Monday, July 25, 2016

Does Nosal II Solve "Without Authorization" Question?

The trade-secrets community has awaited the follow-up decision to the long-running prosecution of former Korn/Ferry executive, David Nosal, based in part on the controversial Computer Fraud and Abuse Act. And with the Ninth Circuit's decision on July 5 in United States v. Nosal, the question remains whether we have answered any questions about the CFAA's potential reach.

Nosal I, a 2012 decision, was largely pro-employee and restricted the scope of the CFAA's most controversial provision - the so-called "exceeds authorized access" prong of Section 1030(a)(4). As a result of Nosal I, the consensus seems to be building that violations of use policies do not mean that a user exceeding his authorized access of a protected computer. In other words, it is not sufficient to base an (a)(4) claim on misuse.

But Nosal I did not address the other part of (a)(4). One cannot obtain anything of value out of a protected computer if he accesses a protected computer "without authorization." And that's where Nosal II squarely lands. The Ninth Circuit upheld Nosal's conviction on multiple CFAA claims under this aspect of (a)(4) under a fact paradigm that is well-known to trade-secret practitioners. Nosal and two ex-employees of Korn/Ferry obtained the password of a then-current Korn/Ferry employee to access a database containing valuable information on executive search candidates.

Was that access "without authorization" under (a)(4)? Yes, said a divided panel of the Ninth Circuit.

The case predictably has produced a lot of commentary, but the most essential read is Orin Kerr's lengthy analysis. The crux of the case hinged on whether it mattered that the current employee gave Nosal's co-conspirators the database password. The majority felt it crucial that Korn/Ferry said that the employee could not disseminate log-in credentials, while the dissenting judge examined whether the employee said yes when her former co-workers asked for the password.

I agree with Professor Kerr that the court reached the right result and that Nosal's accomplice liability conviction was appropriate. But as I read the dueling analyses before Kerr's cogent summary, it was quickly apparent that the case had the chance to be an extremely limited one. For starters, the case doesn't really seem to establish a rule for future application. As Judge Reinhardt notes in dissent, the holding seems to rely heavily on employment-related facts but the CFAA is not an employment law at all.

Professor Kerr then offers his take on where the case should have gone analytically and how the court could have bridged the two opinions. His take is that the  password sharing in the context of the "without authorization" standard really should have embraced an "agency/non-agency" distinction. In other words, because Nosal's co-conspirators used the current employee's password for their own purposes, there was no agency relationship among them. Kerr's argument looks principally to the initial delegation of authority (in Nosal II, that would be the computer access granted from employer to employee) and then to the subsequent conduct and whether it's outside the agency of the initial account holder. This, Kerr argues, would solve the "parade of horribles" laid out by the dissent, which extrapolate innocuous conduct into federal crimes. And in Nosal II itself, it would establish why the employee's grant of her log-in credentials to the ex-employees was "without authorization" - they couldn't have had an agency relationship at that point.

The CFAA, of course, remains a controversial law. Its use in garden-variety employment disputes may be waning in light of the federal Defend Trade Secrets Act. But it is still a potent weapon. What is notable about the plight of David Nosal is that it's not all that far removed from many fact patterns we see in civil cases. The conduct at issue was brazen, to be sure. Still, it seems awfully arbitrary that he has endured criminal prosecution for conduct that many others like him never would face. And on that score, the dissenting opinion's cautionary tale about the influence that Korn/Ferry's firm was able to muster is worth a read in its own right.

Monday, July 11, 2016

New Legislation in Connecticut and Massachusetts Serves to Limit Non-Compete Enforcement

For non-competes, courts and legislatures often have taken incremental steps to chip away at the default reasonableness test. These steps usually are in response to some larger public-policy issue. Two more states are moving to reform the law of non-competes, and both are attempting to curtail their use.

Connecticut is the first, and it has enacted legislation (Public Act No. 16-95) that limits the enforceability of physician non-competes. For any non-compete "entered into, amended, extended or renewed on or after July 1, 2016," the new Connecticut law establishes bright-line enforceability rules. In particular, a non-compete may not exceed one year in duration (presumably post-employment, though the law oddly does not say this) and may not extend beyond a 15-mile radius from where the physician primarily practices (I am simplifying here a bit). Further, an employer may not enforce a non-compete if the physician is terminated without cause.


Massachusetts law has not been changed, at least as of yet. But the long-in-the-works legislative changes appear to be gaining steam. Last week, the Massachusetts House of Representatives unanimously passed a bill to impose stringent limits on non-compete agreements and to adopt (at long last) the Uniform Trade Secrets Act. House Bill 4434 accomplishes several things:

(1) The UTSA piece is unremarkable, but it does require the identification of the subject trade secret "with sufficient particularly under the circumstances of the case" before beginning discovery. This is a legislative endorsement of what many courts already require, but it contains needed flexibility that enables a court to establish discovery parameters.

(2) The bill also would establish the Massachusetts Noncompetition Agreement Act, which would require:

  • At least 10 days' advance notice of the non-compete;
  • For existing employees, independent "fair and reasonable" consideration independent from the continuation of employment (along with 10 days' advance notice);
  • A maximum 1-year duration (except in cases of breach of fiduciary duty or theft, in which case the maximum may be 2 years);
  • A reasonable geographic reach, which is presumptively established if the restricted area is consonant with the employee's sphere of influence within the last 2 years of employment;
  • Garden-leave payment of at least 50 percent of the employee's highest base salary within the 2 years preceding termination or other "mutually-agreed upon consideration" (which is undefined.
Finally the proposed Act would bar enforcement if an employee is terminated without cause and would ban non-competes for non-exempt workers under the Fair Labor Standards Act.

There are some definite quirks in the proposed Massachusetts law, which is to be expected after the long slog this bill has been through. The next step would appear to be a vote in the state senate.


UPDATE (at July 12, 2016):

Apparently, my post was timely. The Massachusetts Senate has acted. I defer to Russell Beck's excellent summary. The Boston Globe article can be found here.

Tuesday, July 5, 2016

Trade Secret Specificity and Inevitable Disclosure

For good reason, the "inevitable disclosure" doctrine has been the focus of much discussion among those in the nerd blogosphere (that's a term of endearment, for I am a charter member and wear the nerd label proudly).

The reason is that the Defend Trade Secrets Act, recently enacted by Congress, disapproves of the doctrine. In truth, so do many states and the doctrine itself always was meant to apply to a very narrow slice of trade-secrets cases. To be sure, the doctrine nominally was available to a discrete subset of injunction cases where the plaintiff had some indicia of bad faith that stopped short of an outright threat to steal.

Like many facets of the law, this narrow carve-out turned into a sledgehammer for reasons that are not particularly altruistic. The very use of the inevitable disclosure theory ought to raise judicial hackles, for it surely can be a weapon improperly deployed and not easily disabled.

Which got me thinkin'...

Assume a plaintiff decides to embark on the inevitable disclosure path (and therefore eschews the DTSA as a means of recovery). How does this fit within another secondary trade secrets principle - that the secrets themselves must be identified with reasonable particularity? Put another way, is there - or should there be - a heightened specificity requirement when a plaintiff uses the inevitable disclosure theory of misappropriation?

I think the answer must be yes, for a few reasons. First, if "inevitability" is a benign form of a threat, then the plaintiff must have a pre-existing factual basis for what that threat is. Otherwise, there simply is no claim and no sense of inevitability of a legal wrong occurring. Second and relatedly, if the plaintiff alleges only general categories of trade secrets and claims inevitable disclosure over them in an undifferentiated way, it suggests implausibility over the act of misappropriation. Another way to say this is that the plaintiff really is just fearful of unfair competition but can't state that fear beyond mere generalities.

The difficult part of this inevitable disclosure/specificity problem is procedure. Courts understandably don't require plaintiffs to set forth the details of their actual trade secrets in a complaint, so it's hard to dismiss cases on the pleadings when the claimed deficiency is a crummy attempt at identifying the actual secret. But hiding details and demanding specificity are not incongruous concepts. Here, I think courts need to take a much more pragmatic approach and assess generally what the theory of misappropriation is and what the plaintiff is claiming the trade secret is. If the claim is based on inevitable disclosure and the plaintiff is unable or unwilling to plead its secrets in a narrow, particular way, then the claim becomes presumptively implausible.

One way to tell is to see if the plaintiff is offering up only broad categories - strategic plans, for instance, as opposed as to a particular launch date in a particular market. Remember, the details of the secret need not be in the pleading, but the allegations must give enough notice to the defendant and the court to inform the ultimate theory of the case.

Friday, June 24, 2016

More Rejection by Illinois Courts of Bright-Line Consideration Rule

The federal courts have become the final frontier for Illinois employers looking to enforce non-compete agreements against at-will employees. Those agreements contain embedded consideration problems if the gap between signing and termination dates is less than two years and if the employer cannot point to some other form of consideration beyond the job itself.

With the recent district court decision in Allied Waste Servs. of N. Am. v. Tibble, there is firm momentum in federal court to move away from the two-year, bright-line rule that two of the five appellate courts have established. The Supreme Court of Illinois twice has refused to weigh in on the matter, apparently content to let this issue play out in the other appellate districts.

Allied Waste breaks no new ground and largely follows the reasoning of other federal district courts, the most persuasive of which is Judge McDade's thoughtful opinion in Cumulus Radio Corp. v. Olson. The essence of these cases is that consideration is too fact-intensive for bright-line rules and that courts should consider the totality of the circumstances (e.g., method of termination, length of at-will employment, conditions of employment).

Indeed, one could argue that Allied Waste is not all that relevant, since it appears the account executive also received a salary bump, greater bonus potential, and promotion in conjunction with his non-compete agreement. Put differently, this really wasn't a classic case in the mold of Fifield and the other disputes that truly center on "continued employment as consideration."


Having now read and thought about these consideration cases for nearly three years, I am warming to an alternative way of thinking of how the consideration question could be resolved. I developed three rules of thumb, which are more or less working concepts and not specific proposals at this point. They seek to balance important interests related to contract formation with the need to avoid bright-line rules, which remove the important function of judicial discretion.

First, if the contract recites the consideration granted for the restrictive covenant, then it should control and the employer may not introduce evidence to contradict (or even supplement) its own agreement. This requires no more than a plain reading of the agreement and informs how the court will proceed with further analysis over the consideration issue.

Second, if the contract is silent or ambiguous as to consideration, then a court may consider extrinsic evidence of specific consideration that would support the agreement. Here, the employer would need to identify something tangible and concrete as opposed to an after-the-fact reconstruction of an individual's employment status that may not have anything to do with consideration for the restrictive covenant.

Third, if the consideration is continued employment and the employee is terminated, then the court should find as a matter of law that the consideration is illusory. This should be an obvious, black-letter principle that poses none of the problems sometimes associated with bright-line rules.

Fourth, courts should conduct limited evidentiary hearings to resolve consideration questions at the earliest possible moment, much like they do now with jurisdictional discovery. The issue of contract formation is essential and requires prompt resolution in a way that is divorced from the other issues that attend non-compete disputes. If the court finds that the consideration given was not adequate in light of the specific restraints, then the court should enter a judgment on the contract in the employee's favor immediately. In this regard, employers who use very broad restraints but only support themwith nominal or potentially meaningless consideration (like continued employment) likely will suffer an early defeat before broad expensive discovery begins.

Friday, June 3, 2016

Texas Supreme Court Addresses Trade-Secret Access

Within the trade-secrets community, the case of In re M-I, LLC has been percolating for some time. The case (the procedural nuances of which are immaterial to this post) addressed the question of whether a trial court may exclude a defendant's party representative from the courtroom when the plaintiff disclosed the details of the allegedly stolen trade secrets.

A few weeks back, the Supreme Court of Texas held that when confronted with such an issue a trial court must conduct a balancing analysis to determine whether exclusion would violate the Fourteenth Amendment's guarantee of due process. Those balancing considerations include the following:

  1. The degree of competitive harm that the plaintiff may incur from disclosure, which necessarily entails some analysis of the merits.
  2. The degree to which the defense would be impaired by the witness' exclusion.
  3. The witness' role in the organization and whether he would have "specialized expertise that would not have been available to" outside experts.

I am somewhat concerned that the In re M-I balancing "test" suggests that a defendant must retain an expert to evaluate the particular trade secrets at issue. That itself would appear to limit access to many defendants unable to pay for experts (paying for lawyers is bad enough). I doubt that the case can be read as setting forth a categorical rule in that regard, and in situations about court access the better approach is to let judges judge and make discretionary calls without being hemmed in by specific standards that may not fit each case. The basic problem in In re M-I is that the trial judge never considered any countervailing interests that the plaintiff had in protecting the secrets during the court proceeding.

It is a little curious that the Court in its Fourteenth Amendment analysis never cited E.I. duPont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917), when Justice Holmes addressed the exact same question as that presented in In re M-I. There, Holmes (citing no authority at all) noted that:

"the judge who tries the case will know the secrets, and if in his opinion and discretion it should be advisable and necessary to take in others, nothing will prevent his doing so. It will be understood that if, in the opinion of the trial judge, it is or should become necessary to reveal the secrets to others it will rest in the judge's discretion to determine whether, to whom, and under what precautions, the revelation should be made."

That simple formulation is much more sound and simple to understand that the Texas Supreme Court's analysis. But perhaps they ultimately reach the same destination.

As best illustrated by Masland, this is hardly the first time courts have addressed the particular question of access. The Ninth Circuit, and courts in California, previously have followed the same analysis as that in In re M-I. They focus, for instance, on whether the excluded witness has some involvement in competitive decision-making functions. So, for instance, an in-house patent attorney may be prevented from seeing particular secrets, because (as the Court in In re M-I put it) he "could not resist acting on what he may learn."

The Court's observation on this point, though, does not amount to a tacit endorsement of the "inevitable disclosure" doctrine, as at least one commentator has suggested. The inevitable-disclosure theory is used to demonstrate a required element of a claim - misappropriation - whereas the balancing test articulated in In re M-I simply follows a long-held rule of due process and a more recent rule under the Uniform Trade Secrets Act that courts should deploy measures in litigation to protect the actual secret being litigated. Shoehorning this common-law and statutory recognition about protective measures courts may take during litigation into a broad substantive rule that few courts endorse would be a profound mistake.

Friday, May 27, 2016

Personal Clients/Firm Clients

In 1999, the New York Court of Appeals decided BDO Seidman v. Hirshberg and said this:

" would be unreasonable to extend the covenant to personal clients of defendant who came to the firm solely to avail themselves of his services and only as a result of his own independent recruitment efforts, which BDO neither subsidized nor otherwise financially supported as part of a program of client development."

Which raises the question...

...what's a "personal client" and what's a "firm client"? The particular facts and context of BDO Seidman aren't the point of this post. Rather, the larger issue is the construct of rules in non-compete law that can have unintended consequences for the very parties those rules are intended to aid - employees bound by restrictive covenants.

The difference between a personal client and a firm client is not straightforward. An employer will no doubt contend that an employee's affiliation with it is an extension of its goodwill, branding, reputation in the marketplace, and particular product or service offering. That may be true. Or, as the employee will retort, "I did everything and got no help." That also may be true. The truth may lie somewhere in between.

Rules like that in BDO Seidman are easy to state and hard to apply. Take Marsh USA, Inc. v. Schruhriemen, a New York district court case decided earlier this month. There, Judge Jed Rakoff applied this personal client/firm client rule and entered a limited injunction that basically told the employee "I have no idea, so you're on your own." Of course, Judge Rakoff would never say just that, but he did say that "the Court cannot, without further factual development, provide a definitive ruling on whether [the subject client] falls within the scope of the 'personal clients' exemption" from BDO Seidman so "Mr. Schuhriemen acts at his own peril" if he services the client.

Rules like that announced in BDO Seidman are meant to be objective and place sensible limits on the use of restrictive covenants. But too often, these very rules (expressed objectively) invite further disputes, subject parties to immense litigation risk, and (most noticeably) increase litigation expense on the parties least able to bear them.

The personal clients/firm clients rule from New York is not alone. Disputes about non-compete consideration, the scope of legitimate business interests, and blue-penciling of overbroad agreements all deal with limiting unfair agreements. But only infrequently do these rules solve anything. And in too many cases like Marsh USA, they leave everyone twisting in the wind.

Friday, May 13, 2016

In Wake of Defend Trade Secrets Act Passage, a New Whistleblower Ruling Protects Employees

I cannot begin to wade into the commentary surrounding the passage of the Defend Trade Secrets Act, which officially became the law this week. The summaries of this new federal legislation are so numerous and sweeping that I am already too late to the game.

I would like to discuss, though, one provision of the DTSA which protects whistleblowers - those who may need to use or reveal company confidential information to expose fraud, illegality, or some wrongdoing. Section 7 of the DTSA now immunizes employees from civil and criminal liability if they disclose confidential or trade secret information to the government for reporting suspected violations of the law. I wrote recently about the DTSA's new whistleblower provision and how this obscure provision of the new law may result in employers avoiding federal court (at least for a while) during the law's honeymoon period). Mike Greco of Fisher & Phillips takes a deeper dive into the subject, which is worth a read.

Before the DTSA's enactment, the rub of any whistleblowing activity concerning trade secrets, no matter how legitimate, is the potential for a counterclaim. When whistleblowing activity results in litigation against the company, the company may fire back and claim that the disclosure of confidential documents to counsel or the government violates an existing employment non-disclosure agreement.

Two days before President Obama signed the DTSA into law, a federal district court in the Northern District of Illinois addressed the precise type of whistleblowing activity the DTSA is meant to partially immunize. In United States ex rel. Cieszyski v. LifeWatch Services, Magistrate Judge Schenkier dismissed LifeWatch's counterclaim against an ex-employee, Matt Cieszyski, for breach of a non-disclosure agreement.

Cieszyski took corporate documents as part of his pursuit of what is known as a qui tam suit under the False Claims Act. This type of action enables a private person to bring an action in the name of the government if that person has evidence that another has submitted a false claim to the government.

Judge Schenkier found that LifeWatch did not state a plausible claim for breach of the non-disclosure covenant after balancing the countervailing interests Cieszyski had in pursuing his action (which necessarily depended on the information in the claimed confidential documents). Critically, Cieszyski took what he believed was necessary and did not disclose the corporate information to any LifeWatch competitor. The key passage from Judge Schenkier's ruling reads:

"It is unrealistic to impose on a relator the burden or knowing precisely how much information to provide the government when reporting a claim of fraud, with the penalty for providing what in hindsight the defendant views as more than was needed to be exposure to a claim for damages. Given the strong public policy encouraging persons to report claims of fraud on the government, more is required before subjecting relators to damages claims that could chill their willingness to report suspected fraud."

(A "relator" is someone like Cieszyski who brings a qui tam action.)

Keep in mind that the DTSA's whistleblower provisions do not give employees a free pass to do what Cieszyski did. What Cieszyski did in limiting what he took was obviously smart. But an employer still can maintain a counterclaim against a whistleblower if the scope of his or her taking exceeded what was necessary to maintain the qui tam suit (keeping in mind the ex ante perspective used by Judge Schenkier) or if there was some separate disclosure of the documents outside the suit, such as to a competitor.

Friday, May 6, 2016

New Utah Law Limits Use of Non-Compete Agreements

Every year marks the dawn of legislative efforts to restrict or expand the use of non-compete agreements. This year is no different, and the State of Utah wasted little time drastically restricting the use of restrictive covenants.

The Post-Employment Restrictions Act, known as House Bill 251, accomplishes three major objectives: (1) it limits the use of non-compete agreements to a duration of one year; (2) it exempts non-solicitation covenants from the applicable definition of a non-compete; and (3) it allows employees to recover legal fees if an employer seeks to enforce an unenforceable agreement.

The law takes effect next week, on May 10, 2016.

There is some room for interpretive guidance that surely will come. With regard to the non-solicitation exemption, the law offers no definition. An interesting question will be whether a broad non-solicitation agreement (which restricts any service of an employer's customers, as opposed to affirmative acts of soliciting them) rises to the level of a non-competition agreement.

Several sponsors of House Bill 251 authored a column before Gov. Gary Herbert signed the new law which advocated for its passage. One particularly interesting aspect of that column follows:

"We live in a free country whose prosperity is built on the free market, and as business owners we make choices. The best way for a company to retain its most valuable employees is to treat them well and compensate them sufficiently. Attempts to use legal tools to artificially block the movement of employees leads to a loss of trust and a loss of talent."

What interested me about this comment is that it actually resembles arguments that employees make in court. And that brings to the fore the notion that legislature are best suited to reflect these kinds of normative judgments, even though legislative change happens very slowly.

The state of non-compete law, though, renders courts susceptible to de facto policy making. The very factors courts must consider appear objective, but actually aren't. Those factors tend to lead  judges down the path of making rulings that reflect their personal policy preferences. This may not be a bad thing, ultimately, if the equities of the dispute match the result. But the problem is that the matrix of legal factors and how courts will apply them are highly unpredictable and can't possibly known to litigants or their counsel.

Tuesday, April 19, 2016

Why (Some) Companies Won't Sue Under the Defend Trade Secrets Act

The Senate's unanimous passage of the Defend Trade Secrets Act has resulted in a flood of legal blog posts that have, for the most part, extolled the virtues of having a federal regime covering this fourth branch of intellectual property.

However, there are at least three reasons why the Act, which still must pass the House of Representatives, may not result in an immediate wave of federal litigation.

1. The "Inevitable Disclosure" Doctrine's Inevitable Demise

One of the most prominent - and sensible - features of the DTSA is its implicit rejection of the inevitable disclosure theory of misappropriation. That topic has generated a wave of posts on this blog alone. To be sure, it is highly controversial and enables parties to bring suit without evidence of actual or even threatened misappropriation of trade secrets. In practice, it can amount to an implied non-compete without any objective parameters.

Fortunately, few states (Illinois, Iowa, New Jersey are a few) have adopted this theory and many have expressly rejected it (California and Georgia, for example). But in many states, it's just not clear whether inevitable disclosure is a viable theory on which to proceed. Since the Uniform Trade Secrets Act is the basis for most states' law, this uncertainty is a real head-scratcher.

The DTSA now provides that a federal court may grant a plaintiff an injunction as long as it doesn't "prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows."

Since the DTSA is intended to work in tandem with state law, a company that relies on the inevitable disclosure theory of misappropriation has no factual basis to invoke federal law and must proceed in state court.

2. Protecting the Whistleblower

During the amendment process, the Senate added protections in the DTSA which will protect a whistleblower who must disclose trade-secret information as part of reporting wrongdoing by an ex-employer. As part of these protections, an employer will have certain obligations that require it to notify an employee in a contract or policy statement of the DTSA's immunity provisions. If the employer does not provide notice of whistleblower immunity, it "may not be awarded exemplary damages or attorneys an action against an employee to whom notice was not provided."

It is somewhat unclear whether this provision applies in all trade-secret cases or only those that concern some whistleblowing activity. From the plain language of the DTSA's notice provision, I have to assume that it applies across the board. This is a somewhat obscure and late addition to the DTSA and it's not clear what the House will end up doing with the proposed legislation. But it's reasonable to assume that many smaller employees with less-sophisticated compliance operations will not have fully compliant agreements or policy statements. In that case, employers that feel they have a strong claim for punitive damages and attorneys' fees may have to resort to state law.

3. Fee-Shifting in Federal Court

The last reason that federal suits may not be as prevalent is related to the inherent weaknesses in many trade-secrets cases. This area of the law produces a large volume of silly, frivolous, and anti-competitive litigation. These weak cases often arise in employment-based trade-secrets suits, rather than those that are driven by intellectual property protection. For plaintiffs who seek to deter competition and invoke trade-secrets law in doing so, the federal system may end up helping defendants because of courts' willingness to sanction discovery abuse, bad-faith conduct by counsel, and spurious claims that lack evidentiary support.

The DTSA adopts the familiar bad-faith fee-shifting language now endorsed by most states. So simply as a textual matter, the opportunity for defendants to recover fees shouldn't be all that enhanced. However, practically speaking, federal courts have the know-how and political cover to award sanctions for frivolous cases.

Friday, February 26, 2016

When Bankruptcy Law Collides with Non-Compete Obligations

Non-compete proceedings for most employees are daunting undertakings. For that reason, most non-compete disputes get litigated in the "shadows," outside of reported court decisions.

And as any attorney representing an employee knows, the possibility of bankruptcy looms should litigation go poorly. Many employees are generally aware that a bankruptcy suit stays (or puts a stop to) other litigation. Although this can alleviate pressure in debt-collection suits, a stay is by no means a safe harbor when it comes to non-compete disputes.

That is because a creditor can file a lift-stay motion in bankruptcy court, which would allow it proceed against an employee for enforcement of the restrictive covenant. Like many other areas of non-compete law, this one too is somewhat opaque and not governed by a clear, bright-line rule. Generally, a bankruptcy court must balance the hardship to a creditor (i.e., employer) if it is not allowed to proceed with the lawsuit against the debtor. It also must consider prejudice to the debtor, the debtor's other creditors, and the bankruptcy estate itself.

A seminal case from 1984, In re Curtis, sets out twelve separate factors that bankruptcy judges must consider when ruling on a lift-stay motion. Those factors are:

(1) Whether relief would result in a partial or complete resolution of the issues;

(2) Lack of any connection with or interference with the bankruptcy case;

(3) Whether the other proceeding involves the debtor as a fiduciary;

(4) Whether a specialized tribunal with the necessary expertise has been established to hear the cause;

(5) Whether the debtor's insurer has assumed responsibility for defending the case;

(6) Whether the action involves primarily third-parties;

(7) Whether litigation in another forum would prejudice other creditors;

(8) Whether the judgment in another action is subject to equitable subordination (!?!);

(9) Whether the movant's success in the other proceeding would result in a judicial lien avoidable by the debtor;

(10) Judicial economy;

(11) Whether the parties in the other proceeding are ready for trial; and

(12) The impact of the stay on the parties and the balance of harms.


It is important to remember that ongoing compliance with a non-compete is not dischargeable in and of itself, even if defending against the injunction would be costly. But still, an employer must show "cause" under Curtis to lift the stay and seek an injunction. The best argument for relief is that a denial of relief will moot any contract rights the employer has, because non-competes only last a short period of time (usually 6 months to 2 years). Conversely, an employee normally contends that the enforcement will hamper his ability to perform under a plan of reorganization (assuming a Chapter 13 case).

These are difficult interests to reconcile, and for that reason, bankruptcy courts will look to determine the likelihood an employer will prevail in a separate proceeding, and whether a non-compete injunction proceeding was well underway before the bankruptcy filing. Employees should not assume that bankruptcy court provides a safe have to avoid an injunction proceeding, as even that question is so fact-specific that it is difficult to predict accurately how a lift-stay motion will be resolved.