Friday, February 17, 2017

The Reading List (2017, No. 7)

Non-Compete and Trade Secret News for the week ended February 17, 2017

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Choice-of-Forum Clauses

The Illinois case of Aon, PLC v. Heffernan, No. 1:16-cv-1924, shows the difficulty of transferring a non-compete case in federal court when the parties have agreed in advance to a forum-selection clause. This difficult became more pronounced after the Supreme Court's Atlantic Marine decision. And the presence of a California defendant does not appear to alleviate this difficulty. Put simply, a defendant's motion to transfer venue, in the face of a clear forum-selection clause, is the exception and must cite a clear public-interest rationale. The transfer decision in Heffernan is available here.

For those wanting a deeper analytical dive into forum-selection clauses post-Atlantic Marine, please read Professor Stephen Sachs' article in the Hastings Law Journal.

Defend Trade Secrets Act

In my second weekly column of the year, I alluded to the New Jersey case of Chubb INA Holdings v. Chang, No. 3:16-cv-02354, which presented an interesting procedural question about the Defend Trade Secrets Act. Specifically, the case raised the issue of whether the DTSA applies to potential acts of misappropriation that arose before the Act went to effect.

The key fact concerning the DTSA's reach are simple: certain ex-Chubb employees allegedly downloaded critical sales and operational information before leaving Chubb. Importantly, this occurred before May 11, 2016 when the DTSA went into effect. But Chubb alleged something else: that the employees inevitably would use that misappropriated information for their new employer's benefit. And that allegation implicated concerns after May 11. This illustrates that the concept of "misappropriation" embodies three separate and distinct branches of conduct: (1) improper acquisition, (2) improper disclosure, and (3) improper use. Because Chubb (at least in part) relied on the "use" branch, the DTSA claim was viable at the initial filing stage. Put another way, each improper use (if proven) would be a separate wrong and independent of the initial acquisition that enabled the use.

The opinion on Chubb's motion for preliminary injunction (which was denied) is available here.

Contract Acceptance

The Third Circuit Court of Appeals has rejected the argument of two ex-ADP employees, who contended that they did not "agree" to non-compete obligations by electronically accepting stock awards electronically on ADP's website. The non-competes were embedded within the electronic documents that each employee signed online. As with many of these click-wrap agreements, the employees acknowledged reading the contracts. The agreements further noted that the non-compete restrictions were a condition of accepting the stock award. The court had no trouble rejecting the employees' novel defense about contract interpretation. A contrary ruling potentially would have lead to absurd results in other cases.

You can read the Third Circuit's unpublished opinion in ADP, LLC v. Lynch, No. 16-3617, by clicking here.

Judge Gorsuch and Trade Secrets

For Supreme Court watchers, Judge Neil Gorsuch of the Tenth Circuit has written one rather notable opinion that delves into trade secrets law. His discussion of Utah's trade secret statute, and the availability of unjust enrichment damages, comprises only part of his opinion for the 10th Circuit in Russo v. Ballard Medical Products, but it is nonetheless an interesting read.

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A few interesting new law review articles have appeared recently.

Jim Pooley, a former Deputy Director General of the World Intellectual Property Organization, published The Myth of the Trade Secret Troll: Why the Defend Trade Secrets Act Improves the Protection of Commercial Information. Mr. Pooley addresses and refutes many of the arguments advanced, particularly in the academy, against the DTSA.

On the non-compete side, Kristen Almond published in the Louisiana Law Review an extensive analysis of that State's quirky non-compete law. Having advised on Louisiana law recently (and frequently in the past), articles like this are essential for a practitioner's full understanding of the law from all perspectives. The publication is called Equalizing the Threat of Noncompete Agreements: Solutions Beyond Louisiana's Tangled Web of Nullity.

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Finally, next Friday I am speaking at the University of Denver at CLE International's Defend Trade Secrets Act conference. I will be presenting with John Marsh on the topic "The Search for Uniformity and Understanding: Reconciling Differences Among the States." I plan to use my upcoming March monthly column to discuss the CLE International conference and the impressions I gained. Many thanks to Mike Greco of Fisher Phillips, who is chairing this event.

Friday, February 10, 2017

The Reading List (2017, No. 6)

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

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Georgia Blue-Penciling of Restrictive Covenants

Last December, a federal district court in Georgia limited courts' ability to modify overbroad restrictive covenants. More on this significant case in my end-of-the-month column, but LifeBrite Labs. v. Cooksey, No. 1:15-cv-4309, merits a brief mention this week.

The court held that Georgia's relatively new state statute concerning non-competes, which permits courts to "modify a covenant that is otherwise void and unenforceable," allowed it only to excise language that rendered the agreement overbroad. In other words, courts could not rewrite the contract, or supply it with any new terms, as part of its statutory ability to modify agreements. The court relied principally on Georgia's existing case law in the sale-of-business context and the rule that it must construe statutes in derogation of the common-law narrowly. Put simply, "modify" means blue-penciling. The opinion and order, with its very insightful analysis, is available here.

(FordHarrison also comments on this case in its Non-Compete News.)

Military Contractor Trade Secrets

The Eleventh Circuit Court of Appeals has reversed a summary judgment of a trade-secrets claim between military contractors, Advantor Systems of Florida and DRS Technical Services, Inc. The disputed technology involved intrusion detection systems that Advantor originally sold certain United States Air Force bases. When the Air Force elected to consolidate its security systems across all AF bases, Advantor was left out in the cold. DRS won the contract and dumped Advantor as a potential sub-contractor during negotiations. The parties had signed a transactional confidentiality agreement and a one-year "no direct hire" agreement that precluded either from directly soliciting the other's employees.

The ruling is rather lengthy (53 pages) and since it's unpublished, it does not merit an extended discussion. However, it is worth reading the passage where the court of appeals reverses summary judgment on the trade-secrets claim based on the Air Force's disclosure of technical manuals and drawings to DRS. Those manuals were necessary for DRS' continued service of Advantor equipment previously sold to the AF (recall that Advantor used to supply systems to several, but not all, AF bases). The analysis discusses a rarely litigated question concerning the term "misappropriation": whether the defendant (DRS) had "reason to know" that a third-party (AF) had some limitation on its ability to disseminate information obtained in confidence (from Advantor).

A copy of the Eleventh Circuit's unpublished opinion is available here.

Choice-of-Law Clauses

California courts have continued a trend of invalidating choice-of-law clauses with regard to employee restrictive covenants. The general principle is that courts will enforce such clauses unless the contractually chosen law is "contrary to the fundamental policy of the forum state." In Stryker Sales Corp. v. Zimmer Biomet, No. 1:16-cv-01670, a California federal district court found a public-policy rift between Michigan and California law concerning non-competes. No surprise there. Michigan is a fairly typical state when it comes to non-compete law, employing a reasonableness test to restrictive covenants. But California bars them almost entirely, which led the court to invalidate the choice-of-law clause in Stryker Sales.

This case illustrates why obtaining the proper forum, and enforcing forum selection clauses, is so crucial to non-competes directed at parties with some California connection. The original action was brought in Michigan, but venue wasn't proper there. A copy of the decision is available here.

Restoration Hardware Trade Secrets Suit

Multiple outlets have reported on a trade-secrets suit between Restoration Hardware and Crate and Barrel. The Complaint, filed in California state court, alleges that Crate and Barrel CEO and former Restoration Hardware employee Doug Diemoz tried to hire other RH executives in violation of a no-hire agreement. According to the Chicago Tribune, Diemoz is alleged to have used Gmail to communicate with RH employees, stating in one such e-mail "that damn non solicitation!" Diemoz' supposed recruitment allegedly ties into another employee's downloading of confidential information about RH's food and beverage operations in Chicago.

The crux of the trade-secret allegation is a little odd. RH seems to be claiming that Crate and Barrel is attempting to replicate its "model" of providing food-and-beverage services in conjunction with its other retail offerings. I suppose that something about the roll-out of those operations could be secret, but it seems like an allegation primed for a reverse-engineering defense. RH's pilot program was launched at the Three Arts Club in Chicago. Before its conversion (it was badly rundown), I lived at the Three Arts Club for a summer in my early 20s and consumed an untold number of alcoholic beverages - not the coffee drinks RH is now peddling to its shoppers.

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In other news, Holland & Hart reports on a $5.175 million trade-secrets verdict it obtained in Utah on behalf of Hydro Engineering, Inc. against Riveer Environmental. The case stemmed from Riveer's hiring of a key salesperson who had a non-compete with Hydro. The verdict summary illustrates, once again, that e-mail communications among the defendant's employees were central to the plaintiff's proofs.

Friday, February 3, 2017

The Reading List (2017, No. 5)

Non-Compete and Trade Secret News for the week ended February 3, 2017

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Defend Trade Secrets Act

I alluded to this case in my prior post.

But we have another federal district court case that discusses the Defend Trade Secrets Act and the ex parte seizure order. In Magnesita Refractories Co. v. Mishra, the court found that a temporary restraining order issued under Federal Rule of Civil Procedure 65, which mandated the seizure of a defendant's laptop, did not require the plaintiff to follow the process outlined in Section 1836(b)(2) of the DTSA.

This is about as in-the-weeds as you can get, but it reaffirms the much larger point: courts are going to issue TROs that have the same effect as the seizure order. And if that's the protocol, then the seizure order may - as I predicted - be more bark than bite. A copy of Judge Simon's ruling, which is truly for nerds like me, is available here.

Non-Recruitment Clauses

Tesla Motors has sued a director of its Autopilot program, Sterling Anderson, claiming misappropriation of "hundreds of gigabytes" of confidential information and improper solicitation of Tesla employees. The Complaint reads like a typical bad divorce between a key employee and a jilted employer, with some fairly serious allegations related to efforts to conceal electronic evidence and pre-termination "cloak and dagger" meetings to plan a competing venture. In California, where the suit is based, post-employment restrictions on soliciting employees are enforceable. That's the centerpiece of the contract claim.

The case is pending in Santa Clara Superior Court. A copy of the Complaint is available here. For a detailed news account, see this article in The Verge.

Sixth Circuit Appeal

The Sixth Circuit Court of Appeals this week heard oral argument in the case of Stryker Corp. v. Ridgeway, No. 16-1654. A jury in the Western District of Michigan entered a verdict in favor of Stryker in the amount of $745,000, which was based in part on Ridgeway's breach of a non-compete agreement. Among other things, the appeal raises a very important choice-of-law/choice-of-forum issue concerning Louisiana law. That state's law is very favorable to employees, but the district court did not apply it. (The district court ruling on the choice-of-law issue is at 2015 WL 5682317.)

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Russell Beck discusses in his Fair Competition blog post the renewed efforts at non-compete reform in Massachusetts. This has become an annual rite of passage. Seyfarth Shaw discusses the same proposals floating around the Massachusetts house and senate.

IPWatchdog has posted an article entitled How to Write Enforceable Non-Compete Agreements. This is a very nice, concise summary of employers' considerations in deciding whether and how to use restrictive covenants. A number of helpful quotes from some of my colleagues...

Other colleagues of mine, from Seyfarth Shaw, have posted their Top Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2016. This post is notably longer than my year-end list and gives a few more illustrative cases - particularly on non-competes and federal computer fraud claims.

Tuesday, January 31, 2017

Monthly Column (2017, No. 1): Why All the Hullabaloo Over the Ex Parte Seizure Order?

We are closing in on one year of the Defend Trade Secrets Act, with not a whole lot of controversy. So far, no real controversies. No concerns of federalism. No huge legal question that has confounded courts. No apparent abuse of the statute.

I was relatively late to the party in terms of supporting the DTSA, which I originally felt was unnecessary. I warmed to the idea for a number of reasons, which I wrote about months before the law was enacted.

Approximately seven months since enactment, the issue that likely delayed the DTSA's passage for two years and the one that still generates the most commentary is a statutory provision that will yield the smallest practical impact: the ex parte seizure order.

The remedy is designed to give victims of trade secrets theft a quick, uncontested way to seize the instruments of the theft. (Click here for a good summary of what the order, and applying for it, entails, by Wilmer Hale.) The problem is that the remedy really adds nothing to a judge's arsenal of relief and is unnecessary to administer the DTSA effectively.

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I noted this about the ex parte seizure order provision back in 2015 when I endorsed the DTSA: 

This is not the law's most outstanding feature, to be sure. But it's not an independent reason to defeat the law. For starters, I have a hard time believing that federal courts will warm to the idea of this remedy. It will be deployed sparingly...Judges are competent enough to snuff out abuses and impose damages for a wrongful seizure of property. This remedy potentially is a paper tiger, and it will work itself out in practice.

With the benefit of time, I stand by my conclusion. The text of the remedy, found in Section 1836(b)(2), is so long and detailed that one must think think it adds a very heavy substantive and procedural layer of protection that the law otherwise does not afford. That's plainly not the case. In fact, federal courts have wide discretion to implement procedural orders that (a) require the immediate turnover of devices or laptops (the real target of the seizure provision), (b) protect the confidentiality of the information found on devices, and (c) preserve evidence. This authority can be found in the Federal Rules of Civil Procedure and in the court's inherent authority to control and monitor its own docket for the efficient disposition of cases.

For instance, a victim of trade-secret theft always can apply for a temporary restraining order that accomplishes precisely the same thing as a seizure order under the DTSA. Some restraining orders actually mandate conduct. So the DTSA's seizure provision overlaps significantly with what a judge could order under Federal Rule of Civil Procedure 65. Many of the subsets of the DTSA already are part of basic TRO practice, including the provisions on mandating particular findings, a return date for a hearing, a description of the property to be seized, and a surety bond.

The DTSA confusingly says that the seizure provision is unavailable if Rule 65 is inadequate to achieve the provision's purpose. No one really knows what that means, except that it certainly gives a judge reason to hit the pause button. Given the discretion a judge has to order temporary injunctive relief (even on an ex parte basis), it seems overly cumbersome for an attorney to make this showing. About the only real difference between an ex parte restraining order and an ex parte seizure order is that the latter requires a hearing on 7 days. Rule 65 gives you 14 days, so I am unclear why a victim would want to embark on a process, and then defend an order, with a shorter duration.

The DTSA does contain a provision that allows one (probably a third-party) to file a motion for encryption. This would allow one to encrypt information on a seized laptop, for instance, that's unrelated to the theft. Imagine a new employer's product designs which are on an employee's laptop, but which have nothing to do with the case. It seems reasonable and not intrusive to allow the employer to move for prophylactic relief to protect its product designs, but the Federal Rules of Civil Procedure are flexible enough to embrace that right anyway. A non-party who seeks a protective order only needs to first intervene in the case. That can't be much more cumbersome than seeking an encryption order.

District courts seem pretty sanguine about the ex parte seizure order, which bears out what I have been saying about its limited scope and impact. Three separate district courts have issued Rule 65 temporary restraining orders in DTSA cases that seize property. See Magnesita Refractories Co. v. Mishra, No. 2:16-cv-524 (N.D. Ind.); Earthbound Corp. v. MiTek USA, No. C16-1150 (W.D. Wash.); and Panera LLC v. Nettles, No. 4:16-cv-1181 (E.D. Mo.). All Rule 65 orders accomplished precisely what the ex parte seizure order was designed to do.

Another case, OOO Brunswick Rail Mgmt. v. Sultanov, No. 5:17-cv-17 (N.D. Cal.), denied a motion for an ex parte seizure order because it was issuing both (a) a separate evidence preservation order on non-parties that maintained personal e-mail accounts for the defendants, and (b) ordering the defendant to deliver devices to the court at the time of an injunction hearing. These orders fall within the court's inherent authority to issue orders preserving evidence and under Rule 65 itself.

Before the DTSA became law, Professor Eric Goldman of Santa Clara University School of Law wrote that "[i]n light of the remedies already available to trade secret owners in ex parte temporary restraining orders...the seizure provision [of the DTSA] purports to apply to only a narrow set of additional circumstances."

I'm still waiting for someone to tell me what those narrow set of additional circumstances are.

Friday, January 27, 2017

The Reading List (2017, No. 4)

Non-Compete and Trade Secrets News for the week ended January 27, 2017

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Illinois Restrictive Covenants

Judge Amy St. Eve is among the very best of the judges on the Northern District of Illinois. In The Carlson Group, Inc. v. Davenport, she denied a preliminary injunction motion brought against former key employees on the basis that they violated non-disclosure and non-solicitation covenants. The opinion is notable for its discussion of a temporally unlimited confidentiality clause with a very broad definition of "confidential information." Since the non-solicitation covenant was tied to customers about which the employees had "confidential information," the overbreadth concerns spilled over onto that covenant as well. As usual, her opinions are very clear and informative. A copy of the injunction ruling is available here.

Aleynikov Conviction Reinstated

Sergey Aleynikov, the ex-Goldman Sachs coder who inspired Michael Lewis' Flash Boys, has had his New York state-law conviction for theft of "secret scientific material" reinstated by the Appellate Division. Aleynikov's legal troubles have been chronicled at length here and elsewhere, but this is the latest sobering chapter in multi-pronged journey through the civil and criminal justice system. After a jury convicted Aleynikov in 2015 on state-law theft charges, a State Supreme Court Justice (in New York, that means a trial court judge) threw out the conviction for failure to prove the material elements of the crime. The details of the appellate court's reasoning are somewhat murky and technical - not at all interesting like the actual back-story of this litigation.

The reinstatement means Aleynikov goes back for sentencing. However, since he already has served one year on a federal charge, which later was overturned by the Second Circuit Court of Appeals, he'll get credit for one year of time served. The state-law theft conviction is a Class E felony, with a sentencing range of 1 to 4 years. This means Aleynikov may not face additional jail time. He shouldn't. No one - no matter what they say - even understands what he took. Aleynikov's counsel, Kevin Marino, vows an appeal.

On a related matter, Goldman and Aleynikov are fighting over whether he is entitled to indemnification for defense-related fees from the invalid federal criminal conviction. The Bloomberg story concerning that separate fight is chronicled here.

Customer Lists as Trade Secrets

A very commonly alleged trade secret, particularly in the employment context, is the customer list. However, customer lists come in many different shapes and sizes so it's hard to make blanket statements about what is and isn't legally protected. A federal district court in Texas addresses this question under Ohio's trade-secret statute. The decision is illustrative in showing what level of detail may be required to vest a customer list with trade-secret status. The customer list in KeyCorp v. Holland contained only names and contact information, and the court held that wasn't enough.

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The Fairfield County Business Journal reports on a new non-compete suit brought by Sun Products and Henkel against a former Chief Technology Officer/Senior Vice-President for Research and Development, Carlos Linares. Judge Eginton signed a temporary restraining order that bars Linares from starting his new position at Church & Dwight. It appears that the parties are set to proceed to a preliminary injunction hearing on February 9. Of interest, one of the claims is brought under the Defend Trade Secrets Act and the Connecticut Uniform Trade Secrets Act. Connecticut courts have expressed a willingness to apply the "inevitable disclosure" doctrine, which is largely disfavored under the DTSA. Given that Linares appears to have a non-compete agreement, the potential divergence of the state and federal trade secrets act might not be a central point of contention in the case. But we shall see. A copy of the Amended Complaint is available here.

In a blog post by Tarter Krinksy & Drogin, the authors note that a New York appeals court decided a "Game-Changer on Enforcement of New York Non-Compete Agreements." The post discusses Buchanan Capital Markets, LLC v. DeLucca, 144 A.D.3d 508 (1st Dep't. 2016), and remarks on the case's comment that non-competes in New York are not enforceable unless the employer demonstrates a "continued willingness to employ the party covenanting not to compete." In reality, this case isn't much of a game-changer given the limited appellate analysis. It does remind us, however, that New York courts have issued many decisions that seem to create a per se rule against enforcement in a termination-without-cause scenario. Why a company would want to enforce in that circumstance, by the way, is beyond me.

South Florida's Daily Business Review reports on a case working its way through the Florida Court of Appeals, which concerns State Farm's efforts to protect as a trade secret certain information about where it's selling homeowners' policies. Insurers like State Farm often need to provide data about underwriting activities to state regulators. Depending on the state insurance codes' exemptions, such public disclosure of company-wide data can materially impact trade-secret claims. Insurers' obligations to disclose are similar to what we're starting to see in the fracking industry, which requires similar public disclosure of information but which also allows for certain narrow trade-secret exemptions. This will be an interesting case to watch when the Court of Appeals rules. The case is Office of Insurance Regulation v. State Farm Florida, No. 1D16-2301.

Friday, January 20, 2017

The Reading List (2017, No. 3)

Non-Compete and Trade Secrets News for the week ended January 20, 2017

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New Jersey Non-Competes

Non-compete disputes in the medical device and implant field are a dime a dozen these days. In that realm comes Synthes, Inc. v. Gregoris, No. 2:16-cv-6255, out of the District of New Jersey. There, Synthes successfully obtained a preliminary injunction against a former area sales vice-president who had sought to join Globus, Inc. to head up its new trauma sales division. The injunction opinion is quite long, but it hits nearly every significant legal question under New Jersey law and is a very readable primer for lawyers and non-lawyers alike.

Of particular interest is the passage concerning the employee's negotiation of a $475,000 payment from Globus if the court enforced Synthes' restrictive covenant. Crediting the employee and his counsel for obtaining this protection, the court felt that this obligation seriously mitigated the undue hardship that otherwise might result from judicial enforcement. This is the double-edged sword of indemnity obligations: they provide much-needed insurance for employees for jumping ship, but undoubtedly hurt the employee when it comes time to litigate. A copy of the Opinion is available here.

Weird Lawsuits

Perhaps because they are wrought with emotion, dust-ups over non-competes can yield some very strange lawsuits. I once had a client sued in divorce court over a non-compete because the business owner's divorce lawyer felt my client's actions somehow impacted marital property. (I won't explain here, but will say it was even more convoluted than it sounds.)

One of these bizarre non-compete related suits comes from Washington, where the Court of Appeals recently affirmed the dismissal of an action against the spouse of a former employee. The employee had breached a non-compete, and the employer sued his spouse for a constructive trust on the earnings that her husband contributed to the family's shared expenses. The employee had filed for bankruptcy, but the judgment concerning the non-compete agreement was deemed non-dischargeable. Suing the spouse didn't help the employer collect. A copy of the Opinion is available here.

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A few weeks back, I commented on the pending cert petition that asked the Supreme Court to address the International Trade Commission's authority to investigate trade secrets theft when the acts occurred outside the United States. As Jones Day writes, the Supreme Court denied Sino Legend's petition, essentially leaving intact the Tian Rui decision from several years ago that allowed the ITC to exclude the importation of goods when the misappropriation occurs outside the U.S.

Milwaukee Mayor Tom Barrett authored an op-ed in the Journal Sentinel in which he advocated for reducing employers' reliance on non-compete agreements. Wisconsin is a rather difficult enforcement state, and despite legislative efforts to liberalize non-compete law there is no indication that this will gain any real foothold. The op-ed provides an interesting viewpoint of those who believe that non-competes stifle, rather than promote, innovation.

Fisher Phillips comments on the Sultanov case, in which a federal judge denied an emergency application under the Defend Trade Secrets Act for entry of an ex parte seizure order. I wrote on this last week. The post nicely summarizes the considerations counsel must consider when seeking this type of extraordinary remedy.

From the Las Vegas strip comes a non-compete dispute between two casinos, Aria and The Cosmopolitan. The lawsuit centers on a claim that a former Aria executive wooed the casino's top customers to gamble at The Cosmopolitan. The dispute has factual shades similar to Golden Road Motor Inn v. Islam, in which the Supreme Court of Nevada held that judicial modification of non-competes was not permitted. The Las Vegas Review-Journal reports on the emergency proceedings now pending in federal court.

And in my favorite story over the past seven days, the New York Post has an article about a competition dispute between two barber shops. Three former stylists left Paul Mole's Barber Shop to start their own business, and none had a non-compete agreement. They are striking back, accusing their former employer of slandering them on Facebook and lodging allegations of "stealing" customers. Though such talk may sound like bluster, it indeed can be defamatory and non-privileged speech, potentially giving rise to presumed legal damages. Rob Radcliff has more on this story, and some practical tips, in his recent blog post.

Friday, January 13, 2017

The Reading List (2017, No. 2)

Non-Compete and Trade Secret News for the week ended January 13, 2017

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Defend Trade Secrets Act

We have the first district court opinion dealing with the relatively new (and highly controversial) ex parte seizure order available under the federal Defend Trade Secrets Act. In OOO Brunswick Rail Mgmt. v. Sultanov, a federal district court denied an application to have a court order the seizure of e-mail information maintained by third-party providers (such as Google), reasoning that the providers would be required to preserve it anyway. The court further denied the ex parte application to the extent it sought to seize the company-issued laptop and mobile phone in the defendant's possession, since the court ordered the defendant to produce them at the injunction hearing.

The order, a copy of which is available here, illustrates that the ex parte seizure order remedy may be more bark than bite, as courts already have at their disposal a number of less intrusive means to preserve data and the integrity of the litigation process. They no doubt will use them before deploying this very unique, and disfavored, remedy.

Hard-Drive Inspections

Writing a blog post on motions to compel is like describing your workout routine to someone else. You immediately sense eyes glazing over. However, at the risk of turning readers away, I'll mention one ruling that I recently read.

A recurring trade-secrets discovery issue seems to be one party's request that an adversary turn over hardware for forensic inspection. Because computers and external devices often are the means to pilfer protected information, it is logical for an aggrieved party to ask for a direct inspection of those devices. However, courts still are reluctant to do so and rely on the traditional discovery process to generate accurate responses, even when computers make the process more cumbersome and opaque. Courts normally won't order the direct production of devices unless there is proof they were used in the act of misappropriation or there is some history of discovery non-compliance. But even then, as Brand Services, LLC v. Irex Corp. illustrates, courts have the discretion to order the production of electronically stored information pursuant to a less intrusive key-word search protocol. Direct production of devices remains the exception rather than the rule.

Ethics

Non-compete disputes raise a lot of interesting conflicts and ethics question. But a very stark and sobering reminder comes from CytImmune Sciences, Inc. v. Paciotti, in which Judge Paul Grimm of the District Court of Maryland disqualified an employee's counsel because he previously worked on the same confidentiality agreement on the plaintiff's behalf many years prior.

Judge Grimm disqualified Alston & Bird since the lawyer's continued representation of the employee was materially limited due to his past representation of the employer. The material limitation apparently crystallized when defense counsel did not advance an argument on the agreement's enforceability (a facial challenge) during injunction briefing. That was particularly problematic for the court since it found the agreement unenforceable on its face and felt another attorney could have made a "full-throated facial challenge to the breadth of the" contract. The ruling is available here. (Not addressed, but perhaps looming, is the possibility the firm will need to disgorge fees from the engagement.)

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From around the web, lots of material on the Defend Trade Secrets Act percolating...

Cozen O'Connor writes that trade secrets litigation will spike in 2017. In Judge Grimm's parlance, I'll lodge a "full-throated" disagreement. It may, but who knows? The post seems to suggest the ex parte seizure order process is the reason, but come on. No one sues based on the slim chance that a court may issue what amounts to a temporary discovery order. What seems likely is an uptick in federal litigation, as practitioners have a full year to assess the DTSA, and employees have a full year of ignoring both common sense and their lawyers' advice on how to leave their jobs.

The Legal Intelligencer has an overview of the DTSA, and it emphasizes remedies. Again, there's a fulsome discussion of the seizure order. Lots of noise about something unlikely to generate much real action.

In a similar vein, Christopher Stief of Fisher & Phillips published this piece on Law.com, also discussing questions looming as courts implement the DTSA.

Somewhat related to DTSA commentary is Perkins Coie's terrific post from January 5 entitled How Will Criminal Trade Secret Prosecutions Fare under President Trump? This article describes the federal criminal statutory framework for trade-secret theft, which was rarely used until the Obama Administration made it a priority. This is well worth a read, even for civil litigators.

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Finally, there's an interesting DTSA case pending in New Jersey called Chubb INA Holdings v. Chang, No. 3:16-cv-02354. Pending before the District Court is a defense motion to dismiss a Computer Fraud and Abuse Act claim and a DTSA claim.

The CFAA motion is premised on a Nosal-style theory that the employee's access to protected computers was not in excess of authorized access, while the DTSA argument presents a more novel issue. It examines the DTSA's applicability to conduct that at least started before the DTSA went into effect. From briefing, it appears the question may hinge on whether the new federal statute would apply to either an inevitable disclosure theory of misappropriation or the continued retention of information after the DTSA's effective date (even if the predicate acts took place beforehand).

The motion to dismiss is available here. The response brief is here.

Friday, January 6, 2017

The Reading List (2017, No. 1)

Non-Compete and Trade Secrets News for the week ended January 6, 2017

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Commercial real estate broker Avison Young has sued three former brokers who joined Cushman & Wakefield. According to Crain's Chicago Business, the factual predicate for the complaint appears to be the downloading of firm confidential material before departure. The lawsuit is pending in the Circuit Court of Cook County, Illinois.

The law firm of Foley & Lardner was sued by its client, 1347 Property Insurance Holdings, Inc., for failing to secure non-compete agreements from key employees of a company that the client acquired. The Complaint, filed in the Eastern District of Wisconsin, alleges that the employees formed a rival and then solicited the acquired entity's most significant clients. 1347 Property seeks damages of over $1.5 million arising from business that it would have kept if the executives had been required to sign enforceable non-competes. The Complaint is available here.

Illinois' new non-compete law took effect on January 1. The Freedom to Work Act generally prohibits non-compete contracts for low-wage employees. Please review my prior blog post about the new law.

Jonathan Pollard, a non-compete and trade secrets lawyer in Florida, has posted an excellent YouTube video of what he calls Florida's "non-compete crisis." Pollard is a strong, principled voice in this field and has some excellent perspectives on Florida law. Recall that many states, including Illinois, view Florida law as so extreme to call it contrary to public policy. I wrote on this particular issue about 18 months ago.

Seyfarth Shaw's Trading Secrets blog discusses a petition for certiorari that asks the Supreme Court to rule on the International Trade Commission's authority to investigate and adjudicate acts of trade secret misappropriation that occur entirely overseas. The ITC's enforcement activity in this area is a relatively new phenomenon and springs largely from the 2011 Tian Rui case.

Fisher & Phillips reports on a new Colorado case, which concerned a protective order dispute and the potential ramifications for protecting trade secrets in litigation. It's a very interesting read, stemming from a case where the underlying claims have nothing to do with trade secrets.

Also outside the non-compete context, but certainly relevant to non-compete claims, is the Appellate Court of Illinois decision in Carlson v. Jerousek. Though a personal injury case, the dispute involved an appeal from a contempt citation for the plaintiff's refusal to turn over five personal computers for forensic imaging. The appellate court found that the trial court failed to conduct an appropriate balancing test that governed the need for forensic imaging, principally because the computers lacked any nexus to the dispute and because the plaintiff had no history of shirking discovery obligations. This could prove to be a very important foundational e-discovery case in Illinois for competition disputes.

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This time of year, the blogosphere is crowded with year-end wrap-up posts. I went with four of them, so I have little room to complain about the fire-hose of information circulating around. I recommend checking out two of them.

The National Law Journal has Epstein Becker & Green's "Key Trade Secret and Non-Compete Developments in 2016."

Russell Beck's Fair Competition Law post contains a more comprehensive list of non-compete and trade secret developments, which goes beyond the year's most significant highlights that I discussed .


Friday, December 30, 2016

Year-End Extravaganza (Part 4): Top 10 Books (Non-Compete) Lawyers Should Read

As the son of an English teacher and a school superintendent, there never was much doubt that I'd be a reader - either by volition or conscription. I was the kid who had "summer reading lists," which admittedly at the time seemed oppressive and unreasonable. However, I got over it. I took to reading books at an early age, a habit I'm sure steered me to choose law as a career. I've never gotten over it, and doubt I ever will.

I'd thought I'd end this crap-show of a year on a somewhat lighter note. I decided to list ten books that I think lawyers should read. This is nothing more than a catharsis, a way to divert us from the everyday grind of what we do. I appreciate those who read my blog and hope I've provided some interesting content for you. The year-end post, the last post, gets to be mine. Pardon the self-indulgence.

The first half of this list is geared (however slightly) to non-compete lawyers, and I explain why below. The second half of this list is not at all specific to my practice of law, but the books (both fiction and non-fiction) provide valuable lessons for attorneys of all stripes. Think of this as my gift to you. You're welcome...

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10. Flash Boys (Michael Lewis, 2014). Anyone who has followed trade secrets law knows the plight of ex-Goldman Sachs programmer Sergey Aleynikov. His use of Goldman's proprietary computer code (many call it "stealing") sparked two criminal prosecutions and a separate civil suit. Along the way, Aleynikov almost single-handedly managed to cause Congress to change how federal law deals with the theft of products that affect interstate commerce. Flash Boys is not my favorite Michael Lewis book (try, Boomerang). But Aleynikov inspired Lewis to delve into the largely opaque world of high-frequency trading, which itself is punishingly secretive. And Lewis has an uncanny ability to deconstruct technical, difficult subjects and break them down into understandable terms that a layperson can understand. That's a gift lawyers should try to emulate in their oral and written presentations.

9. Worse than the Devil (Dean Strang, 2013). Dean Strang is one of the legal stars of the Netflix series, Making a Murderer. Before that series exploded, Strang published this concise study of the 1917 bombing of the Milwaukee Police Station and the ensuing trial of several Italian anarchists. The story in its own right is quite interesting, if for nothing more than the quick rush to judgment of a class of immigrants seems all too real in today's world. But principally, I recommend the book for its 6-page Preface. It's perhaps the best example of persuasive legal writing I have ever read. Non-compete lawyers must be good writers, because so much of our most critical work is done on written submissions to the court. If you want a legal writing primer, read this short passage.

8. Point Made: How to Write Like the Nation's Top Advocates (Ross Guberman, 2011). On the subject of legal writing, I veer into the technical with this selection. Legal writing books and blogs are ubiquitous now. But with apologies to Bryan Garner, I think Ross Guberman has the most bang for the buck with Point Made. The format of this book is really effective. He breaks down all the components of effective legal writing - structure, thematic elements, persuasion, language - with specific examples from top advocates' briefs. Lawyers earn their living by being effective writers. Too many fall well short. Guberman's book is a fantastic nuts-and-bolts of how to write well.

7. Talent Wants to be Free (Orly Lobel, 2013). Professor Lobel's book has received mention on this blog and is well-known to lawyers who practice in the field of restrictive covenants and trade secrets. Talent Wants to be Free is valuable for how accessible it is and for how it challenges much of the conventional wisdom that girds this area of the law. It is useful for anyone who practices in this field simply because lawyers will gain a better, macro understanding of economic and labor-market forces that create so much tension between the freedom to contract and the freedom to compete. This book forces the reader to think big, which is a quality lawyers too often lose in the heat of a particular battle.

6. Wonder (R.J. Palacio, 2012). Speaking of qualities many lawyers lack...empathy. This is the reason I chose Wonder - one of my all-time favorite books. It's a children's novel based around the story of Auggie Pullman - a 10 year-old boy with a severe facial deformity who for the first time is headed off to school. It's very rare that I read a book and think "everyone should read this." Wonder, however, is one of those books. Remember: children's books are not just for children. Back to empathy (which is the obvious theme of the book), it's a particularly important quality for lawyers to have in the field of non-competes and trade secrets. Many who pursue spurious and vindictive claims simply fail to understand the damage their conduct has on peoples' careers. I'll chalk it up to the never-ending quest to aggrandize legal fees, a shameless part of our profession.

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5.  Fahrenheit 451 (Ray Bradbury, 1953). My mom - the English teacher - hates this book. I mean, really hates it. Dystopian novels are not for everyone, but I chose Fahrenheit 451 because it embraces a rejection of conformity. Our profession is undergoing a sea-change in the attorney-client relationship, the way in which we communicate, obtain fees for our work, and deliver services to our clients. Lawyers who blindly accept things the way are and always have been are doomed to fall behind in a declining profession. Fahrenheit 451 reminds lawyers they should embrace change and reject the fealty to tradition.

4. Sex, Drugs and Cocoa Puffs: A Low-Culture Manifesto (Chuck Klosterman, 2003). Because lawyers are uptight and need to laugh. This book will do it. Enough said.

3. Reflections on Judging (Richard A. Posner, 2013). I'm pissed off at Judge Posner. I think he has taken some unnecessarily gratuitous shots at judges and lawyers over the past year. His questioning at oral argument can be over the top. But, he still is the most influential judge in my lifetime not named Scalia. What he says is important, even if it's not how I would like to see him express it. I have read several of his books, and many I find to be inaccessible and unnecessarily dense (such as How Judges Think). However, Reflections on Judging is the one I recommend the most. He explores practical problems, such as the impact of technology on judging, as well as the theoretical, such as the flaws in the Scalia/Garner interpretive model. He also discusses problems that are less obvious, such as judges' reluctance to grapple with facts. Overall, this is a good read by a really important jurist. I wouldn't recommend this book to everyone. But lawyers? A definite must read.

2. Zeitoun (Dave Eggers, 2009). The aftermath of Hurricane Katrina is still one of the most disturbing events I can recall and one which I fear is still largely untold. Zeitoun explores this through the eyes of a Syrian Muslim, a businessman who stayed in New Orleans and toured the city in his canoe. Many themes of criminal and civil justice permeate this wonderful non-fiction account, including anti-Islam sentiment and the authoritarian governmental response to human suffering. This book exposes how Americans easily can lose their cherished civil liberties, ones that many of us take for granted.

1. The Fountainhead (Ayn Rand, 1943). Since this is my list, I get to pick my favorite book as one I think all lawyers should read. This novel about individualism certainly has great appeal to lawyers (Roark, the protagonist, is an architect). It is particularly appealing for attorneys who do not always embrace popular causes or represent popular clients. To me, the novel always has stood for its theme of individual self-determination. I can think of few greater lessons for lawyers to take than to stand up for one's beliefs (or her belief in her client), even at risk of public condemnation.

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I hope this detour (or left-turn) has been interesting. I'll be thrilled if one of you decides to read one of these books simply upon my mere suggestion.You won't be disappointed.

In the meantime, get the hell out of here 2016. You really sucked.

Friday, December 23, 2016

Year-End Extravaganza (Part 3): Top 10 Developments in Non-Compete and Trade Secrets Law for 2016

The first two installments of my year-end review were designed to be pragmatic, to offer my perceptions of the most common mistakes made in employee competition disputes. The third installment is more traditional and recaps the year's top legal developments throughout the country concerning non-compete and trade secrets law.

10. California amends Labor Code provision affecting non-competes. Advising clients on non-compete issues is much more involved than just analyzing the restriction's scope. It's also about assessing clauses that are secondary to the agreement, namely provisions governing arbitration, fee-shifting, choice-of-law, and choice-of-venue. These clauses take on added importance when non-compete issues arise for California residents because that state bans non-compete contracts. Some courts have allowed non-competes against California residents when the underlying contract contains both a forum-selection clause mandating venue outside California and a provision requiring application of another state's laws. Seeking to close this rather narrow but significant loophole, California's legislature has tightened the Labor Code and will give employees the option to void these important contract provisions. For more, read my October 18 post on this development.

9. States limit enforcement of physician non-competes. States have a patchwork of exceptions to their general statutory or common-law rules governing non-competes. Lawyers are exempted, but there's no real rhyme or reason to other industry-based exemptions. This year was full of legislative activity, once again, including categorical bans on non-competes for workers in specific industries. Both Connecticut and Rhode Island limited the enforcement of non-competes against physicians. My July 11 summary on the Connecticut law can be found here, and the discussion concerning Rhode Island's legislative change is available here.

8. Utah changes non-compete law. Aside from categorical bans, other states limited the circumstances in which companies could enforce non-competes. Utah enacted the Post-Employment Restrictions Act, limiting non-competes to a duration of one year. Employees also have the right to seek legal fees for defending an enforcement action if the agreement is found to be unreasonable. The development is particularly noteworthy, since Utah is the reddest of red states politically. However, unlike dysfunctional state legislatures in North Carolina and Illinois, Utah's actually works quite well and develops legislative compromises on even the most difficult areas of public policy. Please read my May 6 post for a more detailed discussion of the new state non-compete law.

7. Ninth Circuit closes the book on Nosal computer fraud dispute. The most well-known case brought under the Computer Fraud and Abuse Act, to date, has been United States v. Nosal. The Ninth Circuit now has issued two significant appellate rulings, which interpret key provisions of the CFAA. In the first go-around, Nosal scored a win, prevailing on a narrow interpretation of the statutory term that one can be held liable when he "exceeds authorized access" to a protected computer. The second time around, Nosal was not as fortunate. The Ninth Circuit in Nosal II found that the former Korn Ferry executive violated the CFAA's proscription on accessing a computer "without authorization" when he obtained an employee's password to access a database containing information on executive search candidates. The lengthy opinion (which features a strong dissent) has produced a lot of commentary and even a revised opinion. My thoughts on the case can be found in my July 25 post here.

6. Feds seek to limit "no-poach" agreements. In October, the Department of Justice and the Federal Trade Commission issued its Antitrust Guidance for Human Resource Professionals concerning a topic that is well-known to large technology companies: horizontal employee "no-poaching" agreements. The DOJ and FTC have pledged to criminally investigate these arrangements, which serve to restrict labor markets even in employee-friendly jurisdictions in California. Whether this initiative changes with a new administration is a question that would yield rank speculation. The incoming president has been fairly vocal about investigating antitrust complaints, and he has no love for Silicon Valley. My November 14 post on this topic can be found here.

5. NLRB continues to scrutinize non-disclosure contracts. One of the more unforeseen developments over the past couple of years has been the interest the National Labor Relations Board has taken in policies and contracts that limit union organizing activity. Some sources of the friction between private companies and the NLRB are handbook policies, employment contracts, and severance arrangements. This year, in Quicken Loans, Inc. v. NLRB, the United States Court of Appeals for the District of Columbia enforced an NLRB order that struck down overbroad non-disclosure clauses and non-disparagement covenants. Private enforcement actions, such as the recent John Doe v. Google case, may be the next litigation frontier in this arena. My August 22 summary of the Quicken Loans opinion is available here.

4. Nevada rejects blue-pencil doctrine. The most significant state court ruling on non-compete law came from a state that rarely has waded into the fray: Nevada. In a thoughtful opinion, the Supreme Court of Nevada soundly rejected the blue-pencil doctrine (a judicially-created doctrine of equity used to modify or rewrite overbroad non-compete agreements). This ruling places Nevada squarely in the minority, but it's indeed a vocal and persuasive minority. The case is Golden Road Motor Inn, Inc. v. Islam. You can read my July 28 post on the decision by clicking here.

3. Attorneys General step up scrutiny on oppressive non-compete contracts. This could be called the Year of Jimmy John's...and not just because my daughter begs to go there all the time. The sandwich chain thrust itself into non-compete law by requiring low-level employees to sign broad restrictive covenants. This profoundly silly policy was a public-relations disaster and caused state attorneys general to intervene. Ultimately, Jimmy John's had to pay the State of Illinois a $100,000 settlement. Attorneys General in New York and Illinois have pledged to investigate other firms' misuse of broad non-competes into the coming year. Presumably, they will target companies that require broad restrictions throughout the corporate hierarchy, irrespective of employees' ability to cause any harm. My August 30 blog post discusses enforcement actions in Illinois.

2. White House issues non-compete "Call to Action." In October, the White House released its Call to Action and urged state lawmakers to adopt significant reforms to non-compete law. The proposal generally implores states to do three things: (a) ban non-competes for low-wage workers, those who do not have access to trade secrets, and those are who are laid off; (b) require upfront disclosure about non-competes and additional tangible consideration (beyond mere employment itself) for employees who sign them; and (c) adopt a strict red-pencil doctrine that would eliminate a court's discretion to rewrite overbroad agreements. My discussion from October 28 on the White House's Call to Action can be found here.

1. Defend Trade Secrets Act becomes law. Well, at least number one this year was easy. The Defend Trade Secrets Act, long in the works, amends Title 18 of the criminal code and creates a private right of action in federal court for trade secret misappropriation if the trade secret is related to a product or service used in interstate commerce. The DTSA largely tracks existing state law, but it provides the federal muscle that sometimes is necessary in cases of theft. Of the unique statutory provisions in the DTSA, the ones likely to garner the most attention are its express rejection of the inevitable disclosure theory of misappropriation (still a viable theory in some states), the provision enabling ex parte seizures of items (such as laptops) used to commit trade secrets theft, and a clause protecting whistleblowers. As of time of this post, we have one Colorado case that discusses the scope of available injunctive relief and one from Massachusetts that involved the whistleblower provision. 2017 should yield a trove of cases addressing key aspects of the law.

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So, yeah. Pretty big year. In a few days, the final installment on my year-end extravaganza.