The Fifth Circuit Issues Its First Decision on the Defend Trade Secrets Act

trade secrets label on folder

Two and a half years after the Defend Trade Secrets Act (DTSA) became effective, the Fifth Circuit has issued its first opinion addressing the statute.  Earlier this month, the Court ruled that: (1) a party must “prevail” before it can recover any attorney’s fees under the DTSA and (2) a plaintiff’s dismissal of its claims without prejudice does not confer the “prevailing party” status on defendants. 

Dunster Live, LLC v. Lonestar Logos Management Company, LLC involved a situation where the plaintiff, Dunster, having lost an injunction hearing in a trade secrets case in federal court, wanted to dismiss the case without prejudice and refile it in a state court sans the DTSA claim.  Under 41(a)(2) of the Federal Rules of Civil Procedure, if a defendant has already answered the lawsuit or filed a motion for summary judgment, plaintiff is required to file a motion with the court asking for a permission to dismiss its claims without prejudice. The district court granted Dunster’s motion to dismiss, and the plaintiff proceeded to file an almost identical trade secrets lawsuit but without the DTSA claim in a state court.

After the dismissal, Lonestar sought to recover its attorney’s fees of over $600,000 on the basis that Dunster had brought its federal lawsuit in “bad faith.” The district court denied Lonestar’s request for attorney’s fees holding that a dismissal without prejudice of Dunster’s claims did not make Lonestar a “prevailing party” under the DTSA.

Lonestar furter argued that Dunster sought to evade paying attorneys fees by strategically seeking a dismissal without prejudice once it realized that its lawsuit was doomed, and that the DTSA’s “bad faith” provision supported a fee award even when a defendant had not officially prevailed.  The DTSA’s provision upon which Lonestar relied states the following:

[i]f a claim of the misappropriation is made in bad faith, which may be established by circumstantial evidence, a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated, [a court may] award reasonable attorney’s fees to the prevailing party.  18 U.S.C. 1836(b)(3)(D).

The district court rejected this argument as well denying Lonestar’s request for attorney’s fees.

The Fifth Circuit affirmed the district court’s ruling finding that a dismissal without prejudice under the DTSA did not confer the status of a “prevailing party” on Lonestar, similar to other federal statutes that allow prevailing parties to recover attorney’s fees, such as the Equal Access to Justice Act, Patent Act, Civil Rights Act, or Individuals with Disabilities Education Act.

The Court also rejected Lonestar’s argument that the DTSA only required a showing of “bad faith” by a plaintiff in filing a lawsuit and not a showing that a defendant was a “prevailing party.”  It explained that “[a]llowing bad faith alone to support a fee award would improperly read the concluding language of Section 1836(b)(3)(D) – ‘the prevailing party’ – out of the statute.”  Thus, a party seeking attorney’s fees under the DTSA must establish both: (1) that it is a prevailing party and (2) one of the three qualifying scenarios described in 1836(b)(3)(D).

TAKEAWAY:  With the DTSA becoming effective on May 11, 2016, plaintiffs in Texas now have a choice of whether to seek redress for trade secrets misappropriation in state courts or federal courts.  Dunster makes it clear that as long as plaintiff has brought its DTSA claim in good faith in federal court, it may have a chance to change the strategy down the road and explore its claims in state court without facing the penalty of having to pay defendant’s attorneys fees as the result of dismissing its federal lawsuit without prejudice.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

The Two Steps All Small Businesses Can Take to Protect Their Trade Secrets

I-Too-Like-To-Live-DangerouslyDoes your business have a client list? A tested marketing strategy? A sales script? A proprietary business process? Those are just a few things that may give your company a competitive advantage over other similar businesses and may  be considered your company’s “trade secrets.”  

Now imagine one of your employees walking out the door and taking that information to a competitor because they offered him or her a slightly better compensation or using it to start their own copycat business. This happens on a daily basis.  Yet, when it does, many business owners are not prepared to deal with it and have done nothing to address it ahead of time. 

So, if your company does nothing else in 2019 to protect its trade secrets, it should do at least the following two things to prevent its competitive information from walking out the door with the next employee who leaves:

Have your employees sign confidentiality and non-competition/non-solicitation agreements. These agreements do not have to be complex, but they have to comply with the laws of the state where your company operates and possibly with the laws of the states where the employees work.  So, for example, if your company is based in Texas, but you have employees in other states, your confidentiality and non-compete/non-solicit agreements must meet Texas-specific requirements for such agreements and may also need to comply with the laws of other states. 

If you think these agreements are not enforceable, check our my prior post addressing the most common misconceptions about non-compete agreements.

Learn about the security features of the document management systems you use and implement them.  Many small businesses use Google, Microsoft 360, Dropbox or some other similar systems to maintain and manage company records.  All of those systems allow the administrator to: (1) set restrictions on which employees can access which information within the company; (2) track what the employees do with that information when they access it; (3) set restrictions on whether the employees can print, download, copy or share the information with other employees or people outside the company; (4) periodically change passwords to access the systems; and (5) many other features that can help business owners prevent their information being shared outside the company. 

Additionally, many other programs, applications, CRM and ERP systems, sales databases, etc., have their own settings that restrict how  the sensitive and proprietary information contained in them can be shared within and outside the company.  Business owners should determine who within the company should have access to which parts of each system, limit such access on the “need-to-know” basis and set the systems to either prevent individuals from downloading, printing, emailing or otherwise exporting the information out of the system, or alerting the company when such actions are taken.  Regardless of whether a business sets the alerts or restrictions, at a minimum, each company system should keep track or log what employees are doing with respect to the sensitive information they use in the course of their work.

Additionally, anytime you consider purchasing a new document management systems, or an ERP, CRM, sales system or databases, consider not only whether it matches your business needs, but also what security measures it offers in terms of tracking and limiting access to the system by the employees.

BOTTOM LINE: Large companies can dedicate a lot of resources to protecting their trade secrets – resources that are not available to small businesses.  However, every small business has the resources to implement the two steps described above.  If you, as the owner of the company, do not take the time to put the proper employee agreements in place and to educate yourself about the security measures available to you and use them, the employees will know the security gaps and will be in position to exploit them when presented with the right incentives. 

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.

Is it a Crime to Take Employers’ Trade Secrets?

corporateFew employees realize that when they take their employers’ trade secrets with them when leaving their jobs they may be exposing themselves to criminal liability under the Economic Espionage Act, which makes it a crime to steal trade secrets when: (1) the information relates to a product in interstate or foreign commerce (which is virtually any product now days) or (2) the intended beneficiary is a foreign power. 

Of course, the overwhelming majority of employees do not take trade secrets for the purpose of selling the information to a foreign government; however, they can still be guilty of trade secrets theft if they were aware that the misappropriation would injure their employer, as the owner of trade secrets, to the benefit of someone else.

When is Trade Secrets Theft a Crime?

Under the Economic Espionage Act, a criminal defendant is guilty of trade secrets theft and can be fined and imprisoned for up to 10 years if:  

  1. The defendant stole, or without authorization of the owner, obtained, destroyed or conveyed information;
  2. The defendant knew this information was proprietary;
  3. The information was in fact a trade secret;
  4. The defendant intended to convert the trade secret to the economic benefit of anyone other than the owner;
  5. The defendant knew or intended that the owner of the trade secret would be injured; and
  6. The trade secret was related to or was included in a product that was produced or placed in interstate or foreign commerce.

What is a “Trade Secret” Under the Statute? 

The definition of a “trade secret” under the statute is very broad.  It means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

A recent indictment of six former and current Fitbit employees, who used to work for its rival Jawbone, demonstrates what conduct may result in criminal charges under the Economic Espionage Act. These six individuals were indicted on the grounds that they “knowingly received and possessed the Jawbone trade secrets, knowing them to have been stolen and appropriated, obtained, and converted without authorization, with the intent to convert the trade secrets to the economic benefit of someone other than Jawbone, and intending and knowing that the offense would injure Jawbone.” 

Specifically, the indictment states that after these employees had resigned from Jawbone and signed certifications stating that they had returned all of Jawbone property, they continued to possess the following trade secrets – while working for Jawbone’s direct competitor – Fitbit:

  1. Chinese user market study of Chinese consumers and their motivation, influences, preferred brands, reasons for buying fitness trackers and shopping methodologies. 
  2. Vendor and pricing list for international suppliers, compounded over time through trial and error, including competitive negotiated pricing and their specialized skills or equipment. 
  3. Schematics, design specification and detailed description of unreleased products. 
  4. Quantitative and qualitative studies of Jawbone users’ characteristics, reasons of using such trackers and a multitude of other factors useful in product development.

BOTTOM LINE: Companies should educate themselves and their employees on what types of information such companies consider to be their trade secrets and educate employees on what consequences they will face if they take that information to the competitors.  If a trade secrets theft is detected, companies should assess whether the theft is serious enough to pursue criminal charges against the thief.  

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.

 

Texas Amends Its Trade Secrets Statute Effective September

good-wifeTexas Governor recently signed House Bill 1995, which amends Texas Uniform Trade Secrets Act (“TUTSA”) and aligns is with the Defend Trade Secrets Act (“DTSA”).

HB 1995 will go into effect on September 1, 2017 and will eliminate the difference between the TUTSA’s and DTSA’s definitions of “trade secrets,” removing an incentive to forum shop. Additionally, the statute will emphasize that the owner must take reasonable “measures,” and not just “efforts,” to protect its trade secrets. HB 1995 also introduces the following new definitions:

• “Owner” means, with respect to a trade secret, the person or entity in whom or in which rightful, legal, or equitable title to, or the right to enforce rights in, the trade secret is reposed.

• “Willful and malicious misappropriation,” means intentional misappropriation resulting from the conscious disregard of the rights of the owner of the trade secret.

• “Clear and convincing evidence” required to establish willful and malicious misappropriation is defined as the “measure or degree of proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established.”

Additionally, come September, Texas courts will have to apply a balancing test first articulated in  In re M-I, L.L.C., 505 S.W.3d 569 (Tex. 2016) when determining whether a party involved in a trade secrets lawsuit can be denied access to documents or testimony about its competitor’s trade secrets.  TUTSA codified this test as follows:

a presumption exists that a party is allowed to participate and assist counsel in the presentation of the party’s case. At any stage of the action, the court may exclude a party and the party’s representative or limit a party’s access to the alleged trade secret of another party if other countervailing interests overcome the presumption. In making this determination, the court must conduct a balancing test that considers:

•  the value of an owner’s alleged trade secret;
• the degree of competitive harm an owner would suffer from the dissemination of the owner’s alleged trade secret to the other party;
• whether the owner is alleging that the other party is already in possession of the alleged trade secret;
• whether a party’s representative acts as a competitive decision maker;
• the degree to which a party’s defense would be impaired by limiting that party’s access to the alleged trade secret;
• whether a party or a party’s representative possesses specialized expertise that would not be available to a party’s outside expert; and
• the stage of the action.

Bottom Line: In light of these new amendments, companies involved in trade secrets disputes in Texas will have to strategize early on – even pre-litigation – not only about proving their claims and defenses but also about protecting their trade secrets during the lawsuit and gathering evidence necessary to obtain attorney’s fees related to the trade secrets misappropriation claim.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. If you are a party to a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108

 

Protect Your Trade Secrets or Lose Them

TradeSecretsThe first rule of the fight club is you don’t talk about the fight club.  The same rule applies to trade secrets.  If you talk about your trade secrets – pricing, customer names, vendor relationships, or other aspects of your business, with people who do not have non-disclosure agreements, you are going to lose the “trade secret” status that such information may carry, which means your employees will be able to take that information to your competitor or their new business.

Under the Texas Uniform Trade Secrets Act (TUTSA), an owner of a trade secret must use “reasonable efforts under circumstances” to protects its trade secrets.  Depending on how large or sophisticated the business is, those methods may include anything from keeping key files in a locked cabinet to passwords for logging into a customer database, to issuing company computers that have no outside ports, to fingerprint and iris-scan access devices.  

Obviously, a mom-and-pop shop is not going to install fingerprint access devices or buy an expensive software that will alert it when an employee downloads an unusually large amount of information, but it can implement simple measures like asking all of its employees to execute a non-disclosure agreement as part of their employment file, make sure that the financial and other sensitive information is accessible only to the owners, and make sure that any confidential information, such as customer lists, is clearly marked as “confidential.” 

Larger businesses – those that wield a workforce comprised of dozens, hundreds, or thousands of employees – need to have more advanced trade secrets protection measures, as well as the periodic audits of the effectiveness of such measures.

At a bare minimum, all businesses should have a standard confidentiality (non-disclosure) agreement for its employees, vendors, investors, and anyone else who has access to the business’s trade secrets.  They should also look at what protection methods are used by their competitors or are common in their industry and implement those that make sense most for the company. 

A little time and expense invested in the trade secret protection on the front end can save thousands of dollars down the road.  If you think that providing company computers to your employees is too expensive, imagine how much it will cost in legal fees to retrieve your company’s confidential information from the departed employees’ personal devices.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108. 

Why Trade Secrets Protection is Even More Important in the Strong Economy

downloadIt is a well-known fact that when the economy improves, employee mobility rises as well. The most valuable employees – those with a specialized skill set and many years of experience in a particular industry – tend to stay within that industry while moving among competitors. Since such employees are usually given access to confidential information as part of their job duties, their move to a rival company often raises a concern of whether they will be sharing that information with their new employer. 

As 2016 was drawing to a close, a number of nationally known companies filed lawsuits to prevent their former employees from working for their competitors and/or sharing their confidential information. In December, Carolina Herrera sued Oscar De La Renta for hiring Herrera’s former Senior VP of Design despite her 6-month non-compete with Herrera. In January, Aria sued its Las Vegas rival, Cosmopolitan, and a former executive, alleging that she took confidential information about Aria’s high-roller clients in order to solicit them for Cosmopolitan. Earlier that month, Zynga, a mobile app gaming power house and creator of Farmville, sued two of its former employees for allegedly taking 14,000 files related to a new game Zynga was developing before going to work for its competitor. These are just a few examples that have received attention in the media.  In reality, similar situations develop all over the country on a daily basis.

In short, in the current market, any successful business, regardless of its size or industry, may be subject to trade secret theft not from foreign entities, but from its own departing employees. To prevent theft, or minimize the inherent damage that it carries with it, companies must have a process in place for protection of trade secrets and a plan of action for when theft is detected.

I have previously written about the simple steps any company can take to protect its trade secrets. In addition to these preventative steps, companies should be prepared to act quickly if a trade secrets theft is detected or suspected as time is of the essence, and not only from the practical standpoint of preventing dissemination of trade secrets, but from the legal standpoint as well. The more time passes between a company’s discovery of trade secret theft and any legal action, the less likely is the company to obtain an order from the court prohibiting the thief from using or disseminating the information.  Thus, being prepared to act quickly and having the resources to do so, can make e a difference in the company’s ability to stop the thief from sharing its confidential information with others.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Why the Appointment of Jeff Sessions as the New Attorney General May Lead to More Trade Secrets Litigation

jeff-sessions-827pngOn Friday, President-elect Donald Trump named Alabama Sen. Jeff Sessions as his pick for the next Attorney General. Sessions is a former U.S. attorney and current senator with lengthy experience with the Justice Department. He is also known as a pro-business conservative, who on numerous occasions has expressed a favorable view of corporate indictments of executives marred in white-collar crimes. 

Sessions co-sponsored the Federal Defend Trade Secrets Act, which became the law this year. The statute allows civil lawsuits to prevent or redress theft of trade secrets in addition to already-existing criminal penalties under 18 U.S.C. § 1832.  His previous publicly expressed views suggest that he will not shy away from indicting big companies and individuals for white-collar crimes, which include theft of trade secrets.  

For example, in 2010, during a confirmation hearing for the U.S. deputy general, Sessions questioned the candidate about the “dangerous” philosophy of not charging companies criminally because of concerns regarding the effect of such charges on employees and shareholders and stated that he “was taught that if they violate a law, you charge them.” 

Trade secret theft indictments have been on the rise over the past several years, prompting an almost unanimous passage of the Federal Defend Trade Secrets Act in the beginning of this year. The uptick in criminal litigation has been accompanied by a blooming civil litigation of trade secrets theft on state and federal level as well.  

Given Sessions’ prior remarks regarding his preference for corporate indictments in lieu of settlements or payment of penalties, as well as his expressed support towards protection of trade secrets, we can expect a rise in corporate indictments arising out of theft of sensitive information (especially when it is shared with foreign companies or states). This will put the spotlight on the rise of trade secrets theft in the country, will garner more publicity for such acts, and will in turn educate the US companies and business owners as to legal remedies available to them in the civil court to remedy trade secret theft.  

In short, Sessions’ expected tough stance on corporate crime, including trade secrets theft and the accompanying publicity will likely result in an increase in civil litigation in that arena as well. 

Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Common Ways Businesses Leak Trade Secrets Without Their Knowledge

bookkeeping-online-sofware-computer-tablet-phoneIf you have a business, you have trade secrets. It is really that simple. In Texas, any information can be a trade secret as long as (1) it has economic value because it is not generally known and (2) the owner of the information has used reasonable efforts to keep it secret. Customer lists, pricing and discounts, manufacturing designs, financial data, food recipes – are all common examples of trade secrets.  However, virtually any information that meets the above two criteria can be classified as a trade secret in Texas.

When a trade secret information is stolen by a competitor or a former employee, the owner can seek injunctive and monetary compensation in court.  To get that, however, he will have to show that the information that was stolen is, indeed, a trade secret, i.e. that it has economic value and that he has used reasonable efforts to keep it secret. Unfortunately, many business owners do not realize what their trade secrets are until they are taken, unwittingly exposing such information to the public and destroying its trade secret status. Here are some common ways that companies are unknowingly sharing their trade secrets causing them to lose protection under the Texas Uniform Trade Secrets Act: 

Company Websites.  Many companies will post their customer lists and customer endorsements or recommendations on their websites to help attract other customers. Some companies also provide their pricing, rebates or discount information on their websites as well. While this may be very useful in attracting new clients, once such information is posted on a website, it loses its trade secret status.

Social Media.  Information shared on social media is not considered to be confidential or secret. Sometimes, companies will share their customer names or even pricing information on social media to attract a wider customer base.  Other times, company employees will share such information on their personal social media.  In either case, putting information out into the public domain means that the owner of the information probably will not be able to pursue a legal claim against anyone who decides to use such information.

Vendor and Third-Party Contracts. Even those companies that have non-disclosure agreements with employees often fail to include such restraints in their contracts with vendors and other third parties, which means that any information shared with such parties may lose its trade secret protection.

Public Filings. Unless filed under seal, any documents filed in court are open to the public, which means anyone can get a copy.  A business that voluntarily files documents containing trade secrets with the court may make the confidential information lose its trade secret status.  For example, filing a client contract in a collections lawsuit without redacting the pricing information will waive the confidential nature of that information.

Conclusion: The first step in avoiding an unwitting disclosure of trade secrets is taking stock of all information that your business has that might be a trade secret and implementing the processes and measures that would be considered reasonable to preserve the confidentiality of such trade secrets. When in doubt, consult with an attorney to conduct an audit of trade secrets at your company and devise the proper protection procedures. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.