Friday, September 23, 2016

Deconstructing the Trump Campaign's Non-Compete Agreement

The inspiration for this post comes from Donna Ballman's terrific blog and her latest post today, titled "Trump Campaign Noncompete Agreements May Break Multiple Laws."

It probably comes as no surprise that Trump's noncompete agreement sucks and is woefully inadequate. Once you wade past the grammatical errors, the contract contains the typical, rote litany of promises not to disclose any "confidential information," not to disparage Trump, not to solicit anyone associated with Trump, and not to provide "competitive services. Absolutely no one is shocked that he has campaign workers sign these.

But given that this is not really a business agreement, and really a political one, let's try to apply some of the utterly inane provisions in this contract to the general legal principles we've come to understand.

  1. The non-disclosure covenant. The longest provision of Trump's contract is a non-disclosure clause, which surprises absolutely no one. It has no time limitation, which is a red flag in many states and would render it unenforceable, for instance, against a campaign worker/volunteer in Illinois. (Incidentally, not sure who in the Trump campaign exactly signs this piece of paper, but given what we know, presume everyone.) The definition of "Confidential Information" is truly rich since it is circular in that it applies to all information of a "private, proprietary or confidential nature." Then it goes further and applies to information "that Mr. Trump insists remain private or confidential." With that qualifier, the mind truly reels. As you might expect, it gets better. If Mr. Trump so elects, confidential information can extend to "any information with respect to the personal life, political affairs, and/or business affairs of Mr. Trump." There are no carve-outs for information that is within the public domain so it may be hollow, but it is worth noting that Mr. Trump includes as non-exclusive examples of "Confidential Information" such idiotic categories like his relationships (a voter interviewed on Comedy Central?), alliances (Sarah Palin?), decisions (to build a wall?), strategies ("....."), and meetings ("Sept. 26 Debate against H. Clinton"). Unenforceable.
  2. Non-disparagement. Predictably, this too is a real beauty. Trump requires that anyone working on his campaign never "disparage publicly" Mr. Trump. Hypothetically, if he is elected President and it's a disaster, a former campaign worker could not criticize his term in office. It also applies to any Family Member of Trump, including his children. So if you work on Trump's campaign, and Tiffany Trump's singing career does not go great, you cannot criticize her on Twitter. Unenforceable and non-sensical.
  3. Non-solicitation. This one, actually, is hard to read. The Trump campaign has no customers, unless you consider a voter a customer. So it smartly leaves that term out. But a campaign worker may not solicit another worker "for hiring" until the campaign is over. So if you're a Trump campaign worker and meet another campaign worker, you cannot hire him/her for any type of work until the campaign is over, even if that work has nothing to do with politics. Unenforceable and almost incoherent.
  4. Non-compete. The best for last. A Trump campaign worker cannot assist anyone for federal or state office besides Trump, whether for compensation or as a volunteer. Therefore, a campaign worker cannot contribute to a candidate for state representative. He or she cannot host an event for that person. He or she cannot put out a yard sign for that person. And he or she cannot seek to encourage another voter to vote for that person. Unenforceable and just plain idiotic.

On the upside, you get an arbitration clause, a favorable New York choice-of-law clause, and the possibility of fee-shifting if you prevail. Plus, and this is truly priceless, you get a piece of paper with the signature of the one and only "Donald J. Trump, President." Presumably, of his campaign and not the entire United States.

A copy of the Trump non-compete is available on my Scribd site here.

Rhode Island Bars Physician Non-Competes

Only rarely do courts strike non-competes on the final element of the three-part reasonableness test: whether enforcement would be contrary to a public interest.

Earlier this year, a Rhode Island court followed Massachusetts' lead and held that a physician non-compete could not be enforced through injunctive relief. The court believed "the strong public interest in allowing individuals to retain health care service providers of their choice 'outweighs any professional benefits derived from a restrictive covenant.'" Med. & Long Term Care Assocs., LLC v. Khurshid, 2016 R.I. Super. LEXIS 39 (R.I. Super. Ct. Mar. 29, 2016). Khurshid did not, however, rule out the possibility of a damages award for a breach. Its ruling was tailored to the injunction the medical practice sought.

It didn't take long for the other shoe to drop.

In July, Rhode Island banned physician non-competes in their entirety - meaning that the narrow escape hatch for employers to seek legal relief has closed (at least for contracts signed after the law's effective date of July 12, 2016. It is likely that contracts entered into before this date are governed by the common-law, which still may bar injunctions but may not prevent a damages award.

Public policy arguments like the one advanced in Khurshid (and in other states for that matter) are difficult to make. Normally, statements of public policy come through constitutional provisions, statutory text, or a widely and universally declared judicial policy. In the context of non-compete arrangements, lawyers generally are not bound by them due to the Rules of Professional Conduct. Physicians have met with some success in Rhode Island in elsewhere due to the public interest in fostering the doctor-patient relationship. Investment advisers, on the other hand, are susceptible to non-compete enforcement, as are accountants. Other states carve out certain professions through legislative fiat, such as the relatively recent Hawaii law that bans non-competes for tech workers.

Public policy arguments are indeed difficult to make in the normal case because trial court judges do not set policy. And most non-compete disputes are quite fact-intensive. It is unusual to see blanket, categorical exclusions for enforcement.

Monday, September 12, 2016

Illinois Appellate Court Announces a "Test" to Evaluate Bad Faith in Trade Secrets Claims

In Conxall Corp. v. iCONN Systems, LLC, the First District Appellate Court of Illinois set forth what only loosely can be described as a "test" for determining when a party maintains an action for trade secrets misappropriation in bad faith.

If my frustration is not yet overt, let me be overt: I'm frustrated.

Our appellate court has struggled mightily with business and competition issues in recent years, notably with an unnecessary fissure among courts regarding whether an employer must show a protectable interest to support a non-compete (answered yes) and then again regarding whether employment itself is sufficient consideration for an at-will employee's non-compete (answered no, but yes if employment lasts two years, with almost all federal courts just categorically saying yes, but with some saying no).

Conxall addresses a question no reported Illinois descision has had to confront yet: how do you determine bad faith in trade secrets claims? The decision is a jumbled mess of three opinions, with the concurrence actually producing the legal standard to answer that question (to get there, you must read the dissent, which agrees with the concurrence in part).

In my judgment, there really are only two possible tests for determining bad faith. One is the Octane Fitness test, which comes from a Supreme Court patent case a few years ago outlining the fee-shifting standard under Section 285 of the Patent Act. Why pertinent? Since the Uniform Trade Secrets Act's fee-shifting clause stems from the Patent Act (per the commissioners' comments), it only makes sense to look to Octane Fitness for guidance. That case holds that fees are recoverable if the case "stands out from others with respect to the substantive strength of the litigating party's position...or the unreasonable manner in which the case was litigated."

Put differently, a patent defendant gets its fees if the plaintiff's case sucked or the plaintiff's attorneys acted like pricks.

If courts don't go with Octane Fitness, then the logical test is the two-part standard California courts apply and which many others have adopted. Why California? Because it has by far the most experience with trade secrets cases, and because the test has worked in application. That test simply looks at whether the claim is objectively specious and whether there is evidence of subjective misconduct. Again, seems reasonable and relatively easy to apply, with needed flexibility but actual, you know, standards.

So which did Conxall choose? Um, neither. (The court didn't bother citing Octane Fitness and suggested federal courts were asleep at the wheel by adopting California's standard.)

The court held that the standard for determining bad faith is either (1) whether the pleadings, motions or other papers violate Rule 137 (the equivalent of Federal Rule of Civil Procedure 11), or (2) whether the party's conduct violated the spirit of Rule 137, which is to prevent an abuse of the judicial process. Part one of this "test" offers nothing, since as the court acknowledged, a separate statute already provides for fee recovery. In that sense, the legislature would never enact a fee-shifting clause that entirely and perfectly overlaps with another law.

The court then unhelpfully suggested that Rule 137 cases may provide guidance, but that courts shouldn't be limited by those precedents. No clue what that means. And then the court further suggested the California test was "less strict" than the test that it set forth. But it never explains how an objectively specious action with some evidence of subjective misconduct is "less strict" than an action that looks like an abuse of process.

Welcome to the semantic jungle.

By comparing its bad faith test to what California uses, the Illinois courts provide virtually no guidance to litigants in determining what conduct will allow a defendant to recover fees. Under transitive reasoning, California precedents become unhelpful and a trial court judge will be hard-pressed to even view them as authoritative. And by focusing trial courts (confusingly, but still focusing nonetheless) on a pleading standard, the appellate court ignored one major truism of trade secrets law.

Bad faith is almost never defined by a four-corners look at the pleadings. Crappy trade secrets cases often have marvelous complaints. Along the same lines, as one of Conxall's justices described, bad faith usually is exposed at trial - even after summary judgment - when a withering cross-examination reveals a case's deficiencies.

The very reason that trade-secrets suits are so punishing is that a court has no incentive to resolve them before trial. They come alive in the courtroom, when the case weaknesses are fully exposed and the plaintiff has nowhere to run. By looking to the pleading rules, the court has done defendants with strong positions on the merits a grave disservice.

Tuesday, September 6, 2016

Ohio Case Proves It: The Inevitable Disclosure Doctrine Is Inherently Unworkable

Trade secrets theft is a serious thing. We all know that by now.

Equally serious, though, is a charge of trade-secrets theft that proves totally unfounded. Meritless claims deter entrepreneurship, limit outside investors, ruin customer and vendor relationships, and cause significant litigation expenses that detract from a firm's operational success.

The inevitable disclosure doctrine is like a gateway drug to specious claims. I have written so extensively on the subject that I am kind of tired of reciting the basic rule, but it goes something like this: a plaintiff can establish its right to injunctive relief by showing that a defendant's use of trade secrets is inevitable. (Let's fully and finally dispel with the uncontroversial proposition that the inevitable disclosure doctrine can be used for anything other than securing an injunction.)

The problem, though, is that the rule is not workable. It lacks standards. It is overused. And it appears to be enforced by no more than a particular judge's subjective determination as to how far it is intended to reach. That's not a rule. That's a sham.

To illustrate this truism perfectly, just read the relatively short injunction opinion in Polymet Corp. v. Newman, No. 1:16-cv-734, out of the Southern District of Ohio. Polymet is in the business of manufacturing something called "hot extruded wire." It had some patents over its process and apparently is a market leader, selling to companies like General Electric, Rolls Royce, and Pratt & Whitney.

Danny Newman apparently worked in several different roles for Polymet for 15 years, from shipping-and-receiving, to purchasing, to sales. He signs no non-compete and no confidentiality agreement. Newman then decides to leave, which was his right to do. He starts his own business to manufacture and sell hot extruded wire, called Element Blue.

Polymet sues him and has no evidence that Newman took anything with him, and no evidence that Element Blue's products are identical to or even substantially similar to what Polymet sells. Instead, it pointed to "circumstantial evidence" that trade secret disclosure was inevitable. That "circumstantial evidence"? How about this:

  1. Newman made plans to form Element Blue while still an employee.
  2. Newman sold hot extruded wire to the same customers.
  3. Newman used a few Polymet vendors and a former Polymet distributor.
And for the Southern District of Ohio, this was apparently enough to lead it to believe that Newman and Element Blue should be enjoined under the inevitable disclosure doctrine.

As wrong as that judgment appears to be (I didn't hear the evidence, but if there was stronger evidence for Polymet, why not cite or allude to it?), the analysis really goes off the rails when applying the inevitable disclosure doctrine.

The whole f*cking point of the doctrine, it appears to me, is that it should provide a restrictive covenant-like remedy. In other words, if the threat of disclosure is that significant - inevitable, it might be said - then the trade-secret holder ought to get the appropriate form of relief. In the Polymet case, that would mean preventing Newman and Element Blue from manufacturing and selling competitive products.

Is that what the court did? Nope.

Instead, it takes a far more confusing path that only will invite future disputes. It bars the defendants from using "Polymet's confidential, proprietary or trade secret parameters, processes, or procedures, and Polymet's confidential pricing and product development strategies for their own benefit." Talk about vague. On that scope, Polymet is sure to be haranguing Element Blue endlessly about what type of process it's using to manufacture its products. The lack of any ascertainable scope also enables Polymet to just shift its trade-secret theory to whatever it learns Element Blue would be doing.

Even the defendants may have been better off facing a broader production-or-sale injunction, if for no other reason that to eliminate the fees associated with a contempt hearing down the road (which on this order seems, dare I say it again inevitable).

The court undermined the very basis of the inevitable disclosure doctrine at the end of its order, finding as follows:

"[P]rohibiting Element Blue from making hot extruded wire, which would effectively shut down the company, is a bridge too far given the current lack of any direct evidence of misappropriation of trade secrets at this time."

That actually might best describe the inevitable disclosure theory - a "bridge too far." To engage in this sort of too-cute-by-half analysis undermines the theory itself. What's really going on here is obvious: the court saw the superficial appeal to the doctrine given the facts, and then when it came time to apply it, the court pulled back entirely from the main point of the doctrine. Through its disjointed analysis, the court illustrated and proved all the shortcomings of the inevitable disclosure theory.

The Polymet case serves as a reminder of why inevitable disclosure almost never works. It is highly unfortunate to have a case like this hanging out there on such weak facts. I continue to believe that the doctrine is properly applied as a rationale for why a narrowly tailored, reasonably drafted non-compete should be enforced. And in no other circumstances.

Tuesday, August 30, 2016

Illinois Bans Non-Compete Agreements (Sort of...)

2016 is shaping up as another busy year on the legislative front (don't tell Massachusetts, though).

Earlier this month, Governor Bruce Rauner signed into law the Illinois Freedom to Work Act, which bans covenants not to compete for low-wage employees. That term means those workers who earn the greater of the prevailing minimum wage or $13.00 per hour. This forever may be known as the Jimmy John's Bill, since during the debate over the law Attorney General Lisa Madigan sued Jimmy John's for requiring sandwich shop employees to execute non-competes (barring employment within three miles of their location).

The new Freedom to Work Act does not contain any investigative mechanism. Originally, the Senate version of the bill would have enabled the Department of Labor to investigate the use of employee non-competes, with appropriate penalties to follow for failing to comply with an investigation or for failing to keep adequate records. This means that Attorney General Madigan is likely to follow through on her pledge to root out the use of oppressive non-compete agreements, perhaps in similar retail, non-traditional restrictive covenant environments like Jimmy John's.

Private litigants can pursue declaratory relief when there is a justiciable controversy over their own non-competes. A largely unresolved question (now that the Jimmy John's case has settled) is whether the Attorney General or a private litigant can use the Consumer Fraud and Deceptive Business Practices Act as an alternative means to challenge an unenforceable non-compete arrangement as an unfair trade practice. That law would at least provide a route for the recovery of legal fees. If the Attorney General sues, a violation of that law could result in the imposition of a civil penalty up to $50,000.

Monday, August 22, 2016

Contract Overreaching and the DC Circuit's Quicken Loans Decision

A great deal has been written about the D.C. Circuit Court's decision in Quicken Loans, Inc. v. NLRB. That case enforced the National Labor Relations Board's order striking down portions of an employment non-disclosure clause and related non-disparagement provision.

The court's strongly worded ruling, which can be found here, provides a template for how employer can get into trouble by trying to coerce certain behavior in the workplace - even if that workplace is not unionized. Indeed, the NLRB's foray into non-union activity is one of the more notable employment law developments over the past few years. Quicken Loans just brings together many of these policies in a judicial opinion from the nation's most important appeals court.

To take a step back, Section 7 of the National Labor Relations Act enables employees to engage in concerted activities for the purpose of collective bargaining. These guaranteed rights, so the reasoning goes, allow employees to communicate about forming a union and about improving the terms and conditions of their employment.

So how do non-disclosure and non-disparagement clauses fit into this equation? As for the former, many restrictions contain overly broad definitions of "confidential information." The Quicken Loans policy was no different; it prohibited use of non-public employee information and all personnel lists (including e-mail addresses, cell phone numbers, and the like). The court of appeals easily found that this type of information "has long been recognized as information that employees must be permitted to gather and share among themselves and with union organizers in exercising their Section 7 rights."

As to the latter - non-disparagement clauses - Quicken Loans stumbled when it barred employees from criticizing the company in any oral or written statement, including any internet postings. Calling this clause a "sweeping gag order," the court had little trouble concluding it too violated the NLRA. Its internal procedure designed to enable employees to redress complaints did not provide any kind of a safe harbor since it, by definition, forbade a public airing of grievances.

The Quicken Loans decision certainly underscores the need for employers to stop with the overreaching. Indeed, many of these paternalistic clauses find their way into employment contracts with almost no forethought. Lawyers who encourage corporate clients like Quicken Loans to load up on prophylactic policies often ought to consider what message is being sent and what precisely there is to gain.

As a general rule, then, employers should not be enacting policies, handbook statements, rules, or form agreements that do any of the following:

  • Broadly define "confidential information" to include employee data of the kind typically needed for employees to communicate with each other about the terms and conditions of their employment;
  • Bar employees from criticizing the employer;
  • Prohibit employees from disclosing the terms of their employment, such as salary and benefits; and
  • Prohibit employees from disclosing the terms of their restrictive covenants.
This last point is something I see quite often. Frequently, I see contracts that prevent an employee from revealing that she has a non-compete and what it says. I don't get this. Why? What's the point? Is it included because some lawyer read somewhere that it might be a good idea? Is that a sufficient reason?

Much of the law is, quite frankly, common sense. If it sounds off, it probably is. No doubt many management and employment attorneys are up in arms about Quicken Loans, but read it. The court speaks in somewhat caustic terms. You get the sense they're saying this wasn't a close case. Attorneys shouldn't run into the problems noted in Quicken Loans if they simply apply real-world experience and understand that not every remote unrealized fear needs to be embodied in a contract term. 

Friday, August 12, 2016

The "Access and Opportunity" Argument and Evidentiary Burdens

In my last post, I discussed another bad-faith ruling in the context of misguided, opportunistic trade-secrets litigation.

When discussing that particular case, I raised the prevalence of the "access and opportunity" theory and how the use of that particular theory (and the simplistic building blocks upon which it's based) can walk a plaintiff right into a bad-faith fee claim.

This post, somewhat of a follow-up to my prior one, discusses a recent Fourth Circuit decision called RLM Communications, Inc. v. Tuschen, in which the court (applying North Carolina law) discussed the burdens of proof associated with an access-and-opportunity claim. To remind readers, an access-and-opportunity claim is one where the plaintiff's reasoning is based entirely on circumstantial evidence that pieces two innocuous facts together to lead to a conclusion. That is, the employee had access to certain trade secrets and s/he now works at a company where she would have the opportunity to benefit from using those secrets; therefore, s/he has misappropriated them.

For starters, "access and opportunity" might be called "inevitable disclosure" without the help of steroids. Typically, an inevitable disclosure claim rests on a trigger fact - that is, some suspicious fact that creates a needed evidentiary link to bolster an access-and-opportunity claim. One example might be suspicious work activity in the day or two leading to a resignation.

The Tuschen court addressed a North Carolina statute that allows an employer to establish a prima facie case of trade secret misappropriation by showing knowledge of the secret and an opportunity to disclose it. According to the court, proving these facts alone did not enable the employer to survive summary judgment. In the critical passage, the court notes:

"In the employment context, if knowledge and opportunity suffice for a prima facie case of misappropriation, then an employer can state a prima facie case against its employee merely by showing that it gave the employee access to its trade secrets. The employer therefore can force such an employee to go to trial on a misappropriation claim - unless the employee can rebut the prima facie case."

The court dealt with the burden-shifting question by finding that North Carolina courts would require employers to do more. Either the acquisition of the trade secret was through an abuse of access (which would seem to fit within the plus-factor, inevitable-disclosure analysis I describe briefly above), or the employer must come forward and rebut an employee's showing that the acquisition of the trade secret was gained through the consent of the employer. This, too, would require some form of abuse or misuse of company access to take proprietary information.

An alternative way of saying this is that, for summary judgment purposes, knowledge and opportunity is not enough. An employer must present evidence beyond this to raise an inference of misappropriation.

The decision is a fairly interesting read in that it discusses burden-shifting much like courts assess claims of employment discrimination. The larger question the court addresses, though, is that weak trade secrets claims are perfectly suited for summary determination short of trial. Clearly the court was concerned about simplistic reasoning and the piling of unreasonable inferences - when the price for that stretched logic is forcing an employee to go through the pains of an arduous trial.

Thursday, August 4, 2016

Bad-Faith in Trade Secrets Litigation and the "Access and Opportunity" Argument

Admittedly, one of my go-to topics is bad faith in the context of trade secrets litigation - if for no other reason than I've seen it time and again in my experience representing defendants.

Most of the rich, intelligently discussed bad faith cases come from California courts, which hear a disproportionate number of trade-secrets suits to begin with. And that state's strong rejection of the inevitable disclosure doctrine gives it ample opportunity to chastise plaintiffs for pursuing defendants (usually ex-employees) on a spurious "access and opportunity" theory of wrongdoing.

That theory is becoming more and more prevalent. The reasoning is utterly fallacious, of course. It goes something like this:

Employee X had certain responsibilities, all of which encompassed some trade-secret knowledge, and now she works at Employer Y in a similar position. Therefore, X must be using the trade secret for Y's benefit.

Though some litigants (let me digress into a Trumpian "believe me, I litigate against them and see this all the time, folks") dress up the theory a bit more with meaningless ancillary facts, those facts are not elemental - meaning that if proven they still can't close the deal.

The "access and opportunity" doctrine is one that hasn't necessarily received uniform treatment by courts (more on this in my next post, a very informative Fourth Circuit opinion). Some give it more credence than it clearly is due. But increasingly, courts seem apt to reject it as overly simplistic and little more than a backdoor attempt to impose a non-compete agreement where the parties never bargained for one.

I really enjoyed reading RBC Bearings v. Caliber Aero, 2016 U.S. Dist. LEXIS 100521 (C.D. Cal. Aug. 1, 2016), from the Central District of California, where the plaintiff got whacked for $130,000 in fees for pursuing a trade-secrets claim in bad faith. The case is a good read because it systematically walks through how courts assess bad faith. (Another digression: The $130,000 in defense fees is right in the wheelhouse of what I have seen in garden-variety employee trade secrets cases that go to judgment and that do not involve highly technical concepts. For technical trade secrets, the fees normally are quite a bit higher.)

Courts first look to see whether the case was objectively specious, meaning that it was notable or stood out for its weakness. As in many cases, the plaintiff in RBC Bearings couldn't prove an act of misappropriation. The "access and opportunity" theory was patently deficient because that conclusory leap is not enough to establish that an insider misappropriated anything at all. To compound the problem, RBC Bearings' identified trade secrets (a list of customers) were publicly displayed (on the plaintiff's website). Problem.

In California, courts then look to subjective purpose, in addition to the weakness of the claim. This is still troubling, to me, because requiring a defendant to prove an improper purpose is exceedingly tough. But to its credit, the RBC Bearings court did go through a rigorous analysis focusing on a few different factors that suggested an improper motive: satellite litigation that suggested an intent to run up legal fees for the defendant, evidentiary shortcomings (which is usually duplicative of the objective speciousness requirement), and improper settlement demands.

The last factor is a very interesting one, because plaintiffs often are careless with demanding money in trade-secrets claims even when that demand is not provable in court. Not all settlement communications, remember, are privileged. They are to the extent one tries to use that communication to prove liability, but they aren't to ascertain whether bad faith exists. Plaintiffs who use litigation as a weapon often fall into this trap because they want to show how tough they are. Counsel who reflexively parrot what his or her client says about demanding an exorbitant amount to compromise a claim walk right into a trap, particularly at the time of fee-shifting. The RBC Bearings court specifically discusses counsel's ethical obligation to make a good-faith settlement demand and not one that is divorced from an evidentiary analysis. This is something I've never seen discussed before in such stark, yet pragmatic, terms.

Also of interest was the court's assessment of plaintiff's counsel. Aside from the unprofessionalism of demanding a settlement payment that would not be provable and pursuing a crappy case, the court was clearly bothered by counsel's inability or unwillingness to cite precedent accurately. I am experiencing this same problem in a protracted case where counsel repeatedly misstates the record, trial evidence, or case law - to the extent that it's obvious he thinks no one will call him on it. Credibility is all a lawyer has. And in RBC Bearings, the court made clear that a lack of credibility informs a bad-faith finding.

Thursday, July 28, 2016

Supreme Court of Nevada Rejects Blue-Pencil Doctrine

Non-compete law continues to evolve at the state level, both in terms of targeted legislation and judicial refinement of common-law principles. For the most part, the decided trend is for lawmakers and judges to pare back the use of broad non-competes and to make specific public-policy based exceptions (or create categorical limits), as in the case of covenants impacting emerging technology workers and health-care providers.

I have often remarked, both here and in presentations to colleagues, that if we're going to get serious about the proper use of non-compete agreements then we ought to hone in on two very specific concepts: ensuring the adequacy of consideration (preferably at the outset of a lawsuit) and discarding the notion that courts should be reforming overbroad contracts that are carelessly and gratuitously written.

This month, the Supreme Court of Nevada rejected the blue-pencil doctrine and held that courts may not rewrite a non-compete agreement to make it reasonable. The case is Golden Road Motor Inn, Inc. v. Islam, 132 Nev. Adv. Rep. 49 (a link to the docket page is available here). Briefly stated, the case involved a casino manager who signed a one-year, post-termination covenant (apparently well after she started working for Atlantis Casino Resort) that broadly prohibited her from working in any gaming business within 150 miles of her employer. The effect of the restriction rendered her unemployable in Nevada's largest casino market.

The Court, in a 4-3 opinion, rejected the blue-pencil doctrine as inconsistent with Nevada law on reformation of contracts. In a passage that is sure to be cited in future cases, the majority rejected the dissent's endorsement of the blue-pencil rule where appropriate and said:

"Our exercise of judicial restraint when confronted with the urge to pick up the pencil is sound public policy. Restraint avoids the possibility of trampling the parties' contractual intent...Even assuming only minimal infringement on the parties' intent, as the dissent suggests, a trespass at all is indefensible, as our use of the pencil should not lead us to the place of drafting. Our place is in interpreting. Moreover, although the transgression may be minimal here, setting a precedent that establishes the judiciary's willingness to partake in drafting would simply be inappropriate public policy as it conflicts with the impartiality that is required of the bench, irrespective of some jurisdictions' willingness to overreach."

Apart from these public policy principles, the Court defaulted its legal analysis to general principles on contract reformation. Generally, courts can reform contracts if one shows mutual mistake by clear and convincing evidence. That is an awfully tough showing, reserved for cases where a writing does not reflect what the parties intended. The blue-pencil rule has nothing to do with conforming a contract to the parties' mutually-held intent, but rather fashions a judicial rewrite of an agreement after-the-fact under the guise of fairness.

The Court then parsed reformation further, focusing on procedure. That discussion is crucial for lawyers to understand. What the Court in Golden Road Motor Inn was saying is that courts often reform or blue-pencil non-competes in the context of awarding preliminary injunctions. It didn't endorse that approach, to be sure. But once a case reaches final judgment on the merits, the employer must demonstrate the agreement is reasonable on its face and not plead for judicial reformation.

It is interesting to see the Court make this nuanced distinction. The thinking apparently is that an injunction is in fact equitable in nature and courts have the ability to fashion appropriate relief at an emergency hearing, subject of course to the possibility that the court later may find the agreement is unreasonable. But at a preliminary stage, a court does not make ultimate fact determinations and so is not ruling definitively on enforceability. Conceivably, a court could say it is likely the agreement is reasonable but that the injunction requested seeks too much. Therefore, we'll just blue-pencil for now.

That may be what happens in practice, but I don't think so. To be certain, the cases don't read this way. And therein lies the problem. The blue-pencil rule has become a crutch, used to deter fair competition and used to bless poor drafting and (in many cases) an intent to restrain trade for no valid reason.

On this score, the Golden Road Motor Inn dissent's argument that the blue-pencil rule "also favors the employee by appropriately limiting the restriction" is pure nonsense. My experience is that employees sure as hell don't feel that way. The next employee who comes into my office and is excited by an overbroad agreement and the potential for judicial modification (after expensive litigation) will be the first.

Monday, July 25, 2016

Does Nosal II Solve "Without Authorization" Question?

The trade-secrets community has awaited the follow-up decision to the long-running prosecution of former Korn/Ferry executive, David Nosal, based in part on the controversial Computer Fraud and Abuse Act. And with the Ninth Circuit's decision on July 5 in United States v. Nosal, the question remains whether we have answered any questions about the CFAA's potential reach.

Nosal I, a 2012 decision, was largely pro-employee and restricted the scope of the CFAA's most controversial provision - the so-called "exceeds authorized access" prong of Section 1030(a)(4). As a result of Nosal I, the consensus seems to be building that violations of use policies do not mean that a user exceeding his authorized access of a protected computer. In other words, it is not sufficient to base an (a)(4) claim on misuse.

But Nosal I did not address the other part of (a)(4). One cannot obtain anything of value out of a protected computer if he accesses a protected computer "without authorization." And that's where Nosal II squarely lands. The Ninth Circuit upheld Nosal's conviction on multiple CFAA claims under this aspect of (a)(4) under a fact paradigm that is well-known to trade-secret practitioners. Nosal and two ex-employees of Korn/Ferry obtained the password of a then-current Korn/Ferry employee to access a database containing valuable information on executive search candidates.

Was that access "without authorization" under (a)(4)? Yes, said a divided panel of the Ninth Circuit.

The case predictably has produced a lot of commentary, but the most essential read is Orin Kerr's lengthy analysis. The crux of the case hinged on whether it mattered that the current employee gave Nosal's co-conspirators the database password. The majority felt it crucial that Korn/Ferry said that the employee could not disseminate log-in credentials, while the dissenting judge examined whether the employee said yes when her former co-workers asked for the password.

I agree with Professor Kerr that the court reached the right result and that Nosal's accomplice liability conviction was appropriate. But as I read the dueling analyses before Kerr's cogent summary, it was quickly apparent that the case had the chance to be an extremely limited one. For starters, the case doesn't really seem to establish a rule for future application. As Judge Reinhardt notes in dissent, the holding seems to rely heavily on employment-related facts but the CFAA is not an employment law at all.

Professor Kerr then offers his take on where the case should have gone analytically and how the court could have bridged the two opinions. His take is that the  password sharing in the context of the "without authorization" standard really should have embraced an "agency/non-agency" distinction. In other words, because Nosal's co-conspirators used the current employee's password for their own purposes, there was no agency relationship among them. Kerr's argument looks principally to the initial delegation of authority (in Nosal II, that would be the computer access granted from employer to employee) and then to the subsequent conduct and whether it's outside the agency of the initial account holder. This, Kerr argues, would solve the "parade of horribles" laid out by the dissent, which extrapolate innocuous conduct into federal crimes. And in Nosal II itself, it would establish why the employee's grant of her log-in credentials to the ex-employees was "without authorization" - they couldn't have had an agency relationship at that point.

The CFAA, of course, remains a controversial law. Its use in garden-variety employment disputes may be waning in light of the federal Defend Trade Secrets Act. But it is still a potent weapon. What is notable about the plight of David Nosal is that it's not all that far removed from many fact patterns we see in civil cases. The conduct at issue was brazen, to be sure. Still, it seems awfully arbitrary that he has endured criminal prosecution for conduct that many others like him never would face. And on that score, the dissenting opinion's cautionary tale about the influence that Korn/Ferry's firm was able to muster is worth a read in its own right.