Articles Posted in Trade Secrets

Don’t think you can get out of your non-compete agreement just because you’re a contractor and not an employee. While it’s true that independent contractors, unlike regular employees, may not owe a fiduciary duty of loyalty to the party that hired them (hence their independence), a business may legitimately require its consultants and contractors to enter into binding non-compete and non-solicitation agreements that will restrict their right to compete with the business for a reasonable length of time after their contracts end.

A few weeks ago in Newport News, Judge Raymond A. Jackson allowed a case brought by tax-preparation firm Tax International against two of its former independent contractors to go forward, denying the defendants’ motions to dismiss. The litigation involved allegations not only that the defendants had violated their non-compete agreements but also that they committed trade secret misappropriation, tortious interference with business expectancy, copyright infringement, trademark infringement, false designation of origin, and unfair competition. Judge Jackson allowed all claims to go forward, finding the allegations plausible on their face.

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When an employee has signed an enforceable non-competition and non-solicitation agreement, he will be prohibited from soliciting the employer’s customers for a certain length of time after the employment relationship ends. In the absence of an express non-competition clause, a former employee is generally free to compete with his former employer, even if that means contacting the former employer’s customers and offering lower prices. Without the benefit of contractual noncompetes and the remedies they provide, employers who pursue their former employees in court often argue that the employees violated their post-employment fiduciary obligations by making inappropriate use of the employer’s customer list and/or pricing data. In a recent opinion authored by Judge Liam O’Grady of the Eastern District of Virginia, the court held that customer lists aren’t automatically entitled to trade-secret or other “confidentiality” status, and that whether former employees can use the data depends on the steps taken by the employer to keep it confidential.

In Contract Associates, Inc. v. Atalay, Contract Associates, Inc. (“CAI”) sued its former employees, Senem Atalay and Michael Spade, claiming that they breached their fiduciary duties and misappropriated trade secrets when they left to form their own competing company. Neither employee had a written employment agreement. Within hours of tendering their resignations, they called three of CAI’s major clients to announce their resignations and the formation of their new, competing company. Shortly thereafter, virtually all of CAI’s major clients terminated their at-will agreements with CAI and moved their business to the defendants’ new company, costing CAI “nearly its entire revenue stream.” CAI sued for breach of fiduciary duty, misappropriation of trade secrets, tortious interference with existing and prospective contracts, and statutory business conspiracy.
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“I made a copy of the client list because they are my clients; I won the business for my company” is a refrain I hear often in consulting with former employees. We’re sorry to have to tell you that this commonly held belief is not accurate. Those clients and customers you may have generated as an employee are not “yours” to take with you. They belong to the company. Making a copy of such a list by printing it, downloading a file, copying it onto a flash drive, or emailing the list to yourself can get you into a lot of trouble because such actions violate Virginia common law as well as certain Virginia statutes. This is true whether or not employees are subject to a noncompete or nonsolicitation agreement. Here are several laws a former or soon-to-be former employee may be violating by copying or taking a former employer’s client or customer list:

If you copy, download, or upload the company’s client and/or customer lists, you may be committing the business tort (the legal term for a civil “wrong”) of conversion. Conversion is the wrongful exercise over another’s property, which deprives the owner of possession, or any act of dominion wrongfully exerted over the property in denial of or inconsistent with the owner’s rights. This means that if your former employer gets its IT people to inspect your computer or work phone and discovers you’ve taken a client list, you may be found liable for conversion of the employer’s property.
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AWP, Inc. is engaged in the business of traffic control solutions for road construction sites and emergency situations. AWP alleges that Shawn Watkins, a former employee, began his own traffic control business, Traffic Control Solutions, LLC (TCS) while still working at AWP, and that he misappropriated information he obtained from his position at AWP such as the identity, needs and issues of customers, pricing, and protocols and methodologies for traffic control. AWP deems this information protected trade secrets. Watkins also allegedly solicited four AWP employees to join him at TCS. AWP prepared to sue Watkins but settled prior to litigation, with Watkins agreeing to cease TCS operations, never work with an AWP competitor, and turn over all AWP property. Watkins also signed an affidavit stating that he was instrumental in creating TCS and had access to AWP’s trade secrets which he used without permission to underbid AWP on jobs and misappropriate AWP customers.

Instead, AWP sued its competitor Commonwealth Excavating, Inc. and its president, Ira Biggs. AWP claimed that Watkins approached Biggs and offered to sell AWP’s trade secrets and equipment for $45,000. Commonwealth allegedly offered to hire the four AWP employees who left for TCS, and it offered Watkins an $85,000 salary which Watkins refused for fear of violating his non-compete agreement. AWP believes that Watkins and Biggs plotted to have Commonwealth take over at least four of AWP’s customers, but the complaint does not state whether any of the customers accepted the offer. The complaint contains counts for common law conspiracy, statutory business conspiracy, misappropriation of trade secrets under the Virginia Uniform Trade Secrets Act (VUTSA), tortious interference with contract or business relationships and unjust enrichment. The defendants moved to dismiss.

Under Federal Rule of Civil Procedure 12(b)(6), a plaintiff must show more than a mere possibility that a defendant has acted unlawfully. Rather, a plaintiff must demonstrate enough factual matter which, if accepted as true, states a plausible claim for relief. In ruling on a 12(b)(6) motion, a court will accept factual allegations as true and construe them in the light most favorable to the plaintiff, but threadbare recitations of the elements of a cause of action are not sufficient and must be supported by sufficient facts.

The allegations in Autopartsource, LLC v. Bruton presented a fairly egregious case of stolen trade secrets. Due to a defendant’s failure to answer, those allegations were deemed true. As remedies, Autopartsource sought $1,131,801.55 in compensatory damages, $350,000 in punitive damages (the statutory maximum), $59,409.72 in attorneys’ fees and costs, a worldwide production injunction to last seven years, and a permanent injunction prohibiting the use of Autopartsource’s trade secrets. The court held an evidentiary hearing and ruled that while Autopartsource was entitled to an injunction and substantial damages, the scope of the requested injunction would be narrowed and the damages would be reduced.

Autopartsource designated employee Stephen Bruton to spearhead the company’s effort to develop business in China, where it sources its automobile parts. Bruton secretly developed his own competing business, BBH Source Group, and misappropriated Autopartsource’s trade secrets in doing so, using them to redirect prospective Autopartsource customers to BBH. After Autopartsource discovered Bruton’s actions and fired him, Bruton broke into an Autopartsource facility and deleted proprietary information from its database.

Autopartsource sued for violation of the Virginia Uniform Trade Secrets Act, tortious interference with business expectancy, and tortious interference with contract. The court found that Autopartsource had established liability on all three theories but that, under Virginia law, it could not recover damages under both VUTSA and its claim for tortious interference with business expectancy, as a party cannot receive damages for a common law tort if the underlying conduct involves an intentional misappropriation of a trade secret.

Spoliation of evidence can result not only in an adverse inference instruction to the jury, but in an award of attorneys fees and expenses incurred in proving the spoliation. As demonstrated by the contentious trade secret litigation between E.I. DuPont de Nemours and Company and Kolon Industries, Inc., those fees and expenses can be substantial.

Several months ago, the court found that several key Kolon employees had intentionally deleted relevant emails, hampering DuPont’s ability to present and prove its case. As a result, the court granted DuPont’s request to instruct the jury that it could assume the destroyed evidence contained information damaging to Kolon. DuPont won the case, then sought an award of fees and expenses incurred in connection with proving the spoliation.

The court noted that DuPont had engaged in a “long, and oftentimes tortuous, journey” to discover emails Kolon had deleted and documents it had destroyed. Complicating DuPont’s burden was what the court called Kolon’s “overall obfuscatory conduct.” Still, DuPont had to prove the reasonableness of the fees requested.

If you’re going to sue a bunch of former employees for various business torts, you need to be clear in your allegations as to who did what. It’s all too easy to lump all the defendants together when describing the wrongful conduct in the complaint, especially when there are numerous defendants. Increasingly, however, Virginia courts are dismissing defendants from cases in which their specific involvement cannot be ascertained from the face of the complaint.

Recently in a Virginia federal court, Alliance Technology Group, LLC (Alliance), an IT services provider, sued a cadre of its employees and Achieve 1, LLC (Achieve), a competing company, for conspiracy, fraud, misappropriation of trade secrets, and other claims. One defendant, William Ralston, moved to dismiss due to the fact that many of the allegations of the complaint lumped all the defendants together, accusing all the defendants of committing tortious conduct collectively.

The rules are pretty lenient on what a complaint must contain to survive a motion to dismiss. A complaint must include a short and plain statement of the claim showing that the pleader is entitled to relief, and enough factual information to give the defendant fair notice of the nature of the claim. It must allege enough facts–not conclusions–to make the asserted right to relief plausible on its face rather than merely speculative or conceivable.

The law presumes that the public should have access to judicial records. This presumption stems from both common law and First Amendment concerns and may be abrogated only in unusual circumstances. Fourth Circuit case law indicates that a district court can seal court documents if competing interests outweigh the public’s right to access.

When faced with a request to seal documents, a court must first determine the source of the right to access in order to weigh the competing interests. The court must then (1) give notice of the request to seal and allow interested parties a reasonable opportunity to object; (2) consider less drastic alternatives to sealing the documents; and (3) provide specific reasons and factual findings supporting its decision to seal the documents. A local rule in the United States District Court for the Eastern District of Virginia requires the party moving to seal documents to provide (1) a non-confidential description of the documents to be sealed; (2) a statement as to why sealing is necessary; (3) references to governing case law; and (4) a statement as to the period of time the party seeks to have the matter sealed and as to how the matter is to be handled upon unsealing.

In a recent case in the Eastern District of Virginia, East West, LLC v. Rahman, the plaintiff sought to seal four exhibits relating to the parties’ expert reports. The reports were designated “Attorney’s Eyes Only” under a confidentiality order entered during discovery that allowed the parties to so designate documents that contained highly sensitive business or personal information,Seal.jpg the disclosure of which might cause significant harm.

Does an employer have any sort of ownership interest in its employees’ tweets or Twitter following? This very current social-media question may be tested in a lawsuit originally filed last July in federal court in California by PhoneDog, a South Carolina-based company that reviews mobile phones and services online, against former employee Noah Kravitz. An amended complaint in the case, filed on November 29, 2011, has attracted considerable media attention.

When Kravitz worked for PhoneDog as a product reviewer and video blogger from 2006 to 2010, he tweeted under the handle @PhoneDog_Noah and attracted some 17,000 followers for his comments and opinions on Twitter. When he left the company, he continued tweeting under the name @NoahKravitz. But he didn’t create a new account with that name; instead, he kept the account (with all its followers) and just changed the Twitter handle to @NoahKravitz. Eight months later, PhoneDog sued Kravitz, alleging that his continued use of the account and his tweeting to his followers constitute a misappropriation of PhoneDog’s trade secrets, intentional interference with prospective economic relationships, and conversion. Phone Dog said that it had suffered loss of advertising revenue as a result and that Kravitz “was unjustly enriched by obtaining the business of PhoneDog’s Followers.”

PhoneDog essentially claims ownership rights due to the fact that it directs its employees to maintain Twitter accounts and instructs them to tweet links to PhoneDog’s website, thus increasing PhoneDog’s page views and generating advertising Kravitz.jpgrevenue for PhoneDog. PhoneDog said in the complaint that since Kravitz now works for TechnoBuffalo, a competitor of PhoneDog, he is exploiting PhoneDog’s confidential information on behalf of a competitor. PhoneDog is seeking $340,000 in damages — $2.50 per month per Twitter follower for eight months. Although PhoneDog said in the complaint that “industry standards” peg the value of a Twitter follower at $2.50 per month, the company did not give a source for that estimate. Nor did PhoneDog attempt to distinguish between people who followed Kravitz because of his connection to PhoneDog and those followers who are merely friends of his or enjoy his commentary.

It’s clear that dances composed by choreographers can be subject to copyright as creative works, just like paintings or photographs. It’s also clear that no matter how creative a football player’s evasive “spin move” can be, neither he nor his team can copyright it so as to prevent others from using it without paying royalties. What about a series of yoga poses? Where does that fit into the world of copyright? Three cases now pending in the U.S. District Court for the Central District of California involve that question, and although the issue remains very much in dispute, the U.S. Copyright Office has taken the view that yoga exercises are more like athletic activities or health regimens, which cannot be copyrighted, and less like dance routines, which can be.

In the lawsuits, Bikram’s Yoga College of India, based in California, and its founder, Bikram Choudhury, have sued three yoga providers for copyright and trademark infringement, contending that they have unlawfully used the specific movements and poses of Choudhury’s brand of yoga, known as Bikram Yoga. Bikram Yoga, performed for precisely 90 minutes in a room heated to 105 degrees Fahrenheit, has become quite popular in recent decades. Bikram Yoga includes 26 poses, two breathing exercises, and a carefully scripted dialogue.

Greg Gumucio is a defendant in one of the cases, along with the company he founded, New York City-based Yoga to the People. Gumucio is a former student of Choudhury. According to the complaint in that case, Choudhury “created an original Yoga Pose.jpgwork of authorship consisting of a series of instructions and commands that accompany, and correspond to, each poster of Bikram Yoga.” This “original work is recited in a precise manner,” according to the complaint, and the sequence of poses received protection from the U.S. Copyright Office on several occasions. Gumucio and the other yoga studio owners, Choudhury said, had infringed upon the copyrights.

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