United States: 10 Important Pieces Of Noncompete, Trade Secret, And Computer Fraud News

Last Updated: February 28 2013
Article by Brian P. Bialas

During this past fall and much of the winter, I was serving as a Special Assistant District Attorney in Norfolk County, Massachusetts, which didn't give me much time to blog. So, to steal a technique that John Marsh uses every week to supplement his excellent posts on the Trade Secret Litigator blog, here are some short discussions of interesting cases and articles I came across over the past few months.


1. Appellate courts rarely rule on noncompete issues, and the U.S. Supreme Court almost never does. But in Nitro-Lift Technologies, L.L.C. v. Howard, the U.S. Supreme Court determined that, under the Federal Arbitration Act (FAA), a determination of whether the non-disclosure and noncompete provisions in an employment agreement are invalid under state law should be decided by an arbitrator and not a state court where that employment agreement has a valid and applicable arbitration clause.    

2. Two recent cases in Massachusetts state courts show that noncompete cases sometimes do go to trial. In O'Toole & Company v. Gaudet(subscription required), Judge Daniel Wrenn of the Middlesex Superior Court awarded $224,263 in lost profits to an accounting firm and enforced a noncompete after three former employees, one being a former shareholder owing duties of utmost good faith and loyalty and bound by a three-year noncompete, conspired to solicit the company's clients and employees and divert them to their own newly formed business. In Sentient Jet LLC v. Mackenzie (subscription required), which Michael Rosen wrote about here at an early stage in the case, the plaintiff private airline company was awarded $586,790 by a Norfolk County jury from three former salesman of the company. The salesmen went to work for a competing airline, breaching their one-year noncompete, improperly solicited customers of their former company, and downloaded proprietary information from their former employer's computers. 

3. Peter A. Steinmeyer provides "10 Steps to Take When Hiring from a Competitor." Besides analyzing any restrictive covenants, like noncompetes, he suggests addressing "human elements" by orchestrating proper timing and by making sure departing employees act appropriately on their way out the door.

Trade Secrets

4. The Obama Administration has issued a report containing strategies and recommendations for protecting U.S. trade secrets from foreign companies or governments. Action items from the report include: (1) focusing diplomatic efforts to protect trade secrets overseas; (2) promoting voluntary best practices by private industry to protect trade secrets; (3) enhancing domestic law enforcement operations; (4) improving domestic legislation; and (5) promoting public awareness and stakeholder outreach. 

5. On that same theme, Patrick J. O'Toole and Allison S. Lukas have written an excellent piece in Massachusetts Lawyers Weekly (subscription required) on "Protecting Trade Secrets in a Global Economy." They suggest that businesses: (1) mark confidential information as confidential; (2) lock up physical files; (3) encrypt electronic information; (4) limit access to trade secrets to those with a need to know; (5) require employees to sign non-disclosure and noncompete agreements; (6) have IT policies and trainings that emphasize confidentiality; and (7) have third parties who receive access to trade secrets sign written agreements detailing specific measures regarding information protection.

6. "Are Social Networking Contacts Trade Secrets?," ask Michael H. Bunis and Diana T. Huang. They suggest the answer is "maybe," and that "businesses would do well to have robust policies regarding social media use, maintenance and account ownership." 

7. Two new federal criminal statutes on trade-secret theft—one expanding the scope of the Economic Espionage Act, another increasing penalties for violations—might increase trade-secret prosecutions and spur the creation of a federal civil cause of action for the misappropriation of trade secrets.

Computer Fraud and Abuse Act

8. In an intriguing article published in Massachusetts Lawyers Weekly (subscription required), famous Boston criminal defense attorney Harvey Silvergate calls the prosecution of computer prodigy Aaron Swartz "the most recent in a long line of abusive prosecutions coming out of the U.S. Attorney's Office in Boston." Silvergate calls the CFAA, which Swartz was prosecuted under, "a notoriously broad statute enacted by Congress seemingly to criminalize any use of a computer to do something that could be deemed bad." 

9. A judge of the U.S. District Court for the Northern District of California ruled that a complaint brought under the CFAA by a former employer against its former employee for stealing proprietary information "during and following his employment" should be brought in an arbitration because the employment contract between the plaintiff company and the defendant employee required the arbitration of any dispute arising out of the employment relationship.  The court held that, under Ninth Circuit case law binding on the court, such a clause is to be read broadly and allegations of a complaint need only "touch matters" covered by the clause to be arbitrable. Because the allegations of the complaint occurred, at least in part, while the defendant was employed, arbitration was appropriate.   

10. A judge of the U.S. District Court for the Southern District of New York has sided with the Ninth Circuit in its narrower interpretation of the CFAA. The court went against the interpretation of other Southern District judges in ruling that the CFAA only applies to defendants who steal confidential information without being granted access to that information (e.g., "hackers"), rejecting the broader interpretation that includes defendants who had access to confidential information but used that access to misuse or misappropriate the information within the CFAA's scope. I've written a lot on this topic. 

To view Foley Hoag's Massachusetts Noncompete Law Blog please click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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