It’s Alive, It’s ALIVE! How to Kill a TCPA Motion in a Trade Secrets Lawsuit

It’s Alive, It’s ALIVE! How to Kill a TCPA Motion in a Trade Secrets Lawsuit

It’s Franken-steen

First let’s get something out of the way. The Texas Citizens Participation Act (TCPA) is a Frankenstein’s monster that the legislature created and now needs to reign in (not that they listen to me).

As I explained in a three-part series back in the summer of 2017, the TCPA grants defendants in certain cases the unusual right to require the plaintiff to prove its case before taking any discovery. In litigator jargon, it effectively lets the defendant file a “no-evidence” motion for summary judgment without first requiring an adequate time for discovery.

The statute was intended to curtail “SLAPP” lawsuits, e.g. where a big company sues a “little guy” in retaliation for exercising his right to publicly criticize the company. The idea was to stop litigation bullies from using groundless lawsuits to grind ordinary people into submission under the weight of crushing legal fees.

But the legislature in its wisdom used broad language in the TCPA, and the Texas Supreme Court applies the plain meaning of statutes (in theory). So the TCPA has taken on a bizarre life of its own. It can apply to just about any kind of lawsuit, including “departing employee” lawsuits where a company claims its former employees misappropriated trade secrets or other confidential information.

This really makes no sense. There is no compelling public policy reason why some defendants should have a right to file a motion to dismiss before any discovery takes place and others should not, depending on whether the lawsuit falls under the byzantine definitions in the TCPA.

Might this have been avoided by construing the statute “liberally”–rather than literally–as the statute itself tells courts to do?[1]

Maybe. But that ship has sailed. As Justice Pemberton wrote in a recent dissent, Texas courts now apply the TCPA as written, even when the implications “sound crazy.” As he noted, unintended consequences are likely when courts interpret statutes “superficially in a mistaken perception of plain-meaning textualism.”[2] So here we are.

The bottom line is that the TCPA will apply to most trade secrets lawsuits in Texas state court. And maybe in federal court too.

This raises several strategic questions in a Texas trade secrets lawsuit:

1. Can the plaintiff avoid the TCPA by filing the trade secrets lawsuit in federal court under the federal trade secrets statute?

2. Can the plaintiff in a trade secrets suit avoid the TCPA by “pleading around” it?

3. When should the defendant in a trade secrets case file a TCPA motion to dismiss?

4. What evidence does a trade secrets plaintiff need to offer to defeat a TCPA motion to dismiss?

In the words of MC Hammer, let’s “break it down.”

Some trade secrets strategery

First, it’s possible that the plaintiff may be able to avoid the TCPA by filing the trade secrets lawsuit in federal court rather than state court. The federal Defend Trade Secrets Act (DTSA) allows a plaintiff to file a trade secrets lawsuit in federal court as long as the case has some connection to interstate or foreign commerce, which means virtually every case.

Courts are divided about whether the TCPA applies in a federal case, and the Fifth Circuit has not yet resolved the issue.[3] It turns on whether the TCPA is considered “procedural” or “substantive,”[4] which is kind of like asking whether the Beatles were a rock band or a pop band.

Law professors and people who were on law review love this kind of question. Personally, I’m less intrigued. I initially assumed the TCPA was procedural and would not apply in federal court, but there are people smarter than me who argue it is substantive, and I’ll concede you can make a reasonable case for that. (If you want more details on this issue see the good summary in this Law360 article by April Farris and Matthew Zorn.)

If I had to predict, I’d say the Fifth Circuit will hold that the TCPA does not apply in federal court. But for now it remains an open question.

That means that filing your trade secrets lawsuit in federal court won’t necessarily get you out of the TCPA woods. Your choice of state or federal court will likely depend on other considerations, i.e. whether you prefer a judge appointed for life who can do whatever the *#$% he wants, or a judge with no experience who got swept into office because he picked the right political party.

Regardless of where you file your trade secrets suit, you can try to avoid a TCPA motion by pleading around the TCPA. Without getting too much into the weeds, the TCPA applies to claims that relate to “communications” about a matter of public concern. So one theory is that the plaintiff in a departing employee case can avoid the TCPA by pleading only use of the trade secrets rather than disclosure of the trade secrets. Disclosing a trade secret to the new employer is obviously “communicating” the information, so just don’t say anything about disclosure.

That’s what I mean by “pleading around” the TCPA. But this may be easier said than done. Even if the plaintiff does not expressly plead that the employee disclosed the trade secrets to the new employer, that allegation will often be implied.

Plus, the mere allegation that the employee has joined another company and used the plaintiff’s trade secrets may be enough to ensnare the plaintiff in the TCPA’s definitional web. The TCPA covers “a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.”[5] Arguably, any time an employee goes to work for a competitor, there is necessarily going to be communication between employee and employer to “collectively . . . pursue . . . common interests.”

So, omitting allegations of trade secrets disclosure from your pleadings may not be sufficient to avoid the TCPA.

Defense wins championships

Now let’s look at it from the other side. If you represent the defendant in a trade secrets case, should you file a motion to dismiss under the TCPA? I see three potential benefits:

(1) obviously, the potential early dismissal of the lawsuit;

(2) smoking out the plaintiff and making him put his cards on the table (talk about mixed metaphors); and

(3) slowing down the plaintiff’s momentum.

Also, if you win the motion you have the right to recover legal expenses “as justice and equity may require.”[6]

The potential downside of filing a TCPA motion in a trade secrets case is that, if the court finds your motion was “frivolous or solely intended to delay,” you will lose the motion and be ordered to pay the plaintiff’s attorneys’ fees for responding to the motion.[7] That’s a momentum shift like throwing a pick-six in the first quarter.

So, deciding whether to file a motion to dismiss a trade secrets case will likely come down to whether you think the plaintiff has enough evidence to prove the claim.

This gets us to the last question: if the defendant files a motion to dismiss, what evidence does the plaintiff need to offer to defeat the motion?

As a threshold matter, the plaintiff can try to prove the TCPA does not apply to the lawsuit. But if the TCPA applies, the plaintiff will need to offer evidence of three essential elements:

(1) the information at issue is a “trade secret”;

(2) the defendant “misappropriated” the trade secret; and

(3) the misappropriation caused some injury to the plaintiff.

I cover the key points of these elements in my Trade Secrets 101 memo (soon to be updated and published in the Texas Journal of Business Law). And a recent opinion from the Tyler Court of Appeals provides a roadmap for offering evidence to support these elements.

But if that salt has lost its flavor . . .

In Morgan v. Clements Fluids South Texas, three employees left Clements, an oil and gas services company, to work for two competitors. Clements claimed it trained the employees on its proprietary system for well completion and production called “salt systems.” It sued the former employees in state court for breach of their NDAs and misappropriation of trade secrets, and the employees filed a motion to dismiss under the TCPA.[8]

The defendant employees met their initial burden to show that the trade secrets claim was factually predicated on conduct that falls within either the “exercise of the right of association” or the “exercise of free speech,” as defined by the TCPA. The court reasoned that the claim was “based on, relates to, or is in response to,” at least in part, the employees’ communications among themselves and within the competitors through which they allegedly “shared or utilized” the alleged trade secrets.[9]

The court then turned to the plaintiff’s burden to establish by “clear and specific” evidence a prima facie case for each element of its trade secrets claim. The TCPA “does not impose an elevated evidentiary standard,” the court said, “and circumstantial evidence and rational inferences may be considered.”[10]

To prove the information at issue was a trade secrets, Clements claimed it had a confidential method for salt systems that gave it a competitive advantage. Its vice president signed an affidavit stating that Clements invested millions of dollars for almost 33 years on research, development, training, and testing of its salt systems, that its system was not available through any outside source, that the system was not available outside the company, and that the system had made Clements the industry leader. The Court of Appeals concluded this was sufficient “clear and specific” evidence of a trade secret.[11]

Whether the employees misappropriated the trade secrets was a closer call. The defendants argued that Clements failed to prove misappropriation because it did not show the employees actually used the trade secrets. The employees signed affidavits denying that Clements provided them with any training they did not have before working for Clements, and denying they shared any Clements information with any third party.[12]

But the court found that Clements offered sufficient evidence of misappropriation to avoid dismissal. Specifically, Clements established:

(1) The employees had no experience in salt systems before working for Clements.

(2) Clements trained the employees to perform salt systems and disclosed its proprietary formula to them.

(3) The employees left Clements to go to a company, Greenwall, that was not doing salt systems.

(4) Shortly after that, Greenwell launched a salt systems business, announcing it in a website post authored by one of the employees.

(5) Greenwell then performed a salt systems job for Pioneer, one of Clements’ customers.

“Given Clements’ description of the time, money, and effort dedicated to the development of its salt systems,” the court said, “it is reasonable to conclude from the totality of the circumstantial evidence that [the employees] used Clements’ proprietary and confidential information in concert with Greenwell to launch its salt systems business.”[13]

Finally, Clements had to offer evidence it was injured by the trade secrets misappropriation. “The burden of proof on damages for misappropriation of trade secrets is liberal,” the court said, “and is satisfied by showing the misappropriation, the defendant’s subsequent commercial use, and evidence by which the jury can value the rights the defendant obtained.” The Texas Supreme Court does not require the plaintiff to establish a specific amount of damages in response to a TCPA motion. Clements was only required to offer evidence supporting a “rational inference as the existence of damages, not their amount or constituent parts.”[14]

The defendants argued that Clements failed to link its loss of the Pioneer job to the alleged misappropriation of trade secrets, but the court disagreed. Greenwell did not previously do salt systems jobs, it performed a salt systems job for Pioneer shortly after the Clements employees joined, and Clements had previously performed all of Pioneer’s salt systems jobs. This was sufficient circumstantial evidence to link the alleged misappropriation to Clements’ loss of Pioneer’s business, establishing an injury to Clements.[15]

The Morgan case teaches us that, while speculation and assumption are not evidence of trade secret misappropriation, you don’t need surveillance camera footage of the employee handing over the secret formula either. It’s enough to offer circumstantial evidence creating a reasonable inference that an employee has used the information to help a competitor take business from the plaintiff.

But Morgan was somewhat unusual. The plaintiff had actual evidence of a secret method that other competitors (allegedly) did not know or practice.

Most trade secrets cases don’t have this. The typical case involves “soft” trade secrets like customer lists, prices, and customer information. And usually the two competitors both do the same kind of non-confidential business before and after the employee changes jobs. In these cases, the fact that a customer follows an employee from one company to another doesn’t necessarily prove the employee used any confidential information. It could just mean the employee has a good relationship with the customer.

So plaintiffs in soft trade secrets cases beware. You will probably need “something more” than losing a customer to defeat a TCPA motion. At least until the legislature fixes the monster it created.

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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. Most of his posts don’t have so many footnotes.

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] Tex. Civ. Prac. & Rem. Code § 27.011(b) (“This chapter shall be construed liberally to effectuate its purpose and intent fully”).

[2] Hawxhurst v. Austin’s Boat Tours, 550 S.W.3d 220, 233-35 (Tex. App.—Austin 2018, no pet.).

[3] Thoroughbred Ventures, LLC v. Disman, No. 4:18-CV-00318, 2018 WL 3472717, at *3 (E.D. Tex. July 19, 2018).

[4] Even if the TCPA is substantive, it may not apply in federal court because it conflicts with Federal Rules of Civil Procedure 12 and 56. Id. at *3.

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

[6] See Tex. Civ. Prac. & Rem. Code § 27.009(a)(1). A successful movant also has the right to recover sanctions sufficient to deter the plaintiff from filing similar lawsuits, see § 27.009(a)(2), but it will probably be a rare trade secrets case where the court finds such sanctions are needed in addition to attorneys’ fees.

[7] See Tex. Civ. Prac. & Rem. Code § 27.009(b) (“If the court finds that a motion to dismiss filed under this chapter is frivolous or solely intended to delay, the court may award court costs and reasonable attorney’s fees to the responding party”).

[8] Morgan v. Clements Fluids South Texas, Ltd., No. 12-18-00055-CV, 2018 WL 5796994, at *1 (Tex. App.—Tyler Nov. 5, 2018, no pet. h.).

[9] Id. at *3.

[10] Id. at *4 (citing In re Lipsky, 460 S.W.3d 579, 586 (Tex. 2015)).

[11] Id. at *5-6.

[12] Id. at *7.

[13] Id. at *8. However, as to a third employee, Laney, the court held that Clements did not meet its burden. Unlike the evidence concerning the first two employees, Clements offered no evidence, circumstantial or otherwise, that Laney disclosed or used the trade secrets at his subsequent employer, ChemCo. And there was no evidence of whether Chemco had performed salt systems before, or that Laney performed any salt systems jobs with ChemCo. Id.

[14] Id.

[15] Id. at *8-9.

When Is a Customer List a Trade Secret?

When Is a Customer List a Trade Secret?

Imagine if I said to every salesperson in Texas: I don’t care whether you signed a non-compete or not. If you quit your job and try to take your customers with you to a new company, your original employer can sue you in federal court and get an injunction to prevent you from contacting any of your customers.

That would amount to saying every salesperson has a de facto non-compete.

Surely this cannot be true, right? But here’s how you get there:

  1. Almost every salesperson has some kind of list of his own customers, even if it’s just contacts on a smartphone. The salesperson knows the identity of the customers, their contact information, what they buy, and the prices they pay.
  2. A customer list is a trade secret under both the Texas Uniform Trade Secrets Act (TUTSA) and the federal Defend Trade Secrets Act (DTSA).
  3. Under the DTSA, the employer can file a trade secrets claim in federal court.
  4. The court can enter a preliminary injunction barring the salesperson from contacting anyone on the customer list.
  5. If the salesperson can’t contact his customers, the effect is about the same as a reasonable non-compete.

Hey, you had a good run, sales people. But you’re stuck where you work now, unless your employer agrees you can leave.

Wait. Is it really that bad?

Not quite. Because I’ve overstated one step in the analysis above: Step no. 2. A sales person’s customer list can be a trade secret, but it’s not always a trade secret. It depends.

That gives judges an important role. It’s up to them to police the boundary between when a customer list is a trade secret and when it isn’t. If judges set the bar too low for giving trade secret protection to a customer list, the result will be what I said: de facto non-competes for all sales people.

The Austin Court of Appeals made this very point the Trilogy Software case: “[I]nformation that a firm compiles regarding its customers may enjoy trade secret status under Texas law. But this does not mean that trade secret status automatically attaches to any information that a company acquires regarding its customers; if it did, it would amount to a de facto common law non-compete prohibition.”[1]

So, preservation of American free enterprise as we know it depends on courts holding companies to their burden of proof when they claim that customer lists are trade secrets.

To prove the customer list is a trade secret, the company has to show three things:

(1) the customer list has “independent economic value”

(2) it is not “readily ascertainable” by competitors

(3) the employer took “reasonable measures” to keep it secret

It’s usually not that hard to establish element no. 3, reasonable measures. Did the company avoid sharing the information publicly, require employees to sign confidentiality agreements, and maintain password protection on company computers? Those things are typically enough.

What about element no. 1, “independent economic value”? That’s a harder one. But it’s usually going to follow from element no. 2. If the customer list is not readily ascertainable by a competitor, that’s a good sign it has independent economic value. If it was readily ascertainable, it wouldn’t have much value.

One warning: there are still some Texas cases that say a readily ascertainable customer list can be a trade secret. This is a mistake, for reasons I explained in my longest-titled blog post ever, Customer List Confusion: The Pesky Persistence of the Brummerhop Rule in Texas Trade Secret Litigation.

No, a readily ascertainable customer list is not a trade secret. But how readily is “readily”? It is of course a matter of degree. If a competitor could compile the same list from spending a day running Google searches, that’s probably “readily” ascertainable. If it would be extremely difficult to compile the list from public sources, that’s not readily ascertainable. Most cases fall in the middle. It’s going to be a fact-intensive issue.

That means it will often be a fact question for either the jury (at trial) or the judge (at a temporary injunction hearing). In those cases, the jury verdict or judge’s ruling will hold up as long as there is at least a little evidence to support it.

For example, in Amway Corp. v. bHIP Global, Inc., there was testimony that the customer contacts and information the employee provided were his own contacts he had previously developed. This was sufficient evidence to support the jury’s conclusion that the information was not a trade secret.[2]

Conversely, in 360 Mortgage Group, LLC v. Homebridge Financial Services, Inc., No. A-14-CA-00847-SS, 2016 WL 900577, at *4 (W.D. Tex. Mar. 2, 2016), there was sufficient evidence that the customer list was a trade secret. The fact that the employee emailed herself a copy of the broker list was evidence the list was not readily available elsewhere. And the list provided more than simply names and addresses. It also included compensation rates that could be used to “undercut” the employer. (See also The Price Undercutting Theory in Trade Secrets Litigation.)

As these cases illustrate, whether a customer list is a trade secret often presents a fact issue. But in some cases, the undisputed facts will establish as a matter of law that the customer list is not a trade secret.

For example, in Alliantgroup, LP v. Feingold, the court granted summary judgment that a client list was not a trade secret. It was undisputed that the client list was very short (under 15 names), the information was limited, and the names were readily ascertainable.[3]

Parker Barber & Beauty Supply, Inc. v. Wella Corp. was a similar case involving, strangely enough, the barber and beauty supply industry. The court held that “basic customer contact and limited sales information” that the company provided about 39 of its customers was readily ascertainable and therefore not entitled to trade secret protection.[4]

In Numed, Inc. v. McNutt, Numed argued that its pricing structure, marketing research, customer lists, and renewal dates were trade secrets. But the court disagreed: “The evidence reflects much of the information Numed wishes to protect is not secret. Instead, it is contained in the contracts distributed to Numed’s customers, which in turn may be discovered by anyone.”[5] This was a pre-TUTSA case, but the principle should still apply.

Finally, Guy Carpenter & Co. v. Provenzale was a pre-TUTSA case where the federal district court denied the employer’s motion for a preliminary injunction, and the employer appealed. The Fifth Circuit, applying Texas law, noted that a “customer list of readily ascertainable names and addresses will not be protected as a trade secret,” citing numerous cases. The court then said:

. . . the district court implicitly found the customer lists were readily ascertainable. We agree. Evidence in the record indicates participants in the reinsurance market freely disclose the identity of their reinsurance broker and the nature of the reinsurance products they regularly consume. We also note that Provenzale’s list of customers was relatively short—it included only those companies he personally serviced while at Guy Carpenter. He could easily reconstitute this list even without the aid of a trade publication. Even though Guy Carpenter took steps to protect its customer list and Provenzale signed a contract stating the customer list was confidential, we conclude the customer list was not a trade secret because it was readily ascertainable.[6]

So, if the employee offers evidence like this, the court may reject trade-secret status of the customer list as a matter of law.

These cases suggest some good deposition questions to ask if you are the lawyer representing the employee:

  • How long is the employee’s customer list in comparison to the entire customer list for the company?
  • Does the company require all of its customers to keep their transactions with the company secret? If not, how is the identity of the customers a secret?
  • Do customers freely share the identity of companies they buy from?
  • Could the employee easily reconstruct her short customer list? If so, doesn’t that suggest the information is readily ascertainable?
  • Are you saying a competitor would pay real money for this customer list? If not, how can you say it has “independent economic value”?

These can be tough questions for the company. But the company’s lawyer always has the best comeback: if the customer list is readily ascertainable and doesn’t have any economic value, why did the employee take it?

___________________________________________________________________

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

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

[1] Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex. App.—Austin 2004, pet. denied) (emphasis added).

[2] Amway Corp. v. bHIP Global, Inc., No. 4:10-CV-549, 2013 WL 2355083, at *2 (E.D. Tex. May 29, 2013).

[3] Alliantgroup, LP v. Feingold, 803 F.Supp.2d 610, 626 (S.D. Tex. 2011).

[4] Parker Barber & Beauty Supply, Inc. v. Wella Corp., No. 03-04-00623-CV, 2006 WL 2918571, at *17 (Tex. App.—Austin Oct. 11, 2006) (mem. op.).

[5] Numed, Inc. v. McNutt, 724 S.W.2d 432 (Tex. App.—Fort Worth Feb. 5, 1987, no writ).

[6] Guy Carpenter & Co. v. Provenzale, 334 F.3d 459 (5th Cir. 2003).

FBI Nabs Apple Trade Secrets Thief

FBI Nabs Apple Trade Secrets Thief

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

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

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

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

MS. CUNNINGHAM: Yes, Your Honor.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And that’s cheating. Thank you.

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

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

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

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

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

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

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

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

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

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

Or the apple. [wink]

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

_________________________________________________________________

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

 

The Price Undercutting Theory in Trade Secrets Litigation

The Price Undercutting Theory in Trade Secrets Litigation

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

Hi, I’m Zach Wolfe.

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

I’m a lawyer. I do business litigation.

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

Mostly non-compete and trade secrets cases.

Trade secrets? That sounds interesting. Like patents?

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

Oh, I didn’t know that.

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

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

Exactly.

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

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

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

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

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

A typical price undercutting scenario

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

It depends. Let’s consider a hypothetical.

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

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

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

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

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

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

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

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

When are prices trade secrets?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Causation rears its ugly head

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

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

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

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

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

– Dawn has longstanding personal relationships with her customers

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

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

– The customers ordered from Dawn because of their personal relationships

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

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

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

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

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

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

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

Ask me next time you see me at a party.

___________________________________________________________________

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

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

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

A Series of Unfortunate Trade Secrets

A Series of Unfortunate Trade Secrets

Prologue: Look Away

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

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

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

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

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

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

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

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

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

Chapter One: The Pleadings

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

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

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

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

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

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

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

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

Chapter Two: Interrogatories

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

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

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

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

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

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

Chapter Three: Mandamus

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

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

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

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

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

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

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

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

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

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

Chapter Four: The Corporate Rep Deposition

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

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

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

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

Screen Shot 2018-04-15 at 9.40.49 PM

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

Chapter Five: Motion for Summary Judgment

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

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

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

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

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

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

___________________________________________________________________

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

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

 

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.

*Update: Dannon and Muyshondt settled quickly. On May 29, 2018, the court entered this Permanent Consent Injunction, in which Muyshondt represented he diligently searched for and turned over all documents potentially containing Dannon’s confidential information and trade secrets.

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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.