Saturday, May 26, 2012

New Hampshire Takes Broad View of Trade Secrets Preemption

Courts interpreting the Uniform Trade Secrets Act interpret the preemption provision either narrowly or broadly. The narrow view does not limit similar claims for misappropriation based on lesser-protected confidential information, while the broad view does.

New Hampshire is one of the adherents to the broad view, along with a number of other states including Ohio. As explained in the recent unreported case of Wilcox Indus. Corp. v. Hansen, 2012 U.S. Dist. LEXIS 63668 (D.N.H. May 7, 2012), broad view preemption eliminates "other tort causes of action founded on allegations of misappropriation of information that may not meet the statutory standard for a trade secret." Put another way, there are two classes of information - trade secrets (defined by statute, interpreted by cases) and general knowledge (always unprotected). Something in between won't cut it.

Except if you have a contract claim. The cleanest way to assert a claim for misappropriation or improper use of confidential information is to show a breach of some non-disclosure covenant. That won't be preempted by trade secret law, and an employer need not worry about establishing the standards of secrecy applicable to UTSA claims.

In the Hansen case, the preempted claims were unjust enrichment and breach of fiduciary duty. Conversion claims and those based on common law unfair competition often suffer a quick demise at the hands of the preemption clause.

Friday, May 25, 2012

Non-Compete Case Law Update (And a Tip for Clients)

I've been absent the last several days, so I feel I have some catching up to do. And there have been some really interesting cases and legal issues to report on.

First, though, a practical tip to clients, particularly employees who have to deal with non-compete issues. Assemble your documents. That sounds easy, but apparently it's not. If you leave and stay in the same industry or compete with your former employer, you need to have a handle on your obligations. Those obligations may exist outside of an employment agreement. Here generally are the sources of where you can find documents outlining restrictions or post-termination obligations:

(1) Employment Agreement (including older ones that may (or may not) be superseded)
(2) A separate Confidentiality Agreement (yes, many employers keep them separate)
(3) A Severance or Separation Agreement, which likely applies only if you've been terminated
(4) Any agreement you have to sign to participate in an equity incentive plan (these sometimes contain forfeiture-for-competition provisions, if not outright covenants not to compete)
(5) Employee handbooks

Okay, onto some new decisions of interest...

Non-Competes and the Ohio Merger Statute

I could have woken up at 2 am to write and John Marsh of Hahn Loeser in Columbus still would have beaten me to the punch. The Supreme Court of Ohio held this week, in Acordia of Ohio v. Fishel, 2012 Ohio 2297, that covenants not to compete are not automatically assigned in the context of a statutory merger. Practically speaking, the merger statute - which is common and similar to other business corporation laws, in that all assets and obligations of the merged entity vest in the assigned entity - has to give way to the plain language of the covenant.

This 4-3 decision surprised me. Marsh's post here contains a more extensive discussion. A PDF of the court's slip opinion can be found here.

Wisconsin Kicks Out 3-Year Non-Compete Covenant

Litigating non-competes in Wisconsin is no bargain for employers. And just as Share Corporation had a restrictive covenant tossed last year on a Rule 12(b)(6) motion, so too did the employer in Priority Int'l Animal Concepts, Inc. v. Bryk, 12-cv-150 (E.D. Wisc). The covenant in that case lasted three years and contained no territory or activity limitation, rendering it unenforceable under Wisconsin's restrictive covernant statute, Section 103.465. That statute is highly favorable to employees and often can result in dismissal of contract actions before discovery even begins. The choice-of-law analysis in that case proved fatal, as the employer had argued Ohio law applied and did not appear to contest the fact the agreement was unenforceable under Wisconsin law.

Flat Fee Liquidated Damages Clause - Penalty or No?

I have written a lot about liquidated damages clauses in non-compete agreements, both here and in my home state's bar journal. My recommendation to employers has never been to take the easy route and use a fixed, or flat, fee for computing liquidated damages. They're not per se unreasonable, as the district court's opinion in Kadant Johnson, Inc. v. D'Amico, 2012 U.S. Dist. LEXIS 64237 (E.D. La. May 8, 2012), indicates.

The court, applying Michigan law, held that such a clause - providing for $250,000 upon violation of a non-compete - could be reasonable, or at least was "not unreasonable as a matter of law." This was despite testimony from the CEO of the Plaintiff who stated that it was a "penalty", "a good deterrent", and that there was "no real reason" to choose that number. Honestly, I think the plaintiff got away with one - sounds like the plaintiff admitted it was a penalty.


Next up, another trade secrets preemption case extensive discussion on the high-profile case of Capital One Financial v. Kanas. Then we'll get to Capital One v. Kanas.

Sunday, May 13, 2012

Supreme Court of Wyoming: Continued Employment Is Sufficient Consideration for Invention Assignment Agreement

Invention assignment agreements are often important for employees who work in a highly technical field, creating patentable or trade secret material used to give a company a competitive advantage. As long as that technology is within an employer's line of business, that employer should have every expectation that the employee's invention will become the employer's property. That is, after all, what the employer is paying a good wage for.

Assignment clauses are part and parcel of most confidentiality agreements. If they are a species of a non-compete, they're not a particularly onerous one. Still, they do give rise to some litigation, most frequently when an invention falls within a so-called "trailer" clause - a clause extending the assignment for a short period of time past the end of employment.

In Preston v. Marathon Oil, the Supreme Court of Wyoming answered a certified question from the United States Court of Appeals for the Federal Circuit on invention assignment clauses. The Court held that an employee's continued employment is sufficient consideration for such a clause, even though Wyoming is in that group of states holding that continued employment is not sufficient consideration for a covenant not to compete. The court had little trouble differentiating the types of contracts, reasoning that the continued employment rule in the non-compete context clashed with an employee's right to earn a living.

Keep in mind that in the absence of an express assignment, an employer still has a shop right to an employee's inventions - in effect, a paid-up, royalty-free license to use it - but the employee is still the owner. Illinois also has a statute which technically requires an assignment clause to carve-out certain classes of inventions, essentially those having nothing to do with the employer's line of work or R&D. I am not aware of any case addressing the consequences, though, of a non-compliant assignment clause in Illinois.

A copy of the Preston opinion can be found here.

Friday, May 11, 2012

The Weekly Posner (Nos. 3 and 4)

Revisiting Judge Posner's Dissent in Outsource Int'l v. Barton

About 12 years ago, the Seventh Circuit decided Outsource Int'l v. Barton, one of only a handful of employee non-compete cases it has heard. The case arose in the staffing industry and involved a fairly limited customer non-solicitation covenant and a 25-mile non-compete. As with many non-compete disputes, the case centered on reasonableness - not actual breach, because there was not dispute Barton did.

The Seventh Circuit affirmed the district court's grant of injunctive relief, which prompted a dissent from Judge Richard A. Posner who remarked that Illinois courts would not enforce Barton's non-compete. The dissenting opinion was interesting in the sense that Posner agreed with the outcome, at least in terms of whether the result was substantively fair, but disagreed with the application of the law. He felt that Illinois courts were too hostile to the contract to enforce it, particularly under the then-applicable legitimate business interest test.

The dissent prompts me to wonder if Judge Posner would now view courts as hamstrung, given that Reliable Fire Equipment v. Arredondo has replaced the test which he felt doomed the employer's chances in Barton. I think he would now feel that judges were not so constrained.

There are a few interesting nuggets from that case, which are great for lawyers to keep in mind. To be certain, Judge Posner believes in the notion of freedom of contract, such that I don't think he views the prevalent reasonableness test as anything but outdated and paternalistic. He would, in my mind, be open to viewing particularly onerous covenants that really don't protect much of anything (say, for a low-level employee with no skills to move customers) as subject to a defense of unconscionability or fraud. I'm not one for affirmative defenses, but perhaps employees need to be thinking about fitting their theory into a traditional contract defense rather than resting on the employer's inability to prove reasonableness.

Judge Posner feels that the foundation for judicial hostility to covenants has collapsed. This may be so, as an array of employment laws fairly well undercut the idea that employees are subject to the abusive whims and caprices of their masters. Too, the vast choices of employment attorneys has reduced the cost for employees to seek and obtain legal advice before signing a covenant. This says nothing of the amount of free information available to employees on the internet who resort to self-help. Such as the tidbits provided on this blog...

"Duck, Bluff, Weave and Change the Subject"

Those are Judge Posner's words, apparently uttered at the Seventh Circuit Bar Association's annual dinner. Apparently not directed at some of my opponents, they were meant to describe how judges grapple with increasingly complex subjects before them. Judge Posner is sitting as trial judge on an upcoming patent case, so he may be particularly motivated to discuss this topic now. He is an advocate of independent, court-appointed experts to help sift through the battle of retained experts and cut through some of the technical jib-jab at trial. That should do plenty to scare the hell out of lawyers, but it makes sense. In the non-compete world, many covenants are enforced to protect trade secrets - and trade secrets (like patents) can be highly technical. This may be an area district judges explore, particularly in cases involving source code, financial derivatives, or biotechnology.

A link to the article on Judge Posner's speech from the Chicago Tribune can be found here.

Saturday, May 5, 2012

Case Law and Non-Compete News Update

Some interesting news stories and cases to report on this week.

News Stories

A couple of years ago, FLIR Systems engaged in an ill-advised trade secrets action in California which resulted in a substantial fee award to the defendants under a theory of bad faith. Now, the defendants are going after FLIR's counsel in that case, Latham & Watkins, on a malicious prosecution theory of liability. Apparently, the genesis of the claim against L&W arose when the plaintiffs (that is, the defendants in the original trade secrets case) discovered FLIR was invoking the "advice of counsel" defense. There a number of interesting procedural issues which could come out of this, including the possibility that L&W may have a SLAPP defense under California law. Epstein Becker & Green discusses the case.

In this author's opinion, counsel should not be granted an absolute privilege for bad faith or malicious litigation if they act as a mere instrumentality for their client.

John Marsh discusses the high-profile dispute between sports agent Aaron Mintz and Priority Sports Entertainment, a battle taking place in California over a non-compete apparently governed by Illinois law. Given California's clear public policy on non-competes, there certainly will be questions whether the choice-of-law clause is valid. Mintz joined CAA, which represents NBA stars LeBron James, Chris Bosh, Dwyane Wade, Carmelo Anthony and others. Priority Sports is headed by Mark Bartelstein, a graduate of the University of Illinois and a resident of suburban Chicago. Some salacious details of the suit can be found here.

Reported Cases

The Tennessee case of ProductiveMD, LLC v. 4UMD, LLC, 821 F. Supp. 2d 955 (M.D. Tenn. 2011), contains a good discussion of the "same proof" standard to determine trade secrets preemption. This standard essentially examines whether proof of a non-trade secrets claim would also establish a claim for misappropriation of trade secrets. If the answer is yes, the claim is preempted. Most frequently, the same proof test will jeopardize claims of common law unfair competition, unjust enrichment, breach of the duty of loyalty (at least in part), and civil conspiracy. To my knowledge, Hawaii is the only other state which has adopted the "same proof" test of preemption.

Grace Hunt IT Solutions, LLC v. SIS Software, LLC, 2012 Mass. Super. LEXIS 40 (Sup. Ct. Feb. 14, 2012), discusses the Massachusetts rule which voids non-compete agreements if there has been a "material change" in the employment relationship. The rationale for this rule is that a material change equates to a brand new employment relationship, which requires a new non-compete to be signed. An example of a material change would be a reduction in compensation. Interestingly, in the Grace Hunt case, the court discounted the employer's point that the reduced compensation could be made up through bonuses, because the evidence equivocated over whether those bonuses could realistically be achieved.

Franchise non-competes are usually enforced, as demonstrated by Outdoor Lighting Perspectives Franchising, Inc. v. OLP-Pittsburgh, Inc., 2012 U.S. Dist. LEXIS 53583 (W.D.N.C. Apr. 17, 2012). As I have noted on this blog before, the interests to be protected under franchise covenants are different than those in an employment contract, even though most franchise covenants are non-negotiable. The interest is not only business goodwill, but protection of the franchise system itself. Often times, the court will examine the interests of third-parties, other franchisees, who need protection. The case was interesting in one respect, however. The non-compete extended to a 100-mile buffer around the ceded franchise territory and other franchisees' territories. This was too broad, almost by definition, and the court cut it back to eliminate the 100-mile buffer language. However, the court did state that the restriction on competition within other franchisees' territories was reasonable.