Tuesday, May 29, 2018

Justice Thomas and Questions About Severability

A lot can be said about Justice Clarence Thomas. Some of it bad, but much of it quite good. For those who assert he is one of the worst Supreme Court justices of all time, take that for what it is good. Toxic political commentary and sheer uninformed drivel.

The best of Justice Thomas comes out in the now-familiar lone-wolf opinion, whether concurring or dissenting. His unique views span a wide range of the legal landscape, from the Eighth Amendment to the collateral-order doctrine to qualified immunity. Whether you agree with those views or not, they spark discussion and offer an idiosyncratic viewpoint that often makes a great deal of sense.

He expressed another one of these views again last week in Murphy v. NCCA on the issue of severability, which comes up in the Court's constitutional jurisprudence from time to time.

Put simply, the severability doctrine arises when the Court strikes at least part of a statute as unconstitutional. The question then becomes whether the Court should "sever and excise" the offending parts while saving the remainder.

Justice Thomas would like to reexamine that doctrine and has doubts that it is an appropriate part of constitutional analysis for two reasons: (1) it does not follow statutory interpretation principles, because by definition it requires courts to determine what a legislature would have done had the unconstitutional parts of the statute never been enacted at all; and (2) it requires courts to render an advisory opinion on issues the parties aren't fighting over.

***

You may be asking: what the hell does this have to do with non-compete agreements, which is after all sort of the point of this blog.

The connection, however loose or attenuated, is that non-compete law has its own severability principle and it's not all that dissimilar from what Justice Thomas discussed.

In Illinois, the general rule on contract severability is this: a court may enforce the valid parts of an agreement "in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange." That framework generally parrots the Restatement (Second) of Contracts, Section 184. And to further clarify the rule, whether an unenforceable term is an "essential part" of the contract depends on the relative importance of the term in light of the entire agreement between the parties.

The black-letter formulation of this rule thus invokes some of the concerns Justice Thomas outlined in his Murphy concurrence. Assume the following very realistic hypothetical scenario:


  • Employee signs agreement containing broad non-compete clause and narrow non-solicitation of customers clause.
  • Employer focuses its case on customer solicitation, but appears to agree that employee can work for competitor despite the nominal presence of the non-compete in the contract.
  • Employer is generally successful in showing actual solicitation and that the circumstances render the non-solicitation enforceable.
  • Employee proves that the facts make the non-compete gratuitously overbroad.
In such a circumstance, what do we make of the severability rule? It is clear in my hypothetical that part of the agreement is unenforceable, but does that doom the non-solicitation covenant? Under Illinois law, the employee may have a winning argument if circumstances show that the non-compete was integral to the overall contract formation. For instance, she could show the following:

  • Employer insisted that it be included, despite the employee's objections to the broader non-compete.
  • The contract recitals suggest all provisions of the agreement work in unison, are all needed to protect confidential information, or are each integral to the contract.
  • The Employer threatened to enforce the non-compete in an early cease-and-desist letter.
At least if we apply Justice Thomas' reasoning, the severability principle may be a big distraction if the employer isn't attempting to enforce it in court. In other words, the defendant would be addressing a counterfactual: yes, your Honor, but if Employer did try to enforce it, it would lose. Depending on the facts, though, Justice Thomas' stated concerns over an advisory opinion may be overstated. 

The prevailing law on severability then diverges a bit from Justice Thomas' analysis and focuses less on whether the employer would have entered into the agreement with the employee if it had known the non-compete wouldn't have been enforceable and instead more on whether the offending non-compete covenant was an essential part of contract formation. On this score, the analysis does not seem to raise the judicial power concerns Justice Thomas discusses in Murphy and rather focuses on the circumstances at signing. 

The arguments for and against severability are not easy to resolve. Justice Thomas' opinion, though, clarifies in a very straightforward way the tension surrounding them.

Monday, April 9, 2018

Sinclair Broadcast and Its (Alleged) Non-Compete Agreement

Until about a week ago, few of us had ever heard of Sinclair Broadcast Group. That is, until this video went viral.

The video shows local news anchors in a bizarre montage reading precisely the same script about news outlets pushing "irresponsible" stories to push fake news without appropriate fact-checking. Predictably, this generated a response among more prominent news outlets, some of whom took their local broadcast colleagues to task for not standing up to a corporate mandate.

Earlier this week, Bloomberg News reported that there may be a reason why those local anchors did not stand up and quit their jobs. The cost of doing so appears to be fairly steep. Bloomberg News reported that Sinclair employees sign contracts with 6-month non-compete clauses and liquidated damages clauses that call for repayment of up to 40 percent of annual compensation for quitting outside of a notice period.

The Bloomberg News article cites one example where Sinclair attempted to enforce a liquidated damages clause against a Florida news anchor who quit in disgust over some Sinclair tactics. The amount sought was quite low, however. Still, for some seasoned on-air talent, a repayment clause could be enough to deter an employee from quitting on principle.

The non-compete issue is an interesting one as well, though. Many states, including Illinois, prohibit non-compete arrangements in the broadcast industry. Sinclair is trying to buy the Tribune Media group, which means it would own Chicago's revered WGN.

Its apparent use of non-competes would run into a problem with WGN's on-air talent under the Broadcast Industry Free Market Act. That statute prohibits the use of non-compete agreements for television, radio, and cable station talent. It does not apply to sales or management employees. And if Sinclair were to violate the Act, it would be liable for both damages and attorneys' fees.

A number of other states, including New York and Massachusetts, also bar broadcast industry non-competes. California does so too by virtue of its general law banning restrictive covenants in employment.

Tuesday, April 3, 2018

Trump and the Terrible, Horrible, No Good, Very Bad NDA

Leaks from the Oval Office are nothing new.

But the media attention on leaks from this Oval Office has generated considerable buzz for a couple of reasons. First, President Donald Trump is, to put it mildly, unconventional and just plain odd. So anything leaked is grist for the media mill and sure to generate giggles. Second, both Trump himself and his minions flip out at any perceived slight that ends up in the media, no matter how peripheral it is to a substantive policy issue. This is kind of like the Streisand Effect. If they just  would move on to something that matters, few people would talk about the leak.

Normally, the remedy to dispense with a leaker in the executive branch is to dismiss the leaker. No surprise there. It happens. A lot. And let's be clear, leaking isn't a good thing. You don't have to like Trump to bash leaks. We can, and should agree, that they're bad regardless of political affiliation.

That, though, doesn't mean that we can just sanction whatever consequence comes of the leaks. And it certainly doesn't mean we can endorse punishment of people who've left and dished on the doings in the Oval Office.

On that score, Trump is doing something unprecedented. We know he is the first non-politician/non-military officer to run the Executive Branch. And we know that he loves confidentiality agreements from his time working in the private sector and just plain "working" in private.

So we really shouldn't be all that surprised that Trump has deployed a truly private-sector tool, the nondisclosure agreement (NDA), within the White House to stem leaks, no matter how trivial or silly they are in the grand scheme of things.

***

I commented a week ago or so on LinkedIn that Trump's NDA for staffers was obviously unenforceable. I stand by that wholeheartedly. The Trump trolls were out, flooding my comments and email with nonsensical, grammatically challenged screed on topics that have no relationship whatsoever to the point I was trying to make. I guess that, too, was predictable.

A few other would-be apologists, probably too lazy to do their own work, demanded that I provide points and authorities for my conclusions. Apparently, common sense and that thing called the First Amendment were insufficient pillars for my post. Though I hate to indulge laziness or plain ignorance, I think the point is worth discussing in more depth.

***

Let's revisit the basics of what apparently has occurred with the White House staff, much of which comes from an article in The Washington Post, a famous Trump target.

The Post obtained a preliminary draft of the NDA, which in all likelihood differs somewhat from the final version the White House demanded staffers to sign. What do we know about it? A few things:

  1. The scope of the NDA is not limited to "classified" information (more on this below). Instead, it captures "confidential information" defined as "nonpublic information I learn of or gain access to in the course of my official duties in the service of the United States Government on White House staff,” including “communications...with members of the press" and "with employees of federal, state, and local governments."
  2. The preliminary liquidated damages figure for a breach of the NDA was $10,000,000 per violation.
  3. An enforcement clause, which appears designed to create standing, states: “I understand that the United States Government or, upon completion of the term(s) of Mr. Donald J. Trump, an authorized representative of Mr. Trump, may seek any remedy available to enforce this Agreement including, but not limited to, application for a court order prohibiting disclosure of information in breach of this Agreement.”
  4. The non-disclosure restriction appears to last in perpetuity.
***

I want to leave aside the problems with each of the four numbered points above just for a second. We need to step back and understand an overriding principle at work. People who work for the government serve the public. The information they obtain, with some limited exceptions, belongs to the public. And of course, they have First Amendment rights that those employees in the private sector do not enjoy.

Courts haven't really confronted public-sector employee NDAs before, but they have developed some principles that apply to the White House's agreement. Two are crucial to understand the legal question Trump's newest NDA raises. First, restrictions on the speech of governmental employees must protect a substantial government interest unrelated to the suppression of free speech. And second, the restriction must be narrowly drawn to restrict no more speech than is necessary to protect the asserted substantial government interest.

***

I want to return to a preliminary point I made before.

Leaks are bad.

With Trump, I kind of like them in the way I like a beer when I get home. But speaking objectively for a second, we can assume the government can dismiss an employee who discloses information, either to confidential sources or brazenly with his or her name attached to the disclosure.

This is part of a balance that courts must strike in evaluating speech and restrictions on public-sector employees. We know from case law that not all regulation of speech is the same. The government can regulate what its employees say far beyond what it could regulate of the general public. No debate there.

This solves the question of whether Trump could fire, say, Kellyanne Conway, for spilling to a source at the Post. (Hypothetically, of course...). She would have no Section 1983 claim for violation of her First Amendment rights.

***

The problem with Trump's NDA, though, is well beyond that non-controversial point about existing leakers. Trump is trying to coerce perpetual silence from current and former staffers through agreements that do run afoul of the First Amendment.

In some states, non-disclosure agreements must contain a reasonable time limit and also be reasonable in scope. A perpetual NDA in these jurisdictions is likely void on its face.

***

Now let's look at the scope of information protected by the NDA. It captures nonpublic governmental information. There is no set of limiting factors that illustrate what this may be. But it goes well beyond classified or even confidential information.

Some case authority illustrates why this scope is patently unreasonable and an infringement on the First Amendment.

The most apt line of cases involves CIA pre-publication clearance contracts. Put simply, these are agreements that CIA agents sign and that allow the CIA to censor or screen classified material before an agent seeks to publish material about CIA activities in articles or books. Regulations define "classified" material  as information about military plans, foreign governments, or the (now familiar) intelligence "sources and methods."

Pre-publication agreements, and the government's efforts to censor classified material, have been upheld as a reasonable means to protect a substantial governmental interest. But the key to upholding these agreements is the presence of a particular, ascertainable standard that limits governmental discretion to censor in the first instance.

If the standards were too flimsy, then the censorship scheme would fall apart and violate the First Amendment. 

***

When viewing the pre-publication clearance agreement line of cases against the current NDA, it's pretty obvious Trump's White House has gone way too far. The NDA, it appears, prohibits the disclosure of confidential information, not classified materials, along the lines of what a business may try to enforce in the private sector. No reasonable lawyer could claim that "nonpublic information" learned in a governmental job is akin to classified materials like foreign intelligence sources.

The NDA fails to satisfy the "narrowly drawn" test, for it captures random chatter in the White House among staffers. It would prohibit the disclosure of an ex-staffer's impressions of Trump's response to a phone call with a foreign dignitary. And it would also bar a former employee from telling the media that Trump ignored a warning not to say something on a phone call with Vladimir Putin. Even if all of this is "nonpublic" information, it is the ultimately information the public has a right to and should be able to see.

No substantial governmental interest would support such a sweeping NDA.

***

The NDA of course suffers other problems, too. The liquidated damages clause is an unenforceable penalty designed to coerce compliance with the terms rather than predict likely loss. Indeed, it's not clear what financial harm could inure to the federal government if one ex-staffer published a book outlining the dysfunction within the Cabinet.

Any party enforcing a liquidated damages clause must show that the selected amount was reasonable at the time of contracting and contains some relation to damages likely to result. The enforcing party then also must show actual damages would be uncertain and difficult to prove. In some cases, NDA liquidated damages clauses have been upheld as reasonable. From what I've seen, the amount selected still has some evidentiary basis that enables a court to find it was a sound predictor of harm.

Of course, I have not found any case that upholds a liquidated damages amount approaching what Trump seeks in the NDA. But aside from the fact that it's unprecedented, there's a much bigger question at play. Who exactly is damaged? Trump is not a private citizen anymore. He holds an office as part of the public trust. If a staffer revealed damaging information about Trump's conduct in the White House, then this damages Trump only in one sense: the way the public perceives him. And it's not in a sense that is remediable the way Trump thinks.

Put another way, if the public learns accurate information that affects their perception of the President, then the disclosure actually confers a benefit on the federal government. It damages nothing about the institution itself.

Note again the distinction with the CIA pre-publication clearance agreement cases. Disclosure of nuclear strategies or intelligence sources can objectively damage the country regardless of who is in power. But disclosure of the President's behavior in the White House does not suggest the same kind of damage. 

***

This gets to a final problem. Who exactly would enforce this NDA? The draft seems to give either the government or Trump the option. But again, this makes little sense. Trump personally does not have standing to sue an ex-employee for disclosing "nonpublic" information about his tenure in the White House. If a staffer leaks classified material, then that is a crime. But the idea of an enforcement action by Trump against someone he perceives as a disloyal leaker is not only unprecedented, but it completely ignores his status as a public servant.

***

My advice to ex-Administration employees remains the same. Speak freely as long as you don't dish classified information. And by all means, do not worry about what you signed. 

Monday, April 2, 2018

The Supreme Court of Illinois Is Not Interested in the Non-Compete Consideration Rule

For the third time, the Supreme Court of Illinois has declined to hear a petition for leave to appeal that confronts the question of continued employment as consideration for a non-compete agreement.

For at least the past few years, practitioners have operated under the assumption, perhaps wrongly, that Illinois courts established a bright-line two-year rule under which continued employment may serve as consideration for an employee restrictive covenant agreement. This is the so-called Fifield rule, stemming from a 2013 First District Appellate Court case that appeared to set forth a bright line. The Supreme Court declined to hear an appeal in Fifield, so the lack of interest in follow-on cases is not surprising.

This past week, the Court declined a petition for leave to appeal in the case of Automated Industrial Machinery, Inc. v. Christofilis, 2017 IL App (2d) 160301-U. This was my case, and I represented Tom Christofilis at trial and on appeal. Early on in the litigation, the circuit court had granted our motion to dismiss a breach of contract claim given that Christofilis' former employer, AIM, had required him to sign an afterthought non-compete that lasted only for 5 months before he resigned. The court noted that it was not relying at all on Fifield, rightly stating that not a single case in Illinois endorsed consideration of just 5 months' continued employment.

Illinois' consideration rule has come under criticism from some, who apparently are dissatisfied that courts have tread a middle ground between the absolutist positions. Those positions state either that continued employment is not valid contract consideration for a non-compete, or that it is. Very few states require some sort of meaningful period of employment, and Illinois' "substantial period of time" rule is perhaps the most well-developed line of cases that forges a pragmatic path.

Though I say the cases are well-developed, they could certainly be clearer. I think Fifield is misunderstood because sometimes easy cases make for bad law. In retrospect, the two-year pronouncement was both unnecessary to the case's disposition and simply a product of loose opinion writing. I hate to say that and don't mean to indict the appellate court, but it's simply true.

In the bigger picture, the notion of continued employment as adequate consideration at all for a restraint of trade is just weird. It is ephemeral and in many cases illusory. It fails to account for the adhesive nature of the arrangement and the fact that the employee receives nothing at all comparable to what he or she is giving up. As lawyers, we're stuck with this silly, non-sensical paradigm of analyzing contract consideration that makes very little sense to clients and seems directly at odds with the disfavored nature of non-competes in the first instance.

Legislating this issue will prove difficult. But there's another way. If a court ever took a fresh look (and based on Fifield and Christofilis, I don't see that as imminent), it may want to ask just why continued employment is a permissible form of consideration in the first instance. Or how it comports with the adequacy rule that requires some decent fit between the restraint and the benefit conferred on the party restrained. Inertia is not often a good reason for justifying a legal rule, even if lawyers and judges assume that it is.

Tuesday, March 6, 2018

"Solicit," in a Non-Solicit, May Not Mean First to Solicit

Clear?

Didn't think so.

Much ink has been spilled over the term "solicit," since it's obviously a flash-point in non-compete litigation. That is, not all non-competes are true non-competes. Some restrict customer, or employee, solicitation. This is especially true for salespersons, who often have more limited restrictive covenant agreements concerned only with client contact.

For 20 years, I've dealt with clients who come to me with some variation of this question: What if the customer calls me first?

In other words, is that a "solicitation" that violates a restrictive covenant?

(Short digression.

The first layer of analysis is to look at the contract itself. Many non-solicitation covenants actually are broader, despite their customer-centric focus. They may prohibit an ex-employee from working with or accepting business from a group of clients. If that's the case, then an employee who wants to work with former customers needs to shift her focus away from the breach question to either contract formation or reasonableness.

Now back to the main point of this post.)

The meaning of "solicit" is pretty fact-specific. If a client contacts the employee about a project or ongoing work, then the employee likely hasn't solicited anything and may be free to work with the client on competitive business. But what if the client's initial contact is preliminary, vague, and just a precursor to eventual work? What if the discussions, in other words, contemplate that something else will happen?

There are a fair number of cases that give some color to the type of conduct that qualifies as "solicitation." But I haven't seen one quite like Quality Transportation Services, Inc. v. Mark Thompson Trucking, Inc., 2017 IL App (3d) 160761, which effectively answers my rhetorical questions.

The court there found that the client's initial contact was not dispositive of the solicitation question, and that the court needed to evaluate other circumstances. In particular, the factual question concerned the "large gaps of time that followed [the client's] initial phone call." Since the restrained party--it was a corporation, not an employee--appears to have made "multiple and arguably separate contacts" with the client, the "solicitation" question was not clear-cut. The case is definitely worth a read for anyone who wants to deconstruct the meaning of solicitation and get a sense of how courts look at customer contact.

A copy of the opinion is available here.

So what to draw from this. Employees bound by a true non-solicitation covenant, and who claim they didn't initiate client contact, need to keep detailed records of text messages, e-mails, and phone calls received. Those also should describe the nature of the conversation and whether the contact was preliminary or concrete enough to protect further communications as incidental follow-ups, and not renewed efforts to win business.

Remember: when an employer has a non-solicitation covenant, it has no real means of assessing who called whom. These clauses are ripe for litigation because the movement of business itself will trigger a reasonable assumption that the employee made first contact, not the client. But that isn't always the case. Proving that, however, is often really, really hard.

Monday, February 19, 2018

No One Owns Anyone: Orly Lobel's New Book and Thoughts on Knowledge as a Transferable Property Right

Few scholars or commentators have advanced the study of non-compete agreements more than Professor Orly Lobel.

I've referenced her 2013 book, Talent Wants to Be Free, numerous times on this blog and even managed to cite it in a legal brief or two. Professor Lobel is a strong advocate of what she calls "knowledge flows." This is the idea that the migration of people from one firm to another, or to their own firm, can lead to a net societal gain in terms of innovation and technological development.

Her latest book, You Don't Own Me: How Mattel v. MGA Entertainment Exposed Barbie's Dark Side, is a much different read. But it is utterly fantastic, and you don't need to be an IP nerd like me to enjoy it.

The setting for the book is the biggest intellectual property dispute over the past 20 years (sorry, Waymo, you settled): Mattel's war on MGA Entertainment for its development of Bratz dolls to compete with long-time market leader, Barbie. The impetus for the legal battle centered on product developer Carter Bryant, who conceived the idea of the competing Bratz toys while on hiatus from his job at Mattel.

I will leave to the side the copyright and trademark issues that permeate the book, though by no means do I wish to discount them. The legal issues are fascinating. Mattel's claim over Bryant's creative work stemmed largely from the interplay of contract and intellectual property law, a narrow branch that doesn't receive nearly as much attention in the reported decisions: an invention assignment clause. Strictly as a matter of intellectual property law, there's no doubt Bryant would own his own ideas or conceptions related to Bratz. But to what effect did a contractual assignment of those inventions allow Mattel to claim them as its own?

We know how this story turns out. Mattel won the first trial, but lost in the Ninth Circuit. One of the tenets of the Ninth Circuit's opinion was decently simple: Mattel's invention assignment clause never mentioned "ideas," and the concept of Bratz was an idea Bryant had. The jury got bad instructions on his contract. On re-trial, MGA won. Eventually it recovered attorneys' fees. And a line in Judge David Carter's fee opinion (the Copyright Act permits a court to award fees to the winner) nicely sums up the case and its lasting impact:

"Mattel's claim posed a serious threat to the public's access to free and competitive expression; the possibility that Mattel ignored decades-old principles about the unprotectability of ideas in good faith is not an excuse and does not diminish the benefits society will reap as a result of MGA's successful defense."

***

Much can be written about this book, but it's a great page-turner and a courtroom drama of the highest order, not to mention a wonderful application of some difficult principles to some easily digestible facts. We all know Barbie dolls. And who among us hasn't had a great idea--whether explored or not--while off the clock?

But I want to focus on three points I took from the book.

First, lawyers.

Professor Lobel describes how MGA switched horses mid-stream in the case. Shortly before the second trial, MGA hired Jennifer Keller, who was not an intellectual property law expert and appears not to have commanded a whole lot of respect from Mattel. But it's clear she knew her stuff and knew how to command a courtroom. The book gives great examples of how she was able to connect with the jury in a way Mattel couldn't. It's not a stretch to say she was one of the deciding factors in swinging the resolution in MGA's favor.

This is a huge point for clients to consider. If a client is reading this, don't blindly hire a non-compete lawyer to represent you in a non-compete case. Hire a lawyer who is smart, relatable, and who has courtroom chops. She can learn non-compete law (it's not hard). But some pencil-neck who can recite cases poses a grave risk of losing a judge or jury. In fact, one of the worst courtroom attorneys I have seen is a self-described national thought leader in this field.

I tell this to clients. I know I can do a great job, because I am very comfortable in a courtroom, speak plainly, and have the testimonials from judges to prove I'm good. Being a strong advocate is far more than citing case law or applying some rules. It's knowing the facts and weaving them into a clean, clear story. Keller obviously did that way better than her counterparts.

Second, attorneys' fees.

The best part of You Don't Own Me is Chapter 11, where Professor Lobel recounts the aftermath of the long litigation battle. Reading this was somewhat like a trip down memory lane for me, though on a much grander and dramatic scale. Litigation like this almost never produces winners. Except, in many instances, the attorneys. At page 239, Professor Lobel suggests that Mattel's legal expenses topped $450 million and then she states "[i]t is possible that the litigators...were the ones who gained the most from the decade long battles." My only quibble with the book: she should have swapped the phrase "virtually certain" in lieu of "possible."

I am often skeptical that claims my clients face are driven by lawyers who gin up disputes with the idea that the litigation will enable them to meet some punishing billable hour requirement. They seize on their clients' raw feelings that they've lost people who are disloyal. And cases fueled by emotion lead to terrible decisions, not the least of which is the crucial decision to start a case.

Most disputes, on their face, aren't worth even the initial bills from counsel. Until we have a sounder fee-shifting mechanism in place, the specter of litigation cost will continue to smother these disputes. To give my readers an idea of what full-scale litigation war can cost, MGA's successful fee petition in the District Court resulted in an award of $105,668,073 in legal fees and $31,677,104 in costs.

Third, knowledge.

And by that I mean, knowledge as a property right. The central theme in You Don't Own Me concerns the ownership of ideas, specifically Carter Bryant's conception of the Bratz dolls. Non-compete cases are related, but different. They often concern the ownership of knowledge and collective work experience. To what extent is that an interest that can be restrained by contract?

To me, this seems slightly more esoteric than the ideas question that You Don't Own Me deconstructs. Ideas can be divorced entirely from one's day-to-day work, and jurors can grasp that because it's easily relatable (as long as a good lawyer is telling the story). Work experience is harder to disaggregate because it's, well, work. But the logic behind walling off that experience for its sake alone, and then restricting it through court, is really hard to justify.

The collective wisdom of work experience is, in my view, a natural right that is inalienable. A non-compete bolstered in its application only by this experience (and the inevitable use of that experience to benefit someone else) seems flimsy. Courts still seem to struggle to separate the notion of trade secrets from embedded knowledge. Even strong plaintiff's testimony is loaded with hypotheticals like "she might be able to..." It can play well or fall totally flat. The line between protected and unprotected knowledge may not be easy to draw. But we have to do a better job of at least trying to draw it.

Wednesday, February 14, 2018

Diversity Hiring as a...."Protectable Business Interest"

Just when I think there are few unexplored topics on here, I check my Google news alerts to see what new interesting non-compete stories pop up. And sure enough, we get a real doozy.

IBM has sued its former Chief Diversity Officer, Lindsay Rae McIntyre, who left to join Microsoft. The fulcrum of IBM's suit is plainly stated in its brief seeking a temporary restraining order:

"By taking the identical job at Microsoft, and bringing the highly confidential and competitively sensitive information she knows about IBM's diversity data, strategies, and innovations, McIntyre threatens to disclose and use IBM's valuable business secrets for the benefit of one of IBM's most significant competitors."

The TRO brief goes on--for fifty pages--to say basically the same thing. Workplace diversity is important. IBM is a leader. Microsoft is behind. Customers want diversity in employment. And that diversity leads to greater innovation.

Fair enough.

But is this really a business interest that a company can protect through a broad non-compete?

The concept of workplace diversity is no doubt important (and IBM is apparently very good at it), but wouldn't firms who are successful at recruiting and retaining diverse workforces want to publicize that fact? And wouldn't tech titans want to promote not only top talent that it brought into the fold, but how it was able to get them to the company in the first place?

The IBM filing also reveals a problem in non-compete suits that festers incessantly. It's one thing to identify a broad strategy (here, hiring and retention of diverse candidates) as "confidential." But it's then quite another to introduce evidence that disaggregates something specific from that which is in the public domain already.

This seems especially difficult when the claimed protectable interest concerns broadly stated hiring goals or achievements, at least some of which certainly get into the public domain. The position IBM asserts necessarily assumes a corporate culture that is on par with Microsoft (which its filing suggests is not the case at all) and assumes that the workforces are susceptible to having one crossover employee implement or replicate the same hiring tactics on diversity. And it further assumes that Microsoft will want to copy IBM altogether.

It is relatively unusual to see (sustainable) non-compete cases that involve a protectable interest you cannot directly monetize. Most involve sales executives or managers, or those who create and develop intellectual property or other consumable products. The interest in those actions has a direct nexus to sales and customer goodwill. In IBM's current suit against McIntyre, however, the reference to goodwill is starkly indirect--that is, good hiring practices create a good culture which ultimately strengthens the corporation's overall position in the market.

The interest IBM asserts also invokes the notion of "embedded knowledge"--the collective experience an employee brings to the new job simply by being an employee. That is, knowledge at a very high level is a transferable, natural right that a non-compete shouldn't be able to protect. Many corporations do, to be sure, and a great many attorneys feel right at home arguing that knowledge barriers are just fine and dandy. When those suits arise, and the case becomes one about embedded knowledge, it becomes awfully difficult for a court to deconstruct that abstract or collective knowledge gained from concrete secrets deployable somewhere else.

When that happens, sometimes it is easiest for courts just to pivot back to the most obvious, natural theme--one plainly obvious from the first five pages of IBM's own case. Do we really want to restrict an employee from leaving to help other organizations diversify their workforces? This one is a real head-scratcher.

Friday, January 26, 2018

Trade Secret Litigation Statistics Revisited

Thank God for firms like Skadden Arps.

Unlike some terrible "national" law firms that attempt to blog and end up shoveling out worthless drivel, Skadden regularly publishes great content (not to mention high-quality lawyering).

This January 23 post is no different and provides very helpful, practical information for trade secrets attorneys and litigants. Though the article is titled "The Rise of Trade Secret Litigation in the Digital Age," some of its most interesting tidbits focus on statistical measures.

For instance, Skadden notes the following:


  • Trade secrets cases increased 14 percent per year from 2001 to 2012. This runs against the grain, as civil litigation statistics confirm a steady downward trend of filings.
  • Trade secrets holders have a recent success rate of 69 percent at trial.
  • Trade secrets cases are dismissed at a lower rate (22 percent) than other types of complex civil litigation actions.
  • In recent trade secrets cases, only 2 percent resulted in preliminary injunctions -  a surprising trend, given that historically the rate is 10 percent.
Data on litigation outcomes is not easy to come by. Federal court statistics generally can present a skewed picture, given the high percentage of prisoner 1983 actions. So data aggregated on a macro basis is not reflective of all litigation. A high percentage of cases settle very early, so we don't know how meritorious all filings are.

But generally, the public literature shows a few general points to keep in mind, which dovetail nicely with what Skadden summarized:

  • Contract claims usually fare better than tort claims. Trade secrets actions are more akin to tort suits.
  • Federal court jury verdicts tend to be a bit higher.
  • Tort actions involving products liability and medical malpractice fare worse than other civil actions, somewhat skewing the tort number downward. This is even more pronounced in federal court.
  • In trade secrets cases where the employee was the alleged misappropriating party, the plaintiff was nearly twice as likely to obtain a preliminary injunction as when the claimed wrongdoer was a former business partner.
The bible, if you will, on statistical analysis of trade secret litigation comes from David Almeling, and his article is available here.

Generally, my rules of thumb are as follows. And bear in mind that these are grounded less in statistics and more in anecdotal experience and general kibitzing with other nerds:

  • A court will dismiss a trade secrets case on the pleadings less than 10 percent of the time (assuming no abject incompetence on the plaintiff's part).
  • Preliminary injunctions are successful at a rate of 20 and 30 percent.
  • Of those, at least 75 percent are partially successful and deny the plaintiff part of what it seeks.
  • Summary judgments motions are 50/50 propositions at best, but in trade secrets cases the legal standards push that down closer to 40 percent. Non-compete claims are more amenable to summary judgments.
  • At trial, plaintiffs in commercial actions win some material claim at a 60 to 65 percent clip.
  • In 85 percent of jury cases, a trade secrets lawyer will put at least two jurors asleep.
  • In 100 percent of cases, judges beg the parties to try and settle.

Wednesday, January 24, 2018

Wisconsin Supreme Court: No-Hire Provision is a Covenant Not to Compete

When they're not suing each other, the Wisconsin Supreme Court justices actually have some interesting stuff to say and some interesting cases to decide.

This past week, the Court held in Manitowoc Company v. Lanning that an employee non-solicitation clause is a covenant not to compete for purposes of the State's relatively strict non-compete statute, Wis. Stat. § 103.465.

To recap, an employee non-solicitation covenant (or no-hire clause) bars employees from inducing former co-workers to quit or join another company, usually a competitor. They are not litigated all that much, except when pied pipers try to build out sales teams beneath them.

The Court held that it has taken a flexible view of the term "restraint on trade" and that no-hire clauses fit within that term, given that they restrict an employee's "ability to engage in the ordinary competition attendant to a free market," specifically with respect to recruiting the "best talent in the labor pool."

What's the significance? The applicable Wisconsin statute requires an employer to clear a number of different hurdles to establish the validity of a restraint of trade. And just as importantly, the statute provides that any covenant that is unreasonable is void and illegal, even if some remaining portion of the restraint would be valid.

It is an all or nothing proposition.

Which is why Manitowoc Company lost on the merits of its claim, after the Court found that the governing statute applied.

What was wrong? Basically, the no-hire clause said the employee could not, for two years, solicit or encourage any company employee to leave. It's actually broader than that, but I'm trying to be brief.

The Court concluded that Manitowoc Company had no protectable interest in maintaining its entire workforce. The employee it sued had no knowledge of the 13,000+ employees the company had worldwide. The covenant, to be sure, was so broad that no protectable interest could support it. Under the statute, it was void. Plain and simple.

This is yet another opportunity to offer a lesson in contract drafting. Many non-competes get tossed out because counsel salivate at the mouth and want to appease their client. Drafting is not an exercise in chest-thumping, in which counsel gets to boast about how tough he was in writing a restrictive covenant. It's actually much more nuanced than that. Part of being a lawyer is being objective, knowing what makes sense, and then communicating that to the client.

Maybe I'm a dying breed.

Tuesday, January 9, 2018

The Trade Secret Status of Football Game Plans

For the second day in a row, The Wall Street Journal identified interesting questions concerning the law of trade secrets. Today's article comes in the wake of the Alabama-Georgia national title game, which Alabama won in dramatic fashion.

The question the article raises is pretty simple and quaintly summarized: are football game plans trade secrets?

The article explores this question rather indirectly, given WSJ's apparent effort to use Freedom of Information laws to seek these game plans from public universities. My readers will be stunned to learn that the recipients of these FOI letters were less than forthcoming.

One of the traditional exceptions to disclosure of public documents is that information's trade secret status. For their part, FOI laws contain slightly different definitions of trade secrets than do federal and statutes designed to guard against misappropriation. For example, the so-called Exemption 4 under federal law allows for the protection of trade secrets and "commercial or financial information obtained from a person [that is] privileged and confidential." The Supreme Court never has interpreted Exemption 4.

So let's look at Alabama, whose flagship school's football game plans were the subject of the WSJ article today. Alabama's Open Records Act contains no exemption for trade secret material, which is odd but no more odd than sending Roy Moore twice to the state Supreme Court. Though I haven't researched any other statutory basis the University of Alabama may have to withhold game plans under a records request, the Open Records Act does not appear to do so.

Aside from this, the larger question is quite intriguing. Are game plans actually trade secrets?

The best analogy I can come up with is the scripts for popular television serials, a subject I wrote on several years ago in the lead-up to the final Breaking Bad episodes. I've since changed my conclusion and do not believe those scripts are trade secrets, though they can be protected contractually. Why do I say that?

The answer comes straight from the statutory definition of a trade secret. We'll use the 1979 Uniform Trade Secrets Act, whose definition is most in use. The term "trade secret" means that the information must:

(1) derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(2) be the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

While much of the text would suggest popular television scripts are protectable, the highlighted part illustrates why they're not. How, for instance, would any other production company, studio, or network gain from knowing what the plot lines of a series finale are? They wouldn't. In all likelihood, the only remedy that the script owner has is contractual. That is to say, the owner could claim that improper disclosure by an insider bound to a confidentiality clause reduced the economic impact of a television run, such as through lost advertising fees.

My rationale, though, supports giving game plans trade secret status.

Let's start with the basics. Those game plans are valuable, in that they reveal compilations of plays, schemes, coverages, and strategies for a variety of in-game scenarios. So too, there are economic interests at stake, as college football is a business. Universities stand to gain in myriad ways from successful football programs.

And game plans, unlike television scripts, are useful to competitors - even if only to the competitor whose being schemed against in the game plan. So assume that the University of Georgia has a copy of Alabama's game plan. It should know the preferred set of plays for 3rd-and-short. It would know how Alabama's blitz patterns. And it may know whether Alabama wants to deploy a trick play on special teams. That would provide it economic value in the form of a marginally better chance of winning a game, which in turn could yield significant economic gains for the university.

The oft-used defense of reverse engineering likely would not be a good one as applied to game plans. Those plans change week to week based on a variety of factors, including newly obtained personnel, injuries to key players, past performance, competition level, and even the weather. Knowing what Alabama did on 3rd-and-short against Fresno State in September is only marginally helpful when it faces a different defensive scheme, and totally different personnel, against Georgia the following January.

The rather unique aspect of game plans, though, is that they likely have a very short useful life as a trade secret-even for a matter of days. That is to say, anyone can watch tape of last night's game and deduce what Alabama's preferred blitz coverages looked like. They could, in theory, reconstruct a game plan in large part. And again, obtaining a game plan for Georgia would prove marginally helpful, if at all, next season when Alabama opens its season with new players and new schemes.

Today's WSJ article is a fun read and even notes that the paper reviewed Alabama's defensive game plan for its first-round playoff win against Clemson. No one from Alabama seems too worked up about that, suggesting that game plans aren't a trade secret for very long. As one of the Alabama assistants even said, "There's some good information in there, but I don't understand it."

Most people, even other college coaches, wouldn't either. The idea of game plans as trade secrets is academically interesting and challenges us to apply timeless concepts to unique situations. But the debate is still largely theoretical.