In addition to the standard fare for redressing theft of confidential information, the Computer Fraud and Abuse Act (CFAA) is another tool that is available for combating theft of trade secret information. Parker Poe recently published an article in Law 360 regarding the application of the Computer Fraud and Abuse Act in this area. “Fighting Theft of Company Data Through the CFAA.” The link is as follows: http://www.parkerpoe.com/media/pnc/6/media.756.pdf
Author Archives: Eric Welsh
REVISED MERGER GUIDELINES RELEASED
Filed under Antitrust Developments, DOJ, FTC
As discussed in my prior report, the FTC, in April of this year, released for comment proposed revisions to the Horizontal Merger Guidelines. See Proposed Revisions To The Horizontal Merger Guidelines Released. After months of public comment and discussion, the FTC and DOJ have now released the revised Horizontal Merger Guidelines. Horizontal Merger Guidelines. As noted by Chairman Leibowitz in his accompanying statement, the Guidelines have been improved in large and small ways. Among other things, “the Guidelines emphasize the competitive effects of a deal over the more rigid, formulaic approach imposed by some interpretations of the 1992 Guidelines.” Under the Guidelines, market definitions and economic theory, while important, are only part of the story of competitive effects.
In an accompanying statement, Commissioner Rosch provided his own thoughts regarding the final version of the Guidelines, finding some agreement with Commissioner Leibowitz’s assessment.
“These Guidelines properly consider competitive effects first, and market definition second, thereby making clear that while market definition is important to assessing competitive effects and that the market must be defined at some point in the process, ultimately merger analysis must rest on competitive effects of a transaction.”
Commissioner Rosch rejected the notion of many that under the 1992 version of the Guidelines, market shares and structure were “gating items,” or necessary predicates for considering the competitive effects of the merger. Under the revised Guidelines, according to Commissioner Rosch, the competitive effects is given more appropriate consideration.
The Merger Guidelines no doubt provide greater clarity on a number of issues. For example, the Guidelines contain a section dealing with Powerful Buyers and lists the types of evidence to be considered when looking at the competitive effects of a merger, including the impact on innovation and the potential elimination of a “maverick” firm. The two year guidance for entry has been eliminated and the threshold numbers for the Herfindahl-Hirschman Index have been increased, as expected.
For Commissioner Rosch, though, the changes fall short of what is required. For example, Commissioner Rosch notes that the Guidelines say little about non-price competitive effects and do not provide a “clear framework for analyzing non-price considerations” (i.e. how do you factor in a loss of innovation?). According to Commissioner Rosch, economic theory should be, at best, a secondary consideration with empirical inferences to be in the forefront.
“The antitrust defense bar and its clients do not need safe harbors. That bar (including the many who are members of the Antitrust Section) are among the best and brightest lawyers in the world. What that bar and their clients deserve is what these Guidelines promise at the outset — namely, that they will be a complete and accurate description of what our enforcement staff considers in merger investigations and that they will be a helpful guide to courts. These Guidelines are neither.”
Essentially, Commissioner Rosch found fault with the heavy emphasis of economist and the antitrust defense bar in the revision process which “inevitably led to overemphasis on economic formulae and models based on price theory.”
Perhaps the tension identified by Commissioner Rosch emanates from the fact that heavy reliance on “empirical inference” rather than economic theory and analysis potentially leads to greater subjectivity and would be less help than more to the courts. The courts have required more in terms of evidence in the past and the Guidelines’ apparent move away from market definition is certainly a significant departure from the prior guidelines and indeed inconsistent with judicial precedent. What impact the Merger Guidelines will have in the courts in the future remains to be seen.
WHETHER TALKING ABOUT A GOOD MUFFIN OR OBTAINING AN INJUNCTION: IT’S ALL ABOUT THE INGREDIENTS
Filed under Trade Secrets
Finding a sufficient likelihood, but not inevitability, of disclosure of a former employer’s trade secrets, the Third Circuit Court of Appeals last month affirmed the district court’s grant of an injunction in Bimbo Bakeries USA, Inc. v. Botticella, No. 101510 (July 27, 2010). See Actions Speak Louder Than Words: Bad Faith Conduct Supports Finding of “Inevitable Disclosure” of Trade Secret.
In that case, Bimbo Bakeries USA, Inc. obtained an injunction against Chris Botticella, Bimbo’s former Vice President of Operations in California, to prevent him from working with Bimbo’s competitor, Interstates Brand Corporation (now Hostess Brands Inc.). Bimbo contended that Botticella had downloaded confidential, trade secret information of Bimbo prior to his departure, which he continued to receive as an employee of Bimbo after he had received his offer from Hostess. Bimbo also argued that an injunction was warranted given the sufficient likelihood that Botticella would disclose Bimbo’s trade secrets in his new position. The district court agreed with Bimbo and granted the injunction. On appeal, the Third Circuit affirmed.
The Third Circuit opinion raises several interesting points. First, in affirming the district court’s injunction, the Third Circuit made it clear that it was not basing its decision on the theory of “inevitable disclosure.” Rather, the Third Circuit based its decision on the Pennsylvania trade secret statute’s proscription of threatened misappropriation.
Second, the Third Circuit clarified that the standard for showing such threatened misappropriation. Rejecting the argument that a showing was required of ”virtual impossibility” of avoiding disclosure of the trade secrets, the Third Circuit concluded that a lesser standard, of showing a sufficient likelihood of disclosure, is all that is required.
In clarifying the standard for proving threatened misappropriation (and in the process distinguishing prior contrary language of the Third Circuit in Victaulic Co. v.Tieman, 499 F.3d 227, 234 (3d Cir. 2007) as dicta), the Third Circuit found more than enough evidence in the record, to support Bimbo’s likelihood of success on the merits, including evidence of Botticella’s continued receipt of Bimbo confidential information after he had received his Hostess offer, his “copying Bimbo’s trade secret information from his work laptop onto external storage devices” and the substantial similarity of his positions at Hostess and Bimbo. Interestingly, the Third Circuit also found that the district court was entitled to make an adverse inference against Botticella for failing to testify at the preliminary injunction hearing.
As any good chef knows, a great dish is made up of not one but many great ingredients. For the district court, and the Third Circuit, Bimbo introduced many pieces of probative evidence that made a compelling case that absent an injunction, Botticella was likely to misappropriate Bimbo’s trade secrets. Bimbo’s case was not reliant only on claims of “inevitable disclosure.”
FTC SETTLES WITH INTEL: “A BIRD IN THE HAND . . .”
Filed under Antitrust Developments, FTC, Unfair Competition
Nearly eight months after issuing a complaint against Intel Corp. for unfair competition under Section 5 of the FTC Act (See FTC Moves Forward with Stand Alone Section 5 Claim), the FTC announced last week that it has reached the terms of a settlement with Intel. The settlement (Decision and Order) is subject to public comment. In reaching the terms of this settlement, the FTC noted that the settlement does not strip Intel of its alleged monopoly in the x86 CPU processors, because that alleged monopoly was obtained through its innovation. Rather, the settlement is designed to address Intel’s commercial conduct moving forward in an effort to aid competition in that and other alleged markets.
“The touchstone of the Proposed Consent Order is the protection of consumers and competition. Thus, the Proposed Consent Order provides structural relief designed to restore the competition lost as a result of Intel’s past conduct, and injunctive relief that prevents Intel from engaging in future unfair methods of competition. The injunctive relief would prohibit Intel, when faced with new competitive threats, from engaging in the exclusionary and unfair conduct alleged in the Complaint. These provisions are designed to open the door to fair and vigorous competition in the relevant markets, leading to lower prices, more innovation, and more choice for consumers. The immediacy of this relief is particularly important in these rapidly changing markets.” (Analysis of Proposed Consent Order to Aid Public Comment)
The settlement appears, though, to reflect a number of concessions by the FTC. As noted, the settlement does not immediately alter Intel’s alleged monopoly status with the x86 CPU processors. Moreover, certain of the requested relief sought in the complaint is not reflected in the settlement, such as providing notice to the FTC of acquisitions in the future. Other relief sought in the complaint, which was broad and categorical, has been refined and narrowed in the settlement. Indeed, an entire section of the settlement expressly carves out exceptions to the restrictions imposed on Intel’s commercial conduct in the future (see Section IV.B.). For example, the FTC tries to strike a balance with the limitations to be imposed on Intel in entering exclusive contracts with OEM’s in the future. In the complaint, the FTC had sought to limit Intel’s practices in entering into these exclusive contracts. In the settlement, the FTC obtained those limitations while making it clear that it was not banning the practice entirely.
“Section IV.B.8 would allow Intel to enter into no more than ten exclusive agreements over the next ten years when it provides an OEM with “extraordinary assistance” under certain circumstances. The Commission recognizes that Intel has worked with OEMs and other customers to create innovative products that have benefitted consumers. The Commission wants to ensure that Intel has the opportunity to continue to invest monies in projects with OEMs and other customers to support future innovations. Intel, like any other firm, will only invest in research and development if it achieves a return on that investment. Section IV.B.8 recognizes that in “extraordinary” circumstances Intel should be able to negotiate exclusivity for a specific product in which it has invested research and development resources with an OEM or other customer.”
The FTC appears to have obtained much of the relief sought by the complaint (and in some places more – see appointment of Technical Consultants) through this settlement. It is apparent that the FTC understood though that a protracted fight would accomplish little in this industry, where technology changes rapidly. A prompt resolution, where some benefits could be obtained today, was evidently perceived as a better outcome than obtaining a victory years later with the landscape having changed in the interim. As Chairman Jon Leibowitz described the settlement (News Release):
“By accepting this settlement, we open the door to competition today and address Intel’s anticompetitive conduct in a way that may not have been available in a final judgment years from now. Everyone, including Intel, gets a greater degree of certainty about the rules of the road going forward, which allows all the companies in this dynamic industry to move ahead and build better, more innovative products.”
Clearly, for the FTC, the settlement was “the bird in the hand,” and was more valuable than trying to find two birds later in a bush that is ever changing.
TRADE SECRET THEFT CLAIM DOES NOT REQUIRE DIRECT PROOF OF ACTUAL MISAPPROPRIATION
Filed under NC Business Court, NC Court of Appeals, North Carolina law, Trade Secrets
A recent decision by the North Carolina Court of Appeals (Armacell LLC v. Jeffrey Bostic, et al., No. COA09-1160 (July 20, 2010)) reminds us that under the North Carolina Trade Secrets Protection Act, N.C. Gen. Stat. § 66-152, direct evidence of misappropriation is neither required nor necessary to establish a claim for misappropriation.
Armacell LLC manufactured foam insulation products and employed Jeffrey Bostic in its Research and Development Group as a Senior Research Scientist. Armacell had developed and marketed a foam insulation that was based on ethylene propylene diene methylene (EPDM), which was superior to other pipe insulation in terms of its fire test ratings. Armacell competed with K-Flex, which did not have an EPDM product prior to this dispute.
In its complaint, Armacell alleged, among other things, that Bostic and K-Flex had misappropriated Armacell’s trade secrets for the EPDM insulation product. Armacell alleged that Bostic resigned from Armacell to accept a position as a chemist at K-Flex and in the process, undertook ”a surreptitious campaign of disloyal actions,” copying onto external hard drives thousands of competitively sensitive and confidential information of Armacell. Armacell asserted that K-Flex, which did not have an EPDM product, had been struggling to compete with Armacell in the sale of two inch thick pipe insulation. After Bostic was hired, however, K-Flex quickly had ready for testing a one-inch thick EPDM product, a product for which K-Flex had no commercial need but which could be reproduced to develop a two-inch EPDM sample. Armacell alleged that this evidence was strong circumstantial evidence of misappropriation.
The North Carolina Business Court agreed with Armacell and issued a preliminary injunction against Bostic, K-Flex and its affiliated company. On appeal, the Defendants challenged the injunction order, asserting that the Business Court erred in finding that Armacell had proven a likelihood of success on the merits of its trade secrets claim. The Defendants contended that Armacell brought only “speculative claims” and “while the evidence demonstrated that Bostic took a significant amount of data from [Plaintiff's] computer system, [Plaintiff] did not show that [Defendants] had a specific opportunity to acquire [Armacell's EPDM formulation].” The Defendants argued that the evidence was simply not sufficient.
The Court of Appeals rejected the Defendants’ argument. In affirming the granting of the injunction, the Court correctly observed that North Carolina’s Trade Secrets Protection Act only requires that the plaintiff make out a prima facie showing of misappropriation and the burden then shifts to the defendant to show that it obtained the subject information lawfully.
Under the Act, a prima facie case is established by “the introduction of substantial evidence that the person against whom relief is sought both:
(1) Knows or should have known of the trade secret; and
(2) Has had a specific opportunity to acquire it for disclosure or use or ahs acquired, disclosed, or used it without the express or implied consent or authority of the owner.” N.C. Gen. Stat. § 66-155.
Once the prima facie showing is made, it is up to the defendant to rebut that evidence through the introduction of “substantial evidence that the person against whom relief is sought acquired the information comprising the trade secret by independent development, reverse engineering, or it was obtained from another person with a right to disclose the trade secret.” Id.
Although the defendants challenged the very nature of the burden shifting in the statute, the Court, consistent with precedent, reiterated the view that the statute in fact contemplates a shifting of the burden of proof. Combs & Associates, Inc. v. Kennedy, 147 N.C. App. 362, 369, 555 S.E.2d 634, 639 (2001); Byrd’s Lawn & Landscaping v. Smith, 142 NC. App at 376, 542 S.E.2d at 693. The reason for the burden shifting is simple: the North Carolina statute reflects the practical reality that “[f]ew defendants leave the proverbial ’smoking gun’” when misappropriating a trade secret. Lawsuits Between Business Competitors: Chapter 75-1.1 and Beyond, Eric D. Welsh, Mecklenburg County Bar Association Business Litigation Forum, February 17, 2006, p. 7. Moreover, due to the frequent absence of direct evidence, a claim for misappropriation will often depend upon circumstantial evidence. Medical Staffing Network, Inc. v. Ridgway, 194 N.C. App. 649, 658, 670 S.E.2d 321, 329 (2009); Byrd’s, 142 N.C.App. at 377, 542 S.E.2d at 693; Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp. 2d 541, 545 (M.D.N.C. 2002).
In reviewing the record before it, the Court of Appeals found ample circumstantial evidence to support Armacell’s prima facie case of trade secret misappropriation. The evidence showed that Bostic, as a Senior Research Scientist, had knowledge of Armacell’s EPDM technology and K-Flex, which had not developed an EPDM product prior to Bostic being hired by it, had, within a year after hiring Bostic, produced an EPDM sample. Relying on Sunbelt Rentals, Inc. v. Head & Engquist Equip., L.L.C., 174 N.C.App. 49, 620 S.E.2d 222 (2005), the Court of Appeals found that this “before and after” evidence was ”sufficient circumstantial evidence to show Defendants’ opportunity to acquire the trade secrets as well as Defendants’ subsequent use thereof.”
In Sunbelt, a case involving the theft of trade secrets and unfair competition resulting from a corporate raid, the North Carolina Business Court found as persuasive evidence of misappropriation the fact that the Defendants were able to quickly compete against Sunbelt even though they had not invested time to develop independently the requisite resources to do so. As the Business Court stated:
In this instance it may be more important to look at what was not done and the business results. There is no evidence of a unified pricing structure for Hi-Lift. Many salespeople testified that they did not have prices when they began calling on customers. There were no restrictions placed on the sales people concerning use of BPS information. The sales people began calling on the same customers within days of leaving BPS and in some cases went after business that was based on special pricing arrangements. Credit decisions had to be based upon knowledge obtained at BPS, as there is no evidence of the independent development of credit information for the customers called upon at the outset. Indeed, there is little evidence of the independent development of information by Hi-Lift that one would expect in a normal greenfield operation. As previously noted, there was an advantage to Hi-Lift to get the new Hi-Lift branches open in the BPS markets before Sunbelt could close its transaction. The rapidity with which the old BPS customers were identified, called upon and converted to Hi-Lift, despite the lack of business information and guidance from Hi-Lift management, provides strong circumstantial evidence that at least some of BPS confidential information was used to solicit customers. Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 2003 NCBC 4, 2003 WL 21017456 (N.C. Super. May 2, 2003).
As in Sunbelt, the Defendants in Armacell obtained a head start advantage as a result of Bostic’s alleged misappropriation and that advantage, from the Court’s perspective, was sufficient proof of misappropriation.
The Defendants in Armacell attempted to rebut this prima facie showing, arguing that Armacell’s proof showed only that Bostic stole some of Armacell’s information but not the information related to the EPDM product. Defendants’ curious argument, however, failed because they were unable to come forward with ample evidence to explain how it was that they had developed the EPDM product so quickly if not through Bostic’s efforts. Here, it would appear that Armacell caught Bostic with his hand in the “trade secret cookie jar” — perhaps 7000 times — which was more than enough for the Court to conclude, at this stage, that Bostic not only had access to the information but, in light of the absence of a product before and then sudden introduction of a product after his hiring, had misappropriated that information.
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* Parker Poe represented Sunbelt Rentals, Inc. in the Head & Engquist Equipment litigation and Eric Welsh was a member of the trial team.
SOUTH CAROLINA SUPREME COURT REJECTS EFFORT TO NARROW GEOGRAPHIC RESTRICTION IN NON-COMPETE
Filed under SC Supreme Court, South Carolina Law, Uncategorized, Unfair Competition
In a decision filed in May, the South Carolina Supreme Court reversed the trial court’s “blue-penciling” of a territorial restriction in a non-compete to uphold its validity. Poynter Investments, Inc. v. Century Builders of Piedmont, Inc., No. 26821 (May 21, 2010). In that case, the defendant, Clyde Rector, sold his business to Poynter Investments and in connection with that sale, entered into a non-compete agreement. The non-compete agreement was for a duration of four years and contained a three tiered geographic restriction. By the terms of that agreement, Rector was prohibited from engaging in a competing business (i) within 75 miles of the premises, (ii) if found too broad, then in Greenville County, South Carolina and any bordering county, or (iii) if found too broad, then Greenville County, South Carolina. According to the opinion, Rector subsequently breached his employment and non-compete agreement, and Poynter Investments filed suit against him to enforce the non-compete.
The trial court upheld the non-compete agreement, granting a preliminary injunction. In doing so, the trial court limited the geographic restriction of the non-compete to “Greenville County, and within an area encompassing fifteen miles in any direction of [the Premises].” Rector appealed the decision, arguing, in part, that the trial court impermissibly “blue-penciled” an overbroad non-compete agreement.
On appeal, the South Carolina Supreme Court found such rewriting of the non-compete by the court to be improper. After citing to precedent discussing the limitations of the courts in deviating from the express terms of non-compete agreements, the Supreme Court found that the trial court’s crafted geographic limitation similarly flawed for straying from the express terms of the agreement:
“These cases stand for the proposition that, in South Carolina, the restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties’ agreement, but must stand or fall on their own terms. We hold, therefore, that the trial judge erred in rewriting the territorial restriction in the parties’ contract.”
What is interesting about this case is not what questions have been answered but rather, what remains unanswered by the opinion. For example, had the trial court simply used the third definition of the non-compete’s geographic provision — Greenville County, South Carolina — and ignored the other two, which were probably overbroad, would the court’s decision have been upheld or viewed as improper “blue-penciling”? In such a situation, does the agreement stand by its own terms if two of the definitions are viewed as over broad and ignored?
Interestingly, in North Carolina, where courts are also prohibited from rewriting non-compete agreements, such agreements are not unenforceable simply because the territorial restriction employs multiple definitions of varying geographic reach. As long as the provisions are separate and distinct, a court can strike the overbroad provisions in a non-compete agreement without violating the prohibition on rewriting the covenant. See, e.g. Wachovia Ins. Svcs., Inc. v. McGuirt, No. 06 CVS 13593, 2006 WL 3720430, *9, fn.4 (NCBC Dec. 19, 2006) at *11 (excising single provision of covenant regarding solicitation of customers while preserving remainder); Philips Elecs. North America Corp. v. Hope, 09 cv 363, 2009 WL 1883921 (M.D.N.C. June 30, 2009) at fn.6 (stating blue penciling is especially appropriate to excise provisions separated by the term “or”). Accordingly, a geographic restriction that is tiered in structure is not by itself a bar to enforcement in North Carolina.
South Carolina had previously recognized a similar rule, permitting courts to enforce a non-compete if the offensive provision is “severable.” See Somerset v. Reyner, 233 S.C. 324, 104 S.E.2d 344 (1958); Lampman v. Dewolff Boberg & Assoc. Inc., 2009 U.S. App. LEXIS 6046 (4th Cir. March 23, 2009); see also Rockford Mfg., Ltd. v. Bennet, 296 F. Supp. 2d 681 (D.S.C. 2003). At first blush, Poynter Investments seems at odds with this precedent. Does Poynter Investments mark a change in South Carolina’s treatment of non-compete provisions that are severable? Will South Carolina enforce a strict prohibition on all “blue-penciling” of restrictive covenants? Certainly, the Poynter Investments case can be limited to its facts to avoid any inconsistencies with precedent. The trial court judge did not simply enforce the non-compete based on one of three definitions of geography found in the parties’ agreement. Rather, he modified one of the geographic definitions, thereby broadening its reach. Even under Somerset and other precedent, such judicial intervention would be viewed as improper.
Time will tell whether South Carolina is ushering in a stricter approach to non-compete agreements. One thing is clear, as with North Carolina, non-compete agreements are viewed closely by the courts in South Carolina and will not be saved by judicial rewriting of existing contractual terms.