Friday, January 20, 2017

The Reading List (2017, No. 3)

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

***

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.

***

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

***

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.)

***

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.

***

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

***

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.

***

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...

***

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.

***

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.

***

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.

***

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

Thursday, December 15, 2016

Year-End Extravaganza (Part 2): Top 10 Mistakes Employers Make in Competition Lawsuits

Last Thursday, I wrote the first of my four-part year-end review column. The focus was on mistakes employees make when they leave to join a competitor. This week, I look at the flip-side: mistakes, fumbles, and foibles that employers make when pursuing competition claims.

  1. Litigating based on emotion rather than outcome. Competition claims against ex-employees tend to have a great deal of emotion simmering beneath the surface. Those stem from feelings of loyalty and betrayal. Although the first inclination may be to sue, exact revenge, and send a message, employers that pursue litigation for this purpose inevitably set themselves up for failure. Mistakes often reveal themselves through angry deposition testimony and even outright dissembling about key facts. Employers who let emotion guide their decision-making fail to recognize case weaknesses and end up making poor tactical decisions throughout the case.
  2. Focusing too late on damages. Judge Richard Posner - in one of his seemingly never-ending criticisms of lawyers - believes attorneys in patent cases focus too much on liability and not enough on damages. This time, I agree with him. The same conundrum is true of counsel representing companies in non-compete and trade secret litigation. The fascination with obtaining liability facts devolves from the insatiable appetite lawyers have to load up on the low-hanging fruit and avoid tackling tough issues. Damage theories can be quite tough, and the specter of proving damages is outside many lawyers' comfort zone. Oddly enough, damages rules are flexible enough to give plaintiffs' counsel ample room to be creative, particularly in trade secrets cases. But my experience has been that most of the time, plaintiffs get a start way too late in the game.  
  3. Declining to have a litigation point-person. Representing employees has its many challenges, but it usually is easy to get information from them. A lawyer has one client and one person to keep under control. Representing an organization, though, is tough. Many different people in the company could have access to important documents and knowledge of key facts. Outside counsel can feel as though they are herding cats trying to marshal those diffuse resources. That's why it's key for attorneys to have one point-person within the company, who is preferably not a lawyer, to serve as the point-person for litigation. That individual must have authority, have a vested interest in the outcome, retain organizational credibility, and be responsive. In many cases, however, it is apparent counsel is running the show and simply has no one to coordinate the fact-gathering and strategic effort within the company.
  4. Overlooking lower-level employees. One problem that stems from a company's failure to appoint a non-lawyer point-person is that mid- and entry-tier employees may possess vital information that somehow goes undetected until it's too late. This person could have vital knowledge concerning trade-secret security measures, customer contacts, or dealings with the ex-employee. But my experience has been that companies who litigate competition cases poorly rely too much on executive-level employees and ignore those who have a better pulse as to what actually happens in the trenches.
  5. Ignoring third-party impact. Since competition suits should be about loss of business, it stands to reason that third-parties - those who supply that lost business - will play a vital role. Employers who sue ex-employees may not realize where the loyalties of these third-parties lie. When credibility issues are paramount, courts will often make decisions based on which of the non-interested witnesses (i.e., third-parties) are more credible. If they are not aligned with or even hostile to an employer, then this can redound throughout the entire case. Relatedly, companies may not realize the impact that mere litigation will have. Even if customers were inclined to remain with the employer, the litigation itself may be so upsetting or costly that it causes them to leave altogether.
  6. Failing to follow basic exit procedures. A company's mistake in litigation may stem from prophylactic steps it could have taken before the lawsuit to avert a costly suit. Those include: (a) sending effective, call-to-action reminder letters to the departing employee; (b) conducting a simple exit interview; (c) disabling a departing employee's access to sensitive database material; and (d) examining Outlook items or dedicated work computers for information the employee may have taken. Even if a suit eventually arises, a company's sloppy handling of departure procedures can feed into a damaging narrative at trial - that the company was unconcerned about keeping information confidential.
  7. Short-cutting discovery answers. Employees usually do a pretty good job of taking discovery seriously. Employers? Not so. They tend to revel in boilerplate objections and offer answers that simply may get the job done. Those short-cuts inevitably come back to hurt later in the case. To be blunt, companies want to use litigation to their advantage but do not want to bear the burdens that come with litigation. I saw this earlier this year, when a plaintiff gave a half-hearted, misleading answer to a damages interrogatory. It clearly thought it could get by with doing the bare minimum, and in doing so undermined its credibility. This ultimately hurt the company badly in settlement talks, resulting in a resolution far less favorable than it could have been.
  8. Not telling a story. Trials - like elections - are really no more than telling a story. Abraham Lincoln used to remind young lawyers to be be storytellers. A lawyer should be striving to presents a more compelling story than her adversary. Without a common unifying theme, a plot really, then a trial just devolves into a disorganized and clumsy presentation of facts with no cohesion. Employment competition cases usually have a lot of facts. But employers frequently make the mistake of trying to dump too many disparate facts into a trial, even if they have no connection to the dispute.
  9. Oversimplifying the claimed trade secrets. A lot of frivolous competition cases have at their heart a broad, generalized description of stolen trade secrets. Many times, this is easy to spot. Here are the tell-tale signs: (a) active resistance to disclosing the information allegedly stolen; (b) broad, unintelligible descriptions of the trade secrets at issue; (c) hedging and qualifying as to what the information at issue actually is; and (d) outright speculation as to how anything was stolen. Lawsuits that have any of these features are doomed to fail, usually during discovery when courts intervene and demand the plaintiff do more.
  10. Discounting contract defects. Little-known fact about non-compete disputes. Um, sometimes the contract's not enforceable. You may have heard this. The case reporters are full of such cases. Non-compete suits that go bad for companies often have a defective contract - whether on consideration, reasonableness of the terms, or some other drafting problem. Many employers, however, double-down on their contracts, sure that they must be fine and that a judge will understand this. Not so. A bad contract can ruin a lawsuit, even if the employee doesn't entirely have clean hands.
Next week on the year-end review, the top 10 developments in non-compete and trade secrets law during 2016.

Thursday, December 8, 2016

Year-End Extravaganza (Part 1): Top 10 Mistakes Employees Make When Leaving to Compete

This year, I'm going out with a bang.

The end of each calendar year presents bloggers like me with an opportunity to go big and to avoid being too...meta. I've traditionally featured Year-End Top 10 lists each year since 2008 when I first started writing this blog.

No different, this time around. Let's face it, 2016 sucked in a lot of ways. So to try and get a running start for 2017, I thought I'd do four year-end columns. Think of it as sprinting the last mile of a 10k or buying your spouse a really expensive stocking stuffer. Some of my posts will be in the mold of what I've done in the past, and one is something different that I thought of while driving home last night that adds a bit of a twist to my year-end tradition.

The first installment of this year-end review tries to summarize a lot of what I write and what I observe in my day-to-day practice: common mistakes that employees make when jumping ship. Here are the top 10:


  1. Getting legal advice from a friend. I've heard some variation of this many times: "I coach basketball with this guy, and he told me that Illinois is a right-to-work state and that noncompetes aren't enforceable." There are about ten things that irk me in that sentence, but the big picture is this. Your pal, even if he draws up brilliant in-bounds plays during timeouts, shouldn't be giving you legal advice on a difficult area of the law. He may be shrewd when it comes to how to get out of a traffic ticket, but not so much when figuring out noncompetes. Virtually any street-lawyer advice is sure to be misguided, incomplete, and flippant.
  2. Seeking legal advice too late. This mistake is related to the first one. The individual clients I've been able to help the most come to me early, often when they're exploring whether to take a new job or even whether to interview for a new job. An attorney hardly can mitigate risk (and cost) when his or her client already has done eight bad things on the way out the door.
  3. Forwarding e-mails to personal accounts. Speaking of bad things, the timeless practice of forwarding work e-mails to a personal web-based account has fostered more litigation and more disputes than just about anything I know. By now, one would think that either technological innovation or common-sense would have kicked in, but apparently we're all too lazy. In any event, this short-cut to a competitive edge (a) harms an employee's credibility, (b) is easy for a court to understand, (c) pisses off the employer, (d) is never easy to explain, and (e) requires virtually no effort on the employer's part to discover (even deleted Outlook items can be recovered without hiring a forensic expert).
  4. Making assumptions about "personal" information. Related to the e-mail thing. Employees often want to download or copy personal information from a work computer to a separate device. It's amazing to me how many employees keep their tax returns, little league stats, and kids' pictures on their work computer. Why? But anyway, those who do often decide they'll just transfer data without informing management. The problem is that, even when innocent, the employer may not know what data the employee is moving to a personal device. In a notorious competition case, an employee hid his employer's trade secrets in a file called "chocolate chip cookie recipe" and downloaded those for his own use. So employers are not just going to look at file names and assume that nothing bad happened. Just as problematically, employees may start out with the intent to move some personal information but they often blur the line between personal and professional. Simply because you worked on that spreadsheet doesn't mean its yours. But often there's an insatiable desire to take this information, particularly since it's so easy to do so. Regardless, any sort of data transfer or personal device plug-in is going to look suspicious. Here's an idea: just ask human resources to watch or help you with getting personal information off the work computer. Not hard.
  5. Failing to obtain agreements. This one often shocks me. Many employees never keep agreements they sign, even though they know of them and know they're important. And many never request their agreements upon departure. Employees have a right to access their personnel file (in Illinois, if not in other states) and need to know their legal obligations. Fear of tipping off an employer about post-departure plans is really a crummy excuse for not understanding those obligations.
  6. Trusting new employer's advice. We've established that employees often seek legal advice from their non-attorney friends. Just as often, they vet their non-compete only with the new employer. Here's a newsflash. That employer may not be any more informed than the buddy you coach basketball with. It may not have sophisticated legal counsel. It may not even have legal counsel. And it certainly is not going to look at all the relevant legal, economic, and practical issues from the employee's perspective. The employer may, after all, make a calculated risk that the employee can bring in new clients, and if legal action results, well, then, it could decide to just cut the cord and fire the new worker it assured had nothing to worry about.
  7. Telling clients of future plans. This is a very common problem with sales employees. Clients tend to view their sales person as a key point of contact. That's why, in fact, courts will enforce reasonable restrictive covenants. Employees often find that it's harmless to tell contacts of an impending departure. Many times, they go beyond merely informing them of the departure and want to ensure that the relationship continues. Not only does this type of communication provide an employer with much-needed evidence of competition, but it also could be a breach of the duty of loyalty (which exists independent of any contract). After all, an employee owes a strict duty of loyalty through her last day of employment. Pre-termination planning often is viewed as disloyal under the law.
  8. Lying about departure plans. I would estimate that at least 40 percent of competition disputes have this as a common fact. Employee tells employer during an exit interview something along these lines: "No,  I'm not going to stay in the industry. My brother-in-law and I are starting a real estate company." Not. Good. That may have the short-term benefit of throwing the employer off the employee's scent for a week or two, but inevitably the employer will find out what's happening. And, even if there are legitimate challenges to a non-compete, this type of dissembling will hurt an employee's credibility very badly.
  9. Burning bridges on the way out. The time period between notice and departure is particularly harrowing. For many employees, it's not a period to ensure the company has a smooth transition of accounts or projects in the pipeline. It's about settling scores and airing dirty linens. It's a time to tell the boss she's incompetent and lazy. It's a time to complain about the holiday party, the expense reimbursement program, the crappy health insurance plan, and how no one knows just what the hell Bill in accounting does every day. Though perhaps it seems petty and trite, this type of score-settling behavior only encourages an employer to seek a pound of flesh when it can.
  10. Not telling counsel the "bad" facts. Even in strong cases, bad facts exist. Every one. Employees, who often have no experience with legal counsel, have a perverse sense of counsel's role. We're not cheerleaders. We're advocates, but our job is to provide counsel. If an employee hides bad facts or provides an explanation that is unreasonably dismissive (or, just as often, incomplete), we can't counsel. When those bad facts come out (as they always do), then the relationship between lawyer and client can suffer immeasurably. The best clients put all the facts on the table, explain them to their lawyer, and work with their lawyer to counterbalance those bad facts with ones more material to the dispute.

Next up on the year-end review, you guessed it...Top 10 Mistakes Employers Make in Competition Lawsuits.

Tuesday, December 6, 2016

Colorado Court Interprets Key Remedies Section of Defend Trade Secrets Act

With only a life span of a few months, the new Defend Trade Secrets Act has produced very little in the way of interesting case law. That's hardly a surprise at this point.

For the most part, the DTSA does not change substantive state law concerning trade secrets and how one may "misappropriate" a trade secret. The statutory differences, by and large, concern the scope of available remedies. And of course, the muscle that federal courts provide is the principal value that the new statute offers. (For more discussion on litigating in federal versus state court, see my post immediately preceding this one.)

This past week, a federal district court in Colorado offered perhaps the most in-depth look yet into the DTSA. And not surprisingly, the core aspect of the opinion concerns statutory remedies, particularly those relating to injunctions.

***

Injunctive relief is a default remedy for actual or threatened misappropriation. But injunctions that prohibit merely using or exploiting trade secrets are only so helpful. For one, monitoring that type of order is almost impossible. And just as problematically, trying to define what exactly is prohibited from "use" is an exercise sure to drive lawyers and judges nuts.

To be certain, injunction clauses under the DTSA and state statutory law are not so confining for aggrieved trade-secret owners. State laws don't set precise boundaries on how far injunctions can go. So a late addition to the DTSA drew quite a bit of attention when it appeared to do just that. Section 1836(b)(3)(A) of the DTSA contains two provisions that seem to limit broader conduct-based injunctions - that is, injunctions that extend beyond prohibitions on using trade secrets.

First Exception. The first expressly states that an injunction order may not "prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows." That provision is a clear, direct shot at states that endorse injunctions under the theory of "inevitable" disclosure - something broadly akin to a non-compete agreement.

Second Exception. The second DTSA provision says an injunction cannot "otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business." This simply means that plaintiffs cannot invoke the DTSA to secure more expansive injunctive relief than some employee-friendly states would allow when enforcing non-compete agreements.

***

Engility Corp. v. Daniels (a copy of which is embedded below) brought these two exceptions into play. The case was a fairly typical employment-related trade secret dispute, which arose when two employees of Engility - a former division of L-3 Communications - left to form their own business. The relevant market is somewhat technical in that it concerned the sale of military communications equipment and a related network. The facts giving rise to claims of trade secret theft arose largely from one employee's retention of data pertaining to this market and his shifting story about what he did with that data for a few weeks after termination.

Engility sought more than a use-based injunction. Although it had no non-compete agreement with the employee, Engility wanted the court to prevent the ex-employees and their new firm from working with a particular military customer. The court's challenge was to apply the DTSA, and its limiting language concerning injunctions, to this particular request.

***

The court found that the first remedial limitation did not apply, principally because the ex-employees formed a new business. In the court's words, the DTSA gives "no indication that 'employment relationship' encompasses the role of an outside contractor," which the new entity would be to the military customer that was the focal point of the injunction request. It might have been easier, however, if the court simply stated that the exception did not apply because the employer did demonstrate a likelihood of actual or threatened trade-secret misappropriation.

The court then turned to the second exception and found that Colorado state law independently did not bar the customer-based restraint. The question was significant, because Colorado state law is much more restrictive of non-compete use than many other states. Here, however, the court relied upon state statutory law that allows non-compete agreements to be enforced "for the protection of trade secrets." Applying this provision, the court was able to issue a broader conduct-based injunction under the DTSA since Colorado law allowed it to the extent necessary to protect trade secrets.

***

The Engility decision is instructive for how the new remedies provision of the DTSA may apply in practice. Its applicability, however, may be somewhat narrow for difficult future cases. The facts of Engility established a firm basis for the court to conclude that the employee engaged in actual or threatened trade secret misappropriation - at least at the preliminary injunction phase. With those facts determined, the court didn't really have a tough call in applying the two DTSA injunction exceptions.

The much harder cases will come when employers are unable to present facts that look like theft or misuse of confidential information. The DTSA statutory exceptions should be sufficient to weed out these weak speculative claims, based largely on a theory that an employee inevitably will use something secret. That is why those exceptions are there. Broad conduct-based restrictions under the DTSA won't survive unless employers show facts in the mold of those described in Engility.


Tuesday, November 29, 2016

Competition Claims: Federal versus State Courts

This post largely is inspired by a YouTube video I watched recently by Jonathan Pollard, who discusses the importance of litigating trade secrets in federal court - particularly if you're a defendant.

Jonathan's 15-minute discussion is a great way for clients - particularly individuals - to understand some of the procedural aspects of litigation. Often times, it is the procedure where disputes like this are decided. And unfortunately, in the world of litigation, procedure tends to be opaque and something we as lawyers merely gloss over.

Having litigated non-compete and trade secret claims for nearly 20 years, I can say with a fair amount of certainty that my work has been split equally in state and federal court. I suspect that the enactment of the Defend Trade Secrets Act last year will slowly start to tilt that equation towards federal litigation.

Here are the biggest differences I have noticed over the years between litigating competition claims in federal versus state courts:


  1. Attention to the Merits. The quality of judges in the federal system is - on the main - higher than in state court. This is a pretty uncontroversial generalization to make. Many state court judges are terrific, and some of the best judges I've ever appeared before are products of the state court system. Apart from that, however, state court judges have a higher case load than their federal counterparts. Many state court judges in Illinois have nearly 1,000 cases assigned to them. By contrast, the average number of cases filed per judgeship in federal court is 412. Many judicial districts vary in terms of the time from filing to disposition. But on average, it is fair to say that a federal court judge has fewer assigned cases to her docket than does a state court judge. Therefore, they can devote more attention to fewer cases.
  2. Help. Federal judges also have a staff of law clerks, which Jonathan describes in his video. This is an enormous benefit to litigants in emergency injunction proceedings. Quite honestly, even the most astute well-intentioned state court judge isn't going to have the time or resources to evaluate a TRO or preliminary injunction submission with the kind of attention it probably deserves. This certainly is the case with disputes in highly-technical fields or which require analysis of electronic evidence.
  3. Hearings. Part of the reason state court judges seem so busy is that they spend more time on routine hearings, status calls, and motions in court. This clogs up the available time for review of documents in chambers, legal research, and thoughtful analysis of contested cases. State judges have no one to draft written orders or opinions, and very rarely do so even on contested dispositive motions. For that reason, too, status court judges are generally much more reliant on oral argument and on in-court presentations by the litigants. In federal court, even contested preliminary injunctions may be resolved solely on the papers rather than on in-court live witness testimony. This, mind you, is not necessarily a benefit of federal court proceedings, though it certainly reduces cost. Often a strong case can come alive in a courtroom and appear more milquetoast solely when considered on the written submissions.
  4. Presumptions. The best point Jonathan makes in his video is that many state court judges start with a firm presumption that the plaintiff is correct. One of the reasons this is the case is that state courts are filled with rather form-oriented and even mundane disputes (often with pro se litigants on the other side) where the merits are not contested. Examples are collection disputes, evictions, and mortgage foreclosures. For judges who handle those calls, it's understandable to have a pro-plaintiff bent when the plaintiff is almost invariably the winner. Non-compete and trade secret cases are not susceptible to easy handicapping, and if anything, the merits may tip in favor of the defense.
  5. Scheduling. Federal courts operate with a set of procedural rules that are clear, demanding, and inflexible. The rules require early conferencing and discussion of proposed case management, and courts enter scheduling orders that can be changed only on good cause. State courts are notorious for continuances and delays, although that trend seems to be changing. In Illinois, most practitioners ignore our nominal case management rule (sort of a hybrid between Federal Rules of Civil Procedure 16 and 26). Judges seem not to care too much about it.
  6. Cost. Because of the demands in federal court (such as for pre-trial orders and expert witness disclosures), many view federal litigation as more expensive. My experience is precisely the opposite. I think the clear nature of the procedural rules, combined with judges' reluctance to blindly continue cases and fewer mundane court appearances, creates a construct in which attorneys can and should litigate disputes more efficiently. Federal courts also have magistrate judges before whom parties to a civil case can consent to have the case heard. 
  7. Fee-Shifting. Federal court tends to work better because the defense has greater opportunities for fee-shifting. State court judges are elected officials and face retention every six years. They invariably are the product of local bar associations and simply are loathe to ruffle feathers and sanction intransigent litigants. Federal court judges are appointed for life and have no allegiance to counsel. The Federal Rules of Civil Procedure also contain a number of different mechanisms that make fee-shifting appropriate, particularly when parties are unreasonable in serving or responding to discovery. This deterrent effect tends to reduce litigation cost because parties and counsel simply do not want to expose themselves to fee-shifting - even for discrete discovery dust-ups. In state court, sanctions are handed out so infrequently that delay and distraction seem to be the norm. When a party faces a disparity of litigation resources, this can be crippling.
Is there a clear-cut solution to where a plaintiff or defendant would rather litigate? It would seem to lean pretty strongly towards federal court. But as Jonathan notes, it's particularly crucial for defendants. 

Tuesday, November 22, 2016

Employee Training and the Value Proposition of Non-Competes

The best part of the current debate over non-compete agreements is not that we're nearing a consensus: it's that we're having the debate.

With the White House's Call to Action, and the research that led to this unprecedented move, commentators have begun to explore why firms have non-competes in the first place. The answer usually is that many view non-competes as protecting trade secrets, customer relationships, or training investments.

In the main, those all sound rational, depending of course on the firm's line of work and the employee's ability to inflict damage after leaving. My personal views on this largely have not changed in the nearly 20 years I have been practicing in this field. I summarize them as follows:


  1. Non-competes should not be per se invalid and should be reserved for those at the highest levels of the company.
  2. Businesses use them indiscriminately without considering their benefits and drawbacks.
  3. A garden-leave approach, which provides tangible benefits to employees during the restricted period, is economically efficient and the preferred template for businesses to use.
  4. Courts should not enforce non-competes when there is a termination without cause.
  5. The judicial reformation or "blue-pencil" doctrine is inappropriate and creates poor incentives. It should be banned.
  6. Less onerous restraints, such as non-disclosure agreements, most often provide sufficient protection.
What is notable about my list, though, is that it doesn't really account for the employers' incentive to train workers. Do non-competes actually facilitate training by encouraging firms to devote scarce resources to developing employees' skills? Would firms continue to train employees if non-competes were not allowed?

There are a couple of different viewpoints on this.

In a Wall Street Journal op-ed, Jason Furman and Alan B. Kruger discussed "monopsony" power and the use of non-competes. They note that "[i]f monopsony power creates barriers to workers switching jobs, it can slow labor turnover, reducing dynamism and innovation." They then cite the now-commonly approved benchmark that nearly 20% of workers have signed a non-compete agreement. (There are about 1,500 non-competes suits per year, according to Evan Starr.) Noting that nowhere near that many workers have access to trade secrets, Furman and Kruger conclude that "[t]here is no reason why employers would require fast-food workers and retail salespeople to sign a noncompete clause - other than to restrict competition and weaken worker bargaining power."

The counter to this monopsony argument focuses on the employer's inability to recapture training costs without a non-compete agreement in place. The analysis does not focus on trade secret access.

Hoover Institute fellow, David Henderson, summarizes his thoughts in a rebuttal to the Furman/Kruger rationale. Simply put, Henderson notes that an employee who receives training may be able to obtain a higher wage elsewhere than that which the employer is willing to offer. While carefully stating that he is not endorsing non-competes, Henderson clarifies the "training" rationale for why a low-wage worker may be subject to a non-compete.

However, I find this theoretical rationale misses the mark. First, American businesses long have assumed the responsibility for educating their employees. It seems illogical that they would fail to do so merely because of the possibility of future competition. Second, formal training is no panacea. Most effective training occurs on the job, through the collective experiences of day-to-day work and a general exposure to the marketplace. Courts long have concluded that general skills and knowledge are not protected interests.

Quantifying training, too, is nearly impossible and cannot be reduced to a mathematical equation that will conclusively demonstrate whether non-competes incent or deter training. If quantification were possible, then training repayment agreements - or quantifying damages based on such a hypothetical contract between market competitors - would seem to be a better solution than broad non-compete enforcement. Could we even envision a new regime where a repayment model supplants an enforcement model? I doubt it, but it makes for an interesting discussion.

The bigger problem, though, may be reciprocal use of non-competes and the development of industry standards, using some sort of an anti-trust "relevant market" analysis. A firm, for instance, may not be inclined to use a non-compete but does so only in response to its direct competitors' pre-existing inclination to do so. In that sense, the reluctant firm is only trying to avoid the free-rider problem: if competitors see that the reluctant firm has no non-compete regime with its workforce, those competitors will be less willing to invest in appropriate employee training, thereby lowering production costs. This explanation for why firms use non-competes in a blanket fashion actually seems to prove what Furman and Kruger are saying: monopsony power stems from artificial means to restrict competition, that being an industry-wide practice of using non-competes in the first instance.

If anything, therefore, the attempt to justify non-competes on the basis of protecting training costs seems to explain why so many workers without the ability to harm their employers are subjected to them.