Friday, November 17, 2017

The "Inevitable Disclosure" Non-Compete Clause: What is it and for God's sakes...why?

Leave it to lawyers to see an obscure, narrow, and disfavored legal theory and then try to drive a mack f**king truck through it like it's the next great revelation.

To what might I refer? Try a non-compete on steroids, one so hopelessly inane and stupid that, at first blush, it actually has some appeal. Until, of course, you analyze it and put more than three minutes of thought into what you're doing.

I refer to this unicorn (in the eyes of some) as the inevitable-disclosure non-compete, the intersection of obscurity and protectionism. Allow me to explain how this bad-ass of contractual clauses works (until it's declared invalid).

Start with the basics.

An agreement may have several different types of post-employment covenants that bind the employee. You have your standard non-disclosure clause, which limits for a period of time the use of confidential information the employee learned. Then you have your non-solicitation covenant, which may preclude work with a group of valuable clients or recruitment of co-workers.

Hard stop for a second.

Those two types of covenants have some legitimate uses. But lawyers must still draft them reasonably and with sensible scope and time limits, even if a geographical one isn't needed.

I continue.

Your agreement may even have a general, market-based non-compete that bars work in a relevant industry.

Hard stop again.

This type of covenant needs to be even more carefully tailored, given its broad economic hardship on the person agreeing to the covenant. It limits work, not a type of work or a narrow subset of work activity. Here, we need activity limits, probably a shorter duration, and in many (but not all) cases a geographic scope confined to the employee's or company's sphere of influence.

An inevitable-disclosure non-compete is profoundly different. It requires the employee to refrain from accepting employment that may require him to use, disclose, or rely on the employer's confidential information. This precise type of covenant recently was held unenforceable in the case of Sullivan v. Gupta, M.D., LLC, No. 2:17-cv-609 (E.D. La. Aug. 10, 2017), because it failed to comply with the requirements in Louisiana for enforceable restraints of trade. (Among other things, State law requires an identification of which parish the non-compete applies to, and this one didn't cut the proverbial mustard.)

This is by no means the first case to find that a stealth non-disclosure agreement constitutes a non-compete.

I have my own experience with agreements like this, and it hasn't been positive (except for the fact that we've won). I blogged a few weeks ago about our trial and appellate victory in Automated Industrial Machinery, Inc. v. Christofilis, 2017 IL App (2d) 160301-U, where the Second District affirmed a fee award for my client, the defendant, of nearly $1.5 million.

One of the issues in that case concerned a non-compete, which the trial court found invalid for lack of consideration. The Appellate Court affirmed that ruling. But it didn't discuss the terms of AIM's non-compete. Had we not prevailed on the consideration issue, we had a strong argument on invalidity (not to mention lack of breach, for which there was no evidence).

That agreement was a true inevitable-disclosure non-compete, and I reprint below the operative restriction, which is stunning in scope:


Pretty rough start when you call your non-compete clause a "doctrine of inevitable disclosure." Who the hell thought of that one? Way to be pedantic, and nice way to warm up to a judge.

Beyond that titular snafu, look at the terms. Just two low-lights to point out:

(1) It applies in perpetuity if my client "could not help but rely on or use...or would otherwise inevitably disclose Confidential Information." Who makes that call? How is that agreement one containing definite terms, a plain requirement under contract law?

(2) The employee must provide the company with, basically, a job description and then beg for permission to take it. And the company has 20 days to decide whether "such ...employment is prohibited under the doctrine of inevitable disclosure."

So a clause like this, patently unenforceable and overbroad, vests the employer with sole discretion in perpetuity to decide whether a particular position would require the employee to use its confidential information.

This violates every conceivable principle of non-compete law. No certainty at all. Vast amounts of discretion reserved to the employer to veto an employee's career choice. No time limit to speak of (beyond what the employer itself decides is appropriate). Economic protectionism, to be sure, is not a legitimate business interest.

Bottom line: You use an agreement like this, you deserve to lose. And you will.

Friday, November 10, 2017

The Reading List (2017, No. 27): Judicial Rock-Stars,Forum-Selection Clauses, Attorney General Suits, and Worthless Blog Posts

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

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Vicarious Liability Ruling in Waymo v. Uber

For those of you following the driverless car technology trade secrets lawsuit between Google and Uber, I urge you to take a break from the day-to-day litigation filings. They're interesting, to be sure. But they ain't as interesting as this article in The Verge about the judge presiding over the case, William Alsup. I can't do it justice. Read it. It is stunning.

On to more mundane topics in this case: vicarious liability. One of the defendants, Otto Trucking, is out of the case. Judge Alsup granted its summary judgment motion, soundly rejecting Waymo's theory of vicarious liability for the actions of its founder, Anthony Levandowski, the former star engineer whose mass download of files is the heart of Waymo's suit. The court specifically relied on Waymo's strategy to divide and conquer, an effort that kept its claims against Levandowski out of court and the other defendants out of arbitration. As Judge Alsup stated, Waymo could not treat the two as "fungible targets."

The issue of vicarious liability doesn't arise much in the case law, at least in terms of nuanced legal analysis. One line of cases holds that respondeat superior, or vicarious liability, is not available under the Uniform Trade Secrets Act on the grounds that it is a common-law remedy preempted by the statute. Other cases take a more flexible, case-by-case approach, relying on the equities. Judge Alsup's idiosyncratic opinion avoids this discussion entirely, and it's bereft of a single case citation. That doesn't make it uninteresting or even wrong.

To me, the better approach - one textually consistent with the state and federal statutes - is to assess each defendant separately and to determine whether the relevant conduct for each amounts to misappropriation. This is, I think, what Judge Alsup is saying. He eschews any reference to statutory preemption, but it's just a different way of getting to the same result.

Maryland Non-Compete Agreements

Judge Paul Grimm, another total judicial rock-star, struck down a five-year, market-based non-competition clause against a high-level engineer, a ruling summarized in Allied Fire Protection, Inc. v. Thai, 2017 WL 4354802 (D. Md. Oct. 2, 2017). The particular non-compete had the feel of being an amalgamation of form clauses, designed specifically to instruct lawyers on how not to draft non-competes.

For starters, the duration was five years - something sure to align the court with the affected employee. Those limits may be acceptable in the sale-of-business context, where there's equal bargaining power, but they almost never have any justification for at-will employees. Then the employer decided to bar the employee from working in a "similar" business with any of the plaintiff's former, current, or future clients. No parameters. No illustration of why. No common sense.

Judge Grimm's ruling that the non-compete was not tailored to protect a business interest, in the main, is not surprising. But it is significant that it arose in the context of a motion to dismiss, and not after the evaluation of evidence at the injunction or summary-judgment stage. These kinds of early, case-dispositive rulings happen all too frequently, but they embody a pragmatic approach sorely needed in litigation featuring an asymmetry in resources. Judge Grimm was careful to note the lack of allegations demonstrating the need for such broad covenants, a point that enabled the early dismissal.

Practice tip: if you're an employer, never lead with a frivolous argument. For reasons that confound, the employer decided it was a good idea to challenge the removal petition - the case originated in State court - on the grounds that removal jurisdiction violated Article I, § 10 of the United States Constitution - the so-called impairment-of-contracts clause. But as Judge Grimm noted, that clause applies to the States, not the federal government (and it was, after the federal government's jurisdiction that was challenged constitutionally). This approach to argument does nothing to endear one to the court.

Forum-Selection Clauses Following Atlantic Marine

On to a more challenging venue issue.

Venue, jurisdiction, and choice-of-law are heavily litigated procedural issues in non-compete and trade secrets litigation. Though it may seem like in-the-weeds, lawyer drivel, questions of procedure can be consequential. For instance, a few years back, Illinois courts held that Florida choice-of-law clauses are unenforceable because they contravene public policy. If that issue weren't litigated, cases may have come out differently.

Venue clauses may be equally as important. The Supreme Court, in Atlantic Marine Construction Co v. U.S. District Court, endorsed forum-selection clauses and has held courts must honor them in all but the most unusual cases. Practically, that means that only certain public interests (outside of any interests the litigants assert) will justify a transfer when a forum-selection clause is present. That means litigants cannot get out of a choice-of-venue clause if it is inconvenient to them. Predictably, district courts have followed Atlantic Marine and have cut back on the number of transfer orders in federal non-compete cases.

The Third Circuit, this Summer, addressed a difficult question under Atlantic Marine: how should courts apply the ruling when some, but not all, defendants are bound to forum-selection clauses that designate different federal districts? Get ready for some freakin' procedure, folks...

According to the court, there's a four-step inquiry (always a BAD sign). First, courts will apply Atlantic Marine to parties with forum-selection clauses, meaning their claims may be severed and transferred to the agreed-upon forum.

Second, courts then consider public and private interests related to the non-contracting parties (such as a corporate defendant with no direct contractual relationship to the former employer). Here the factors may suggest that the same forum is appropriate for both the contracting and non-contracting parties. And that may be enough for the court to kick or keep the whole action.

Third, if the court finds that the first two steps point in opposite directions, then it must consider severing the claims. That means that a court may need to transfer the action as to some defendants while retaining jurisdiction over others. For instance, a court may lack personal jurisdiction over a non-contracting defendant. It couldn't keep the case, in that instance, for efficiency reasons.

Fourth, if the issue of severance is not clear, then the court must evaluate "efficiency" interests and the non-contracting parties' private interests. Here, a court could find that public interests "overwhelmingly" outweigh the parties' interest in upholding the venue clause and thereby decline to enforce it.

The application of this four-step approach is fairly intricate, but the circuit court's analysis will resemble many of the same issues that arise in multi-defendant non-compete litigation, where individuals have forum-selection clauses and the new employer operates in a venue remote from the contractually chosen one. A link to the opinion is available here.

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I am not sure I understand the point of drafting worthless, uninteresting blog posts. But if you are a blogger (or aspiring to start one), then I would highly recommend reading the latest entry on the Employment Trial Report. It's a classic example of what not to do. This post caught my eye when it showed up in a blast e-mail through Lexology and purported to "analyze" a $6.8 million trade-secrets judgment in California. Sounds f**kin' awesome, bruh!

No. For starters, don't waste everyone's time talking about a default judgment involving a defendant who has no legal representation and who "failed to participate in the subsequent damages proceedings." What is the takeaway there? It's good to have a lawyer? It's advisable to contest damages? It's best to show up in court for a hearing?

And then don't tell us how the judgment demonstrates that companies "need to be vigilant and act quickly and decisively when it appears" there's theft by an insider. Has anyone ever counseled an employer that, in such a situation, companies should be sluggish and move slowly and equivocally?

Sorry, but you clog up the blogosphere and so you deserve some opprobrium. Take a stand. Say something interesting. Offer a viewpoint. Don't spew drivel. And I could care less if the mandate from the firm's Executive Committee was to fill up the site with more posts...

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Thad Felton over at Greensfelder in Chicago writes about the Attorney General's non-compete lawsuit against Check Into Cash of Illinois, Inc., calling the move "somewhat unusual." A better description would have been "entirely appropriate." The Freedom to Work Act, signed into law effective January 1, 2017, bars employers from using covenants not to compete against so-called "low-wage employees." This is a move that has gained traction across the United States, as State legislatures seek to pare back the use of overbroad restraints that do nothing to promote economic freedom and serve only to stifle competition.

According to the Attorney General's suit, brought under the Freedom to Work Act, the common law, and the Consumer Fraud and Deceptive Business Practices Act, the affected employees were store clerks, assistant managers, and managers, many of whom were paid on an hourly basis. The non-compete, recited in a pain-staking block quote, is oppressively overbroad and disconnected to any legitimate business interest. It's obviously unenforceable, despite the thatchy, semantic jungle in which the contractual language is buried.

A copy of the Attorney General's complaint is available here.

Friday, November 3, 2017

The Reading List (2017, No. 26): Fee Awards, New Legislation, and Inevitable Disclosure

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

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Illinois Appellate Court Affirms $1.5 Million Fee Award

In a Rule 23 Order, the Second District Appellate Court affirmed a substantial fee award, nearly $1.5 million, for the prevailing defendant in a fiduciary duty, trade secret, and non-compete case. I had the privilege of representing the defendant, Tom Christofilis, at trial and on appeal. It is truly a pleasure working with someone who is so candid, forthright, and credible that you don't even need to prepare him for his testimony. Good things happen to good people.

The basis of the $1.5 million fee award is rooted in corporate law and in particular the bylaw indemnification provisions that cover former employees, officers, and directors of Christofilis' former employer, Automated Industrial Machinery, Inc. I have written before that corporate indemnity procedures, whether rooted in internal documents like bylaws or through state statute, are the potential game-changer and equalizer in competition suits. It is essential that counsel fully assess the interplay of indemnity when deciding whether and how to pursue competition claims against a former insider. It is just as crucial for defense counsel to understand the legal framework and position his or her client for fee-shifting.

The Appellate Court's judgment here demonstrates the raw power of indemnification, ruling that it covered non-compete, trade secret, and fiduciary duty claims. But to be sure, this case was very fact-specific, and the availability of indemnification depended at least in part on Christofilis' complete success, the sheer breadth of the claims asserted against him, and the anchoring fiduciary-duty cause of action that brought the bylaw provisions into play.

Keep in mind the deferential standard of review applicable in this case. No two indemnification cases are the same. And the trial court retains substantial discretion in making the call as to what claims are and are not indemnifiable, given the pleadings, legal theories, and evidence.

A link to the Rule 23 Order in Automated Industrial Machinery, Inc. v. Christofilis is available here.

New Legislation on Non-Competes

For those interested in legislative updates, Russell Beck's Fair Competition Law blog is a must read. Here are a few links that discuss pending and enacted legislation on non-compete law:

October 21: Russell reports on bills in New York and Pennsylvania concerning very different aspects of non-compete reform.

October 15: Russell discusses bills in several states, including changes to Oregon and West Virginia law. Oregon now bans non-competes for home-care workers, while West Virginia outlaws certain types of physician non-competes. This continues a trend of industry-specific reform, rather than wholesale, across-the-board changes.

The DTSA and Inevitable Disclosure

The Defend Trade Secrets Act contains a crucial limitation on injunctive relief: courts cannot issue an injunction under the DTSA to "prevent a person from entering into an employment relationship." And conditions on a person's employment must be based on threatened misappropriation, not merely on information the person knows. This limitation forms part of the compromise that resulted in the DTSA's near-unanimous passage. And it departs from the law of several states that allow for inevitable-disclosure injunctions that bar employment altogether.

Courts, though, are frequently terrible at applying the doctrine of inevitable disclosure. A perfect illustration comes from the case of Express Scripts, Inc. v. Lavin, where a federal court appears to have applied the DTSA to issue an injunction, at least in substantial part on inevitable disclosure. It could be that the court was loose with its analysis, since it already had found a non-compete agreement to be enforceable. And it could be that the court was relying on Missouri law. But it sure as hell does not help to have a poorly engaged analysis like this, suggesting that the DTSA does not mean what it says.

I reviewed the briefs filed by the plaintiff's law firm (one that must remain nameless). The brief never indicates for the court that the DTSA limits inevitable-disclosure injunctions. It lumps stuff together in a way that I feel is highly misleading. That's troubling, because the court was ruling on a petition for temporary restraining order. More concerning is the court's rote copying of the law firm's brief (down to the word). This amounts to judicial abdication, not bona fide engagement.

Let's be clear: the DTSA does not permit inevitable disclosure injunctions of the kind that the court in Express Scripts may have ordered. This decision carries no weight at all. I'll chalk this one up to an emergency ruling, a busy judge, and sloppy lawyering.

A copy of the ruling can be found online (I refuse to link to it or make your job easy). The case name is Express Scripts, Inc. v. Lavin, No. 4:17-cv-1423 (E.D. Missouri). The case since has settled.

Computer Fraud and Abuse Act

The most significant CFAA case of the past several years has been United States v. Nosal, which made two trips to the Ninth Circuit. The Supreme Court has declined to grant certiorari on Nosal's latest appeal. That cert petition made headlines when Nosal enlisted Supreme Court star litigator Neal Katyal on brief. Reuters discusses the Court's decision not to review Nosal and a separate CFAA case called Facebook v. Power Ventures.

Speaking of the CFAA, it continues to generate fewer cases of interest in light of the Defend Trade Secrets Act and the federal civil remedy now available for trade secret misappropriation. But some cases still wind through the system.

The sharp divide, which stems in great part from Nosal, concerns the application of one statutory term in the CFAA: the meaning of the phrase "exceeds authorized access." In the CFAA framework, this could mean an individual's misuse of protected information in violation of a corporate policy or common-law duty. Or it could mean something far narrower, namely an employee's improper access of files in the more objective sense without regard to state of mind or intent.

In Hedgeye Risk Management, LLC v. Heldman, the United States District Court for the District of Columbia adopted the narrower reading of the CFAA. In effect, it held that the statutory language is not concerned with the purpose for which the employee accessed the computer files. In so doing, the court joins the Second, Fourth, and Ninth Circuits. On the other side of the ledger, the Fifth, Seventh, and Eleventh endorse a purpose-based analysis, with the reasoning of those courts varying to some extent. As the district court in Heldman noted, the D.C. Circuit has not weighed in.

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Last week, I had the privilege of presenting at PLI in New York for a conference titled Trade Secrets 2017: What Every Lawyer Should Know. My panel consisted of Audra Dial from Kilpatrick Townsend & Stockton in Atlanta and John Siegal of Baker Hostetler. Our moderator was the great Vicki Cundiff of Paul Hastings. In the company of such luminaries, I felt like one of those fringe candidates on stage at a debate with the audience wondering who the hell I was. But my co-presenters were just terrific, and I thoroughly enjoyed it. For lawyers seeking to learn more about trade secrets, PLI offers a similar program via webcast next week.

Years back, I butted heads with Farmers Insurance in a number of non-competition cases, all of which settled pretty amicably. Apparently, Farmers has more problems to solve in this area, as reported by Insurance Journal. This suit sounds like it fits a familiar pattern in which an employee copied a number of documents and scooted off to a competitor. Of note, it's pending in California, which does have a trade-secret "exception" to its non-compete law.

Forbes has a long article about a burgeoning dispute between Citrix and Egnyte, one that brings to the fore the difficult procedural question that often arises when employees bolt for a California company but don't live in California.

Finally, if you're interested in further reading on an array of subjects, including the Waymo v. Uber case and Defend Trade Secrets Act case updates, I suggest linking to John Marsh's Trade Secret Litigator blog and his October monthly wrap-up. Lots of excellent source material here.

Friday, October 20, 2017

Much Overdue Case Law Update, Part II

This week, I offer my second case-law update, highlighting a variety of cases from around the company on topics of interest.

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Indiana Court Affirms Nationwide Non-Compete Agreement

Last Friday, the Court of Appeals of Indiana addressed the enforceability of a nationwide non-compete agreement for an engineer in the glass container business. The facts follow a typical pattern and deal generally with a senior-level engineer's move from Ardagh Glass Containers to Owens-Illinois. (As an aside, my paternal grandfather worked at Owens-Illinois for something like 35 years, during which time he consumed approximately 364,000 unfiltered Camel cigarettes working the assembly line, kind of a poor man's Don Draper in this respect.)

The employee's non-compete barred his work anywhere in North America and covered products over which the employee contributed development knowledge. The Court of Appeals, applying Pennsylvania law, enforced the non-compete, reasoning that both Ardagh and Owens competed nationally for the same type of customers. The court also remarked on a few typical facts in enforcing the preliminary injunction: (1) the employee's lack of candor on a few important facts that pertained to consideration and his "paid-leave" status at Owens-Illinois; and (2) the employee's lack of urgency in contesting the preliminary injunction and the appeal.

Of greater concern was the court's breezy trade-secrets analysis, which seemed to excuse an improper trade secrets identification at trial. The court all but found the injunction order was too broad in finding that Ardagh Glass identified 16 categories of trade secrets that were at risk. And it found Ardagh Glass would need to do better at a permanent injunction hearing. But the court was not engaged at all in assessing whether the at-risk secrets were actually "threatened" from misappropriation.

A link to the Court of Appeals' decision in Vickery v. Ardagh Glass Inc. is available here.

Forfeiture-on-Termination Clause Found Unenforceable

This one is crazy.

Kelley Rieves took a job as an assistant manager at Buc-ee's - a convenience store chain in Texas. It was at that point that Buc-ee's and its cadre of lawyers foisted upon her a historically stupid agreement. Rieves had the ability to decide how she was going to get paid - but it had to be a split between hourly wages and a flat monthly amount.

The catch? The flat amount had to be repaid to Buc-ee's if Rieves (at at-will employee) left within 5 years and didn't give 6 months' notice. This is known (by me) as the stick-without-the-carrot approach. Rieves and Buc-ee's re-upped a year later with a similar arrangement. Rieves, of course, left before the 5-year period ended and filed suit to declare the repayment provision unenforceable. Somehow, Buc-ee's convinced a state court judge to enter an award for payment of the entire amount owed (less taxes) under the contract's repayment clause.

Rieves appealed and, mercifully, won. Common sense prevailed. The reason? A repayment clause inhibits employee mobility. And unless the contract is consistent with non-compete law, it's unenforceable. The salary disgorgement provision, here, was totally unlike a prototypical forfeiture clause that would, for instance, cancel unvested stock options if the employee leaves to compete. Instead, it had no connection to incentivizing the employee's future performance, imposing an illogical and disproportionate penalty on an at-will employee's election to find a better job.

Buc-ee's should be publicly shamed for requiring Rieves to sign such a manifestly stupid agreement. For now, at least we have a public opinion - available here - that will prevent any sort of spurious litigation like this in the future.

Federal Circuit Affirms $91 Million Trade Secrets Verdict

In an unpublished ruling, the Court of Appeals for the Federal Circuit affirmed a $91 million trade-secrets verdict arising out of a business transaction gone wrong in the mitral-valve implant market. The particular invention at issue in that case arose after Neovasc sought to collaborate with CardiAQ and provide CardiAQ with ancillary products. During the course of their relationship, Neovasc apparently designed a competing transcatheter mitral valve implant that was similar to the one CardiAQ had developed. Neovasc learned of the TMVI device after signing a non-disclosure agreement.

The Federal Circuit approved the district court's award of $70 million in compensatory damages and $21 million in enhanced damages (along with an 18-month head-start injunction). The court rejected several claims Neovasc had made concerning the trade secret instructions given to the jury. And it further found CariaAQ's royalty damages testimony was supported by the evidence. This is yet another in a series of high-damage trade secrets judgments we've seen over the past several years.

A copy of the unpublished disposition is available here.

Monday, October 9, 2017

Much Overdue Case Law Update, Part I

It has been a while since I surveyed new reported decisions. So over the next few weeks, I'm going to summarize very briefly some of the cases I've seen that piqued my interest. The topics are varied, which is kind of the point.

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Non-Recruitment Clauses in Georgia

Georgia courts have proved to be tough venues when it comes to enforcing restrictive covenants. The prevailing rule of non-severability (for older agreements) generally means that an unenforceable restrictive covenant will void other similar covenants, even if they (standing alone) might be considered reasonable.

But as the Court of Appeals in Georgia recently noted, this non-severability rule does not apply to non-recruitment/no-hire provisions that bar employees from soliciting co-workers. Simply put, those types of restraints to do not rise to the upper tier of restrictive covenants. And so a void non-compete will not invalidate a reasonable no-hire clause. Other courts in other States seen to equate no-hire clauses with more restrictive covenants.

The case is CMGRP, Inc. v. Gallant, and it's written by Twitter star Chief Judge Stephen Dillard. A link to the opinion can be found here.

Seventh Circuit Discusses Sale of Business Non-Compete Dispute

The Seventh Circuit hears about one or two non-compete cases per year. They generally involve questions of Indiana, Illinois, or Wisconsin law. And those States have non-compete laws that are interesting and nuanced.

But E.T. Products, LLC v. D.E. Miller Holdings, Inc. did not require the court to delve much into substantive State law (here, Indiana) because the case hinged on whether certain activity amounted to a breach of the non-competition clause. The case involved a business acquirer's attempt to enforce a sale-of-business non-compete against the seller, after the seller rendered post-closing assistance to the acquirer's distributor. The court found that the seller's conduct did not amount to prohibited competition, saying that "a firm whose sole conduct in the relevant market consists of distributing one manufacturer's product plainly isn't that manufacturer's competitor." The court also noted the seller terminated its relationship with the distributor and rendered no assistance at all once the distributor began competing on some product lines. The facts, as the court recited them, amply demonstrated the defendant's good faith and intent to adhere to the non-compete. The pursuit of the case appeared to be vast overreach.

The opinion, written by Judge Diane Sykes, is available here.

The Protocol for Broker Recruiting and "Good Faith"

Those of us who represent advisory firms and financial advisors have a good deal of familiarity with the Protocol for Broker Recruiting. But many don't. The Protocol's design is to foster client choice, a recognition of the intensely personal nature of the advisory relationship. More broadly, the Protocol represents an industry solution to expensive, uncertain non-compete litigation - in effect, a contractual way around flexible legal standards being applied by judges who generally lack deep knowledge of particular industries.

The Protocol's basic tenets allow an advisor to avoid liability if she takes client information to her departing firm (generally, it must be related to those clients she serviced and the information must be provided to her firm on departure). If followed in good faith, the employee will not be bound by any contractual restrictive covenant or held liable under trade secrets law pertaining to the taken (and disclosed) client information and subsequent solicitation efforts of those clients.

The term "good faith" is a bit nebulous and fact-specific. If an employee engages in bad faith, the she cannot avail herself of the Protocol and courts default back to any signed agreement the employee has. The district court decision in UBS Financial Svcs., Inc. v. Fiore, No. 17-cv-993, 2017 WL 3167321 (D. Conn. July 24, 2017), contains a lengthy discussion of good faith in the context of advisor departures. Ultimately, it found that despite some wrongful behavior, the defendants did not forfeit the Protocol's protections since their notice was proper and they took only information pertaining to their client lists. The court focused on the fact that UBS still had all the information it needed to contact the same clients.

In the past, courts have found that the Protocol did not apply when employees took information beyond what was allowed, altered information in a client database, or deleted contact information in a work e-mail account. Like most good-faith inquiries, each case turns on its facts. The Fiore decision is interesting and well worth a read because it is not particularly clear cut factually. The departing defendants complied with the Protocol in the most crucial ways but still did some things that appeared designed to hinder UBS' ability to retain its wealth-management clients.

Tuesday, September 19, 2017

The Farewell to Judge Posner: Ten Opinions for Non-Compete Lawyers to Read

Less than two weeks ago, Judge Richard Posner left the Seventh Circuit Court of Appeals. Immediately. No senior status. No notice. Just up and left. Presumably to hang out with his cat, Pixie.

And like that, the most widely cited appellate judge since at least Henry Friendly (and probably well before that) was gone.

His post-retirement exploits are being met with more than a little skepticism and head-scratching, as he promptly released a long book airing some of his dirty laundry with his Seventh Circuit colleagues. The early returns are, how shall we put it, not great.

I met Judge Posner once, when I was a 3L at the University of Illinois College of Law and editor of the Moot Court Board. He had come down for the annual competition, and I was sort of coordinating it. He was as you'd expect. Passively intimidating, somewhat aloof, lost in his thoughts. Not on my dream dinner guest list. I've argued three cases in the Seventh Circuit but never had him on a panel, which was probably just as well. Oral arguments with him are just torture to listen to, as the whole thing seemed to resemble a reflexive exercise in self-indulgence.

In truth, I can't say he was my favorite judge. I liked his writing style, to a point, and I appreciated the unconventional approach he took with cases. I think his overly academic view of non-compete agreements, however, was not at all pragmatic (even though he claims to have been the great pragmatist). I found many of his recent opinions to be a bit out there, such as his bizarre concurring opinion in the Hively case that brought sexual orientation within Title VII's sexual discrimination ambit. And I certainly don't think he was the best judge on his own court. I always have felt Judge Frank Easterbrook was stronger, more consistent, and more clear in his writing. And even Judges Diane Sykes and David Hamilton have approaches to deciding cases that I can grasp with much greater confidence.

But, he's Posner and everyone seems to worship him. So some tribute seems in order. Though the Seventh Circuit only decides one or two trade secrets or non-compete cases per year, his influence in this area is profound with a number of important decisions under his belt. I thought I'd offer a farewell to Posner with a top ten list of cases he wrote that influence this field of law:

10. Outsource Int'l, Inc. v. Barton, 192 F.3d 662 (7th Cir. 1999). This is the one dissent from Judge Posner I am including, and it's from an appellate decision that endorses a staffing industry non-compete. Posner thought the result was correct in principle, but not under Illinois law. So he dissented. But in doing so, he outlined the historical hostility to non-competes and concluded "[t]here is no longer any good reason for such hostility." He does a nice job wading through the policy choices behind non-compete enforcement and the courts' antagonism to these restraints. But, I think he has it all wrong. His concerns are, no doubt, academically grounded. But he largely misses the point that a disparity in bargaining power, coupled with asymmetrical resources, create a large deadweight loss to society from breezy judicial attitudes towards non-compete arrangements.

9. Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 626 F.3d 662 (7th Cir. 2010). This is a trademark case, but it's instructive for analyzing fee petitions. Trademark defendants can obtain fees only if the case is exceptional. In Nightingale Home Health Care, Judge Posner says that a defendant can meet the exceptionality standard by showing the case was an "abuse of process," designed to impose disproportionate costs on the defendant. This standard mirrors that under the Trade Secret Act's "bad faith" provision and reflects a pragmatic approach. Just as important, Posner cautions against an elaborate state-of-mind inquiry on the fee petition, preferring that fee-petition hearings be summary proceedings rather than drawn-out affairs.

8. Confold Pacific, Inc. v. Polaris Indus., Inc., 433 F.3d 952 (7th Cir. 2006). I call this a "trade-secrets light" case. It confronts the frequent fact-pattern of what happens when one party, bound by a contractual relationship, tries to subvert contract law and claim a host of related remedies from a relationship gone wrong, such as unjust enrichment and trade-secrets theft. Judge Posner deftly explains, as if lecturing the plaintiff's counsel, what trade secrets are and how they fit into a broad continuum of other intellectual property and informational rights.

7. Rockwell Graphic Systems, Inc. v. Dev Indus., Inc., 925 F.2d 174 (7th Cir. 1991). This is a terrific read for trade-secret practitioners who are litigating the issue of whether one made reasonable efforts to keep proprietary information secret. Factually, the case addresses a common issue. Can one claim trade-secret status for information that is disclosed to others - in this case, vendors who receive part drawings? Judge Posner says yes and explains in very simple, easy-to-understand language why that's the case.

6. Micro Data Base Systems, Inc. v. Dharma Systems, Inc., 148 F.3d 649 (7th Cir. 1998). The first of three damages cases, this one involving a claim of trade-secret misappropriation by a software developer against a buyer who disclosed the program to a third-party. The proof of damages was relatively simple, in effect allowing a non-expert to base a claimed damage award on projected lost future sales. Judge Posner rejected the argument that because the testimony was self-serving, it was inadmissible. The case also contains a good discussion of the point made earlier in Rockwell Graphic Systems - that some trade secrets (to be useful) must be disclosed to others. That won't destroy secrecy in the legal sense.

5. ATA Airlines, Inc. v. Federal Express Corp., 665 F.3d 882 (7th Cir. 2011). From a simple damages presentation to a downright intimidating one, Judge Posner vacated a jury verdict in excess of $65,000,000. Key to the discussion was the failure of the parties and the district court judge to understand the expert's damages testimony. Posner tears into the regression analysis that ATA's expert applied to the breach-of-contract suit. He makes a couple of crucial points. First, if a district court judge doesn't understand what the expert is saying he can either require him to speak in plain English or appoint the court's own expert. Second, he concluded the attorneys in the case did not understand the regression analysis central to the damages presentation (kind of shocking, given the size of the damages requested and granted by the jury). And as if to prove a point, Posner spends pages dissecting the damages analysis and ripping it apart, concluding ultimately that the expert's "regression had as many bloody wounds as Julius Caesar when he was stabbed 23 times by the Roman Senators led by Brutus." For the lawyers in the case, this must have been a tough one to read.

4. Schiller & Schmidt, Inc. v. Nordisco Corp., 969 F.2d 410 (7th Cir. 1992). Another case on damages, this one with a simpler and punchier analysis, is one of my favorite opinions. It is decidedly defense friendly, but the gist of it is that courts must pay close attention to expert witness damages theories and not let those witnesses get away with what Judge Posner calls "simplistic extrapolation and childish arithmetic." Posner's opinion chastises both the expert and the plaintiff for their failure to attribute lost revenue to causes unrelated to the act of trade secret misappropriation. This is a must-read for any defense counsel litigating a claim on damages where several intersecting causes may have played a part in the alleged loss.

3. Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466 (7th Cir. 1983). The hidden gem of all Judge Posner cases. I love this decision for many reasons. The gist of the action was Grip-Pak's claim that baseless anti-competitive litigation behavior violated antitrust laws under the Sherman and Clayton Acts. The essence of Posner's commentary is found in this passage: "The existence of a tort of abuse of process shows that it has long been thought that litigation could be used for improper purposes even when there is probably cause for the litigation; and if the improper purpose is to use litigation as a tool for suppressing competition in its antitrust sense...it becomes a matter of antitrust concern."

2. Roland Machinery Co. v. Dresser Indus., Inc., 749 F.2d 380 (7th Cir. 1984). If you didn't study this case in law school, you're very old or went to a shitty law school. This is the case that in effect teaches the preliminary injunction standard and how courts should evaluate the standard in light of the evidence. Not only does Judge Posner give an in-depth analysis of the "inadequate remedy at law" test, but he also gives courts a new way to think about how the traditional four injunction factors fit together. He articulates what is still called the "sliding scale" analysis, in which courts weigh the moving party's likelihood of success and the relative harms associated with grants or denials of injunctive relief. In other words, he reformulates the test so that courts may balance one against the other. A strong case for injunctive relief does not require a substantial showing of harm from a denial of that relief.

1. Curtis 1000, Inc. v. Suess, 24 F.3d 941 (7th Cir. 1994). At the time, Curtis 1000 seemed like a garden-variety non-compete case in which the employer simply failed to demonstrate a protectable interest supporting the covenant. But the case has taken on added importance in Illinois, given the ongoing and unresolved debate on just what constitutes adequate consideration for at-will employee restrictive covenants. In classic Judge Posner style, he dissects the justification for the consideration rules and then reconstructs them in a way that is readable and satisfying.


Thursday, September 7, 2017

Judicial Engagement and Non-Compete Litigation

The lack of judicial engagement is a serious thing - particularly in competition disputes.

What do I mean by judicial engagement? For simplicity, I mean a bridge between judicial activism and judicial restraint. It's a method of evaluating and deciding cases, plain and simply.

The term is somewhat in vogue in libertarian circles (which I inhabit) and used when litigants challenge economic regulations on the grounds that they are irrational or impinge on personal liberties.

So when a government enacts a law that restricts economic freedom - say, an occupational licensing requirement - those who favor judicial engagement do not want courts to abdicate their roles. That is to say, courts should not simply defer to whatever the legislature says is a rational justification for the law.

Rather, courts must engage with the evidence and ensure that it supports the need for the law. And on that score, advocates for judicial engagement would argue that protectionism is never a valid governmental interest. Unfortunately, the black-letter rules that attend government economic regulation all but invite trial judges to defer entirely to whatever the legislature says. An overreading of these black-letter principles leads courts to the wrong results, in which they often time rely on theoretical assumptions or abstract hypotheticals.

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The same decisional framework, judicial engagement, applies to non-compete cases because the applicable legal rule already demand a searching analysis without granting undue deference to the party in whose favor a non-compete runs. So that seems easy enough and a perfectly reasonable analogue to the traditional playing field for the theory of judicial engagement.

I digress for a second, but only a second. As my colleague Jonathan Pollard writes in a recent post, non-competes are first and foremost restraints of trade. Unless we are discussing a negotiated agreement (such as in a sale of business) with real consideration, non-competes are not traditional contracts. They may not even be contracts at all.

When an employer involves the government, here the judiciary, the same liberty concerns arise - with just as much force as an irrational, generally applicable regulation that the legislature passes. The problem that has vexed courts, lawyers, and litigants is how to engage or grapple with the facts in a non-compete dispute. To be sure, judicial restraint is no method of deciding such cases at all.

But many courts employ a burden-shifting approach that all but requires an employee to prove the impossible: that the employer lacks a legitimate business interest in enforcing a restraint. Allowing employers, for instance, simply to mouth some variant of a "legitimate business interest" is not the proper way for a judge to sanction a restraint and impede someone's livelihood.

Let me be clear: nothing in the philosophy of judicial engagement calls upon courts usurp their roles. Just as it is crucial for courts to assess the rationale for governmental regulations of economic activity, it is a moral imperative for them to scrutinize an employer's attempt to enforce through court order a restraint of trade. This is particularly so given the dead weight that enforced and unenforced non-competes have on the economy and productivity.

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Let's take an example of judicial abdication, rather than engagement. The Kansas case of Servi-Tech, Inc. v. Olson is as bland of a non-compete case as you can get. I've handled some variation of this dispute for 20 years, and this fits within the most basic of fact-patterns, summarized (for simplicity as follows):


  • Employee signs a non-compete agreement, containing a broad 2-year market-based restraint wherever the company's clients are located;
  • Employee's non-compete also contains a 2-year restriction against soliciting clients with whom he had contact;
  • Employee works for 2 years before the company terminates him;
  • Employee receives nothing but his job for signing the agreement;
  • Employee is assigned 10 clients when he starts;
  • Employee's friends and family then comprise 5 additional clients after he starts;
  • After being fired, employee stays in the same field and works only with his 5 "friends-and-family" contacts.
The district court enforces the non-solicitation agreement against the employee and includes within the injunction the 5 new clients that joined the company because of their relationship with the employee.

I am simplifying the case for purposes of this discussion. And there are elements of the court's ruling that are proper (if not in reasoning then certainly in result). For instance, the court found the market-based restraint unenforceable, which seems fairly obvious.

But I am concerned about the reasoning in the injunction opinion, particularly its lack of engagement with the facts. On this score, the court seems just to be accepting at theoretical value whatever the employer has said in defense of its broad restraint.

For instance, in discussing the employer's proof of a legitimate business interest, the court said this:

"Olson received some special crop consulting and agronomy training from Servi-Tech, so Servi-Tech has a legitimate business interest to enforce the non-competition clause to protect its investment in him. This, coupled with Servi-Tech's interest of not losing customers, justifies the non-solicitation provision ... that prevents Olson from contacting customers he had worked with as a Servi-Tech employee."

Let's examine this further.

First, the court never describes any aspect of this "training" that the employee, Olson, received. Training if an oft-asserted, rarely convincing "interest" in need of protection. Would companies fail to train people if they lacked non-competes? Does all training incentivize performance or build goodwill? Hardly. The interest is easy to state in the abstract but it often falls apart under even the most basic level of scrutiny. More problematically, the court in Servi-Tech never explains why the particular training received justifies a 2-year work ban (to be fair, it later found the non-compete unreasonable on other grounds). Put differently, the court abdicated its role to assess the proper fit between the asserted interest and the scope of the restriction. 

Second, the interest in "not losing customers" is hardly one to justify a restraint of trade. True, there may be something special about a particular customer relationship - exclusivity, large up-front capital investment - that could justify a customer-based restraint. But no business wants to lose customers. Classifying this as an interest, much less a proven rationale, is judicial abdication and the product of undue deference to whatever the employer says.

Third, the court uses this purported interest to justify a restraint on all customers Olson had worked with at Servi-Tech. But what about the five family members who came to Servi-Tech because of Olson. What does the court say about them: "...they still became Servi-Tech's clients - not Olson's. Once they became Servi-Tech's clients, Servi-Tech was entitled to the benefits of doing business with them." True. That only is relevant, though, for the time Olson worked there. Nothing indicates that Servi-Tech did anything to create goodwill with those small group of personal contacts Olson had. Perhaps they would have come even if Servi-Tech had a poor marketplace reputation. In all likelihood, their fealty was to Olson himself. The court simply used an overbroad rationalization - "they're the employer's clients" - to justify a restraint that limits not just Olson's rights, but those of the clients themselves.

This is not to say, of course, that enforcement of all non-solicitation covenants leads to the same analytical problem. All I am asking for is for courts to engage and not defer. Engage with the facts, as well as the logical conclusions and implications of what the employer alleges.

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So what must judges do to engage, rather than defer or abdicate? Here are some preliminary suggestions and steps:

(1) Hold the employer to a strict burden of proof. In some states, this is not an option for judges. Unless the legislature has made a qualitative judgment concerning this burden, the employer must bear it at all times.

(2) Evaluate the fit between the asserted business interests, the evidentiary facts, and the scope of the restriction. It is not enough for the employer simply to state an interest it deems worthy of protection. The court must demand hard evidence that supports an interest over and above protectionism. And the employer must demonstrate the logical relationship between the interest and the restraint's reach.

(3) Disaggregate special skills, training, or customer relationships from those that are ordinary or common. Too often, we see employers recasting easily acquired industry knowledge (even if through day-to-day work experience) as trade secrets. And training that is conventional on-the-job training, or gained via everyday work experience, is often something that employers provide regardless of having a signed non-compete. 

(4) Examine the time period of the restraint and assess its fit to the asserted interest. It is insufficient for courts to point to some case 20 years ago where a durationally similar non-compete was enforced. That is not engagement - that's punting.

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Of course, these are just starting points. I have advocated, too, other approaches such as "quick-look" hearings on adequacy of consideration or facial validity of the agreement. Those may have some utilitarian, pragmatic benefit. But if we're constrained at this point to evaluate all non-compete cases individually, then judges really need to start doing so. No more deference to the employer. No more blind acceptance of allegations that have some theoretical appeal. And no more forgiveness of evidentiary lapses.

Friday, September 1, 2017

The Reading List (2017, No. 25): Eighth Circuit Affirms Damages Award in West Plains Litigation

Non-Compete and Trade Secrets News for the week ended September 1, 2017

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Jury Verdict Affirmed in West Plains Litigation

The Nebraska case of West Plains, LLC v. Retzlaff Grain is unique in that it belongs in the limited group of trade secrets and unfair competition cases to proceed to jury verdict. The case is garden-variety lift-out, engineered by a former owner of the plaintiff who systematically recruited away key employees to replicate his former business. A Nebraska jury returned a verdict of $1,513,000 in compensatory damages (along with compensation forfeiture in varying amounts against certain ex-employees).

The case is valuable for its discussion of a very common tort that usually accompanies trade-secret or non-compete claims: interference with business relationships. In most cases, interference can be privileged or legally justified if it's for competitive purposes. But interference can be tortious (or wrongful) if done in bad faith, with improper means, or as part of a fraudulent or illegal scheme. Here, the Eighth Circuit found that enough evidence of unjust interference was present in the employees' mass exodus from their former employer. Specifically, the employees used customer lists, documents, and other internal confidential information to plan a coordinated departure. Too, the plaintiff introduced communications that suggested the defendants knew they were acting inappropriately in using their then-employer's information to establish a turn-key competitor from day one.

West Plains shows the value that ancillary tort claims can play in competition cases. With the right facts, it is not always necessary to have a restrictive covenant. To be sure, finding evidence of bad faith or willful misconduct is not easy. But employees seem to keep finding a way to leave digital fingerprints all over the place.

A link to the opinion is available here.

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Privilege in the Waymo/Uber Fight

Privilege issues in trade secrets litigation can arise in a variety of ways. But those issues extend well beyond garden-variety claims of attorney-client or work-product privilege.

The trade-secrets battle-of-the-millennium in Waymo, LLC v. Uber Technologies, Inc. has featured several intricate disputes over production of privileged materials. In July, Magistrate Judge Corley denied Waymo's efforts to compel Anthony Levandowski - the ex-Google engineer in charge of driverless car technology - to produce documentation and media that would have reflected his retention of 14,000 files belonging to Waymo and that concerned its proprietary LiDAR technology. Given that Levandowski's pre-termination conduct posed a risk that he would be prosecuted for trade-secrets theft, the court found that compelling the production of those files would implicate his Fifth Amendment privilege against self-incrimination.

But Judge Corley's order denying Waymo's motion to compel went further. She extended the Fifth Amendment privilege to a privilege log that Levandowski had to prepare. The court had required Levandowski to develop the privilege log with enough substance so that Waymo could respond to his Fifth Amendment arguments. As her ruling shows, even the outlines and parameters of a privilege log, without a corresponding production of the logged materials, can provide enough of a link to a potential crime so as to implicate constitutional concerns.

The Order is available at Waymo, LLC v. Uber Techs., Inc., No. 17-cv-939, 2017 WL 2864854 (N.D. Cal. July 5, 2017).

Friday, August 18, 2017

An Analysis of Two California Cases. Big California Cases.

Over the past week, we received two big decisions from two different California courts on two vastly different issues. One was a decision that has no precedential effect, but which garnered a lot of headlines, particularly in tech circles. That case was decided correctly. The other received almost no attention, but which is precedential. And that case was wrongly decided.

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The Computer Fraud and Abuse Act and Data Scraping

I have a been a long-time critic of the CFAA, a law put together so haphazardly and over so many years that it is difficult to resolve important questions of statutory interpretation. The key legal question that arises under the CFAA - at least in the context of employee claims - is when one exceeds her authorized access to a protected computer or accesses that computer "without authorization." Put another way, many cases have analyzed claims of insider misappropriation within the CFAA's statutory text, even though it seems clear the statute didn't really have that type of case in mind.

But applying the "without authorization" language of the CFAA goes beyond just employment claims, as reflected in the important case of hiQ Labs, Inc. v. LinkedIn Corp. The case involved another question of statutory interpretation: whether the CFAA prohibited access to public LinkedIn profiles after LinkedIn revoked permission to such access.

A little background is essential, since the idea of an open internet is crucial to the case's disposition. hiQ Labs is a data analytics company. Its business model revolves around scraping data off of LinkedIn users' public profiles. It then can offer products to its client companies: an analysis of which employees are likely to leave or be recruited (such as by employees updating their skills and other LinkedIn fields) and a separate analysis of which skills individual workers possess.

LinkedIn demanded that hiQ stop scraping public data from its website, relying on its User Agreement and the term that prohibited data collection. hiQ sought injunctive relief, arguing that LinkedIn's threats undermined its business model and violated state statutory and common law. The analysis, though, hinged on the CFAA - for a reading of that statute in LinkedIn's favor would have preempted the offensive claims hiQ brought.

The district court found that the CFAA likely did not preclude hiQ's claims, and it relied on two general concepts. First, it distinguished other cases where CFAA infractions involved access to private, as opposed to public, data. And second, it looked to the law of trespass to conclude that, despite LinkedIn's supposed revocation of hiQ's access to public profiles on its website, hiQ hadn't circumvented any sort of authentication system to view those profiles. This analysis incorporated Professor Orin Kerr's influential Columbia Law Review article that discussed the law of trespass as explaining some of the ambiguity and context of the "without authorization" language in the CFAA.

The decision seems intuitive and obvious, but in large part it was constrained by the text of the CFAA itself, which has confounded courts over the years. Thank goodness we have thought leaders like Orin Kerr to make sense of the statute and provide the appropriate analytical framework on which courts can reconcile very difficult questions. Public websites need to be open and accessible, and operators cannot erect artificial barriers under the guise of an unread, boilerplate user agreement to invoke the specter of criminal liability for viewing and using what's freely available.

Malicious Prosecution

The second decision comes from the Supreme Court of California, where the Court absolved Latham & Watkins for its pursuit of a frivolous trade-secrets claim many years ago. That case made its way up to the Court of Appeal and is somewhat well-known to lawyers (like me) who believe that a robust, common-sense interpretation of "bad faith" is essential to defense fee-shifting claims. The case of FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (2009), was the precursor to Parrish v. Latham & Watkins. In FLIR Systems, the Court of Appeal affirmed a fee award for the prevailing defendants after the plaintiff's trade-secret claim (and the expert testimony girding that claim) fell apart at trial. As the Court had held, the plaintiff's modest success in defeating summary judgment did not insulate the bad-faith fee award. That was a sound rationale: trade secrets plaintiffs often dodge, duck, and distract a trial court into believing there are factual issues in need of resolution.

Unfortunately, for the defendants in that case, the summary-judgment "loss" hurt them in a later, independent malicious prosecution claim that they brought against Latham & Watkins, the law firm that represented FLIR Systems. The Court of Appeal held that the so-called "interim adverse judgment" rule barred the malicious prosecution claim, a decision the Supreme Court of California affirmed last week.

That rule says that a malicious prosecution plaintiff cannot maintain a claim if a "trial court judgment or verdict" is rendered in favor of the plaintiff in the underlying suit - here the FLIR Systems litigation. The problem with applying this rule is that FLIR Systems' defeat of a summary judgment motion is not a judgment in and of itself. It's an interlocutory order that is not even appealable and is a reflection of the trial judge's perception that fact issues need a full airing in court. Indeed, a denial of a summary judgment motion is not a ruling on the merits in any sense.

California is ground-zero for crummy trade secrets claims, so the ruling is an important one. It is particularly important if the plaintiff cannot satisfy a fee award or if the pursuit of the claim caused collateral damage that flowed from the pursuit of the action (such as lost investors, delayed market entry, jettisoned goodwill). A fee award won't cover those damages, but a malicious prosecution suit will. The "interim adverse judgment" rule, applied to denials of summary judgment motions, is an artificial construct that insulates attorneys who pursue claims without an objective, good-faith basis. That they survive a summary judgment is by no means a reflection of the suit's merit, since the trial is where the facts are most tested. Courts need flexibility to assess whether the entirety of the prosecution was malicious, not whether the plaintiff's lawyers were skilled enough to defeat a motion.

An obvious consequence? California courts may see less summary judgment motions. Why risk it after the Latham & Watkins case?

Friday, August 11, 2017

The Reading List (2017, No. 24): Idaho Non-Competes Featured in NYT Article

Non-Compete and Trade Secrets News for the week ended August 11, 2017

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The New York Times Continues to Explore Non-Compete Agreements

Over the past few months, The New York Times has published several stories and editorial pieces concerning non-compete agreements than I ever can recall. The latest, published July 14, takes readers far away from New York to Idaho, where Conor Dougherty explores the change in the law that makes it much more difficult for employees to contest the validity of restrictive covenants. the NYT piece explores the motivations for how the law changed to favor employers and the lobbying efforts behind the legislative efforts.

Idaho's statute is focused on "key employees," which actually includes independent contractors too. The applicable definition is fairly broad and applies automatically to the top 5 percent in terms of wage earnings. But it goes beyond that to include those who "have the ability to harm or threaten an employer's legitimate business interests."

The statute does more. It creates a series of rebuttable presumptions concerning reasonableness. For time, 18 months is presumed reasonable. For territory, it's where the key employee provided services. And for activity scope, reasonableness is presumed if the covenant is limited to the type of employment that the key employee conducted. The upshot of the Idaho law is this: the employee has the unenviable burden of proving a negative, that he or she is incapable of impairing the employer's legitimate business interests.

This sort of burden-shifting approach turns non-compete law on its head. The employer, seeking to restrain trade, always should justify and establish both the legitimate business interest (beyond mere protectionism) and the imminent harm it faces to that interest. The Idaho approach is reminiscent of the way courts have analyzed 14th Amendment challenges to economic legislation through rational-basis review. That standard, which fairly can be called judicial abdication and not judicial review, requires a challenging party to disprove every conceivable basis which might support the law. And in some jurisdictions, a legitimate basis might even be economic protectionism or a pure economic interest.

The dynamism of our economy requires much more engagement by the judiciary to assess, meaningfully, the asserted interest and justification for a non-compete clause. Requiring the employee to bear the burden of proving he or she won't harm the employer will lead courts to embrace covenants that are too protectionist and safeguard against only theoretical or irrationally perceived harm.

Contractual Injunction Clauses

Non-compete agreements contain a number of important terms beyond the restrictive covenants themselves. Clauses pertaining to fee-shifting, jury trial waivers, arbitration, and venue play a big role in determining how a case gets litigated and decided.

One standard clause that receives a lot of intention is the "stipulation" that a breach necessitates an injunction. Put another way, employers try to use these clauses to convince courts that they need not prove the essential elements of an injunction. They, instead, can point to the agreement itself as the basis for equitable relief.

Most courts are not receptive to this argument, finding that contractual clauses (particularly since they're not negotiated) must give way to court rules and procedures concerning injunctions. But not all courts say that. The Court of Appeals of Minnesota in St. Jude Medical, Inc. v. Carter, found an injunction remedies provision valid, relying on a general contract principle that court must enforce unambiguous terms. The problem with this reasoning is that it equates a non-compete with a freely bargained-for, non-adhesive agreement. In reality, a non-compete is not a conventional contract but a restraint of trade. Courts should always assess whether a moving party has met its burden to obtain an injunction, regardless of any contractual stipulations.

A copy of the opinion is available here.

Wal-Mart Trade Secrets Verdict

In April, Wal-Mart was hit with a jury verdict in excess of $12 million for misappropriating technology pertaining to e-commerce software. The trade-secret owner, Cuker Interactive, thereafter moved for entry of a permanent injunction as is available under the Arkansas Trade Secret Act. The district court agreed that such an injunction was available to protect the development time Wal-Mart avoided by misappropriating Cuker's technology. The district court's opinion is an engaged discussion on the availability of injunctive relief even after entry of a damages award.

But Cuker's win was slightly tempered. The court also reduced the damages award by over $2 million based on a limitation-of-liability clause in the contract between Wal-Mart and Cuker.