Companies zealously guard their trade secrets and other information that gives them a competitive edge. And as we’ve covered in prior posts, companies often resort to the courts to protect this kind of information.
Recently, a media company filed a lawsuit seeking to use trade secret protections to recover something very public—a reporter’s Twitter account.
When a company believes that an employee has breached a non-compete agreement by going to work for a competitor, one remedy it can seek is a preliminary injunction. A preliminary injunction is meant to preserve the status quo in a case pending a trial on the merits. In the context of non-compete litigation, this means that an employer can file a lawsuit and quickly obtain an order barring its competitor from hiring the employee.
Getting such an injunction isn’t so easy, however, as shown by an Illinois federal court’s recent decision in Cortz, Inc. v. Doheny Enterprises, Inc.
Owners of stolen trade secrets now have another weapon in their arsenal.
Last month, President Obama signed the Defend Trade Secrets Act (the DTSA), which creates a new cause of action in federal court for the misappropriation of trade secrets. The DTSA does not preempt state laws governing misappropriation of trade secrets, so employers and other trade secret owners may now bring actions under the DTSA and applicable state laws. See 18 U.S.C. § 1838.
Federal prosecutors recently indicted David Colletti, a former VP of marketing with MillerCoors LLC, on charges relating to a scheme to embezzle $7 million from the beer brewing giant. Mr. Colletti, a thirty-year veteran of the company, allegedly broke bad by conspiring with others to defraud the company through fictitious invoices for promotional and other events that were never held. According to Law 360, MillerCoors sued its former marketing executive for $13.3 million last year in an effort to recover for the alleged fraud. Prosecutors claim that Mr. Colletti and his co-conspirators used the proceeds to purchase collectible firearms, golf and hunting trips, and—perhaps inspired by Pink Floyd—even bought an arena football team.
Nanoventions Holdings is a Georgia company that designs and manufactures microstructure technology used to prevent the counterfeiting of such things as currency, driver’s licenses, and event tickets. In 2011, $2 million went missing, and an investigation revealed that that its CFO, Steve Daniels, allegedly forged checks and converted funds to his own use as owner of a company called BIW Enterprises. In an interesting twist, BIW is engaged in the business of growing and distributing marijuana in California. According to Courthouse News Service, the company is suing Mr. Daniels for compensatory, treble and punitive damages under Georgia RICO statutes, and related causes of action. If the allegations are true, one might find a historical equivalent to these events in the 1920s, when the president of the Loft Candy Company stole thousands of dollars to buy Pepsi-Cola out of bankruptcy. Loft Candy ended up owning Pepsi on the basis that it was a stolen corporate opportunity. If Georgia shared Colorado’s stance on marijuana legalization, would the court award ownership of the pot business to Nanoventions? Oh what a difference a century makes.
Who doesn’t love the year-end countdown? We’re here to offer you one of our own – our most-read posts in 2014 about executive disputes. The posts run the gamut from A (Alex Rodriguez) to Z, or at least to W (Walgreen). They cover subjects from sanctified (Buddhists and the Bible) to sultry (pornographic materials found in an executive’s email). Later this week, we’ll bring you a look at what to expect in 2015.
Without further ado, let the countdown begin!
8. The Basics: Dodd-Frank v. Sarbanes-Oxley
This post is an oldie but a goodie. It includes a handy PDF chart that breaks down the differences in the Dodd-Frank and Sarbanes-Oxley whistleblower laws. Each of these laws continues to be a hot-button issue for plaintiffs and employers.
7. When Employment Relationships Break Bad
America may have bidden adieu to Walter White and his pals on Breaking Bad, but employment relationships continue to spin off in some very unpleasant ways. Such was the case with Stephen Marty Ward, who ended up in federal prison after he threatened his employer with disclosure of its trade secrets, as we covered in this post.
Companies prize their formulas for best-selling products like nothing else. Visitors to the World of Coca-Cola can visit the vault holding the soda syrup recipe. And KFC’s fried chicken seasoning method has been described as one of its most valuable assets.
NuScience Corporation makes the skin product CELLFOOD, which it describes as an “oxygen and nutrient supplement” using “proprietary water-splitting technology.” And as recounted by the California Court of Appeal in a recent opinion, NuScience has fought hard to keep the CELLFOOD formula secret. The California court’s decision addressed an unusual spinoff of NuScience’s trade secret battle: a malicious prosecution complaint filed by a former employee, David McKinney, who alleged that NuScience wrongfully brought a prior racketeering and misappropriation case against him. See McKinney v. NuScience Corp., No. B240831 c/w B244074 (Cal. Ct. App. 2013).
According to the court, most of NuScience’s trade secret troubles involved the Henkel family – father John and sons Michael and Robert – who found a copy of the CELLFOOD formula after it had been purchased by NuScience. After discovering the formula, the Henkels then repeatedly sought to sell it to other buyers, get money from NuScience to hand it over, or sell a competing product. NuScience won federal court injunctions against the Henkels, but Michael and Robert didn’t stop their efforts. And after NuScience fired McKinney, its vice president of sales and marketing, the Henkels got him involved in their efforts to discredit NuScience and use the formula. NuScience then filed its racketeering lawsuit against McKinney and Robert Henkel, alleging that the two engaged in a conspiracy to disparage CELLFOOD and violate the federal judgment against Robert. NuScience eventually dismissed that case without prejudice, asserting that it did so because Robert was threatening to disclose the CELLFOOD formula.
McKinney then filed a malicious prosecution lawsuit based on NuScience’s decision to voluntarily give up the case. However, NuScience quickly moved to strike his lawsuit based on California’s anti-SLAPP statute (Cal. Code Civ. Proc., § 425.16).
Do you want to know a secret?
Do you promise not to tell?
With all due respect to the Beatles – and the full lyrics of their 1963 hit are here – perhaps they weren't asking the most important questions to ask about secrets. Maybe the more important, or at least existential question is: is the secret really a secret at all? And how exactly do you tell?
The Fifth Circuit Court of Appeals confronted that issue last week in Heil Trailer v. Kula, et al. The question came up in a suit brought by Heil – which makes tractor-trailers – against three of its former employees and their new employer, Troxell. We’ve written often about confidentiality agreements between employers and employees, and the issues those agreements can raise when an employee goes to work for the competitor down the street. But we don’t see too many opinions about whether the trade secret or other protected information is really “secret-worthy,” although our friends in the federal government sector seem to have it down to a whole system.
In a decision last week, Judge Ewing Werlein Jr. of the U.S. District Court for the Southern District of Texas addressed the question of whether an employer had successfully alleged a claim under the Computer Fraud and Abuse Act (“CFAA”), such that the employer could properly bring its numerous claims against former employees and their companies in federal court. He ruled that the employer had properly pleaded the CFAA claim, and that as a result, the court had subject matter jurisdiction over the case. Beta Technology, Inc. v. Meyers, Civ. No. H-13-1282, 2013 WL 5602930 (S.D. Tex. Oct. 10, 2013).
Before we get into the substance of the decision, some background is in order. Subject matter jurisdiction is an important issue for federal judges. If there’s no basis for subject matter jurisdiction, a case doesn’t belong in federal court. First-year civil procedure students learn this rule from the venerable decision in Capron v. Van Noorden, in which the Supreme Court allowed a plaintiff to obtain reversal of a final judgment because he hadn’t properly alleged that the court below had subject matter jurisdiction over his claim.
The two main categories for federal jurisdiction in non-criminal cases are diversity jurisdiction and federal question jurisdiction. Diversity jurisdiction, as defined in 28 U.S.C. § 1332, permits the federal courts to hear disputes between citizens of different states – i.e., “diverse” citizens – so long as more than $75,000 is at stake. Federal question jurisdiction, which is defined in 28 U.S.C. § 1331, allows the federal courts to address “all civil actions arising under the Constitution, laws, or treaties of the United States.” And under 28 U.S.C. § 1367, once the court has jurisdiction to hear one claim, it can hear any other claims that form “part of the same case or controversy,” even when those claims drag additional parties into the mix.
A recent decision by a federal court in Alexandria, Virginia, illustrates an important point about the trade secrets laws that is often missed: you can be liable even if you merely took your former company’s trade secrets (such as by downloading them onto your thumb drive) but did not use them or disclose them to anyone else. That’s what a company executive in the Alexandria case allegedly did, and the court allowed her former employer’s claim that she violated the Virginia Uniform Trade Secrets Act (the VUTSA) (which parallels many states’ trade secrets laws) to go forward.
When Yu-Hsing Tu worked at pharmaceutical company UCB Manufacturing, he signed a strict confidentiality agreement. In the agreement, Tu promised that he would never disclose any of UCB's “secret or confidential information,” including a laundry list of items such as “designs, formulas, processes, . . . techniques, know how, improvements, [and] inventions.” Tu's work was important to UCB: he helped formulate its cough syrup products, including Delsym, and had significant knowledge of its “Pennkinetic system” for controlled release of cough medication in liquid form.
In 2001, Tu left UCB and started working for his friend Ketan Mehta at Tris Pharma. Soon after, Tu and Tris Pharma began formulating generic versions of UCB’s cough syrups. Six years later, Tris's competitive products were on the market, and UCB lost a lot of market share.
UCB immediately went to court and sued Tu and Tris for misappropriation of trade secrets, breach of contract, and unfair competition. It asked for a preliminary injunction -- a court order early in the lawsuit that would require Tris to stop using its trade secrets until the merits were finally decided. After a five-day hearing focused on the misappropriation claim, the trial judge denied the injunction, maintaining the status quo for Tris.
Shortly after that win, Tu and Tris took the offensive in the litigation, moving for summary judgment. At that point, UCB made a decision that would end up costing it later on: it voluntarily gave up its claim for misappropriation of trade secrets. The trial court then granted Tu and Tris’s motion for summary judgment on the other claims, relying on its finding during the preliminary injunction phase that Tu and Mehta were credible when they testified that they didn’t misuse UCB’s confidential info. UCB appealed.
As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.
Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.