What’s Happening in Technology, Intellectual Property & Contracts – January 2019



This month:

  • Token Taxonomy Act
  • AirFacts, Inc. v. Diego de Amezaga
  • Dittman, et al. v. University of Pittsburgh Medical Center



Technology News

Token Taxonomy Act, H.R. 7356.

On December 20, 2018, Representatives Warren Davidson and Darren Soto of Ohio and Florida, respectively, introduced a bill H.R. 7356, entitled the “Token Taxonomy Act.” For those following the legal issues related to digital assets and tokens, this bill attempts to adequately distinguish digital assets commonly called “security tokens” from non-security tokens as well as provide a safe harbor for digital asset holders if the SEC determines that their tokens qualify as securities.

The bill defines a digital token as follows:

(20) DIGITAL TOKEN.—The term ‘digital token’ means a digital unit that—

(A) is created—

(i) in response to the verification or collection of proposed transactions;

(ii) pursuant to rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control; or

(iii) as an initial allocation of digital units that will otherwise be created in accordance with clause (i) or (ii);

(B) has a transaction history that—

(i) is recorded in a distributed, digital ledger or digital data structure in which consensus is achieved through a mathematically verifiable process; and

(ii) after consensus is reached, cannot be materially altered by a single person or group of persons under common control;

(C) is capable of being traded or transferred between persons without an intermediate custodian; and

(D) is not a representation of a financial interest in a company, including an ownership or debt interest or revenue share.

A digital unit is defined as follows:

(21) DIGITAL UNIT.—The term ‘digital unit’ means a representation of economic, proprietary, or access rights that is stored in a computer-readable format.

The proposed bill recommends gross income exemptions with regard to virtual currency transactions if the exchange is an exchange of virtual currency for something other than cash or cash equivalents so long as the exchange is valued at less than $600.

The bill recommends amendments to the Securities Act of 1933, the Securities Exchange Act of 1934 as well as the IRS Code of 1986, among others.

Intellectual Property – Trade Secrets

AirFacts, Inc. v. Diego De Amezaga, No. 17-2092 (4th Cir. 2018)

This appeal to the Fourth Circuit from the U.S. District Court for the District of Maryland addresses both breach of contract and misappropriation of trade secret claims as they relate to a former employee. The District Court found in favor of former employee, Diego de Amezaga stating that he did not breach his employment agreement nor did he misappropriate trade secrets. The Fourth Circuit affirmed the District Court in part, vacated in part and remanded to the District Court for further proceedings.


From 2008 through 2015, de Amezaga was an employee of AirFacts which developed and licensed revenue accounting software. The software at issue in this case, TicketGuard, analyzes airline ticket fares for airlines and travel agencies to ensure accurate pricing. The automated auditing process requires an AirFacts employee to input ticket data into the software where the output is the ticket’s correct price. This information is communicated to the airline or travel agency that sold the ticket which are separately responsible for issuing any refunds.

De Amezaga was subject to an employment agreement which required him to return all AirFacts property upon departure. In addition to the property return, de Amezaga agreed to “fully disclose and deliver any [AirFacts defined] materials in his possession and, at AirFacts’ request, execute, upon his own (or his counsel’s review) review, any and all documents reasonably necessary to ensure and verify compliance with the terms of the Agreement” under paragraph 4.2. The employment agreement also had a non-compete clause which restricted de Amezaga’s employment for a year after departure. Under the non-compete, de Amezaga agreed not to perform “services for, own, work for, consult, be employed by, or become financially interested in any the [sic] employer’s customers … unless the services being performed is [sic] not in competition with, or similar to, either (i) the services or products provided by the employer during the term of the employee’s employment or (ii) anticipated services or products of the employer of which the employee has material knowledge” under the agreement’s paragraph 8.1. He tendered his resignation on February 6, 2015.

Over the course of his employment, de Amezaga and “a few” other employees were granted access to an online document storage provider in order to store and access company documents.

For four months prior to his departure, he created flowchart documents which displayed rules derived from a system called ATPCO, relevant processing information and “things from his head” for the benefit of AirFacts employees.

On his last day, February 13, 2015, de Amezaga emailed a spreadsheet which outlined a new product related to AirFacts upcoming proration software framework and related model to his personal email account.

A month after his last day, de Amezaga accessed via his former employee access account from which he downloaded two flowcharts and submitted them as part of a job application to a travel agency.

Other than these events, de Amezaga didn’t access the employer accounts or disclose the documents to anyone.

De Amezaga started working for American Airlines three months after his departure. American Airlines had a license from AirFacts for their TicketGuard software which was incorporated into their in-house auditing process. De Amezaga told American about his employment restrictions and American called the AirFacts CEO to assure them that de Amezaga’s work would not violate his employment agreement.

De Amezaga’s job at American was to manage ticket refund employees who directly pay refunds to passengers. American has its own proprietary software that it uses to analyze ticket prices. As an American employee, de Amezaga attended staff meetings and received emails from refunds and revenue related departments.

AirFacts alleged that de Amezaga breached his agreement by working for American in a way that was similar to his work at AirFacts and similar to the products on which de Amezaga was working when he left. AirFacts also alleged that de Amezaga’s receipairfact of email and his attendance at staff meetings was also a breach of his employment agreement.

AirFacts alleged in its complaint that de Amezaga breached his employment agreement under paragraphs 4.2 and 8.1 by retaining these documents and misappropriated AirFacts trade secrets by sending the flowcharts to the travel agency.

While AirFacts alleged breach of contract, misappropriation of trade secrets and conversion in its complaint, since the conversion claim was abandoned, only breach of contract and misappropriation are discussed below.

Breach of Contract

AirFacts was granted a temporary restraining order prohibiting de Amezaga from destroying AirFacts documents and requiring him to return all documents in addition to granting AirFacts permission to “forensically search his electronic devices.”

The district court held a bench trial and indicated in its opinion that since AirFacts did not mention paragraph 4.2 related to the return of documents, that AirFacts had abandoned its claim that de Amezaga breached that portion of the contract. With regard to paragraph 8.1 regarding non-competition, the court found that de Amezaga’s work was not similar to or in competition with AirFact. AirFacts appealed that decision.

The Fourth Circuit found that the district court erred in holding that AirFacts abandoned its breach of contract claim under the employment agreement paragraph 4.2, vacated that decision and remanded the issue back to the district court. With regard to AirFacts claims under paragraph 8.1, the Fourth Circuit agreed that de Amezaga’s work at American was “insufficiently similar to or in competition with AirFacts’ [software] and correctly held that Mr. De Amezaga did not breach Paragraph 8.1(d)(ii).”

Maryland Uniform Trade Secrets Act (MUTSA)

The district court found that the flowcharts, the subject of the employment agreement’s paragraph 8.1, contained public information that was widely available to AirFacts employees so they were not trade secrets under MUTSA. With regard to the potential new proration product documents, the court found that while that information qualified as trade secrets under MUTSA, de Amezaga did not misappropriate them since his authorized access to them occurred while he was an AirFacts employee.

In order to prove misappropriation under MUTSA, AirFacts would have to show “(1) that it possessed a valid trade secret, (2) that the defendant acquired its trade secret, and (3) that the defendant knew or should have known that the trade secret was acquired by improper means.” [Citation omitted.] Under MUTSA, a trade secret is “information, including a formula, pattern, compilation, program, device, method, technique, or process that: (1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Md. Code Com. Law Section11-1201(e).

The Fourth Circuit found that while the ATPCO’s data was accessible to anyone with a subscription, de Amezaga organized and compiled information based on his expertise in order to display the information in a useful format. According to the court “Mr. de Amezaga’s painstaking, expert arrangement of the ATPCO data made the Flowcharts inherently valuable separately and apart from the publicly available contents.” Moreover, the flowcharts were valuable to AirFacts because it would improve “efficiency in the performance of its contractual obligations.” In addition, AirFacts required all employees to sign confidentiality agreements and installed monitoring software on computers which indicates that AirFacts took “reasonable steps” to maintain the flowcharts’ secrecy. The court said “What matters is the efforts AirFacts took to preserve the Flowcharts’ confidential status outside of the normal scope of their restricted use within AirFacts’ business.” The Fourth Circuit, therefore found, that the district court erred in finding that the flowcharts were not trade secrets and remanded the claim to the district court.

With regard to the new proration product documents, the district court found that de Amezaga accessed those documents within the scope of his employment and emailed them to himself in order to answer AirFacts questions after he resigned, upon AirFacts’ request. The Fourth Circuit affirmed the district court’s decision that de Amezaga did not misappropriate those documents.

This interesting Fourth Circuit case provides instruction to employers and employees with regard to employment agreements and trade secrets. In this case, de Amezaga’s disclosure of his prior employer’s restrictions on his employment as well as American’s subsequent contact with his former employer was likely very influential in both courts’ analysis of the case. The other thought worthy note for employers and employees is that de Amezaga’s electronic devices were forensically searched. Because AirFacts allowed its employees to work from home, and since it did not appear that AirFacts required its employees to use company issued electronic devices, de Amezega’s personal electronic devices were searched. Employers and employees should consider carefully how much employer related information is stored and available on personal electronic devices and develop policies related to the possibility of forensic analysis on personal electronic devices .

Contracts – Economic Loss Doctrine and Employee Personal Information

Dittman v. UPMC, __ A.3d __, No. 43 WAP 2017 (Pa. 2018)

Since so much personally identifiable information is made available via internet accessible databases, often there are questions about whether employers have a duty to protect their employees’ information that have been collected pursuant to their employment. Recently, the Pennsylvania Supreme Court faced this issue and found that employers do have such a duty under common law principles.

This case was an appeal from an order by the Superior Court which affirmed a trail court decision in favor of the employer, University of Pittsburgh Medical Center (UPMC) and a putative class of individual employees and others similarly situated.


UPMC experienced a data breach which compromised 62,000 employees’ and others’ personal and financial information including names, birth dates, SSNs, tax forms and bank accounts. This data was stolen and some information used to file fraudulent tax returns. The subject employee information was required by UPMC as a condition of employment.

The employees claimed that UPMC breached its duty to use reasonable care by failing to “adopt, implement, and maintain adequate security measures” to safeguard employees’ information and “failing to adequately monitor the security of its network, allowing unauthorized access to … information, and failing to recognize in a timely manner that … information had been compromised.” They also claimed that the duty of care arose out of the relationship between the employees and UPMC since UPMC required employees to provide information as a condition of their employment. Finally, employees claimed that this breach was a direct and proximate harm to the employees and that they incurred damages as well as being exposed to increased and imminent risk of becoming victims of identity theft and fraud. UPMC objected to the claims by asserting that there was no cause of action for negligence because employees did not allege physical injury or property damage under the economic loss doctrine.

The trial court found that there was no duty of care and that the economic loss doctrine was a bar to recovery. This decision was affirmed by the Superior Court, however, Judge Musmanno wrote in a dissenting opinion that the “ubiquitous nature of electronic data storage, the risk to UPMC’s employees posed by the failure to reasonably protect such information, and the foreseeability of a computer breach and subsequently identity theft” outweighed the majority’s conclusion that the “social utility” of electronically storing employee information outweighed the risk and foreseeability of harm.

On appeal, the Pennsylvania Supreme Court addressed two issues:

  1. Whether the employer has a “legal duty to use reasonable care to safeguard sensitive personal information of its employees when the employer chooses to store such information on an internet accessible computer system” and
  2. Whether the economic loss doctrine permits “recovery for purely pecuniary damages which result from the breach of an independent legal duty arising under common law, as opposed to the breach of a contractual duty.


Whether the employer owed a duty to employee depends on whether there was a contractual duty, a common law duty, or a legislative duty. The employees claimed that there was a common law duty of care required by UPMC because UPMC required the information that the employees provided and UPMC affirmatively made that information available online. UPMC claimed that they shouldn’t be responsible for third-party criminal conduct. The Supreme Court found that there was a common law duty where in “scenarios involving an actor’s affirmative conduct, he is generally ‘under a cut to others to exercise the care of a reasonable man to protect them against an unreasonable risk of harm to them arising out of the act.” [Citation omitted.] In this case, because UPMC required employees to provide certain personal and financial information which was collected and stored on an internet-accessible computer system without adequate security measures, their duty to use reasonable care to protect employee data was breached.

Economic Loss Doctrine

The economic loss doctrine in Pennsylvania says that negligence-based tort claims are barred if a duty arises under a contract between the parties. In other words, if a party wants to bring a negligence-based tort claim, it would have to arise independently of an existing contract. The employees alleged that the economic loss doctrine does not bar negligence-based tort claims involving financial harm “provided that the plaintiff establishes that the defendant owed a common law duty arising independently from any contract between the parties.” UPMC countered that it is well settled Pennsylvania law that the economic loss doctrine bar applies unless there were economic damages accompanied by physical injury or property damage.

The Supreme Court decided in favor of the employees finding that losses could be purely economic under Pennsylvania law and these losses were not required to be the result of physical injury or property damage.

Since the legal duty existed independent from any contractual obligation, the economic loss doctrine did not bar the employees claim.

Because the court found that a legal duty existed to use reasonable care and that the economic loss doctrine did not bar employee’s claims, the lower courts erred. The judgment of the Superior Court was vacated, the trial court’s order was reversed, and the matter remanded to the trial court to proceed in a manner consistent with the Superior Court’s opinion.

What this case does not answer is whether the court would have found in favor of the employees if there was only a data breach and not fraudulent tax filings. However, this case does go a long way to instruct Pennsylvania employers to protect data it requires by its employees. While this case was decided in Pennsylvania, the novel way the employees used the common law and applied it to new negligence claim subject matter may be used in other jurisdictions to achieve similar results.

Programs and Publications

Legal Aspects of Engineering, Design and Innovation 10th edition by Cynthia Gayton

This edition was released in January 2017 and is available through the publisher, Kendall-Hunt publishers and on Amazon.com in paper and e-book form. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues. This new edition includes separate chapters for each intellectual property type, introduces and explanation of blockchain smart contracts, discusses trends in product liability, and has recent case law to highlight chapter topics. It also expands from a primarily engineering perspective to include design professionals and innovation-specific coverage.

Thank you for reading!

The information contained in this post is for general guidance on matters of general interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this newsletter should not be construed as a substitute for consultation with professional advisors. Certain links in this newsletter connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.


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