The early registration deadline for Law & Society is nearly upon us.  For corporate and securities, this year is being organized by Wendy Gerwick Couture at Idaho Law.  The current set of panels looks fascinating. We’ll also have an Author-Meets-Reader Session featuring The Rise of the Working Class Shareholder: Labor’s Last Best
Weapon by David Webber.  It’s in Washington, D.C. this year. 

 

    Hope everyone had some great holidays.  A couple of weeks ago I posted on the relationship between fiduciary duty and trade secret law.  https://www.businesslawprofessors.com/business_law/2018/12/the-relationship-between-fiduciary-duty-and-trade-secret-law-ive-got-some-questions-/.  I ran across a recent Fifth Circuit case (applying Louisiana law) that comes out the way I had hoped (at least in part), but that drops a footnote indicating that this resolution is far from uniform among the states.  In relevant part, the court noted the following:

LUTSA’s [Louisiana’s Uniform Trade Secret Act] preemption provision states:

  1. This Chapter displaces conflicting tort, restitutionary, and other laws of this state pertaining to civil liability for misappropriation of a trade secret.
  2. This Chapter does not affect:

(1) contractual or other civil liability or relief that is not based upon misappropriation of a trade secret, or

(2) criminal liability for misappropriation of a trade secret.

LA. STAT. ANN. § 51:1437. Official commentary to the statute explains that LUTSA “applies to duties imposed by law in order to protect competitively significant secret information.” Id. cmt. (1981) (Louisiana Official Revision Comments). But it does not apply to contractual duties or to “duties imposed by law that are not dependent upon the existence of competitively significant secret information, such as an agent’s duty of loyalty.” Id. 

A claim for conversion of trade secrets plainly seeks protection of competitively significant information. Thus, we conclude that the plain text of LUTSA would preclude a civilian law conversion claim involving confidential information that qualifies as a trade secret under LUTSA.

We also conclude that if confidential information that is not a trade secret is nonetheless stolen and used to the unjust benefit of the thief or detriment of the victim, then a cause of action remains under Louisiana law. LUTSA’s uniformity provision instructs that LUTSA “shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this Chapter among states enacting it.” LA. STAT. ANN. § 51:1438. But courts interpreting their respective states’ versions of the Uniform Trade Secret Act (“UTSA”) have not uniformly applied UTSA’s preemption provision; instead, courts have come to varying conclusions about the preemption provision’s intended scope.4 Thus, because there is not enough uniformity among states to predict how the Louisiana Supreme Court would decide the issue, we look to intermediate state court decisions. See In re Katrina, 495 F.3d at 206.

The Louisiana appellate courts have twice held that LUTSA does not preempt where non-trade secret information was at issue.5 See B&G Crane Serv., L.L.C. v. Duvic, 935 So.2d 164, 166–67 (La. Ct. App. 2006); Defcon, Inc. v. Webb, 687 So.2d 639, 642–43 (La. Ct. App. 1997) (holding that LUTSA does not preempt breach of fiduciary duty claims for misappropriation of confidential information, as the statutory comments “make it clear that the Act … does not apply to duties … that are not dependant [sic] upon the existence of a trade secret”). These cases appear consistent with the plain text and stated purpose of LUTSA’s preemption provision: to preempt tort claims “pertaining to civil liability for misappropriation of a trade secret,” LA. STAT. ANN. § 51:1437, which the official commentary explains limits LUTSA’s preemption to other laws that “protect competitively significant secret information,” id. cmt. (1981) (Louisiana Official Revision Comments). Because Defcon and B&G Crane support the plain-text reading of LUTSA’s preemption provision, we conclude that LUTSA does not preempt civilian law claims for conversion of information that does not constitute a trade secret under LUTSA. Thus, we REVERSE the district court’s judgment on Brand Services’s civilian law claim for conversion of confidential information outside the definition of a trade secret without reaching the merits of that claim.

FN 4:  See Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 733 (7th Cir. 2014) (concluding that Illinois’s UTSA preempts claims “that are essentially claims of trade secret misappropriation, even when the alleged ‘trade secret’ does not fall within the Act’s definition”); Unique Paving Materials Corp. v. Fargnoli, 361 F. App’x 689, 690 (6th Cir. 2010) (affirming without analysis the district court’s conclusion that Ohio’s UTSA preempted claims for “conversion, misappropriation of trade secrets, tortious interference, and unfair competition”); C&F Packing Co. v. IBP, Inc., 224 F.3d 1296, 1307–08 (Fed. Cir. 2000) (holding that Kansas’s UTSA preempted a fraud claim where it was “indistinguishable from [the plaintiff’s] trade secret misappropriation” claim); Omnitech Int’l, Inc. v. Clorox Co., 11 F.3d 1316, 1330 (5th Cir. 1994)(concluding that LUTSA preempted a fiduciary duty claim “grounded in … trade secret allegations”); Integrated Direct Mktg., LLC v. May, 2016 Ark. 281, 495 S.W.3d 73, 76 (2016) (concluding that “intangible property, such as electronic data, standing alone and not deemed a trade secret, can be converted”); Am. Biomedical Grp., Inc. v. Techtrol, Inc., 374 P.3d 820, 827 (Okla. 2016) (holding that Oklahoma’s UTSA preempts “conflicting tort claims only for misappropriation of a trade secret” and “does not displace tort claims for information not meeting this definition” (internal quotation marks and citation omitted) ); Orca Commc’ns Unlimited, LLC v. Noder, 236 Ariz. 180, 337 P.3d 545, 547 (2014) (concluding that the state’s UTSA “leaves undisturbed claims that are not based on misappropriation of a trade secret,” including claims for misuse of confidential information (internal quotation marks omitted) ); Robbins v. Supermarket Equip. Sales, LLC, 290 Ga. 462, 722 S.E.2d 55, 58 (2012) (concluding that Georgia’s UTSA did not except from its scope claims for “the misappropriation of proprietary or confidential information”); BlueEarth Biofuels, LLC v. Hawaiian Elec. Co., 235 P.3d 310, 323 (Haw. 2010) (concluding that Hawaii’s UTSA preempts common law claims for misappropriation of trade secrets and other confidential information); Burbank Grease Servs., LLC v. Sokolowski, 294 Wis.2d 274, 717 N.W.2d 781, 793–94 (2006) (holding that Wisconsin’s UTSA “leave[s] available all other types of civil actions that do not depend on information that meets the statutory definition of a ‘trade secret’ ”); Savor, Inc. v. FMR Corp., 812 A.2d 894, 898 (Del. 2002) (concluding that Delaware’s UTSA preempted common law unfair competition and conspiracy claims where they were based on the same alleged wrongful conduct as the trade secret claims); Mortg. Specialists, Inc. v. Davey, 153 N.H. 764, 904 A.2d 652, 664 (2006) (“[T]he [New Hampshire UTSA] preempts claims that are based upon the unauthorized use of information, regardless of whether that information meets the statutory definition of a trade secret.”); Frantz v. Johnson, 116 Nev. 455, 999 P.2d 351, 357–58, 357 n.3 (2000) (concluding that Nevada’s UTSA preempted various common law tort claims that “arose from a single factual episode, namely misappropriation of bidding and pricing information”); Weins v. Sporleder, 605 N.W.2d 488, 491 (S.D. 2000)&#016
0;(concluding that South Dakota’s UTSA “prevents a plaintiff from merely restating their trade secret claims as separate tort claims”); Fred’s Stores of Miss., Inc. v. M & H Drugs, Inc., 725 So.2d 902, 908 (Miss. 1998) (concluding that the state’s UTSA only preempts claims that would fall with a failed UTSA claim).

FN 5:  Both of these cases concern breach of fiduciary duty claims, an area specifically excepted from LUTSA’s preemption provision. We see no reason, however, that Louisiana courts would think differently about a conversion claim.

Brand Services, L.L.C. v. Irex Corp., No. 17-30660, 2018 WL 6073675 (5th Cir. Nov. 21, 2018). 

    Given the UTSA comment that preemption does not apply to “duties imposed by law that are not dependent upon the existence of competitively significant secret information, such as an agent’s duty of loyalty,” I still wonder how some courts (see, e.g., Omnitech in footnote 4 above) conclude that breach of fiduciary duty claims — even ones that do involve misappropriation of trade secrets — are preempted?  Hmmm . . . .

To start the New Year, I found a few thoughtful quotes to help me get in a good state of mind. I thought I’d share. Wishing you health, love, and success for 2019. 

“A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.” – Henry Ford

“It is difficult, but not impossible, to conduct strictly honest business.” – Mahatma Gandhi

“Don’t bargain yourself down before you get to the table.” – Carol Frohlinger

“Goals are dreams with deadlines.” – Diana Scharf Hunt

“Our goals can only be reached through a vehicle of a plan, in which we must vigorously act. There is no other route to success.” – Stephen A. Brennan

I am finishing up the last of my grading (grades are due on Wednesday).  Nevertheless (or maybe for the purpose of grading avoidance), I have been determined all day to take a pause to reflect on 2018 and look forward to 2019.  For me (and perhaps for us all), 2018 was a year with both joys and sorrows; achievements and failures; ups and downs.  I admit that 2018’s sorrows were more abundant than usual–or than I would have liked.  And so, I am primed to kick 2018 to the curb.  Ready or not, 2019 will be here in a few short hours.  I have much to look forward to in the coming year–a research leave, my son’s wedding, and lots more that I know I am forgetting or do not even know about yet!

Among my more serious reflections and (dare I say it) resolutions heading into 2019 is self-care.  I am particularly mindful of the need for lawyers and lawyers-in-waiting (our students) to be aware of an attendant to their mental health.  A few days ago, The American Lawyer published an article entitled After a Year Marked by Tragedy, Attorney Mental Health Takes the Spotlight.  The article highlights industry-wide and organizational efforts to boost mental health awareness and support.  It also notes that “[l]aw school curricula and continuing legal education classes have already begun to take mental health into account . . . .  [P]eople throughout the industry are searching for concrete ways to address structural issues.”  This article followed on many others this past year, including those here and here and here.

I applaud these institutional initiatives and publications.  We need more press about lawyer mental health.  And we must invest in and acquire the comprehensive tools that continuing education and workplace programs can provide.  I, for one, desire to know a lot more than I do about both lawyer mental health and lawyer substance abuse.  If you are knowledgeable in either area, please send links to resources along by email or post suggestions in the comments.

In my heart, however, I know that broad-based awareness and guidance on lawyer mental health, while necessary, is insufficient to the task.  I have come to the view that it would be meaningful if each of us could step back from the madness of life more than once in a while to assess not only our own well-being, but also the well-being of those around us.  An increased knowledge base is important to the task, but a heightened level of personal commitment also is required.  I will be working toward that commitment in 2019 and hope that some of you will join me.

Happy new year to all!  May you have a joyous and healthy 2019.

Chief Justice Leo Strine of the Delaware Supreme Court just posted a fascinating article/speech to SSRN, which was apparently delivered to the Institute for Corporate Governance & Finance in November.

The subject of the speech is the fiduciary obligation that mutual funds owe fund beneficiaries when voting their shares, and in particular, the funds’ failure – in Strine’s view – to adequately police portfolio companies’ political spending.

The general thesis is that investors in mutual funds benefit most when the economy does well by generating long-term, sustainable jobs, and he lauds the current trend of mutual funds’ willingness to second-guess corporate managers and vote for measures that promote long-term sustainability, including their increasing willingness to back shareholder-sponsored proposals on ESG measures.  As he puts it:

[I]nstitutional investors are not just getting involved in boardroom battles.  … [S]ome prominent mutual funds have now expressed the view that their portfolio companies should act with sufficient regard for the law and general social responsibility. That is, in the area of corporate social responsibility, the largest institutional investors seem to be evolving in a positive direction.

He laments, however, that funds’ willingness to buck management appears to stop when it comes to political spending:

In the key area of corporate political spending, the Big 4 have opted for a policy of total deference to management….  [T]he Big 4 generally will not even vote to require corporations to disclose what they spend on politics, leaving the Big 4 and others largely blind to what is going on… [T]o be fair, State Street has done far better, supporting a majority of these proposals over the years….

In his view, political spending indicates that the corporation is seeking to profit by short-term regulatory arbitrage rather than by long-term investment in better products and services that will pay off more over time:

If a business has to try to make money by influencing the political process, that suggests that its prospects for growth by developing improved products and services are not strong. Instead, the business apparently has to seek special favors to gain access to subsidies or government  contracts, not on the basis of the merits alone, but by currying favor…

He calls upon mutual funds to vote in favor of transparency regarding political spending, and even in favor of supermajority shareholder approval of political spending. 

So, this intrigues me for several reasons.

First, there is currently a fierce political battle being waged over the value of ESG proposals and whether mutual funds should vote in favor of them.  As I previously mentioned, this was a topic of discussion during the SEC’s recent proxy roundtable, and Phil Gramm in particular spoke emphatically against such proposals.  (He has also written, with Mike Solon, an op-ed against them).  Main Street Investors is, despite the name, a corporate group that has also been lobbying against such proposals and against mutual funds’ increasing tendency to support them.  Thus, it is surprising to see the Chief Justice stake out such a firm position in favor of ESG proposals.

But that’s not all.

The usual argument in favor of these proposals is that they are in fact long-term wealth maximizing, as Strine acknowledges.  But he also goes further and suggests that mutual funds should favor these proposals – and restrictions on political spending – even if they are not wealth maximizing in the corporate sense, out of respect for fund beneficiaries’ presumed shared interest in the safety of their jobs and the health of the environment.  As he puts it:

Worker Investors derive most of their income and most of their ability to accumulate wealth, from their status as laborers, not as capitalists. ….Unless American public companies generate well-paying jobs for Worker Investors to hold, Worker Investors will not prosper and be economically secure….

[F]or diversified investors any increased profitability by particular corporations that results from externalities is suffered by them both as Worker Investors and as human citizens who pay taxes, breathe air, and have values not synonymous with lucre.

The colder economic term externalities can be put in the more human terms of dirtier water and air, workers who suffer death or harm at an unsafe workplace, employees whose health care needs to be covered by the government or a spouse’s more responsible employer, or defrauded or injured consumers. All of them are costs that Worker Investors bear as taxpayers, human victims, and as diversified investors.  In other words, Worker Investors are not in on the swindle that results when an industry, think big tobacco, is able to make profits by shifting its costs of harm to others….

This is an extraordinary claim.  He is placing workers’ shared desire for certain basic living standards on par with the hypothetical shared desire of all investors to maximize returns, and claiming that mutual funds have a duty to advance those interests.

Now, he’s not the first to make this argument (Other examples here and here).  But I didn’t expect to hear it from Strine, and I have so many questions.

First, there is the issue of the factual basis for the argument.  Some of those workers presumably are employed with big tobacco, or big oil, or coal, or any of the other industries where the desire for good jobs (or even the desire for affordable transportation) and environmental sustainability conflict.  Shall we gloss over these distinctions (in the same way we do regarding the somewhat fictionalized concept of wealth maximization)?

Second, assuming he is correct, why is this a duty imposed on mutual funds and not the corporations directly?  Strine has been a vocal champion of directors’ duties of wealth maximization; is he saying that mutual funds should be voting for policies that directors’ own duties prohibit them from advancing?  I mean, obviously, the business judgment rule would prevent any kind of judicial second-guessing one way or another, but if we can talk theoretically about what mutual funds’ fiduciary duties require we can do the same for corporate directors.

Now, Strine (with co-author Nicholas Walter) has written before that if corporate political spending cannot constitutionally be constrained by regulation after Citizens United, then that suggests the shareholder wealth maximization norm must give way to a stakeholder theory of corporate obligation. (An argument that has also been made by others, including David Yosifon).  Previously, though, I took him to mean that Citizens United should be overruled; should we now take him to be inching toward a reformed view of corporate law? 

I obviously do not know whether anything more will come of this, but I look forward to future developments.

We now have some new developments on the non-attorney representative front.  After taking time to consider responses to its prior request for comments, FINRA’s board has approved a new rule proposal to prohibit “compensated non-attorney representatives from practicing in the FINRA arbitration and mediation forum.”  Once filed with the SEC, the proposed rule should be available here.

 

Merry Christmas to you and yours, if you’re celebrating. And if you’re not, love to you, anyway. 

A few reminders on Christmas:  LLCs are corporations. And the business judgment rule gives directors a lot of latitude. Or at least it should. Even if Delaware courts say dumb stuff from time to time. 

Love to all.