Congress Creates a New Cause of Action for Trade Secret Theft

On April 27, 2016, in a move lauded as the most significant expansion of federal intellectual property law in the last half-century, Congress passed the Defend Trade Secrets Act of 2016 (“DTSA”) and established the first civil remedy for trade secret misappropriation under federal law.   The bill was passed as an amendment to the Economic Espionage Act, 18 USCA § 1832, which currently permits the Attorney General to enjoin trade secret misappropriation, but does not provide equivalent standing to civil litigants. Following significant cross-partisan support and easy passage through Congress, the DTSA was today signed into law by President Obama.

The most ostensible feature of the DTSA is jurisdictional, as the bill forges a new road to federal court without the barriers that previously confined a great deal of trade secret litigation to state tribunals.  Since a trade secret dispute brought under the DTSA arises under federal law, litigants no longer need to worry about the state citizenships of parties to get their case into federal court for relief.  However, not every trade secret dispute will be eligible for adjudication under the DTSA. Unlike patents and copyrights, the bill is grounded in the legislature’s “commerce power,” so only trade secrets relating to a product or service intended for use in interstate commerce may qualify for federal protection.

A noteworthy aspect of the DTSA is its similarity to the current legal framework.  With few exceptions, almost all states have enacted misappropriation statutes modeled after the Uniform Trade Secrets Act (“UTSA”), albeit with some variation.   The DTSA uses strikingly similar language to the UTSA in defining what constitutes a “trade secret” and “misappropriation.”  In interpreting the federal law, courts will likely rely on the robust case law that has developed under UTSA for the past three decades.  With that said, this preexisting statutory framework across 48 states perhaps undercuts the need for uniformity in trade secret law, as touted by proponents of the bill.

Despite its continuation of this common statutory language, the DTSA does contain certain unique features.  Notably, it includes a provision for the pre-trial seizure of property related to the improper use or dissemination of a trade secret.  The bill allows a trade secret owner to present an “ex-parte” petition to the court requesting that certain property of a defendant be seized and retained by the court pending the outcome of the case.  Although such seizure should only issue in “extraordinary circumstances,” the availability of this powerful mechanism raises concerns as to its effect on the cost and complexity of trade secret lawsuits.  If trade secret litigation becomes unduly expensive, parties will be pressured to enter early settlements just to avoid the cost of defending against such actions.

Finally, the DTSA’s whistleblower provision is sure to keep human resources departments busy over the next few months. Under the bill, any agreement with an employee governing the use of trade secrets (i.e. many non-competition and non-disclosure contracts) must include a notification that an employee is immune from liability if information is disclosed to address a potential violation of law. If a contract does not contain this notification, an employer who sues an employee for trade secret misappropriation in violation of such an agreement will be unable to recover exemplary damages or attorney’s fees.  These kinds of new features ensure that the DTSA will have a big impact.

David Moon is an attorney with Washington, DC regional business law firm, Berenzweig Leonard. David can be reached at dmoon@berenzweiglaw.com.

What Is the Real Reason the FBI Canceled the Apple Hearing?

The FBI canceled the March 22 court hearing scheduled to take place in California that was aiming to force Apple to create code for unlocking an iPhone.  The FBI suddenly changed course and notified the judge, and Apple, that an unknown source may be able to crack the security encryption feature on the San Bernadino terrorist’s iPhone, without Apple’s help.  If that holds true, the government’s case could be withdrawn in the next few weeks and this historic chapter in one of the biggest technology cases in the nation could conclude.

This news raises the question whether there was something else going on which motivated the government to avoid this fight with Apple.  An answer can probably be found in the briefs both sides recently filed with the court.  As those legal arguments evolved, the FBI’s case became weaker as Apple’s rebuttals became more targeted.  Perhaps the most powerful argument was raised when Apple pointed out there is a federal statute demonstrating that Congress did not want to give the government the authority to force a way to break cellphone encryption.  Apple pointed to the Communications Assistance for Law Enforcement Act (‘CALEA’), which requires telecom carriers to enable the government the means to wiretap telephone traffic for law enforcement purposes.  CALEA has an exception for phone manufacturers such as Apple (section 1002 of the Act), confirming that cellphone developers cannot be forced to design an encryption master key.  The FBI asked Congress in 2013 to change this feature of CALEA, but Congress refused.  Therefore, Apple has persuasively argued, there is a federal law directly on point which overtakes the government’s attempt to argue that the All Writs Act of 1789 (that’s right, 1789) somehow gives general authority to the contrary.

Faced with this stark disparity in legal positions, it is not surprising that the FBI ducked the hearing and is searching for another solution to avoid an adverse ruling.  This development also means that consumers’ protection of their personal information stored on cellphones just became more secure, at least for now.  This case may soon come to a close, while the tech battle continues to challenge industry programmers to somehow design more sophisticated safety features to safeguard informational privacy in an increasingly hostile environment.

Seth Berenzweig is a founding and managing partner of Berenzweig Leonard, and has discussed the FBI-Apple case on television, covering the legal issues impacting technology companies and individuals.

Fantasy Sports Puts Its Cards on the Table for NY Court Hearing

The two biggest daily fantasy sports (‘DFS’) operators and the NY Attorney General will be placing big bets Wednesday in a New York courtroom, when they ask Judge Mendez for an injunction which could lead to the rescue or destruction of fantasy sports in New York.  Since the hearing addresses whether daily fantasy sports is a game of skill or a game of chance, the results will also spill over into the several other states whose Attorney Generals are investigating the industry and placing their own bets on the multi-billion dollar industry.

Observers of this legal battle got an interesting flavor of Judge Mendez’s perspective on the case a few days ago, when he denied DraftKing’s and FanDuel’s motions for a temporary restraining order. The requests to set aside NY Attorney General Eric Schneiderman’s recent cease and desist letter was denied, and the court set a hearing date of Wednesday, November 25th for all parties to present their arguments for a preliminary injunction.  The winner of this hearing will be dealt a strong hand, since a core part of the court’s analysis depends on which side the judge feels demonstrates a likelihood of success on the merits of their case.

If DraftKings and FanDuel win the hearing they can continue operating in New York, one of the most crucial states to their business model and financial existence.  If the government wins, the fantasy sports operators will be ordered to follow Schneiderman’s demand to cease such operations and stop accepting bets in New York.  A loss for DraftKings and FanDuel could also have other harmful effects, since the ruling will be predicated on whether DFS is an illegal game of chance – a result other Attorney Generals could use to further their own agendas and bring new storm clouds to additional fantasy sports operators including internet giant Yahoo.  

Daily fantasy sports is facing several major challenges, including various class actions lawsuits and government investigations.  Those other headaches will need to take a back seat to the hearing in New York this week, as the parties in that case take off the gloves and step into the litigation ring with much on the line.  Faced with no immediate opportunity for a business discussion with government officials for some kind of middle ground, all bets are off as spectators take a seat and await Judge Mendez’s crucial decision.

Seth Berenzweig is the founding and Managing Partner of Berenzweig Leonard.  His business law practice includes representing companies, executives, entrepreneurs and former professional athletes to help them address business growth and compliance.  He is also a Director of The Corporate Huddle, a non-profit organization that aligns CEOs with former professional athletes for professional mentoring.

The Fantasy Sports Business – A Real Bet or Fantasy Fraud?

Just as daily fantasy sports (“DFS”) companies such as DraftKings and FanDuel have become huge multi-billion dollar businesses, breaking news has raised questions about whether fantasy sports is a soundly run responsible business or a clumsily disguised sham.  A recent scandal in the DFS industry arose when a DraftKings employee, Ethan Haskell, allegedly used sensitive betting information internally collected by his employer and utilizing it to his advantage, selected a fantasy lineup that won $350,000 on FanDuel, a competing DFS website. The money that Haskell collected was naturally won from the losing bets and cash of other DFS participants who were not as fortunate to have access to such information, leading some lawmakers as well as others to seriously question whether the rules of the game should change to protect consumers.

The legal background on this story begins in 2006, when the federal government created a law prohibiting internet gambling but deemed fantasy sports a game of skill and not chance, an important distinction which allowed fantasy sites to continue operation.  Classifying fantasy sports as a game of skill is a debatable notion that nonetheless survived the 2006 law thanks to aggressive lobbying from professional sports.  The fantasy sports industry as well as the technology enabling its growth subsequently exploded over the next several years, blossoming into a multi-billion dollar industry with high profile investors including lead sports figures such as Dallas Cowboys owner Jerry Jones and Robert Kraft of the New England Patriots owner Robert Kraft.  ESPN and Yahoo have also been participants in the fast growing industry.

FanDuel and DraftKings’ relentless marketing promotes users who have won millions of dollars in a single weekend, but for each user who does win, countless others walk away with nothing. For a participant to win a million dollar cash prize they must defeat hundreds of thousands of other competitors. Strategy is paramount, and salary cap limitations imposed by DFS sites means a participant cannot simply buy up all the best talent. Ideally, a participant would want to select players who few of his competitors have selected. By selecting these “under the radar” players and having those players post substantial statistics, a participant could drastically enhance his chances of victory in a mass entry contest. Information about the players that competitors have selected for their lineup are not available to the public, but having knowledge of the betting strategies of competitors would be advantageous.

The potential for abuse is more than theoretical here. Both DraftKings and FanDuel have acknowledged that Haskell won $350,000 on a $25 bet in a mass entry contest on FanDuel. Additionally, in his employment capacity, Haskell was privy to the betting information of competitors and could gain a competitive advantage by applying this information. A spokeswoman for DraftKings said that Haskell made a “mistake” and did not use information improperly, although this is probably of little solace to customers who place bets and rely on the soundness and ethics of DFS sites to operate responsibly.  DraftKings and FanDuel’s recent announcement of policies to prohibit their employees from betting may bring comfort to some, but others are not convinced that self-proclaimed policies are the best path to compliance.  As infamous companies such as Enron demonstrated, impressive looking ‘compliance programs’ are sometimes not worth the paper they are written on.  This legal backdrop explains why some legislators are now throwing the flag at the industry and suggesting it may be time for legislative hearings and new legislation.

This story will continue to evolve over the coming weeks, as DraftKings and FanDuel try to get a handle on the situation and try not to fumble their hold on an extremely lucrative industry.  In the meantime, people may wish to be cautious when placing their bets on fantasy sports, and consider whether such actions are a true bet or Hail Mary.

Seth Berenzweig is the Managing Partner of Berenzweig Leonard, who works with business executives including former professional athletes and appears on national television to discuss breaking business and sports news.  Drew Smith is the Director of Professional Sports Law at Berenzweig Leonard, LLP and also represents current and former professional athletes.

Independent Contractor or Employee? New DOL Guidance Concludes Most Independent Contractors are Misclassified.

The U.S. Department of Labor (“DOL”) recently issued an Administrator’s Interpretation addressing the common misclassification of employees as independent contractors under the Fair Labor Standards Act (“FLSA”). The misclassification of employees as independent contractors may lead to those employees failing to receive certain workplace protections, such as minimum wage and overtime compensation under the FLSA. The DOL concludes that most workers qualify as employees under the FLSA’s definition.

Employers often use the common law “control test” to determine whether a worker is an employee or an independent contractor. The “control test” analyzes whether a worker is an employee or independent contractor based on the employer’s control over the worker. While the “control test” has been adopted by courts in the context of other employment statutes, the DOL makes clear that the FLSA’s broad definition of “employ” as including “to suffer or permit to work” is more expansive than the control test. The agency says that for purposes of determining FLSA applicability, the focus must be on the economic realities of the relationship – that is, “whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).” The guidance then discusses the six factors that courts have developed to determine whether a worker is an employee or independent contractor under this “economic realities” test.

The six factors to be considered in determining whether a worker is an employee or an independent contractor for purposes of the FLSA are: “(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.” The guidance states that these factors are not a checklist, but are to be “examined and analyzed in relation to one another.” The analysis is qualitative, not quantitative, and the FLSA’s intended expansive covered must be considered.

Given the broad statutory definition of “employ” under the FLSA, the DOL concludes that most workers are employees that are economically dependent on their employer, and would not qualify as an independent contractor that is truly in business for him or herself. The DOL is concerned about the trend of misclassification of employees as independent contractors, especially in industries with low-wage workers.

While an employer may have independent contractor agreements with its workers, such agreements are not relevant to the analysis of the workers’ status under the FLSA. In light of this guidance from DOL, employers should review whether their independent contractors are properly classified, or if they are employees under the “economic realities” test. If these workers are misclassified, employers should take proactive steps to avoid or minimize potential litigation that could result in significant liability for unpaid wages and overtime.

Stephanie Wilson is an attorney at the Washington, DC business law firm, Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com.

Hadeed Carpet’s Subpeona Against Yelp Gets Swept Under the Rug

The Virginia Supreme Court made it harder for businesses stung by anonymous social media postings to fight back and get information identifying the people who post online comments.  In Yelp v. Hadeed Carpet Cleaning, the court threw out a Virginia Subpoena and Contempt Order against Yelp after the social media giant refused to turn over documents identifying people who anonymously posted negative social media comments about Hadeed.

In a decision that sidestepped free speech issues presented by going after negative social media commentary, the court concluded that in order to force Yelp to fork over the identifying documents that were stored in San Francisco, Hadeed had to go to a San Francisco court and get a subpoena there to get the documents.  This decision yields a convoluted result, since such a business trying to unmask an anonymous social media purveyor of defamatory online statements needs to go ‘coast to coast’ in order to get a Virginia court to obtain documents in California.  This is not an efficient use of company resources already suffering from false online commentary.  Also, as the dissenting justices pointed out, this result is clearly outdated since companies like Yelp probably have documents electronically available all over the country, and treating these materials like they are sitting in a 1950’s file cabinet seems absurd.

Businesses and executives need to be aware of this decision, and the fact that they can still go after anonymous online social media postings that are false and defamatory.  They just need to go through an extra hoop to get a subpoena that is issued from the jurisdiction where such information is located to get the information identifying who posted false online information.  Companies can still get their day in court to fight false online social media postings, but will have to do so more methodically as they fight back to maintain their online reputations.

Seth Berenzweig is managing and founding partner of Berenzweig Leonard, LLP, and often appears in the national media to discuss breaking business news.

Yelp Gets a Pass On Negative Social Media Post

The Fourth Circuit Court of Appeals recently issued a decision having a big impact on how businesses must deal with disparaging commentary on social media.  In Westlake Legal Group v. Yelp, Inc., the court rejected a Virginia law firm’s claim against Yelp complaining about defamatory comments on the firm posted on Yelp’s website.  Yelp asserted that the case should be dismissed, arguing that federal law provided it and other social media companies immunity from such lawsuits.

The Fourth Circuit Court of Appeals agreed with Yelp and dismissed the firm’s case, rejecting the argument that the victim of a false social media post can sue computer service providers.  Citing the Communications Decency Act (‘CDA’), the court ruled that the CDA bars such businesses “from holding interactive computer service providers legally responsible for information created and developed by third parties.”  Basically deeming Yelp an electronic billboard immune for posts that could be defamatory, the court ruled that Yelp could not be sued without facts showing that “that any alleged drafting or revision [by Yelp] … was something more than a website operator performs as part of its traditional editorial function.”

The Westlake decision is significant for several reasons.  It shows that if any individual or business wants to legally challenge defamatory social media, it should ‘keep its powder dry’ and not waste time and money suing the social media company posting the content.  Social media providers like Yelp will likely get a broad pass of immunity for such claims.  Rather, anyone challenging anonymous false statements on social media should focus on so-called ‘unmasking’ cases which could permit subpoenas for business records from the Yelps of the world (such as recently allowed in the Madeed Carpet case) to identify and attack the actual author of the post.  Understanding these rules of the road for challenging disparaging social media can make the difference between protecting one’s reputation and wasting valuable time and money.

Seth Berenzweig is the founding and Managing Partner of Berenzweig Leonard, LLP, and often appears on national media to discuss breaking news business developments.