Troy & Schwartz Attorneys-At-Law

Background

This blog discusses the September 14, 2017 Florida Supreme Court’s holding in the consolidated cases of White v. Mederi Caretenders Visiting Services of SE Florida, LLC, et al. and Americare Home Therapy, Inc. v. Hiles.

A previous blog discussed Florida’s restrictive covenant statute which, when compared to similar statutes in other states, is generally quite favorable to businesses when it comes to the enforcement of non-compete agreements.  Many lawsuits involving Fla. Stat. 542.335 involve a former employee who has left the employment of the business and either started a competing business or has gone to work for a competitor.  Generally, the employee has signed a non-compete agreement as a condition for employment with his former employer.  The former employer may commence a lawsuit to prevent the former employee and his new employer from using information associated with the former employer’s  legitimate business interests.  Where the former employee goes to work for a competitor of the former employer, both the former employee and new employer are often named as co-defendants.

Under the Florida statute, a contract providing restrictions on competition must involve a legitimate business interest as defined by statute to be enforceable.  Fla. Stat. 542.335(1)(b).  Both of the above referenced cases involved employees who had worked for businesses that relied on home health referral sources cultivated through extensive personal marketing and relationship building with potential referral sources, primarily physician’s offices.  Section 542.335 does not specify home health referral sources as a legitimate business interest but does provide a non-exhaustive list preceded by the words “legitimate business interest includes but is not limited to:

1. Trade secretes as defined in s. 688.002(4);
2. Valuable, confidential business or professional information that does not otherwise qualify as trade secrets;
3. Substantial relationships with specific, prospective, or existing customers, patients, or clients;
4. Customer, patient, or client goodwill associated with:  a) An on-going business or professional practice, by way of trade name, trademark, service mark, or trade dress; b) A specific geographic location; or c) Specific marketing or trade area;
5. Extraordinary or specialized training.”

The Florida Supreme Court’s Analysis

In White/Americare the Florida Supreme Court engaged in statutory interpretation to conclude home health referral sources were indeed legitimate business interests for several reasons.  First, the legislature’s stated examples were meant to be just that – examples.  The list was never intended to be exhaustive as clearly indicated by the words “includes but is not limited too.”

Second, the Court refused to interpret the statute in such a way so as to exclude a claimed legitimate business interest in non-identifiable prospective patients.  The Court tellingly stated “[g]enerally, it is improper to apply espressio unius to a statute in which the Legislature used the word include.  This follows the conventional rule in Florida that the Legislature uses the word “including” in a statute as a word of expansion, not one of limitation.” Slip opinion at 13.

Third, the Court noted that for home health care companies (HHCs), there is an “indispensable relationship between referral sources and their undisputed legitimate business interests in relationships with patients protected by the statute”  Furthermore, the Court noted that referral sources are somewhat analogous to customer goodwill which is expressly protected by the statute.  Slip opinion at 20.  It is important to understand the home health referral sources generally do not involve identifiable patients although the home health referral sources will hopefully result in referred patients who then of course become identifiable.

In reaching its conclusion, the Court was careful to point out that the statute does not protect covenants whose “sole purpose is to prevent competition per se because such contracts are void against public policy.  Even under Florida law with its pro-business stance, the courts have held that “[f]or an employer to be entitled to protection,   ‘there must be special facts present over and above ordinary competition such that, absent a non-competition agreement, the employee would gain an unfair advantage in future competition with the employer.’ ”  White/Americare citing Passal v. Naviant, Inc., 844 So. 2d 792, 795 (Fla. 4^th DCA 2003).   Slip opinion at 21.

The statute also allows the courts to ameliorate any concern regarding overly restrictive covenants by commanding the courts to modify any non-competition agreement that is not reasonably necessary to protect the legitimate business interest and to grant only the relief necessary to protect such interests.  Fla. Stat. s. 542.115.  Here both non-competition agreements were limited to certain geographical areas – to the counties where the HHCs actually operated for a period of one year.

Conclusively, by finding for the HHCs, the Court was not expanding the reach of restrictive covenants to limit competition.  It was merely finding that the nature of an HHC-based business necessitates the classification of its referral sources as legitimate business interests.

Take-Home Points

After White/Americare, businesses may be able to more easily establish legitimate business interests to protect their interests in non-compete agreements where the alleged business interest is not specifically articulated by the statute.   The decision shows, however, that the analysis will be fact-specific, and that the agreement must still be reasonably tailored to cover a reasonable geographic area and time-frame.  The plaintiff will also need to be able to adequately explain why the subject matter is a legitimate business interest based on the nature of the business.

This commentator notes that the conduct of the employee in Hiles was particularly egregious with respect to her transferring of Americare’s confidential information, including patient information, to her personal e-mail account both before she even gave notice of her resignation and after she was let go a few days after giving notice to Americare prior to her notice’s specified “last day.”

Clearly the technology age has made the wrongful usage/theft of a business’s intellectual property and/or confidential information (intangible assets) easy.  It is up to businesses, no matter how small, to be proactive in protecting their intellectual property and confidential information from this wrongful usage.  As the White/Americare holding demonstrates for cases involving employees, a non-compete agreement does not always prevent problems after an employee resigns or is terminated.   Contact us to obtain a complimentary checklist of suggested steps to take to help protect your business’s intangible assets and thereby try to eliminate the need of future costly litigation to protect your business’s interests.

© 2017 by Troy & Schwartz, LLC

WE THANK YOU FOR READING THIS BLOG.  HOWEVER, THE FOREGOING IS NOT LEGAL ADVICE AND IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY.  IF YOU ARE CONTEMPLATING ANY ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSIDER CONSULTING WITH AN ATTORNEY.

 Part I. Introduction

Social media has become a game changer in the way we communicate and the courts are attempting to deal with such technology-based communications in the context of existing laws. Although it has had a huge impact in the area of intellectual property law, the impact of social media on other areas of the law may be less well-known.  Technology allows anyone to send of negative missives about anybody by the mere press of a button into cyberspace.  What if the sender is an employee who complains about an employer, boss, supervisor, etc.?  Can an employer fire such an employee?  It depends on the purpose behind the derogatory missives and whether existing law prevents the employer from firing such an employee.

Part II. Discussion of the April 27, 2017 Decision by the Second Circuit Court of Appeals in the Matter of the National Labor Relations Board v. Pier Sixty, LLC.   Take-home points are provided in Part III.   

The National Labor Relations Act (NLRA) prohibits employers from firing an employee engaged in concerted or union-related activity. Section 7 of the Act guarantees employees the right to “engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection.”  29 U.S.C. 157.

The National Labor Relations Board (NLRB) is charged with the task of determining whether an activity falls within the meaning of Section 7. An order issued by the NLRB may include directives to pay a fine, cease and desist from such unfair labor practices, and to take such affirmative action including reinstatement of employees with or without back pay and other necessary steps that will effectuate the policies of the subchapter.  29 U.S.C. §§ 160(a)-(c).  See also footnote 14 of the decision.

Sections 8(a)(1) and 8(a)(3) of the NLRA prohibits employers from firing employees in retaliation for participation in protected union-related activity. The protected activity includes the right of employees to discuss unionization and participate in meetings and communication with other employees.  In today’s technological world, this communication may well encompass social media as a conduit to communicate with other employees.   Yet, under the NLRA, the employee cannot act in such an abusive manner that he loses the protection of the NLRA.

In Pier Sixty, employee Hernan Perez (“Perez”), had posted a profanity-laced four sentence tirade on Facebook.  The first three sentences included vulgarity directed to his supervisor and the supervisor’s family.  The last sentence stated, “Vote YES for the UNION!!!!!!!” Perez testified that he did not realize the tirade would appear publicly and that he thought his Facebook page was private.  His Facebook page included ten fellow employees as friends.  As it turned out, Perez removed the posting three days later but by then the post had come to the attention of the management.  He was fired about two weeks later.

On the same day as his firing, Perez filed a charge with the NLRB that he had been terminated in retaliation for “protected concerted activities.” A second charge was filed by the employee who had led union organizing efforts at Pier Sixty.   The administrative board found that Perez had been fired in retaliation for protected activity (his Facebook post) under the NLRA.  The NLRB filed an application for enforcement with the Second Circuit Court of Appeals and Pier Sixty filed a cross-petition for review.  The Court concluded that Perez’s conduct was not so “opprobrious” as to the lose the protection of the NLRA.  It is clear from the opinion that the Court was not “happy” with Perez’s conduct but rested its conclusion heavily on the deference afforded the NLRB’s interpretation of the NLRA.  The decision’s final sentence states: “We note, however, that Perez’s conduct sits at the outerbounds of protected, union-related comments.”  Our emphasis.

A different outcome might have been reached if the employer itself had not exhibited questionable conduct towards its employees. Specifically, this conduct was as follows:

The employer had:

• Demonstrated hostility towards employees’ union organization activities just prior to the election;
• Threatened to rescind and/or fire employees who voted for unionization;
• Enforced a “no talk” rule on groups of employees, including Perez, from discussing unionization;
• Consistent tolerating profanity among the employees and managers and seldom disciplined any employee from using the type of vulgar language that appeared in Perez’s Facebook post; and
• Fired Perez just two days before the vote when he had never been disciplined for his use of similar language during his thirteen years of employment. The work environment was apparently one laced with “bad” language from the top down.

The outcome might also have been different had Perez not actually referred to unionization in his Facebook post or had his outburst been in the immediate presence of customers or had he disrupted a catering event for which the employer had been hired. The fact that he had quickly removed his post once he realized it was not private was also in his favor.  In siding with Perez, the Court noted that his comments were on an online forum that “is a key medium of communication among coworkers and a tool for organization in the modern era. . .Nor was his Facebook post equivalent to a “public outburst” in the presence of customers and can thus be distinguished from other cases of “opprobrious conduct.”  In this case, the NLRB’s conclusions were ratified but the Court noted that any test for evaluating “opprobrious conduct” must be sufficiently sensitive to the employers’ legitimate disciplinary interests. Pier Sixty, LLC Court citing NLRB v. Starbucks Corp., 679 F.3d 70, 79 (2d Cir. 2012)

Part III. What is an Employer to Do?

Social media is here to stay. How can an employer protect its legitimate disciplinary interests in the age of Facebook, Twitter, etc. but not run afoul of Section 7?  Should an employer have a social media policy spelling out what an employee can and cannot communicate about in social media?  A policy may be very useful – but it must be emphasized that the NLRA vigorously defends employees’ rights to communicate on matters related to the terms and conditions of their employment in a concerted fashion.  Several cases handled by the NLRB show that any ambiguity as to what the employer’s social media policy does or does not allow may well be construed in favor of the employee.

For example, generalizations such as “be respectful in your social media communications” may even be unlawful under Section 7 of the NLRA if it could be deemed by employees to include complaints about terms and conditions of employment.  Also, as the Pier Sixty decision demonstrates, protected employee social media communications under the terms and conditions of employment do not need to be couched in sugary terms.  Perez’s profane speech was found to be protected, albeit “borderline protectable” speech under the NLRA.  Additionally, ambiguity about whether a provision of a social media policy is restricting protected Section 7 rights will likely cause that provision to be unlawful.

In conclusion, a well-written social media policy for employees that is commensurate with the requirements of Section 7 may be extremely helpful for both the employer and the employee. Such a policy will also be useful for all levels of managers who may have no idea of employees’ rights under Section 7. It is quite possible that Pier One had no idea that its actions by and through its managers to curtail union-related discussions were unlawful even before Perez’s Facebook post.

We hope the post was instructive. If you are an employee and have concerns about your current social media policy or would like to have an appropriate social media policy in place, contact the office for a complimentary consultation to discuss your matter.

© 2017 by Troy & Schwartz, LLC

WE THANK YOU FOR READING THIS BLOG. HOWEVER, THE FOREGOING IS NOT LEGAL ADVICE AND IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY.  IF YOU ARE CONTEMPLATING ANY ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSIDER CONSULTING WITH AN ATTORNEY.

On March 28, 2017 in In re RaceTrac Petroleum, Inc. (RPI), the TTAB (“Board”) held that the applicant could not use prior use as a ground for securing registration of a mark where the examining attorney had found that the applied-for design mark Swirl World was confusedly similar to the registered design mark Swirlz World (the “Z Mark”) and therefore could not be registered.  The Board reached this conclusion even though the applicant/appellant itself had 4 registered marks for Swirl World as either standard character marks or design marks under IC class 30 (frozen yogurt) or IC class 35 (self-serve yogurt shop services), all of which predated the registration date of the Z Mark.  The registered mark for the Z Mark was registered on the Principal Registered for IC 35.

Interestingly, the mark application at issue in the In re RPI proceeding was for a mark that was basically equivalent to the two design marks previously registered by the applicant except color was claimed as a feature of the mark and the designated classes were for both IC 30 and IC 35.  Compare application serial no. 8663641 with registration numbers 4246942 and 4238768.

At first blush, the TTAB’s holding seems unfair.  Nevertheless, the holding is consistent with the procedures available to contest the registration of a proposed mark during examination proceedings through the commencement of an opposition proceeding.   Once a mark registers, a party may also seek cancellation of the registered mark on the basis of priority and likelihood of confusion under 15 U.S.C. § 1064 within five (5) years of the registration date of a registered mark.  The owner of the Swirl World marks did not take the steps to commence either an opposition proceeding during the examination of the Z Mark for registration or a cancellation proceeding after the Z Mark was registered in 2013.   In reaching its conclusion that the appellant’s “prior use” argument was irrelevant during the application examination stage and the instant appeal, the TTAB relied on the holding in In re Calgon Corp., 435 F.2d 596 (CCPA 1071) (stating that “[a]s the board correctly pointed out, ‘the question of priority of use is not germane to applicant’s right to register in this ex parte proceeding.’ ”).  As the In re RPI decision states, “[e]ven though the appellant may well have good grounds related to prior use, a “priority of use in such a case constitutes a collateral attack upon the cited registration which cannot be entertained in an ex parte proceeding.”  Slip opinion at 15.

It is noted that RPI did file an intent to commence opposition proceedings against the applicant of the Z World mark but never formerly commenced the proceeding.  The Board held that the issuance of the Applicant’s four prior registrations does not compel the issuance of a fifth registration if it would be otherwise improper to do so.  In this case, there was a likelihood of confusion between the application and the registered Z World mark and the fifth registration would not have been improper.

The Board did not discuss whether the Z World mark should even have been registered in the first place.  It would seem that RPI would have prevailed in an opposition proceeding or even been successful in a cancellation proceeding.  For example, clearly frozen yogurt and self-serve yogurt shop services are often provided in the same marketplace to all relevant classes of purchasers.   That is, the trade channels for the goods and services are the same.  Slip opinion at 11.  Moreover frozen yogurt classified as a good under IC 30 is a natural extension of self-serve frozen yogurt services under IC 35 (and vice versa) under a likelihood of confusion analysis.  Also, the literal portions of the Z Mark and the Swirl World are virtually equivalent.  RPI should also have been able to establish prior use of its marks over the registered Z Mark (2011 as opposed to 2012).

The Importance of the Five Year Incontestability Status

The appellant had argued that the holding in In re Strategic Partners, Inc., 102 USPQ2d 1397 (TTAB 2012) should apply.  There, the Board had held that the proposed mark in an application which had been submitted by the owner of a previously registered mark could be registered even though it was substantially similar to the mark in a prior registration owned by another.  See TMEP 1207.01.  The In RPI Board distinguished the two cases by noting that, in In re Strategic Partners, the applicant’s previously registered mark had reached incontestable status because it had coexisted with the cited later registered mark for over five years.  Because the appellant’s prior registration was over five years old, it was not subject to challenge by the owner of the later cited registration based on a likelihood of confusion.

In the In re RPI proceeding, on the other hand, the Board noted that the applicant’s earlier four registrations are still subject to cancellation on the basis of priority and likelihood of confusion and had not reached the “incontestable status” five-year threshold. The Strategic Partners, Inc. decision is a good example of the Board’s invocation of the thirteenth du Pont factor in a likelihood of confusion analysis which “relates to any other established fact probative of the effect of use.” In re du Pont de Nemours & Co., 476 F.2d 1357, 1361 (CCPA 1973), the seminal case in trademark law for articulating the factors that are still relied on today to conduct a likelihood of confusion analysis.

Conclusions and Take-Home Points

As the decision illustrates, the filing of an ex parte appeal after the examiner’s rejection of the proposed mark was not the way to obtain registration of the Swirl World “color” design mark based on the applicant’s past registration history versus the “intervening” registered Z World Mark.   RPI had other options available even once the appeal proceeding was commenced.  For example, the Board noted that RPI could have sought suspension of the appeal and commenced cancellation proceedings of the Swirlz World mark.  Slip opinion at 14.  Although an applicant has the right to appeal the examining attorney’s rejection of an applied-for mark, the Board will generally not entertain issues concerning the validity of a previously registered mark(s) which the examiner relied on to reject the applicant’s mark.

Unfortunately for small business owners in particular, opposition and cancellation proceedings can be expensive.  An attempt to file an application to register a mark and hope for the best may seem like a much cheaper alternative.  In the In re RPI proceeding, however, the resultant appeal process was undoubtedly itself expensive.  Had it gone ahead with the appropriate procedures, whether an opposition proceeding at the time the Z Mark was undergoing examination for registration or a cancellation proceeding of the registered Z mark, RPI may well have prevailed and the fees and costs would at least have been well spent.

What are the take home points? The USPTO publishes proposed marks in the Official Gazette on a regular basis.  Also, all information pertinent to trademark applications and registrations is publicly available at www.uspto.gov.  Registered trademark owners and companies/individuals contemplating trademark registration should regularly check out these two sources of information.  If there appears to be a “problematic” trademark up for registration, the registered trademark owner or owner might consider speaking with an attorney about filing an opposition proceeding.  As another example, if the owner of a common law trademark is considering filing for registration of the mark and can prove priority of use prior to the usage of a similar registered mark which could prevent registration of the common law mark on likelihood of confusion grounds, the common law trademark owner may wish to file a cancellation proceeding within five years of the registered mark’s registration date.

Trademarks are essential to branding and can be very valuable business assets.  If your business strategy includes building a strong brand presence through registered trademarks, don’t make a procedural mistake in protecting your rights by commencing the wrong type of action with the USPTO.  Be careful about selecting company names, where a trademark infringement lawsuit by the owner of a registered mark could also become a costly problem.  And also keep an eye on the five year deadline for contesting a previously registered mark on likelihood of confusion grounds and prior use.

© 2017 by Troy & Schwartz, LLC

WE THANK YOU FOR READING THIS BLOG.  HOWEVER, THE FOREGOING IS NOT LEGAL ADVICE AND IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY.  IF YOU ARE CONTEMPLATING ANY ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSIDER CONSULTING WITH AN ATTORNEY OF YOUR CHOOSING.

Ownership as the Result of a Work Made For Hire

Copyright law seems deceptively simple compared to patent and trademark law.  Where copyright law can get particularly complicated for the unwary, however, is in the area of copyright ownership.  Under U.S. law, the creator or author of the work is the owner of the copyright.  But what happens if the work was created by and employee in the scope of his/her employment or by an independent contractor who was hired or commissioned to create the work?

Regarding an employer-employee relationship, the work is generally treated as a work made for hire wherein the employer (and not the employee) is deemed the author and owner of the work.  The forms for federal registration of a copyrightable work include a section addressing ownership secured on the basis of a work made for hire.

Regarding an independent contractor relationship, the work may qualify as a work made for hire providing two conditions are met pursuant to the Copyright Act (Act).  First, the work must fall into one of the nine enumerated types of works specified in the Act.  Second, the independent contractor and the hiring party must have both signed an agreement agreeing that the work to be created is a work made for hire.  If these two requirements are met, the hiring party is deemed as the owner of the work created by the independent contractor.   17 U.S.C. § 101, et. seq.

Note the difference between works made for hire by an employee versus those made by an independent contractor.  In the latter case, the type of works qualifying as work made for hire are limited by statute and a written agreement is required.

Why the Distinction Between and Employee and an Independent Contractor Is Important

Take the scenario of software developers who are often hired as independent contractors by startup companies.   Software can be copyrighted, but software is not one of the enumerated types of works qualifying as a work made for hire work by Independent Contractors.  Therefore, even with a written agreement stating that the software is to be designated as a work made for hire, the hiring company will not actually own the copyright to the developed software under the work made for hire doctrine even though the software developer (Independent Contractor) was paid to create the software.   That is, the software developer may well still be the owner of the software despite the work made for hire agreement.   On the other hand software development companies such as Microsoft Corporation that have employees dedicated to developing software are the owners/authors of any copyright-related rights in the software under the work made for hire doctrine.   See the U.S. Copyright Office Records for Microsoft Corporation’s registered copyrights where Microsoft is listed as the author of the work as the result of an employer work made for hire.

Copyright ownership issues as they relate to Independent Contractors may remain hidden and only arise when: 1) a business is being sold and the sale involves intellectual property (IP) assets such as copyrights; or 2) in a copyright infringement lawsuit.    The buyer of IP assets will want assurance that the IP assets are indeed owned by the seller so that they may be effectively assigned to the buyer by a written instrument signed by the seller and the buyer.   A deal could fall through if the seller cannot prove to the buyer’s satisfaction that it – the seller – is the owner of the copyrights and therefore has the right to transfer ownership to the buyer.

A defendant in a copyright infringement lawsuit may be able to use “lack of ownership” as a defense if the work was created by an independent contractor and the work does not qualify as a work made for hire under the Copyright Act.  That is, ownership remains invested in the Independent Contractor and plaintiff does not own the copyright it claims is being infringed.

Ensuring the Legally Sufficient Transfer of a Copyright by an Independent Contractor

What steps can be taken to ensure the proper transfer of copyright-related rights from an Independent Contractor?  Where the work(s) to be created clearly fall into one of the nine (9) enumerated classifications specified within the copyright statute, the Independent Contractor and the hiring party need to sign an agreement wherein the work(s) to be created is designated as a work made for hire with all associated copyright-related rights belonging to the hiring party.

Copyright ownership can also be transferred by an assignment of rights and by operation of law (e.g., as the result of a probate proceeding).  For my clients, I include an assignment of rights provision within all work made for hire agreements with Independent Contractors as a precaution to cover the situation where the created work may be found to not qualify as a work made for hire.  Thus if for whatever reason the work should not qualify as a work made for hire because, e.g., it does not fall into one of the nine enumerated categories, the hiring party would still own the copyright as the result of the creator’s assignment of rights to the hiring party.  17 U.S.C. § 101;  17 U.S.C. § 201(d)(1).  Any such assignment needs to be clear as to the rights being conveyed and the nature of the underlying works.  For a good discussion of how important an assignment of rights provision may be where the work made for hire conveyance to an Independent Contractor fails, see Capital Concepts, Inc. v. Mountain Technology Corp., et al., WL 6761880 (W.D. Va. 2012).

THE ABOVE IS FOR INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE.

© Troy & Schwartz, LLC

To date, the only federal law specific for trade secrets is the Economic Espionage Act (EEA), a criminal statute wherein charges under the EEA must be brought by the U.S. government.  The EEA does not provide for civil jurisdiction in federal court.

Trade secret law involving civil causes of action has historically been a creature of only state law wherein almost all states, including Florida, have adopted some form of the Uniform Trade Secrets Act (UTSA).   Florida’s trade secret law is codified in Fla. Stat. ch. 688.  The definition of subject matter that may qualify as a trade secret as stated in the USTA and the underlying state statues is very broad but can be summed up as information that has independent economic value, actual or potential, because it is not generally known and whose owner reasonably tries to maintain the secrecy.  The statutes protect against misappropriation of trade secrets through procurement by improper means or through disclosure.   Disclosure occurs when someone with access to the trade secret discloses it or uses it without the consent of the owner.

In the event of misappropriation, the general sought remedy is an injunction.  Plaintiffs, however, may also seek damages.   The alleged misappropriation may be threatened or actual.  See, e.g., Fla. Stat.  ch. 688, s. 003(1).

Now trade secrets are well on their way to becoming protectable via actions in either federal or state courts.   On April 4, 2016, the Senate unanimously passed Senate Bill 1890 entitled the Defend Trade Secrets Act of 2016 that would allow businesses to sue in federal court for trade secret theft and potentially seize property used to facilitate the theft.  The bill is now awaiting approval by the House of Representatives.  Upon passage of the bill by the Senate, the White House expressed strong support for the bill.

It is not surprising that many have pushed for a federal cause of action for trade secret theft for several reasons.  First, although the differences between the UTSA and the enacted state trade secret statutes are generally relatively minor, these differences may impact the outcome of a case, i.e., prove case-dispositive, because states have not applied their respective versions of the Act in a uniform manner.   This is particularly true with the doctrine of inevitable disclosure as discussed below.   Application of the inevitable disclosure doctrine by state courts has been intertwined with the states’ underlying public policies governing employer-employee relations.

Second, state laws are generally focused on local activities involving trade secret matters and do not really address the realities of the movement of trade secrets in today’s electronic-based work environment in interstate commerce and across international borders.  The proposed Senate Bill is designed to assist in the swift preservation of evidence and to protect trade secrets from being further divulged, features that the Intellectual Property Owners Association pushed for.  The federal cause of action would not preempt state laws meaning that plaintiffs will have the option of seeking remedies for trade secret theft in federal or state court.

Senate Bill 1890 originally had two controversial aspects that were amended prior to the Senate’s vote.   The most controversial aspect would have allowed a trade secret owner to request government seizure of any property that was used to help facilitate the suspected trade secret theft.   Several Senators expressed concern that this feature could be misused and had potential for abuse.  The bill was changed to add specific limits to the seizure provisions, paving the way for unanimous passage for the bill.  Should the Bill evolve into an actual law, future federal jurisprudence may well determine what facts constitute sufficient grounds for seizure of “any property” and the definition of “any property.”

The original Senate Bill was also criticized for language that could be interpreted as meaning that an employer could prevent an employee who has been privy to an employer’s trade secrets from taking a new job with the employer’s competitor.  This original wording was apparently derived from a doctrine that covers an employer’s right to seek an injunction preventing the hiring of one of its key “trade secret-knowing” employees and is known as the inevitable disclosure doctrine.   The doctrine is grounded in the “threatened misappropriation” wording of the USTA and various state statues as well as the common law that existed before codification of state trade secret law.   It substantially enlarges the reach of trade secret law because the plaintiff only needs to show that that the former employee would be employed in such a capacity that they would “inevitably” close trade secrets.

Due to push back, the amended Senate Bill now requires the employer-plaintiff to provide evidence of threatened misappropriation and not merely seek an injunction barring the employee’s employment with a competitor on the information the employee knows.   Presuming the Defense of Trade Secrets Act of 2016 is signed into law, just how federal jurisprudence evolves for the inevitable disclosure doctrine remains to be seen.  The following provides a brief background on state case law involving this doctrine.

This doctrine has only been adopted by a few states and is often discounted because it is often viewed as hampering many states’ public policies favoring employee mobility.   California and New York are two states where the courts have consistently articulated the public policy of “employee mobility” and have refused to enjoin a former employee from working for a competitor, either temporarily or permanently.  See, e.g., Bayer Corp. v. Roche Molecular Sys., Inc., 82 F. Sup. 2d 1111, 1120 (N.D. Cal 1999).   Such states also generally frown on any employment agreement that has a non-compete provision, because, similar to the inevitable disclosure doctrine, non-compete provisions are viewed as inhibiting an employee’s right to move from one job to another.  Furthermore, such provisions are often deemed as restrictive covenants to be carefully construed by the courts.   See our recent blog on Florida’s highly employer-favorable restrictive covenant statute.

At the same time, such states may enforce a confidentiality agreement signed by an employee as a condition for employment.  Where such an agreement is in place, a court may enjoin the employee from disclosure of the trade secrets pursuant to the employee’s obligations under the employment agreement.   This type of injunction does not necessarily prevent the employee from actually working for a competitor.

Florida’s jurisprudence in the area of the inevitable disclosure doctrine is limited and mixed.  In Del Monte Fresh Produce Co. v. Dole Food Co., Inc., 146 F. Supp. 29 1326, 1335 (S.D. Fla. 2001), the court stated that Florida’s trade secret law does not “prohibit a former employee with knowledge of trade secrets from going to work for a competitor.”    The court opined that Fla. Statute ch. 688 prohibits only misappropriation of trade secrets which means the acquisition, disclosure, and/or use of the information to the disadvantage of the owner of the trade secret.   It does not prevent an employee from working for a competitor.

In a much earlier Florida state court long before the enactment of Fla. Stat. ch. 688, the court upheld an injunction against an employee because “it would seem logical to assume that his employment by a competitor . . . would eventually result in a disclosure of [his former employer’s trade secrets].”  Here, the court determined that the employee’s new job involved activities “were so entwined with his former activities that an injunction simply against disclosure of the trade secrets was not enough.”  Fountain v. Hudson Cush-N-Foam Corp., 122 So. 2d 232, 234 (Fla. Dist. Ct. App. 1960).

The factual scenario in the Fountain case is similar to a seminal post USTA-adoption (by the State of Illinois) case decided by the Seventh Circuit in PepsiCo. Inc. v. Redmond, 54 F. 3d 1262, 1269 (7^th Cir. 1995) in that the court found that the employee’s new job activities were “too close” to his activities at PepsiCo.    The court specifically found that the employee “(1) possessed intimate knowledge of PepsiCo’s strategic goals, which were trade secrets; (2) that the respective positions at Pepsico [and new employer Quaker] were similar and therefore the knowledge the employee obtained at Pepsico would influence his position at Quaker; and (3) the employee’s actions “demonstrated lack of candor . . . and proof of [his] willingness to misuse PepsiCo’s trade secrets,” i.e., exhibited bad faith.”   Bad faith was found on the basis of the employee’s lack of candor regarding accepting the position at Quaker.

The Seventh Circuit enjoined the employee from working at Quaker for five months to protect Pepsico’s business strategies for the upcoming year.  Thus, even with bad faith conduct, the employee was not permanently enjoined from working at Quaker.  The imposed injunction is consistent with the USTA and various state statutes concerning the applied time-frame for any imposed injunction.    See, e.g., Fla. Stat. ch. 688, s. 003 (1). The court was silent as to whether it would have reached the same conclusion had it not ascertained that the employee had acted in bad faith.  Certainly the employee’s conduct in Pepsico did not militate in his favor.

The foregoing illustrates that there is still considerable disagreement across states lines as to when the inevitable disclosure document will result in an injunction.  Clearly, the inquiry involves a highly factual inquiry and, depending upon the state, public policy considerations.   Whether or not a future federal law will result in more consistent “inevitable disclosure” decisions remains to be seen.   Public policy considerations may be less influential since federal courts will presumably be under no obligation to consider a state’s public policy concerning employee mobility.   Nevertheless, it is clear that employees should not be enjoined from accepting a new position simply because the employer asserts that the employee is going to disclose valuable trade secrets without more.  Also, the length of time of any imposed injunction related to employment under federal law will presumably be consistent with the specified reasons for the injunction and the imposed time-frame for unemployment and not go on indefinitely.

If the federal trade secret law is enacted, employers may well choose to bring trade secret actions in federal court. To help ensure that they could meet the evidentiary requirements of establishing threatened disclosure in a federal court of law, this commentator recommends that employers: 1) review their current trade secret [and other IP] protection procedures and policies; 2) review non-disclosure agreements and other employee-employer agreement documents and amend as necessary; and 3) review their procedures for maintaining trade secret integrity when an employee resigns.  The steps taken to update existing trade secret protection policies and procedures may be dependent upon the trade secrets involved.

In conclusion clearly Congress considers a federal trade secret law to be an important addition to the legal options available to American companies for addressing trade secret theft.  The push for the new federal trade secrets law recognizes that trade secrets are just as valuable as the other forms of intellectual property and as such warrant the same federal legal protections enjoyed by the other types of intellectual property.  Let’s hope that the current political climate will not delay the passage of the corresponding House bill and timely sign-off of the law by President Obama!

THE FOREGOING IS NOT LEGAL ADVICE.  IT IS PROVIDED FOR INFORMATION ONLY.  YOUR READING OF THIS BLOG DOES NOT CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP.

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