Thursday, May 28, 2009

Stored Communications Act Playing Big Role In Competition Cases (Pure Power Boot Camp v. Warrier Fitness Boot Camp)

Back in March, I wrote an article focusing on a bizarre employment dispute between Bonnie Van Alstyne and her former employer, Electronic Scriptorium. Broadly speaking, Van Alstyne's former boss fired her and then accessed her personal AOL e-mail on numerous occasions. This conduct resulted in a federal claim brought by Van Alstyne under the Stored Communications Act, 18 U.S.C. 18 U.S.C. 2707, for which punitive damges and attorneys' fees are available.

What does all this have to do with non-compete cases? My experience shows that a substantial percentage of the relevant evidence in non-compete cases involves e-mail. Often times, this e-mail is generated, sent and stored on employees' personal accounts as they develop their departure and competitive plans. The rub lies in the fact many employees also access their e-mail from time to time at work. Depending on the particular internet settings established, the work computer may store web-based e-mail usernames and passwords. If these are not removed prior to an employee's departure from the company, he or she may be unknowingly providing the ex-employer with the tools to access private e-mail accounts.

This, in fact, is what happened to Bonnie Van Alstyne. It also happened to Alexander Fell, who planned to leaving his job at a fitness company to start his own. When Fell resigned, his boss - Lauren Brenner - was able to access a Hotmail account Fell had logged onto while at work. She was further able to obtain access to Fell's gmail account, and a separate account set up under Fell's new company's name. Brenner then found damaging evidence related to Fell's pre-departure activities.

We can expect scenarios like this to happen with increasing frequency. Brenner's conduct violated the Stored Communications Act and severely damaged her ability to pursue Fell for unfair competition. Though it is not clear whether Fell has since countersued Brenner under the SCA, he may have an independent claim to attorneys' fees and punitive damages even if he is liable to her for unfair competition. To add further insult to Brenner's (self-inflicted) injury, the damaging e-mails she obtained in violation of federal law cannot be used against Fell, unless he opens the door to them or unless they are used solely for impeachment purposes. The harsh reality is that Brenner would have been able to obtain these in the normal course of discovery from Fell or anyone who communicate with Fell - business partners, clients, vendors and the like.

Even internet or e-mail policies may not give an employer a basis to access personal e-mail accounts used during work hours. As the court in Fell's case noted, employees still have a reasonable expectation of privacy to their personal accounts. One important caveat should be noted, here, though. The court was not addressing a situation where Fell drafted and disseminated the e-mails while using his ex-employer's computer, network and server. Presumably, evidence obtained from the server itself or hard-drive would pose problems. But it seems that a court would still be very hesitant to bless any access of a personal e-mail account on this basis alone.

Employers can wade into dangerous territory by being overly aggressive in searching employee's computers. When dealing with personal e-mail accounts, it is best to obtain only what is available from the company's network and rely on the discovery process to glean relevant facts.


Court: United States District Court for the Southern District of New York
Opinion Date: 8/22/08
Cite: Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 587 F. Supp. 2d 548 (S.D.N.Y. 2008)
Favors: Employee
Law: Federal

Tuesday, May 26, 2009

Don't Mess With Texas (Courtroom Sciences v. Andrews)

In a relatively short amount of time, Texas went from a state where an employer virtually never was able to enforce a non-compete agreement against a departed at-will employee, to one where there seems to be a presumption that such a non-compete will be enforced. All this despite no legislative interference.

The case of Courtroom Sciences v. Andrews breaks no new legal ground, though it may be the first reported case to follow the predictable decision from the Texas Supreme Court in Mann Frankfort, about which I wrote some time ago. The beauty of this case is its non-sensical, sub-Three Stooges analysis - something all too familiar to lawyers who follow Texas non-compete cases.

Andrews, who worked in jury consultancy and trial services out of Chicago for CSI, signed an employment agreement with an array of restrictive covenants. They weren't terribly drafted, which meant she had no chance of winning. Essentially, they prohibited her from disclosing a range of confidential business information, soliciting CSI clients with whom she had a relationship, interfering with employee relationships, and working nationwide for a trial sciences consultancy firm. Other than the confidentiality restriction, the covenants lasted two years.

The court's analysis about the level of Andrews' violation of her agreement when she left abruptly to join DecisionQuest is predictably thin. It seemed to focus on her failure to return certain corporate information - not really defined at all - to CSI within 24 hours of her departure. It also seemed to suggest CSI lost business, though it's not clear Andrews solicited any clients to leave or if they just left CSI as a result of Andrews' resignation. The court didn't bother to give us that rather helpful bit of information.

Here's the richest part of this case, though. The court itself acknowledged that Texas law requires courts to modify covenants if they are unreasonable or overbroad in any respect. The court further discussed at length CSI's nationwide practice and how it would be unfair or illogical to put a geographic parameter on the non-compete. Then, despite enforcing the other activity covenants in the agreement, the court ignored the non-compete clause and did not restrain DecisionQuest from employing Andrews. Instead, it prohibited her from performing work for CSI clients through trial (in essence, what the non-solicitation clause barred), disclosing certain information unique to CSI, and soliciting employees of CSI (despite the absence of any evidence this actually took place).

So the end result of the non-compete clause was that it was not enforced despite the court's recognition that the law compelled enforcement.

Of all the inane and stupid commentary throughout the decision, however, the real head-scratcher comes in the "analysis" regarding Andrews' breach of her fiduciary duty as an employee of CSI. In citing the evidence supporting a finding in plaintiff's favor, the court actually had the temerity (or ignorance) to cite this fact: "[Andrews] obtained a 'fail-safe' contract insuring her income regardless of the result of this anticipated litigation."

Supposedly now, in Texas, it is a breach of fiduciary duty for an employee to negotiate a favorable contract with a new employer. I would argue this seems a bit ridiculous, but we've come to expect that from Texas courts.


Court: United States District Court for the Northern District of Texas
Opinion Date: 5/11/09
Cite: Courtoom Sciences, Inc. v. Andrews, 2009 U.S. Dist. LEXIS 39917 (N.D. Tex. May 11, 2009)
Favors: Employer
Law: Texas

Thursday, May 14, 2009

Royalty Injunction Not Appropriate for Knowing Misappropriation of Trade Secrets (Progressive Products v. Swartz)

The Court of Appeals of Kansas recently rendered an opinion on a somewhat obscure issue of law under the Uniform Trade Secrets Act. The question involved application of a royalty injunction, under which a party found to have misappropriated trade secrets can still utilize them as long as a reasonable royalty is paid to the non-infringing party.

The case arose out of a fairly typical departing employee fact pattern. Progressive Products is engaged in the manufacture and sale of Ceram-Back, a ceramic coating for pipe elbows that lengthens the life of a pipe. Several employees left to form a competitor which manufactured the identical product under a different name. The evidence adduced at trial indicated the defendants took the formula for Ceram-Back, its mixing process, a pricing method related to the sale of Ceram-Back, price lists, and customer lists. The court of appeals was unwilling to overrule the trial court's factual determination that the information taken constituted trade secrets and that Progressive Products demonstrated misappropriation under the uniform act.

The tougher issue concerned the remedy. The trial court did not award Progressive Products any damages and refused to issue a prohibitory injunction against the defendants. Instead, it issued a royalty injunction, which conditioned the defendants' future use of the trade secrets on payment of a 20 percent royalty to Progressive Products for three years.

This remedy is found in the uniform act, which varies slightly from state to state. The court of appeals reversed this aspect of the judgment and remanded for the trial court to determine the extent of a prohibitory injunction. In Kansas, the trade secrets law allows for a royalty injunction to issue under "exceptional circumstances." That has been interpreted to include either: (a) an overriding public interest; or (b) acquisition of a trade secret in good faith, with prejudice resulting to the innocent misappropriator should a prohibitory injunction issue.

In this case, the court found the defendants could not qualify as innocent misappropriators. It disagreed with the trial court's rationale that a royalty injunction was appropriate given the interest in competition, Progressive Products' culpability in failing to protect its secrets, and the need for some trade secret protection. As a matter of law, the trial court's rationale failed to meet the applicable standard.

Had the defendants acquired the formulas and other product information innocently or in good faith, perhaps from a party who had misappropriated them, a royalty injunction might have been appropriate. But it was not in a situation involving knowing misappropriation.

In Illinois, the uniform act is not as broad and only permits a royalty injunction to issue when there is an "overriding public interest."


Court: Court of Appeals of Kansas
Opinion Date: 4/17/09
Cite: Progressive Products, Inc. v. Swartz, 2009 Kan. App. LEXIS 167 (Kan. Ct. App. Apr. 17, 2009)
Favors: Employer
Law: Kansas

Wednesday, May 13, 2009

Wisconsin District Court Follows Citrin in Allowing Computer Fraud Claim to Proceed (Dental Health Products v. Ringo)

The increasing federalization of trade secrets claim in Illinois is a direct result of the Seventh Circuit's 2006 decision in Int'l Airport Centers, LLC v. Citrin. That case, which broadly interpreted the Computer Fraud and Abuse Act, provided a wide open pathway for employers to bootstrap trade secrets actions into federal CFAA claims as long as some act of misappropriation involved computers. These days, virtually all trade secrets claims involve the downloading of data.

The gist of Citrin is the notion that an employee loses his authorization to access protected computers once he violates his duty of loyalty and acquires an interest adverse to his then-employer. Because each CFAA claim mandates a plaintiff to show a defendant accessed a protected computer "without authorization" or in a manner that "exceeds" the employee's authorization, Citrin allows an employer to convert a trade secrets claim into one under the CFAA if the employee downloads or copies company business information before he quits and leaves to compete.

The case of Dental Health Products v. Ringo applied Citrin to an employee competition case that reads like many others. Ringo, a former salesman for a dental supply company, allegedly copied his entire work hard-drive onto an external drive while he was still employed and while he was actively competing for accounts on behalf of a different entity. Presumably, Ringo intended to use this information on behalf of a competing firm. After DHP filed suit, Ringo tried to dismiss the CFAA claim, arguing his access to the computer at the time of the relevant events was authorized.

The district court relied on Citrin to deny Ringo's motion to dismiss. DHP asserted Ringo's conduct violated the three most common provisions of the CFAA that apply to employee competition claims: (a)(2), (a)(4) and (a)(5).

The (a)(2) claim, or the "theft of data" theory, requires an employer only to show the employee improperly accessed a computer to obtain information. That information need not be a trade secret, or even lesser-protected "confidential information." Under Citrin, the court upheld the claim with ease.

The (a)(4) claim is the "intent to defraud" provision, and again the court ruled DHP stated a cause of action. Importantly, a plaintiff need not allege fraud with particularity under this section. For purposes of Federal Rule 9(b), an (a)(4) claim is not a traditional fraud claim and plaintiffs need only allege that the information was taken through dishonest means.

Finally, the court upheld the (a)(5) claim. That provision generally requires a plaintiff to demonstrate unauthorized access to a computer that results in damage. A key question that Citrin seemed to resolve, but on which other courts have been significantly divided, is whether information that is merely copied results in "damage." Clearly, deleted information would seem to meet that definition, but data that is copied stands on a different footing.

The court in Ringo struggled a bit with the allegations made by DHP, but ultimately concluded DHP stated a cause of action. Once a practitioner cuts through the maze of confusing terms utilized in the CFAA, and its haphazardly organized provisions, it is fairly clear the breadth of each section allows plaintiffs to bring a broad range of claims in competition cases involving the taking of electronically stored information. In the Seventh Circuit, this is far easier than in other jurisdictions where the issue of "authorization" is more defendant-friendly.


Court: United States District Court for the Eastern District of Wisconsin
Opinion Date: 4/20/09
Cite: Dental Health Products, Inc. v. Ringo, 2009 U.S. Dist. LEXIS 38328 (E.D. Wis. Apr. 20, 2009)
Favors: Employer
Law: Federal

Monday, May 11, 2009

Litigation Misconduct Supports Finding of Bad Faith In Trade Secrets Action (Precision Automation v. Krevanko)

For a defendant who prevails in a trade secrets action, obtaining attorneys' fees is never going to be easy. In most states that have adopted some version of the Uniform Trade Secrets Act, the standard will be "bad faith" prosecution of a trade secrets claim. Courts have taken different approaches to applying the bad faith test.

A commonly applied standard is the objective-subjective analysis, requiring the court to de
termine whether the plaintiff's trade secrets claim was "objectively specious" and whether pursuit of the claim involved "subjective misconduct." In a recent case out of the District of Oregon, a court found that the defendant met this standard and awarded him prevailing party fees from his ex-employer.

The objectively specious part of the analysis focused on two key factors. First, the employer was unable to produce a confidentiality agreement binding the employee. The plaintiff relied on the fact another employee signed a confidentiality agreement and that it would most likely find one relating to David Krevanko, the main defendant. As the court noted, this bizarre contention was specious "at best." Second, the claimed trade secrets - to the extent they were even identified at all - were dealer and customer identities, as well as product specifications. These are the kinds of broad trade secret assertions that often land plaintiffs in hot water.

The court found that dealer identities were not secret, since they were posted on plaintiff's website. Never an advisable way to protect a trade secret...

The court further noted the plaintiff had no discernible method for identifying confidential business data, nor did it have any real security measures in place to prevent access to trade secrets by other employees. Finally, the product specifications were not trade secrets, since lists were sent out to dealers who were under no obligation to keep them secret.

The more interesting part of the opinion focused on subjective misconduct. During the deposition of Krevanko, the plaintiff's counsel misled him into thinking that a confidentiality agreement which was presented as an exhibit was generated in the ordinary course of business. The exhibit contained Krevanko's name and bore a footer that suggested it had been created in the normal course.

In fact, the exhibit was prepared for litigation purposes and had been created after the plaintiff fired Krevanko. The court was less than thrilled the attorney questioning Krevanko had used the deposition exhibit to suggest Krevanko had been presented with, or even signed, a confidentiality agreement during his employment with the plaintiff.


Court: United States District Court for the District of Oregon
Opinion Date: 4/28/09
Cite: Precision Automation, Inc. v. Technical Services, Inc., 2009 U.S. Dist. LEXIS 36506 (D. Ore. Apr. 28, 2009)
Favors: Employee
Law: Oregon

Monday, May 4, 2009

New Jersey Case Law Demonstrates Breadth of Protectable Interests (Ajilon Professional Staffing v. Griffin)

In most every state, a non-compete agreement must not only be reasonable, it must support a legitimate (or protectable) business interest. The rationale is that agreements that restrict competition per se are unenforceable restraints, much like anti-trust law bars certain types of business combinations or contracts.

The scope of protectable interests varies from state to state, though there is a significant level of overlap. New Jersey's test, applied on a recent motion for temporary restraining order, is employer-friendly and gives a court greater discretion to find a restraint supports a protectable interest. Like many states, New Jersey recognizes an employer has an interest in protection of confidential information and client relationships. However, its third recognized interest protects "an investment in an employee."

As should be evident, this goes beyond what other states permit. Many states, New York among them, protect unique or extraordinary skills (such as an on-air personality), while others protect specialized employee training. But just about every employer makes some "investment" in an employee. It is difficult to imagine how an employer could not satisfy the protectable interest test the way New Jersey courts have framed it.

In Ajilon Professional Staffing v. Griffin, the court had little trouble concluding at the TRO stage that an executive placement agency demonstrated a protectable interest when one of its recruiters left to join a competing firm. The court noted Griffin had worked for Ajilon for 12 years and developed a reputation in the community as a solid recruiter for financial professionals. The TRO was, therefore, extended to bar Griffin from performing a host of competitive activities under his non-compete agreement, activities which extended beyond mere solicitation of Ajilon clients.


Court: United States District Court for the District of Arizona
Opinion Date: 4/10/09
Cite: Ajilon Professional Staffing, LLC v. Griffin, 2009 U.S. Dist. LEXIS 35895 (D. Ariz. Apr. 10, 2009)
Favors: Employer
Law: New Jersey

Friday, May 1, 2009

Insurance Industry Non-Compete Supported By Valuable Consideration - But Still Overbroad (Hejl v. Hood, Hargett & Assoc)

The Court of Appeals of North Carolina issued another employee-friendly ruling on a non-compete claim. In this particular dispute, two issues were up for review. First, the court had to determine whether $500 given to an existing employee for his execution of a non-compete was sufficient consideration for the contract. Second, the court addressed the employee's argument that the contract was too broad to be enforced.

At trial, the court ruled in favor of the employee on the consideration argument, but the appellate court rejected that reasoning. The issue of consideration in after-thought covenants has always been a fertile ground for litigation. States differ in their approaches, with many holding that continued employment is sufficient consideration for an at-will employee's non-compete agreement.

North Carolina is different. It requires new or separate consideration. In this case, the court found that $500 was sufficient to meet this requirement. It also noted the following would suffice:

Continued employment for specified amount of time;
Raise, bonus or other change in compensation;
Additional training;
Uncertificated shares of ownership;
Other increase in responsibility.

The court noted there is a difference between separate consideration and adequacy of that consideration. Clearly, the $500 payment was separate consideration. Whether it was adequate was irrelevant under North Carolina law.

However, the employee still prevailed in the end, just on separate grounds as he did in the trial court. The customer non-compete clause which bound the insurance broker-employee was too broad. In particular, the court held that since it included even prospective customers to whom the employee may have only quoted insurance products (but not necessarily sold them to), the covenant exceeded the protectable interests the employer had. Therefore, it was void and unenforceable.


Court: Court of Appeals of North Carolina
Opinion Date: 4/7/09
Cite: Hejl v. Hood, Hargett & Assocs., Inc., 2009 N.C. App. LEXIS 377 (N.C. Ct. App. Apr. 7, 2009)
Favors: Employee
Law: North Carolina