Trade Secrets & Employee Mobility

In Valentine Capital Asset Management, Inc. v. Agahi, 174 Cal. App. 4th 606, the California Court of Appeals, First District, recently looked at the issue of whether an associated person of a FINRA member could be compelled to arbitrate his company's trade secret and unfair competition claims against former employees who were also associated persons of a FINRA member.

Although issues involving misappropriation of trade secrets are frequently litigated, they rarely result in criminal charges. However, according to recent stories in The Chicago Tribune, Reuters.com, and other media outlets, a former employee of Goldman Sachs was recently arrested by the FBI for allegedly stealing trade secrets (software code regarding a proprietary trading system) worth millions of dollars.

While there is no magic wand that will prevent a theft or stop a thief in his tracks, a company can substantially lower the risk of trade secret misappropriation through proactive policies and procedures.

The Economic Espionage Act ("EEA"), 18 U.S.C. §§ 1831-39, gives companies another tool in the fight against misappropriation of trade secrets to "adopt a national scheme to protect U.S. proprietary economic information" and to combat the rising tide of espionage against and threats to corporate trade secrets. It criminalizes misappropriation of trade secrets.

A recent decision from the United States Court for the District of New Jersey demonstrates how a corporation's tenacity in seeking electronically stored information despite the intransigence and apparent spoliation of evidence by a former employee and his new company led to positive results for the corporation.

The New York State Supreme Court recently shot down a request to enjoin two former salesmen and their new employer from tortiously interfering with a real estate investment firm's business, from interfering or contacting its customers or using or exploiting its trade secrets.

Many New York attorneys, when seeking a preliminary injunction against a party that has misappropriated their clients' trade secrets, will argue that a presumption of irreparable harm to their clients automatically arises upon the determination that a trade secret has been misappropriated. A recent decision of the U.S. Court of Appeals for the Second Circuit, however, holds that misappropriation of trade secrets does not automatically lead to irreparable harm. The aggrieved party only faces irreparable harm if the misappropriator will disseminate the secrets to a wider audience or otherwise irreparably impair the value of the secrets.

A study released by Ponemon Institute LLC on February 23, 2009 confirms a human resources truism: departing employees frequently steal company data while heading out the door. The study contains a wealth of other interesting statistics about employee data thefts.

In a decision, dated January 26, 2009, in the matter Epiq Systems, Inc. v. Hartie, Index No. 111950/08, the Supreme Court of the State of New York, New York County, by Judicial Hearing Officer (and retired Justice) Ira Gammerman, denied a preliminary injunction in aid of arbitration sought by plaintiffs Epiq Systems, Inc. and related companies (collectively, "Epiq"). Epiq claimed that it faced inevitable disclosure of its trade secrets by three individual defendants formerly employed at Epiq and their new employer Kurtzman Carson Consultants LLC ("KCC") with respect to three computer programs, including one web-based system, developed and used by Epiq to solicit ballots and tabulate ballot results in Chapter 11 bankruptcy proceedings, and in analogous foreign proceedings, involving widely-held public securities.

If, as expected, the Paycheck Fairness Act becomes law (it was passed by the U.S. House in January 2009 and is currently pending in the Senate), employers may want to review provisions in confidentiality agreements and policies that expressly bar the disclosure of wage information.