Friday, March 21, 2014

"Embedded Knowledge" and the Trade Secret Gap

For anyone (lawyer or otherwise) interested in the tensions associated with employee mobility, a truly must-read is Talent Wants to Be Free, by Orly Lobel.

Professor Lobel discusses a wide range of issues associated with talent and knowledge flows, and she incorporates thoughts that transcend the law and devolve into economics and sociology. The book is, to say the least, thought-provoking even for those who may choose to disagree with some of her conclusions. There's a particular issue that Professor Lobel discusses that touches upon one of competition law's great tensions.

In my judgment, one of the most difficult areas of the law for lawyers, judges, and clients is drawing a distinction between two concepts: general skill and knowledge (which is not protectable) and a trade secret (which is). Consider the following from an Illinois decision some twenty years ago:

"General skills and knowledge acquired in the course of employment...are things an employee is free to take and to use in later pursuits, especially if they do not take the form of written records, compilations or analyses." Passage quoted from Colson Co. v. Wittel, 569 N.E.2d 1082, 1087 (4th Dist. 1991).

This is somewhat (largely?) unhelpful for two reasons. First, it's so obvious that we shouldn't feel the need to use it as a guidepost or legal marker. Second, the notion of "general skills and knowledge" suggests a disconnect from experiential information or data the employee may have obtained by reason of his or her employment with a business. Put another way, GSK sounds like information an employee may acquire just by virtue of being in a particular field and that generally may be available to anyone, but not of any real use to people who are engaged in other occupations.

This disconnect is troubling when trying to parse out what kinds of information a business can protect by contract or through assertion of a trade secret right. A passage in Chapter 4 of Professor Lobel's book gets closer to solving the disconnect and bridging the ideas of general skill and knowledge, on the one hand, and trade secrets, on the other.

She talks of "embedded knowledge." Here's how she puts it in context:

"Knowledge that is embedded comes from experience, from learning by doing or observing; this kind of knowledge is difficult to codify and write down. Embedded knowledge (also known as tacit knowledge) is learned informally through direct and repeated contacts."

This formulation actually gets us closer to determining what is protectable and what is not, but only if we say embedded knowledge is something only an enforceable non-compete can safeguard. In other words, we should be careful not to lump in embedded knowledge with the amorphous (some might say rudderless) definition of a trade secret.

Examples of embedded knowledge likely include a person's familiarity with key contacts and customer requirements or buying habits. It also may include the odd concept of "negative know-how" (that which isn't effective). It certainly includes pricing patterns or strategies. Perhaps, too, it encompasses knowledge of which particular vendors are reliable or can lead to efficient sales distribution. To be sure, this will be company-specific data; they're not "general" in the fair sense of the word.

Professor Lobel also makes the point that "embedded knowledge" doesn't spread with great accuracy. Again, from Chapter 4:

"As you can imagine by now, the way tacit knowledge spreads depends on the shape of the network and the complexity of the information being diffused. When knowedge is transmitted, it usually does not diffuse accurately and flawlessly across companies."

This is another way of saying that embedded knowledge can be (and likely is) fleeting or ephemeral; it changes, in other words.

Consider this example. An employee is charged with developing a new product and has his hands in various business units that may impact the development of the good before it's rolled out publicly. If that employee leaves, he may have knowledge that his former company still is rolling out the product. But much likely has changed since his departure. Perhaps the company switched vendors, changed chemicals that go into the product formulation, or had to purchase new equipment (thereby decreasing the amount of months it would take to generate a positive return on investment).

It is entirely reasonable that the employee would not know anything about these developments, even if he had day-to-day involvement in the product for a long time while he was there. To Professor Lobel's point, if he then used his prior information about the product (his embedded knowledge) in a new position with a new company, it's likely to be inaccurate. That is to say, the passage of time and fluidity of useful information reshapes the employee's knowledge in such a way as to render it less valuable and even counterproductive to a competitor.

A trade secret, by contrast, shouldn't face the diffusion problem. The central point of a trade secret is that it's a patent substitute. An owner achieves an economic advantage (possibly in perpetuity) by keeping the information secret, rather than gaining a limited monopoly through the patent system. If that's the case, then the trade secret should be something the firm can monetize. Embedded knowledge, by contrast, is that which shifts and is not capable of monetization.

An alternative way for lawyers and judges to look at whether something meets the definition of a trade secret may be to get away from the mutli-factored standard that yields more questions than answers and determine whether, in Professor Lobel's words, it can "diffuse accurately and flawlessly across companies."

Friday, March 7, 2014

The Janitor Analogy, Once Again

"The agreement is so broad that it would prohibit my client from working for his new company even as a janitor!"

- Comment attributed to every defense attorney in every non-compete case, generally accompanied by arms flailing up and down violently.

***


Despite my sarcasm, this isn't a terrible argument.

In fact, it's made repeatedly with great success. And the analogy has managed to work its way into one court opinion after another.

The cases in which you see this generally involve a broad non-compete agreement, as opposed to a more limited non-solicitation of customers restraint. The argument never works for a high-level executive because courts generally assume such executives have pervasive access to confidential information of their former employer, such that a tightly defined job-scope limitation isn't required based on the interest the company is trying to assert.

However, the argument has appeal when a mid-level sales person has a restrictive covenant that goes beyond his or her ability to service or solicit clients and that extends to a broader restriction more appropriate for those that develop products or manage the flow of confidential information. So the argument goes, the broad market-based covenant is not narrowly tailored to protect the interest (customer goodwill) the employee can impair.

Two North Carolina appellate decisions discuss broad non-competes in this context, and both came out in favor of the ex-employee. The cases are Horner Int'l Co. v. McKoy, No. COA13-964 (March 4, 2014), and CopyPro, Inc. v. Musgrove, No. COA13-297 (Feb. 4, 2014). Neither case breaks new ground, but they serve as strong illustrations of how courts examine broader covenants as applied to salespersons. Prohibitions on employment altogether for this class of employees will raise major red flags. The problems easily can be cured with more reasonably drawn non-solicitation of customers provisions.

On this score, though, there's a further problem percolating underneath the surface in restrictive covenant law. Too much, generally, is made of the need for a geographic limitation. While some businesses still are hyper-local, many aren't. As the economy continues to evolve and individual spheres of influence extend beyond particular geographic borders, courts are going to have to reformulate their enforceability tests to move away from a geographic analysis. The short concurrence in the McKoy case makes this point.

Changes to our economy pose a special challenge for lawyers who draft agreements for their employer clients. We have to begin paying more attention to scope limitations in non-competes contracts and tailoring contracts to the particular employee. This is an issue separate and apart from the utility of any geographic restraint. More and more, I am reviewing non-competes that have no real meaningful geographic restriction but which are more carefully defined in the type of role the employee would be restricted from assuming after his or her departure.

It's encouraging that drafting seems to have evolved in this respect. But as the North Carolina cases show, there still frequently is a large disconnect between the employee's activities and the employer's business, on the one hand, and the practical impact of the covenant language, on the other.

Thursday, March 6, 2014

Fifield, Federal Style

"The law is an ass. But it's not that big of an ass..."

U.S. District Court Judge - Northern District of Illinois on March 5, 2014, discussing holding of Fifield v. Premier Dealer Services.

***

In the past several weeks, two federal district court judges have declined to follow Fifield's bright-line, 2-year continued employment rule for enforcement of non-compete agreements. As readers of this blog know, Fifield generated enough controversy that - at least among lawyers in Illinois - it's now a noun ("I have a Fifield hearing at 2 pm"), a verb ("The judge just Fifield-ed me."), and an adjective ("That ruling had a crummy, Fifield-ish quality to it.").

Surprisingly, neither judge in the Northern District of Illinois cited my dissenting opinion in Fifield (available here). But the gist of both rulings is the same and, remarkably, somewhat similar to what I laid out last year in my beer-induced missiv:

(1) There has to be some latitude in the consideration rule for a particular employee's position within the company;

(2) The closer the employee bumps against the 2-year window, the less relevance the rule has;

(3) The method of termination - voluntary or involuntary - has to be relevant (if not dispositive).

The Fifield decision has caused a fairly wide rift. It's now a federalism issue. Federal courts, under the Erie doctrine, must determine how the Supreme Court of Illinois would look at the issue of consideration. The court yesterday in my case found that the Supreme Court would not adopt Fifield and that under Erie, the two-year rule was not in fact the law in Illinois.

We continue to see a proliferation of trade secrets and non-compete disputes make their way into federal court under diversity rules or as adjuncts to Computer Fraud and Abuse Act claims. This only will continue in light of recent rulings, and it may spur on plaintiffs to add CFAA claims where they otherwise wouldn't.

It's also only a matter of time until another district within the Appellate Court of Illinois (there are five) confronts a Fifield issue, which may give the Supreme Court a second chance to clarify this unacceptably confusing area of the law.

All the while, lawyers will continue hedging their advice with multiple disclaimers. Which, of course, clients love.

Friday, February 14, 2014

The Yardstick Method and Non-Compete Damages


One of the most difficult tasks for a plaintiff in non-compete litigation is the need to focus on a remedy. I was reading an interview Judge Richard Posner gave to Stout Risius Ross recently concerning patent litigation, and some of his comments and criticisms about that type of suit ring true with respect to non-compete and trade secrets claims.

Judge Posner was highly critical of the plaintiff's bar for its laser-like focus on establishing liability. He said - and I agree wholeheartedly - that when it comes time to assessing the viability of a remedy, the plaintiff tends to lose steam. Normally, this isn't much of a problem at the injunction phase. My experience is that plaintiff's counsel generally has a decent handle on what it wants for interim, injunctive relief.

The problem is the next step.

Several years ago, I wrote a law journal article emphasizing the need for businesses to consider using liquidated damages clauses in non-compete agreements for this very reason. I tend to think most lawyers do a really bad job at figuring out damages issues. There are two main factors at force here. For starters, an increasing number of lawyers have very little business or economics background. They're more comfortable proving historical facts - did X solicit the business from Y? - than they are modeling an economic picture of lost profits that has even a basic degree of smarts behind it. And just as important, lost profits require effort - real effort, not just poring over documents. Just deriving a theory can be a tough task to undertake.

There are a number of different methodologies for proving lost profits. Say a non-compete defendant has undoubtedly competed and taken business away. Even if a plaintiff sustains a claim for injunctive relief, that may not be enough to mollify his or her client. There's real economic loss. But how to prove it, that's the challenge.

Modeling is complex stuff, and even settling on an accepted method only solves part of the problem. Take the "yardstick" method of showing lost profits. This method, widely approved and used in
antitrust cases (overall a good analogy for non-compete claims), measures the plaintiff's financial performance against a substantially similar business (this comparator being the "yardstick"). Based on that comparison, the plaintiff should be able to draw inferences about how its business would have performed but for the contract breach (the use of a customer list, diversion of clients, and the like).

But gauging the appropriate yardstick - in essence, data sampling - is the trick. Suppose the defendant raids a branch office of the plaintiff. It takes its top three sales employees, steals the customer list associated with that branch office, and causes widespread disruption in the branch's ability to operate day-to-day. The yardstick approach may be a viable candidate to model damages as long as the plaintiff can find a comparison point. But the plaintiff has a lot of work to do to select the right yardstick.

What can go wrong? Several factors. Assume the plaintiff chooses to pick the financial performance of one of its other branch offices that wasn't raided. Presumably it will pick one that is doing very well. The selected yardstick may not be comparable or provide a reliable indicator of damages. The experience of its employees may be different. The yardstick location may have a super-competent branch manager. It may operate in a geographic location with different organic growth levels. The yardstick location may face a lower level of competition.

The plaintiff would have to run a very intense analysis to show how the comparable location is truly similar in most material respects to the one impacted by the unfair competition. This is no easy task and requires the plaintiff to tease out a lot of factors that may cause it to present an inaccurate, unreliable financial picture during a damages presentation.

My personal preference is to avoid the yardstick method in most non-compete cases. I think that it has some applicability as long as you can draw a reliable comparison, but it is very easy for a defendant to question the data assumptions and point to other yardsticks that may be more appropriate. On that score, it tends to make discovery very expensive.

Friday, February 7, 2014

When Do I Have to Turn Over My Devices?

Defendants in competition cases quickly realize that the discovery battlefield often sits in the land of electronic information. Devices such as smart-phones, laptops, tablets, thumb drives, and cloud storage programs potentially contain relevant information that may bear upon both liability and damages issues. Many times in these types of disputes, an employee's retention of actual paper is minimal, so that discovery may not appear at first blush to be that much of a burden on the employee and its counsel.

However, when an employer requests access to devices, the landscape changes. Employers - often rightly so - are suspicious that an employee has kept information electronically and may not have the digital footprint to track data to a particular device. An employee often reacts viscerally and may be surprised that such a request is even proper.

So under what circumstances will courts order the inspection of devices?

There are some important groundrules and principles to consider. Let's start with the basics, which tend to favor (at least initially) an employee's resistance to turning over devices for inspection:

(1) Many courts find that imaging and production of devices is an exercise that should be undertaken sparingly.

(2) Courts will deny requests for inspections where the request is too broad.

(3) If the employer does not make a connection between the device and the factual underpinning of the claim, then a court will be hesitant to order imaging of the device and inspection.

(4) Courts will frequently put in place protocols to ensure an employee's personal records are kept private and not otherwise exposed (for instance, to protect disclosure of personal photos, financial information, or tax records).

(5) Absent bad faith, employers bear the cost of the imaging.

So with that general landscape in mind, under what circumstances will a court likely order some production of devices for inspection?

(1) There is specific evidence tying a misappropriation of records to the particular device. An employer may, for instance, learn through an examination of a work computer that an employee inserted an external hard-drive the day she left. This would likely justify an inspection of the device by a third-party expert.

(2) An employee has destroyed information in violation of a court order or a duty to preserve evidence. For instance, if an employee admits tossing out a stolen customer list after receiving a summons, a court likely won't have much sympathy for any objection to a device inspection request. The Court would seem to have the inherent authority to order the inspection to see if other vestiges of the list remain somewhere.

(3) An employee's document production has been inadequate. If an employee obfuscates during discovery, then an employer legitimately could claim that the only way to ensure a complete production is to inspect devices to see if the employee has sent information elsewhere that he has failed to account for.

Having considered these general principles, what are the best practices for an employer to obtain an inspection of devices?

(1) Try to learn specific facts tying the claim to a device.

(2) Propose a fair, even-handed protocol for inspection that accounts for an employee's privacy concerns. Attach a draft protocol and order to a motion seeking such an inspection.

(3) Follow the discovery rules. A request for inspection is nothing more than a discovery request. Don't short-circuit the process by filing a motion. Understand - and follow - procedures for resolving discovery disputes (including meet-and-confer efforts with opposing counsel).

(4) Keep the request narrow. Don't ask for all devices kept within the employee's control or possession. A court won't order the production of a 12 year-old's iPod.

(5) Learn other facts first. Often times, the best approach is to take an employee's deposition first to lock him or her into testimony about how a particular device may have been used or what it may contain. At that point, the employer will be on stronger factual footing to request an inspection with specific admissions and testimony backing up the reasonableness of the request.

Wednesday, February 5, 2014

Trade Secrets, Litigation Funding, and the Fall of Champtery

The rise of third-party litigation funding presents a quandary of legal, ethical, and economic issues, which commentators have tried to sort through for many years. With the importance of trade secrets to many businesses, it's no surprise that this facet of intellectual property litigation has drawn the interest of litigation financiers.

Yet, despite this reality, very few courts have had the opportunity to examine the legal issues that come into play when a third-party funds a trade secrets plaintiff. One of the more high-profile Chicago-area trade secrets cases, however, deals with this new paradigm. The case is Miller UK v. Caterpillar, Inc. - now several years old. It is a typical business-to-business trade secret case, which features a dispute arising from the fracturing of a long-term business relationship when Caterpillar allegedly began offering a product derived from Miller's confidential information. Most non-employment trade secrets cases feature some variation on this fact pattern.

It turns out Miller had concerns about its capability - financially, that is - to litigate against Caterpillar. And, as everyone knows, trade secrets litigation ain't cheap.

Enter the funding company. Caterpillar cried foul. And a discovery dispute arose, raising significant issues that likely will arise time and again. Are discovery disputes interesting? Not really, but this one worked its way in to the Wall Street Journal a few weeks ago.

The dispute presented two significant legal questions that I feel are important to address (many others seemed secondary and aren't worth commenting on).

First, do litigation funding agreements violate laws against champtery? Those ancient statutes generally bar third-parties from stirring up lawsuits by helping others to promote litigation in an officious manner.

The Miller court answered that question with an emphatic "no." In a lengthy opinion by Magistrate Jeffrey Cole (somewhat renowned for his lengthy, well-cited opinions), the court held that Caterpillar couldn't obtain the litigation funding agreements between Miller and its litigation sugar-daddy because they weren't relevant. In particular, those documents couldn't help Caterpillar establish any sort of defense or counterclaim, since the champtery statutes did not apply to litigation funding arrangements.

Second, the attorney-client privilege does not protect documents that the trade secrets plaintiff and its counsel share with the actual or potential funders. Since the privilege does not extend to business arrangements, a plaintiff cannot cloak communications with the privilege even if they somehow relate to the litigation process.

Importantly, this does not preclude a trade secrets plaintiff from precluding disclosure of information under the work-product privilege, which may offer greater protection. Disclosure of mental impressions, internal memos and the like to a third-party does not destroy the privilege, and in Miller's case it at least was able to show that it took some steps to guard against disclosure of its counsel's case memos even though potential funders received them.

Magistrate Judge Cole's opinion is embedded below.


Thursday, January 9, 2014

Alabama and Washington Experiences Show Difficulty With Contract Formation Questions

One of the more difficult problems for employers to address is one of simple practicality:

How and when do I notify someone that she has to sign a non-compete agreement?

This sounds simple, but it's not an easy question to answer. Particularly with closely-held companies, a business may not have robust or sophisticated human resources help. They may hire infrequently. And they may not want to deal with their outside counsel to keep costs down. They may think of a non-compete at the 11th hour, before an employee has started but after she has committed to the relationship.

Or, just as frequently, the employer may decide to have her sign a non-compete after the employer has begun work. Because of the perceived "need to please," an employee may feel compelled to sign the agreement without a second thought.

These scenarios raise complicated issues of contract formation: when exactly do you have a contract and is there consideration for it?

The recent experiences of two states - Alabama and Washington - illustrate the challenges posed.

Alabama has a strange contract formation rule. It has a statute that courts have interpreted to validate non-compete arrangements only if they are "signed by an employee." That requirement is somewhat anamolous because a prospective employee who has been offered employment but who has yet to start is not "an employee" able to sign an enforceable contract. This very paradigm rendered a non-compete unenforceable in Dawson v. Ameritox, Ltd., 2014 U.S. Dist. LEXIS 801 (S.D. Ala. Jan. 6, 2014). This somewhat runs counter to advice that attorneys often dispense, which is to tell an employee beforehand of the non-compete to give that person adequate time to consider it.

Contrast this with a jurisdiction like Washington which has a fairly strong consideration rule. Like many states, Washington states that an employee may sign a noncompete when hired (such that the employment itself is consideration). But if she signs it at some time after hire, then the employer must provide fresh, independent consideration. The Court of Appeals of Washington reaffirmed this rule in McKasson v. Johnson, 2013 Wash. App. LEXIS 2848 (Wash. Ct. App. Dec. 17, 2013). The key point here is preparedness; the employer must ensure the agreement is signed at the start of the relationship.

So, what to do? The most important task for any corporate counsel or in-house attorney to do is to determine what kind of consideration rules a particular state has concerning non-competes. The Alabama rule, to be sure, is odd. The rule in Washington is far more common. And then there are plenty of states where continued employment will suffice, in which case the concerns about contract formation are not quite as paramount.

These rules are important because they override any issues pertaining to a contract's scope or whether an employee even committed a breach. They determine whether there is a contract to begin with.

Tuesday, December 31, 2013

2013: The Top 10 List (Part II)

I hate to see 2013 leave, so I stretched my annual year-end review into two parts. Yesterday, I discussed the first half of my top 10 developments in non-compete and trade secret law. And today, I conclude the year with numbers one through five.

Here we go....

5. Aleynikov's Advancement Victory Highlights Oft-Overlooked Issue in Competition Suits. Former Goldman Sachs code developer has the distinction of making the Top 10 list in back-to-back years. (He is, in essence, the Arcade Fire of trade secrets litigants.) In last year's post, I summarized his legal high-wire act and predicted that he just might win his indemnification and advancement suit against Goldman Sachs. Well, he prevailed at least in part, with a federal district court finding that Aleynikov is entitled to have Goldman advance his legal expenses to fight the ongoing state criminal case in Manhattan. This development is significant because advancement and indemnification rights are the soft underbelly of many competition cases and often can throw a wrench into a company's plans to fight unfair competition. States recognize the broad policy goals of advancement and indemnity and will apply these statutes liberally to further those goals. Aleynikov's case, and others like it, should teach plaintiff's counsel to carefully consider how to plead and pursue competition claims. For a recap of Aleynikov's win in New Jersey, read my post from last month.

4. Federal Court Convicts David Nosal of Computer Fraud. The Computer Fraud and Abuse Act continued to wreak havoc on logic and reason (and more than a few lives) in 2013, and the case of David Nosal is one such example. The former Korn/Ferry search executive was convicted for violating the CFAA and the general federal conspiracy laws in California federal court. Nosal's plight (he will again appeal) indicates that conduct often giving rise to civil claims for unfair competition can actually result in criminal charges. Nosal's conviction generated a fair amount of controversy and demonstrates the broad applicability of the CFAA. For a discussion of the Nosal conviction, listen to the Fairly Competing podcast that John Marsh, Russell Beck, and I produced and posted back on May 28.

3. Illinois Appellate Court Issues Controversial Fifield Decision. No single non-compete has generated more buzz than the Appellate Court of Illinois' opinion in Fifield v. Premier Dealer Services. The case holds that a non-compete given in exchange for employment is not sufficient consideration unless the employment continues for at least two years. (To those unfamiliar: this is a case not legislation. I know it's confusing.) The rule broadly impacts at-will employees and has caused business counsel to lose sleep and wring their hands over just how to draft employment contracts. The Supreme Court of Illinois tacitly approved of the holding, declining to take the petition for leave to appeal. They were not persuaded, apparently, by my "dissenting opinion" in Fifield as the phantom Fourth Justice. (For those of you interested in assessing blogging metrics, this post - by a factor I can't even count - generated the most hits, the most e-mails, two news magazine interviews, and three citations in opposing counsel's legal briefs.) For my follow-up take, you can read more on Fifield here. (And if you want even more, just Google "Fifield." You'll find plenty.)

2. Seventh Circuit Decides Tradesmen Int'l v. Black. My case. Navel-gazing. Can say no more. Read here and here.

1. Federal Legislation to Protect Trade Secrets on the Horizon? Number one is a runaway. Not even close. It is difficult to overstate the importance of many proposed bills that are currently working their way through committee or that could be reintroduced in some form or fashion. Of particular note in 2013 was "Aaron's Law", which Zoe Lofgren introduced to cut back on the perceived unfairness and breadth of the CFAA. John, Russell, and I discussed the CFAA prosecution of activist Aaron Swartz on our Fairly Competing podcast early this year. Rep. Lofgren also introduced the Private Right of Action Against Theft of Trade Secrets Act, which would create a private civil cause of action at the federal level. Other legislative activity at the federal level included introduction of the Deter Cyber Theft Act, which would establish a "watch list" of countries that engage in cyber theft and require border patrol to bar imports from those countries. My June 4 discussion of the Act can be found here. Finally, and most recently, Senator Flake introduced the Future of American Innovation and Research Act. This legislation would provide a federal trade secrets remedy against those acting outside the U.S. or for the benefit of a foreign actor. It also provides for an ex parte seizure order, subject to some limitations. And finally, if you're interested in listening to further discussion about the federalization of trade secrets law, listen to the podcast John, Russell, and I produced on May 17.

***

That's a wrap on 2013. Again, many thanks to my readers and those who are kind and thoughtful enough to e-mail me. You have made this a truly enjoyable experience once again. A less warm farewell for the year to those spammers who have ruined the commenting portion of this blog permanently. Such is life on the internet.

I am looking forward to starting Year 6 and reaching that milestone of post number 500. See you in 2014!

Monday, December 30, 2013

2013: The Top 10 List (Part I)

And so ends Year 5, my fifth full year writing this blog. Sometime during the first quarter of next year, I will be penning my 500th post. I guess that qualifies as a milestone, but I'm not exactly sure how to celebrate. Perhaps a guest column? We'll cross that bridge later.

For now, we'll have to make do with what has become an annual tradition - a countdown to the Top 10 most significant developments for the past year. Some on this list will be familiar, some perhaps not. And as usual, I have my own reasons (which I'll try to explain) for why I think a development is signficant.

This year, I am breaking the post into two parts. Not so much to speed-up the countdown to Post No. 500, but to continue on with the suspense-building tradition of bifurcating Top 10 lists (see Pitchfork's Top Albums list, for instance).

So here goes Part I, in which I'll summarize 10 through 6. Tomorrow, we'll conclude the year with Part II, in which I outline the five most important developments of 2013.

10. State Legislatures Continue Examining Non-Compete Agreements. Every January we see legislatures consider a host of new bills - many of which are unpassable sops to constituents. It has become commonplace to see the introduction of bills regulating non-compete agreements. This year was no different, as legislatures in Minnesota, Illinois, New Jersey, Connecticut, and Oklahoma all considered regulating various aspects of non-compete law. For a take on the Oklahoma bill, read my post from June 10.

9. First Circuit Addresses Scope of "Solicitation." One of the year's more interesting circuit opinions comes from Massachusetts and the always-reliable Judge Selya. The case of Corporate Techs. v. Hartnett addressed a frequent problem posed by non-solicitation covenants: just what is a "solicitation" anyway? The case pragmatically concludes that there is no real viability to a "first contact" rule, and that business realities must play some role in assessing whether an employee has impermissibly solicited a client in violation of a contractual restriction. For a summary of Hartnett, read my October 17 post.

8. Fracking Bills Intersect Public Policy with Trade Secret Rights. For those of you interested in our country's continuing debate over energy independence, the very word "fracking" can invoke a visceral reaction. It is beyond dispute, however, that the renewed interest in fracking as a means of energy production has led to job creation, particularly in areas hard-hit by the recession (including my state of Illinois). As a result, state legislatures are considering or enacting bills to allow (and heavily regulate) this method of energy production. But in doing so, states are having to consider how to protect the trade secret rights of oil and gas producers. Understandably, many environmental groups want to know what kinds of chemicals the producers are using in their fluid compositions (which is critical to the fracking method). And this leads to an explosive intersection of public policy and private ordering of trade secret rights. For my take on the issues likely to come up time and again in fracking cases, read my May 2 post.

7. Supreme Court Validates Use of Forum Selection Clauses. It is near-sacrilege on this blog to discuss matters related to venue and jurisdiction, if only to prevent internet-induced boredom. But there is no doubt for practitioners that these issues are important to understand. For the second straight year, the Supreme Court has issued an opinion that will be critical for those attorneys who deal with the enforceability of non-compete agreements. While last year's decision dealt with arbitrability, this year, the Court reaffirmed the notion that forum selection clauses are presumptively enforceable. As it stands right now, the only real method of shifting venue when the underlying contract contains a forum selection clause is to argue third-party inconvenience. For my summary of the Atlantic Marine case, read my post from last week.

6. Courts of Appeal Affirm EEA Convictions. The Economic Espionage Act continues to generate much discussion among commentators, particular given the importance of trade secrets in our economy. This year, we saw two courts of appeal affirm EEA convictions arising out of theft of trade secrets. In one case, the Seventh Circuit affirmed Hanjuan Jin's conviction arising from her misappropriation of technology from Motorola (though the technology is now somewhat dated). In the more interesting case, the Sixth Circuit affirmed the convictions of Clark Roberts and Sean Howley for misappropriating Goodyear's tire-assembly machine technology. But it reversed the sentences the district court imposed, particularly given Goodyear's inability to describe adequately the economic loss it incurred from the theft. For my discussion of the Goodyear case, read my February 6 discussion in USA v. Roberts.

***

Stay tuned for Part II (5 through 1) tomorrow afternoon, featuring proposed federal legislation, criminal convictions under the Computer Fraud and Abuse Act, and developments in Illinois.

Tuesday, December 24, 2013

Supreme Court Finds Forum Selection Clauses Presumptively Valid

For the second straight year, the Supreme Court has issued an opinion which impacts procedural issues surrounding many non-compete disputes.

Last year, the Court held that when an employment contract contains an arbitration clause, an arbitrator - not a court - must determine the enforceability of a restrictive covenant. This year, the Court addressed an issue which seems more and more pervasive in covenant fights: the enforceability of forum selection clauses. These procedural disputes are time-consuming, expensive, and totally ancillary to the merits.

Venue provisions seem to be part and parcel of any employment agreement nowadays, with those clauses specifying what law the parties agree to apply and where any dispute should be heard. Although it is not uncommon to see venue provisions as merely optional or permissive, it is far more frequent in my opinion to see mandatory clauses that specify the employer's home state as the exclusive place for dispute resolution.

The problem concerning enforceability of these clauses generally arises when an employee lives and works out of state. Often times, the employee - anticipating a covenant lawsuit - will file preemptively in his or her home state to establish a venue different than that specified in the contract. Just as frequently, the employee's first response in a covenant suit is to try to dismiss or transfer the case on venue grounds to his or her home district.

Is this permissible? The Court in Atlantic Marine Constr. Co. v. U.S. Dist. Ct. makes it much more difficult for the employee to raise this defense.

The Court in Atlantic Marine held that a district court should enforce the forum selection clause and transfer the case to a different federal court (the one in the pre-determined venue) unless extraordinary circumstances "unrelated to the convenience of the parties" work against a transfer. Effectively, the forum selection clause has controlling weight in the case, and a district court judge should transfer the case unless non-parties would be inconvenienced.

For an employee, the only practical way to prevail in this type of forum fight is to introduce by way of affidavit specific testimony showing that nearly all of the relevant witnesses are located out of state. This would cause a court to consider whether maintaining the suit in the chosen state would work a hardship on third-parties and lead to problems with subpoena compliance. Even that may not be enough, since presumably the employer will introduce counter-testimony showing which witnesses reside in the contractually agreed-to state. The availability of video testimony or use of depositions at trial further work against the employee. That said, the employee's showing must be compelling, detailed, and substantial if he or she is to have any shot at all.

It is important to remember that when a venue fight like this arises it usually takes place in federal court. If the employee files a preemptive suit in another state, it is a virtual certainty there will be complete diversity between the parties so the suit will end up somehow in federal court (either on its own or through the process of removing it out of the state court into the federal court). When seeking to enforce a forum selection clause, the employer is going to move to have the case transferred to a different federal court or dismissed so it can refile in the appropriate state court. However, the Court's opinion indicates the same test concerning enforceability of the forum selection clause will apply regardless of whether the motion is for transfer or dismissal.