Friday, May 31, 2013

The Employee's First Client Meeting

I am taking a little bit of a different approach with this post, with a focus on representing employee clients in competition litigation.

When I first talk to a new client who has a legal problem involving a non-compete (or a related issue), there is much to consider in a short amount of time. The client frequently is overwhelmed. Her mind is going in many directions. He or she may never have hired an attorney before.

When this is the case, clients often want to know what to expect and how to prepare for an initial meeting.

Obviously, every attorney is different. But I think these rules generally apply (both to non-compete cases and to other types of engagements). If individual clients understand these points, they should feel more at ease before meeting with an attorney:

  1. Have your documents ready. At the risk of stating the obvious, clients should have relevant documents available for counsel to review. These should include, at a minimum, the following: employment contracts, handbook provisions, cease and desist letters, the complaint and related court papers if a suit is on file, and the contents of any personnel file. My personal preference is to receive these before the meeting, provided the engagement letter is signed. Which leads me to Rule #2...
  2. Review the engagement letter. My standard practice before a meeting with a new client is to send them the engagement letter for review. I prefer to have any questions about retainers, fees, and the scope of the engagement addressed up front before the meeting, so our first meeting is focused on legal advice.
  3. Develop a list of questions you want answered. Clients sometimes are surprised by the direction meetings with counsel take. And it is frequently the case that they forget to ask questions that are important to them. It is worth taking the time to type out a list of questions ahead of time. I prefer the client e-mail these questions to me beforehand so I can think about how I want to answer them. The questions themselves will alert me to other issues I may need to explore. Finally, they often help guide the meeting and enable a client to feel as though they're participating actively in the meeting, rather than just being questioned. My experience is that clients - whether new or seasoned to litigation - ask very smart questions.
  4. Let your attorney understand the industry. Competition disputes (unlike most civil litigation) require the attorney to understand the business. This means clients need to help educate their lawyer learn about the competitive forces at work and the details of how the business operates. I am very direct in telling clients to stop using industry jargon and reduce "inside the beltway" concepts to plain English. If I represent that client, a judge will demand the same of me in court.
  5. Disclose all facts - good and bad. Clients need to understand that their attorney is their personal counselor and will represent them in a non-judgmental manner. Too often, clients "hide" bad facts. Lawyers are not, and shouldn't be, cheerleaders. We need to know if there are problematic documents out there or facts that may prove damaging in a lawsuit. Only then can the client receive proper advice.
  6. Expect follow-up. Many individual clients want all the answers at an initial meeting. Sometimes, that's not possible. Your attorney may identify an issue that needs some legal research. (Competition disputes are notorious for this.) He or she may need to understand the industry better (particularly if it's not explained well enough at the initial meeting). And it's usually better to make important decisions on litigation strategy after thinking through them for a while.
  7. Understand your best, worst, and most likely outcomes. A judge once told me that the best lawyers advise their clients as to these three outcomes. I agree wholeheartedly. Clients need to understand all three. If the lawyer is not giving you all three and explaining them in a concise manner, you need a new lawyer.

Tuesday, May 28, 2013

Episode 9 of Fairly Competing: The Conviction of David Nosal Under the Computer Fraud and Abuse Act

Our ninth Fairly Competing podcast is now available for listeners and subscribers.

In Episode 9, John MarshRussell Beck, and I discuss the recent conviction of David Nosal under the Computer Fraud and Abuse Act.

John, Russell, and I discuss Nosal's conviction under the remaining CFAA counts that survived the Ninth Circuit's en banc decision in 2012. In particular, we debate whether the government's theory of unauthorized access via password sharing falls within the terms of the CFAA. We also predict how the Ninth Circuit may rule after Nosal appeals his conviction. 

You can listen to the podcast by clicking on the link below, visiting the official podcast website, or subscribing to Fairly Competing on iTunes.

Listen to this episode

Friday, May 24, 2013

Password Sharing and the Computer Fraud and Abuse Act, Revisited

I was reading Eric Ostroff's fine post discussing customer lists as trade secrets, in the context of a recent case involving Farmers Insurance Exchange and several of its former agents, Farmers Ins. Exch. v. Steele Ins. Agency, 2013 U.S. Dist. LEXIS 70098 (E.D. Cal. May 16, 2013).

The trade secret at issue in that case involved an electronic compilation of data about insurance customers. Farmers maintains that compilation for its captive agents through something called an "Agency Dashboard." In the captive insurance setting, the insurer normally owns proprietary rights to its customer information. This is in stark contrast to the independent agency system, where the agents themselves retain rights to such data.

Eric does a nice job summarizing the steps Farmers takes to protect its customer data, including the requirement that agents log in with passwords each time they gain access to the database. They must, as Eric points out, acknowledge Farmers' proprietary rights upon entry to Farmers' dashboard system.

Full disclosure, now.

I litigated several matters against Farmers Insurance over the years. And I am well-familiar with the way in which Farmers pursues trade secrets cases against ex-agents, and all too familiar with the Agency Dashboard, what it looks like, and how it works.

So I won't summarize what Eric wrote, but instead I want to highlight a fact that came up in the case and try to apply a claim Farmers hasn't (yet?) pursued.

Yes, I am talking about our old pal, the Computer Fraud and Abuse Act.

At least two of the defendants in the Farmers' case used passwords that did not belong to them to access Agency Dashboard.

One of the defendants was an office employee (seemingly a customer service agent) who used another Farmers agent's password to download reports out of Agency Dashboard. That agent, apparently not complicit, had severe health problems.

Another defendant was the son of a Farmers agent (again, it didn't appear the agent was complicit) and used his father's Farmers password to log in to Agency Dashboard. Though not crystal clear from the record, the defendant then presumably used proprietary data from the dashboard to switch customers away from Farmers. Neither of those defendants had password credentials of his or her own.

This case comes at an interesting time. John Marsh, Russell Beck, and I just recorded another episode of the Fairly Competing podcast (which will be available Tuesday morning), and we discussed the latest chapter in United States v. Nosal. The factual matrix in that case (also from California) involved something very similar to what I've just described: gaining access to a protected computer system through password sharing. (For my prior post discussing Nosal in the District Court, click here.)

That is: X uses Y's password to log in to a protected database, when X can't otherwise gain access through credentials assigned to him.

As the Nosal jury found, this conduct violated the CFAA because the individual is gaining access to a protected computer without authorization. A password is the quintessential access barrier, familiar to everyone.

The Farmers case was teed up for a preliminary injunction around the time the Nosal verdict came down, and there isn't much precedent available for extending the CFAA to the password-sharing paradigm. In fact, given the Ninth Circuit's rather narrow interpretation of the CFAA, it's to be expected that attorneys would pull back on civil claims under this statute.

But it appears that the agents who accessed Agency Dashboard without proper password credentials may have violated the CFAA, at least under the statutory interpretation applied by the District Court in Nosal. The case under the CFAA may be stronger than that against Nosal, because there's no indication Nosal himself accessed the database with someone else's password. He was just directing traffic.

I still have not reconciled, personally, whether the CFAA should be extended to this fact pattern, though I think it probably should. I have great reservations about the CFAA for many reasons. And given the Ninth Circuit's narrow construction of the CFAA, it is possible we'll get further guidance on whether password sharing implicates a statutory violation when Nosal II is decided.

Friday, May 17, 2013

Episode 8 of Fairly Competing: Has the Time Come to Add a Federal Civil Trade Secrets Claim?

Now available is Episode 8 of the Fairly Competing podcast: Has the Time Come to Add a Federal Civil Trade Secrets Claim?

In this episode, John MarshRussell Beck, and I discuss the proposals to add a federal cause of action for trade secrets theft.

We address the pros and cons of the proposed legislation known as PATSIA - Protecting American Trade Secrets and Innovation Act of 2012. John, Russell, and I also weigh other options to create a federal civil remedy compared to the PATSIA framework and discuss the policy rationales behind federalizing trade secrets claims in civil litigation.

You can listen to the podcast by clicking on the link below, visiting the official podcast website, or subscribing to Fairly Competing on iTunes.

Listen to this episode

Thursday, May 16, 2013

Proposed Non-Compete Legislation in Connecticut Follows Legislative Trend

So far, 2013 has been active for proposed non-compete legislation.

At the beginning of any calendar year, it's not surprising to see a number of bills introduced in state assemblies or legislatures - many of which have no chance of becoming law. This year, bills impacting non-compete agreements have been proposed in Minnesota, Massachusetts, Maryland, and Illinois. We've also seen the momentum build in various states concerning restrictions on employer access to social media passwords. And very recently, Texas enacted what many believe to be a business-friendly version of the Uniform Trade Secrets Act.

Following this trend, the Connecticut House of Representatives Bill No. 693 - regulating non-compete agreements - reported favorably out of the Judiciary Committee. A copy of the bill file is embedded below, but I'll summarize it briefly.

There are two chief elements to the law:

  1. It would codify the common law, in essence allowing non-competes to be enforced if reasonable as to time, territory, and scope of activity.
  2. The procedural change requires employers to provide at least ten days prior notice to the employee to get a legal review of the non-compete.
  3. The law allows for, but does not require, equitable modification by the court of an overbroad agreement.
  4. It only applies to agreements "entered into, renewed or extended" on after October 1, 2013.
A couple of open questions - big surprise - remain:

  1. The law does not mention anything about what an employer must show in terms of a legitimate business interest supporting the covenant, though that is something every employer must be prepared to demonstrate.
  2. It likely does not apply to confidentiality agreements.
  3. It is not clear whether it applies to non-solicitation agreements.
  4. It is limited to employment agreements, not those between businesses (or businesses and independent contractors).
My favorite aspect of the proposed bill is the proviso that states a person harmed by a violation of the law "may bring a civil action" to recover damages, costs, and fees. This is meaningless because anyone "may bring a civil action" for just about anything. They just might not be successful. The law, though, does not require an award of attorneys' fees for a successful enforcement of, or challenge to, the underlying covenant.

Finally, I am not sure why the Judiciary Committee felt it necessary to have the law apply to agreements "extended" on or after October 1, 2013. Arguably, any non-compete that is currently in effect is "extended" past the effective date of the statute. I would hope courts wouldn't construe this provision in an absurd way, as that could have the unintended consequence of invalidating agreements entered into previously in full compliance with common law.

Monday, May 13, 2013

You Can't Reverse Blue-Pencil a Non-Compete

By now, I hope readers of this blog would be aware that the title of this post simply reinforces the obvious.

For background, the "blue-pencil" rule is intended to allow a court to enforce the reasonable parts of non-competition agreements, while deleting those portions that render the covenant overbroad. Its cousin, the "equitable modification" rule gives a little more discretion to a trial court judge, such that he or she can make substantive changes to the clause (as opposed to deletions) when narrowing it up.

What neither rule allows is expansion of the covenant to include a broader range of competitive activity. Lawyers and clients need to understand, though, that judges are generalists and aren't as accustomed to examining this issues with the kind of depth that nerds like me are. So they make mistakes.

A perfect illustration comes from the Appellate Court of Illinois, which issued an opinion this week that addressed this reverse blue-penciling issue. The non-solicitation covenant at issue in that case was similar to what many provide: the employee (a physician) could not "solicit, divert or take away business or patronage" of the medical practice for three years following termination of employment.

The case, which is embedded below, is yet another primer on "How Not to Leave Your Employer" and follows the same basic fact pattern as I've written about on prior occasions. The trial court in Chicago issued a preliminary injunction which enforced the agreement and restrained the defendants (including one not bound to any non-compete) from "treating any current or former patients of" the medical practice.

This is more extensive than the terms of the non-solicitation covenant because "treating" is broader than the operative triggering language in the contract - "solicit, divert or take away." The Appellate Court held such an expansion of the terms was improper given the relatively clear language of the contract.

Counsel drafting non-solicitation covenants should always consider whether the terms are broad enough to include "passive" solicitation (that is, a client approaches the ex-employee) as opposed to mere "active" solicitation (affirmative efforts to lure clients away). Because it is almost impossible for an employer to assess objectively the difference between the two (it only knows the client has left), there are few business reasons why a non-solicitation covenant should be drafted to exclude passive solicitation.

Friday, May 10, 2013

Episode 7 of Fairly Competing: Trade Secrets, Whistleblowers, and the First Amendment

Episode 7 of the Fairly Competing podcast, Trade Secrets, Whistleblowers and the First Amendment, is now available for listeners and subscribers.

In this episode, John Marsh, Russell Beck, and I discuss the special problems posed when companies pursue trade secrets claims against whistleblowers.

We also discuss First Amendment concerns posed by these suits, state SLAPP statutes, and a recent case involving Anheuser-Busch that encompassess many of these interesting issues.

You can listen to the podcast by clicking on the link below, visiting the official podcast website, or subscribing to Fairly Competing on iTunes.

Listen to this episode

Wednesday, May 8, 2013

Supreme Court of Georgia Rejects Independent Claim for "Inevitable Disclosure"

The "inevitable disclosure" doctrine is one of the most discussed, controversial topics in unfair competition law. The commentary among academics and bloggers reminds me of the ongoing debate over the proper scope of the Computer Fraud and Abuse Act.
All but two states have adopted some version of the Uniform Trade Secrets Act, but there is little uniformity when it comes to applying the inevitable disclosure doctrine. Reduced to its essentials, the doctrine allows a plaintiff to substitute the concept of "inevitable disclosure" for actual or threatened misappropriation.

The Supreme Court of Georgia is the latest to weigh in on the application of the doctrine and held in Holton v. Physician Oncology Svcs, LP that a plaintiff cannot maintain an independent claim for misappropriation by relying solely on the idea of inevitable disclosure. The Court did not address whether:

  1. the doctrine can be applied to support a claim for "threatened" misappropriation of trade secrets (which is contemplated by the very text of all trade secrets statutes); or
  2. the doctrine can be applied to support a protectable interest as part of a non-competition covenant.
Companies seeking to assert trade secrets claims should, for the most part, do all they can to avoid pleading inevitable disclosure. From my perspective, it's a theory of last resort in that actual or threatened misappropriation (even if the threat is indirect or implied) is a far easier concept to present, particularly when requesting a disfavored remedy like an immediate injunction. Eric Ostroff essentially notes the same in his blog post discussing Holton.

The reluctance to invoke inevitable disclosure is not as pronounced when a company is seeking to enforce a non-compete. The theory of inevitable disclosure is much more appealing when it's used demonstrate that an actual, protectable interest supports the contractual restraint. Non-compete law is more objective and forward-looking. Because parties have contracted in advance for a certain type of restriction, it makes little sense for a company to have to wait for actual misappropriation of company secrets to enforce the agreement in court.

Thursday, May 2, 2013

Fracking and Trade Secrets: An Introduction


If you've read the newspaper over the past year or so, fracking suddenly has become a household term. Hydraulic fracturing, or "fracking," involves the injection of highly pressurized fluids into rock layers to release petroleum or natural gas. Though fracking has been around for decades, it has received a great deal of press and legislative attention for two primary reasons.

First, some states - most prominently, North Dakota - have seen a rejuvenation of their economies and manufacturing base, spurred on by fracking and its correspondent increase in energy production. Some studies, in fact, show the United States may overtake Saudi Arabia as the world's leading oil producer by the end of this President's term.

Second, fracking has received scrutiny from conservationist and environmental groups that are concerned over the public health risks associated with fracking. In particular, these groups have expressed concerns over the depletion of water supplies attendant with fracking, as well as the release into local aquifers of the additives contained in fracturing fluids.

At this point, you may be asking: what on earth this post has to do with competition law?

The answer's fairly simple.

Oil and gas producers largely believe their fluid compositions (or hydraulic fracturing chemicals) are trade secrets.

But state laws require producers to disclose these compositions as part of the permitting process. If publicly filed, those fluid compositions then can be obtained through freedom of information laws.

Unless...they're trade secrets.

This tension between commerce and conservation has spawned recent litigation in Wyoming and Pennsylvania. The legal issues here and elsewhere involve a collision of many different public and private concerns, including:

  • What oil and gas producers must show a state administrative agency to assert trade secret protection over fluid compositions;
  • The ability of interest groups to challenge administrative decisions over trade secret protection;
  • Provisions in some state laws that require oil and gas companies to provide chemical composition data (despite its trade secret protection) to third-party medical providers;
  • Medical providers' objections on First Amendment grounds to being forced to sign confidentiality agreements as a condition of receiving this chemical composition data; and
  • The omnipresent risk that a disaffected employee - that is, a "whistleblower" - might disclose such trade secret information to a government agency or in the course of a retaliatory discharge lawsuit.
In future posts, I'll be discussing all of these topics. Fracking law, as it affects trade secrets, is potentially an explosive area of litigation for the foreseeable future.