Wednesday, December 17, 2014

Three Anti-Trust Cases Non-Compete Lawyers Must Know

Many non-compete attorneys think that damages are the tail wagging the dog during the lawsuit. The reason is simple, but not intuitive: plaintiff's attorneys give very little thought to how to prove damages. Instead, they are focused - too much so - on unearthing every conceivable fact about liability.

So the case law - let alone scholarship - on damages in non-compete suits is thin at best. There are a handful of state law cases that intelligently discuss the issue, and a few recent decisions out of the federal circuit courts that do the same. But the relevant body of law doesn't really exceed maybe 30-40 decisions. Given the proliferation of non-compete litigation, this is truly startling.

The biggest obstacle for plaintiffs is tying conduct to particular loss, with defendants often taking the position that it didn't really cause any competitive loss because the plaintiff was going to lose sales or market share anyway. So where does one turn, particularly from the perspective of one trying to come up with a theory of recovery that avoids this common defense attack?

The logical starting point is an old line of cases from...the Supreme Court.

The cases come from Sherman Act and Clayton Act disputes, which deal with monopolization and price discrimination claims. Non-compete disputes are really restraints of trade, and attorneys don't often think to look to federal anti-trust law for guidance. Particularly in the damages realm, that's a valuable source of information.

Story Parchment

The first case is Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931), which dealt with a conspiracy to monopolize trade in vegetable parchment. The conspiracy involved the effort of several parchment companies to lower their prices below cost, forcing the plaintiff to lower its price. The Court's damages analysis disapproved of a tactic that resembles what many defense lawyers in non-compete cases often attempt to do: speculate that absent the conspiracy to fix prices below cost, the prices would have dropped anyway. This is not at all different than the defense position that "the customer would have left even if I hadn't solicited it away."

The key part of Story Parchment is its articulation of the wrongdoer rule. This is the passage: "Where the tort itself is of such a nature as to preclude the ascertainment of damages with certainty, it would be a perversion of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from making any amend for his acts." The Court recognized, in other words, that some cases by their very nature do not allow for the plaintiff to prove damages with any certainty. As long as the fact of damages is certain, there is nothing wrong with speculating as to amount.

Bigelow

The second case, Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251 (1946), involved a Sherman Act claim. The case concerned an alleged conspiracy among movie theaters and distributors to show particular films before some independent exhibitors. The idea here was that the preferred release system harmed the independent exhibitors, who suffered lost sales from not exhibiting a hot new movie. With respect to damages, the plaintiff used a comparison of prior years' profits when he could show first-runs with those when he wasn't able to due to the illegal conspiracy.

The defendants balked at the speculative nature of the damages presentation, The Court relied on Story Parchment and found that "the wrongdoer shall bear the risk of the uncertainty which his own wrong has created." When dealing with claims based on illegal restraints of trade, in other words, it is difficult to ascertain damages and figure out what would have happened under "freely competitive conditions." The Court then appeared to go further and stated that "the wrongdoer may not object to the plaintiff's reasonable estimate of the cause of injury and its amount, supported by the evidence, because not based on more accurate data which the wrongdoer's misconduct has rendered unavailable."

The last passage in Bigelow teaches that if the plaintiff presents a damages picture, or reconstruction of what it expected to earn after a non-compete violation, the defendant (even while denying liability) still must portray an alternative picture.

Truett Payne

The final, most recent case is J. Truett Payne Co., Inc. v. Chrysler Motors Corp., 451 U.S. 557 (1981), a price discrimination case under the Robinson-Patman Act. The case dealt with a simple set of facts whereby Chrysler appeared to set a sales incentive program up in such a way as to pay one Alabama dealer less than others. The Court's statement on damages is not as complete as in Bigelow or even Story Parchment, probably because the lower courts' hadn't flushed out liability as the other cases had.

The Court did, however, endorse the wrongdoer rule and in particular noted the before-and-after comparison that the plaintiff presented in Bigelow. It is this same before-and-after presentation that often draws the ire of non-compete defendants. With the Court's endorsement of it, that line of attack may not be as strong as defendants think.

***

The Court's anti-trust cases are under-appreciated when applied to non-compete disputes. The wrongdoer rule derives from this line of anti-trust cases, where the claim itself means there has been a competitive injury. Regardless of what one thinks of non-compete law, a finding of liability is, by definition, a competitive injury.

While plaintiffs cannot engage in unreasonable speculation or make improper assumptions, the wrongdoer rule reflects a policy judgment that defendants cannot erect a roadblock to a damages case by relying on the very uncertainty they have created.

Friday, December 12, 2014

Third District in Illinois Follows Fifield's Consideration Rule

Business lawyers have discounted the much-bastardized decision in Fifield v. Premier Dealer Services, Inc. as unmoored, largely because it seems to be one-of-a-kind and pulled from the ether.

With the exception of a few federal district court opinions (which aren't authoritative), the validity of the Fifield case largely has been confined to the blogosphere and to those state trial courts which probably are trying to figure it out.

To take a step back...

Fifield rewrote the rules on what kind of consideration an employer must show to enforce a non-compete agreement in Illinois. For an at-will employee (that is, those workers who have no contract for a set term), Fifield says the employment itself only provides consideration for the non-compete if the employee remains on the job for two years-plus. The rule is meant to reflect that an at-will employment arrangement is somewhat illusory; an employer could trick an employee into an onerous covenant with the hope of a long-term relationship, yet pull the rug out quickly. Fifield makes no distinction between terminations that are involuntary and those an employee initiates.

Yesterday, Fifield gained a large measure of credibility when a separate district of the Appellate Court of Illinois (the Third District) followed it and endorsed the two-year consideration rule. The case is Prairie Rheumatology Associates, S.C. v. Francis, 2014 IL App (3d) 140338, linked here, and the facts aren't really any different than Fifield itself.

The analysis is predictably non-academic and thin. The court endorsed the Fifield rule to vacate a preliminary injunction against a physician who signed a 2-year, 14-mile non-competition agreement at the start of her employment. She resigned 15 months after the start of her practice and officially separated within 19 months. Fifield precluded enforcement.

Francis gives Fifield a much-needed injection of credibility. Many, including me, were highly critical of Fifield. (I was more aghast at is reasoning and rather glib conclusion, and not so appalled at the disposition). Having a second branch of the Appellate Court endorse Fifield creates some momentum and likely will encourage other districts (there are five) presented with the question to follow suit.

The Fourth District is the most likely to distance itself from Fifield, and it likely will need to do so for the Supreme Court of Illinois to intervene. The Supreme Court declined to hear Fifield, which one could read as a tacit endorsement of the holding.

Tuesday, November 25, 2014

2014 AIPLA Trade Secret Law Summit Is Nearing

For those attorneys who follow this blog, I encourage you to consider attending the American Intellectual Property Law Association's Trade Secret Law Summit. The event will be held on December 4 and 5 at Intel Corporation in Santa Clara, California. You still can register for this event, and you do not need to be a member of the AIPLA to participate.

Registration information is available at this link.

The program for this year, much like last, is simply outstanding. The complete CLE outline is available on the AIPLA's registration information page. If you read through the outline, it is easy to see why trade secret and non-compete lawyers should not miss this event.

I am pleased to be moderating the last session of the 2-day event, Perspectives from the Bench: How State and Federal Judges View the Growth and Scope of Trade Secrets Disputes. I will be joined by the Honorable James Ware (Ret.), who previously was the Chief Judge of the Northern District of California. Also on the panel is the Honorable James Kleinberg (Ret.), a former California Superior Court judge in Santa Clara, County.


Thursday, November 20, 2014

Supreme Court of Arizona Gives Trade Secrets Preemption a Narrow Construction

Perhaps the most boring question in all of trade secrets law generates a lot of commentary, particularly in the blogosphere.

The question is whether the displacement provision of the Uniform Trade Secrets Act applies to claims based on misappropriation of confidential information that isn't valuable enough to meet the trade secret definition. If that's not scintillating, I don't know what is.

If you can contain your excitement, know that courts take differing points of view on this and so the question is somewhat significant to nerds. I gave my view on this a few years back, summarizing the policy rationale for taking a broad view of preemption - one that would displace claims based on misappropriation of confidential information.

The Supreme Court of Arizona yesterday disagreed with me (who doesn't?) and found that a narrow view of preemption was appropriate, relying heavily on the text of the UTSA provision which states that preemption doesn't affect "other civil remedies that are not based on misappropriation of a trade secret." The case is Orca Communications Unlimited, LLC v. Noder, No. CV-13-0351. (This is the Scalia-Easterbrook-Garner school of textualism at its best, revealing just how influential that cadre has been at influencing law over the past 20 years.)

The defendant made some of the same arguments about the absurdity of narrow-form preemption that I have made before. There are many good reasons for broadly interpreting preemption, including some the Arizona court cited and rejected - the uniform structure the UTSA creates for dealing with claims of data misappropriation, the specter of greater punitive damages for misappropriating less valuable types of information. To me, the soundest rationale lies in the incentives that underlie preemption.

If parties have a common-law claim for misappropriation of confidential information, why would they subject themselves to having to prove that it's a trade secret? I cannot understand this. The remedies available to a trade-secret holder aren't materially more significant. The damages theories (aside, possibly, from a royalty-based theory) are not all that different than those found in tort law. But to prove the existence of a trade secret, you must show how the information derives value from being secret and rigorous security measures. Allowing a plaintiff to default to a common-law theory for virtually the same type of information would provide no incentive for a business to undertake secrecy measures.

Just as problematically, in many jurisdictions, this would enable a plaintiff to bring claims in the alternative (i.e., it's a trade secret, but if not, then it's confidential). This alternative pleading scheme, which narrow-form preemption openly invites, undermines the entire purpose of the displacement clause.

Tuesday, November 11, 2014

Unpacking Bad Faith

A very smart lawyer at a very large firm once told me something very convincing.

All the good stuff lies in the privilege log.

The notion of "bad faith" prompted this comment. And by bad faith, I generally refer to the defense perception that many competition cases simply are motivated by a piling on of litigation costs - usually from an established player onto a start-up or nascent rival. As bad faith is often the standard for fee-shifting - certainly under state trade secrets law - then the concept becomes important for building a defense.

The problem for many defense lawyers (and more importantly, their clients) is proving bad faith. The concept smacks of deception, and by its nature the source of its proof largely is outside the control of the defense. On rare occasions, the defense will uncover a smoking gun - this usually is an e-mail, by the way - or a document that suggests an improper purpose behind the lawsuit. That purpose would be to achieve something other than a victory on the merits or a legitimate settlement of a valid claim.

A problem that has vexed me for some time is how to unpack bad faith through discovery. It's a knotty issue, with proof often a patchwork maze of inferences here and there from poorly conceived claims or simple lack of proof. But even a crummy case on the merits might not equate to "bad faith."

Is there something else? Some other way to prove it?

I have talked before about lawyer involvement in perpetuating bad faith claims as a major issue that underlies competition lawsuits. Lawyers often assume their clients' identities and are complicit in maintaining claims that fill up the courts for no legitimate reason. Because competition disputes are amenable to discovery morasses, this is a serious issue. Another serious issue is incompetence. Competition law is not easy, nor intuitive. And many lawyers simply don't understand the law very well. Add to that the declining market for legal services, and attorneys able to grab a competition case see a source of fee revenue for the taking. It's a toxic brew.

So recalling what my colleague said about privilege, is there a way to circumvent it? There might be. It's called the "crime-fraud" exception. Lawyers and clients labor under a terrible misconception of privilege. It is the exception and not the rule, so it's carefully scrutinized and particularly favored. This is particularly so since it's antithetical to the goal of the adversarial process: to find out the truth when reaching a result.

The essence of the crime-fraud exception is fairly straightforward: a lawyer does not render professional services if she is assisting the client to perpetrate a crime or a fraud. In some places, courts give "fraud" a rather broad interpretation. It follows, then, that if a lawyer is facilitating a frivolous suit, then her discussions with her client about how to achieve this should be discoverable. This may loosely be called a "fraud upon the court" (though I recoil at that term), or something akin to fraud.

The procedural hurdle is that the party seeking discovery must advance a preliminary showing of bad faith. This is no small feat. But if a party can present this, then it may ask the court to review otherwise designated privileged material. This in camera review (likely, of attorney-client e-mails) will enable the court to act as a gatekeeper and ferret out truly privileged materials that don't further the fraud.

But communications where a client seeks counsel's assistance in perpetuating a frivolous claim are not privileged and should be disclosed. This rule makes sense when one considers that counsel have an ethical duty to the court, as well as her client. And it further makes sense when one realizes courts have the inherent authority to control their docket and advance cases towards a speedy, just resolution. If a lawyer is assisting a client perpetuate a nonsense claim, why should this help be immune from disclosure?

Tuesday, November 4, 2014

Aleynikov's Observations on Juries

Jurors called to serve look forward to the possibility of drawing an exciting (even if tragic) case.

Non-compete cases are not exciting.

At least by the average layperson's standard.

This is why the specter of a jury trial may cause parties to rethink whether to take the case to trial. From a plaintiff's perspective, it could fear that it will put the jury to sleep explaining a legitimate business interest and the importance of profit margins. And there is the almost inevitable risk that the jury will be flummoxed by an esoteric, confusing damages presentation. Defendants often harbor the same doubts about jury trials, because one or two bad facts could case a jury to form an opinion on liability quickly and then take the plaintiff's mere say-so as evidence.

Consider this from the trial of Sergey Aleynikov, as recounted in Michael Lewis's book Flash Boys: "...when [Aleynikov] looked over, he saw that half the jury appeared to be sleeping." Aleynikov, as we know, was the programmer who left Goldman Sachs' high-frequency trading desk for Teza Technologies - and, in doing so, brought on a slew of litigation that seemingly touched every jurisdiction on the East Coast. And Aleynikov's case had that dose of intrigue that most competition cases don't - computer code deposited in Germany and the specter of Wall Street trading.

Employers often combat the uncertainty of a jury trial with a contractual waiver (enforceable in federal courts and in most states) or a clause requiring the merits to be dealt with in arbitration. The former preserves the availability of appellate review, while the latter allows for companies to conduct their disputes in a quasi-private manner and with more control over the process.

An interesting question, which seems to have generated almost no decisions, is whether a third-party is bound by a jury trial waiver clause. Suppose an employee waives his right to a jury trial, but his new employer is a defendant on a related tort claim for inducing a non-compete violation. Can the plaintiff invoke the jury trial waiver against the third-party?

I don't think so.

Although there is some authority for extending choice-of-law and choice-of-venue clauses to non-parties, jury trial waivers seem different. For one, the right to a jury trial is embodied in the Constitution, though not incorporated to the States. In addition, state constitutions typically have some additional constitutional guarantee. Therefore, the nature of the right seems qualitatively different - even if for reasons that don't appear to extend beyond mere tradition alone.

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.

Blogging

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.

Lawyers

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.

Judges

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 vanko@ccmlawyer.com.

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.