Friday, April 21, 2017

The Reading List (2017, No. 16): DuPont Suffers Another Theft

Non-Compete and Trade Secrets News for the week ended April 21, 2017

***

DuPont Employee Charged with Trade Secret Theft

No company has had bigger problems with trade secret theft than DuPont. And this problem is not ending anytime soon. The latest alleged misappropriation arises out of New Jersey and has resulted in a criminal complaint against retired chemical engineer Anchi Hou. The facts follow a familiar pattern, if they turn out to be true. Hou allegedly downloaded 20,000 files on DuPont's flexographic printing plate technology before his retirement. Chemical and Engineering News reports on the federal charges. A copy of the Criminal Complaint is available here.

Texas Trade Secrets Fee Boondoggle

A while back, I wrote a brief snippet on an absolutely bonkers trade secrets case in Texas called M-I, LLC v. Russo, where a jury found that an employee had failed to comply with a confidentiality agreement and awarded the ex-employer $500,000. But the same jury found the employer pursued a trade-secrets claim in bad faith and awarded the defendant $200,000 in fees. As one might expect, the lawyers had sumpin' to say 'bout that. A Law360 article by Michelle Casady details the trial judge's exasperation with both sides and his feeling that the whole lawsuit was a "waste of time." This post is definitely worth a read to understand how many judges feel about petty competitive lawsuits that seem only to benefit the lawyers.

***

Seyfarth Shaw's Trading Secrets blog has an excellent summary of the trade-secret status afforded customer lists. This particular category of claimed trade secrets generate a high-volume of lawsuits, particularly in the employment context. Courts' treatment of customer lists is highly case-specific because there are so many countervailing arguments. It's crucial to show an act of misappropriation, such as an improper physical or electronic taking of some information.

Automaker Tesla has settled its non-solicitation and trade secrets suit with ex-program manager Sterling Anderson. Anderson was instrumental in developing Tesla's auto-pilot system and allegedly downloaded a number of documents to his laptop upon departing Tesla for Aurora Innovation. Apparently, the settlement was non-confidential, as several outlets (including Fortune) report that Tesla will receive a $100,000 payment and some ongoing ability to audit Aurora Innovation's intellectual property. Out with a whimper, in other words.

Eric Ostroff has written a nice post about a comical incident of trade-secret disclosure by the Orlando Magic, when it tweeted out a picture of a whiteboard listing targeted players it may want to acquire. This proves that the Magic are still incompetent in so many ways.

Law360 reports on a newly-filed case in Illinois state court in the fragmented and highly competitive custom suit industry. It apparently arises out of an ex-employee's departure from Daniel George and new position with ESQ Clothing. According to the report, the employee - Grant McNamara - worked at Daniel George for only a few months but was bound by a fairly broad non-compete. The complaint also appears (from the report at least) to claim "inevitable disclosure" of trade secrets. A few months' employment seems like a fairly weak starting point on which to base an inevitable disclosure. Then again, by definition, they're all weak.

In case you haven't heard, Bill O'Reilly is out at Fox News after the (delayed) fall-out from over a decade's worth of sexual harassment accusations and settlements. The Hollywood Reporter says that O'Reilly's severance agreement terms aren't yet known but that "a non-compete clause will be among them." This is one instance in which I'm all in favor of strict enforcement - in the unlikely event it would ever become necessary - without any regard for a balancing of competing interests.

Utah Business had a terrific article this week on how Utah employers perceive and use non-compete agreements. The article cites a number of statistics that likely parallel the experiences of employers in other States. Utah passed a more restrictive law last year that curtailed the permitted scope of non-compete agreements and enabled employees to obtain attorneys' fees in certain actions.

Finally, Cara Bayles has a Law360 piece on Anthony Levandowski's appeal of an adverse discovery ruling in Waymo LLC v. Uber. Levandowski actually filed a motion to stay entry of the April 10 Order with the Federal Circuit (not the Ninth). I wrote last week about this April 10 discovery order. In general, it concerns the Fifth Amendment issue Levandowski raised concerning Uber's production of a privilege log that would detail some allegedly misappropriated Waymo trade secrets.

Thursday, April 13, 2017

The Reading List (2017, No. 15): Trade Secrets Theft and the Fifth Amendment

Non-Compete and Trade Secrets News for the week ended April 14, 2017

***

The Fifth Amendment and Document Production

The Fifth Amendment, and its guarantee against self-incrimination, plays a role in civil litigation and certainly in trade-secret suits. Claims of theft implicate criminal prosecution both at the federal and state level. And while many prosecutors would decline to get involved in a garden-variety civil dispute, the Sergey Aleynikov and David Nosal experiences we have seen suggest that any line-drawing efforts between civil and criminal fact-patterns are tough for anyone to draw. When it comes document production, the general rule is fairly straightforward: the mere act of producing documents (think stolen plans or diagrams) may be a testimonial act for Fifth Amendment purposes. It may, to that end, be an admission that a person has documents that another claims were stolen.

The big trade secret case of the year is in the Northern District of California between Waymo and Uber. And it centers largely on Anthony Levandowski's alleged downloading of 14,000 documents. The case has taken on a life of its own, with twists and turns arising nearly every day on a host of substantive and procedural issues.

One particular filing of interest, though, is Levandowski's effort to avoid having Uber disclose detailed information about the allegedly downloaded documents. The unusual part of Levandowski's motion is that it does not come at the document production stage; instead, he attempted to claim Fifth Amendment rights in Uber's production of a privilege log concerning a particular "due diligence report" that related to Uber's acquisition of Levandowski's company after he left Waymo.

Levandowski's brief is an interesting take on the Fifth Amendment and the testimonial act of document production. It touches, crucially, on issues of attorney-client and common-interest privilege, given a joint defense arrangement between Levandowski and Uber. Here, Levandowski is trying to say that the joint defense between he and Uber allow him to step into the shoes of Uber and prevent it from disclosing details on a privilege log about the due diligence report. Note that Levandowski is not a party to the Waymo suit, but the conduct that is most relevant involves him directly and the allegedly mass download of Waymo materials. Levandowski's brief is available here.

Yesterday, Judge Alsup denied Levandowski's motion, holding that compelling Uber to produce a conventional privilege log would not violate Levandowski's Fifth Amendment rights. The decision is available here. Judge Alsup found that "mere invocation" of one's Fifth Amendment rights cannot automatically supplant conventional privilege log requirements. To this end, he stressed the need for "targeted factual support" - like a privilege log itself - that lends the Fifth Amendment assertion some plausibility.

Interestingly, Judge Alsup touched on an argument not really advanced but which it seems as though he felt was percolating under the surface. He rejected the idea that Levandowski could claim a privilege if the subject due diligence report was provided to Uber so Uber could see whether Levandowski was arriving with baggage - namely a potential trade secret claim to defend. Judge Alsup noted that one cannot use the attorney-client privilege to cloak wrongdoing through "due diligence." Therefore, as a result of the ruling, Uber will have to place the particulars of the due diligence report on a privilege log for Waymo to see. Whether Levandowski will assert further Fifth Amendment rights to its ultimate production remains to be seen. But I think I know the answer.

Bad Faith in California Trade Secrets Actions

I have an article coming out shortly in the Illinois Bar Journal, and it concerns bad faith in trade secrets disputes. In particular, I discuss Illinois' rule that is akin to a Rule 11 "frivolous pleading" standard. I also discuss the rule that seems to prevail elsewhere - the two-part test used by California courts, focusing on objective speciousness and litigation misconduct. As the Court of Appeal in Vescovi v. Clark makes clear, that test is really a one-part test. Objective speciousness probably is enough, because the litigation misconduct derives from the specious nature of the claim. Vescovi is unpublished, but it's a good read nonetheless. A copy of the opinion is available here.

***

James Flynn of Epstein Becker & Green published a nice piece on Law360 concerning Justice Gorsuch's track record of resolving trade secrets disputes while a Tenth Circuit judge. It is worth a read.


Friday, April 7, 2017

The Reading List (2017, No. 14): Showing Irreparable Harm Requires Actual Facts

Non-Compete and Trade Secrets News for the week ended April 7, 2017

***

Franchise Non-Competes and Irreparable Harm

Disputes over franchise non-competes arise less frequently than employment-based covenants, but they tend to produce some interesting results. Often, they are combined with claims for trademark infringement if franchisees continue to promote their business using the same signage, slogans, or other source indicators that were part of the original franchise relationship. But other times, the franchisee simply ends the relationship and starts a completely separate business in the same territory.

A district court in Nebraska confronted precisely this type of fact-setting in Colorado Security Consultants, LLC v. Signal 88 Franchise Group and denied a preliminary injunction motion brought to enforce a 3-year non-compete. The interesting aspect of the decision, which is available here, concerns the discussion about "irreparable injury," a required element that a plaintiff must prove to establish injunction relief. The court was critical of the plaintiff's conclusory evidence about customer contact. And, at least according to the facts available in this opinion, it appeared the way in which the franchisor elected to end the relationship may have been a contributing factor in the court's denial of its injunction motion. The lesson here is intuitive. If you're asking for injunctive relief, then you need to demonstrate actual, concrete evidence that illustrates how continued competition threatens imminent injury. Abstract statements or mere suggestions of future harm won't cut it.

Bad Faith in Trade Secrets Actions

The bad-faith fee-shifting clause under the Uniform Trade Secrets Act allows for a "prevailing party" to recover fees. By definition, it does not apply to counsel. A successful showing of bad faith by a defendant entitles him to fees only from the plaintiff itself.

Last year, a California Court of Appeal decision in a case called Cypress Semiconductor found that a plaintiff's voluntary dismissal without prejudice did not prevent a defendant from claiming it had been a "prevailing party" for purposes of claiming fees under the bad-faith provision. This past week, the Illinois Appellate Court in an unpublished and non-precedential order disagreed with Cypress Semiconductor. It found that the term "prevailing party" could not include a voluntary dismissal without prejudice. The case is Matrix Basement Systems, Inc. v. Drake.

In the interest of full disclosure, I joined the representation of Tom Drake on appeal after the circuit court had denied his fee petition. Obtaining reversal of an order denying a motion for sanctions is quite difficult under an "abuse of discretion" standard of review, but I felt that Mr. Drake more than deserved a vigorous appeal. The appellate court's order, while not giving us the desired outcome, certainly helped establish that Mr. Drake was the victim of a completely meritless suit that never should have been filed in the first place. The circuit court found that Matrix Basement Systems had indeed lodged allegations against him that were false, but that this alone wasn't enough to warrant sanctions.

***

On his Michigan Employment Law Advisor, Jason Shinn has a more in-depth discussion with practical tips on Estes Forwarding Worldwide v. Cueller, the "Google Drive" access case I discussed two weeks back. The tips he offers are geared towards employers who need to secure web-based storage accounts from improper employee use.

Michael Elkon at Fisher & Phillips has an excellent compliance-oriented post dealing with the hiring of employees from competitors. This lengthy post covers a number of specific questions and procedures employers should be asking and investigating when hiring new employees from competitors.

Korn Ferry, the executive search leader which pursued the high-profile Computer Fraud and Abuse Act case against David Nosal, finds itself on the other end of a competition dispute. Spencer Stuart, a K/F competitor, filed suit in Chicago. This case appears to be more of a garden-variety non-compete dispute, but it involves the defection of a group practice leader - Francois Truc - who earned over $4 million a year from Spencer Stuart.

Munger Tolles & Olson released a 2016 Defend Trade Secrets Act Roundup summarizing DTSA filings and major issues that courts have decided under the law as we approach the one-year anniversary of its enactment.

Finally, Seyfarth Shaw this week flagged a pending bill in Missouri that would invalidate restrictive covenants in the employment setting. House Bill 479 would bring Missouri more in line with the California approach to restrictive covenants, which permits them in connection with the sale of a business. We see legislation creep up like this time and again in the States, but it usually is meant to spark debate that leads to incremental reform. Seyfarth's post on the Missouri bill is available here.

Friday, March 31, 2017

The Reading List (2017, No. 13): The DTSA Is Not an Unconstitutional Ex Post Facto Law

Non-Compete and Trade Secrets News for the week ended March 31, 2017

***

The Defend Trade Secrets Act and "Continuing" Misappropriations

The Eastern District of Pennsylvania rejected a defense challenge to the Defend Trade Secrets Act, which I must confess I didn't see coming.

In Brand Energy & Infrastructure Svcs., Inc. v. Irex Contracting Group, No. 5:16-cv-2499, the court first noted that the DTSA can apply to continuing acts of misappropriation that began before the law's enactment in May of 2016 if those acts continued later. This would, for instance, capture a continuing improper or unauthorized use of an alleged trade secret.

The court then rejected a constitutional challenge as applied to the facts under the ex post facto clause of the United States Constitution. In a long and interesting passage, the court noted the DTSA's heavy reliance on state versions of the Uniform Trade Secrets Act and described how the DTSA was substantially different in its textual description of the law's effective date. As a result, the court found Congress intended to apply the DTSA to continuing claims of misappropriation and to provide a remedy that dealt not only with the acts occurring after the effective date but before as well.

A copy of the decision is available here.

The Anheuser-Busch Whistleblower Case

Remember James Clark? Yeah, I didn't think so. Clark accused Anheuser-Busch of filing a "strategic lawsuit against public participation" (called a "SLAPP action") when it accused him of misappropriating trade secrets related to A-B's brewing process. Clark allegedly took the information to institute a class action against A-B concerning the supposed mislabeling of alcohol content on its beer products.

A California district court had denied Clark's motion to dismiss the case as an improper SLAPP suit. Clark then appealed, a procedure that many state SLAPP statutes allow (even though the denial of a motion to dismiss is not otherwise appealable). In late 2015, the Ninth Circuit reversed and found the district court incorrectly determined that Clark's efforts to litigate (or share information with class counsel) were not the type of "protected activity" encompassed within California's SLAPP statute. The circuit court then remanded for the district court to determine whether A-B had established some probability of success on its misappropriation claim. That inquiry is a core part of determining whether an anti-SLAPP motion should be granted.

Last week, the district court once again ruled in A-B's favor and found it demonstrated such a probability of success, thereby denying Clark's anti-SLAPP motion for a second time. The court commented briefly on Clark's whistleblower defense, a topic of particular interest given how the Defend Trade Secrets Act contains a specific provision to protect whistleblowers The problem for the court, it appeared, is that assisting in a class action is not at all whistleblowing activity. Under California law, for instance, protected whistleblowing activity involves some complaint to a governmental agency.

A copy of the opinion is available here. Clark, by the way, appealed the adverse ruling once again.

***

For an extended discussion on the various States' treatment of consideration in non-compete contracts, please see Sheppard Mullin's article in The National Law Review. Not surprisingly, Illinois merits an extended discussion.

GeekWire reports on the passage of a non-compete bill in the Washington House. The bill is generally considered employee-friendly, particularly as to technology workers. Amazon has been fairly aggressive in its use of non-competes.

Friday, March 24, 2017

The Reading List (2017, No. 12): One Reason Florida Is So Non-Compete Friendly

Non-Compete and Trade Secrets News for the week ended March 24, 2017

***

Florida Non-Competes and Evidentiary Presumptions

The Florida District Court of Appeal's decision last week in Allied Universal Corp. v. Given illustrates why Florida is the safest haven for non-compete enforcement. It further shows how employers have benefited from a statutory directive that entitles them to a presumption of irreparable injury upon the showing of a legitimate business interest. That irreparable-injury showing is an indispensable component of injunctive relief. The case also shows the uphill burden an employee faces in trying to rebut evidence of a legitimate business interest, here the relationships that enable a salesperson to generate business. Employees who do so face a high discovery burden in amassing that type of evidence. Typically, they'll need something like high turnover or customer attrition or a narrative that shows how the new company provides a different customer value-proposition than the old one. A link to the Allied Universal case is available here.

(Eric Ostroff also discusses this decision in a blog post.)

The "Cloud" as a "Protected Computer" under the CFAA

The employment-related claims that a company may have under the Computer Fraud and Abuse Act all have a common requirement, which often is just assumed to exist in litigation: the access of a "protected computer." The way the CFAA is worded, any computer connected to the internet falls within the definition.

A fair number of cases now do not deal with claims where sensitive information was removed from a workplace computer. Instead, they concern disputes over information stored on a cloud-based platform that employees from computers access. So what happens when an employee continues to access this same platform, wrongfully, following termination of employment? Is this access of a cloud-based device equivalent to a "protected computer"? In Estes Forwarding Worldwide, LLC v. Cuellar, a federal judge in the Eastern District of Virginia said yes. But the analysis was very thin and not particularly persuasive.

Prior decisions, such as the Hawaii case of Property Rights Law Group v. Lynch, suffer the same flaw: no real attempt to reconcile a cloud-based service with the definition of a "protected computer." They seem to pivot to the fact that the computer was connected to the internet and end it right there. To the extent this issue becomes a genuine dispute among district courts, it seems Congress could head off the problem by extending the jurisdictional hook to accessing information stored on a cloud-based platform. After all, what's one more amendment to the CFAA?

The Estes Forwarding decision is available here.

Friday, March 17, 2017

The Reading List (2017, No. 11): Trade Secrets Everywhere, Including the Bedroom...

Non-Compete and Trade Secrets News for the week ended March 17, 2017

***

Trade Secrets Identification

The most difficult procedural issue in trade secrets cases involves when and how the plaintiff should disclose its trade secrets. Defendants frequently object to discovery until it has a specific itemization of the secrets the plaintiffs claims have been misappropriated. Courts have wide discretion to handle these types of disputes, and will do so on a case-by-case basis. A federal district court in Oregon, in the case of Quaiz v. Rockler Retail Group, Inc., No. 3:16-cv-1879, recently denied a defendant's motion to identify and stay discovery. As that case shows, the strength of an early-identification motion often is directly related to the allegations of the complaint. Here, the plaintiff gave more specificity than is often seen, confining the trade secret to a particular product and related designs. A copy of the opinion, which provides helpful analysis, is available here.

Trade Secrets Injunctions

The Georgia case of Pinnacle Agriculture Distribution, Inc. v. Mayo Fertilizer, No. 1:17-cv-29, deals with the scope of trade secrets injunctions. It illustrates that when plaintiffs present compelling evidence of misappropriation, a broader injunction may be in order. Here, an ex-employee of Pinnacle Agriculture had provided his new employer with his entire customer list and specific details about those customers, along with other information concerning Pinnacle's branch sales (including details on every product sold and profit margin for each sale). This is true smoking-gun evidence. Despite the lack of any non-compete, the court's injunction operated just like one. Both the employee and the new employer were barred from conducting business with Pinnacle's accounts. A copy of the injunction is available here.

***

The San Francisco Business Times, along with many other outlets, reports this week on Google's attempt to stop Uber's self-driving car technology. Google's effort to enjoin Uber builds on its previous complaint, which I discussed last week. The new evidence Google submitted includes a damaging witness statement from the main individual defendant's former co-worker along with an expert witness.

In more trade secrets news, the Chicago Tribune this week published an article describing Motorola Solutions' suit against Hytera Communications. The trade secrets apparently pertain to Motorola's radio technology and involve more than 7,000 allegedly stolen files. Motorola sued under both the Defend Trade Secrets Act and the Illinois Trade Secrets Act. A copy of the Complaint is available here.

Finally, not sure really how to introduce this one, but Absorption Pharmaceuticals has claimed that Reckitt Benckiser, the maker of, um, K-Y lubricants, stole its trade secrets on a sexual performance enhancer. This claimed misappropriation arose out of the second most common factual scenario for theft: a purported business deal that fell apart. Absorption Pharmaceuticals is asking for an injunction to prohibit RB from selling Duration - a premature ejaculation spray. At the very least, it's a clever product name. A copy of the Complaint is available here.

Friday, March 10, 2017

The Reading List (2017, No. 10): South Carolina Interprets Stealth Confidentiality Agreement

Non-Compete and Trade Secrets News for the week ended March 10, 2017

***

South Carolina Non-Competes

The Court of Appeals of South Carolina issued a very interesting and important ruling on the oft-overlooked interplay between non-disclosure and non-competition covenants. The case is Fay v. Total Quality Logistics, LLC, No. 2014-1828.

In Fay, the Court of Appeals determined that an indefinite non-disclosure agreement operated as a stealth non-competition restriction, because it provided that if the ex-employee entered into a similar business as his employer and worked in a similar type of position, he would "necessarily and inevitably" use the employer's confidential information to perform his job. In other words, the agreement attempted to graft the devilish "inevitable disclosure" doctrine into a non-disclosure/non-competition covenant. Bad move. This contractual language in effect prohibited the employee ever from competing with his former employer. Under South Carolina's strict "blue-pencil" rule, the court couldn't modify the contract to add in a reasonable time limit. As such, it was unenforceable.

The concurring opinion offered the same conclusion, but first looked to Ohio law because that's what the parties agreed to apply to the contract. But even under Ohio law (which is more friendly), the indefinite non-disclosure agreement would be unenforceable. Fay represents yet another case in an emerging area: an employee's challenge of a broad non-disclosure agreement and arguing it operates as a stealth non-compete. You can read the opinion of the Court of Appeals by clicking here.

Proposed Amendments to CFAA

The Computer Fraud and Abuse Act has been amended many times since it first appeared on the scene in 1986. In reality, it needs to be rewritten or broken up into several different laws. But it's back on the legislative docket, at least if one Congressman has his way.

Rep. Tom Graves (R. GA) has proposed the Active Cyber Defense Certainty Act. The bill would allow victims of cyber-attacks to engage in limited defensive measures to identify and stop attackers. In essence, it's a bill that enables "hacking back" and formalizes that concept as a defense to prosecution for unlawful computer access. The text of the bill is available here.

The theory of hack-backs have generated a lot of debate among scholars in recent years, with some arguing that, even if legal, it could have dramatic unintended consequences in ensnaring innocent third-parties. It is often difficult to trace the source of a hack.

***

In other news, a great deal of news is floating around about Waymo, LLC v. Uber Techs., Inc., the trade secrets case involving Google's self-driving technology. News reports first surfaced a few weeks ago about the claim that featured, at its core, the departure of Waymo manager Anthony Levandowski and the supposed downloading of nearly 14,000 confidential Waymo files. Waymo appears to have suspected misappropriation based on the erroneous e-mail transmission of a circuit board drawing, intended for Uber but delivered instead to Waymo. A copy of the Complaint, which features a claim under the Defend Trade Secrets Act, is available here. The "Introduction" sets forth the big-picture story and is a great example of persuasive legal writing.

***

For those interested in the ex parte seizure order procedure available under the DTSA, this link contains the first ever federal court seizure order carried out. The case is Mission Capital Advisors LLC v. Romaka, No. 1:16-cv-5878 (S.D.N.Y.). The collateral costs of obtaining such an order are fairly high. Of note, the defendant in this case never was represented by counsel during the litigation.

***

Finally, the U.S. Attorney's Office in the Middle District of Louisiana released a statement on February 16 that confirms the sentence of Brian Johnson for violating Section (a)(5)(A) of the CFAA. Johnson's guilty plea stemmed from his installation of malicious code on Georgia-Pacific's information technology system after G-P terminated his employment. The code resulted in significant damage to G-P's operations. Johnson will serve a 3-year prison term and must pay more than $1 million in restitution.

Friday, March 3, 2017

The Reading List (2017, No. 9): The First Defend Trade Secrets Act Verdict Arrives

Non-Compete and Trade Secrets News for the week ended March 3, 2017

***

Defend Trade Secrets Act

On February 24, 2017, a jury in the Eastern District of Pennsylvania rendered a verdict in favor of Dalmatia Import Group and against FoodMatch, Inc. under the Defend Trade Secrets Act. As of this posting date, the verdict is not available for viewing, but McDermott Will & Emery (counsel for plaintiff) reports that the judgment will exceed $5 million.

The case grew out of FoodMatch's product launch of what Dalmatia called a "copycat line of fruit spreads." FoodMatch previously had been a Dalmatia distributor in the United States but terminated that relationship and began its own competing line of products. FoodMatch also purportedly engaged Dalmatia's contract manufacturer, who apparently knew of the fruit spread recipes, to develop a competing product line.

The DTSA is largely consistent with state law in terms of the damages remedies available to aggrieved plaintiffs like Dalmatia. It is important to note, too, that this was not just a DTSA case; Dalmatia claimed counterfeiting under the Lanham Act. And though the case seemed to progress quickly to verdict given the DTSA's short history (it was signed into law on May 11, 2016), Dalmatia filed the case well before then and added the DTSA claim later.

Nevada Legislator Introduces Non-Compete Bill

Nevada made news last year for soundly rejecting the blue-pencil doctrine. This year, an Assemblyman has introduced Bill No. 149, which would limit non-competition agreements to a duration of 3 months after the end of employment. The bill further codifies the rule-of-reason analysis used by Nevada courts currently. If a company entered into an agreement with a longer, and therefore statutorily unreasonable, duration, it would be subject to a fine of up to $5,000.

The bill has been referred to the Committee and Commerce and Labor. A PDF copy of the bill is available here.

Fee Awards in Texas

Try making sense of this development. A Harris County, Texas jury awarded an employee nearly $200,000 in attorneys' fees after the jury found his ex-employer pursued a trade secrets misappropriation claim in bad faith.

But the same jury awarded the employer nearly $500,000 in attorneys' fees after finding the employee failed to comply with a confidentiality clause. It's hard for me to understand how to reconcile the two awards. A blog post further describes this rather contentious suit.

Overbroad Non-Competes in Louisiana

As I've discussed several times in the past, Louisiana has a very nuanced framework for non-compete agreements. Most importantly, non-competes must specify a parish or municipality where the restriction applies, and the employer must do business there. Courts have been strictly applying this language.

In Affordable Roofing v. Artigues, 2:16-cv-16872 (E.D. La.), a federal district court determined that a non-compete applying "in any state" where the employer conducts business was void. The employer conceded this but argued the employee in any event knew precisely where the employer did business. As is fairly obvious, such an interpretation would violate the plain language of the statute. A copy of the Order is available here.

Tuesday, February 28, 2017

Monthly Column (2017, No. 2): Georgia Ruling Illustrates Difficulty with Relying on Blue-Pencil Rule

One of the issues I see most frequently when litigating non-compete disputes involves what's known as the blue-pencil rule. The rule actually has a few separate iterations to it, but for the layperson it's the idea that a court might be able to revise or narrow an overbroad agreement and still enforce it (or at least part of it).

(I wrote a state-by-state guide to the blue-pencil rule more than 8 years ago. It may not be entirely accurate now, as I don't routinely update old posts. It remains one of my most viewed pages, with nearly 40,000 unique viewers having read it (i.e., clicked through to it)).

Advising clients about how courts may deploy the blue-pencil rule is a challenge because in many places - including Illinois -its use is discretionary. This makes rendering predictions somewhat challenging, particularly since very few non-compete scenarios are alike.

There's also a separate problem. My experience is the rule is somewhat judge-specific. By that I mean, different judges apply the rule with different philosophies in mind. Many (most?) don't like to insert themselves in the contract drafting process. Others see themselves as arbiters of equity, charged with a more activist role to do "what's right" under the circumstances. Unless you have direct experience on the precise issue with the same judge, that makes predictive counseling an enormous chore.

***

The reason I write on, and revisit, this topic now is due to two separate events. First, from Georgia, we encountered LifeBrite Laboratories, LLC v. Cooksey, No. 1:15-cv-4309. In that case, the district court evaluated the blue-pencil rule in Georgia in light of the 2011 change to Georgia law. Previously, courts had not allowed any sort of blue-penciling. If a covenant was overbroad, the entire thing failed. Georgia's new law gave courts the ability "to modify a covenant that is otherwise void." But the court noted that the new law did not define the term "modify."

It had a choice. Did the term mean to remove offending language or make substantive changes of the court's own accord? The court, having relied on Georgia's common law before the statutory change, chose the former and not the latter. I would guess this came as a surprise to Georgia lawyers, many of whom likely assumed "modify" granted the court broader discretion. I don't think we've heard the last on this subject. LifeBrite isn't controlling in Georgia state courts.

***

I also write because of an appeal I have pending in Illinois. At least one district of the Appellate Court of Illinois has explained its law of severability in terms of non-compete agreements. I happen to have the very issue pending before the same district, so we'll see if the court expounds on its prior case law. The law of severability states that even if some part of a contract is unenforceable, a court may enforce the rest of the agreement "in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange."

The italicized language has been held to ruin an entire non-compete when one clause is unenforceable. That means, for instance, that an overbroad customer non-solicitation covenant could imperil an otherwise enforceable non-disclosure agreement. Or vice versa. And given the crackdown in Illinois on overbroad non-disclosure agreements, I expect the law of severability may rear its head time and again.

***

As a quick primer, recall that there are several permutations to blue-penciling and severability. The terms are important:

1. Blue-penciling. This doctrine is what the Georgia court in LifeBrite endorsed. A court can remove offending language and save the balance of the covenant. That would mean, for instance, deleting a particular county in which the employee never worked but which is part of the restriction.

2. Equitable modification/Reformation. This is a broader doctrine, which allows courts to rewrite an overbroad agreement. It is less technical and interjects the court in the drafing process.

3. Red-penciling. This is a very strict, pro-employee doctrine. If the covenant is overbroad, the court will strike it and not change it in any respect. Nevada is a red-pencil state, as we found out last year.

4. Severability. As discussed above, this doctrine means a court can strike an entire restrictive covenant but save the rest of the agreement. In Illinois, I think it's at best an open question now how the law of severability applies to restrictive covenants. Probably case-by-case, depending on the language of the agreement.

5. Step-Down Clauses. A step-down clause provides that if a court determines one covenant is unenforceable, then a different term or restriction applies. For instance, a step-down clause may say that "if the court determines an 18-month non-solicitation restriction is overbroad, then the parties expressly agree to a 6-month covenant in its place." This, in theory, eliminates the court's job in rewriting a contract. I wrote once on this topic. Notably, the district court in LifeBrite stated it would have enforced a step-down clause providing an alternative provision to the overbroad clause that rendered the agreement unenforceable. (See FN 78 at page 21).

Friday, February 24, 2017

The Reading List (2017, No. 8): An Example of How Differently Courts Treat Non-Competes

Non-Compete and Trade Secret News for the week ended February 24, 2017

***

Overbroad Non-Competes in Virginia

This week's first two updates could be called a Tale of Two Non-Competes.

A federal district court in Virginia ruled that an employee's non-compete agreement, ancillary to a stock option award, was unenforceable because of its overly broad geographic scope. This case illustrates the perils of linking a restrictive covenant to customers or markets about which an employee has "confidential information." For starters, that may require a court to assess how the agreement treats that defined term - a notorious plot of unruly thatch.

But additionally, a restrictive covenant that is drafted this way often lacks objective parameters. In NVR, Inc. v. Nelson, the covenant's geographic term extended to areas "from which [the employee] received...Confidential Information." Because he received information digitally and since there was no way to tell from where the information originated, the non-compete was overbroad. A copy of the opinion denying the employer's temporary restraining order motion is available here.

Preliminary Injunction in New Jersey

The employer fared better with pursuing injunctive relief in Menasha Packaging Co. v. Pratt Industries, a New Jersey case in which the district court applied Illinois law. This dispute stems from the movement of three ex-Menasha employees to Pratt Industries during the period in which Menasha's client, Mondelez, had put up a packaging contract for bid. Unlike the NVR case, the competition and the immediate threat to Menasha were more tangible and apparent from the record. Menasha also sought very limited enforcement of the restrictive covenant, despite some dispute about whether the contract was facially overbroad. The court enjoined the employees' work with Mondelez, on Pratt's behalf, for the 18-month non-solicit term. The case illustrates the wisdom of narrowing the dispute and seeking relief that is directly tailored to the conduct in question. A copy of the New Jersey' court's preliminary injunction opinion is available here.

Non-Competes in Bankruptcy

The United States Bankruptcy Court for the Northern District of Illinois held in United Providers, Inc. v. Pagan that a claim for intentional breach of contract is dischargeable in bankruptcy. The breach arose from the debtor's alleged violation of an employee no-hire agreement in the medical billing field.

The nondischargeability provision of the Bankruptcy Code for "willful and malicious" injuries, Section 523(a)(6), requires that the breach of contract also give rise to an independent tort claim (e.g., breach of fiduciary duty, trade secrets misappropriation). And even then, a court's finding of nondischargeability is not guaranteed. The court's opinion makes sense because many breach-of-contract scenarios give rise to an economically efficient result, regardless of whether the employer likes it or feels as if it has been the victim of a maliciously designed plot. Only if the underlying conduct is intended to produce a harmful result will a viable nondischargeability argument arise. The opinion is available here.

***

One of the more interesting trade-secret filings in a long time comes from the Central District of California, where Songkick has amended its suit against Live Nation Entertainment and Ticketmaster to allege trade secrets theft. The 91-page Complaint is quite a read, but the pertinent allegations of trade-secret theft appear to rest on a departed executive's misappropriation of thousands of documents in order to benefit Ticketmaster's "Artist Services" division, which is now known as OnTour. Consumers may be familiar with this type of service, since it promotes ticket pre-sales, fan clubs, and more direct fan engagement. Songkick's trade-secret theft allegations bolster a more robust antitrust claim against Live Nation, which vigorously has disputed the veracity of the accusations.

For those interested in exploring the data concerning non-competes' impact on wages and mobility, please see the University of Michigan Working Paper entitled Locked In? The Enforceability of Covenants not to Compete and the Careers of High-Tech Workers. The paper details a number of interesting conclusions, including that technology workers in higher enforcement states (think Florida) earn lower wages than their counterparts in lower enforcement states (think California). This at least seems to support the notion that employers do not share the marginal gains from non-compete regimes with their existing employees, a theoretical justification many on the pro-enforcement side frequently offer.