages to be “susceptible of exact calculation.” Lost profits must be calculated with “reasonable certainty.”[3]

As I explained here when I reported on the oral argument in Horizon, calculating lost profits damages requires entering a hypothetical world. The question is how much profit the plaintiff would have earned if the defendant had not used the plaintiff’s trade secrets, breached the non-compete, etc. This necessarily requires making assumptions.

Assumptions made in Horizon v. Acadia – the Westlake contract

Take the Horizon case as an example. To calculate lost profits based on the Westlake contract, Horizon’s expert assumed that Westlake would have signed a similar contract with Horizon if it had not signed the contract with Acadia. Based on that assumption, the expert calculated lost profits of $898,000 on the Westlake contract, and the jury included that amount in its verdict.[4]

Was it a mistake for the expert to assume Horizon would have won the Westlake contract? Not necessarily. To prove causation, Horizon had to show it would have obtained the contract but for the defendants’ wrongful conduct. It was an essential assumption.

But was it a reasonable assumption? The challenge for the plaintiff’s lawyer is that there must be evidence to support the assumption. The strategic question is how to support the assumption: with expert opinion or with some other evidence?

Often it will be better to prove the assumption with other evidence. Financial experts are good at crunching numbers, so it’s pretty easy for them to calculate the amount of profits that would have been made on a contract. But whether the plaintiff would have gotten a contract is another story. On that issue, a CPA doesn’t necessarily have any special insight that an ordinary jury member doesn’t have.

The problem for Horizon was not so much that the expert made the assumption, but that there was insufficient evidence to support the assumption. The Texas Supreme Court said it was “pure speculation” to assume Horizon would have won the Westlake contract if the defendants had not. This was especially true given the fact that there was no evidence that Horizon would have included a specific $150,000 incentive that Acadia included in its bid. Thus, “Horizon failed to establish the fact of damages relating to the Westlake contract with reasonable certainty.”[5]

Assumptions made in Horizon v. Acadia – Piechocki’s future contracts

The Westlake contract was not the only one lost. Horizon’s loss of Piechocki, its top salesperson, also caused Horizon to lose the future contracts Piechocki would have obtained if he had stayed at Horizon.

To quantify the lost profits for these hypothetical contracts, Horizon’s expert had to make assumptions about three issues:

(1) how long Piechocki would have stayed at Horizon

(2) how many contracts Piechocki would have generated at Horizon

(3) the amount of profits Horizon would have made on those contracts

Based on ten years of Horizon’s retention data for employees in Piechocki’s position, the expert provided two alternatives: Piechocki would have stayed either two years or four years. This was only an assumption, because Piechocki was an at-will employee not bound by a non-compete or any employment agreement. The court found there was some evidence to support this assumption, including testimony by Piechocki himself that suggested he would have stayed at Horizon if not solicited to work for Acadia.

There was also some evidence to support the assumption that the loss of Piechocki caused Horizon to lose future sales. This included an email from one of the defendants saying “I cannot think of a bigger body blow relative to impacting future new sales for Horizon than to get Piechocki out of there.”

But the Texas Supreme Court said there was no evidence to support the third assumption: the profitability of contracts Piechocki sold or would have sold had he remained at Horizon. In the court’s view, the specific problem with the expert’s calculation of lost profits was that it was based on the historical profitability of Horizon contracts generally, rather than the historical profitability of Piechocki’s Horizon contracts. The court held that the absence of evidence showing the profit associated with Piechocki’s sales was “fatal” to Horizon’s lost profits claim.[6]

A trend of nit-picking expert calculations of lost profits damages

I see the logic in the Horizon court’s criticism of the expert’s third assumption, but isn’t this getting a little nit-picky? The evidence of Horizon’s contract profitability generally seems like at least a scintilla of evidence of the profit Horizon would have made on Piechocki’s contracts. Remember that all it takes to uphold a jury verdict on appeal is some evidence (in theory).

But at least the Texas Supreme Court has been consistently nit-picky about lost profits damage theories lately. As mentioned earlier, the court did the same thing in Southwest Energy v. Berry-Helfand, finding that the reasonable royalty rate assumed by the expert was not precise enough.

So what practice pointers can prudent practitioners pry from this pair of persnickety opinions? First, if you represent the plaintiff in a lost profits case and you hire a damages expert, you need to work closely with the expert to identify the key assumptions underlying the expert’s calculations, and to evaluate whether the evidence will support those assumptions. If you don’t have the evidence, find another theory.

Second, the at-will status of departing employees is not necessarily fatal to proving causation. Yes, the Texas Supreme Court ultimately found there was insufficient evidence to support Horizon’s damage theory, but its opinion makes clear that an expert can make a reasonable assumption about how long an at-will employee would have stayed at the company, provided there is evidence to support the assumption.

That brings us to the third tip: Whatever assumptions the damages expert is going to make, the plaintiff’s lawyer must be prepared to offer evidence to support those assumptions.

Easy, right?

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IMG_4571
Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He correctly predicted that the Texas Supreme Court would not like the lost profits award in 
Horizon

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] Sw. Energy Prod. Co. v. Berry-Helfand, 491 S.W.3d 699, 720 (Tex. 2016).

[2] Horizon Healthcare Co. v. Acadia Healthcare Co., __ S.W.3d __, 2017 WL 2323106, at *5-8 (Tex. May 26, 2017).

[3] Id. at *4 (citing ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 876 (Tex. 2010)).

[4] Id. at *5.

[5] Id. at *6.

[6] Id. at *6-8.

A SLAPP in the Face to Texas Trade Secrets Lawsuits, or Much Ado About Nothing?

A SLAPP in the Face to Texas Trade Secrets Lawsuits, or Much Ado About Nothing?

Part 3 of 3 in my series

Fivers, you may be wondering why I have not yet reported on the Texas legislature’s recent amendments of the Texas Uniform Trade Secrets Act. I like trade secrets law. I like litigation. And I like making fun of whatever the Texas legislature does. So what gives?

Well, three things. First, you can already find other good reports on this topic, like Leiza Dolghih’s blog post here. Second, the recent changes to the Texas trade secrets statute, while important, are not that big of a deal. And third, I predict that recent court decisions applying the Texas Citizens Participation Act (TCPA) are going to be a bigger deal for Texas trade secrets litigation.

That’s because filing a motion to dismiss under the TCPA is likely to become a routine move by defendants in Texas trade secrets lawsuits.

Texas courts have held that the TCPA applies to claims based on disclosure of alleged trade secrets

So how did we get here? To recap Part 1 and Part 2:

  • The TCPA is the Texas “anti-SLAPP” statute intended to protect the “little guy” from nuisance litigation filed in retaliation for exercising free speech rights.
  • The TCPA allows the defendant to file a motion to dismiss that stays discovery and requires the plaintiff to offer evidence proving each element of its claims.
  • The purpose of the statute is to protect constitutional rights, but the Texas Supreme Court has instructed Texas courts to apply the “plain meaning” of the text, which is much broader.
  • In Elite Auto Body, the Austin Court of Appeals followed the Texas Supreme Court’s instructions and held that the TCPA applied to a company’s claim that its former employees communicated the company’s confidential information and trade secrets to a competitor.[1]

In Part 1, I explained how this issue provides a sort of case study for the “textualist” theory of statutory interpretation, which has received some airplay recently with Neal Gorsuch filling the Merrick Garland seat on the Supreme Court. In Part 2, I hypothesized that the holding in Elite Auto Body is inconsistent with the legislature’s intent and suggested that this illustrates a problem with strict textualism.

But if you’re a lawyer or a party in a trade secrets lawsuit, you don’t care about all that. You want to know what Elite Auto Body means for your lawsuit.

Will it become routine for defendants in Texas trade secrets lawsuits to file motions to dismiss under the TCPA?

It seems likely that defendants in trade secrets lawsuits will now routinely file motions to dismiss under the TCPA. First, because Elite Auto Body says they can. Second, because it will usually be good strategy.

The crux of the Elite Auto Body decision was the statute’s broad definition of the “exercise of the right of association” as “a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.”[2]

The court found that the plaintiff alleged two kinds of communications falling under the statute’s broad definitions: (1) communications between the departing employees and the second employer disclosing confidential information or trade secrets; and (2) communications with employees of the first employer to induce them to work for the second employer.[3]

So, in any case where the plaintiff alleges either (1) communication of the plaintiff’s trade secrets or (2) solicitation of the plaintiff’s employees, the defendants have the option to file a motion to dismiss under Elite Auto Body. I will even provide this Form Motion to Dismiss you can use if you want.[4]

Filing a motion to dismiss will often have benefits for the defendant:

  • The motion will take the wind out of the plaintiff’s sails by immediately staying discovery until the court rules on the motion.[5]
  • It requires the plaintiff to respond with evidence of each element of its claims.[6] This will force the plaintiff to put its “cards on the table” early in the case.
  • In some cases, it will be difficult for the plaintiff to meet its burden before it has had any meaningful discovery.

Of course, there are potential disadvantages to filing a motion to dismiss. Despite the Texas Supreme Court’s instruction to apply the plain meaning of the statute, some trial court judges will still be reluctant to dismiss trade secrets claims that do not implicate constitutional free speech rights. Fighting over the motion to dismiss will often be expensive, and if the judge denies the motion, it will tend to embolden the plaintiff, which could make settlement more difficult. Worst case, if the judge finds that the defendant’s motion was frivolous or solely intended to delay, the court can award attorneys’ fees to the plaintiff.[7]

Despite these concerns, in most cases filing an early motion to dismiss under the TCPA will be good strategy for defendants, if the plaintiff alleges “communication” of the alleged trade secrets.

But that’s a big “if.”

Will it become routine for plaintiffs to plead around the TCPA?

If it becomes routine for defendants to file a motion to dismiss in Texas trade secrets lawsuits, plaintiffs will catch on.

And Elite Auto Body suggests a solution for them. As I pointed out in Part 2, the court in Elite Auto Body said that the TCPA does not apply to allegations of using the alleged trade secrets, as opposed to communication of the trade secrets. That’s why the Austin Court of Appeals only dismissed the plaintiff’s claims in part. It did not dismiss the claims based on conduct that does not constitute “communications” as defined by the TCPA.[8]

So, as Patrick Keating suggested on his trade secrets blog here, it may become routine for plaintiffs to avoid a motion to dismiss by pleading only use of the alleged trade secrets rather than disclosure of the alleged trade secrets. (Here is a Form Original Petition that does just that.) If that happens, then case law applying the TCPA to trade secrets claims may become, as Keating says, “much ado about nothing.”

But I’m not sure this maneuver will become totally routine. First, the plaintiff doesn’t always have a basis to claim use of the trade secrets. Second, the disclosure of the trade secrets is sometimes just too good a part of the story to leave out.

*UPDATE: The Austin Court of Appeals returned to applying the TCPA to a trade secrets claim in Craig v. Tejas Promotions, LLC, No. 03-16-00611-CV, 2018 WL 2050213 (Tex. App.–Austin May 3, 2018), holding that the TCPA applied to a claims for conspiracy to misappropriate trade secrets. This case suggests that, as I predicted, some plaintiffs will continue to plead communication of the alleged trade secrets, which invites a TCPA motion to dismiss.

In many cases, the employer will discover that an employee has taken company information and joined a competitor, but the employer will not have any direct knowledge that the employee has used the information. And it is not unusual for employees to take company information when they leave but to refrain from using it after coming to their senses (or talking to a lawyer).

In cases like that, it may be dangerous for the employer to plead that the employee has used the alleged trade secrets. The plaintiff must have a good-faith factual basis for the allegation. Look for more plaintiffs to plead “on information and belief” that the defendant has used the alleged trade secrets.

In other cases, the plaintiff will really want to plead disclosure of the trade secrets, because that will be the juiciest part of the story. When an employee secretly emails confidential company information to his next employer, who can resist emphasizing that fact in the lawsuit? In those situations, the plaintiff’s lawyer will have to weigh the value of pleading bad acts by the defendants against the possibility of inviting a motion to dismiss.

Or just make a federal case of it

On the other hand, the plaintiff’s lawyer can simply avoid this dilemma by filing suit in federal court under the federal Defend Trade Secrets Act. All you need is a sufficient connection to interstate or foreign commerce, and any claim you would make under the Texas trade secrets statute can be made under the federal statute. And then the TCPA would not apply.

Or would it? I will let the appellate lawyers and former law review editors discuss among themselves.

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

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. The provided forms are only for the convenience of other lawyers. Every case is different, so don’t rely on this post or the forms as legal advice for your case. 

[1] Elite Auto Body LLC v. Autocraft Bodywerks, Inc., No. 03-15-00064-CV, 2017 WL 1833495, 520 S.W.3d 191 (Tex. App.—Austin 2017, pet dism’d).

[2] Tex. Civ. Prac. & Rem. Code § 27.001(2).

[3] Elite Auto Body, 2017 WL 1833495 at *8.

[4] See my disclaimer about forms above.

[5] Tex. Civ. Prac. & Rem. Code § 27.003(c). Under Section 27.006(b), for good cause the court may allow “specified and limited discovery” relevant to the motion.

[6] See Tex. Civ. Prac. & Rem. Code § 27.005(c).

[7] Tex. Civ. Prac. & Rem. Code § 27.009.

[8] Elite Auto Body, 2017 WL 1833495 at *9.