President Not Alone in Cavalier Approach to Protecting the Digital Crown Jewels

A brash, ego-driven leader flaunts his organization’s best efforts to protect precious digital assets. Wielding an unsecure cell phone and overall poor cyber hygiene, this headstrong personality doesn’t take kindly to IT underlings trying to guard the digital crown jewels.

Anyone monitoring the headlines might guess we’re talking about our commander in chief, but President Trump’s cavalier online habits have strong parallels with some leaders in the business world. While Fortune 500 corporations are far ahead of the data security curve, given increasingly strong board and shareholder oversight, it’s not uncommon for smaller companies – particularly privately held businesses – to be led by executives who might be headstrong, less accountable and less inclined to change habits and follow the rules regarding data security best practices.

Revelations that President Trump appears to be using an older model Android-based cell phone are shocking to those who understand the hacking threat, and recent business headlines bring home why it’s so important for businesses to do everything possible to protect data in our knowledge-based economy. Anyone following the news in this area will see lawsuits alleging increasingly creative ways to steal trade secrets. In Houston, Statoil Gulf Services recently sued its former chief technology officer, arguing that he stole trade secret technology, transferred them to his wife, and had her patent the technology. Click here to view Joe Ahmad’s interview with the Houston Chronicle about this lawsuit.  But a key issue in almost any trade secret case is whether the information is a secret.

Businesses that do not do their best to protect trade secrets often find it more difficult to prove to a jury that their secrets have been stolen. In the recently concluded ZiniMax v. Facebook/Oculus trial, ZiniMax won a $500 million verdict against Facebook, but failed to convince jurors that its trade secrets had been stolen by departing high-level employees who had been hired by Facebook. The jury’s decision was likely influenced by testimony that showed the company had not taken steps to keep those secrets secure. See Joe Ahmad’s interview with Polygon.com here.

The possibilities for trade secret theft are infinite and evolving, and defenses for yesterday’s attack may not help you tomorrow. Whether you’re the president of the United States or the president of an oil and gas company, today’s leaders should be working with the premise that it’s not a matter of if, but when a hacker will infiltrate your network. With that in mind, executives should be doing everything possible to make those intangible digital assets as secure as possible, and understanding that using an unsecure cell phone is the equivalent of leaving the back door to the warehouse wide open.

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Game industry executive’s job-hopping mistake leads to `Game Over’ jury verdict for Facebook/Oculus

Hours after a Dallas jury returned its $500 million verdict for ZeniMax over claims that Facebook and Oculus unfairly used its virtual reality coding, the creator of that code, John Carmack, took to social media to continue his defense.

Carmack, the legendary co-founder of id Software and lead programmer for some of the industry’s best-known games, hotly disputed the jury’s finding that Oculus developed its innovative virtual reality headsets with help from “non-literal” copies of code that Carmack had written while employed by ZeniMax. He was accused of taking the code with him when he departed to Oculus, a Facebook subsidiary.

“This is just not true,” Carmack wrote in a Facebook post as Facebook and Oculus promised an appeal, and ZeniMax threatened to seek an injunction on future Oculus headset sales.

While the lawsuit is understandably layered with nuance and complexity, Carmack’s story offers yet another reminder for executives and innovators who leave their jobs for competitors. Carmack’s personal and professional reputation and the Facebook/Oculus defense were seriously damaged by findings that Carmack had taken data with him on a USB drive after he left ZeniMax. In addition, jurors heard testimony that Carmack wiped his hard drive shortly after being served with the lawsuit and that he had even Googled a query seeking instructions for how to clear a hard drive.

For passionate and highly driven minds like Carmack, it’s not hard to understand the urge to take work with them when they leave. It’s human nature to view personal devotion and long hours spent at work as an extension of one’s identity. In fact, unless they have legal advice or are knowledgeable about the law, most people take too much with them when they leave their jobs. As Carmack’s case illustrates, that can be a big problem if someone decides to file a lawsuit.

This case is far from over, and all eyes are now on the post-trial proceedings and the likelihood that ZeniMax will obtain an injunction on future Oculus Rift headset sales. Gaming industry publication Polygon.com has been closely covering this litigation. Read Polygon’s recent coverage here, which includes an interview with Joe Ahmad, AZA founding partner and author of the blog, Legal Issues in the Executive Suite.

Posted in Complaints Against Executives, Confidential Information, Executive contracts, Litigation, Non-Competes, Trade Secrets | Tagged , , , , , , , , , | Comments Off on Game industry executive’s job-hopping mistake leads to `Game Over’ jury verdict for Facebook/Oculus

Picture that text you just wrote on the screen in a courtroom

Executives know better than to put questionable statements in email, right? Well, it is past time to realize the same goes for texts. Just like a Miranda warning: Anything you text can and will be used against you in a court of law.

Texts have been the bane of married men and women in divorce court for years, and they are providing for juicy and damning discovery in civil and criminal cases as well. And, destroying texts is increasingly being seen by courts as destroying evidence. Texts are electronically stored information, and when you know there could be a lawsuit, you should know you need to keep it.

texter-by-daradaradaraTexts are normal fare in courtrooms now. Judge Judy even uses them regularly as evidence in her TV arbitration cases about landlords and loans. In a federal copyright case in New York involving Jay Z, called Walker V. Carter, texts became critical evidence about a contract and royalties. They are treated like normal evidence in criminal cases too. The Texas Court of Criminal Appeals just tossed a conviction and death sentence of a Waco man, finding the admission of text message evidence was unconstitutional because the texts were seized without a warrant.

In a recent case in federal court in North Carolina called Shaffer v. Gaither, the plaintiff dropped her cellphone in the bathroom and destroyed relevant text messages without backing them up. The judge was not happy. The judge didn’t dismiss her sexual harassment case but said he might tell the jury at trial that missing messages could be assumed to have reflected badly on her.

In an trade secret case between night clubs in Colorado called Christou v. Beatport, the court issued a sanction for not securing texts. So when litigation is anticipated, destroying evidence like this is sanctionable. Back up those texts on paper, get a new phone and give the one with evidence to your lawyer. And do not go holding evidence near running water.

It took the world a long time to realize that our private jokes and nasty sentences from emails could be projected up on a screen in court.  That goes for texts too. Executives should be careful to keep a company’s most private business as private as possible by saying it in person to the people who need to know.

Too many of us think of texts like Snapchat – here one minute, gone the next. But texts live on, on your phone and on the recipient’s phone. We speak differently in texts, talking with more raw language, less formality and less care. That late-night message on the road saying, “Stop by my room,” could be costly. Texts could be proof of collusion, proof of trade secret theft, proof of just about anything. They are evidence.

There can be legal distinctions between what is on a company phone and what is on a private phone. But once the two are mixed, the texts are likely discoverable. What to do? Separate your two text worlds. Texts to clients should not include third parties. Speak in person or on the phone whenever possible and when you text, know you may not be alone.

Posted in CEOs, Complaints Against Executives, Confidential Information, Corporate culture, Depositions, Executive Management Style, Fiduciary Duty, Legal, Litigation, Social Media | Tagged , , , , , , , | Comments Off on Picture that text you just wrote on the screen in a courtroom

NFL lessons for the C-Suite on succession planning, Exhibit 1: Tony Romo

Dallas Cowboys owner Jerry Jones has himself in an ideal succession situation. He waited to draft the perfect candidate – Dak Prescott. He and can now let potential future star quarterback Prescott learn while aging star Tony Romo still has the ball.

cowboysBoards and C-Suite folks should think like Jones: Keep your stars in place, but keep an eye on the future of the company. A CEO can fall at any time, be it from a physical problem like the cancer that took Apple’s Steve Jobs, a sexual harassment scandal like the one that felled Fox News’ Roger Ailes or a government investigation like the New Jersey inquiry that caused United Airlines to drop Jeff Smisek.

Certainly the NFL may not always get it right or do it smoothly. Just look at the Indianapolis Colts; they couldn’t afford Peyton Manning and Andrew Luck, so they tossed their older star. Of course, corporate America doesn’t have to deal with NFL salary caps. Nor does corporate America have to bench one player for another to be useful. A CEO successor can be the COO or president or serve some other role in the corporation while being groomed to take the helm should there be a natural succession or a sudden need for a replacement.

A 2014 study by the National Association of Corporate Directors showed that two-thirds of U.S. public and private companies reported they still have no formal CEO succession plan in place. Even though it can be awkward to plan for a company leader’s exit, having no plan is bad for shareholders, bad for employees and bad for business. This can be especially devastating to a smaller business. Even family businesses can have this problem as The Economist notes in discussing a lack of succession planning in family oil businesses in the Arabian Gulf.

 MIT Sloan Management Review this summer cited the example of Surveymonkey whose CEO died unexpectedly last year. There was no succession plan. The company looked at 75 candidates before making a choice two months later, only to have that person be replaced six months after that. That uncertainty and tumult had to cost them.

Apple did it right when the company knew Steve Jobs would be leaving, as I wrote back in 2012. Warren Buffett has been careful about this too. He realizes that such a plan allows people to stay invested and believe that things are, and will be, under control. Boards and incumbent CEOS owe it to their constituencies inside and outside the company to deal with the sensitive subject of passing the baton. Just as a smart company buys insurance for unforeseen problems, a smart company has a succession plan even if it seems the CEO is in great health and the horizon appears to be without scandal. Accidents and quarterback sacks happen.

Posted in Corporate successsion, Executive contracts, Fiduciary Duty, Retention agreements, Severance Packages, Sports contracts | Tagged , , , , , , , | Comments Off on NFL lessons for the C-Suite on succession planning, Exhibit 1: Tony Romo

Your Employment Agreement is Nothing Like a Mortgage Document

employment-contractAnother report on employment contracts is discouraging but not surprising. A survey of 1,000 people in the U.K. showed that more than 90 percent didn’t read their employment contracts – despite the fact that the terms can haunt them for years if they are violated. I have written about this subject before, including earlier this fall in regards to a lengthy online nondisclosure agreement that Republican presidential candidate Donald Trump required of online campaign volunteers.

It can’t be said too often: Read these contracts. Understand them. Get a lawyer’s help if necessary. My high-level executives often are asked to sign complicated non-compete agreements, and I work with them to get more flexible terms. Non-competes used to apply primarily to well-compensated employees, but they are increasingly used for the rank-and-file.

Many people who are asked to sign these agreements consider them fairly innocuous documents, much like the piles of papers one signs when they purchase a home. Buyers sign page after page without thoroughly reading the contents, but they feel fairly confident they understand the terms.

For example, when agreeing to a 30-year mortgage, in no way does the buyer believe he/she MUST remain in that home for three decades, right?! They’re not checking into the “Hotel California,” as the Eagles’ song goes. One can leave as long as the loan is paid off. The lender just wants the loan repaid – they don’t take an early departure personally.

The mortgage lending process is regulated and fairly normalized, so people feel pretty comfortable with the process. That is not the case with employment agreements in Texas, where employers are allowed lots of leeway in setting terms in employment contracts.

Historically, Texas and U.S. laws have been very protective of those who take out mortgages. But in regards to non-compete, nondisclosure and confidentiality agreements, there generally are no similar protections for employees outside of a few states – Texas not being one of them.

These agreements vary substantively and substantially. The job may be appealing, but there can be real danger lurking in the employment agreement that comes with it.

Additionally, after years on the job, an employee may forget signing a binding non-compete agreement way back when. Or they may not have realized they were agreeing to employment terms when they signed onto the company’s savings plan.

Carefully consider all the details, understand the employment terms, protect your own interests. You know the people who may end up suing you if you decide to break your employment agreement.

 

 

 

Posted in CEOs, Confidential Information, Corporate culture, Covenants Not to Compete, Executive Compensation, Executive contracts, Non-Competes | Tagged , , , | Comments Off on Your Employment Agreement is Nothing Like a Mortgage Document

Dialer Beware: Trump Volunteers Must Sign Onerous Agreement to Work Online Phone Bank

sign contractWhere do I begin?

There are so many troubling aspects to the lengthy nondisclosure agreement that Republican presidential candidate Donald Trump is requiring online campaign volunteers to sign that I just had to speak up.

The contents of this 2,271-world nondisclosure agreement have come to light in recent days as the presidential campaigns ramp up their voter outreach efforts.

At this point, I will disclose I’m a Hillary Clinton supporter. But let’s set aside politics and just analyze this from a legal perspective. My complaints and concerns about this nondisclosure agreement come from my experience as a lawyer who represents executives in a variety of matters, including these types of legally binding agreements.

To sign up on the candidate’s website for the Trump Red Dialer, an online call system that connects campaign volunteers with potential voters, one first must first sign the nondisclosure agreement.

If you sign this far-reaching agreement, and you need to think long and hard about it before you do, you are prohibited from criticizing Trump as well as any member of his family for the rest of their lifetimes, not just during the campaign period. You also can’t comment critically on his brands or disclose any personal information about the candidate.

This non-disparagement requirement is just too ambiguous and broad. It states you cannot disparage Trump or any “family member,” which includes grandchildren and his nieces and nephews, or any of their companies. Try figuring out who all of these people and companies are – just try! Nor can you even disparage any of these companies’ products.

Yes, non-disparagement clauses are difficult to enforce and legal cases regarding them are rare. But that doesn’t mean they can’t be successful.  At least one Arizona court has enforced a non-disparagement clause, so you need to be careful about signing one.

The definition of “confidential information” is a little over the top as well. It includes anything Trump insists is confidential, including his “political affairs” and other things that are clearly public.

Additionally, the non-compete and non-solicit is strange and unnecessary. The “no competitive services” clause is particularly troublesome; it requires the person to agree “not to assist or counsel, directly or indirectly, for compensation or as a volunteer, any person that is a candidate or exploring candidacy for President of the United States other than Mr. Trump and to prevent your employees from doing so.”  So much for changing your mind.

I could go on and on, but you get the idea.

Again, we’re talking about online volunteers here! A legal question to ask is what is the consideration – what does the volunteer get – in return for signing this broad agreement?  One guess is that it could mean they may get access to some type of confidential information. But that is neither promised nor even implied in the agreement.

In the business world, this would not fly.  Maybe Trump has passionate supporters who will sign anything just for the privilege of doing work for free.  But most companies will have to promise something, and limit the restrictions to those reasonably necessary to protect the business, for it to be enforceable.

Unfortunately, I think many volunteers will sign the agreement without getting any legal advice whatsoever. They support the candidate and they want to be part of the political process. Those are sincere goals. But in doing so, they also are making a lifetime promise that could someday prove to be problematic.

 

 

 

 

 

 

Posted in CEOs, Confidential Information, Covenants Not to Compete, Executive contracts, Litigation, Non-Competes, Trade Secrets | Tagged , , | 1 Comment

Noteworthy Outcome in Early Test of Federal Trade Secrets Act

court ruling 2There’s a bigger story behind a Florida judge’s recent ruling in one of the first lawsuits brought under the new Defend Trade Secrets Act (DTSA).

U.S. District Judge Cecilia M. Altonaga dismissed, at least temporarily, a lawsuit filed by an engineering and telecom services provider working as a subcontractor on the renovation of the city of Miami Beach’s convention center.

M.C. Dean Inc. filed a claim under the DTSA in May, just days after it was enacted. The company sought injunctive relief to recover employee payroll data it claimed was wrongly obtained by an electricians union from the city.

Judge Altonaga ruled that while M.C. Dean raised plausible allegations that the data had value that was worth keeping confidential, it failed to show it took reasonable actions to protect its payroll information.

“M.C. Dean fails to allege it took reasonable steps to protect the secrecy of the information at issue, thus failing to satisfy the definition of trade secret as to both counts,” the judge said.

However, Judge Altonaga refused the city and union’s request to have the case dismissed with prejudice. She gave M.C. Dean some time to refile an amended complaint that shows it took reasonable actions to protect its confidential information. Stay tuned.

The bigger issue, I believe, is the fact that the case was dismissed so early. That probably would not have happened in state court.

The DTSA, overwhelmingly passed by Congress in April, allows trade theft claims to be filed in federal court. Previously, these actions could only be pursued in state courts.

As I wrote earlier, I’m not sold on the need for the DTSA – and the Florida ruling only confirms my skepticism.

I represent executives in a variety of matters, including trade secrets. I know from experience that in state courts, these types of lawsuits are rarely punted at the start.

But the federal judge in the Florida case was able to apply a higher standard – Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) – in deciding the motion to dismiss.

“Although this pleading standard does not require detailed factual allegations … it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation,” she wrote.

It’s important to remember that trade theft lawsuits often are filed quickly. A company suddenly realizes that confidential information may have been stolen. It rushes for a remedy – an injunction to secure the information as it builds its case. State courts understand this.

So if a federal court is going to hold your claim to a higher standard, is it the proper venue to use?

I don’t know the merits of the Florida lawsuit – but I do know that valuable time has been lost in pursuing the claim, not to mention the ego-deflating effect of losing right out of the starting gate.

You need to give careful consideration to filing a trade secret theft claim in federal court. Is it the best legal avenue to pursue? I’m not so sure.

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Massage Envy No More

massageTexasBarToday_TopTen_Badge_VectorGraphicHouston Chronicle business columnist Chris Tomlinson recently interviewed me about how a woman’s search for a better job landed her in serious legal trouble.

The unfortunate story involves Maxie Foster, who worked for years as a receptionist to pay her way through beauty school to earn an esthetician license. She got a job at a Massage Envy franchise and worked there for 2½ years. Her legal problems began after she got another job at a similar business that paid her better money, which she needed to support her daughter.

FBE Ventures, which owns the Massage Envy franchises in Conroe and Tomball where Ms. Foster worked, filed a lawsuit against her and the new employer, which fired her just before Christmas to settle their part of the legal battle. Ms. Foster, now 27, is still fighting the $100,000 lawsuit and she’s prohibited from working in her field at any business located within 40 miles of her home, which is now a trailer on her parents’ property in Magnolia, a town north of Houston.

As Mr. Tomlinson wrote, Ms. Foster is one of millions of Americans who signed employment contracts that came with non-compete agreements they probably didn’t completely understand.

I represent high-level executives and non-compete agreements are a major focus of my work. I realize they can be an important tool for a company. They help protect a business’ trade secrets and can motivate an employer to invest in specialized training and provide stock options or equity in the company because it makes employees less likely to leave.

But non-competes used to apply primarily to well-compensated employees who had access to confidential information or received highly specialized training or equity in the employer. I’m talking about a company’s top executives and lead researchers. And although I understand their value, I often seek more flexible terms for my executive-clients.

I’m concerned about the expanded use of non-competes. What was once a tool essentially reserved for the executive suite has become a standard practice for the rank-and-file.

Ms. Foster says the company suing her didn’t pay for her training or her license. She says she didn’t have access to company trade secrets or equity and didn’t take any previous clients to her new employer.

“You’d think I’d murdered somebody. They came in with two corporate attorneys and tore me apart,” Ms. Foster told the Chronicle.

Ms. Foster’s lawyer, if she could afford one, likely could make a strong argument against the validity of the non-compete.

I’m not the only one concerned about the increasing use of non-competes. Earlier this year, I wrote about how the White House issued a 16-page report detailing how non-competes are becoming more commonplace among lower-wage employees.

I will say it again and again – please be aware of the real ramifications of signing a non-compete. Please consult an attorney if at all possible before signing any such agreement.

 

Posted in Confidential Information, Corporate culture, Covenants Not to Compete, Executive Compensation, Executive contracts, Litigation, Non-Competes, Trade Secrets | Tagged , , , , , , | Comments Off on Massage Envy No More

Who Says There’s No Crying in Baseball?

baseball-1091210_960_720TexasBarToday_TopTen_Badge_VectorGraphicTo those who shrug off cybertheft as a victimless crime that shouldn’t involve any real punishment, there’s a federal judge in Houston who just officially delivered a very different message on the subject.

U.S. District Judge Lynn Hughes sentenced former St. Louis Cardinals executive Christopher Correa to 46 months in prison for illegal intrusions into the Houston Astros computer database. Correa also was fined $279,000.

Correa, who was the Cardinals’ director of baseball development, admitted in January that he had accessed the Astros’ database in 2013 and 2014. He said then he suspected the Astros of having information proprietary to the Cardinals because former Cardinals employees had gone to work for the Houston team. The Astros have denied the claim and Correa made no mention of it at his sentencing.

It turns out, Correa hacked into the database in part by guessing at logon information, which was similar to what was used by one of the former Cardinals executives. Correa gained access to a database that contained scouting reports, amateur player evaluations, notes on trade discussions and proposed bonuses for draft picks. The U.S. Attorney’s office put the estimated value of the cybertheft at $1.7 million.

Judge Hughes’ indignation at Correa’s actions was evident at his sentencing. As Correa read a letter of apology to the court, the judge interjected some of his words to characterize Correa’s actions: “intentionally, over a long period time, stupidly.”

The key takeaway from this case is that digital theft of trade secrets is a serious matter that can have serious ramifications, including jail time. There seems to be a prevailing attitude, particularly among some younger people, that digital theft of trade secrets really isn’t that big a deal, certainly not something that merits incarceration.

While I do believe the punishment in this high-profile case was pretty stiff, I don’t see this as the only time this could happen. The threat is real. It’s important to understand that there are laws against digital theft of information and procedures in place that can result in severe, life-changing punishments. In fact, the potential for getting into legal trouble has expanded with the recent passage of the Defend Trade Secrets Act (DTSA), which I wrote about earlier this year.

The fallout from this cyber-crime may not be over. Next up to bat? Major League Baseball Commissioner Rob Manfred will decide if the Cardinals face sanctions because of Correa’s actions.

Posted in Confidential Information, Corporate culture, Criminal Prosecutions, Defend Trade Secrets Act, Trade Secrets | Tagged , , , | 1 Comment

Considering a New Job? Please Talk to Your Lawyer

dream jobZillow recently reached a whopping $130 million settlement with Realtor.com operator Move Inc. shortly before the two online real estate giants went to trial over alleged misappropriation of trade secrets. While the settlement amount is a far cry from the estimated $1 billion in potential damages that was at stake in the contentious legal battle, it still is an extraordinary amount of money.

And to think it all started with a job change. Ok, so it wasn’t your run-of-the-mill job switch – it involved two high-level Move executives who took important roles at Zillow.

The legal battle began in March 2014 shortly after Erroll Samuelson resigned from his job as Move’s chief strategy officer and joined Zillow as its second-highest paid executive – on the same day. The second executive was sued later in the year.

In today’s world, leaving a high-level executive position one day and taking a similar job in the same industry the next is a high-risk move. At the very least, this kind of action is going to prompt a meeting between your former employer and its lawyers. Even worse, a lawsuit may be in your future, whether a non-compete clause was involved or not.

Move claimed Zillow engaged in a “very regrettable act of executive poaching.”

These days, there are just too many ways for an executive to get tripped up legally when he/she decides to leave a company. I advise my executive clients to consult an attorney BEFORE they take a new job, even if they aren’t bound by a non-compete agreement.

The key legal points to remember in these cases are: geography, scope of industry and length of time. Is your potential new employer located in the same area? Is in the same field of work? Are you going to join the company immediately, or will you sit out for six months or so?

If you are an executive thinking about leaving your current job, you should first discuss these issues with your attorney before you make any kind of decision that could be harmful to you and your potential new employer. Your attorney can advise you on the risks of accepting a new job as well as explain how to properly exit a position in terms of what information you can take with you and other legal matters.

An executive has the right to seek new employment opportunities. Just do so wisely, with no regrets and with the benefit of legal counsel.

 

 

Posted in Business Continuity, CEOs, Complaints Against Executives, Confidential Information, Corporate culture, Covenants Not to Compete, Executive Compensation, Executive contracts, Executive Management Style, Fiduciary Duty, Legal, Litigation, Non-Competes, Trade Secrets, Uncategorized | Comments Off on Considering a New Job? Please Talk to Your Lawyer