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Supreme Court Enforces Class Action Waiver; California law invalid

On April 27, 2011, the U.S. Supreme Court ruled that the Federal Arbitration Act (the “FAA”) preempts the California law striking as unconscionable any consumer contract provision that waives the right to bring a class action lawsuit. According to the legal press, AT&T Mobility LLC v. Concepcion, et ux. has caused an “earthquake” that has severely shaken the foundation of consumer class action bar.1 Plaintiffs’ lawyer Elizabeth Cabraser described the Concepcion case as the Supreme Court’s endorsement of “small-print tactics used by banks, credit card companies and service providers to prevent their customers from fighting back when products fail, hidden charges are imposed and services are not as advertised.”2 Defense lawyers predict a shift from large class action lawsuits and class-wide arbitrations to more individual arbitrations and expansion of class waivers beyond consumer contracts for telephone, internet, and financial services. Some plaintiffs’ class action attorneys are already focusing on new ways to persuade courts to invalidate arbitration clauses on grounds other than unconscionability. Defense lawyers expect class action lawsuits to continue unabated as plaintiffs’ lawyers adjust their strategies and tactics in light of Concepcion.

On the same day, April 27, the Supreme Court also issued Stolt-Nielsen S.A. et al. v. AnimalFeeds Int’l Corp. In Stolte-Nielsen, the Circuit court required the class plaintiffs to arbitrate their price-fixing claims against “charter parties” – the shippers of small-quantity lots of commercial products – in a class-wide arbitration. The Supreme Court reversed, holding that courts may not compel class arbitration in charter-party contracts that include arbitration of dispute provisions, but make no mention of how class-wide disputes are to be resolved.

The blogosphere and legal press are each abuzz with hyperbolic commentary about the Concepcion/Stolte-Nielsen decisions. When the dust settles, the Concepcion/Stolte-Nielsen decisions will likely:

  • All but eliminate class-wide arbitrations of consumer disputes relating to contracts for communications and media services, financial services, and securities.
  • Encourage defense lawyers to bring motions to compel arbitration, which will cause some .pending consumer class action lawsuits to be stayed pending arbitration.
  • Give rise to Congressional efforts to amend the FAA or otherwise overturn the Concepcion and Stolt-Nielsen cases.
  • Encourage corporations to incorporate arbitration provisions and class action waivers into employment contracts and into a broader range of consumer service and product contracts.
  • Increase the number of individual arbitrations involving consumer claims arising from contracts for communications and media services, financial services, and securities.
  • Provide corporations that serve consumers and employers a brief respite from class action lawsuits while the plaintiffs’ bar regroups and adjusts their tactics to a post-Concepcion class action environment.

Companies that want to take advantage of the Concepcion/Stolte-Nielsen holding should consider having an attorney review the current forms of employment, consumer and business contracts to determine whether the addition of an arbitration provision and class-action waiver may be advantageous as a proactive, low-cost way to reduce litigation exposure.

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Jeffrey M. Judd, the managing partner of Judd Law Group, is a 20-year veteran and former partner of O’Melveny & Myers LLP. Mr. Judd has successfully defended major corporate clients – which include Merck & Co., Inc., Ford Motor Co., and Johnson & Johnson, among others – in class action and mass tort cases throughout the country. In addition, Judd has represented numerous clients in dozens of arbitrations and mediations. Judd was recently inducted as a Member in the Chartered Institute of Arbitrators, which certifies a depth of knowledge and expertise in arbitration and mediation.  Judd Law Group aimsto be the go-to firm for companies at every stage of growth that require the experience, judgment, and quality of a big-firm, but want the service, affordability, and personal attention of a boutique.

Ninth Circuit to Employers, Investors, and Entrepreneurs: “Create and Enforce Computer-Use Policies to Deter Theft of Valuable Trade Secrets and Proprietary Information”

Intellectual capital – trade secrets, proprietary information, and confidential methods of performing services (collectively, “trade secrets”) – is many companies’ most significant asset. A recent surge of senior executives and professionals who have left their jobs to join competitors or start their own competing businesses has made robust trade secret protection essential for all businesses dependent on intellectual capital. Trade secret owners can employ reasonable measures to protect the confidentiality and limit the disclosure of trade secrets without significant expense or overhead. Indeed, in United States of America v. David Nosal, the Ninth Circuit Court of Appeals recently emphasized how a handful of relatively simple and inexpensive measures can serve as powerful deterrents against employees’ use of company electronic resources to steal trade secrets.

In Nosal, a former marketing officer of a large executive placement firm used a copy of the company’s executive candidate database to launch a competing business. In response to the U.S. Government’s criminal indictment for violation of the Computer Fraud and Abuse Act (CFAA), the former officer successfully argued to the trial court that because he had lawfully obtained a copy of the database while working for his former employer, he could not be in violation of the CFAA. The Court of Appeals reversed, however, holding that the former employee’s use of the company computer system to access the database for purposes unrelated to company business exceeded his authority in violation of the CFAA. In reaching this conclusion, the court pointed to the following protective measures that the employer had maintained to limit its employees’ use of electronic resources, including the specific database at issue:

  1. Strictly limiting electronic access to specific, particularly sensitive databases to those employees who needed to use the databases to perform their job duties
  2. Strictly controlling and limiting physical access to the computer servers that contained proprietary data bases to certain technical staff
  3. Giving each employee a unique username and password to company computer systems solely for use in performing job-related duties
  4. Requiring each employee to enter into an agreement that both explained the proprietary nature of the information to which access was being granted and expressly restricted the use and disclosure of that information for legitimate company business
  5. Clearly identifying confidential information by branding each page of every report containing proprietary data with the legend, “Proprietary and Confidential”
  6. At each login to the computer system informing computer users that: (a) the electronic information and processes were company property; (b) specific authority was required to access the company’s system and information; and (c) accessing the company’s system and information without specific authority could lead to disciplinary action and/or criminal prosecution

Company executives, investors, and entrepreneurs should ensure – at a minimum – that the protective measures identified above are in place at the outset and maintained at every stage of their company’s existence. In order to implement a best practices trade secrets protection plan, employers should also consider adopting the following measures:

  • During employees’, vendors’, and consultants’ initial orientation obtain a written acknowledgement of company data protection policies
  • Prevent employees who quit or are terminated from being able to access proprietary information and facilities by promptly
    • terminating or strictly supervising that person’s access to company email servers
    • retrieving company-provided computers, pads, and smart phones and forensically preserving all information stored on those devices
    • obtaining a written certification of compliance with company non-disclosure policies during each former employee’s exit interview
    • Prohibit employees, consultants, and vendors from using personal memory devices such as USB flash drives and memory sticks
    • Regulate and monitor the electronic information employees can access from outside of the office
    • For paper documents and other physical forms of confidential information, limit access, physically segregate, and require adherence to chain-of-custody procedures
    • Deploy computer security measures such as passwords, encryption, and fire walls
    • Require all persons to enter into non-disclosure agreements before gaining access to trade secrets and proprietary information
    • Include non-competition clauses in all employment, consulting, and service agreements in jurisdictions where such clauses are enforced

Management should either perform a self-audit or hire appropriate professional personnel to audit and upgrade their current trade secrets protection programs. Any company that derives significant value from trade secrets and proprietary information that does not have a robust trade secrets protection program should establish one immediately.

Bay Area Business Lawyer Says “Ask These Five Questions Before Hiring Key Employees”

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Hiring a key employee is an important event for any business. Finding the right “fit” for the job – an individual with specialized skills, leadership ability, contacts and proven track record who is culturally compatible – is no small task. Oftentimes the most desirable candidates are employed by competitors, who understandably want to ensure that their proprietary information, customers, and employees do not also leave with a departing employee. Under these circumstances, it is essential to determine whether or not a candidate for a key job in your business is subject to legal restraints imposed by former employers. But once a qualified candidate is identified, the effort to recruit – putting together a compelling package of opportunity, salary, challenge, and responsibility – can overshadow the practical considerations of understanding the extent to which a candidate’s current or former employers have legal rights that could limit or prevent the new hire from performing the job you seek to fill. If a new hire’s former employer brings suit, your company will almost certainly incur significant costs and your new employee will, at best, be distracted from focusing on the new job, if not be enjoined from working for your business altogether. Should this occur, what seemed like the perfect candidate may quickly become a significant liability. Before hiring any key employee you should ask the following five questions:

1. Is the candidate subject to contractual limitations? Employees are frequently required to sign non-competition, non-solicitation, or nondisclosure agreements. Prospective employers should therefore require candidates for key positions to provide copies of any documents they have signed or otherwise agreed to that could limit their ability to perform the job they are applying for. Sophisticated search firms should be able to provide some guidance as to which companies typically require their employees to enter into such agreements.

2. Do prior employment-related contracts limit a candidate’s ability to perform the job? Experienced human resources personnel are generally capable of assessing whether a candidate is subject to confidentiality and non-solicitation limitations similar to those imposed by the hiring company. It may be necessary to obtain the advice of an attorney, however, particularly when a candidate has been employed in a different state. For example, California courts do not recognize the enforceability of non-competition agreements, but other states do, and untangling choice-of-law questions should almost alwsy be accomplished by an attorney. A note on employee records:  Most states, including California, require employers to provide former employees with a copy of their personnel files. When an employee leaves a job, she should as a matter of course always obtain a copy of her personnel file. But a currently employed candidate almost always wants to keep her job search confidential, which means most currently employed candidates will not have a complete set of all the employment-related agreements to provide to a prospective employer. Attorneys and job placement professionals should therefore encourage their clients to maintain a file of copies of all employment-related agreements, so that future employers can easily determine what limitations might apply when they decide to change jobs

3. Are the members of your recruiting team able to solicit their former colleagues? When a current employee recommends a colleague from a former employer, determine whether any non-solicitation limitations might apply. If your current employee is subject to viable non-solicitation obligations, ensure that he or she is not involved in the recruitment of any former colleagues.

4. Does the candidate know not to bring former employers’ confidential and proprietary information with them to the new job? At each stage of the recruiting process, be sure to inform the candidate that he or she cannot disclose or bring any confidential or protected materials or information to your company. Hiring companies must make clear that they expect new hires to abide by the terms of prior employment-related agreements. Employers should also caution new hires not to discuss any of a former employer’s confidential or proprietary information. Obtain a written acknowledgment and certification from new hires to demonstrate that you have made these efforts to avoid tacit or inadvertent misappropriation of competitors’ proprietary information and trade secrets.

5. Has the candidate created evidence that points to misappropriation? Advise job candidates that no e-mails, regardless of the content or subject, should be sent to or from the former employer’s e-mail account after a job offer is made. Employers often review a departing employee’s past computer activities, including recently accessed files and e-mail activity. Advise new hires that files should only be removed or copied from their former employer’s system with the former employer’s express consent, preferably by the former employer’s own IT personnel.

Even the most diligent company may face litigation when it hires a key employee from a competitor. To minimize this possibility, it is generally a good practice to contact the former employer once a candidate has accepted an offer of employment and attempt to discuss how your new hire’s former employment relates to the new job. If the former employer threatens litigation, you are well-advised to attempt to negotiate a settlement before a lawsuit is filed. Depending on the circumstances, this might include an agreement to limit the new employee’s responsibilities, pay for a release from prior agreements, or pay royalties for certain customers or clients who follow the employee to her new job. The basis for any such settlement should be the estimated cost of litigation and the type of judgment or order the court is likely to issue if the dispute is litigated.

In today’s world of frequent job changes, it is inevitable that business competitors will compete as fiercely for talent as customers and clients. In those industries where proprietary information and trade secrets are a business’ most significant assets, it is often best simply to treat your competitors’ trade secrets as you would want your competitors to treat your trade secrets. After all, the position opened in your competitor’s business by the hiring of your new employee may soon be filled by one of your current key employees.

San Francisco business lawyers at Judd Law Group, provide legal advice on trade secrets, hiring key employees, or responding to trade secrets lawsuit, or any other business law issues.

Jeffrey M. Judd

Judd Law Group

222 Sutter Street, Suite 600

San Francisco, CA 94118

415.597.5500

San Francisco Business Lawyer on Employees’ Rights and Obligations Regarding Trade Secrets

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In What Trade Secrets Are and How To Protect Them, the San Francisco Business Lawyers of Judd Law Group outlined basic trade secrets law concepts that every executive, investor, recruiter and attorney should know. In this post, Judd Law Group discusses the primary legal rights and obligations that owners and users of trade secrets should be aware of.

A trade secret is broadly defined as

  • Any information that has potential economic value
  • For which reasonable efforts to maintain its secrecy have been maintained.

The owner of a trade secret may file a lawsuit to obtain legal relief from the person who stole or improperly used the trade secret. The following legal remedies may be available:

  •  Injunction – The primary form of trade secrets relief is a court order that requires or prohibits certain acts. Preliminary injunctions may be ordered to provide interim relief during the legal proceedings. For example, the court may order the defendant to not use the allegedly misappropriated information during the lawsuit. A permanent injunction may issue at the completion of the proceeding. For example, the court may order the defendant to not use the trade secret so long as it remains secret.
  • Royalties – in exceptional cases, where it would be unfair to issue a permanent injunction, a court may issue an order allowing the defendant to continue to use the trade secret, so long as he pays the owner a reasonable amount for use of the trade secret
  • Damages for actual losses – a judgment for actual costs, such as some or all of the R&D costs expended to develop the trade secret, or the loss of a contract or client
  • Damages for unjust enrichment – a judgment for any windfalls the defendant obtained from possessing the secret
  • Punitive damages – an amount sufficient to punish and deter a defendant who obtained the trade secret through fraud, or willful and malicious acts, and/or
  • Attorney’s fees – a judgment to reimburse the owner of the trade secret for some or all of the attorneys fees the spent to enforce his legal rights, typically awarded in cases where punitive damages are appropriate.

In addition to a civil complaint, the owners of trade secrets may also bring criminal complaints to state or federal prosecutors against the persons responsible for misappropriating the secrets. If successfully prosecuted, criminal defendants face significant fines and, possibly, imprisonment. Persons convicted under the federal Economic Espionage Act (EEA), face the possibility of fines, imprisonment, and-court awarded monetary damages. Violations of the EEA may be punishable by imprisonment of up to ten years and fines of up to $5,000,000, however, individuals may be punished only by imprisonment and corporations may be punished only by fine. If a trade secret violation involves state law, different criminal penalties may apply. In California, trade secrets violations may be punished by a maximum prison sentence of one year and a maximum fine of $5000 under California Penal Code section 499c.

Employees and former employees accused of trade secrets misappropriation have well-established rights and protection under the law. In California, although trade secrets statutes apply, any agreement that prevents or unduly inhibits a former employee from being able to perform the same work for a different employer – even for a competitor – is unenforceable. In order to enforce trade secrets agreements in such instances, former employers must prove that the restriction imposed by the agreement is limited to a “reasonable” period of time and geographic area, and does not prohibit the employee from engaging in too many types of occupations or businesses.

If your business obtains economic value from proprietary information, it is essential that you take reasonable means to keep that information secret. Lawyers who specialize in trade secrets can help you devise and implement simple, cost-effective means to ensure that your proprietary information enjoys the protection of state and federal trade secrets laws. If you are sued, or believe that someone has wrongly obtained or disclosed your trade secret information, contact a trade secrets lawyer immediately to obtain advice about what you should do to enforce your rights and comply with your obligations.

The San Francisco Business Lawyers of Judd Law Group advise businesses and individuals about their rights and obligations regarding trade secrets, among other things. Do not hesitate to contact Judd Law Group if you have questions about your rights and obligations regarding trade secrets and proprietary business information.
Jeffrey M. Judd
JUDD LAW GROUP
222 Sutter Street, Suite 600
San Francisco, CA 941208
jeff@juddlawgroup.com
415.597.5500

Understanding Trade Secrets, Part 1: What They Are and Simple Measures You Should Take To Protect Them

Many people talks about trade secrets, but surprisingly few know what they are, or how to protect them. If your business relies on specialized knowledge that is not publicly available, you should have a basic understanding of trade secrets law. If you’re thinking about quitting your job and starting a business that will compete with your current employer, you should know enough to determine whether your business plan might be based on your current employer’s trade secrets, and the consequences if that turns out to be the case. If you have questions about trade secrets, do not hesitate to consult an attorney who practices in the area.


1. What is a Trade Secret?

Most states define a trade secret as any formula, pattern, physical device, idea, process, method, or technique that both (a) provides the owner of the information with a competitive advantage and (b) is treated in a way that reasonably prevents others from learning it without violating the law.

So long as you make reasonable efforts to protect the secrecy of economically valuable information, you have a trade secret. Examples of trade secrets include:

  • Business information, such as marketing plans, profit and pricing information, and customer or client lists
  • Information obtained from your own research and development
  • Information stored on computer databases
  • Inventions
  • Manufacturing techniques and methods
  • Software codes
  • Business ideas that offer a competitive advantage, such as ideas for a new product or service

2. What kinds of “reasonable efforts” must be made to protect trade secrets?

Reasonable efforts depend on the circumstances, including the ease with which others can acquire the information, the extent to which the information is known outside of the company, and the value of the information. Commonly used examples of reasonable efforts include:

  • Disclosing the information only to those who need to know it, such as investors, vendors, employees, and consultants, and obtaining their written promise not to use it for any purpose other than what has been expressly allowed or disclose it to anyone else (this is a “non-disclosure agreement,” or “NDA”)
  • If the information is stored electronically, encrypting the information, limiting access, and electronically branding the information as “Confidential Trade Secret”
  • If the information is stored physically, such as in a prototype device or lab notebook, keeping the device or notebook under lock and key, limiting access to it, and labeling it as a “Confidential Trade Secret”
  • If the information is a manufacturing process, limiting access to the plant, segregating discrete operations so that few people are involved at every step of manufacture, limiting access to the manufacturing facility, and the like

The legal protection available for trade secrets lasts as long as the information is kept confidential. Once a trade secret has been disclosed to the public, its legal protection ends. Many efforts to preserve the confidentiality of a trade secret are relatively inexpensive and a matter of common sense. You may want to consult an attorney about the adequacy of your trade secret protection efforts.

3. What legal rights does the owner of a trade secret have?

The owner of a trade secret can prevent others from copying, using, or benefiting from the trade secret or disclosing the secret to others.  Trade secrets are protected against individuals who:

  • are bound by confidentiality and/or nondisclosure agreements
  • acquire the trade secret through improper means, including theft, espionage, or bribery
  • acquire the trade secret from people who do not have the right to disclose the information
  • knew the information was a protected trade secret

Only a person who has discovered the trade secret independently, without using illegal means or violating trade secret laws, may use the information.

4. How long does a trade secret last?

Trade secrets can be legally protected forever, so long the owner scrupulously makes reasonable efforts to keep the information confidential.

5. What types of legal relief are available to the owners of trade secrets?

A court can order one who has obtained a trade secret improperly from using or disclosing it, by issuing a temporary restraining order or injunction. A court can also require one who has improperly obtained a trade secret to pay money damages to the owner for any economic injury suffered as a result of the improper use or disclosure of the trade secret. Sometimes this may take the form of royalties.

One who intentionally steals trade secrets can be prosecuted for a crime under either federal or state laws. The court may levy fines of up to $500,000 and ten year prison terms to individuals, and fines of up to $5,000,000 against corporations that have engaged in espionage.

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