Thursday, October 23, 2014

Seventh Circuit Appeal Downplays Fifield Consideration Rule

The federal case of Instant Technology LLC v. DiFazio is somewhat of a rare breed in that the parties tried the case to the end. Most business disputes settle, frequently after an initial injunction hearing, and this generally holds true when the case arises from an acrimonious divorce (as was certainly the case with the key players in DiFazio).

I wrote last year on the case, primarily because the district court followed the Illinois Appellate Court's ruling in Fifield v. Premier Dealer Services, Inc. and invalidated several non-compete agreements on the grounds that the employees were not employed for the required two years to vest the contracts with consideration. (Remember, for at-will employees in Illinois, Fifield established the two-year rule if the sole consideration was the job itself.) On the facts in DiFazio, the case appeared to have some strengths for the plaintiffs, but like many non-compete disputes, the facts only get you so far. There's still the law to deal with, not to mention judicial distaste for these types of cases. Instant Technology had trouble during its bench trial on a number of fronts, including its presentation of damages.

Seeing that the case went up on appeal, I was interested to see what role the Fifield rule would play in the Seventh Circuit. Instant Technology's brief is now in.

Fifield appears to have taken a back seat, though that's not to say the Seventh Circuit won't issue some kind of analysis or statement about how the Supreme Court of Illinois might weigh in. The brief is long, but only a few pages mention Fifield. And the analysis seems intentionally thin. The reason could be that the employees who presented Instant Technology with a Fifield problem appear to be secondary players. Many appellate lawyers will abandon issues on appeal so that the reviewing court does not get too lost in a sea of issues.

Interestingly, Instant Technology shifted gears after losing its bench trial and hired a new law firm, Much Shelist, to represent it on appeal. That firm, ironically, represented the winning party in Fifield and helped create the two-year rule that now presents some problems for Instant Technology.

Instant Technology detoured around Fifield in an interesting way. Essentially, it argued the Supreme Court might use its overall "totality of the circumstances" to assess not only whether the covenant is reasonable, but also whether the contract has sufficient consideration. It gave an example from the facts of the case itself. One of the employees apparently had a prior stint with Instant Technology. In the employer's view, this prior employment should be a factor bearing on whether the new contract contains enough consideration.

I find it fairly unconvincing that a court would use the overall reasonableness test to assess the adequacy of consideration because it conflates two separate inquiries. The "totality of the circumstances" approach is a judicial check to weigh the contract terms with the asserted business interest. There's nothing from the Supreme Court's precedent that suggests it's meant to apply to an issue of contract formation. Furthermore, combining the consideration argument in the manner Instant Technology proposes would allow an enforcing party to use the same facts for multiple purposes. This is improper bootstrapping. Put another way, the facts that help an employer illustrate a protectable interest cannot also help it show the contract was formed properly.

Consideration should address what an employer gave up or what an employee gained by signing the contract. Fifield holds that the job itself only sometimes can be consideration because that job can be taken away. Take an example: if an employer agrees the employee only can be terminated for cause (with severance rights for a termination without cause) for a period of two years, then it's giving up a core element of the traditional at-will relationship. That's consideration. Determining whether the employee received access to customers or confidential information is not a consideration issue because it's tied intrinsically to whether the covenant terms are reasonable. Instant Technology's position would meld the two, and I think that's inappropriate.

I have said before that I am no great fan of Fifield, but I don't think we can fix it by creating more confusion in this area of the law.

Thursday, October 16, 2014

Aleynikov Strikes Out in the Third Circuit

About a year ago, I wrote about Sergey Aleynikov's win against Goldman Sachs Group (at least as far as legal fees are concerned). The ex-Goldman computer programmer won an expedited summary judgment proceeding in New Jersey federal court on a claim for fee advancement. His advancement claim related to an ongoing state court criminal case arising out of his alleged theft of Goldman's computer source code, which was used to run its high-frequency trading operation.

"Advancement" is a fancy way of saying that a corporation, under some circumstances, agrees to front legal fees to an officer or director who is part of a proceeding related to his corporate service. Think of a shareholder derivative suit brought against individual directors, in which the claim is for breach of fiduciary duty arising from a proposed business sale. Those directors need assurances not only that the company will cover their expenses if they win but also that the company will pay fees as they're incurred. That's advancement.

Aleynikov's advancement claim against Goldman was somewhat (though only somewhat) unusual since he was in an adverse position to Goldman. After all, they have claimed Aleynikov stole source code with malicious intent. Actually, more than "claimed." His litigation journey (in several states, civil and criminal) is nothing short of remarkable. And for those interested in the non-Goldman side of this, read Michael Lewis' Vanity Fair piece which was published around the time Aleynikov scored his initial win on legal fees. Aleynikov's story inspired Lewis' fantastic new book Flash Boys, which explores the rise of high-frequency trading and the "Army of One" IEX dark pool exchange.

Aleynikov's victory in New Jersey was predicated upon the specific language of Goldman's bylaws, which provided advancement rights to its "officers." Unfortunately, the bylaws weren't terribly clear, and the district court had to contend with competing interpretations of who qualified as an "officer." Aleynikov won in no small part due to Goldman's own drafting problems. This normally is a fair trade. Ambiguities are construed against the drafter; no one even participates in drafting bylaws except the company so there's no apportioning of blame. Arms' length contracts they are not.

The Third Circuit, though, reversed the grant of summary judgment and held that a jury must sort this ambiguity out. That is, did Goldman really intend to include Aleynikov as an officer? It would seem that Goldman will have the upper hand on this question, particularly if Judge McNulty admits evidence of his underlying "offenses" against Goldman (which he shouldn't).

Without belaboring the reasoning, the circuit court effectively found Aleynikov could not benefit from the "no ambiguities" rule because the rule doesn't resolve whether a party has any rights to a contract in the first place. It's only intended to supplant a dispute over the extent of those rights.

The ruling is muddled, confusing, and leaves more questions than it answers. For one, it's not clear how a fact-finder is supposed to sort through this ambiguity. The case is almost uniquely unsuited to a jury's fact determination. Both Goldman and Aleynikov can offer self-serving testimony about what the intent of the provision should be. But that's likely a wash. There are no negotiations to fall back on, since bylaws are not negotiated.

The closest the Third Circuit could come to providing guidance is this bizarre passage: "...resort to extrinsic evidence regarding course of dealing and trade usage to resolve the ambiguity does not seem inappropriate even where Goldman unilaterally drafted the agreement." What this "course of dealing" possibly could be is anyone's guess. The clause "does not seem inappropriate" is hardly a ringing endorsement.

Corporations have great control over how to draft indemnification and advancement provisions. Allowing a case like this to proceed to trial not only undermines the advancement remedy (for it must be expedited to be worth anything) but it encourages poor drafting. It's hard to see how any individual officer or director ever could supply evidence of "course of dealing" to counter what a company would offer in terms of its drafting intent.

Aleynikov lost this one. But he shouldn't have.

Monday, October 13, 2014

My 500th Blog Post

The original title of this post was simply: "Thank you and goodbye."

I have a lot of other stuff I want to do. Write law journal articles. Perhaps start another blog. Do more pro bono work. Learn how to ski. Experiment with vegan cooking.

So ending this at number 500, nearly 6 years after I started, seemed like the right thing to do. And it seemed like the right time, as I just concluded a big trial with immensely satisfying results. (Read here for the news story.)

But I am not ready to let go just yet. So I've decided my readers are stuck with me for a little bit longer. It may be for another 100 posts. Maybe until the end of the year. Who knows? This blog is mine, and I get to decide when I've said all I wanted to say.

So for Number 500, I get to say some things that are on my mind. I'll keep it big and profound.

The Future of Non-Competes

I believe we're close to an inflection point. Having observed the proliferation of non-compete cases and non-compete contracts, I worry about fatigue. I am not "for" or "against" non-competes in the sense that many attorneys are. There are two sides to the difficult questions these contracts pose, and I recognize the arguments are compelling. And when I speak of "fatigue," I am concerned that courts are so accustomed now to these disputes that they view them with less urgency. In this respect, companies don't think through what they're trying to protect and how they're going about it. This is true of both large and small companies, though more so with small ones. Drafting errors abound, and it's somewhat disheartening to see a standard form used for employees with vastly different responsibilities. This, more than anything, causes judges to roll their eyes.

In terms of the inflection point I see on the horizon, I believe the law may be pivoting towards a closer analysis of consideration for at-will employees. Those of us in Illinois can blame the Fifield decision for helping spur this on, but perhaps it's not a bad debate to have. Corporate counsel need to start thinking carefully about the overall structure of non-compete arrangements, and how the issue of consideration might look in an enforcement action. Merely invoking "continued employment" may not be good enough as courts continue to scrutinize enforceability. I personally believe that employers will have to start providing truly meaningful consideration to obtain non-compete agreements. Though consideration costs money, the more thoughtful use of consideration may actually eliminate disputes, as employees will be less apt to challenge the contract on enforceability grounds.

Trade Secrets and the Federal Question

The question of whether we will have a federal trade secrets statute is the hot topic for me and other nerds in my industry. It's truly a debate only a lawyer could love. I believe we'll get some federal legislation in the near future, and the difference between the House and Senate trade secret bills is not significant enough to comment on further. If we get a very watered down bill passed, then perhaps many trade secrets claims will remain in the state courts.

Trade secrets law historically has been the domain of state courts, and I'm somewhat concerned about removing this wholesale (in effect) to federal court. As a practical matter, though, a sizable number of these cases are ending up in federal court anyway under either diversity jurisdiction or as part of a computer fraud case.

Expanding trade secrets law into a federal claim, though, in effect will dump most non-compete cases into federal court, too, since the two theories often go hand-in-hand and the non-compete actions will be part of a federal court's supplemental jurisdiction.

Federal courts may be better equipped, particularly with good magistrates, to handle the increasingly complex discovery issues that trade secrets cases present. Most state courts don't have the resources to manage fast-moving discovery fights or block out time for emergency injunction hearings. Federal courts are busy, but they have the capacity to handle difficult trade secrets cases better than state courts.


The amount of blogs on the subject of non-compete and trade secret law really has exploded. I am not sure how I feel about this. This probably is related to the vast interest in this area of the law, the number of interesting topics on which to write, and the fact lawyers seem now to understand the impact blogging can have.

I started this blog in 2008, so I'm a relative veteran but I now find my voice is fairly diluted. Most bloggers end up quitting fairly quickly; others run out of things to say; and for still others, the demands of the job simply cause the blog to get shifted down the priority list. At times, I worry about falling in the last category. I don't ever want this blog simply to be exclusively a sort-of law school case analysis, where I simply talk about a decision. I'd rather comment on the practical impact of disputes, how issues affect clients, and important developments.

I think blogging for lawyers, in this area or otherwise, is definitely here to stay. This is still a great tool for lawyers and, more importantly, for clients to learn the basics of the law without paying legal fees.That's why I will, in the relatively near future, post my last entry here and start a blog. I may start a new blog, because I love to write. I just don't want this site to retread old ground and say things I've already said.


Finding a non-compete specialist is not necessarily that critical for clients. In my opinion, the qualities that make a good attorney by and large carry over to those who represent individuals or companies in competition suits. I do believe that in this area of the law an attorney who writes well is essential. Having someone who is a good trial attorney and presents will in court is crucial, but because many injunctions are decided on the paper, clients need to have counsel who write clearly and understandably.

Also, lawyers have to develop a deeper understanding of the business that is the subject of the dispute. Unlike many areas of the law, competition suits require that the lawyer have a thorough knowledge of the industry and how the pertinent facts fit into the competitive landscape. I frequently see lawyers fumble around with terminology or key business concepts that tend to diminish their credibility. Unfortunately for clients, it does cost a bit more for the attorney to feel as though he or she is sufficiently knowledgeable about the industry as a whole to represent well in court.


This is an area of the law that continues to divide judges, state and federal alike. Many judges have visceral feelings about enforcing non-competes. This is part of the reason so many non-compete suits settle relatively soon after they start. The lawyers often appear in court quickly after the case is on file, and they then have an excellent opportunity to gauge the judge's reaction to the merits. Contrast a typical Title VII case where a judge may not have an opportunity to assess the merits for 2 years from the filing date.

So a judge's perception of the merits may be colored by where he or she falls on the policy continuum: freedom to compete vs. freedom of contract. Unquestionably, though, the judge will look to whether one of these three crucial factors is at play: (1) the misuse of confidential data or trade secrets; (2) whether there is some bad-faith activity by the employee during the exit process (such as diverting business or parking new clients on the sideline); or (3) the presence of direct solicitation of valuable accounts post-termination in violation of a contract provision.

When one of these facts is in the lawsuit, the defense will have a tougher time prevailing. When all three are absent, the plaintiff is going to face an uphill battle explaining what the injury is and how it is damaged.

Thank You

For those of you who continue to read, thank you. Keeping this blog fresh and full of new content after 6 years and 500 posts is a lot of work but a rewarding challenge. If you have any suggestions or comments, I always invite feedback. Feel free to e-mail me directly at

Thursday, September 25, 2014

Advancement Rights Percolate Beneath Delaware Trade Secrets Lawsuits

Assume you represent a company and suspect a departed executive is competing unfairly by using the company's trade secret information. Further assume you have a case with, at least at first blush, a strong set of facts and a motivated client which wants to move quickly. But like most trade secrets cases, the suit is going to cost a lot of money and take a great deal of discovery to resolve.

How do you feel about advising your client that it may need to pay the ex-employee's legal fees as the case proceeds?

This is the reality of trade secrets lawsuits, particularly against former officers and directors of Delaware corporations. Delaware has a broad public policy that encourages individuals to serve in officer and director roles. To entice that service, Delaware corporate law allows, and virtually all company bylaws adopt, broad advancement rights.

So what is "advancement"?

The concept simply refers to a corporation's obligation to front (or, advance) legal expenses that an officer or director incurs by reason of her service to the company. Unlike indemnification, advancement means that an officer or director may have a right to receive regular payments to defray legal expense as the proceeding develops over time.

Importantly, this advancement right even can apply when the officer or director sits in an adversarial position to the company, as the officer or director would in a trade secrets misappropriation case. I have highlighted above the phrase "by reason of" because it is central to many disputes over whether an individual is properly entitled to advancement of legal fees.

Delaware courts have provided a helpful definition for this key phrase: it simply means there must be a "causal connection" between the underlying proceedings and one's official corporate capacity. See Homestore, Inc. v. Tafeen, 888 A.2d 204, 214 (Del. 2005).

There are a growing number of cases that apply the official capacity test to trade secrets cases. The courts finding advancement rights in these cases reason that where a claim is based on misuse of confidential information learned in an individual's official corporate capacity, that claim is one that qualifies as being brought "by reason of" her service to the company. There are several cases that address this, and most look at the nature of the allegations found in the underlying complaint. An example for practitioners comes from Pontone v. Milso Indus. Corp., 2014 Del. Ch. LEXIS 152 (Aug. 22, 2014), a fairly common dispute between a company and a former officer, who competed after his non-compete agreement ended. The core allegation dealt with the officer's purported misuse of trade secrets to lure away customers and employees of the former employer.

The overarching rationale that allows for advancement is that a corporate officer would not have had access to confidential information but for her service to the company. This, courts reason, provides the essential link between the challenged conduct and the official capacity needed to meet the "by reason of" language that virtually all Delaware corporations have in their bylaws.

The advancement rights that are likely available may be limited to officers and directors, as opposed to employees. But it is essential to parse carefully the language of the state's enabling statute and the corporate charter and bylaws to see who qualifies for advancement and what the precise conditions are for receiving advancement. Though many states will follow Delaware case law, there is variation among the statutory provisions and a high likelihood that a non-Delaware entity will not provide for broad advancement rights.

So for those attorneys who are filing trade secrets cases, it is essential to evaluate the potential for advancing your adversary's costs along the way. In effect, this could double your client's litigation expense.

Thursday, September 18, 2014

A Fool's Errand: Seizing Instrumentalities of Trade Secrets Theft

There is much debate about the companion pieces of legislation introduced in Congress that relate to trade secrets law.

Those two proposed laws are known as the Defend Trade Secrets Act of 2014 (the Senate version) and the Trade Secrets Protection Act of 2014 (the House version). The debate often centers around whether it is sensible for Congress to federalize a branch of law traditionally reserved to the States, under which a well-established body of case law already exists. There also is the perception that federal courts provide muscle that state courts cannot, and that in certain states overly taxed judges do not have the resources to handle complicated discovery disputes and the sheer pace of trade secrets litigation.

One area of friction that is starting to gain some attention concerns the federal proposal to allow for ex parte seizure orders in trade secrets cases - something that commands almost no attention at the state level. Seizure orders are common in copyright and trademark cases because the infringing good (a pirated movie, for instance) is itself a reflection of the wrong. In trade secrets cases, however, the device used to store a stolen secret - a hard-drive or a server - may have (indeed, likely has) a mostly legitimate, non-infringing purpose. The DTSA attempts to incorporate the provisions of the Trademark Act in regards to seizure order, but this fails to recognize the vast difference in the type of intellectual property which trademark law is intended to protect compared with trade secrets law.

The TSPA is, to be certain, more mindful of the problems associated with the ex parte seizure order. But in trying to be more balanced (ostensibly), the TSPA deploys a weird seven-part test that an applicant must show on an ex parte basis. As if district court judges need more seven-part tests to apply.

Part one of the test specifically requires an applicant to show that a temporary restraining order would be ineffective because the responding party would evade it. Yet, the law clearly allows federal courts to issue orders directed at parties to preserve relevant evidence. And the destruction of evidence not only leads to sanctions, but it's also a criminal act. The built-in deterrent from the common law is so strong that part one of the test is almost self-defeating. Then, there's part six of the test, which separately requires an applicant to show that the responding part would "destroy, move, or hide the property" subject to the seizure order. I have thought about this too much and still cannot see how this is any different than the part one, but I suppose someone will come up with a reason. The only "benefit" I can see is that it gives an associate three more pages of briefing to come up with in the ex parte motion.

The seventh part of the test is downright bizarre, as it states that the applicant cannot have publicized the requested seizure. This raises the obvious question of what constitutes a publication. If a company needs to reassure investors, lenders, or clients that it is taking steps to remedy trade secrets theft that includes the application for a seizure order, it seems unusual to penalize the company for such a practice and remove an otherwise viable remedy the statute provides. There's no policy rationale to discourage publication.

In opposing the new federal legislation, a group of 31 law school professors stated that they were "concerned the TSPA requires a level of secrecy about court rulings that is unprecedented." I don't believe that's the case at all, since nothing in the TSPA requires the impoundment of court orders relating to ex parte seizure applications. My concern is that existing law covers any concerns Congress may have. And the new law may stand in the way of applying that time-tested law relating to preservation of relevant evidence, expedited discovery, and the use of court-appointed neutrals to image and copy digital storage media.

I have been relatively ambivalent when it comes to federalizing trade secret law. But any law that allows for the use of ex parte seizure orders is pushing me towards favoring the current state law regime. This is simply a poor fit for a branch of intellectual property law that is qualitatively different than trademark and copyright.

Monday, September 15, 2014

A Non-Compete Damages Overview

Companies that enforce restrictive covenants against ex-employees often face an uphill battle in proving damages resulting from a breach. It is for this reason that in the vast majority of cases a plaintiff focuses primarily on securing an injunction right away. It also is fairly clear that unless a new employer has aided the breach in some respect (for which it could be liable to an equal extent as the breaching employee) that an individual likely does not have the ability to pay a monetary judgment.

Still, it is important for plaintiff's counsel to understand the damages landscape and how to value a case. In this regard, the following damages theories might be available in a non-compete dispute:

  1. Lost profits - The conventional method of proving contract damages is through a showing of lost profits. By definition, lost profits are speculative to a degree because they seek to project a model of economic activity in a counter-factual world. Put another way, but for the breach of the restrictive covenant, what profits would the employer have earned? Lost profits claims are delimited by the "reasonable certainty" rule, which means that a plaintiff must establish loss to a reasonable degree of certainty. Many courts confuse this rule's application. Generally speaking, it applies to the fact of damage. And once a plaintiff shows some damage, it is entitled to greater latitude in quantifying the harm - particularly where the employee's conduct has impeded quantification. In non-compete cases, a party may attempt to prove lost profits by projecting a picture of future sales from diverted or impaired customers.
  2. Restitution - Although lost profits is likely the preferred route to establish damages, the concept of restitution also may apply in non-compete suits. Many courts hold that if a plaintiff's lost profits (or reliance) damages are unavailable due to the uncertainty in measuring the loss, a plaintiff can recover in restitution. The term simply refers to the plaintiff's interest in having restored to it any benefit the defendant achieves. Non-compete cases present an obvious case for restitution damages when a new employer has benefited from an employee's breach. The damages simply may be the new employer's own profits that are tied to the employee's breach, not those the ex-employer would have earned absent the breach.
  3. Liquidated Damages - I have written extensively, both in this blog and in published journals, regarding the benefits of using liquidated damages clauses in non-compete agreements. The idea is that an employer can predetermine its damages by setting forth a formula in a contract. That formula then would apply if (a) it's a reasonable measure of damages, (b) the potential loss is difficult to quantify, and (c) it is not intended as a penalty to coerce contractual performance. Many cases find that non-compete contracts are well-suited to liquidated damages clauses. The reason is that the interest a non-compete protects is largely intangible. Therefore, proving specific, monetary loss always will be difficult. Drafting is essential, with the employer bearing a significant burden to show that its damages formula is reasonable. Employers would be well-advised to create a working damages model based on objective criteria that will stand up in court to the inevitable defense challenge.
  4. Goodwill Impairment - The concept of "goodwill" is intrinsically tied to non-compete cases because many times the contract protects this intangible business interest. Goodwill is nothing more than a company's expectation that its customers will remain with the firm. Since a non-compete violation can result in a permanent loss of customers beyond the covenant's duration, a damages analysis relying on goodwill impairment is another possible means of recovery. In some respect, it overlaps with a projection of future profits so the two analyses shouldn't result in a duplicate damages claim. Although expert testimony is not needed to prove lost profits, it likely would be required if a plaintiff sought to prove goodwill impairment. The reason is that any goodwill impairment analysis should incorporate some sort of regression analysis to explore the relationships among variables that may affect a business's going-concern value.
Assessing damage in a non-compete case frequently is an afterthought. Counsel for both plaintiff and defendant should examine exposure as quickly as possible, even if the facts concerning liability will be the initial focus in the case.

Friday, August 15, 2014

At a Preliminary Injunction Hearing, How Likely Is an Employer to Win?

There are problems with statistical analyses. One of them is that the data sampling size may not be reliable or that the parameters established tend to skew results.

I am no statistician, but I have enough of a background to be dangerous. I decided to conduct a fairly rudimentary analysis of reported non-compete decisions so that I conclude how likely companies were to obtain a preliminary injunction in non-compete disputes at a contested hearing. This is a very narrow inquiry.

Because I only have so much time (and a trial in 10 days), I tried to obtain the best data I could, realizing full well that it was simply a subset of the actual number of decisions floating somewhere in the public domain. But I believe my data is more reliable than those used to predict a presidential, here goes.

Conclusion: At a contested hearing, employers successfully obtain a preliminary injunction to enforce a non-compete agreement about 60% of the time.

Data Summary: I reviewed a sample of federal district court cases from July 2013 through August 14, 2014. I specifically limited my search to exclude appellate decisions (which would review the grant or denial of an injunction) and to exclude state trial court reports, because only a handful of states publish them online. Since federal courts issue opinions that follow the same general format, I found this to be the most reliable source of information. Finally, I only looked at preliminary injunction decisions after contested hearings, where the matter was fully briefed and the court had to decide issues of fact and law.

During this one-year window, I excluded the following from my analysis:

(1) Controversies between franchisors and franchisees (of which there were a significant number);
(2) TRO rulings, because those often times contain a sparse record for the court to consider and may not really be "contested" in the evidentiary sense;
(3) Non-compete issues arising out of a purchase or sale of a business; and
(4) Decisions that dealt only with trade secret enforcement.

I also took a subjective look at the case if the court was split (or granted the injunction only in part). That is, I made a qualitative assessment as to what kind of relief the moving party obtained and what it actually got after a hearing. If the party successfully enforced a key part of a restrictive covenant, I counted this as a favorable outcome for the employer. If it lost and only was able to enforce a non-disclosure covenant, I determined this to be a favorable outcome for the employee.

Other Observations: The data set was limited to 23 comprehensive decisions. This seems like a small number, but again, the parameters that I chose were very narrow and focused only on contested injunction hearings over a narrow span of time. I assessed what I believed were the court cases that met all the criteria in which I was interested in assessing. Though I expected to see 50 cases, the 23 I selected came from all across the country with both employer-friendly jurisdictions (Florida) and employee-friendly states (California) represented.

The conclusion of a 60% victory rate for employers after an injunction trial is, frankly, a little higher than I expected. This is so for a few reasons: (1) the difficult injunction standard employers must meet; (2) the hesitancy of courts to enforce restraints of trade; and (3) the perception that employees quickly settle obvious cases where the facts are bad. If all these are true, then I would think that contested hearings would skew in favor of employees. Apparently, not so.

Interestingly, I found no real clear pattern from the results. I found cases where courts refused to enforce agreements despite seemingly clear evidence of data theft, and cases where an employer enforced an agreement that appeared overly broad. There was no unifying theme among the decisions. This fits with the highly fact-intensive nature of these disputes.

All this underscores the fact that results are not predictable. I believe it is difficult to benchmark success when parties let a judge decide, and that it would be irresponsible to conclude that a party's chances of success ever are much greater than 50-60% even on the strongest facts.

Wednesday, August 13, 2014

Will the Seventh Circuit Weigh In On the Fifield Rule?

The body of work following the decision in Fifield v. Premier Dealer Services is somewhat scattered at best. Federal courts are divided on whether it represents the law in Illinois, with courts taking divergent views.

As most readers may know by now, Fifield stands for the proposition that a covenant not to compete signed by an at-will employee requires at least two years of continued employment for that to constitute sufficient consideration. The key aspect of Fifield is that this consideration rule applies even when an employee signs a covenant at the start of employment, rather than during the course of employment. An undecided issue is how Fifield applies to lawsuits outside Illinois' First District (that is, Chicago).

The Seventh Circuit, though, is primed to weigh in. The plaintiff in Instant Technology LLC v. DiFazio has appealed its loss to the circuit court, and one of the central features of the district court's holding was that Fifield barred the non-compete claims. The district court judge discussed Fifield at length in his memorandum opinion. My discussion of the district court ruling is here.

The plaintiff in Instant Technology is due to file its appellate brief in a few weeks. I will look forward to reading how much it attacks the reasoning from Fifield and whether the two-year rule is likely to be a central feature of the appeal.

Tuesday, August 12, 2014

In Non-Compete Suits, Is the Employee's Age Relevant?

It's a given that courts consider a wide range of facts - perhaps too wide - when ruling on enforcement actions. Already burdened with figuring out the competitive inflection points between warring companies on a truncated record, courts also must balance a completely unrelated issue. Hardship. As in, how would enforcement of a non-compete through a court order harm an employee?

This inquiry, part of the widely used "rule of reason" test, mandates a look at softer facts that really have nothing to do with the merits of the case. Instead, the collateral inquiry all but invites the court to take into account evidence that is highly personal .

This begs a question that few courts tackle head-on. How relevant is age?

I started thinking about this after I read an article by Josh Zumbrun from the July 14 Wall Street Journal ("Lower Job Churn Hurts Young Workers" at p. A2). The article describes a compelling economic rationale for mobility among younger workers, and consequently could be an endorsement that younger workers should be released from non-compete enforcement. The article discusses Federal Reserve Chairwoman Janet Yellen's concern over the lack of mobility among younger workers. The following passage is particularly illuminating:

By hopping from employer to employer, especially early on, workers find jobs better-suited to their skills, build their resumes, bid up their salaries and boost lifetime earnings prospects. They eventually settle down and change jobs less frequently.

Sounds reasonable.

Is this a consideration, though, for courts? It could be, depending on the strategic direction a defendant wants to take. In the context of non-compete battles, time is of the essence and a defendant spends a lot of time reacting. It's conceivable that a defendant could obtain an opinion from a labor economist on the issue of hardship, although that is a hefty expense few can afford.

I used to think of the age factor from a different perspective. Older workers tend to be less mobile and not as attractive on the open market. That could militate against enforcement, since courts occasionally (perhaps rarely) comment on this when looking at the hardship issue. The Wall Street Journal article sort of flipped my thinking and takes a longer term view of the economic impact of not changing jobs.

The tension is interesting because courts used to confront fact patterns where the older, seasoned worker developed goodwill, sales contacts, and enough embedded knowledge that her move to a competitor seemed most likely to pose a threat. In our more technology-driven economy, though, it often is the younger worker who imparts the most value to a company or who is more likely to innovate by developing a new product or service. The economics of job mobility could be seen as militating against non-compete enforcement for these younger, valuable workers.

Thursday, July 17, 2014

NYT Article Adds Grist to the Mill Over Non-Compete Debate

Camp counselors. Hair stylists. Yoga instructors.

These are not the occupations lawyers usually think of when the topic of non-compete enforcement comes up. We normally envision a dispute concerning the mobility of an executive sales manager, a software engineer, or a seasoned product developer.

But many employees in retail professions have to confront non-competes as well. The June 8 New York Times article, "Noncompete Clauses Increasingly Pop Up In Array of Jobs," addresses the ever-expanding use of non-compete agreements and its impact on mid-level professionals.

In fact, the illustration of the 19 year-old camp counselor bound to a non-compete in her summer employment agreement is ridiculous. The owner's justification for such a restriction is laughable:

"Our intellectual property is the training and fostering of our counselors, which makes for our unique environment. It's much like a tech firm with designers who developed chips."

Um, no it's not.

This type of reasoning would, of course, justify the use of non-compete clauses for any employee in any work environment. But the summer camp proprietor's comment illustrates the problem with an employee's ability to challenge the enforceability of that agreement. She would need to show the lack of a legitimate business interest worthy of protection. And the rub is this: that's awfully expensive to prove.

Business owners always will provide some rationale for why their business is unique or how it invests significantly in human capital. And these flimsy, self-serving assertions of a legitimate business interest often carry the day with judges who simply don't have the time to take a deeper dive into what exactly it is the employer is trying to protect. An employee trying to fence with her ex-employer on this issue is hamstrung by the cost of litigation.

The ubiquity now surrounding non-competes, particularly as they are applied to mid-level retail-oriented employees, ultimately could produce a boomerang effect. If non-competes become too widespread, policymakers will search for legislative solutions. Courts will question how the pervasive use of covenants squares with the widespread rule that they should protect only against unfair, not ordinary, competition.

There can, in fact, be too much of a good thing.