Trade Secrets & Employee Mobility

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.

A recent decision of the United States District Court, Southern District of New York, illustrates the importance for employers of making sure non-competition agreements are correctly executed by employees.

A recent article in Lawyer USA discusses how litigation over noncompetition and nonsolicitation agreements has been on the rise in recent years.

A dispute between UBS Financial Services Inc. ("UBS") and three of its former brokers highlights various issues involving trade secrets and non-solicitation covenants in the financial services industry. On May 22, 2009, on UBS's motion in UBS Financial Services Inc. v. Lofton, Case No. 1:09 CV 367, the U.S. District Court for the Southern District of Ohio entered a preliminary injunction prohibiting the three individuals from soliciting any securities investment business from UBS customers pending an arbitration hearing before the Financial Industry Regulatory Authority ("FINRA").

In EMC Corp. v. David A. Donatelli, case number 09-1727-BLS2 in the Suffolk County Superior Court in Massachusetts, the Court modified the preliminary injunction it had issued against Donatelli by allowing him to start working for HP in California. The Court issued a narrow order tied to the protectable interest of EMC while at the same time, not depriving Donatelli his opportunity to pursue his livelihood in a competitive business.

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.

On May 4, the Superior Court in Massachusetts ruled that EMC, a Massachusetts corporation, could obtain injunctive relief preventing Mr. Donatelli, who had been President of one of EMC's major divisions, from starting a job at HP in California even though California has a statutory prohibition on covenants not to compete. The Court made some important findings in its decision.

Employers looking to protect their intellectual property and proprietary information, and wondering whether they can punish the departing employees that ignore demands to return laptops and other transportable electronic devices that hold such data, may now have a newly invigorated weapon at their disposal -- the Computer Fraud and Abuse Act.

An executive's resignation and intention to begin work for a competitor of his former employer has resulted in a bicoastal battle of lawsuits over the terms of a noncompete clause in his employment agreement.

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.