Recent Decisions of Interest (No. 2)

Today, a decision out of Georgia (always a good source of entertainment), a New York court opinion on non-recruitment clauses, and an Ohio case on trade secrets.

Paragon Techs., Inc. v. Infosmart Techs., Inc., 312 Ga. App. 465 (2011). In a technology staffing contract, a covenant that prohibited the staffing provider from working directly with the contractor's client for a period of one year was unreasonable under Georgia law. The reason? This arms' length contract was still judged under the strict scrutiny standard, which invalidates covenants prohibiting unsolicited work with a client.

Renaissance Nutrition, Inc. v. Jarrett, 2012 U.S. Dist. LEXIS 2490 (W.D.N.Y. Jan. 9, 2012). A federal court in New York held that under New York law, a non-recruitment provision barring solicitation of employees must be judged under the traditional three-part restrictive covenant analysis. However, the court also stated that because a non-recruitment covenant does not impinge on an individual's livelihood, it is "inherently more reasonable" than non-compete covenants. This follows the trend in most states. It is surprising that so few cases in New York, which generally produces the most non-compete opinions, have weighed in on the issue.

Finally, we have Columbus Bookkeeping & Bus. Svcs., Inc. v. Ohio State Bookkeeping, LLC, 2011 Ohio App. LEXIS 5655 (Ct. App. Dec. 30, 2011), where the Court of Appeals of Ohio reversed a preliminary injunction in a trade secrets case. The plaintiff had claimed that its list of clients was a trade secret, and that by competing for those clients, the defendants misappropriated trade secrets. The trial court agreed and imposed, in effect, a non-compete as to those clients.

The Court of Appeals found this to be an abuse of discretion, noting that "plaintiff seeks...to enforce a non-existing noncompetition agreement against defendants by invoking the statutory provisions governing trade secrets." The trial court's order was amplified by the expiration date it placed on the defendants' ability to service customers, as the Court of Appeals found that this was more in line with what courts would do for non-compete agreements (which have expiration dates).

A true trade secret should be protected for as long as it is secret and valuable. Finally, the court correctly found that client lists are usually trade secret when accompanied by a host of other non-public data, such as contact information and other particulars known as a result of the client relationship.

The Reading List (No. 2)

A couple of weeks ago, I read "Making Your Case" by Justice Antonin Scalia and Bryan Garner, the latter being sort of the Steve Jobs of the legal writing industry.

On page 62, the authors discuss brief writing and quote Judge Frank Easterbrook (right) of the Seventh Circuit, who says:

"The best way to become a good legal writer is to spend more time reading good prose. And legal writing ain't that! So read good prose. And then when you come back and start writing legal documents, see if you can write your document like a good article in The Atlantic, addressing a generalist audience. That's how you do it: get your nose out of the lawbooks and go read some more." (Incidentally, Judge Easterbrook's brother, Gregg, is a well-known writer on a variety of subjects (including football) who was published in the February edition of The Atlantic.)

Awesome advice. With some exceptions, the legal writing I see is poorly framed, drab, and mind-numbing.

So I start today's reading list suggesting a great non-legal article. In the February edition of Harper's, Barry C. Lynn writes about the impact of "new monopolies" on free competition. In "Killing the Competition", Lynn discusses the much-ballyhooed pact among the Silicon Valley tech companies not to hire each other's employees.

Interesting news item here in Velo News describing a trade secret/employment contract dispute between Specialized and Volagi. Employees of well-known road bike manufacturer Specialized left to start their own firm, and Specialized claimed that they not only stole trade secret information but also used their former employer's time and resources to start a competing enterprise. Though Specialized prevailed on one claim (and received $1 in damages), Volagi claimed victory and noted the more than $1m in legal fees spent by Specialized. The article highlights the difficulty of proving damages in competition disputes and further illustrates the high legal fees associated with contested litigation in this area.

Finally, Michael Elkon from Fisher & Phillips discusses the use of non-compete agreements in college football contracts. The article points out some very astute policy implications. I wrote on this topic in December 2010 when Bobby Petrino inked his new deal at the University of Arkansas.

The Practical Lawyer (No. 1): A Client Gives Me a Drafting Tip

One of the most important pieces of advice I can give any lawyer is very simple (and maybe very obvious): listen to your client.

Many of my clients are small business owners. As corporate counsel, it is critical for me to understand the dynamics that affect my clients' business operations. This week, when working on a draft non-compete agreement, a client caught something that was missing from the form document off of which I start the drafting process.

A provision that deals with cloud computing.

It is standard procedure in my non-compete agreements to have some provision calling for the return of business materials upon termination of employment. Those clauses also call for an inspection opportunity, such that an employer can verify company data isn't maintained on personal thumb-drives, tablets, or smart phones after termination.

However, my form agreement did not mention cloud computing or cloud storage. By now, most attorneys are aware that documents and data can be stored in the cloud. Cloud storage basically means that information is stored online in a pool hosted by a third-party. It provides employees the opportunity, for instance, to access information following departure even if their personal laptop or tablet device appears "clean." It is similar (and far more advanced) than the situation involving employees who have old company e-mails maintained in a web-based e-mail system, which provides ease of access.

Employers should consider restricting the ability of employees to store documents in the cloud. In my opinion, the availability of easy-to-use cloud storage platforms (such as iCloud) creates a potential problem that employment agreements may not address.

Recent Decisions of Interest (No. 1)

My regular Thursday column will survey recent decisions across the United States which touch upon non-compete or trade secret issues. The four cases I chose this week touch on a wide variety of issues, including those relevant to the corporate counsel drafting non-compete clauses.

AMG Nat'l Trust Bank v. Ries, 2011 U.S. Dist. LEXIS 149130 (E.D. Pa. Dec. 29, 2011). The court, applying Colorado law, found that a liquidated damages provision in a two-year non-compete, which called for payment of ten times the annual gross fees for each wrongfully solicited client, was voidable as a matter of law. I drafted two liquidated damages clauses this week for clients, and my advice is always the same: be able to justify the methodology you select under oath. The more random and arbitrary a clause looks, the more likely a court simply will strike it.

ISCO Indus., LLLC v. Erdle, 2011 U.S. Dist. LEXIS 148907 (E.D.N.C. Dec. 28, 2011). A North Carolina court denied entry of a preliminary injunction motion against a sales employee in the piping distribution business. The employee's covenant was not narrowly tailored to restrict him from selling only products or services competitive with those offered by the ex-employer. This further illustrates why attorneys must be careful in considering the scope of the non-compete restriction. Using hypothetical scenarios during the drafting process can help identify problems of overbreadth.

WIT Walchi Innovation Techs., GmbH v. Westrick, 2012 U.S. Dist. LEXIS 1847 (S.D. Fla. Jan. 6, 2012). A court issued an ex parte temporary restraining order against an employee who allegedly stole a laptop containing proprietary source code and programming for a software product. The court issued a broad evidence preservation order and ordered immediate return of the stolen laptop computer. No commentary necessary here. Firsthand evidence of outright theft of property warrants mandatory injunctive relief, even on an ex parte basis.

Pellerin v. Honeywell Int'l Inc., 2012 U.S. Dist. LEXIS 3781 (S.D. Cal. Jan. 12, 2012). A district court in California sustained a defense objection to the retention of a trade secrets expert on the basis that the expert was a former employee of the defendant. Such objections, usually made under the terms of protective order, are common when the expert may have had prior access to an adversary's confidential information. It may be impossible in such circumstances for the expert to provide legitimate, untainted opinion testimony.

The Reading List (No. 1)

As I wrote last week, every Tuesday I will be posting links to other articles of interest. This is the first installment of The Reading List, and I encourage my readers to visit these informative articles from other authors.

Ted Olsen of Sherman & Howard writes on an interesting social media case, involving an employer's posting of entries on its employee's Twitter and Facebook sites. As this article aptly describes, the law and theories under which parties can sue is still evolving and it is not entirely clear what personal and property rights are protected.

Seyfarth Shaw discusses New Jersey's adoption of the Trade Secrets Act in a post here. The actual legislation can be found here.

Rob Radcliffe writes on the proliferation of non-compete agreements in the medical device industry, citing his past experience with a particular party and the trends in overall health care spending. As Rob notes, some companies have developed reputations for being very aggressive in filing or pursuing non-compete actions against ex-employees. Rob notes that one such employer is Synthes Medical.

Chicago Tribune business law writer Ameet Sachdev discusses the Illinois Supreme Court's decision in Reliable Fire Equipment v. Arredondo. Surprisingly, he concludes by saying that labor attorneys representing both management and employees have favorable reviews of the decision. My experience is the opposite.

MIT News contains an article on the impact of non-compete agreements on engineers. The article also cites a detailed academic study recently published in the American Sociological Review, which notes that roughly one-third of technical employees bound by non-compete agreements leave their industry altogether.

New Jersey Adopts Uniform Trade Secrets Act

On January 9, Governor Chris Christie signed the New Jersey Trade Secrets Act into law. This Act is modeled after the Uniform Trade Secrets Act. With this legislation now in effect, only three states - Texas, Massachusetts, and New York - have yet to adopt the UTSA.

The New Jersey version of the Act is very similar to other statutory schemes adopting the UTSA. While the definition of "trade secret" is different, and a little broader, than other states, the basic foundation of trade secret law is still on par with the vast majority of states.

The passage of the UTSA does work a couple of changes. First, preemption now will apply and common law tort claims based on trade secret misappropriation likely will be barred. Second, the UTSA will allow an aggrieved party the opportunity to recover so-called "royalty" damages, a theory previously unavailable under the common law. Previously, a trade secrets plaintiff only could recovery money upon a showing of lost profits or under an unjust enrichment theory. Similarly, a royalty injunction is available, which allows a misappropriating party to use a trade secret into the future provided it pays a reasonable royalty to the trade secret owner.

Finally, the fee shifting provisions common to trade secrets claims - to the plaintiff upon a showing of willfulness, and to the defendant upon a showing of bad faith - will apply.

The New Jersey statute takes effect immediately, though it does not apply to claims of misappropriation arising before January 9, 2012.

Bring on 2012 - A Time for Change

I'm not sure whether Ron Paul is going to get elected President or not (though I have a strong hunch), but 2012 is sure to bring in a great deal of change.

I, for one, like change. I think it's healthy, good, and invigorating. There is nothing more annoying to me than someone who continues doing the same thing over and over again and justifies it simply by saying "that's how I've always done it." I see this all the time with lawyers, who justify bad work product based on prior practice. This hasn't worked for the Chicago Cubs, and it's not a defense. If something sucked ten years ago, it almost certainly still sucks.

So how does the idea of change affect my blog for 2012?

Here's how. Starting next week, I will publish three regular columns per week which will follow a similar theme.

On Tuesdays, I will publish "The Reading List", a quick reference guide to articles I have read from other attorneys and commentators. A lot of my colleagues publish great websites and I want my readers to see other perspectives and points of view.

On Thursdays, I will publish "Recent Decisions of Interest", which is a more condensed version of the case summaries I frequently post. My goal is to provide more content and more cases in a slightly less jargony format. If there is a truly significant decision that merits further discussion, I may write separately on that. I also intend to include issues that relate to employee transition disputes, but not necessarily decisions touching specifically on non-competition agreements. Summaries and posts may include references to social media and commission disputes.

On Fridays, I will alternate between "The Practical Lawyer" and "The Weekly Posner." The former is intended to follow the theme and style of many former columns, because I have received a tremendous amount of positive feedback from clients and fellow lawyers for my prior posts. I won't necessarily to discuss some groundbreaking decision or interesting new non-compete case. Rather, I will impart to my readers what issues I typically see when representing clients and how to begin thinking about them.

The latter will be somewhat of a novel twist for this site, since it won't directly touch on non-compete law. But, (just as it sounds) "The Weekly Posner" will discuss a case or article from the leading jurist in America, Seventh Circuit Judge Richard A. Posner. Judge Posner has had a tremendous influence on my legal career and the way I think about cases and issues. Any attorney who litigates a business case ought to know how Judge Posner has ruled or approached issues in the past. This column will be sort of a tip-of-the-hat to him.

As the year goes, I expect I may revert to my old ways and break from this format on occasion. However, I want to keep this site fresh and interesting and hope that you will enjoy what I provide in 2012.

2011: Year-End Review, Part II

I decided to augment my year-end review this year with a different tone and message. In the past, I have confined my end of the year analysis to a true summary of what legal developments we saw in the area of non-compete law during the prior twelve months.

But upon reflection of the year that is now behind us, I wanted to share some personal thoughts about what I have seen representing clients in lawsuits and non-compete disputes.

In 15 years of practice, I have never been more bothered and disturbed by the role attorneys play in facilitating their clients' grievances, rather than resolving them. Competition disputes are a little bit different - actually, a lot different - than other ordinary suits. More than frequently, they are not about righting a wrong or recovering some liquidated debt. Rather, they are intensely personal, strategic, and improperly pursued. I have written before on the range of legal fees often generated in these cases and what factors go into those ranges. Clients and potential new clients are sometimes shocked to hear this, but it is much better for them to know at the outset.

In 2011, I tried three non-compete cases to final judgment - two victories and one defeat. And on each occasion, the court ultimately got it correct. The attorney I lost to was one of the finest and most honorable attorneys I have met, represented his client well, and worked well with me to get a non-compete case tried to final judgment in a remarkable 35 days. This is what lawyers should aspire to. I left the case sad for my client, but emboldened in my belief in the system and that some attorneys just "get it."

Along the way, however, I witnessed lawyering that was the complete opposite. To sum it up eloquently, the representation I saw this year from a wide range of lawyers was fucking horrendous.

Lawyers seem to forget that they have obligations not only to the clients they represent, but also to the court and opposing counsel. In competition cases, these considerations seem to get swept under the rug all too often. Competition suits have the potential to be strategic - that is, not meant to redress a true grievance, but to gain foothold in the marketplace and to impose litigation costs on a competitor. This in and of itself is wrong. Many lawyers, however, could care less.

The law provides some redress for parties who are the victims of frivolous or strategic lawsuits (and, that term means both suits that were not well-grounded from the start, but also - and especially - those that were filed and maintained for some ulterior purpose), but the avenues to gain just compensation are exceedingly narrow, difficult to prove, and cost inefficient. My experience is that courts are impermissibly hostile to fee-shifting petitions, wary of counterclaims, and unwilling to view the motive behind lawsuits with a jaundiced eye.

Just three illustrations from this year to show what I have experienced firsthand.

I litigated a trade secrets injunction case in state court where the plaintiff, my opponent, had no idea what its trade secret was and ultimately concluded it was his "overall business model." (It was about halfway through a preliminary injunction hearing when the plaintiff finally decided this.) Aside from the fact my client was not even in the same line of business and never took anything from the plaintiff, the plaintiff and its lawyer pursued us anyway and forced a young man to spend $20,000 in personal savings to clear his good name. The court denied our motion for sanctions, which the plaintiff did not even defend.

I also prevailed in a federal court non-compete/trade secrets case where my opponent could not identify how it was ever harmed or injured as a result of what turned out to be business activity in a completely separate market outside the geographic scope of my clients' non-compete agreements. My fee petition for $100,000 is now pending, and my adversary has bitched, whined and lied that I failed to disclose information about my opponent's damages (not sure how this is even possible) and that I confused a deposition witness (is this a compliment or a complaint?).

In another trade secrets case, my opponent filed a claim in a complex industry, claiming that certain technology know-how components (each of which were clearly in the public domain) gave rise to an inevitable disclosure case. The suit, in essence, was a forced hostile takeover of a corporate competitor by virtue of a dubious trade secret claim, and resulted in a large settlement just so the defendant could move on with its business and close its debt financing. At no point did the plaintiff show any interest in what its trade secrets were (its theory changed three times before the first witness was deposed), but the lawyers managed to rack up millions in legal fees.

Victims of lawsuit abuse can always pursue claims for attorneys fees, abuse of process, malicious prosecution, and antitrust violations. But they are hard to prove, perhaps intentionally so. More problematically, lawyers these days seem more interested in charging their clients, building their books of business, and collecting fees, rather than doling out sound advice and pursuing cases to recover compensation.

There are simply too many attorneys chasing too little work, encouraging clients to take on stupid lawsuits for the sole purpose of litigating. Too infrequently, lawyers give little thought to how they will win a case. Litigating is enough until they get their ass handed to them or force their client to settle (usually after most of the fees have been charged and collected) right before trial.

I don't want to give the impression that I won't pursue a case for a client who has been truly wronged. In the past two years, I have been lead counsel for a plaintiff on only five cases - a mere fraction of how many times I defend clients in competition suits. But in those five suits, I know what I am doing and my clients damn well know I investigated the case before I filed it. I don't pretend to know everything, and I have had my share of disappointments. However, I have never used a competition suit for some ulterior purpose. Unlike many of my opponents, I can look myself in the mirror and say that I understand what the profession means.

Faces of Lawsuit Abuse

2011: Year-End Review, Part I

I put a fair amount of effort into this blog, but I try to go the extra mile in my year-end review. I went back and read my material from prior years, and I am proud of the content I have provided my readers as we have turned the page on another year.

So this year, I am going a step further and dividing my column in two parts. This installment features some notable developments in competition law and some links to suggested reading. The second installment will be a lot different, and I hope you find it valuable too.

As I look back on 2011, there were five significant developments (four of which I wrote about) in non-compete and trade secret law.

1. Supreme Court of Illinois "Reaffirms" Reasonableness Test. Courts in Illinois have struggled for 3 or 4 years to determine what test to apply to non-compete agreements. Due to a district split, the Supreme Court had little choice but to take Reliable Fire Equipment v. Arredondo to clarify the law applicable to covenants. As it turns out, the opinion in Reliable Fire was not all that illuminating, but it reaffirmed the tripartite reasonableness test that is common to many states and further held that an employer must demonstrate a protectable interest. The biggest change is that the protectable interest is to be assessed under a "totality of the circumstances" approach - a notable departure from a rigid test that lawyers and courts frequently struggled with. I wrote about this decision earlier this month. The defendants in that case have petitioned the Court for a finding that the ruling applies prospectively only. I will update the blog when the Court rules on (denies) that motion.

2. Texas Supreme Court Expands Permissible Scope of Non-Competes. In July, I wrote about Marsh USA v. Cook, an important Texas Supreme Court case which completed a long revamp of Texas law. Essentially, Texas has now migrated away from an analysis based on whether a covenant was "ancillary" to an employment contract and focused more on whether it is reasonable to protect a legitimate business interest. In Marsh USA, the Court determined that the provision of stock options (as opposed to confidential information) was the type of consideration that could support a non-compete. The best part of the case, though, is Justice Willett's scholarly and beautifully written concurring opinion. It should be required reading for any judge before he or she examines a non-compete case.

3. Georgia's New State Law Takes Effect. After some fits and starts, Georgia's new non-compete statute took effect earlier this year. Though the law only applies to contracts entered into after a certain date, Georgia now goes from being a notoriously employee-friendly state to one more neutral in how it assesses non-competes.

4. Colorado Allows for Continued Employment to Serve as Valid Consideration. The issue of whether continued employment can serve as sufficient consideration for a non-compete is one of my top wedge issues - those that clients often don't grasp and which are the subject of disagreement among states. Earlier this year, Colorado joined a majority of states in concluding that continued employment can constitute sufficient consideration.

5. Massachusetts Courts Expand Trade Secret Proteciton. This is not an issue I wrote about, but it is worth reading Russell Beck's discussion on the Fair Competition Law blog of Specialized Technology Resources v. JPS Elastomerics. Massachusetts has not enacted the Uniform Trade Secrets Act, and Section 93A is its general unfair competition statute. This case appears to give employers some more ammunition for obtaining damages and attorneys' fees against employees who misappropriate trade secret material and use the same after the employment relationship ends. Prior case law had been unclear as to how (or whether) employers could invoke this statute against departing employees.

So that's it for the traditional year-end wrap. Next up, a different and more personal take on 2011.

Iowa Appellate Court Addresses First Sale of Business Non-Compete Case In Over 70 Years (Sutton v. Iowa Trenchless)

Sale of business non-compete cases do not often end up in the appellate courts because they are so frequently enforced. While the contract still technically amount to restraints of trade, the level of scrutiny applied by courts is far more lenient than in employment cases.

The Court of Appeals of Iowa took its first sale of business case in more than 70 years and reaffirmed the long-held principle that courts grant a greater "scope of restraint" in sale of business non-competes than in other adhesive contracts. Interestingly, the court stated the "reasonableness" test is the same, "it is only the application of the test that is different." The court even noted that as long as the area covered by the non-compete was coextensive with the company's line of business, an unlimited duration still could be acceptable.

The Iowa court's formulation of the reasonableness test is similar to that in other states. Some courts will, for instance, presume that a protectable interest exists. Many states shift the burden of proof to the party challenging the covenant, in essence requiring him or her to demonstrate unreasonableness. In a normal employer-employee context, the burden often is on the employer to show why the protections are needed.

Interestingly, in the trial court, the employee - Sutton - sought a declaratory judgment that the non-compete was unenforceable. The employer counterclaimed for breach of contract. Both the trial court and appellate court found that the employer failed to establish an actual breach because it could not prove damages.

In reversing the trial court's grant of declaratory relief, however, the court found that Sutton actually had to reimburse the employer's attorneys' fees under a prevailing party provision of the contract, even though the employer never established breach. Sutton, therefore, may have been better off waiting to see if his ex-employer sued him, rather than filing a preemptive suit for declaratory judgment.

--

Court: Court of Appeals of Iowa

Opinion Date: 11/23/11

Cite: Sutton v. Iowa Trenchless, LLC, 2011 Iowa App. LEXIS 1359 (Iowa Ct. App. Nov. 23, 2011)

Favors: Employer

Law: Iowa