Friday, March 27, 2009

Non-Compete In Shareholder Agreement Found Unenforceable (Lampman v. DeWolff, Boberg & Assoc.)

In many jurisdictions, non-compete agreements contained within a shareholder's agreement are evaluated under a much less stringent rule-of-reason analysis. The idea here is that those who have an equity stake in a venture need to secure the loyalty of those similarly situated to themselves. It goes without saying there is a much lower likelihood that a shareholder-employee will be tricked into making a desperate decision only to be shackled later on under circumstances that seem manifestly unfair.

But in Lampman v. DeWolff, Boberg & Associates, the Fourth Circuit (applying South Carolina law) did not give any deference to a non-compete covenant contained in a shareholder's agreement and found that its overbroad provisions rendered it unenforceable as a matter of law.

Lampman was an employee and shareholder of DBA performing management consulting services. Along with others, he signed a shareholder's agreement in 2004. That agreement contained a restrictive covenant which provided that a shareholder could not directly or indirectly engage in "Competition" with DBA for a period of three years. The definition of "Competition" ultimately was critical to the court's ruling:

"Competition shall mean...serving in any capacity, job or function...for any Person that analyzes, designs, modifies, and implements management systems to improve productivity, quality, service and capacity levels that generates quantifiable financial savings, and where such services are competitive with or similar to those that such Shareholder rendered during his employment with [DBA]." The covenant also contained a non-exclusive list of competitors to whom the covenant specifically applied.

Along with the lack of any geographic restriction, the italicized phrases gave the court grounds to strike the covenant as unreasonable under South Carolina law. By virtue of that state's strict blue-pencil doctrine, modification was not possible. The court gave an example of where the covenant would bar Lampman from performing consulting services outside any geographic area where DBA served clients. This in and of itself probably doomed the agreement.

Secondarily, though, the court noted where the covenant prevented Lampman from working for many entities that do not compete in the same marketplace as DBA. In particular, the use of "indirect" competition and the bar on providing "similar" services yielded absurd results. For instance, Lampman could not go work as an employee at Ford Motor if he was charged with analyzing its management operating systems and developing a model for internal cost savings. This example, the court found, highlighted how the covenant went far beyond preventing direct competition with DBA.

It was not clear from the opinion whether DBA sought to prevent Lampman's employment or merely recoup dividends paid to him after his departure but prior to the time his shares were redeemed pursuant to the shareholder's agreement. But that is not material.

Practitioners in states like South Carolina must be scrupulous in examining the language of non-compete covenants in all types of agreements for any indicia of overbreadth. It is best to use hypotheticals and examples to determine whether any non-competitive activity is inadvertently included within the restriction. And using phrases such as "directly or indirectly" or "similar to" or "in any capacity" almost always invites a challenge from an aggrieved employee on grounds of overbreadth.

Finally, the court in Lampman never discussed whether a less stringent standard of reasonableness should have applied because the covenant was contained in a shareholder's agreement. Had it done so, the outcome may have been different.


Court: United States Court of Appeals for the Fourth Circuit
Opinion Date: 3/23/09
Cite: Lampman v. DeWolff, Boberg & Associates, Inc., 2009 U.S. App. LEXIS 6046 (4th Cir. Mar. 23, 2009)
Favors: Employee
Law: South Carolina

Thursday, March 26, 2009

Illinois Trade Secrets Amendments Face Vote In State Senate As Early As Today

I have previously written about Senate Bill 2149, which proposes important procedural changes to the Illinois Trade Secrets Act. The changes concern an initial disclosure of the trade secrets by the plaintiff, along the lines of Federal Rule 26(a)(1), and detailed attorneys' fee shifting provisions.

SB 2149 has been placed on the Senate calendar order for what is called a "third reading." Under General Assembly rules, a bill must be placed on the calendar three times before a legislative chamber can pass it. The first reading introduces the bill, while the second reading allows for floor amendments. (No floor amendments were made to the bill.) It is the third reading when the bill is actually voted on. This bill is going to get a thumbs-up or thumbs-down; it won't die in the Rules Committee.

Wednesday, March 25, 2009

Illinois Court Goes Bananas Over Unlimited Non-Compete Agreement (Del Monte Fresh Produce v. Chiquita Brands)

Illinois courts have been fairly uniform on the rule-of-reason as applied to industry non-compete agreements. While there is a legitimate debate brewing over whether (or, perhaps to what extent) an employer must show a protectable interest in support of a non-compete, patently unreasonable and overbroad covenants continue to be struck down.

Consider the case of Kim Kinnavy, a former district sales manager with Del Monte who was in charge of customers with banana supply contracts. Kinnavy signed a one-year non-compete contract barring her from working industry-wide for a wide range of businesses involved in the supply or brokerage of fresh vegetables or fruit.

As Judge Hibbler noted, "the Non-Compete prohibits Kinnavy from 'being connected in any manner with' an entity that brought fruit, vegetables, or other produce from Del Monte. Under these terms, Kinnavy could not work as a cashier at a Piggly-Wiggly that bought produce from Del Monte." This example highlights a problem I frequently see in analyzing non-competes: employers give too little thought to drafting the contract so that it contains reasonable parameters on the type of employment that is off-limits.

The fundamental problem here is with notice: if a non-compete is a blanket, industry-wide ban, the employee has no idea what he or she is entitled to do and is therefore discouraged from seeking a job with any competitor, even if that job bears no rational nexus to the job he or she has just left. The court also noted the worldwide ban on employment for one-year and deemed it fundamentally unreasonable, citing a litany of Illinois cases construing and rejecting as unreasonable similar covenants.

Given the breadth of the restrictions, the court declined to modify or blue-pencil the covenant to make it more reasonable. Of primary concern to Illinois courts is the language of the contract. Courts simply won't employ the blue-pencil rule if the employer misses by a wide margin. Here, the covenant failed on two grounds of reasonableness - geographic reach and scope of activity - and the court was not inclined to rewrite the contract for the employer.

The court declined to use the modification rule based on the express language of the contract. Even though the non-compete contained a severability clause, the court found that the non-compete was an "essential feature of the contract at issue" and that the severability rule could not apply. In particular, the contract specifically stated "each of the above provisions is essential to the Company and the Company would not furnish the Employee the consideration set forth in this Policy [of Trade Secret and Non-Competition] absent the Employee's agreement to abide by and be bound by each of the above provisions..." In any case where an employer seeks to invoke the blue-pencil doctrine, the reasoning employed in Judge Hibbler's ruling should be examined carefully.

Finally, for the third time in the last two years, the court struck down a Florida choice-of-law clause as contrary to Illinois public policy. I previously wrote about this issue in another post.


Court: United States District Court for the Northern District of Illinois
Opinion Date: 3/19/09
Cite: Del Monte Fresh Produce, N.A., Inc. v. Chiquita Brands Int'l, Inc., 616 F. Supp. 2d 805 (N.D. Ill. 2009)
Favors: Employee
Law: Illinois

Tuesday, March 24, 2009

Michigan Courts Continue Favorable Policy Towards Enforcement of Non-Compete Agreements (Kelly Services v. Marzullo)

Prior to 1985, Michigan was one of the most employee-friendly states when it came to non-compete agreements. With one very narrow exception, such covenants were void under state statute. Since then, however, the repeal of Michigan's old law and the enactment of a new statutory scheme has made Michigan one of the most-employer friendly venues with respect to non-competes.

Michigan's broad policy favoring non-compete agreements was on display in Kelly Services v. Marzullo, a case in the ever-litigious employment staffing services industry. Marzullo was a high-level executive for Kelly Services, working in its Dallas, Texas office as Regional Manager/Vice-President. In June of 2007, Marzullo signed a new restrictive covenant agreement, which was governed by Michigan law. In addition to a non-solicitation and non-disclosure clause, the contract contained a one-year industry non-compete covenant which barred Marzullo from working in the employee staffing business in any state in which he had responsibility during the three years prior to his termination. From the facts, it appears Texas would be the only state included within the industry non-compete.

After his resignation, Marzullo went to work for Roth Staffing Companies, and he stated that he would be responsible for West Coast operations. At the time he left, Marzullo indicated he would not have responsibility for clients in Dallas and mentioned he would have to relocate. Aided by a LinkedIn profile indicating otherwise, Kelly Services determined Marzullo was not only still living in Dallas after his resignation but was responsible for Roth's Dallas territory.

At the preliminary injunction hearing, Kelly Services conceded Marzullo had not yet solicited any of his old accounts in violation of the contract, nor had it discovered misappropriation of confidential information. Marzullo, however much he tried to downplay the extent of his work in Texas, was in violation of the industry non-compete.

Under Michigan's pro-employer law, this was enough to warrant an injunction in Kelly Services' favor. Marzullo's defense was based mainly on the choice-of-law clause; had he been able to apply Texas law (which he wasn't), Marzullo stood a chance of prevailing on a technical consideration argument, but the court even seemed dubious that contention would enable Marzullo to escape the one-year covenant.

Employers in Michigan have a significant upper hand when litigating non-compete agreements, and they are able to prevail even if less-restrictive activity covenants would otherwise protect an employer.


Court: United States District Court for the Eastern District of Michigan
Opinion Date: 11/20/08
Cite: Kelly Services, Inc. v. Marzullo, 2008 U.S. Dist. LEXIS 107793 (E.D. Mich. Nov. 20, 2008)
Favors: Employer
Law: Michigan

Wednesday, March 18, 2009

Utah Court Questions Parties' Intent After Careless Drafting of Commercial Non-Compete Agreement (digEcor v. e.Digital)

Sometimes unremarkable cases yield insight into how a judge examines a non-compete agreement.

The commercial dispute between digEcor, Inc. and e.Digital is just such a case. The parties signed a contract in 2002 that was, at heart, a standard non-disclosure agreement. Boyer (a predecessor to digEcor) had an idea to market portable viewers to airlines so that passengers could watch movies not yet released for rental to the general public. He wanted to pitch the idea to e.Digital but insisted on a confidentiality provision protecting his idea and e.Digital's ability to compete in the same market.

The non-compete provided e.Digital could not "compete with APS, Inc. directly or indirectly during the term of this Agreement and for a period of seven (7) years after the termination of this agreement anywhere in the world by years after termination of this agreement anywhere in the world by manufacturing and/or selling like or similar components: (any and all components that APS, Inc., and manufactured, designed, etc."

It would be an understatement to state that the nearly unintelligble covenant verged on the ridiculous.

Eventually, the parties signed a separate agreement memorializing the terms by which e.Digital would design and oversee the manufacture of a portable viewer. That agreement contained no non-compete clause.

When the business relationship fell apart, and after e.Digital sought to introduce its own line of portable viewers, digEcor sued for breach of the non-compete agreement recited above. The court concluded California law applied, and under Section 16600 of the Business and Professions Code, the non-compete was per se invalid.

However, the court took the unnecessary (though arguably wise) step of noting the importance of a sloppily drafted agreement on the court's overall view of the case:

"...the court has its doubts concerning digEcor and e.Digital's expectations about the continuing enforceability of the covenant not to compete. It is apparent that little care was taken in drafting and proofreading the 2002 NDA's non-compete provision. Also, when the parties documented their business relationship in the October 22 Agreement, which expressly superceded all prior written and oral agreements on the same subject matter, they did not include a covenant not to compete. One would expect that, given the importance digEcor now attaches to e.Digital's ability to compete, digEcor would have insisted that a non-compete provision be included in the October 22 Agreement, even if doing so seemed overly cautious or not technically necessary."

Practitioners defending a non-compete claim may want to cite this passage when addressing agreements that contain poor drafting, inconsistent terms, or appear to have been put together with little thought.


Court: United States District Court for the District of Utah
Opinion Date: 3/13/09
Cite: digEcor, Inc. v. e.Digital Corp., 2009 U.S. Dist. LEXIS 20382 (D. Utah Mar. 13, 2009)
Favors: N/A
Law: California

Tuesday, March 17, 2009

E-Mail Destruction Leads to Adverse Inference and Fee-Shifting Sanctions (Telequest Int'l v. Dedicated Business Systems)

Few cases implicate discovery sanctions and spoliation of evidence like claims of unfair competition against an ex-employee. With most evidence of trade secrets theft and customer solicitation documented and proven electronically, it is far easier for plaintiffs to trace unfairly competitive activity.

For whatever reason, employees seem to think that computer forensics is still a dark ages novelty. It is routine to read cases where hard-drives are deleted are scraper programs are used to wipe files during litigation. Employees think they are helping their cause by covering their tracks.

They're not.

The recent decision in Telequest International v. Dedicated Business Systems is a good example of what discovery sanctions will be imposed for destruction of evidence. During the course of a protracted discovery dispute about production of documents, one of the defendants ran a "defrag" program just two days before he was under court order to produce a forensic copy of his hard-drive to the plaintiff's expert witness. He installed Secure Clean software, rendering certain key documents untraceable. Though some cases involve e-mail or hard-drive deletion prior to litigation, this occurred well into the dispute. As such, there was no issue the employee was under a duty not to destroy relevant evidence.

Therefore, the primary question was the appropriate level of sanctions. The court discussed the plaintiff's request for a default judgment and concluded this was too severe of a sanction. Instead, the court held an adverse inference instruction to the finder of fact, coupled with a fee award related to the discovery dispute, was a sufficient sanction under the circumstances.

The adverse inference sanction is intended to level the playing field with respect to the discovery violation, since the defendant will be unable to benefit in any way from the deletion activity. Indeed, the fact-finder is instructed that the spoliation is evidence the party did so out of the well-founded fear the contents would harm him.

In a non-compete dispute, this generally means a fact-finder is able to presume improper customer solicitation or wrongful retention of confidential information.


Court: United States District Court for the District of New Jersey
Opinion Date: 3/11/09
Cite: Telequest Int'l. Corp. v. Dedicated Business Systems, Inc., 2009 U.S. Dist. LEXIS 19546 (D. N.J. Mar. 11, 2009)
Favors: Employer
Law: Federal

Monday, March 16, 2009

Senate Bill 2149 Appears Headed for Full Vote in Illinois State Senate

I previously wrote about Senate Bill 2149, introduced by Senator Don Harmon (D-Oak Park). Last week, the proposed amendment to the Illinois Trade Secrets Act passed the Senate Judiciary Committee with a Do-Pass recommendation. In legislative parlance, this means the committee has voted to send the measure to the full Senate for a vote. The do-pass measure was voted upon without amendment to the draft bill.

I will continue to track SB 2149 and report on developments. Please click on the above link for a summary of the procedural changes proposed to the ITSA. If you want to read the draft bill, you can find it here in PDF.

Wednesday, March 11, 2009

Entrepreneur's Trade Secret Claim Ends Up In the Dumpster (Take It Away v. The Home Depot)

If you're anything like me, at least once every so often you have a fleeting thought that you've stumbled onto a great entrepreneurial idea sure to let your family coast into retirement much earlier than expected. At least in my case, by dinner time I've forgotten what the idea was that got me so energized.

Some folks are more resolute.

Case-in-point: William Vaccaro, Michael Walsh and Royal Murphy. Their idea, hatched in 1996, was conceived by Vaccaro while driving by a lumber yard. The gist of the idea was beyond simple: to rent dumpsters or waste bins to customers from home improvement retail locations. Vaccaro freely admitted the simplicity of his idea, stating it came to him in a matter of minutes.

For the next several years, Take It Away, Inc. (which has produced exactly $0 in revenue) embarked upon what can only be described as an aggressive sales pitch to Home Depot, one of America's ubiquitous retailers. To put it mildly, Home Depot was not enthused at the idea of partnering with Take It Away. Over the course of many years, Take It Away approached a number of managers at Home Depot trying to sell them on the idea. At one point early on, the parties even signed a non-disclosure agreement regarding Take It Away's "waste disposal business."

But after that, Home Depot showed little interest. That said, representatives from the supply store did discuss the possibility of leasing Take It Away space in retail stores to conduct dumpster rentals. However, Take It Away never made any proposals concerning this concept and apparently insisted on a middle-man or brokerage arrangement where it take 90% of any revenue from dumpster rentals and remit 10% to Home Depot.

About a year or so after discussions finally concluded, Home Depot entered into four agreements with other firms for the establishment of "dumpster rental referral programs." The concept was based on the leasing idea Home Depot apparently suggested to Take It Away - basically, to set up space in the store and pay Home Depot a referral fee - and which was rejected or just not pursued at all.

Take It Away, with no history of sales let alone profitability, then sued for damages of $60 million based on a trade secrets misappropriation claim. Not surprisingly, the district court granted summary judgment in Home Depot's favor.

Take It Away's claim stood little chance of success for many reasons. To begin with, Take It Away never protected the information in a commercially reasonable manner; the waste removal proposals were sent to Home Depot employees who refused to sign non-disclosure agreements and the original business proposal was sent to Home Depot before the retailer even signed the first confidentiality agreement back in 1997.

Ultimately, however, the transparent simplicity of the idea doomed Take It Away. Vaccaro testified the concept came to him in a matter of minutes, and the idea was little more than a general marketing idea. Once implemented, the idea could be reverse-engineered by anyone who went to the store and learned that waste removal services could be rented on-site. Virtually nothing could protect the concept once implemented.

Take It Away has filed a notice of appeal to the First Circuit.


Court: United States District Court for the District of Massachusetts
Opinion Date: 2/6/09
Cite: Take It Away, Inc. v. The Home Depot, Inc., 2009 U.S. Dist. LEXIS 14279 (D. Mass. Feb. 6, 2009)
Favors: N/A
Law: Massachusetts

Tuesday, March 10, 2009

In Non-Compete Dispute, Preliminary Injunction Denied Based on Ease of Calculating Damages (Timberline Drilling v. American Drilling)

When trying to obtain emergency injunctive relief in a non-compete dispute, employers face three main hurdles:

(a) showing the employee's conduct constitutes an actual violation of the covenant;
(b) demonstrating the covenant is reasonable; and
(c) articulating why monetary damages are insufficient to make the employer whole.

The lion's share of non-compete cases involve (a) or (b). In many states, once an employer shows a likelihood of success on the merits of a non-compete claim, it is presumed that damages would be inadequate. The rationale among jurisdictions which adopt this rule is fairly uniform: the loss of a customer relationship and associated goodwill is at least partially intangible and at some point damages become too speculative.

In Timberline Drilling v. American Drilling, the federal district court in Idaho found that the employer had established a likely breach of the non-compete agreement. However, it denied injunctive relief on the ground the employer could establish damages and therefore had an adequate remedy at law for trial.

The cases like Timberline Drilling are rather sparse, but in the vast majority of them, the customers appear to have made a decision to leave the ex-employer and begin a new relationship with the party in violation of the non-compete. Many times, the employee will raise a refusal-to-deal defense - a defense the Idaho court declined to adopt - and argue that an injunction would provide the plaintiff with no real relief.

In those cases where the employee is in the preliminary stages of violating a non-compete, a preliminary injunction is more likely to be granted.


Court: United States District Court for the District of Idaho
Opinion Date: 3/2/09
Cite: Timberline Drilling, Inc. v. American Drilling Corp., LLC, 2009 U.S. Dist. LEXIS 16323 (D. Idaho Mar. 2, 2009)
Favors: Employee
Law: Idaho

Thursday, March 5, 2009

Forfeiture-for-Competition Clause Held to Be Reasonable Non-Compete (Medtronic v. Hedemark)

I wrote a few weeks ago about forfeiture-for-competition clauses, a different type of restrictive covenant that leaves an employee with a choice to compete at the price of relinquishing deferred compensation or stock option proceeds.

Though there is a divergence of opinion on the issue, the majority of courts hold that forfeiture covenants will not be construed as non-compete agreements and thereby require an overlay of reasonableness. As my prior post indicates, the case authority adopting the minority view, however, is prevalent.

In Medtronic v. Hedemark, the Court of Appeals of Minnesota examined a forfeiture-for-competition clause in a stock option award agreement as a de facto non-compete agreement. In that case, Hedemark's agreement provided that, if he left to join a competitor within six months of exercising stock options granted to him under Medtronic's plan, he had to pay back those proceeds on demand. The court granted summary judgment in favor of Medtronic but denied the company's request for attorneys' fees.

The case analysis proceeded to examine the forfeiture clause as a restrictive covenant, even though technically Hedemark was free to compete (albeit at a price). The court found that the covenant supported a legitimate business interest in promoting employee loyalty and stable relationships between the sales force and company customers.

The court also found the forfeiture clause reasonable in scope. In particular, the court focused on the degree of control Hedemark retained over the clause's application. All Hedemark had to do was wait six months from the time the options were exercised to leave and join a competitor. The case does not address at what period of time this may become unreasonable. Finally, the court was not troubled by the lack of a territorial limitation on the forfeiture clause. In Minnesota, non-competes without territorial limits are "often held to be unreasonable."

Even if viewed as a non-compete, the issue of reasonableness will tend to favor employers in forfeiture-for-competition clauses unless there is an overbroad definition of "competitive business" or if the clawback period stretches on for several years.


Court: Court of Appeals of Minnesota
Opinion Date: 3/3/09
Cite: Medtronic, Inc. v. Hedemark, 2009 Minn. App. Unpub. LEXIS 233 (Minn. Ct. App. Mar. 3, 2009)
Favors: Employer
Law: Minnesota

Wednesday, March 4, 2009

Utah Court Grants Summary Judgment to Defendants On Threatened Disclosure of Trade Secrets (IOSTAR v. Stuart)

Resting somewhere on the continuum between actual misappropriation of trade secrets and inevitable disclosure is the notion that one can be liable for threatening to steal confidential information. While cases concerning inevitable disclosure are now legion, relatively few decisions have articulated what constitutes threatened disclosure under trade secrets statutes.

In IOSTAR Corp. v. Stuart, a federal district court in Utah started putting some parameters on this issue. The dispute arose when IOSTAR attempted to obtain funding for development of an aerospace on-board nuclear power technology. To qualify for a federal loan, IOSTAR needed to raise seed money - about $300 million in liquid assets. As with most start-up ventures, this brought together a diverse group of characters. IOSTAR affiliated with one Richard Busch, who had designed satellite communications technology, and it also began a relationship with a fundraiser - James Stuart - as well as an aerospact industry investor, George French. IOSTAR had plans to make French the majority shareholder in the company.

All three signed non-disclosure agreements, and it was clear all three had access to information IOSTAR felt was proprietary - financial information, technical reports, and contracts. By mid-2007, the relationship between French, Stuart, and Busch, on the one hand, and IOSTAR on the other had become frayed. Stuart quit as President, and French had all but given up on investing in IOSTAR.

In the late summer or early fall of 2007, French, Stuart and Busch had discussions about forming a business in the field of communications satellites and satellite power systems. It appears undisputed the intent was to compete in the same field as IOSTAR, which got wind of the plan when an e-mail was sent to Busch inadvertently at his former IOSTAR account. IOSTAR filed a lawsuit shortly thereafter under a variety of legal theories, including trade secrets misappropriation.

It was clear from the facts IOSTAR could not prove actual misappropriation of trade secrets by any of the defendants; it made no claim for inevitable disclosure. Its hoard of evidence consisted entirely on the mistakenly sent e-mail among its former key group of employees, a series of e-mails months before where the defendants discussed IOSTAR's technology, and their retention of documents (which were not wrongfully acquired in the first place). Nothing indicated any of the defendants attempted to use IOSTAR information in their nascent (albeit competitive) venture.

The court had little trouble granting summary judgment on the trade secrets claim. In particular, the court distinguished between a risk of disclsoure, and a tangible threat to disclose. The statute did not guard against risk, which was too tenuous of a concept on which to order injunctive relief. Specifically, the court stated if it were to accept IOSTAR's argument about the risk of misappropriation, "the Court would essentially be creating a mandatory injunction anytime a party lawfully obtains trade secret information and then leaves his employer to take a position in the same or a similar field. In many instances, this could even create an implied statutory noncompete clause simply by lawfully receiving and lawfully possessing trade secret information."

The IOSTAR case teaches that mere access to trade secrets and an intent to compete won't suffice. A plaintiff must show some intent or threat by a defendant to use specifically identifiable information in direct competition.


Court: United States District Court for the District of Utah
Opinion Date: 2/3/09
Cite: IOSTAR Corp. v. Stuart, 2009 U.S. Dist. LEXIS 9476 (D. Utah Feb. 3, 2009)
Favors: Employee
Law: Utah

Texas Court Reverses Dismissal of CFAA Claim on Jurisdiction Grounds (Ennis Tranportation v. Richter)

I wrote several weeks ago about the bizarre ruling in Texas, where a federal court dismissed a Computer Fraud and Abuse Act claim on subject-matter jurisdiction grounds, holding in essence that removal was not proper because the CFAA is a criminal statute. Though the original CFAA may be criminal in nature, it has been amended several times, and the statute clearly permits civil actions under a number of sections.

Last week, the court granted a motion to reconsider and retained jurisdiction over the case.


Court: United States District Court for the Northern District of Texas
Opinion Date: 2/24/09
Cite: Ennis Transp. Co., Inc. v. Richter, 2009 U.S. Dist. LEXIS 15585 (N.D. Tex. Feb. 24, 2009)
Favors: Neutral
Law: Federal Rules of Civil Procedure

Tuesday, March 3, 2009

Bill Filed in Illinois State Senate Proposes Amendments to Trade Secrets Act

Illinois, like most other states, has adopted a version of the Uniform Trade Secrets Act. That statute took effect in 1988. Twenty years later, it may be in for some revisions.

Senator Don Harmon (D-Oak Park) last week introduced Senate Bill 2149 to amend the Trade Secrets Act in a number of respects. The proposed changes focus mostly on procedural issues and entitlement to attorneys’ fees:

(a) An order of injunctive relief must specifically identify the trade secrets at issue, but confidentiality will be preserved. This would eliminate the problem of vague injunction orders.

(b) The most significant change is that a party asserting a trade secrets claim must submit a written statement of the trade secrets it contends have been misappropriated before commencing oral or written discovery, though amendments to the written statement can be made upon good cause shown. Presumably, this would allow a statement to be amended if discovery reveals theft of trade secrets not suspected or initially disclosed by the plaintiff.

(c) The trade secrets statement will be admitted as substantive evidence at trial and shall be conclusive as to the identity of the alleged misappropriated secrets.

(d) The prevailing party in a trade secrets case will be entitled to attorneys’ fees as of right. Right now, either a showing of willful misappropriation or bad faith prosecution of a claim is required for fee-shifting.

(e) Attorneys’ fees also must be awarded in specifically enumerated circumstances. For instance, a party who submits an overbroad or objectively unreasonable trade secrets statement will be responsible for reimbursing attorneys’ fees related to that issue, and a party who resists a motion to dissolve an injunction in bad faith also must pay attorneys’ fees related to the motion for dissolution.

(f) An award of attorneys’ fees may be awarded in other enumerated circumstances. For instance, a party may be held responsible for fees if an injunction order is modified or if it maintains an “objectively specious” damage claim. Fees also may be awarded if a defendant succeeds in obtaining a more definite trade secrets statement by court order.

The proposed amendments would seem to ameliorate discovery abuse and vague trade secrets claims, and potentially deter damages suits that have no basis in fact. It also codifies the requirement that an injunction must put a defendant on notice of what s/he is prohibited from disclosing. From the plaintiff’s side, the prevailing party fee provision is a significant addition to make whole those aggrieved by misappropriation of trade secrets.

The most significant change, though, concerns the trade secrets statement that must be served at the outset of the case – much like a Rule 26(a)(1) disclosure pleading. This would require a plaintiff to put the defendant on notice of what is at issue in a trade secrets action before starting the expensive process of discovery. Since it can be amended only upon leave of court, this would require a trade secrets plaintiff to think through its claim carefully prior to instituting litigation. A similar procedural scheme is in place in California.

Monday, March 2, 2009

Ambiguous Non-Compete Agreement In Real Estate Broker’s Contract Found Unenforceable (Century 21 v. Lambert)

In some states more than others, employers have little room for drafting ambiguity, and even the smallest error can doom an otherwise enforceable contract. A dispute between a real estate agent and Century 21 in Louisiana illustrates the strict construction rule perfectly.

In Century 21 v. Lambert, the agent had a non-compete agreement which provided that she would “refrain from carrying on or engaging in the Real Estate Marketing, brokerage, sale or similar business to that performed by [Century 21] and also from soliciting customers of the broker within the parishes of Orleans, Jefferson, St. Charles, St. Tammany, St. Bernard and Plaquemines for a period of two years from the date [she] leaves the Broker’s company. This clause shall survive termination of this agreement and prohibits the engagement by [Lambert] in any business directly or indirectly which competes with that of the broker.”

Lambert left Century 21 to join Keller Williams, a competing brokerage. Though the realty office was situated outside the parishes enumerated in the non-compete clause, it appeared as though Lambert engaged in some advertising and limited sales activity within the proscribed territory.

The trial court found the last sentence of the non-compete rendered the entire clause unenforceable, and the Court of Appeal affirmed. The reasoning: presumably, that last sentence (bold-italicized above) purported to extend the non-compete term beyond two years, the maximum allowed under Louisiana’s non-compete statute. Due to a paucity of legal analysis, it is not entirely clear what the appellate court meant by this. But the only logical reading of the decision is that the phrase “this clause” refers not to the preceding and (predominant) sentence of the non-compete, but rather the last sentence concerning Lambert’s engagement in a competing business. If this is the court’s interpretation, then the second sentence would appear to stand on its own as a separate covenant and contains no temporal limit at all.

If this is not what the court meant, then the ruling makes no sense. It is customary for non-compete agreements to contain express language stating that the post-employment restriction survives termination of the agreement. That sentence does not purport to extend the term past two years for a breach. Rather, it merely clarifies that should the broker’s contract end, her non-compete obligations remain in effect.

Whether the ruling will be appealed or contested on rehearing remains to be seen.


Court: Court of Appeal of Louisiana, Fifth Circuit
Opinion Date: 2/25/09
Cite: Century 21 Richard Berry & Assocs., Inc. v. Lambert, 2009 La. App. LEXIS 298 (La. Ct. App. Feb. 25, 2009)
Favors: Employee
Law: Louisiana