Friday, January 23, 2015

New Legislation and a Sentencing for Trade Secrets Theft

The new year always means a spate of legislative activity. Proposed new laws related to trade secrets misappropriation and non-compete agreements do not generate many headlines, but they are fairly common. Two states in particular are considering revising their laws concerning enforcement of non-compete agreements.

Washington

First up is Washington. Earlier this month, several legislators in Washington state introduced a bill to restrict the use of non-compete agreements that bar physicians from practicing medicine. The twin bills (one for osteopathic medicine and surgery; the other for physicians) would make non-competes void and unenforceable. The lone carve-out is that the law would allow an action to enforce a contractual provision for damages due to termination of a contract, as long as the enforcing party establishes the reasonableness of damages by clear and convincing evidence. It's not clear from the draft bill whether "termination" means a termination before the end of a set contract term, or whether it's termination of the relationship altogether. It must mean the former if non-competes would be void under the proposed law.

Physician non-competes raise, perhaps more than any other profession, issues of public policy impact, particularly if a rural area would experience a shortage of available care as a result of non-compete enforcement. The Washington bill cites the American Medical Association Code of Medical Ethics as a policy rationale for the proposed change in the law. The pertinent code provision discourages use of non-competes.

Many state courts, such as Illinois, have not found the AMA Code to raise sufficient public policy concerns to invalidate physician non-competes across the board. It is, therefore, more of a legislative judgment, rather than one for courts to balance. Other states, like Texas, attempt to strike a balance by enabling a physician to buy his or her way out of a restrictive covenant at a fair price. Texas' statute also cites to the AMA Code.

The text of the Washington house bill is available here.

Massachusetts

Next up - shocker - is Massachusetts. I, for one, hope that this state just does something so I can stop following what is going on.

Massachusetts has considered enacting the Uniform Trade Secrets Act for something like a decade, which is remarkable considering it's a uniform statute. Decide, already! The details of that debate are not that interesting.

Of more importance is whether the state will reform its laws concerning enforcement of non-compete agreements. A number of legislators have introduced bills to ban non-compete agreements, and Russell Beck's fine summary is available here. For those interested in why reform of non-competes in Massachusetts is of interest, Orly Lobel's terrific book Talent Wants to Be Free discusses this at some length.

***

On the trade secrets front, criminal prosecutions continue to garner headlines.

Another one comes from Chicago where Judge Norgle handed down a tough sentence on two former employees of Citadel LLC, a high-frequency trading (HFT) outfit. As illustrated in Michael Lewis' book Flash Boys, HFT firms engage in algorithmic equities trading, a sort of shadowy corner of the markets that increasingly garners attention in the Wall Street Journal for a variety of reasons.

Citadel's victim impact statement to Judge Norgle indicated that it had spent over $2 million in costs investigating the employees' theft of trade secrets and assisting the U.S. Attorneys' office. Interestingly, Citadel had non-compete agreements with both employees and apparently paid (or contracted to pay) them during the non-compete terms. The defendants, prosecuted in part under the Economic Espionage Act, received three-year prison terms and an order to pay over $750,000 in restitution.

The allegations of trade secrets theft generally centered on the employees' repeated downloading of trading strategies and source code from Citadel's servers onto personal storage devices. Given the value of this data to Citadel's HFT platform, and the security measures it used (detailed at length in the indictment), it is not difficult to see how this conduct rose of the level of trade secrets misappropriation.

Friday, January 16, 2015

Non-Compete Disputes and the Mootness Rule on Appeal

One of the reasons non-compete cases generate a lot of appeals is that the law is tense. By that, I mean that non-compete cases present a unique tension between freedom of contract and freedom to compete. And because public policy underlies many non-compete cases, appellate courts often scrutinize trial court rulings more carefully than garden-variety contract disputes or tort judgments.

But taking a non-compete case on appeal presents a unique legal issue: mootness. Most non-compete cases concern an agreement of relatively short duration, say one year or maybe two. Even if litigation is expedited, the non-compete period may run its course if there is an appeal.

How courts treat the issue of mootness on appeal is one of the more interesting procedural questions that non-compete lawyers face. Here are the three possible treatments:

1. Expiration of the covenant renders the appeal moot. Some courts treat expiration of the covenant on appeal as mooting any issue pertaining to injunctive relief. Remember: mootness only affects the injunction request. A damage claim can subsist for years after the defendant is free to work unencumbered. Texas is an example of a jurisdiction that seems to have a fairly strong mootness rule, as reflected in the recent case of Argo Group US, Inc. v. Levinson, 2015 Tex. App. LEXIS 250 (Tex. Ct. App. Jan. 14, 2015).

2. Expiration of the covenant does not impact an appeal. Other courts take the opposite approach, finding in essence that the appeal may not be moot. The doctrine is called "equitable tolling." A line of Ohio cases suggests an appeal from a denial of injunctive relief may not be moot even if the term of the post-termination covenant has run. But as the case of Tradesman Int'l, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2013), illustrates, this doctrine relies heavily on the factual and procedural posture of the case. Generally, a plaintiff must move promptly for injunctive relief to secure the benefit of the equitable tolling doctrine. If it does so, and an appellate court finds the trial court incorrectly denied the injunction, the employer still can gain the benefit of its bargain through a new term of injunctive relief that nominally extends past the expiration date. The Tradesman case dealt with the opposite fact pattern. The employer there did nothing to pursue preliminary injunctive relief and then, after the covenants expired, sought to impose a permanent injunction - effectively restarting the non-compete period against its ex-employees. As the Seventh Circuit's opinion discusses, this type of litigation conduct will not allow a plaintiff to pursue an injunction.

3. Expiration is a function of what the non-compete says. The final approach that some courts have taken is to push the expiration or mootness issue back onto the contract itself. Courts in Illinois seem to have endorsed this approach, though the case law has enough fluidity in it to make it sound like there still are no hard-and-fast rules on mootness. The notable cases are Prairie Eye Center, Ltd. v. Butler, 329 Ill. App. 3d 293 (4th Dist. 2002), and Stenstrom Petroleum Svcs. Group, Inc. v. Mesch, 375 Ill. App. 3d 1077 (2d Dist. 2007). Both look at mootness in the context of whether the parties agreed upon an extender clause within the non-compete itself. As a result, it is fairly common to see sophisticated Illinois-based agreements with robust remedies sections incorporating the holdings in Prairie Eye Center and Stenstrom Petroleum.

***

I generally don't have much of a problem with options 2 or 3. Option 1 brings squarely into play the law of unintended consequences. In those jurisdictions that endorse a rigid mootness rule, the law encourages employers to adopt longer covenants so as to give them a fair chance of litigating the case, while at the same time preserving appeal rights.

In this respect, a rule that appears employee-friendly at first actually may not be. Employers will tend to compensate for the common law and "bargain" for longer post-termination covenants, knowing the mootness rule reduces the value of litigating a short non-compete in the first place.

Friday, January 9, 2015

10 Checklist Items for Every Employee Who Leaves to Compete

The dawn of the new year is always a good time to return to basics.

When consulting with individual employees, it amazes me how frequently I run through the same basic departure protocol. By now, this seems intuitive to me. But I realize that for clients it is anything but.

I can't overstate the importance of carrying out a good, clean departure, even if the end of the employment relationship is fraught with hard feelings. Most employee competition lawsuits that go sideways have at their core a common thread: a sloppy, hastily-planned exit. The general perception that an employee violated some basic business ethic on the way out the door can convert an otherwise weak plaintiff's case into one that is able at least to persist through discovery and perhaps trial. That, in and of itself, may be a net loss to an employee who is usually less able to fund a legal defense.

The following list describes ten crucial departure steps employees must take to reduce risk in the event of a competition suit. This is by no means exclusive, and I don't present this in order of importance.

10. Get your agreements in order. I believe well over half of employees now have signed something that potentially affects post-termination conduct. In many cases, the pertinent document could be just a form non-disclosure agreement, which would pose no true restriction on taking a new job. But increasingly, employees sign more extensive non-compete or non-solicitation agreements. For a recent article discussing the proliferation of non-competes, see the linked AP story from January 3 ("Scrutiny on Worker Non-Compete Deals" by Ray Henry). Employees must obtain all relevant agreements, including those they believe to be outdated. It's also important for those employees with restricted stock or stock options to obtain any award agreements, as they frequently contain restrictions or forfeiture-for-competition clauses. An attorney cannot advise a client who is unprepared. Unsigned agreements and similar agreements that co-workers once had is only marginally helpful.

9. Prepare your resignation letter. At some point, an employee who makes the choice to leave and compete should prepare a resignation letter. Even if this seems like a mere formality, a resignation letter could be an exhibit at a trial. And a carefully crafted letter will give the court evidence that the employee was, indeed, careful. A judge can perceive this as a window into an employee's mindset before litigation begins. There are three general rules for drafting a resignation letter: (a) keep it short but articulate; (b) be respectful and thankful for the opportunity; and (c) if you state a reason for departure, be clear but deferential. An employee should have counsel review any resignation letter before delivering it.

8. Return all business documents. My experience is that about 2 out of every 3 employees keeps some non-public information when leaving, even if inadvertently. In many cases, retaining confidential documents is the factual foundation for an employer's case that otherwise might founder from the start. When an employee thinks about leaving, she should make sure to gather all documents (yes, including those at your "home office") and even create an inventory of what she returns. To take it further, employees should make sure those documents are organized and not returned in a scatter-shot fashion. This will show a court that the employee was trying to act respectfully and in good faith during the departure process.

7. Inventory electronically stored information. Closely related to point 8, employees often mar an otherwise clean departure by failing to account for electronic information. This presents a particularly acute problem for the increasing number of employees who work from home. Typically, digital information resides on a personal laptop hard-drive, an external thumb drive, a cloud storage platform, or in personal e-mail that continues to be accessible past resignation. During any competent exit interview, a manager or human resources professional will ask whether the employee has deleted or returned electronic information. A common question employees have is how to "return" electronic information. My pat advice usually is to have the employee disclose all facts about where the electronic information sits and ask the company specifically how to handle any deletion or return of documents. As long as the employee does this, any technical difficulties should be easy to work through.

6. Assess terms of new job offer and proposed employment agreement. Employees frequently become enamored with the idea of a new and better job opportunity. So much so, in fact, that they often forget about what they will have to sign when starting. This is relevant for the obvious purpose that the new job may require a non-compete. But it's doubly relevant because the new hire documents can help frame a lawsuit or the response to a cease-and-desist letter. It is vitally important that the offer letter contain language that respects the enforceable agreements of competitors, ensures that the company is hiring the employee for her general skills and knowledge (and not any proprietary information of competitors), and that failure to abide by these rules will result in termination. If the employee must sign a new agreement, those same admonitions should appear in the agreement as well. Many lawsuits sputter out of the gate if a judge sees that the new employer has no need to compete unfairly and in fact prohibits it.

5. Accommodate exit interview requests. Leaving a job is not easy. Personal emotion becomes wrapped up with professional obligation. And on this score, it's relatively easy for employees to want to bail out on proper protocol, because sitting down to notify a manager that they're leaving is not the easiest thing for the average person to do. However, it is essential to go through the painful exit interview process. For one, it may be contractually required, depending of course on what the employee's agreement or corporate handbook says. Secondarily, it always looks bad if an employee refuses to sit for an exit meeting. That can at least raise the inference the employee intends on hiding unfairly competitive conduct. On the flip side, if the employee is candid during the interview process, she may gain helpful facts to use in defending a subsequent action. The most important fact is participation itself; if the employee goes through the process and participates in good faith, this moots a potential employer line of attack at trial. More dramatically, I have represented clients who have participated in exit interviews and been told by managers that their new job would not be a non-compete violation. I have even seen follow-up e-mail communications that confirm these discussions, only to have the employer reverse course down the road. Another common fact that arises because of an exit interview is the employer's lack of diligence with gathering business documents. Those sorts of facts are game-changers. And they only arise because the employee participated in an exit interview.

4. Establish the new employer's expectations. As part of the hiring process, the employee must have a clear understanding of her anticipated job responsibilities. This is essential so the employee can determine whether the new employer expects her to abide by the restrictive covenants or whether it has another goal in mind. Too often, I have seen employees who are asked to "thread the needle" once they start. They then face the Hobson's choice of violating a post-termination covenant or ignoring an assignment.The employee must be on the same page with management regarding the day-to-day expectations, and in particular how to address the difficult, close issues (such as servicing a common client or working with clients who arguably fall within the territorial scope of a non-compete).

3. Work loyally to the end. I normally tell my employee clients to make their last month at work their best. This is relatively hard to do, but it is nothing more than common sense. An employee who neglects clients, shows up late, and ignores office meetings is likely to be viewed as untrustworthy. It also may cause an employer to file suit, or at least threaten suit, when it otherwise wouldn't have. Employees are often surprised at how much goodwill they can buy just by acting like a grown-up. A lot of employees simply don't.

2. Hire counsel early. Finding a knowledgeable, trustworthy attorney is no easy task. An employee is best served by hiring a lawyer early, during the phase of a job search where a move becomes real. This frequently occurs when an employee has a hot lead on a job. It never hurts to get a legal assessment before that, but counsel needs some understanding of the new position to advise the employee fully on her exposure. Waiting to seek counsel until after the employer sues means the attorney can't help shape the "job transition" facts, many of which I've outlined above. He or she is stuck with a departure that the employee may have planned hastily.

1. Expect the unexpected. It continues to amaze me how badly employees can predict what will happen upon departure. The accuracy of their predictions seems to be inversely correlated to their confidence. The bottom line is you rarely can predict whether an employer will sue. Nor can you count on a manager "going to bat" for you. And sometimes employers act irrationally, seemingly oblivious to the fact that customers may react poorly to being thrust into a lawsuit. Competition suits take on a life of their own (at least for a while), and they often are clouded by poor judgment.

***

Those readers who find this post informative may want to check out a related post I wrote on May 31, 2013 titled The Employee's First Client Meeting.

Wednesday, December 31, 2014

2014: The Annual Year-In-Review Column

I read many law blogs, and inevitably at the end of the year I come across posts that say what a monumental year it has been for legal developments in this area or that. Usually, that's an exaggeration.

And it would be misleading to say that 2014 was significant for non-compete law. Because it wasn't in the slightest.

Still, there were noteworthy cases and developments that draw the attention of practitioners, and which are worth a brief recap. So, in the tradition of this blog, I present my annual Year-In-Review for 2014 with the top five developments over the past twelve months:

5. Texas Supreme Court Weighs In on Forfeiture-for-Competition Clauses. Although I did not write about Exxon Mobil Corp. v. Drennen, it is nonetheless a significant state supreme court case worth reading. The Supreme Court of Texas usually produces interesting opinions on non-compete law, but we haven't seen any for a couple of years. This year, Drennen was the most notable decision from state supreme courts, and it didn't disappoint. The case involved the enforcement of a forfeiture provision in an employee incentive compensation plan. The Court found the provision was not contrary to Texas public policy and did not constitute a covenant not to compete. Accordingly, it allowed for Exxon to apply New York law. That state's well-developed "employee choice" doctrine allows for enforcement of a forfeiture provision without regard to a reasonableness analysis. The case brings into play many procedural issues that counsel must know, particularly choice-of-law clauses and the proper construction of what many believe to be indirect non-compete provisions that deter (but don't prohibit) competition. A copy of the case is available here.

4. Aleynikov Loses in the Third Circuit. Sergey Aleynikov is a mainstay on my end-of-the-year column, which is somewhat hard to believe. His legal troubles began with his departure from Goldman Sachs for Teza Technologies in June of 2009. Allegedly, Aleynikov misappropriated part of Goldman's high-frequency trading source code by placing it on a remote server (in Germany, which doesn't sound good but is actually quite meaningless). That led to a criminal conviction (overturned by the Second Circuit), a near-unanimous amendment to the federal Economic Espionage Act (think about getting Congress to agree on anything), a subsequent indictment by the Manhattan District Attorney (for which Aleynikov is not likely to serve any time), and a parallel lawsuit Aleynikov filed to have Goldman advance his legal expenses in the state criminal case. Aleynikov originally prevailed at summary judgment on his advancement suit (critically important, since he could have Goldman pay for his defense). That last piece of his litigation odyssey was the subject of a Third Circuit opinion, which I discussed on October 16. Aleynikov had his advancement victory overturned in a decision that I found poorly reasoned and inconsistent with the summary nature of advancement rights. I expect that a year from now we may have Mr. Aleynikov in our year-end list again, and I anticipate discussing what happened with his state criminal case for computer crimes. Aleynikov also made his way into popular culture, as his legal troubles inspired Michael Lewis's fantastic book Flash Boys.

3. DuPont's Trade Secret Verdict Overturned on Appeal. One of the largest verdicts of the past several years involved a trade secrets case. The dispute involved trade secrets DuPont owned with regard to Kevlar, a para-aramid fiber found in a variety of materials including tires, body armor, and cell phone cases. DuPont filed a trade secrets claim against Kolon Industries that resulted in a $920 million verdict and a 20-year production injunction against Kevlar. The civil case prompted criminal charges against Kolon and some of its employees. The Fourth Circuit, in reversing the jury verdict, questioned some of the evidentiary rulings the district court made concerning DuPont's purported public disclosure of materials related to the trade secrets. (Lesson on appeal: it probably doesn't hurt to have Paul Clement represent you on appeal. Whatever Kolon paid him, he earned it.)

2. Federal Trade Secrets Legislation Looms. I am required to include this in my list. Congress considered two separate pieces of federal legislation. The Defend Trade Secrets Act of 2014, which originated in the Senate, and the Trade Secrets Protection Act of 2014, which originated in the House of Representatives. For years, commentators and legislators have been pushing for a federal trade secrets remedy, perhaps because it's the only branch of intellectual property law that lacks a true federal legislative framework. Trade secrets also are increasingly important to the economy, a fact crystallized by patent decisions the Supreme Court has issued recently. I am not a wild proponent of federal legislation in this area, but I've come to accept it as inevitable. For a recent recap, see Russell Beck's excellent post from December 13, which summarizes the bipartisan efforts to federalize trade secret law and which also reports on recent House action on the Trade Secrets Protection Act of 2014. This time next year you can expect I'll discuss actual legislation that passed Congress.

1. State Courts Take Up Consideration Issue in Non-Compete Agreements. In my 500th Blog Post, I wrote that the future of non-competes would pivot towards the issue of consideration and away from reasonableness. Many non-compete disputes involve at-will employees, and courts are beginning to grapple with what exactly qualifies as legal consideration to support a restraint of trade - particularly when an employee can be let go at any time. I believe this issue will continue to vex courts and legislatures. I have been a notable critic of Fifield v. Premier Dealer Services, an Illinois appellate case that seemed to legislate a bright-line, two-year rule for employment serving as consideration for at-will employees' non-compete agreements. The decision is clearly bad in the judicial sense, but perhaps not awful from the policy perspective. And since the court decided it, other states have taken up similar (though not identical) consideration issues for at-will employees. The Pennsylvania Supreme Court will hear an appeal in Socko v. Mid-Atlantic Systems of CPA, Inc. and decide whether continued employment can serve as consideration for an at-will employee's non-compete. Earlier this year, the Wisconsin Court of Appeals certified the same question to the state supreme court in Runzheimer Int'l Ltd. v. Friedlin, which was the subject of my May blog post. And, the Supreme Court of Kentucky in Charles T. Creech, Inc. v. Brown issued an employee-friendly ruling this year, finding continued employment was insufficient to support an employee's non-compete agreement. The decision was poorly reasoned and confusing for employers to apply, since the Court seemed to indicate it was a fairly fact-specific decision. Regardless, it is now clear that many states are interested in just what consideration at-will employees must receive to be bound by post-termination non-competes. This issue will filter through the courts next year.

***

Finally, many thanks to all who continue to follow me and offer their words of encouragement. In 2015, I will try to post once per week - every Friday. This year, I did not post as frequently as I would like, but I am going to try and keep this going at least through the end of next year. Aiming for one post every week will be ambitious, but I am sure I can find enough material to keep the content fresh and insightful.

Wednesday, December 17, 2014

Three Anti-Trust Cases Non-Compete Lawyers Must Know

Many non-compete attorneys think that damages are the tail wagging the dog during the lawsuit. The reason is simple, but not intuitive: plaintiff's attorneys give very little thought to how to prove damages. Instead, they are focused - too much so - on unearthing every conceivable fact about liability.

So the case law - let alone scholarship - on damages in non-compete suits is thin at best. There are a handful of state law cases that intelligently discuss the issue, and a few recent decisions out of the federal circuit courts that do the same. But the relevant body of law doesn't really exceed maybe 30-40 decisions. Given the proliferation of non-compete litigation, this is truly startling.

The biggest obstacle for plaintiffs is tying conduct to particular loss, with defendants often taking the position that it didn't really cause any competitive loss because the plaintiff was going to lose sales or market share anyway. So where does one turn, particularly from the perspective of one trying to come up with a theory of recovery that avoids this common defense attack?

The logical starting point is an old line of cases from...the Supreme Court.

The cases come from Sherman Act and Clayton Act disputes, which deal with monopolization and price discrimination claims. Non-compete disputes are really restraints of trade, and attorneys don't often think to look to federal anti-trust law for guidance. Particularly in the damages realm, that's a valuable source of information.

Story Parchment

The first case is Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931), which dealt with a conspiracy to monopolize trade in vegetable parchment. The conspiracy involved the effort of several parchment companies to lower their prices below cost, forcing the plaintiff to lower its price. The Court's damages analysis disapproved of a tactic that resembles what many defense lawyers in non-compete cases often attempt to do: speculate that absent the conspiracy to fix prices below cost, the prices would have dropped anyway. This is not at all different than the defense position that "the customer would have left even if I hadn't solicited it away."

The key part of Story Parchment is its articulation of the wrongdoer rule. This is the passage: "Where the tort itself is of such a nature as to preclude the ascertainment of damages with certainty, it would be a perversion of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from making any amend for his acts." The Court recognized, in other words, that some cases by their very nature do not allow for the plaintiff to prove damages with any certainty. As long as the fact of damages is certain, there is nothing wrong with speculating as to amount.

Bigelow

The second case, Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251 (1946), involved a Sherman Act claim. The case concerned an alleged conspiracy among movie theaters and distributors to show particular films before some independent exhibitors. The idea here was that the preferred release system harmed the independent exhibitors, who suffered lost sales from not exhibiting a hot new movie. With respect to damages, the plaintiff used a comparison of prior years' profits when he could show first-runs with those when he wasn't able to due to the illegal conspiracy.

The defendants balked at the speculative nature of the damages presentation, The Court relied on Story Parchment and found that "the wrongdoer shall bear the risk of the uncertainty which his own wrong has created." When dealing with claims based on illegal restraints of trade, in other words, it is difficult to ascertain damages and figure out what would have happened under "freely competitive conditions." The Court then appeared to go further and stated that "the wrongdoer may not object to the plaintiff's reasonable estimate of the cause of injury and its amount, supported by the evidence, because not based on more accurate data which the wrongdoer's misconduct has rendered unavailable."

The last passage in Bigelow teaches that if the plaintiff presents a damages picture, or reconstruction of what it expected to earn after a non-compete violation, the defendant (even while denying liability) still must portray an alternative picture.

Truett Payne

The final, most recent case is J. Truett Payne Co., Inc. v. Chrysler Motors Corp., 451 U.S. 557 (1981), a price discrimination case under the Robinson-Patman Act. The case dealt with a simple set of facts whereby Chrysler appeared to set a sales incentive program up in such a way as to pay one Alabama dealer less than others. The Court's statement on damages is not as complete as in Bigelow or even Story Parchment, probably because the lower courts' hadn't flushed out liability as the other cases had.

The Court did, however, endorse the wrongdoer rule and in particular noted the before-and-after comparison that the plaintiff presented in Bigelow. It is this same before-and-after presentation that often draws the ire of non-compete defendants. With the Court's endorsement of it, that line of attack may not be as strong as defendants think.

***

The Court's anti-trust cases are under-appreciated when applied to non-compete disputes. The wrongdoer rule derives from this line of anti-trust cases, where the claim itself means there has been a competitive injury. Regardless of what one thinks of non-compete law, a finding of liability is, by definition, a competitive injury.

While plaintiffs cannot engage in unreasonable speculation or make improper assumptions, the wrongdoer rule reflects a policy judgment that defendants cannot erect a roadblock to a damages case by relying on the very uncertainty they have created.

Friday, December 12, 2014

Third District in Illinois Follows Fifield's Consideration Rule

Business lawyers have discounted the much-bastardized decision in Fifield v. Premier Dealer Services, Inc. as unmoored, largely because it seems to be one-of-a-kind and pulled from the ether.

With the exception of a few federal district court opinions (which aren't authoritative), the validity of the Fifield case largely has been confined to the blogosphere and to those state trial courts which probably are trying to figure it out.

To take a step back...

Fifield rewrote the rules on what kind of consideration an employer must show to enforce a non-compete agreement in Illinois. For an at-will employee (that is, those workers who have no contract for a set term), Fifield says the employment itself only provides consideration for the non-compete if the employee remains on the job for two years-plus. The rule is meant to reflect that an at-will employment arrangement is somewhat illusory; an employer could trick an employee into an onerous covenant with the hope of a long-term relationship, yet pull the rug out quickly. Fifield makes no distinction between terminations that are involuntary and those an employee initiates.

Yesterday, Fifield gained a large measure of credibility when a separate district of the Appellate Court of Illinois (the Third District) followed it and endorsed the two-year consideration rule. The case is Prairie Rheumatology Associates, S.C. v. Francis, 2014 IL App (3d) 140338, linked here, and the facts aren't really any different than Fifield itself.

The analysis is predictably non-academic and thin. The court endorsed the Fifield rule to vacate a preliminary injunction against a physician who signed a 2-year, 14-mile non-competition agreement at the start of her employment. She resigned 15 months after the start of her practice and officially separated within 19 months. Fifield precluded enforcement.

Francis gives Fifield a much-needed injection of credibility. Many, including me, were highly critical of Fifield. (I was more aghast at is reasoning and rather glib conclusion, and not so appalled at the disposition). Having a second branch of the Appellate Court endorse Fifield creates some momentum and likely will encourage other districts (there are five) presented with the question to follow suit.

The Fourth District is the most likely to distance itself from Fifield, and it likely will need to do so for the Supreme Court of Illinois to intervene. The Supreme Court declined to hear Fifield, which one could read as a tacit endorsement of the holding.

Tuesday, November 25, 2014

2014 AIPLA Trade Secret Law Summit Is Nearing

For those attorneys who follow this blog, I encourage you to consider attending the American Intellectual Property Law Association's Trade Secret Law Summit. The event will be held on December 4 and 5 at Intel Corporation in Santa Clara, California. You still can register for this event, and you do not need to be a member of the AIPLA to participate.

Registration information is available at this link.

The program for this year, much like last, is simply outstanding. The complete CLE outline is available on the AIPLA's registration information page. If you read through the outline, it is easy to see why trade secret and non-compete lawyers should not miss this event.

I am pleased to be moderating the last session of the 2-day event, Perspectives from the Bench: How State and Federal Judges View the Growth and Scope of Trade Secrets Disputes. I will be joined by the Honorable James Ware (Ret.), who previously was the Chief Judge of the Northern District of California. Also on the panel is the Honorable James Kleinberg (Ret.), a former California Superior Court judge in Santa Clara, County.


Thursday, November 20, 2014

Supreme Court of Arizona Gives Trade Secrets Preemption a Narrow Construction

Perhaps the most boring question in all of trade secrets law generates a lot of commentary, particularly in the blogosphere.

The question is whether the displacement provision of the Uniform Trade Secrets Act applies to claims based on misappropriation of confidential information that isn't valuable enough to meet the trade secret definition. If that's not scintillating, I don't know what is.

If you can contain your excitement, know that courts take differing points of view on this and so the question is somewhat significant to nerds. I gave my view on this a few years back, summarizing the policy rationale for taking a broad view of preemption - one that would displace claims based on misappropriation of confidential information.

The Supreme Court of Arizona yesterday disagreed with me (who doesn't?) and found that a narrow view of preemption was appropriate, relying heavily on the text of the UTSA provision which states that preemption doesn't affect "other civil remedies that are not based on misappropriation of a trade secret." The case is Orca Communications Unlimited, LLC v. Noder, No. CV-13-0351. (This is the Scalia-Easterbrook-Garner school of textualism at its best, revealing just how influential that cadre has been at influencing law over the past 20 years.)

The defendant made some of the same arguments about the absurdity of narrow-form preemption that I have made before. There are many good reasons for broadly interpreting preemption, including some the Arizona court cited and rejected - the uniform structure the UTSA creates for dealing with claims of data misappropriation, the specter of greater punitive damages for misappropriating less valuable types of information. To me, the soundest rationale lies in the incentives that underlie preemption.

If parties have a common-law claim for misappropriation of confidential information, why would they subject themselves to having to prove that it's a trade secret? I cannot understand this. The remedies available to a trade-secret holder aren't materially more significant. The damages theories (aside, possibly, from a royalty-based theory) are not all that different than those found in tort law. But to prove the existence of a trade secret, you must show how the information derives value from being secret and rigorous security measures. Allowing a plaintiff to default to a common-law theory for virtually the same type of information would provide no incentive for a business to undertake secrecy measures.

Just as problematically, in many jurisdictions, this would enable a plaintiff to bring claims in the alternative (i.e., it's a trade secret, but if not, then it's confidential). This alternative pleading scheme, which narrow-form preemption openly invites, undermines the entire purpose of the displacement clause.

Tuesday, November 11, 2014

Unpacking Bad Faith

A very smart lawyer at a very large firm once told me something very convincing.

All the good stuff lies in the privilege log.

The notion of "bad faith" prompted this comment. And by bad faith, I generally refer to the defense perception that many competition cases simply are motivated by a piling on of litigation costs - usually from an established player onto a start-up or nascent rival. As bad faith is often the standard for fee-shifting - certainly under state trade secrets law - then the concept becomes important for building a defense.

The problem for many defense lawyers (and more importantly, their clients) is proving bad faith. The concept smacks of deception, and by its nature the source of its proof largely is outside the control of the defense. On rare occasions, the defense will uncover a smoking gun - this usually is an e-mail, by the way - or a document that suggests an improper purpose behind the lawsuit. That purpose would be to achieve something other than a victory on the merits or a legitimate settlement of a valid claim.

A problem that has vexed me for some time is how to unpack bad faith through discovery. It's a knotty issue, with proof often a patchwork maze of inferences here and there from poorly conceived claims or simple lack of proof. But even a crummy case on the merits might not equate to "bad faith."

Is there something else? Some other way to prove it?

I have talked before about lawyer involvement in perpetuating bad faith claims as a major issue that underlies competition lawsuits. Lawyers often assume their clients' identities and are complicit in maintaining claims that fill up the courts for no legitimate reason. Because competition disputes are amenable to discovery morasses, this is a serious issue. Another serious issue is incompetence. Competition law is not easy, nor intuitive. And many lawyers simply don't understand the law very well. Add to that the declining market for legal services, and attorneys able to grab a competition case see a source of fee revenue for the taking. It's a toxic brew.

So recalling what my colleague said about privilege, is there a way to circumvent it? There might be. It's called the "crime-fraud" exception. Lawyers and clients labor under a terrible misconception of privilege. It is the exception and not the rule, so it's carefully scrutinized and particularly favored. This is particularly so since it's antithetical to the goal of the adversarial process: to find out the truth when reaching a result.

The essence of the crime-fraud exception is fairly straightforward: a lawyer does not render professional services if she is assisting the client to perpetrate a crime or a fraud. In some places, courts give "fraud" a rather broad interpretation. It follows, then, that if a lawyer is facilitating a frivolous suit, then her discussions with her client about how to achieve this should be discoverable. This may loosely be called a "fraud upon the court" (though I recoil at that term), or something akin to fraud.

The procedural hurdle is that the party seeking discovery must advance a preliminary showing of bad faith. This is no small feat. But if a party can present this, then it may ask the court to review otherwise designated privileged material. This in camera review (likely, of attorney-client e-mails) will enable the court to act as a gatekeeper and ferret out truly privileged materials that don't further the fraud.

But communications where a client seeks counsel's assistance in perpetuating a frivolous claim are not privileged and should be disclosed. This rule makes sense when one considers that counsel have an ethical duty to the court, as well as her client. And it further makes sense when one realizes courts have the inherent authority to control their docket and advance cases towards a speedy, just resolution. If a lawyer is assisting a client perpetuate a nonsense claim, why should this help be immune from disclosure?

Tuesday, November 4, 2014

Aleynikov's Observations on Juries

Jurors called to serve look forward to the possibility of drawing an exciting (even if tragic) case.

Non-compete cases are not exciting.

At least by the average layperson's standard.

This is why the specter of a jury trial may cause parties to rethink whether to take the case to trial. From a plaintiff's perspective, it could fear that it will put the jury to sleep explaining a legitimate business interest and the importance of profit margins. And there is the almost inevitable risk that the jury will be flummoxed by an esoteric, confusing damages presentation. Defendants often harbor the same doubts about jury trials, because one or two bad facts could case a jury to form an opinion on liability quickly and then take the plaintiff's mere say-so as evidence.

Consider this from the trial of Sergey Aleynikov, as recounted in Michael Lewis's book Flash Boys: "...when [Aleynikov] looked over, he saw that half the jury appeared to be sleeping." Aleynikov, as we know, was the programmer who left Goldman Sachs' high-frequency trading desk for Teza Technologies - and, in doing so, brought on a slew of litigation that seemingly touched every jurisdiction on the East Coast. And Aleynikov's case had that dose of intrigue that most competition cases don't - computer code deposited in Germany and the specter of Wall Street trading.

Employers often combat the uncertainty of a jury trial with a contractual waiver (enforceable in federal courts and in most states) or a clause requiring the merits to be dealt with in arbitration. The former preserves the availability of appellate review, while the latter allows for companies to conduct their disputes in a quasi-private manner and with more control over the process.

An interesting question, which seems to have generated almost no decisions, is whether a third-party is bound by a jury trial waiver clause. Suppose an employee waives his right to a jury trial, but his new employer is a defendant on a related tort claim for inducing a non-compete violation. Can the plaintiff invoke the jury trial waiver against the third-party?

I don't think so.

Although there is some authority for extending choice-of-law and choice-of-venue clauses to non-parties, jury trial waivers seem different. For one, the right to a jury trial is embodied in the Constitution, though not incorporated to the States. In addition, state constitutions typically have some additional constitutional guarantee. Therefore, the nature of the right seems qualitatively different - even if for reasons that don't appear to extend beyond mere tradition alone.