In a case of first impression, a federal district court in the District of Columbia has joined those courts that restrict the applicability of the federal Computer Fraud and Abuse Act. Previously, we have written about the growing number of cases that have adopted a broad reading of this Act in a way that permits a claim to be made where an employee has accessed an employer's computer and removed proprietary data after deciding to accept a new job. See posts dated March 27, 2009 and September 7, 2010.
The CFAA protects companies from the misappropriation of proprietary information by someone who does not have authorized access to the computer or who has been authorized to access the computer, but who exceeds that authorization. The cases attempt to define the limits of authorized access.
A number of courts following the 7th Circuit's opinion in Int'l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006) have held that an employee who has been given access to his employer's computer network, loses that right of access as a matter of law when he has decided to accept a new job and downloads proprietary information from the network to use in his new position. Courts adopting this logic posit that such conduct violates the employee's duty of loyalty owed to his employer because, once he has made the decision to leave and has accepted the new position, the employee's interests become adverse to the interests of his current employer. Those courts find that accessing the computer, and copying proprietary information under such circumstances, exceed the authorization that the current employer has provided and violate the CFAA.
Not so in the District of Columbia according to a recent opinion by Magistrate Judge John Facciola in Lewis-Burke Associates, Ltd. v. Widder, 725 F. Supp.2d 187 (D.D.C. 2010), click here. There, the court relied upon the analysis of the 9th Circuit in LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), which held that, once an employer has authorized an employee to access the company computer, even if for limited purposes, that access is still authorized even if the employee violates those limitations. Id. at 1133. According to Brekka, whether an employee has authorization to access a computer is dependent upon whether the employer has terminated that authorization.
In the District of Columbia case, before he left his job, Widder copied proprietary and confidential electronic files onto a thumb drive that he took with him to his new employer. Some of the copying took place on his last day of work. The court found the Citrin standard to be unworkable and confusing. Instead, it held that Widder did not exceed his authorized access to the system even if he accessed and copied documents he was not entitled to see. Accordingly, the court dismissed the CFAA claim.
Based upon this decision, the CFAA is not an available remedy or a means of creating federal question subject matter jurisdiction in the District of Columbia for the theft of proprietary electronic information, except where the employer has terminated the employee's access rights before the theft occurs.
Thursday, May 12, 2011
Monday, April 25, 2011
Publicly Available Software Code Can Be a Trade Secret if Compilation is Not Generally Known
A recent Fourth Circuit opinion analyzed when a software compilation can qualify for protection as a trade secret. The plaintiff company claimed that although its software used publicly-available mathematical formulas, the combination and implementation of these formulas contained in the source code for the software constitutes a trade secret. The Fourth Circuit agreed, holding that a trade secret may be composed of publicly-available information if the method by which that information is compiled is not generally known. Processes that are publicly known can become trade secrets when combined into a source code and the manner and sequence of the processes is unique and unknown to the public. The case is Decision Insights, Inc. v. Sentia Group, Inc., 2011 U.S. App. LEXIS 5151 (4th Cir. Va. March 15, 2011), and can be foundThe case can be found here.
The case arose when Decision Insights, Inc. (“Decision Insights”) filed a complaint against Sentia Group, Inc. (“Sentia”) and individual former employees alleging that Sentia’s development of a competing software application was based on materials obtained from the Sentia’s misappropriation of Decision Insight’s trade secrets. The question considered by the district court was whether Decision Insight’s software application, as a total compilation, could qualify as a trade secret under Virginia law.
Sentia had hired a former consultant for Decision Insights who worked to develop software for Sentia that would compete with Decision Insights’ software. According to Decision Insights, the software developed by Sentia is almost identical to its own. Decision Insights asserted that all the parameters, variables, and sequencing associated with the programs must have been the same as Decision Insights’ software to obtain such identical software.
The criteria for establishing the existence of a trade secret under Va. Code § 59.1-336 includes whether or not the compilation has independent economic value, is generally known or readily ascertainable by proper means, and is subject to reasonable efforts to maintain secrecy.
On appeal, the court considered whether Decision Insights adduced enough evidence at trial for a jury to reach the conclusion that Decision Insights’ software, as a compilation, is not generally known or ascertainable by proper means. At trial, Decision Insights had introduced two experts who testified that part of the source code was unknown to the public and the sequence of the processes was unique and not publicly available. One expert identified 13 proprietary processes in the source code, and stated that “[t]he collection of these processes as a whole and the sequence of these processes also serve as a proprietary aspect of [Decision Insights’ software].” Opinion at 14.
The court held that due to the evidence offered by the two experts, the trial court erred in concluding that Decision Insights had not satisfied its evidentiary burden to show that its software compilation was not generally known or readily ascertainable by proper means. The court noted that a trade secret may be composed of publicly-available information if the method by which that information is compiled is not generally known. The court cited Servo Corp. of America. v. General Electric Co., which held that a trade secret “might consist of several discrete elements, any one of which could have been discovered by study of material available to the public.” 393 F.2d 551, 554 (4th Cir. 1968). The court also found that numerous variables that were part of the Decision Insights software code were not in public literature or known outside the company.
The court remanded and directed the district court to consider other criteria specified by the Virginia Trade Secret Misappropriation Act, including whether Decision Insights’ software code has independent economic value and whether Decision Insights engaged in reasonable efforts to maintain the secrecy of the software code. See Va. Code. Section 59.1-336.
In the past, parties have claimed that a company’s products or process are not trade secrets unless kept strictly and wholly confidential. This case is important because it allows some components of trade secret information to be publicly known in certain circumstances while maintaining their trade secret status so long as other important information, such as the way those public pieces of software code are put together, remains confidential. The question of whether information was adequately kept confidential frequently arises in unfair business practices cases and this opinion helps clarify the issue.
The case arose when Decision Insights, Inc. (“Decision Insights”) filed a complaint against Sentia Group, Inc. (“Sentia”) and individual former employees alleging that Sentia’s development of a competing software application was based on materials obtained from the Sentia’s misappropriation of Decision Insight’s trade secrets. The question considered by the district court was whether Decision Insight’s software application, as a total compilation, could qualify as a trade secret under Virginia law.
Sentia had hired a former consultant for Decision Insights who worked to develop software for Sentia that would compete with Decision Insights’ software. According to Decision Insights, the software developed by Sentia is almost identical to its own. Decision Insights asserted that all the parameters, variables, and sequencing associated with the programs must have been the same as Decision Insights’ software to obtain such identical software.
The criteria for establishing the existence of a trade secret under Va. Code § 59.1-336 includes whether or not the compilation has independent economic value, is generally known or readily ascertainable by proper means, and is subject to reasonable efforts to maintain secrecy.
On appeal, the court considered whether Decision Insights adduced enough evidence at trial for a jury to reach the conclusion that Decision Insights’ software, as a compilation, is not generally known or ascertainable by proper means. At trial, Decision Insights had introduced two experts who testified that part of the source code was unknown to the public and the sequence of the processes was unique and not publicly available. One expert identified 13 proprietary processes in the source code, and stated that “[t]he collection of these processes as a whole and the sequence of these processes also serve as a proprietary aspect of [Decision Insights’ software].” Opinion at 14.
The court held that due to the evidence offered by the two experts, the trial court erred in concluding that Decision Insights had not satisfied its evidentiary burden to show that its software compilation was not generally known or readily ascertainable by proper means. The court noted that a trade secret may be composed of publicly-available information if the method by which that information is compiled is not generally known. The court cited Servo Corp. of America. v. General Electric Co., which held that a trade secret “might consist of several discrete elements, any one of which could have been discovered by study of material available to the public.” 393 F.2d 551, 554 (4th Cir. 1968). The court also found that numerous variables that were part of the Decision Insights software code were not in public literature or known outside the company.
The court remanded and directed the district court to consider other criteria specified by the Virginia Trade Secret Misappropriation Act, including whether Decision Insights’ software code has independent economic value and whether Decision Insights engaged in reasonable efforts to maintain the secrecy of the software code. See Va. Code. Section 59.1-336.
In the past, parties have claimed that a company’s products or process are not trade secrets unless kept strictly and wholly confidential. This case is important because it allows some components of trade secret information to be publicly known in certain circumstances while maintaining their trade secret status so long as other important information, such as the way those public pieces of software code are put together, remains confidential. The question of whether information was adequately kept confidential frequently arises in unfair business practices cases and this opinion helps clarify the issue.
Friday, February 25, 2011
Press Releases Can Cause Waiver of Work Product
Statements made in a press release, if based on attorney work product information, may waive work product as to the subject matter of the statements. In E.I. DuPont de Nemours and Company v. Kolon Industries, Inc. (E.D. Va. July 30, 2010), click here, the court found that the plaintiff, E.I DuPont de Nemours and Company ("DuPont") waived information that was otherwise non-discoverable work product because DuPont relied upon that information to support a statement in its press release.
The case involves allegations by DuPont that the defendant Kolon Industries, Inc. ("Kolon") misappropriated DuPont’s secret processes and technologies for manufacturing Kevlar. In addition to the civil litigation filed by DuPont, the F.B.I. had previously conducted a criminal investigation of a Kolon employee. During that criminal investigation, DuPont's general counsel office had worked closely with government officials. In a previous opinion, the Court held that work product was not waived by Dupont's sharing of documents with law enforcement agencies that were investigating the alleged misconduct. E.I. DuPont de Nemours and Company v. Kolon Industries, Inc., (E.D. Va. Apr. 13, 2010).
However, DuPont's issuance of the press release was another story. The controversial statement read: "FBI investigation has revealed that, in August 2008, three Kolon managers flew to Richmond, the location of our global Kevlar technology and business headquarters, expressly for the purpose of obtaining confidential DuPont process technology." DuPont was distributing the press release to DuPont’s customers, presumably in an attempt to gain a competitive advantage. Press releases are, of course, a common tactic used by companies to protect and bolster public opinion and brand name.
Kolon sought discovery of work product information, contending that DuPont had waived its work product relating to the subject matter of the statement because the information relating to manager’s intent could have only be based on protected information. DuPont responded that the press release was based solely on publicly available information.
The court found that the press release statement relied on more than just public information. The court based its finding, in part, on its conclusion that the in-house counsel who drafted the statement had reviewed multiple rources of information relating to the meeting, and in drafting the statement in question, he could not possibly have "segregated the various categories of [publicly available and protected] information." Therefore, the press release was not based solely on public information. Rather, the statement about Kolon's purpose in attending the meeting was most likely based at least partly on privileged information that the in-house counsel had been exposed to throughout the course of his work with the government investigation.
The court also addressed the scope of the waived subject matter. Kolon sought production of "all communications in DuPont's possession relating to the Government's investigation of [Kolon's employee] and Kolon." The Court, however, more narrowly defined the scope of the waived subject matter to be those documents that "provide the factual basis for the statement in the press release that, in arranging for and attending . . . the meeting, Kolon had the purpose stated in the press release."
The Court also limited the waiver to fact work product and refused Kolon's request for opinion work product to be produced, finding that opinion work product is only discoverable in extreme circumstances. And the court found that an issuance of a press release is a common, not an extraordinary, circumstance in business.
This case serves as another warning to companies in litigation to carefully monitor the process of drafting press releases and what statements to include in them because press releases can lead to sanctions, waiver of work product and privileged information, and increase litigation costs. At the same time, companies in litigation often feel compelled to try to shape the public's perception of the litigation and the companies themselves. This is particularly true in cases involving unfair business practices or competition when the survival of a company's business model can be at stake. But, in doing so, they need to carefully weigh the risks of what they are saying publicly.
The case involves allegations by DuPont that the defendant Kolon Industries, Inc. ("Kolon") misappropriated DuPont’s secret processes and technologies for manufacturing Kevlar. In addition to the civil litigation filed by DuPont, the F.B.I. had previously conducted a criminal investigation of a Kolon employee. During that criminal investigation, DuPont's general counsel office had worked closely with government officials. In a previous opinion, the Court held that work product was not waived by Dupont's sharing of documents with law enforcement agencies that were investigating the alleged misconduct. E.I. DuPont de Nemours and Company v. Kolon Industries, Inc., (E.D. Va. Apr. 13, 2010).
However, DuPont's issuance of the press release was another story. The controversial statement read: "FBI investigation has revealed that, in August 2008, three Kolon managers flew to Richmond, the location of our global Kevlar technology and business headquarters, expressly for the purpose of obtaining confidential DuPont process technology." DuPont was distributing the press release to DuPont’s customers, presumably in an attempt to gain a competitive advantage. Press releases are, of course, a common tactic used by companies to protect and bolster public opinion and brand name.
Kolon sought discovery of work product information, contending that DuPont had waived its work product relating to the subject matter of the statement because the information relating to manager’s intent could have only be based on protected information. DuPont responded that the press release was based solely on publicly available information.
The court found that the press release statement relied on more than just public information. The court based its finding, in part, on its conclusion that the in-house counsel who drafted the statement had reviewed multiple rources of information relating to the meeting, and in drafting the statement in question, he could not possibly have "segregated the various categories of [publicly available and protected] information." Therefore, the press release was not based solely on public information. Rather, the statement about Kolon's purpose in attending the meeting was most likely based at least partly on privileged information that the in-house counsel had been exposed to throughout the course of his work with the government investigation.
The court also addressed the scope of the waived subject matter. Kolon sought production of "all communications in DuPont's possession relating to the Government's investigation of [Kolon's employee] and Kolon." The Court, however, more narrowly defined the scope of the waived subject matter to be those documents that "provide the factual basis for the statement in the press release that, in arranging for and attending . . . the meeting, Kolon had the purpose stated in the press release."
The Court also limited the waiver to fact work product and refused Kolon's request for opinion work product to be produced, finding that opinion work product is only discoverable in extreme circumstances. And the court found that an issuance of a press release is a common, not an extraordinary, circumstance in business.
This case serves as another warning to companies in litigation to carefully monitor the process of drafting press releases and what statements to include in them because press releases can lead to sanctions, waiver of work product and privileged information, and increase litigation costs. At the same time, companies in litigation often feel compelled to try to shape the public's perception of the litigation and the companies themselves. This is particularly true in cases involving unfair business practices or competition when the survival of a company's business model can be at stake. But, in doing so, they need to carefully weigh the risks of what they are saying publicly.
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