Trade Secrets and  Covenants Not to Compete:  A Guide for In-House Counsel David L. Williams   Kutak Rock LLP September 16...
Today’s Agenda  <ul><li>Trade Secrets under Arkansas law </li></ul><ul><li>How to Preserve Trade Secrets </li></ul><ul><li...
Theft of trade secrets is widespread and growing  <ul><li>40% of companies affected  </li></ul><ul><li>Small companies gre...
Substantial verdicts are common <ul><li>$60 million v. Farm Bureau, insurance company district manager, Utah, 8/20/08 </li...
Employees face criminal charges  <ul><li>Former Coca-Cola employees sentenced to 8 years for offering sample of new produc...
Trade Secrets  <ul><li>Important to protect business from unfair competition </li></ul><ul><li>Failure to protect confiden...
Definition of Trade Secret (Uniform Trade Secrets Act) <ul><li>USTA developed in 1979 and adopted in some form by virtuall...
Definition of Trade Secret <ul><li>Independent value from not being generally known to, or ascertainable by, others  </li>...
Factors in Determining Trade Secret Status <ul><li>Extent known outside the business, </li></ul><ul><li>Extent known insid...
Likely Trade Secrets <ul><ul><li>Business plans, drawings, and designs </li></ul></ul><ul><ul><ul><li>Expansion plans </li...
Likely Trade Secrets  (cont.) <ul><li>Customer lists if </li></ul><ul><ul><li>Confidential information, e.g., contract exp...
What is not protected <ul><li>Information acquired in good faith and by fair and honest means </li></ul><ul><ul><li>Indepe...
What is not protected  (continued) <ul><li>General industry knowledge and skills </li></ul><ul><li>Alleged secrets not ide...
What Can You Do? <ul><li>No safe harbor to ensure trade secret protection </li></ul><ul><li>Best rule of thumb, compelling...
Recent Development  <ul><li>Increasingly, plaintiff’s must identify trade secret with particularity  before  discovery or ...
ATSA Is Exclusive Remedy <ul><li>ATSA displaces other tort-based claims for misappropriation </li></ul><ul><li>Did not dis...
ATSA Damages <ul><li>Actual damages of either lost profits or defendant’s profits, whichever is greater </li></ul><ul><li>...
No Punitive Damages <ul><li>Unlike UTSA, Arkansas does not allow punitive damages </li></ul><ul><ul><li>Cf.  Ark. Code Ann...
Attorneys’ fees require intent  <ul><li>Bad faith claim of misappropriation  </li></ul><ul><li>Motion to terminate injunct...
ATSA Remedies <ul><li>Injunctive relief </li></ul><ul><ul><li>Actual or threatened misappropriation may be enjoined </li><...
ATSA Remedies  (continued) <ul><ul><li>Injunction requires showing of actual or threatened disclosure </li></ul></ul><ul><...
Preserving Trade Secrets: Keep the “Secret” in Trade Secret
Precautions to maintain trade secret status <ul><li>Restrict access to information  </li></ul><ul><li>Confidentiality agre...
Common trade secret mistakes  <ul><li>Treating non-disclosure agreement as “just another form” for new employees </li></ul>
Common trade secret mistakes  (continued) <ul><li>Failing to limit distribution </li></ul>
Common trade secret mistakes  (continued) <ul><li>Failing to communicate regularly  </li></ul><ul><ul><li>Must have ongoin...
“Shhh” happens?
Common trade secret mistakes  (continued)   <ul><li>Exit interview is critical </li></ul><ul><li>Remind employee of duty u...
Avoiding Claims by Competitors <ul><li>Written policy prohibiting use of confidential information or trade secrets from pr...
Avoiding Claims by Competitors  (continued) <ul><li>Where possible, do not place new hire in position requiring specialize...
Better Method to Enforce Trade Secrets?  <ul><li>Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030 </li></ul><ul><ul><...
CFAA Claims <ul><li>Claim arises where employee exceeds his authorized access and damages protected computer  </li></ul><u...
CFAA applied to trade secrets <ul><li>Employee accessed his employer’s computer to send trade secrets to new employer.  CF...
CFAA Claim Expanded <ul><li>“Damage” includes deleting confidential information </li></ul><ul><li>Employee authorization t...
Covenants Not to Compete
Non-Compete 101 <ul><li>To be enforceable, a non-compete agreement must be reasonable </li></ul><ul><ul><li>Valid business...
Non-Compete 101  (continued) <ul><li>Reasonable in Time, Scope, Geographic Area </li></ul><ul><ul><li>No bright line rules...
Employer/Employee Non-Competes <ul><li>Enforceable only where: </li></ul><ul><ul><li>Employer provided special training  <...
Employer Protectable Interest  <ul><li>Special training must be more than general industry knowledge  </li></ul><ul><li>St...
Employer/Employee  (continued) <ul><li>Confidential information of trade secrets can be proved by </li></ul><ul><ul><li>Si...
Sale of Business  <ul><li>Non-competes ancillary to sale of business are valid to extent to protect purchaser’s interest <...
Sale of Business <ul><li>Buyer need not show protectable interest, such as trade secrets, customer lists, or special licen...
No-Hire Covenant <ul><li>Also called “anti-raiding” or “noninterference” </li></ul><ul><li>Designed to prevent former empl...
Non-Compete Developments  <ul><li>California recently invalidated all employer-imposed non-competes  </li></ul><ul><li>Bas...
Trade Secret Protection Plan  <ul><li>Point person  </li></ul><ul><li>Inventory  </li></ul><ul><li>Prioritize value (high/...
Trade Secret Protection Plan  (continued) <ul><li>Assess risk of loss and effect </li></ul><ul><li>Develop company-wide pr...
Conclusion
Thank you ____________ Questions?
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Trade Secrets and Covenants Not to Compete: A Guide for In-House Counsel

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Presentation to Arkansas corporate in-house counsel given in September 2008

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  • Trade Secrets and Covenants Not to Compete: A Guide for In-House Counsel

    1. 1. Trade Secrets and Covenants Not to Compete: A Guide for In-House Counsel David L. Williams Kutak Rock LLP September 16, 2008
    2. 2. Today’s Agenda <ul><li>Trade Secrets under Arkansas law </li></ul><ul><li>How to Preserve Trade Secrets </li></ul><ul><li>Common Mistakes to Avoid </li></ul><ul><li>Trends in Trade Secret Litigation </li></ul><ul><li>Alternative causes of action </li></ul><ul><li>Non-Compete Agreements </li></ul><ul><li>No-Hire Agreements </li></ul>
    3. 3. Theft of trade secrets is widespread and growing <ul><li>40% of companies affected </li></ul><ul><li>Small companies greatest losses </li></ul>
    4. 4. Substantial verdicts are common <ul><li>$60 million v. Farm Bureau, insurance company district manager, Utah, 8/20/08 </li></ul><ul><li>$57 million, pharmaceutical formula, N.C., 9/3/08 </li></ul><ul><li>$11 million, manufacturing process, Alabama, 5/22/07 </li></ul>
    5. 5. Employees face criminal charges <ul><li>Former Coca-Cola employees sentenced to 8 years for offering sample of new product and confidential documents to Pepsi </li></ul><ul><ul><li>May 23, 2007 </li></ul></ul><ul><li>Former IBM executive pleads guilty to theft of trade secrets and trying to use with new employer HP </li></ul><ul><ul><li>July 12, 2008 </li></ul></ul><ul><li>Former Intel employee charged with theft of trade secrets </li></ul><ul><ul><li>Sept. 15, 2008 </li></ul></ul>
    6. 6. Trade Secrets <ul><li>Important to protect business from unfair competition </li></ul><ul><li>Failure to protect confidential information has serious financial consequences </li></ul><ul><li>But protecting non-critical data may dilute and undermine protection for trade secrets </li></ul>
    7. 7. Definition of Trade Secret (Uniform Trade Secrets Act) <ul><li>USTA developed in 1979 and adopted in some form by virtually every state </li></ul><ul><li>Information must satisfy both: </li></ul><ul><ul><li>Economic value because not generally known to the public </li></ul></ul><ul><ul><li>Reasonable efforts to maintain its secrecy </li></ul></ul>
    8. 8. Definition of Trade Secret <ul><li>Independent value from not being generally known to, or ascertainable by, others </li></ul><ul><li>Subject to reasonable efforts to maintain its secrecy </li></ul><ul><ul><li>Ark. Code Ann. § 4-75-601(4) </li></ul></ul>
    9. 9. Factors in Determining Trade Secret Status <ul><li>Extent known outside the business, </li></ul><ul><li>Extent known inside the business, </li></ul><ul><li>Measures taken to guard secrecy, </li></ul><ul><li>Value of information to business and competitor, </li></ul><ul><li>Money/effort used to develop information </li></ul><ul><li>Ease/difficulty others could develop same information </li></ul><ul><ul><li>Saforo v. Porocel Corp. , 337 Ark. 553 (1999) </li></ul></ul>
    10. 10. Likely Trade Secrets <ul><ul><li>Business plans, drawings, and designs </li></ul></ul><ul><ul><ul><li>Expansion plans </li></ul></ul></ul><ul><ul><ul><li>Profit margins </li></ul></ul></ul><ul><ul><ul><li>Cost of materials </li></ul></ul></ul><ul><ul><ul><li>Suppliers </li></ul></ul></ul><ul><ul><ul><li>Quality assurance </li></ul></ul></ul><ul><ul><ul><li>Machines patterned after former employer’s </li></ul></ul></ul><ul><ul><ul><li>Theory for development of trade area </li></ul></ul></ul><ul><ul><ul><li>Particular type of product/process used, e.g., adhesive </li></ul></ul></ul>
    11. 11. Likely Trade Secrets (cont.) <ul><li>Customer lists if </li></ul><ul><ul><li>Confidential information, e.g., contract expiration date </li></ul></ul><ul><ul><li>Produced from customized software </li></ul></ul><ul><ul><li>Satisfy other Saforo factors </li></ul></ul><ul><li>Not protected </li></ul><ul><ul><li>If readily ascertainable through other means </li></ul></ul><ul><ul><li>If developed by former employee </li></ul></ul><ul><ul><li>Small trade area </li></ul></ul>
    12. 12. What is not protected <ul><li>Information acquired in good faith and by fair and honest means </li></ul><ul><ul><li>Independent invention </li></ul></ul><ul><ul><li>Reverse engineering </li></ul></ul><ul><ul><li>Accidental disclosure </li></ul></ul>
    13. 13. What is not protected (continued) <ul><li>General industry knowledge and skills </li></ul><ul><li>Alleged secrets not identified with specificity </li></ul><ul><ul><li>Wal-Mart v. P.O Market, Inc., 347 Ark. 651 (2002) </li></ul></ul>
    14. 14. What Can You Do? <ul><li>No safe harbor to ensure trade secret protection </li></ul><ul><li>Best rule of thumb, compelling narrative </li></ul><ul><ul><li>What are the secrets </li></ul></ul><ul><ul><li>What was done to develop </li></ul></ul><ul><ul><li>How it was done </li></ul></ul><ul><ul><li>Why it was done </li></ul></ul><ul><ul><li>How was it protected </li></ul></ul><ul><ul><li>Results of those efforts </li></ul></ul>
    15. 15. Recent Development <ul><li>Increasingly, plaintiff’s must identify trade secret with particularity before discovery or face dismissal </li></ul><ul><ul><li>DeRubeis v. Witten Technologies, Inc ., 244 F.R.D. 676 (N.D.Ga. 2007) </li></ul></ul>
    16. 16. ATSA Is Exclusive Remedy <ul><li>ATSA displaces other tort-based claims for misappropriation </li></ul><ul><li>Did not displace contractual or other civil liability not based on misappropriation </li></ul><ul><ul><li>Ark. Code Ann. § 4-75-602(b) </li></ul></ul>
    17. 17. ATSA Damages <ul><li>Actual damages of either lost profits or defendant’s profits, whichever is greater </li></ul><ul><li>So long as no double-dipping, also recover for unjust enrichment to extent not included in actual damage award </li></ul><ul><ul><li>Ark. Code Ann. § 4-75-606 </li></ul></ul>
    18. 18. No Punitive Damages <ul><li>Unlike UTSA, Arkansas does not allow punitive damages </li></ul><ul><ul><li>Cf. Ark. Code Ann. § 4-75-606 and USTA § 3 </li></ul></ul>
    19. 19. Attorneys’ fees require intent <ul><li>Bad faith claim of misappropriation </li></ul><ul><li>Motion to terminate injunction made or opposed in bad faith </li></ul><ul><li>Willful and malicious misappropriation </li></ul><ul><ul><li>Ark. Code Ann. 4-75-607 </li></ul></ul>
    20. 20. ATSA Remedies <ul><li>Injunctive relief </li></ul><ul><ul><li>Actual or threatened misappropriation may be enjoined </li></ul></ul><ul><ul><li>Royalty order injunction. If “unreasonable” to prohibit future use, may condition future use on payment of reasonable royalty </li></ul></ul><ul><ul><ul><li>Lower threshold than UTSA which requires “exceptional circumstances” </li></ul></ul></ul><ul><ul><ul><ul><li>Ark. Code Ann § 4-75-604(b) </li></ul></ul></ul></ul>
    21. 21. ATSA Remedies (continued) <ul><ul><li>Injunction requires showing of actual or threatened disclosure </li></ul></ul><ul><ul><li>Arkansas follows inevitable disclosure rule </li></ul></ul><ul><ul><ul><li>Statco Wireless, 80 Ark. App. 301. </li></ul></ul></ul>
    22. 22. Preserving Trade Secrets: Keep the “Secret” in Trade Secret
    23. 23. Precautions to maintain trade secret status <ul><li>Restrict access to information </li></ul><ul><li>Confidentiality agreements </li></ul><ul><li>Stamp information “confidential” </li></ul><ul><li>Sanitize brochures, web pages </li></ul><ul><li>Bar facility tours </li></ul>
    24. 24. Common trade secret mistakes <ul><li>Treating non-disclosure agreement as “just another form” for new employees </li></ul>
    25. 25. Common trade secret mistakes (continued) <ul><li>Failing to limit distribution </li></ul>
    26. 26. Common trade secret mistakes (continued) <ul><li>Failing to communicate regularly </li></ul><ul><ul><li>Must have ongoing policy to reiterate importance of trade secrets </li></ul></ul><ul><ul><li>Methods include: </li></ul></ul><ul><ul><ul><li>Periodic emails and memos </li></ul></ul></ul><ul><ul><ul><li>Distribute and update policy manuals </li></ul></ul></ul><ul><ul><ul><li>Regular training sessions </li></ul></ul></ul><ul><ul><ul><li>Annual or semi-annual meetings </li></ul></ul></ul>
    27. 27. “Shhh” happens?
    28. 28. Common trade secret mistakes (continued) <ul><li>Exit interview is critical </li></ul><ul><li>Remind employee of duty under confidentiality or non-compete agreement </li></ul><ul><li>Standard checklist for all employees </li></ul><ul><li>Recovery of all computer, drives, cell phones, etc. </li></ul><ul><li>Written certification by employee </li></ul>
    29. 29. Avoiding Claims by Competitors <ul><li>Written policy prohibiting use of confidential information or trade secrets from prior employer </li></ul><ul><li>Question potential hires regarding covenants and trade secret with current employer </li></ul><ul><li>Determine what information is publicly available </li></ul>
    30. 30. Avoiding Claims by Competitors (continued) <ul><li>Where possible, do not place new hire in position requiring specialized knowledge from previous job </li></ul>
    31. 31. Better Method to Enforce Trade Secrets? <ul><li>Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030 </li></ul><ul><ul><li>Originally federal criminal statute outlawing certain computer crimes </li></ul></ul><ul><ul><li>Amended in 1996 to add civil remedies for damages and injunctive relief </li></ul></ul><ul><ul><li>Compared to RICO </li></ul></ul>
    32. 32. CFAA Claims <ul><li>Claim arises where employee exceeds his authorized access and damages protected computer </li></ul><ul><li>Any computer connected to Internet covered </li></ul><ul><li>Federal forum </li></ul>
    33. 33. CFAA applied to trade secrets <ul><li>Employee accessed his employer’s computer to send trade secrets to new employer. CFAA covers inside access for improper purpose. </li></ul><ul><ul><li>Shurgard Storage Centers v. Safeguard Self Storage , 119 F. Supp. 2d 1121 (W.D. Wash. 2000) </li></ul></ul>
    34. 34. CFAA Claim Expanded <ul><li>“Damage” includes deleting confidential information </li></ul><ul><li>Employee authorization to access company laptop ended when he decided to delete data before he left employment </li></ul><ul><ul><li>Citrin, 440 F.3d 418 (7 th Cir. 2006) </li></ul></ul>
    35. 35. Covenants Not to Compete
    36. 36. Non-Compete 101 <ul><li>To be enforceable, a non-compete agreement must be reasonable </li></ul><ul><ul><li>Valid business interest to protect </li></ul></ul><ul><ul><li>Geographic restriction not overly broad </li></ul></ul><ul><ul><li>Reasonable time limit </li></ul></ul><ul><ul><ul><li>Bendinger v. Marshalltown Trowell Co ., 338 Ark. 410 (1999) </li></ul></ul></ul>
    37. 37. Non-Compete 101 (continued) <ul><li>Reasonable in Time, Scope, Geographic Area </li></ul><ul><ul><li>No bright line rules </li></ul></ul><ul><ul><li>Time limitations </li></ul></ul><ul><ul><ul><li>In general, courts do not enforce non-competes longer than 2 years </li></ul></ul></ul><ul><ul><li>Territory restricted must not be larger than historic trade area </li></ul></ul>
    38. 38. Employer/Employee Non-Competes <ul><li>Enforceable only where: </li></ul><ul><ul><li>Employer provided special training </li></ul></ul><ul><ul><li>Employee received confidential information or customer lists, and </li></ul></ul><ul><ul><li>Employee able to use information to gain unfair advantage </li></ul></ul><ul><ul><ul><li>Jaraki v. Cardiology Associates of Northeast Arkansas , P.A., 75 Ark. App. 198, 55 S.W.2d 799 (2001) </li></ul></ul></ul>
    39. 39. Employer Protectable Interest <ul><li>Special training must be more than general industry knowledge </li></ul><ul><li>Stifling ordinary competition not a legitimate business interest </li></ul>
    40. 40. Employer/Employee (continued) <ul><li>Confidential information of trade secrets can be proved by </li></ul><ul><ul><li>Significant decrease in former employee’s trade area </li></ul></ul><ul><ul><li>New employer benefiting from unfair advantage </li></ul></ul><ul><ul><li>Competitor able to draw customers that would be impossible without access to confidential information </li></ul></ul><ul><li>Arkansas is not “blue-pencil” state; must be valid as written </li></ul>
    41. 41. Sale of Business <ul><li>Non-competes ancillary to sale of business are valid to extent to protect purchaser’s interest </li></ul><ul><ul><li>Buyer has legitimate interest in protecting against competition by seller. </li></ul></ul><ul><ul><li>Purpose of agreement must be to sell business and its goodwill </li></ul></ul><ul><ul><ul><li>Duffner v. Alberty, 19 Ark. App. 137 (1986) </li></ul></ul></ul>
    42. 42. Sale of Business <ul><li>Buyer need not show protectable interest, such as trade secrets, customer lists, or special licenses </li></ul><ul><li>Enforceable even in “mundane” and non-specialized business </li></ul><ul><ul><li>Hyde v. CM Vending Co., Inc. 288 Ark. 218 (1986) </li></ul></ul>
    43. 43. No-Hire Covenant <ul><li>Also called “anti-raiding” or “noninterference” </li></ul><ul><li>Designed to prevent former employees or consultants from soliciting current employees </li></ul><ul><ul><li>Former employees’ knowledge of workplace gives them unfair advantage to woo productive employees </li></ul></ul><ul><li>Prevalent in consulting and outsourcing contracts </li></ul><ul><li>Relatively recent development </li></ul><ul><li>Courts are mixed; no Arkansas law </li></ul>
    44. 44. Non-Compete Developments <ul><li>California recently invalidated all employer-imposed non-competes </li></ul><ul><li>Based on statute but rationale similar to common law jurisdictions </li></ul><ul><li>Covenants ancillary to sale and protection of trade secrets not affected </li></ul><ul><ul><li>Edwards v. Arthur Anderson LLP, (CA S. Ct. Aug. 7, 2008) </li></ul></ul>
    45. 45. Trade Secret Protection Plan <ul><li>Point person </li></ul><ul><li>Inventory </li></ul><ul><li>Prioritize value (high/medium/low) </li></ul><ul><li>Analyze how secrets map to business </li></ul>
    46. 46. Trade Secret Protection Plan (continued) <ul><li>Assess risk of loss and effect </li></ul><ul><li>Develop company-wide protection plan </li></ul><ul><li>Perform “gap” analysis on status quo </li></ul><ul><li>Close gaps </li></ul><ul><li>Reassess regularly </li></ul>
    47. 47. Conclusion
    48. 48. Thank you ____________ Questions?

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