The Computer Fraud and Abuse Act, and Protecting Employer’s Electronic Data

The Southern District of New York recently joined a number of other jurisdictions in foreclosing one avenue of recovery for employers seeking to recover against employees who steal company information for competitors.  In Advanced Aerofoil Technologies, AG v. Todaro,  2013 WL 410873 (S.D.N.Y. Jan. 30, 2013), the court ruled that the Computer Fraud and Abuse Act’s private right of action does not extend to cover employees’ theft of information when it is stolen using channels of access that are authorized.  In doing so, the Southern District joined the Eastern District of New York and the Ninth Circuit in a narrow reading of the statute, while citing opposing holdings out of the First, Seventh, Fifth, and even other courts in the Southern District, which would give the CFAA a more expansive reading.

In Advanced Aerofoil Technologies, the plaintiff company Advanced Aerofoil Technologies (AAT) sued a number of defendants for procuring customer lists and proprietary information and funneling the information to their own new competing venture.  The list of defendants included former employees of AAT who allegedly used their unfettered access to divert clients and investors toward a new company that they formed while still employed.  According to the plaintiff’s summary judgment brief, the defendants continued their employment after the secret formation of their new company for the purpose of collecting information, and deleted entire swaths of information upon their departure in order to cripple AAT.  AAT brought a private suit (allowed under 18 U.S.C. § 1030(g)), citing violations of 18 U.S.C. § 1030(a).  Nevertheless, the court ruled that the language of this section of the statute hinges on subsection (a)(2), which disallows the intentional accessing of a computer without authorization to obtain information with the intent to defraud.  Because the defendant employees in AAT had “unlimited and unfettered access,” by definition they could not have exceeded their authorization.  The court therefore held that there was no violation of the CFAA, and dismissed the case.

What can employers take away from this case?  Simply this: that by carefully defining “authorized use” in personnel policies, employers may give courts that are reluctant to broaden the CFAA a reason to side with them in cases of blatant employee theft.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Live Events Agency Sues Former Employees And Independent Contractor For Breach Of Non-Solicitation Agreements

On March 18, 2013, TBA Global, LLC, a live events market and communications agency, sued LEO Events, LLC and several of its owners for breach of non-solicitation agreements and misappropriation of TBA’s trade secrets and confidential information.  TBA claims LEO’s owners are using confidential information they gained while working for TBA to solicit TBA’s clients, including Walmart and Exxon.  A copy of TBA’s complaint can be found here.

According to TBA’s complaint, LEO was created by two former TBA senior vice presidents and a former TBA independent contractor to directly compete with TBA.  TBA also contends LEO’s owners are using information and skills they gained from TBA, including customer information and relationships and specialized training, to solicit TBA’s customers.

Since forming LEO, TBA alleges, LEO’s owners have actively solicited TBA’s clients and/or prospective clients for the purpose of developing business relationships for themselves and LEO.  TBA contends, however, that LEO’s owners are bound by two-year non-solicitation agreements which prohibit them from directly or indirectly communicating with TBA’s clients or pursuing business relationships with them.  Further, the agreements prohibit LEO’s owners from utilizing TBA’s trade secrets and confidential information to compete with TBA.

TBA has also petitioned the court for a temporary restraining order and preliminary injunction to prohibit LEO and its owners from violating their non-solicitation agreements.  A copy of the TBA’s motion can be found here.  The court denied TBA’s motion for a temporary restraining order and set TBA’s preliminary injunction motion for a hearing.

We will follow-up on this post as the TBA suit unfolds.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Protecting Your Closely Held Business

A client recently came to me with a problem lawyers often hear: the client’s family-owned business needed to hire new employees to keep up with the growth. In particular, the company needed additional sales force and additional operators in the field. The problem was that in order to train and then oversee these new employees, the client had to disclose to them both its pricing guidelines and its field techniques. This particular business (which was highly regulated and dealt with restricted and often dangerous chemicals) kept its customer base because – like most successful businesses – it provided excellent customer service combined with very competitive pricing.

The owner feared that once his customers became acquainted with the new sales personnel and/or the new field technicians, the new employees could use their knowledge of the company’s pricing guidelines and field techniques in order to start a competing business. Fortunately, under Chapter 542, Florida Statutes, we were able to craft a document that lawfully restricted the new employees’ ability to quickly begin a competing company and that gave the client peace of mind to continue the company’s expansion.

A primer on Chapter 542, Florida Statutes

The short title for Chapter 542 Florida Statutes is “Florida Antitrust Act of 1980.” So basically it’s a statute “to complement the body of federal law prohibiting restraints of trade or commerce in order to foster effective competition.” See 542.16. Fla. Stat. However within the statute is the current language in 542.335 Fla. Stat., entitled Valid restraints of trade or commerce.

Within this section, Florida law allows restrictive covenants, “so long as such contracts are reasonable in time, area, and line of business”. It is important to note, however, that Florida law strictly construes restrictive covenants, all of which are unenforceable unless set forth in writing signed by the person against whom enforcement is sought. It is also essential that the restrictive covenant itself is only valid if the party seeking enforcement can demonstrate a “legitimate business interest” worthy of protection. Examples of legitimate business interests include:

1. Trade secrets;
2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets;
3. Substantial relationships with existing or perspective clients, patients or customers;
4. Good will associated with a trade name, a trademark, a service mark, or “trade dress,” a specific geographic location, or a specific marketing or trade area;
5. Extraordinary or specialized training.

As you might imagine with any strictly interpreted statute, failure to prove the legitimate business interest will render a restrictive covenant unlawful, void and unenforceable. The statute also shifts the burden from the entity seeking to enforce the restrictive covenant to the person opposing enforcement upon prima facie showing that the restraint is reasonably necessary. Defenses to these actions include that the restrictive covenant is “overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interests.”

If the court determines that one of these defenses exists, then the statute directs the court to modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.

Fortunately, Florida law also sets forth some parameters to help both drafters of restrictive covenants and parties seeking to enforce or defend enforcement actions with some guidelines as to the validity of any particular restriction. As one might expect, the more vital the need to protect a “legitimate business interest,” the longer the period Florida law will deem as reasonable. For instance, as long as the restrictive covenant does not deal with the sale of a business or professional practice or an equitable interest in any other type of business or professional practice (including a partnership or limited liability company), then as to a former employee, agent, or independent contractor the court shall presume reasonable in time any restraint that is six months or less in duration and shall presume unreasonable in time any restraint that is more than two years in duration. If a party seeks to enforce a restrictive covenant against the distributor, dealer, franchisee, or licensee of a trademark or service mark (not associated with the businesses listed above) then the court increases its timeframes and will presume reasonable any restraint of one year or less and shall presume unreasonable any restraint more than three years in duration. On the other hand if the restrictive covenant does specifically deal with an action against the seller of all or part of the assets of a business or professional practice, the shares of a corporation, partnership interest, a limited liability company membership or any equity interests of any other type in a business or professional practice, then the court shall presume reasonable a restraint of three years or less and increases its tolerance for reasonability to a period from three years to more than seven years in duration.

The statute also deals with trade secrets and specifically states that a “post term restrictive covenant predicated upon the protection of trade secrets” is presumed reasonable if the restraints are for five years or less and unreasonable if the restraint is for more than ten years. However, all of those presumptions are rebuttable.

Florida law in this area has many nuances. It is quite possible that your valid, written restrictive covenant was drafted to narrowly protect a line of business or a geographical area in which your company no longer has an interest. In such cases, the courts can consider these facts as a defense even in the face of an argument that future damages could arise.

Getting back to the client whose inquiry prompted this post, his closely held corporation sought both legal protection and peace of mind. After a series of successful hires, all signs so far indicate that the client has achieved an effective and enforceable restraint of trade. Because that client services nearly every county in the State of
Florida, the written restrictive covenant bars the new employees from working for a period of two years in the same line of business in all of those counties. To the extent any of the techniques that the client utilizes and/or developed for its field technicians constitutes a trade secret, the document also restricts the use of that trade secret for a period less than five years. Most critical for enforcement, however, is the fact that the business owner never allows a new sales person or field technician to begin work until he or she executes the restrictive covenant. The business owner even goes one step further, having all prospective employees to whom the restrictive covenant applies initial the section of the restrictive covenant indicating that the prospective employee was given the documents in advance of the employment and had the right to seek his or her own legal counsel prior to executing the restriction. If carefully drafted and thoughtfully implemented, a written restrictive covenant can successfully protect the business owners of small, closely held companies just as well as they can protect mid-sized or large corporations.

This is the point in the blog where I tell you to seek legal advice in the drafting or enforcement of your restrictive covenant. The Burr & Forman legal team has qualified attorneys throughout its footprint with significant experience in these issues.