The new year is off to a pretty big start. We've already seen significant decisions from federal appellate courts on criminal trade secrets prosecutions and the epic Mattel/MGA "Bratz" dolls dispute. We have a looming debate over amendments to the Computer Fraud and Abuse Act, and pending legislation in Massachusetts concerning non-compete agreements.
But there's other activity in the trenches - the sort of routine work that parties and courts continue to crank out that don't necessarily generate headlines. Over the past few weeks, I've noticed some lower court decisions come through that are significant in their own right.
Trade Secrets Preemption in New Jersey
Last year, New Jersey became the latest state to adopt the Uniform Trade Secrets Act. Like all versions, the New Jersey Act displaces conflicting remedies based on claims of trade secrets misappropriation. However, the language of the statute preserves other common law rights and remedies, such that its text is not directly comparable on the issue of preemption in other states. As a result, New Jersey courts have not yet subscribed to the view that other civil claims are not preempted. This is an odd result, and the statute may be in for revision since it's near impossible to reconcile the preemption clause with the savings clause. The case discussing preemption is unreported and not binding on any other New Jersey court, SCS Healthcare Marketing, LLC v. Allergan USA, Inc., 2012 N.J. Super. Unpub. LEXIS 2704 (Sup. Ct. Ch. Div. Dec. 7, 2012).
I have written in the past on the considerations underlying the need for an injunction bond - effectively, security for a preliminary order later deemed wrongfully entered. Federal courts have to consider the amount of security when entering a temporary restraining order or preliminary injunction. The case of Smiths Group, PLC v. Frisbie, 2013 U.S. Dist. LEXIS 9445 (D. Minn. Jan. 24, 2013), looked at a high-level executive's prior year's salary and ordered security in that amount as a condition for enforcing a one-year non-compete covenant.
Dischargeability of Debts Arising Out of Non-Competes
Damages claims against ex-employees often intersect with bankruptcy law. For a defendant found to be in breach of a non-compete, an award of lost profits may greatly exceed the defendant's ability to pay. As such, the specter of bankruptcy is always at the fore. A debt is not dischargeable though if it is a result of a "willful and malicious" injury to another entity or its property. In an adversary proceeding, a hair salon, contending a departed stylist's non-compete debt was non-dischargeable, was unable to show she willfully injured her ex-employer. The court focused on two factors: (a) the employee was terminated and therefore may have breached the agreement not to injure her ex-employer, but rather to pay her bills; and (b) she obtained the names of her customers largely from Facebook, the White Pages, and her memory. Finally, the court determined that the hair salon could not establish that as single customer even left, thereby indicating it suffered no real injury. Though the "willful and malicious injury" test is flexible, this was a clear case where some of the equities strongly favored the employee. The case is In re Rhoades, 2013 Bankr. LEXIS 157 (S.D. Oh. Jan. 11, 2013).