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.

Monday, July 11, 2016

New Legislation in Connecticut and Massachusetts Serves to Limit Non-Compete Enforcement

For non-competes, courts and legislatures often have taken incremental steps to chip away at the default reasonableness test. These steps usually are in response to some larger public-policy issue. Two more states are moving to reform the law of non-competes, and both are attempting to curtail their use.

Connecticut is the first, and it has enacted legislation (Public Act No. 16-95) that limits the enforceability of physician non-competes. For any non-compete "entered into, amended, extended or renewed on or after July 1, 2016," the new Connecticut law establishes bright-line enforceability rules. In particular, a non-compete may not exceed one year in duration (presumably post-employment, though the law oddly does not say this) and may not extend beyond a 15-mile radius from where the physician primarily practices (I am simplifying here a bit). Further, an employer may not enforce a non-compete if the physician is terminated without cause.

***

Massachusetts law has not been changed, at least as of yet. But the long-in-the-works legislative changes appear to be gaining steam. Last week, the Massachusetts House of Representatives unanimously passed a bill to impose stringent limits on non-compete agreements and to adopt (at long last) the Uniform Trade Secrets Act. House Bill 4434 accomplishes several things:

(1) The UTSA piece is unremarkable, but it does require the identification of the subject trade secret "with sufficient particularly under the circumstances of the case" before beginning discovery. This is a legislative endorsement of what many courts already require, but it contains needed flexibility that enables a court to establish discovery parameters.

(2) The bill also would establish the Massachusetts Noncompetition Agreement Act, which would require:


  • At least 10 days' advance notice of the non-compete;
  • For existing employees, independent "fair and reasonable" consideration independent from the continuation of employment (along with 10 days' advance notice);
  • A maximum 1-year duration (except in cases of breach of fiduciary duty or theft, in which case the maximum may be 2 years);
  • A reasonable geographic reach, which is presumptively established if the restricted area is consonant with the employee's sphere of influence within the last 2 years of employment;
  • Garden-leave payment of at least 50 percent of the employee's highest base salary within the 2 years preceding termination or other "mutually-agreed upon consideration" (which is undefined.
Finally the proposed Act would bar enforcement if an employee is terminated without cause and would ban non-competes for non-exempt workers under the Fair Labor Standards Act.

There are some definite quirks in the proposed Massachusetts law, which is to be expected after the long slog this bill has been through. The next step would appear to be a vote in the state senate.

***

UPDATE (at July 12, 2016):

Apparently, my post was timely. The Massachusetts Senate has acted. I defer to Russell Beck's excellent summary. The Boston Globe article can be found here.

Tuesday, July 5, 2016

Trade Secret Specificity and Inevitable Disclosure

For good reason, the "inevitable disclosure" doctrine has been the focus of much discussion among those in the nerd blogosphere (that's a term of endearment, for I am a charter member and wear the nerd label proudly).

The reason is that the Defend Trade Secrets Act, recently enacted by Congress, disapproves of the doctrine. In truth, so do many states and the doctrine itself always was meant to apply to a very narrow slice of trade-secrets cases. To be sure, the doctrine nominally was available to a discrete subset of injunction cases where the plaintiff had some indicia of bad faith that stopped short of an outright threat to steal.

Like many facets of the law, this narrow carve-out turned into a sledgehammer for reasons that are not particularly altruistic. The very use of the inevitable disclosure theory ought to raise judicial hackles, for it surely can be a weapon improperly deployed and not easily disabled.

Which got me thinkin'...

Assume a plaintiff decides to embark on the inevitable disclosure path (and therefore eschews the DTSA as a means of recovery). How does this fit within another secondary trade secrets principle - that the secrets themselves must be identified with reasonable particularity? Put another way, is there - or should there be - a heightened specificity requirement when a plaintiff uses the inevitable disclosure theory of misappropriation?

I think the answer must be yes, for a few reasons. First, if "inevitability" is a benign form of a threat, then the plaintiff must have a pre-existing factual basis for what that threat is. Otherwise, there simply is no claim and no sense of inevitability of a legal wrong occurring. Second and relatedly, if the plaintiff alleges only general categories of trade secrets and claims inevitable disclosure over them in an undifferentiated way, it suggests implausibility over the act of misappropriation. Another way to say this is that the plaintiff really is just fearful of unfair competition but can't state that fear beyond mere generalities.

The difficult part of this inevitable disclosure/specificity problem is procedure. Courts understandably don't require plaintiffs to set forth the details of their actual trade secrets in a complaint, so it's hard to dismiss cases on the pleadings when the claimed deficiency is a crummy attempt at identifying the actual secret. But hiding details and demanding specificity are not incongruous concepts. Here, I think courts need to take a much more pragmatic approach and assess generally what the theory of misappropriation is and what the plaintiff is claiming the trade secret is. If the claim is based on inevitable disclosure and the plaintiff is unable or unwilling to plead its secrets in a narrow, particular way, then the claim becomes presumptively implausible.

One way to tell is to see if the plaintiff is offering up only broad categories - strategic plans, for instance, as opposed as to a particular launch date in a particular market. Remember, the details of the secret need not be in the pleading, but the allegations must give enough notice to the defendant and the court to inform the ultimate theory of the case.

Friday, June 24, 2016

More Rejection by Illinois Courts of Bright-Line Consideration Rule

The federal courts have become the final frontier for Illinois employers looking to enforce non-compete agreements against at-will employees. Those agreements contain embedded consideration problems if the gap between signing and termination dates is less than two years and if the employer cannot point to some other form of consideration beyond the job itself.

With the recent district court decision in Allied Waste Servs. of N. Am. v. Tibble, there is firm momentum in federal court to move away from the two-year, bright-line rule that two of the five appellate courts have established. The Supreme Court of Illinois twice has refused to weigh in on the matter, apparently content to let this issue play out in the other appellate districts.

Allied Waste breaks no new ground and largely follows the reasoning of other federal district courts, the most persuasive of which is Judge McDade's thoughtful opinion in Cumulus Radio Corp. v. Olson. The essence of these cases is that consideration is too fact-intensive for bright-line rules and that courts should consider the totality of the circumstances (e.g., method of termination, length of at-will employment, conditions of employment).

Indeed, one could argue that Allied Waste is not all that relevant, since it appears the account executive also received a salary bump, greater bonus potential, and promotion in conjunction with his non-compete agreement. Put differently, this really wasn't a classic case in the mold of Fifield and the other disputes that truly center on "continued employment as consideration."

***

Having now read and thought about these consideration cases for nearly three years, I am warming to an alternative way of thinking of how the consideration question could be resolved. I developed three rules of thumb, which are more or less working concepts and not specific proposals at this point. They seek to balance important interests related to contract formation with the need to avoid bright-line rules, which remove the important function of judicial discretion.

First, if the contract recites the consideration granted for the restrictive covenant, then it should control and the employer may not introduce evidence to contradict (or even supplement) its own agreement. This requires no more than a plain reading of the agreement and informs how the court will proceed with further analysis over the consideration issue.

Second, if the contract is silent or ambiguous as to consideration, then a court may consider extrinsic evidence of specific consideration that would support the agreement. Here, the employer would need to identify something tangible and concrete as opposed to an after-the-fact reconstruction of an individual's employment status that may not have anything to do with consideration for the restrictive covenant.

Third, if the consideration is continued employment and the employee is terminated, then the court should find as a matter of law that the consideration is illusory. This should be an obvious, black-letter principle that poses none of the problems sometimes associated with bright-line rules.

Fourth, courts should conduct limited evidentiary hearings to resolve consideration questions at the earliest possible moment, much like they do now with jurisdictional discovery. The issue of contract formation is essential and requires prompt resolution in a way that is divorced from the other issues that attend non-compete disputes. If the court finds that the consideration given was not adequate in light of the specific restraints, then the court should enter a judgment on the contract in the employee's favor immediately. In this regard, employers who use very broad restraints but only support themwith nominal or potentially meaningless consideration (like continued employment) likely will suffer an early defeat before broad expensive discovery begins.


Friday, June 3, 2016

Texas Supreme Court Addresses Trade-Secret Access

Within the trade-secrets community, the case of In re M-I, LLC has been percolating for some time. The case (the procedural nuances of which are immaterial to this post) addressed the question of whether a trial court may exclude a defendant's party representative from the courtroom when the plaintiff disclosed the details of the allegedly stolen trade secrets.

A few weeks back, the Supreme Court of Texas held that when confronted with such an issue a trial court must conduct a balancing analysis to determine whether exclusion would violate the Fourteenth Amendment's guarantee of due process. Those balancing considerations include the following:


  1. The degree of competitive harm that the plaintiff may incur from disclosure, which necessarily entails some analysis of the merits.
  2. The degree to which the defense would be impaired by the witness' exclusion.
  3. The witness' role in the organization and whether he would have "specialized expertise that would not have been available to" outside experts.

I am somewhat concerned that the In re M-I balancing "test" suggests that a defendant must retain an expert to evaluate the particular trade secrets at issue. That itself would appear to limit access to many defendants unable to pay for experts (paying for lawyers is bad enough). I doubt that the case can be read as setting forth a categorical rule in that regard, and in situations about court access the better approach is to let judges judge and make discretionary calls without being hemmed in by specific standards that may not fit each case. The basic problem in In re M-I is that the trial judge never considered any countervailing interests that the plaintiff had in protecting the secrets during the court proceeding.

It is a little curious that the Court in its Fourteenth Amendment analysis never cited E.I. duPont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917), when Justice Holmes addressed the exact same question as that presented in In re M-I. There, Holmes (citing no authority at all) noted that:

"the judge who tries the case will know the secrets, and if in his opinion and discretion it should be advisable and necessary to take in others, nothing will prevent his doing so. It will be understood that if, in the opinion of the trial judge, it is or should become necessary to reveal the secrets to others it will rest in the judge's discretion to determine whether, to whom, and under what precautions, the revelation should be made."


That simple formulation is much more sound and simple to understand that the Texas Supreme Court's analysis. But perhaps they ultimately reach the same destination.

As best illustrated by Masland, this is hardly the first time courts have addressed the particular question of access. The Ninth Circuit, and courts in California, previously have followed the same analysis as that in In re M-I. They focus, for instance, on whether the excluded witness has some involvement in competitive decision-making functions. So, for instance, an in-house patent attorney may be prevented from seeing particular secrets, because (as the Court in In re M-I put it) he "could not resist acting on what he may learn."

The Court's observation on this point, though, does not amount to a tacit endorsement of the "inevitable disclosure" doctrine, as at least one commentator has suggested. The inevitable-disclosure theory is used to demonstrate a required element of a claim - misappropriation - whereas the balancing test articulated in In re M-I simply follows a long-held rule of due process and a more recent rule under the Uniform Trade Secrets Act that courts should deploy measures in litigation to protect the actual secret being litigated. Shoehorning this common-law and statutory recognition about protective measures courts may take during litigation into a broad substantive rule that few courts endorse would be a profound mistake.


Friday, May 27, 2016

Personal Clients/Firm Clients

In 1999, the New York Court of Appeals decided BDO Seidman v. Hirshberg and said this:

"...it would be unreasonable to extend the covenant to personal clients of defendant who came to the firm solely to avail themselves of his services and only as a result of his own independent recruitment efforts, which BDO neither subsidized nor otherwise financially supported as part of a program of client development."

Which raises the question...

...what's a "personal client" and what's a "firm client"? The particular facts and context of BDO Seidman aren't the point of this post. Rather, the larger issue is the construct of rules in non-compete law that can have unintended consequences for the very parties those rules are intended to aid - employees bound by restrictive covenants.

The difference between a personal client and a firm client is not straightforward. An employer will no doubt contend that an employee's affiliation with it is an extension of its goodwill, branding, reputation in the marketplace, and particular product or service offering. That may be true. Or, as the employee will retort, "I did everything and got no help." That also may be true. The truth may lie somewhere in between.

Rules like that in BDO Seidman are easy to state and hard to apply. Take Marsh USA, Inc. v. Schruhriemen, a New York district court case decided earlier this month. There, Judge Jed Rakoff applied this personal client/firm client rule and entered a limited injunction that basically told the employee "I have no idea, so you're on your own." Of course, Judge Rakoff would never say just that, but he did say that "the Court cannot, without further factual development, provide a definitive ruling on whether [the subject client] falls within the scope of the 'personal clients' exemption" from BDO Seidman so "Mr. Schuhriemen acts at his own peril" if he services the client.

Rules like that announced in BDO Seidman are meant to be objective and place sensible limits on the use of restrictive covenants. But too often, these very rules (expressed objectively) invite further disputes, subject parties to immense litigation risk, and (most noticeably) increase litigation expense on the parties least able to bear them.

The personal clients/firm clients rule from New York is not alone. Disputes about non-compete consideration, the scope of legitimate business interests, and blue-penciling of overbroad agreements all deal with limiting unfair agreements. But only infrequently do these rules solve anything. And in too many cases like Marsh USA, they leave everyone twisting in the wind.