Facebook-Hacking Employer Still Gets Injunction Against Ex-Employees 2019-02-26T17:05:19-06:00

Posted on February 26, 2019

Scherer Design Group (“SDG”) sued several of its former employees for starting a competing business (while still employed), stealing trade secrets, and stealing clients. The trial court entered an injunction against the ex-employees based on evidence that came, in part, from one of their Facebook accounts, which may or may not have been left open on an SDG laptop after their departure. It turns out that some of the exes used their Facebook accounts to communicate about their new company. When their Facebook communications showed up as evidence in the injunction hearing, the exes cried foul.

The exes argued that their former employer was not entitled to the equitable relief of an injunction because it had acted inequitably, itself, by wrongfully hacking their Facebook accounts. The trial court rejected this argument, finding that the alleged Facebook hack had no bearing on the employer’s right to obtain an injunction because SDG’s alleged hacking was not directly “related to the litigation.” The hacking occurred, if at all, after the conduct that gave rise to the lawsuit.

On appeal, a Third Circuit panel split 2-1 in favor of the employer, applying New Jersey law. The majority agreed that the alleged hacking was not directly related to the subject matter of the lawsuit because: (1) SDG did not hack the Facebook account as a means to acquire the legal rights it asserted against the exes; (2) SDG would have been able to prove the exes’ disloyalty independent of the Facebook evidence; and, (3) the exes’ privacy rights involved a separate body of law not directly tied to employee disloyalty/unfair competition law, so there was no direct nexus between the litigation and the alleged hacking. This appears to be bad facts making peculiar law—the trial court and the Court of Appeals were extremely reluctant to let the exes off the hook for their extraordinary misconduct simply because SDG may have committed a privacy gaffe.

All we can say is: Kids, don’t try this at home! Assuming SDG did hack one or more Facebook accounts, at the very least it potentially jeopardized its ability to obtain an injunction against the exes. Far worse, SDG might have exposed itself to a variety of federal or state law violations for the alleged hack. Before you go jumping into an employee’s private social media account: (1) talk to your lawyer…a lot; (2) make sure your policies clearly provide that you have the right to access any social media account that is accessed from an employer system or device (except where prohibited by state law); and (3) be sure to record your method of accessing the account so you can prove later on that you did not hack into anything, but simply accessed an open account (as SDG claimed in this case).

Scherer Design Group, LLC v. Ahead Engineering LLC et al., No. 18-2835 (3d Cir. February 25, 2019)

Corporate Mole Bound by Preliminary Injunction 2018-12-04T16:30:49-06:00

Posted on December 4, 2018

By Bill Wright

We’ve seen it over and over. Employees, including top sales people, leave their job and start a competing company in the same city. But they want to take “their” clients with them. In a recent Pennsylvania case, the departing employees left a confederate inside the old employer. The inside man told the old company’s customers (including the largest local client) about the new company, and he offered to (and did!) assist them in transferring their business. He emailed an external account the secret information needed to generate a quote for business, and the new company just changed the letterhead and used the same form. The Pennsylvania courts were not amused.

Most of the departed employees had covenants not to compete. It is no surprise that the courts restricted those former employees from breaching their agreements. But the mole had no such agreement. What stopped him from converting as much business as possible and then, when fired, going to work for the competitor? The time-honored duty of loyalty: every agent owes a duty of loyalty to the principal, and must act in good faith to further and advance the principal’s interests. The court found the mole had access to confidential information, and, if not stopped, would have continued to send and use similar information. Based on these facts, the court enjoined all the employees, including the mole, from any further use of the employer’s confidential information, from engaging in a competing business, and from soliciting the employer’s customers and other employees. The appellate court affirmed. Amquip Crane Rental, LLC et al. v. Crane & Rig Servs., LLC et al., 2018 PA Super 315 (Nov. 27, 2018).

If you have confidential information, plan to protect it. Treat trade secrets especially carefully. Get confidentiality agreements from everyone who accesses the information. Where appropriate, protect trade secrets with covenants not to compete. But, don’t forget traditional tort law – like the duty of loyalty. Make your agreements compatible with defending the duty of loyalty. And, when you are faced with a possible breach, a prompt investigation is crucial. Track those emails employees send to themselves – a smoking gun can make all the difference when searching for a corporate mole.

3 Severance Agreement Time-bombs 2016-08-11T14:21:13-06:00

Posted on August 11, 2016

By John Alan Doran

Yesterday the SEC entered a cease and desist agreement with BlueLinx Holdings, fining the company $265,000.00 for including unlawful confidentiality and waiver provisions in its severance agreements. BlueLinx used a variety of severance agreements or letters with its departing employees. Most of these prohibited the employee from sharing the company’s confidential information with third parties. But, in response to SEC’s 2011 rule prohibiting public companies from stopping employees from whistleblowing to the SEC, BlueLinx changed its agreements to allow employees to file charges with government agencies including the SEC. The amended agreements provided, however, that the employee waives any right to monetary recovery arising out of any charges filed with any government agencies. The amended agreements also required an employee to notify the BlueLinx legal department prior to making any disclosures of confidential information. Whoopsie!

According to the SEC, BlueLinx broke the law in at least three ways. First, by requiring potential SEC whistleblowers to notify the BlueLinx legal department prior to taking issues to the SEC, BlueLinx forced employees to choose between self-identifying as a whistleblower or potentially forfeiting the severance benefit. Second, by requiring employees to forgo monetary awards for whistleblowing to the SEC, BlueLinx directly interfered with the statutory incentives created to encourage whistleblowing under Dodd-Frank and under SEC Rule 21F-17 ( https://www.law.cornell.edu/cfr/text/17/240.21F-2 ). Third, BlueLinx’s use of sweeping confidentiality covenants sans proper carve-outs for protected whistleblowing activity defeated the very purpose of the whistleblower laws.

While this specific action applies only to SEC-regulated companies, we can certainly expect the NLRB, EEOC, OSHA, and others to take the same position with respect to such provisions, and some have already done so. So, if you haven’t revisited your severance agreements to address these three issues, now’s the time.

5 Keys To Federal DTSA 2016-05-11T16:30:24-06:00

Posted on May 11, 2016

By John Alan Doran

Today, President Obama signed into law the Defend Trade Secrets Act (“DTSA”). The DTSA essentially federalizes trade secrets law by creating sweeping civil remedies and penalties for theft of trade secrets. Here are five key things you need to know about the law: (1) The DTSA creates federal court jurisdiction for trade secrets cases. This is excellent news for companies who care about their trade secrets because enforcement under state trade secrets laws such as the Uniform Trade Secrets Act (“UTSA”) has been inconsistent and oft-times cumbersome. (2) For better or worse, the DTSA allows for ex parte seizure orders under exceptional circumstances. This is essentially an order by a court, without prior notice to the alleged trade secrets thief, instructing the government to seize materials that may constitute or contain protected trade secrets. (3) Federal law defines the term “trade secrets” in a fashion that is broader than many states, including Arizona and its Court of Appeals decision in Orca Communications v. Noder. This is excellent news for employers in states where courts have whittled away at the definition of trade secrets under the common law or the UTSA. (4) The DTSA expands the civil penalties available against trade secrets thieves, including treble damages penalties and injunctive relief. (5) The DTSA requires employers to provide written notice to employees (and contractors who will be exposed to trade secrets), that a whistleblower who provides trade secrets to a government agency, court, or attorney for the purposes of reporting a suspected violation of the law is entitled to immunity under the DTSA. The DTSA also requires that this caveat be placed in all employment contracts and contractor agreements that involve trade secrets. Overall, this is excellent news for employers who value their trade secrets, and a major bummer for employees and companies who try to steal those secrets.

Arizona Trade Secrets Grow New Teeth 2014-11-19T10:51:51-06:00

Posted on November 19, 2014

By John Doran

Over the last 18 months, the courts had diluted Arizona trade secret protections, notwithstanding the recent criminalization of trade secret theft by the AZ legislature. Today, however, the Arizona Supreme Court breathed new life into trade secret protection in Orca Communications Unlimited v. Noder, No. CV-13-0351 (Ariz. November 19, 2014). Orca Communications sued its former President, Noder, for unfair competition because Noder, while still employed by Orca, informed Orca customers that she was starting a competing business and urged them to do business with her instead of Orca. The trial court dismissed the lawsuit on the premise that Arizona’s Uniform Trade Secrets Act (“AUTSA”) preempts common law claims such as Orca’s unfair competition claim. The Arizona Supreme Court reversed that decision, in part, finding that the AUTSA only preempts common law claims involving trade secrets as defined by the AUTSA, and not claims based on misuse of confidential information that does not constitute a trade secret.

In a peculiar win/lose for employers covetous of their confidential and proprietary information, the Court added two additional points. First, the Court noted that the unfair competition tort might not even be actionable in Arizona. It would have helped if the Court had recognized that somewhat catch-all tort, but that will have to wait for another day. Second, the Court ordered that only that section of the Court of Appeals decision addressing unfair competition claims be depublished. This is extremely significant because the Court of Appeals opinion contained wide-ranging and, frankly, terrifying language with respect to non-competition, non-solicitation, and confidentiality covenants. Thus, while the Supreme Court giveth, it managed to taketh away. The Court would have done all employers a favor had it revisited the Court of Appeals’ opinion specifically with respect to restrictive covenants.

Arizona Court Strikes Down Restrictive Covenants 2014-05-13T15:19:15-06:00

Posted on May 13, 2014

By John Alan Doran

In a notorious case, the Arizona Court of Appeals today struck down Quicken Loans’ non-solicitation covenants and confirmed that the defendants in the case were entitled to recover their attorneys’ fees. Quicken sued seven of its former employees for breaching their non-solicitation covenants when they joined a competitor, loanDepot. The non-solicitation covenants lasted for two years post-termination and prohibited ex-Quicken employees from communicating with current Quicken employees as well as Quicken employees in some forty other Quicken-owned companies that had nothing to do with residential mortgage loans. loanDepot intervened in the case to invalidate the covenants and to protect its workforce.

The Court of Appeals held that the covenants were unenforceable as a matter of Arizona or Michigan law. The two-year period was overbroad because it exceeded the time Quicken needed to protect its business interests or its confidential information and training program. The restriction itself was overbroad because it prohibited communication with current employees on subjects far beyond proprietary customer or company information. The Court went on to conclude that the ex-employees and loanDepot were both entitled to recover their attorneys’ fees spent defending the litigation. The case is also interesting because its companion case before the NLRB made national news last year.

P.S. loanDepot was represented by none other than Sherman & Howard.

Reminder–Trade Secrets Cases Can Cost BIG (Particularly When You Cheat)! 2013-08-05T16:38:27-06:00

Posted on August 5, 2013

By John Alan Doran

Employers often ignore, or horribly underestimate, the cost of making a mistake about trade secret appropriation/misappropriation, as well as restrictive covenants (such as no-competes, no-hires, no-solicits) and confidentiality agreements. A Minnesota Court of Appeals recently provided employers with a wakeup call in Seagate Technology, LLC v. Western Digital Corp.

Seagate brought an action against Western Digital and a former Seagate employee (Dr. Sining Mao) for misappropriation of trade secrets. In their defense, Mao and Western Digital relied on power point slides that supposedly proved that trade secrets at issue in the case were public knowledge before Mao left Seagate to join Western Digital. After determining that the relevant power point slides were actually ginned up on Western Digital’s system and that Western Digital must have known, the arbitrator held that Mao and Western Digital actually fabricated the power point evidence for the purposes of the case. The arbitrator imposed sanctions against Western Digital and Mao, which included entering judgment in favor of Seagate for $525 million in damages plus $100 million in interest. The Minnesota Court of Appeals recently upheld this judgment, denying an appeal by Western Digital and Mao.

While we can assume Western Digital and Mao will try to appeal this case to the Minnesota Supreme Court, it remains an unpleasant reminder that trade secrets cases can be serious, big-ticket litigation. And, while we shouldn’t need to be reminded of the corollary lesson from this case, it never pays to cheat in litigation.

Customer List Not Secret Enough 2013-05-09T17:50:46-06:00

Posted on May 9, 2013

By Rose McCaffrey

An employer was unable to protect the confidentiality of its customer list, because it failed to present any evidence that the list was worthy of trade secret protection. Calisi v. United Financial Services, Inc., No. CV 2010-000795 (Ariz. App. April 11, 2013). A customer list may qualify as a trade secret when the list contains valuable customer information that the company reasonably attempts to keep secret, “such as [the client’s] particular needs, preferences, or characteristics” or if the company expended substantial effort and resources to acquire its customer information so that a competitor could not easily duplicate the customer information.

In this case, the employee worked as a financial advisor. After leaving his first employer, the employee went to work for a different employer, but as a CPA. The two employers had maintained a mutual referral arrangement, and the new employer sent out a mass email to its clients, and some clients of the prior employer. The original employer sued, arguing that the mass mailing unlawfully relied on its own confidential client list. The court rejected the original employer’s suit for theft of a trade secret because the employer failed to identify unique information acquired in the course of its business or to show that substantial effort and resources were invested to capture information unknown to its competitors.

The case is a strong cautionary reminder that information does not rise to the level of a trade secret or confidential business information just because an employer says so. Wise employers take aggressive, and well-documented steps to imbue their business information with trade secret or confidential status. It is the documentation of those steps, and the documentation of the value of the information, that ultimately wins the day in many of these cases.

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