Does the Alabama Trade Secrets Act Limit Remedies for Theft of Information?

Alabama enacted the Alabama Trade Secrets Act (the “ATSA”) in 1987.  However, since that time, there have been relatively few reported court decisions analyzing the impact of the ATSA on common law claims.  A federal district court in Alabama recently grappled with these issues.  Relying on interpretations of other states’ laws based on the Uniform Trade Secrets Act, Judge Blackburn read the ATSA’s preemption provision broadly, holding that the ATSA preempted any common law claims based on “the same underlying facts.”  Madison Oslin, Inc. v. Interstate Resources, Inc., 2012 U.S. Dist. LEXIS 142082 (N.D. Ala., Sept. 30, 2012).

In Madison Oslin, the plaintiff was an Alabama-based paper-coating company who had developed a novel process for using polyester instead of wax to coat corrugated cardboard.  Whereas traditional wax-coated cardboard cannot be recycled, the new polyester-coated cardboard would be fully recyclable, saving landfill costs.

This Alabama paper-coating company was approached by a cardboard-box manufacturer with facilities in Maryland, and the two companies proposed forming a joint venture to manufacture polyester-coated corrugated cardboard boxes.  Under the proposed joint venture agreement, the box manufacturer would pay the paper-coating company an initial lump-sum fee of $6 million, and thereafter, the two would evenly split profits from the sale of recyclable boxes through the joint venture.

However, after the cardboard-box manufacturer signed a confidentiality agreement and had been allowed to observe the polyester-coating process during tours of the paper-coating company’s facilities in Alabama, the cardboard-box manufacturer allegedly began advertising (and manufacturing) a “recyclable corrugated box.”  The proposed joint venture agreement apparently remained unsigned, and the box manufacturer did not compensate the paper-coating company for use of its proprietary processes.  The paper-coating company, as plaintiff, then brought a multiple-count complaint against several defendants, including the cardboard-box manufacturer and its subsidiary in Maryland that operated the box-manufacturing facility.   The counts included a cause of action under the ATSA, as well as common law claims for conversion, unjust enrichment, breach of fiduciary duty, misrepresentation, and suppression, among others.

The defendants moved to dismiss the plaintiff’s common law claims, arguing that these claims were subsumed by the ATSA claim, and also moved to have the action transferred to Maryland.  In evaluating the motion to dismiss, Judge Blackburn noted that there was very little Alabama case law on point.  Thus, the court analyzed the comments to the ATSA and to the Uniform Trade Secrets Act and also examined other courts’ analyses of this issue under trade secrets statutes enacted in Georgia.  As noted in one of the Georgia cases, statutes protecting trade secrets are intended to encourage the free flow of information.  Under this analysis, claims involving “theft of information” should be limited to cases in which the information can be shown to be a trade secret; allowing claims for the theft of “non-proprietary” information or for the theft of “unguarded” proprietary information could arguably discourage this free flow of information.  Finding this reasoning persuasive, Judge Blackburn in Madison Oslin determined that the ATSA preempted any common law causes of action arising from the same factual allegations as ATSA claims and thus dismissed the plaintiff’s claims for conversion, unjust enrichment, breach of fiduciary duty, misrepresentation, and suppression.  The plaintiff was, however, allowed to proceed with its breach-of-contract claims, as well as its ATSA claims.  Because Judge Blackburn also granted the defendants’ request for a transfer, these remaining claims are now being litigated in Maryland.

A “take away” from the Madison Oslin decision is that an Alabama employer faced with the theft of information may want to begin its analysis of potential legal remedies by looking at the ATSA.

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.

Expansion of the Economic Espionage Act Broadens Protection for Trade Secrets

In the summer of 2009, in an office at Goldman Sachs, in the waning hours of his last day of employment, a computer programmer named Sergey Aleynikov encrypted more than 500,000 lines of source code from Goldman’s proprietary high-frequency trading system, uploaded the code to a server in Germany, and then deleted the history of his computer commands and slipped out the door to attend his going away party.  He later downloaded the code from Germany onto his home computer and other personal devices.  He took portions of the encrypted code to a meeting with his new employer, by whom he had been hired to create the same type of code in an impossibly short span of time.  The FBI arrested Aleynikov at Newark Liberty International Airport as he was returning from the Chicago meeting, flash drives and laptop in hand.  Aleynikov was indicted for violating the Economic Espionage Act of 1996, 18 U.S.C. § 1832 (the “EEA”), among other charges, and was convicted by a jury in the Southern District of New York in 2010.  United States v. Aleynikov, 737 F. Supp. 2d 173 (S.D.N.Y. 2010).  He was sentenced to an eight year prison term.  However, he received a reprieve in 2012 when the Second Circuit performed a detailed textual analysis and determined that the stolen code was neither a product “produced for,” nor “placed in,” interstate commerce, and therefore could not violate the statute as worded.  The Court held that “Aleynikov should have known [his conduct] was in breach of his confidentiality obligations to Goldman, and was dishonest in ways that would subject him to sanctions; but he could not have known that it would offend this criminal law or this particular sovereign.”

In response to this holding, Congress unanimously passed the Theft of Trade Secrets Clarification Act of 2012, which President Obama signed on December 28, 2012.  The Act amends Section 1832(a) to include not only products, but also services, and was designed “to ensure that American companies can protect the products they work so hard to develop, so they may continue to grow and thrive,” according to Senator Patrick Leahy’s comments in a November 27th debate.  The amendment will have a great impact on the financial sector, which relies heavily on proprietary systems that gather information but are not themselves sold in interstate commerce, and may impact computer software companies, and others, as well.  Congress’s rejection of the Second Circuit’s narrow ruling will almost certainly lead to a growth in the number of indictments under this Act.

Congress passed an additional amendment on January 1, 2013, one that still awaits the President’s signature.  This bill, entitled the “Foreign and Economic Espionage Penalty Enhancement Act of 2012,” raises the fines and penalties for violation of the EEA.  Despite these enhancements to the strength of the Act, the EEA still provides no private cause of action.  The lack of such a right leaves companies in the position of continuing to seek redress for trade secret violations at the state level, or, at best, to cooperate with the federal authorities to assist in a criminal case against alleged violators.  Nevertheless, in the face of the Aleynikov case and other similar recent cases (see, e.g., United States v. Agrawal, pending in the Second Circuit), the strengthened EEA creates more protection for company trade secrets.  Employees in the relevant fields should take notice.

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

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