Due Diligence Investigations

“Due Diligence” is a Term That Says Nothing and Means Everything.

I’m sure you’ve seen the ads: Due diligence reports for $100 – $300 per subject. The question is whether the diligence being advertised is sufficient – is it what is “due” for your unique circumstances?  Determining what diligence is “due” is the challenge, not the answer.  Risks vary by client and by the situation.

An example:

Our client is an established privately eld company considering an offer from a would-be acquirer that is a pink sheet company seeking to ultimately trade on the NASDAQ.

The risk in this case is the track record of the pink sheet executives and their funding sources. Is it a pump and dump scheme? Do they have experience and resources to build a company? Does our client intend to accept cash or stock? Does our client plan to participate as board members or executives in the acquiring entity. Are the pink sheet executives associated with known criminals or known fraudsters?

Having identified these and other risks, we then target these issues by gathering information to test them and by following the leads based on experience.

How Do We Know What Diligence is Due?

We ask our clients questions, and we rely on our experience.  We then design our investigative and research efforts to target the potential risks.

But custom structuring the effort is not enough. 

Real due diligence investigations require judgment and experience.  Identifying relevant public records is just the starting point. We then use our business acumen and experience to understand them and to develop leads.  We understand SEC documents, litigations, plea agreements and regulatory rulings, and most of all, we can identify, and unravel complicated transactions to expose the people behind them.

Automated due diligence and amateur hour, cookie-cutter due diligence just isn’t the diligence that is due to avoid risks in every situation. When facing real risks in the real world, contact Levetown Law, LLP.  Levetown Law, LLP has thirty years of experience helping clients to avoid risk by doing the diligence that is actually due.

Cross Examination

How to Excel at Cross-Examination

Over the years, I have been told that I have an excellent cross.  I take this to mean that my cross-examinations have been more effective than most.  At the risk of giving away too many “secrets”, I decided to describe how I prepare for cross-examining a witness. 

Preparing for Cross-Examining a Witness

The purpose of cross-examination is to cast doubt on a witness’ testimony. 

With that in mind, I start by understanding the case in its entirety and then determining why the witness was called by opposing counsel – In other words, I figure out what facts were presented by this witness that hurt my client’s case.

Preparation is 95% of a Good Cross-Examination

I do research into the witness to determine why the witness made an incorrect statement.  I ask myself the following:

  • Is he/she biased, and if so, why?
  • Is the witness afraid to testify truthfully because of a threat, such as losing a job or even because of a physical threat?
  • Is the witness mistaken?
  • Is the witness hiding his/her own wrongdoing?
  • Should the witness know better based on his/her background?
  • Is the witness untrained or ignorant about the substance of his/her testimony?
  • Was the witness otherwise physically or mentally compromised on the day of the events he or she is testifying about? 

Generally Speaking

While I prepare questions based on the facts I discovered about the witness, and I then ask leading questions often to tell my client’s story, I also listen to the witness’ answers as well.  At times, a witness will not disagree with my questions and because I want to know more and because I do not want to look unfair, I ask them an open ended question even though doing so is risky.  Doing this is an in-the-moment judgment call. It requires experience and intuition, but it can also make the case.  

In other cases, the witness may be telling the truth and he or she may seem credible and likeable to the jury.  For these witnesses, I use their testimony to confirm the facts of my client’s case. I ask leading questions for the most part, but I set up the closing argument by getting quotes from these witnesses – “And how do you know my client is telling the truth?  Well, even Ms. X says ….”.

I always keep in mind how the witness presents and whether he or she is likable and credible, and I tailor my questions and my demeanor based on my view of how well the witness’ direct testimony was received.  Whether or not I think the witness is likable, I do not bully witnesses. I am polite and accommodating, but I ask the tough questions that need to be asked so that juries can adequately assess each witness’s testimony.   

Trade Secret Theft Litigation

You Think a High-Level Employee Just Took Your Trade Secrets and Joined a Competitor. Now What?

You call your attorney, and she tells you to begin gathering data so she can file a trade secret theft lawsuit and assorted state-based common law claims in federal court where there are some procedural advantages. 

Sounds good to you, but is this good advice?  The answer may depend on the facts and quirky differences between your state’s Uniform Trade Secrets Act (UTSA) and the federal Defend Trade Secrets Act (DTSA). While there are substantial similarities between these statutes, there are differences that can make or break your case at the pleading stage.

Both Statutes Require Pleading Specific Facts

You may think that the information taken by your former employee are your “trade secrets”, but the two leading Supreme Court cases, Twombly and Iqbal, require more than a hunch.  These cases stand for the proposition that you cannot simply assert that someone stole your trade secrets; you must provide specific facts to support your claim, or your case will be dismissed. You need to identify each trade secret, and you must provide some facts to support each of the material elements of your claim at the pleading stage. In other words, the days of simply alleging that the defendant stole your trade secrets are long gone. 

            To avoid dismissal at the pleadings stage, you must present facts showing the following regardless of which statute you chose:  

  • The identified business information is secret and not widely or publicly known.
  • The information has value because it is secret.
  • The information has been reasonably protected as a secret.

Although there are legions of cases that stand for this proposition, here are two where the holdings may surprise you: Becton, Dickinson & Co. v. Cytek Biosciences Inc., 2018 U.S. Dist. LEXIS 85121 at *7 (N.D. CA 2018) (allegations that defendants downloaded “design review templates”, “fluidics design files” and “source code files” were too broadly stated to identify the trade secrets on which Becton’s claims were based); Space Data Corp., 2017 U.S. Dist. LEXIS 22571 (N.D. CA 2017) at *4 -*5 (“high-level overview” of plaintiff’s trade secrets, such as “data on the propagation of radio signals from stratospheric balloon-based transceivers” failed to satisfy requirements of Rule 8 because the plaintiff must “describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.”). 

Choosing Between the federal DTSA and the state UTSA May Make or Break Your Case at the Outset.

Proof of Ownership is a Standing Requirement under the federal DTSA.

            Unlike the state UTSA statutes, the federal DTSA, requires you to prove you own the trade secrets at issue.  It is not only required, but it is a standing requirement under the DTSA. Therefore, if you have licensed the trade secret or it belongs to your corporate parent, you do not have standing to bring suit under the DTSA.  See 18 U.S.C.A. § 1836(b)(1)(2012)(“An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”).

You Need Some Proof of Damages to Support Most States’ UTSA Claims.

            In other situations, filing in federal court may be the only option. For example, you may not be able to show that the theft caused monetary damages when you draft your complaint. Unlike the federal statute, some proof of actual and defined damages is an essential element under most state UTSA statutes and a showing based on some factual predicate must be pled to avoid a motion to dismiss. While plaintiffs need not actually prove that its damages were caused by Defendant’s misappropriation at the pleading stage, the complaint must allege them with enough specificity and with enough support for the court to find that if the allegations and evidence is taken as true, it would be able to show damages. See e.g. Wash. Consulting Group v. Raytheon, 2013 D.C. Super LEXIS 4 at *107-*109 (“[Plaintiff] must demonstrate the element of proximate causation with respect to its misappropriation claim, as in any [other] tort action.”) quoting Dalo v. Kivitz, 596 A. 2d 35, 41 (D.C. 1991) and citing Catalyst & Chem. Servs. V. Global Ground Support, 350 F. Supp. 2d 1, 7-8 (D.D.C. 2004).

Your Related State Common Law Claims Are Likely Preempted by the UTSA and May be a Waste of Time and Money to Pursue.

            The vast majority of jurisdictions have held that their state legislatures intended their trade secret laws to preempt common law claims like breach of fiduciary duties, conversion and others if the claims involve the theft of business information. The rationale is that the state’s legislature has decided that if the claim involves the theft of business information, common law claims that require less proof are not cognizable because they do not meet the requirements for pleading a trade secret theft.  Most courts have held that permitting such claims would undermine the statutory intent and lead to variations between the states’ laws by allowing claims that do not require pleading the material elements of a trade secret claim. 

            While the extent of the preemption and the analysis used differs by state and sometimes by the courts, if you bring these claims, you will spend time and money litigating these preemption issues without getting greater damages or relief.  Therefore, be wary. If you really need to bring these common law claims for thefts of business information because you fear that you do not have “trade secrets” as defined by the Acts, you can still file common law claims that do not involve the theft of business information in state court, but if you think you may be able to make out a case of trade secret theft, but are uncertain, bring these claims in federal court under the DTSA instead or bring them without the trade secret claims in state court. 

            As a side note, we litigated a trade secret case in federal court recently where we got the case dismissed on the pleadings. The magistrate judge did so grudgingly after we filed a Writ of Mandamus against her for failing to dismiss the case for lack of jurisdiction, and although she ultimately dismissed the case, she recommended that the Plaintiff bring its state common law claims in state court.  To the extent that the claims were predicated on thefts of business information, filing in state court would not have avoided preemption.

Restrictive Covenant and Trade Secret Theft Cases:  The Basics

What are the restrictive covenants at issue?

Are they enforceable?

  • Reasonable time, geographic scope, scope?
  • Strictly Construed (most states)
  • Supported by separate Consideration?

How are they enforced?

  • Preliminary Injunction
  • Permanent Injunction
  • Damages

Counterclaims

  • Libel and Slander (in some cases)
  • Unfair Competition
  • Rule 11 (in some cases)

Trade Secret Theft Cases

  • State and federal laws are substantially similar except:
  • DTSA: ex parte hearing; proof of ownership of trade secret required.
  • UTSA: notice required; proof of damages is required in DC and other jurisdictions.

Claims Must be Pled with Specificity:

  • Claims must be facially plausible.
  • Claims cannot be conclusory but must be specific.
  • Must identify trade secrets at issue as defined by the law defining trade secrets.
  • Must provide evidence showing the information at issue meets the legal requirement for each of the multi-element definition of a “trade secret.”
    • Is the information a secret?
    • Has it been reasonably protected?
    • Does it have economic value because it is a secret?
    • Is it publicly known?  Is it general knowledge to those skilled in the trade?

Defenses

  • Plaintiff has no exclusive right to the info (state claims) or doesn’t own the info (federal claims)
  • It is publicly available information?
  • It was not reasonably protected as passwords not changed; available on shared drives; not restricted; no locks in some cases.
  • Keeping it secret doesn’t create or enhance its value.

Counterclaims

• Unfair Competition, Libel, and Slander (in some cases), Rule 11 (improper investigation, allegations)

Preemption of Other State Law Claims

State law trade secret claims may preempt state common law and statutory causes of action like breach of fiduciary duty, unjust enrichment, tortious interference, unfair competition, and theft of proprietary information claims if they involve similar acts with respect to the trade secrets or if they are just another cause of action involving the misappropriation of the trade secrets unless they are contractual or criminal in nature.