Saturday, April 28, 2012

Wisconsin Court of Appeals Affirms PepsiCo Trade Secrets Ruling

Chalk another one up for dumb lawsuits...

The Court of Appeals of Wisconsin found that a circuit court judge correctly ruled that the statute of limitations barred its trade secrets claim against PepsiCo for an idea which was eventually marketed as the well-known Aquafina bottled water brand.

The inventors, I'm not naming them, originally came up with an idea for purified water, which was was pitched in 1981 as "Ultra-Pure." Though there apparently was some initial interest, nothing materialized in the way of product development.

The origin of the lawsuit is somewhat incredible. Aquafina has been on the market for nearly twenty years. One of the inventors of Ultra-Pure claimed he first saw Aquafina in 2007. When he bought a bottle, he "remembered the unique taste of Ultra-Pure." The inventors concluded that based on the taste of the product and the product marketing information (?), PepsiCo and others misappropriated the Ultra-Pure idea.

(I, on the other hand, must not have a refined palate. It's all I can do to differentiate tap water.)

The circuit court, however, concluded the claim was time-barred. As Aquafina had been on the market for nearly 15 years before the inventors discovered it, they failed to show reasonable diligence. In Wisconsin, a claim of trade secrets misappropriation must be brought within three years of discovery, either actual or constructive (that is, through the exercise of reasonable diligence).

The appellate court agreed with the circuit court's reasoning that the inventors did nothing to exercise reasonable diligence (read a trade journal, or something...) and that they still wouldn't have done anything if one of the inventors "hadn't been particularly thirsty on that day in 2007 when he purchased a bottle of Aquafina by chance."


Court: Court of Appeals of Wisconsin, Fourth District
Opinion Date: 3/29/12
Cite: Joyce v. PepsiCo, Inc., 2012 Wis. App. LEXIS 262 (Ct. App. Mar. 29, 2012)
Favors: N/A
Law: Wisconsin

Wednesday, April 18, 2012

Case Law Update: Source Code "Crimes", The Duty of Loyalty, and Trade Secrets Preemption (My Favorite!)

The year continues to churn out some interesting cases, and they're getting a bit tough to keep up with. Here is a brief survey of some developments I found this past week, broken down by general topic. As you can tell from the title, there is a trade secrets preemption case to report on. I am, for some reason I cannot figure out, oddly fascinated by this procedural topic. This is not something to emulate or be proud of. But it is what it is. Here we go...

Trade Secrets

The Supreme Court of Georgia, in Robbins v. Supermarket Equipment Sales, LLC, 290 Ga. 462 (2012), adopted what I call broad form preemption under the Uniform Trade Secrets Act. Preemption is the idea that if you're claiming trade secret protection, that's your sole remedy; you can't default to some other common law tort as an alternate theory of recovery. In Robbins, the Court held that because the plaintiff alleged certain design drawings for refrigeration "skins" (incidentally, no clue what this is) were trade secrets, the trial court could not award injunctive relief under another equitable theory once the plaintiff failed to prove its trade secrets case. Significantly, the Court stated that because "the drawings were not ultimately found to be trade secrets under the [UTSA] did not make the preemption clause inapplicable." This is the correct result, but by no means are other states in accord.

Employee Duty of Loyalty

In most states, an employee owes a duty of loyalty to an employer. This is different than a "fiduciary" duty, which is accorded somewhat of a special place in the law - reserved in the corporate context for senior officers, directors, and shareholders.

The stinger on duty of loyalty claims is the idea of salary forfeiture. That is to say, an employer may be able to clawback salary paid during a period of disloyalty. Easier said than done. A recent case out of Alabama demonstrates why. In AK Steel Corp. v. Earley, 809 F. Supp. 2d 1326 (S.D. Ala. 2011), the court granted summary judgment in favor of a claim made against several employees for breach of the duty of loyalty. The case was decided under Ohio law, which has adopted the "faithless servant doctrine." The doctrine allows for salary forfeiture only if the acts of disloyalty "permeated" the employee's service. In that case, the employer could not show any active competition prior to termination, meaning that the transfer of a few files did not rise of the level of pervasive disloyalty required for salary forfeiture.

On to Missouri and another duty of loyalty case, Western Blue Print Co., LLC v. Roberts, 2012 Mo. LEXIS 93 (Mo. Apr. 17, 2012). This case arose in a somewhat familiar fact pattern. Roberts was a branch manager for Western Blue, a document management service company. One of the largest clients of the company was the University of Missouri. After obtaining the university contract, Western Blue had to subcontract a portion of the business to a certified minority business enterprise. At this point, Roberts took an interest in an MBE contractor but never disclosed it to Western Blue. In fact, she was approached later about it and denied any arrangement with the subcontractor at all.

When the relationship fractured, Roberts actively worked for the subcontractor, orchestrated the mass exodus of Western Blue employees, recruited them to work for the subcontractor, and bid on - and won- the university contract. This resulted in Western Blue's closure of the branch office. Western Blue sued, won $600,000 in damages, and nearly $250,000 in legal fees. On appeal, the Supreme Court of Missouri reversed, holding Roberts was not a top corporate official of Western Blue and therefore not a fiduciary. Central to the Court's reasoning was the absence of any non-compete agreement between Western Blue and Roberts, and the fact that the knowledge she obtained was simply the product of what she naturally would acquire during the course of her job. For reasons I can't figure out, Western Blue abandoned at trial a separate claim for breach of the duty of loyalty, a duty which is ascribed to regular employees.

Given the facts, this is an unusual result. The Court carefully parsed certain facts to hold Roberts did not violate any pre-termination duty not to compete with Western Blue. It overlooked some essential facts that clearly suggested she was less than forthright and might have gained a head-start when working for the subcontractor. Had Roberts been bound by a reasonable restrictive covenant, the case would have turned out completely different. Or perhaps, Roberts never would have done what she did. To put it mildly, she found a narrow path - a very narrow path - to victory.

Economic Espionage Act

The Second Circuit overturned the conviction of former Goldman Sachs programmer Sergey Aleynikov in U.S. v. Aleynikov, 2012 U.S. App. LEXIS 7439 (2d Cir. Apr. 11, 2012). The man with the name similar to pick-your-Chicago Blackhawks-defensemen from the late '90s had been convicted under various federal statutes, including the Economic Espionage Act when he uploaded source code relating to Goldman's high frequency trading operations. Aleynikov took the source code with him to Teza Technologies in Chicago, where he more than doubled his salary. After conviction in the District Court, his prison term was set at more than 8 years. (Interestingly, there was related non-compete litigation in the Circuit Court of Cook County between Citadel Investment Group and Teza.)

The circuit court found the EEA did not apply, because Goldman's HFT system was not produced for or placed in interstate or foreign commerce. Goldman kept the system confidential and had no intention of selling it or licensing it to anyone. Therefore, by the terms of the EEA, the indictment was improper. The concurring opinion is interesting, as it suggests that Congress ought to revisit the EEA so that its terms reflect its intent.

Friday, April 13, 2012

End of the Week Discussion

I thought I'd take after Russell Beck and John Marsh and provide a longer summary of some cases, articles, and blog posts I read the past week or so.

Mind you, a lot of this information gathering occurred at 3 a.m. holding a screaming baby, so if what I write doesn't make sense, forgive me.

Recent Cases

United Rentals, Inc. v. Frey, 2012 U.S. Dist. LEXIS 40009 (D. Conn. Mar. 23, 2012). A district court granted an employee's motion for summary judgment on the issue of damages. The case followed a familiar pattern, as the employee violated the non-compete provision by contacting customers within the Restricted Area (as defined in the contract). However, the agreement tried to establish damages by placing a constructive trust on whatever the employee earned as a result of the breach. This was contrary to Connecticut law, which mandates that an employer demonstrate what it would have earned absent the breach.

Fail-Safe, LLC v. A.O. Smith Corp., No. 11-1354 (7th Cir. Mar. 29, 2012). The Seventh Circuit affirmed entry of summary judgment on a trade secrets case, one of the few it has had recently. The case involved an effort between two companies to develop a certain type of technology relating to pool drain entrapment prevention technology (which is a long way of describing way to keep people from getting stuck in a pool...). The case describes the failure of the plaintiff to take any steps to protect what it believed was confidential business information in its technology development discussions with the defendant. Of particular importance to the Seventh Circuit was the lack of any confidential relationship between the two companies (they weren't fiduciaries, partners, or anything really...except two independent entities), the failure to designate or mark documents confidential, and the apparent willingness to disclose information without a confidentiality agreement in place. This wasn't a close case.

United Factory Furniture Corp. v. Alterwitz, 2012 U.S. Dist. LEXIS 48795 (D. Nev. Apr. 6, 2012). This case approved of a mirror imaging protocol over the defendants' computers. The case, which does not deal with a non-compete agreement, generally involved an employee's alleged misuse of company information and improper access to a server. The court balanced the interests in preserving potentially relevant evidence and individual privacy considerations, concluding that the appointment of a third-party neutral expert to image and collect hard-drives was the appropriate way to satisfy the competing interests at stake.

Recent Blog Posts and Articles of Interest

I provided a couple of links yesterday to the U.S. v. Nosal commentary, one from John Marsh and another from Robert Milligan at Seyfarth.

For other commentary on this case, see a Reuters article here. Also the Privacy and Security Law Blog, here.

Hat-tip to Rob Radcliff for his link to this article concerning Synthes' continued pursuit of ex-sales reps for non-compete violations. The sales rep is fighting back with an interesting anti-trust counterclaim, arguing (I think) that Sythes is misusing the legal process to restrain trade.

Really good discussion from Fisher & Phillips on the blue-pencil rule. I happen to think an overuse of the blue-pencil rule smacks of judicial activism, forcing parties to agree ex post to contracts other than the ones they've signed. Vice-Chancellor Travis Laster issued an excellent decision last year concerning this, expressing his rather dim view of judicial modification of non-competes.

Speaking of judicial activism, the Chicago Tribune editorial page published an Op-Ed by Geoffrey Stone on judicial activism, specifically with reference to the Affordable Care Act. This has nothing to do with non-competes, of course, and I'm not sure there is a single thing I agree with in this editorial. Still, it's interesting - in the same way listening to Newt Gingrich can be interesting.

Thursday, April 12, 2012

U.S. v. Nosal Leaves Me Feeling a Bit Conflicted

Much of the commentary on trade secrets and non-compete blogs is certain to focus on this week's long awaited ruling in U.S. v. Nosal. That Ninth Circuit case addressed the scope of the Computer Fraud and Abuse Act and in particular two definitions.

Put simply, what does it mean to use a computer "without authorization" or to use it in such a manner which "exceeds authorized access"? Courts have not been consistent in interpreting these terms, and those terms are key to stating a computer fraud claim under federal law.

This issue arises in competitive disputes - not just the obvious cases of computer hacking. How does it arise? Simple. An employee who is planning a departure accesses a customer list on a server, copies it, quits, and competes by using the list. That's a straightforward example. (No doubt, there are others that are more nuanced, but we'll leave it at that for today.)

Courts in several circuits - the Seventh included - have taken a broad interpretation of the CFAA's terms, reasoning that once an employee violates a duty of loyalty, his use and access of a protected computer to obtain confidential information must exceed what has been authorized. Others - the Ninth, sort of - have construed the statute narrowly.

In Nosal, the Ninth Circuit addressed the issue of whether an individual commits a federal crime by accessing protected computer information in a manner inconsistent with an employment policy regarding confidential data. The full Ninth Circuit held that the CFAA could not be read so narrowly.

For discussion on this case, please see excellent posts by John Marsh here and Robert Milligan here.

My take. I'm conflicted.

Ultimately, I think the dissent in this case - which cautioned against reading too much into absurd hypotheticals - has a point about the gravity of stolen confidential data in the workplace. Judge Posner, who wrote an influential opinion in the Seventh Circuit, also has soundly reasoned that the common law duty of loyalty has to play a role in putting color on the meaning of "authorized access."

Here's my problem, though. Don't other claims cover this type of conduct? Why do we have common law torts for breach of the duty of loyalty, interference, trade secrets misappropriation, unfair competition, or even civil theft? And what is up with the incessant need of lawyers to pile on multiple, duplicative claims for the same conduct? I don't get this.

In short, I think the CFAA has been overapplied and has resulted in a broad federalization of claims that were intended to fall within the purview of state courts. Personally, federal courts should be courts of limited jurisdiction, and it seems kind of silly to keep expanding a statute which was originally intended to prevent computer hacking, damage to records of the federal government, and theft of information from financial institutions.

There is another problem. The statute is abysmal, cobbled together through a patchwork of amendments (six by my count in less than twenty years). I still don't understand it. The dissent in Nosal got it wrong, in my opinion, when it called the CFAA's provisions "quite clear." Not so. This also isn't the first time Congress or some other legislative body screwed up a statute. But if the intent is to federalize what amounts to trade secrets misappropriation, Congress should just say so.

Wednesday, April 4, 2012

Recent Decisions of Interest (No. 9): Bad Drafting Can Be Really Bad (And Avoidable, Too)

Poor contract drafting is the number one symptom of non-compete cases gone bad.

(Number two is poor decisionmaking made in the quick vacuum of a perceived threat to a business' competitive position.)

So my recent trial featured an example of a contract which was terribly drafted. How do you justify a nationwide restriction against an employee who worked solely in one county? An employer is begging for an adverse judgment by pursuing such a case with obvious flaws.

Another example can be found in the interesting Florida appellate decision of Heiderich v. Florida Equine Veterinary Svcs., Inc. In that case, a veterinarian had a non-compete (very common in the industry, by the way) which provided that she could not, upon termination, engage in a "veterinary practice within a thirty mile radius" of her former employer.

Heiderich opened her practice outside the 30-mile radius, but provided services (house calls) to clients within the restricted territory. Problem for the ex-vet? Nope.

The Court of Appeal, over a mild dissent, held that Heiderich's work providing services within the 30-mile territory was not a breach of contract because her office location was outside the radius. Florida has a statute which even goes against the common law in terms of contract construction, such that the court did not have to construe any ambiguities against the drafting party.

This was a case which easily could have been avoided with some actual thought to the drafting process. The employer should have known that this was a potential (glaring) loophole. To avoid the problem it created for itself, the employer could have drafted the non-compete to prohibit the veterinarian from "providing veterinary services within a thirty mile radius" of the ex-employer. How hard is that?

One of the challenges facing attorneys (your author included) is the client perception that we print off contracts. That is a flat-out abdication of our professional duty. True, drafting contracts costs money. For an extra few hours, a client can ensure it's done correctly. My guess is Florida Equine spent ten times more in legal fees at trial and on appeal trying to justify a bad contract than it would have simply to make sure it got a proper agreement in place at the start.


Court: Court of Appeal of Florida, Fifth District
Opinion Date: 3/30/12
Cite: Heiderich v. Florida Equine Veterinary Svcs., Inc., 2012 Fla. App. LEXIS 4998 (Fla. Ct. App. Mar. 30, 2012)
Favors: Employee
Law: Florida

Tuesday, April 3, 2012

My First Trial Under Reliable Fire

On Monday, I (successfully) conducted my first non-compete trial since the Supreme Court of Illinois' decision in Reliable Fire Equipment v. Arredondo.

As readers recall, that case affirmed the three-part reasonableness test used to determine the enforceability of employee non-compete agreements. It also reiterated the principle that an employer must demonstrate a legitimate business interest to support the covenant - a relatively uncontroversial maxim which our Appellate Courts made controversial for reasons that are still unknown to me.

I happen to think that Reliable Fire didn't do nearly as much to change the law as a lot of other commentators and attorneys do. With one exception.

TROs are going to be exceptionally difficult to obtain. Because the Court held that the "totality of the circumstances" must be considered, I think courts almost have to consider the evidence both sides present. Imposing a TRO in state courts is essentially a matter of initial pleading, and judges likely will shy away from that exceptional remedy in favor of a more balanced evidentiary hearing.

So, in terms of substance, I still don't see a major change in the way courts approach non-compete cases under Reliable Fire. My first trial since that decision didn't really result in any surprises. I prevailed on my counterclaim for declaratory judgment (as well as defeating a consolidated preliminary injunction motion), with the court rendering a final judgment that the employee's covenant was unenforceable and protected no legitimate business interest whatsoever.

My approach to trial didn't change. With such a poorly worded contract, I wanted the court to focus on the overbreadth and the terms themselves. My case also dealt with an industry which was, essentially, a retail business - with goods and products whose effectiveness were easily determined upon a simple inspection. My case did not concern an intangible, or some professional service - circumstances where courts are more likely to conclude that a departing employee can truly harm a protectable employer interest.

For employer's counsel, Reliable Fire no doubt allows for some creativity into establishing a legitimate business interest - highly specialized training, executive management, disintermediation come to mind. On the flip side, an employee has room to request the court to consider other circumstances bearing on reasonableness. In my case, I submitted evidence of Illinois' high unemployment rate and the fact my client's skills were not easily transferable outside the industry.

In Illinois, as in federal court, if an employee pursues a claim for declaratory relief, she is entitled an early hearing "as in the case of a motion." The employee can, effectively, set a claim for a quick evidentiary hearing, reduce cost, and obtain a declaration of rights - the procedure I used to obtain a final judgment in a matter of a few months. A court can (and should) still consider all the evidence and examine the "totality of the circumstances" in this short period of time. Very few courts want to try a case twice. Reliable Fire probably allows for some additional evidence, but in the vast majority of cases, I don't see the case having a great impact.