Friday, June 28, 2013

Face It: Judges Sometimes Hate Competition Cases

Believe it.

One exceedingly difficult message to convey to clients is this: A judge may not view your case as importantly as you do.

In my personal view, judges should be agnostic to subject-matter. That is, he or she should (in a perfect world) treat each case with equal importance. This may mean some disputes are simple or straightforward, in which case a decision should be fairly easy to reach. But a judge's subjective view as to a type of case should not influence his or her choice of outcomes (or more accurately, his or her relative time spent thinking about the case).

In the world of non-compete and trade secrets disputes, judges often don't like these disputes.

There are a couple of reasons.

First, they usually are teed-up on an emergency basis, clogging already full judicial calendars.

Second, they smack of the ordinary rough-and-tumble of economic life, where battles should be fought in the board rooms.

And third, they almost always sometimes sound like a bunch of old people fighting over canasta points.

There's a couple of recent examples where you can get a glimpse of how judges quickly tire of non-compete litigation.

The first comes from Ohio in the case of Lawyers Title Company v. Kingdom Title Solutions. The case involved apparent pre-termination competition by a couple of ex-Lawyers Title employees. Proceeding to a jury trial and after an extensive trial court record, Lawyers Title obtained a judgment for (hold your breath) $13,000 in damages. On post-trial proceedings, the district judge - barely - upheld the verdict on the proof of damages, noting:

" is impossible to know why [the former customers] took their business elsewhere. But Lawyers did not call its former customers to testify, probably because none of them would ever do business with Lawyers again after being dragged into this silly litigation."

In all fairness to Lawyers, it may have felt compelled to pursue its claims against former employees who (it appears) diverted clients pre-termination. Folding the tent would send a terrible signal for the next slate of employees who may contemplate a move. In that sense, the litigation surely was not "silly." But pursuing litigation with little to no damages is sure to draw the ire of a busy district judge.

The second case, Patch Rubber Co. v. Toelke, originates from North Carolina. There, District Judge Boyle denied a preliminary injunction to enforce a non-compete against a former plant manager. The problem: a ridiculously overbroad agreement that went way beyond protecting a legitimate business interest. In North Carolina, courts cannot modify overbroad agreements, so it is fairly common to see bad contracts chucked out the door early in a case.

And the judge's displeasure at the contract may have colored his view on the remainder of the case. In the face of evidence the employee downloaded "several documents containing a strategic plan...and customer cost and formula information," the court discounted the evidence entirely. It simply found the plaintiff didn't really show how the information was confidential or trade secret material.

This is not to absolve the plaintiff. It very well may have failed to convince the judge. But often times evidence of downloading at least leads to some partial relief, such as a limited injunction to protect against disclosure or use of the downloaded material.

But it's hard not to read the case and conclude that by the time the court got around to analyzing the trade secrets component, he was aggravated by the non-compete.

For employers, it's essential to consider how a generalist judge is going to view a case. The judge will want to know what relief the company will seek and whether there is a real dispute in need of an objective decision maker. It is a stark reality that many judges feel a great majority of competition cases could have been resolved easily before litigation.

Monday, June 24, 2013

Episode 11 of Fairly Competing: Trade Secrets Back to Basics, Part 2

Episode 11 of the Fairly Competing podcast is now available for listeners and subscribers.
In this episode, John MarshRussell Beck, and I conduct the second part of our trade secrets boot camp.

In this podcast, we identify commonly used security measures businesses implement to protect trade secret information. We examine security steps companies should take at the time key employees join the organization, as well as those exit interview steps that lead to the better protection of confidential business information. Finally, John, Russell, and I discuss the perils of "bring your own device" policies that companies utilize, which may impact the ability to protect trade secrets adequately.

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

Tuesday, June 18, 2013

Doc Rivers' Non-Compete Agreement

By the time you read this blog post, it's like to be outdated. Such is the fast-paced world of professional sports, and the insane coaching carousel we see every year (but particularly this year in the National Basketball Association).

This past week, the NBA world - which should be focusing on the Heat-Spurs final - has been distracted by the possibility of Doc Rivers leaving the Boston Celtics for the Los Angeles Clippers. The rub is that Rivers, the game's highest paid coach, has three years and $21 million remaining on his Celtics' agreement.

So how, and under what terms, can Rivers leave if he is bound by a current agreement? There are a few different angles to explore on this.

First, in the NBA, a standard coaching contract provides for a means by which teams can negotiate compensation to let coaches leave and jump ship from one team to another before the contract expires. In Rivers' case, his agreement is not standard. He has a separate clause that prohibits his employment as a head coach by another organization before the end of his contract term. The significance is that the Celtics' top brass simply could invoke the non-compete, rather than negotiate under the standard contract clause for suitable compensation to let him leave for another team. Obviously, this creates leverage for management, which is a by-product of the above-market compensation Rivers received a few years ago.

Second, the incentives in the coaching world strongly favor negotiated transactions to release coaches from their contracts. If a coach makes it publicly known that he's considering leaving, then recruiting (either via free-agency or - in the case of college coaches - from high school players) will suffer. And team chemistry may be shot. Therefore, a team - faced with a disgruntled coach and a looming PR disaster - needs to think about an appropriate business resolution, not enforcing agreements.

Third, the supply of potential competent coaches vastly exceeds the number of available openings. There's a new school of thought, based largely on statistics, which demonstrates that coaches don't influence game outcomes as previously thought. If that's the case, then owners and management can use coaches as mere assets on a balance sheet - to gain even some minimal compensation to waive a contract term and allow a coach to leave if another team genuinely wants that coach. In pro sports, this compensation usually takes the form of draft picks or actual players. In college, it's generally a buy-out of the contract by the hiring university. Economists and other experts likely will debate for years to come the intrinsic value of coaches, but everyone would agree that finding a replacement for most coaches generally is pretty easy.

Recall, too, that coaching obligations generally are in-term, not post-term, restraints. It is not, to my knowledge, illegal to sign a coach to a contract that contains a garden-variety post-termination restrictive covenant (although this may be an interesting question for any institution or franchise in California, Oklahoma, and North Dakota). But no one does it.

Why is that?

For starters, no team or university is likely to set a standard that makes it difficult to attract a top-flight coach. Even though economists may feel as though coaches' ability to influence outcomes is overstated, institutions always want to be viewed as an attractive destination. Put another way, an industry standard has developed that by and large discourages any organization from requiring a post-termination non-compete.

On a related point, coaches sign contracts that guarantee them compensation for a term of years. Most employees are at-will, meaning they can resign at any time and are perpetual free agents. An in-term non-compete for an employee like Rivers limits his ability to leave for another team, and the Boston Celtics have the exclusive right to his unique services for a period of years. Both sides get an obvious tangible benefit. This level playing field simply is not a paradigm most employees are familiar with.

The one high-profile post-termination non-compete exception I have seen in recent years involved Billy Donovan. Donovan, the current University of Florida basketball coach, agreed in principle to leave and join the Orlando Magic after winning two national titles with the Gators. He soon backed out of the deal to which he committed. As part of a settlement, the Magic released Donovan from his coaching contract and allowed him to return to UF. But Donovan agreed not to coach in the NBA for five years. Incidentally, that pact has now expired - and Donovan openly has ruminated over a potential return to the NBA.

Is anyone surprised?

Monday, June 10, 2013

Oklahoma Legislation Impacts Employee Non-Solicitation Covenants

Hat-tip to Josh Salinas at Seyfarth Shaw for his fine analysis of new Oklahoma legislation that chips away at some prohibitions on restrictive covenants.

Oklahoma is one of three red-flag states that generally prohibit non-competition agreements. And while true non-compete arrangements are void like they are in North Dakota and California, Oklahoma statutory law allows for agreements under which an employee agrees not to solicit the sale of goods or services "from the established customers" of the employer.
Therefore, Oklahoma courts will enforce reasonable restraints that fall short of broad non-compete restrictions.

The new legislation, Senate Bill 1031, affects another type of restraint - employee non-solicitation covenants. As readers know, those types of covenants impact an employee's ability to solicit fellow employees to leave and join a competitor. They're commonly referred to as "Pied Piper" clauses and can work significant hardships on employees who are looking to build a team of sales or information technology professionals for a new company.

SB 1031, embedded below, allows for contractual covenants that prohibit an employee's ability to entice away other employees. Josh makes the point in his blog post that this new legislation may permit only clauses restricting active recruitment or enticement away of current employees. Put another way, is a clause prohibiting an employee from hiring those employees who may seek out alternative employment on their own enforceable under Oklahoma law? Josh says likely not.

I agree and think the answer is found in Inergy Propane, LLC v. Lundy. This is an Oklahoma case from 2009 where the same issue was at play, except the case involved a customer (not employee) non-solicitation covenant. As Oklahoma law has developed, a prohibition on diverting clients "where no active solicitation has occurred" runs afoul of state statutory law and is an illegal restraint on trade. I think it's likely Oklahoma courts would find that the same rationale applies to employee non-solicitation agreements, particularly since (as Josh notes) recent Oklahoma cases have frowned upon broad "no-hire" covenants.

The best argument for making the distinction is that a restraint on soliciting customers is much more likely to impact an employee's value to potential new employers and therefore limit his or her right to earn a living. The same hardly can be said for Pied Piper clauses, which shouldn't impede one individual's ability to sell his or her services on the open market.

Unfortunately, this legislative and judicial hair-splitting and word-play does no one any good. It is exceedingly difficult for an employer to determine who solicited whom. And in the absence of a mistakenly sent e-mail or a customer who is exceedingly loyal to the company, an employer is unlikely to find out except through the discovery process which party initiated the contact.

These statutes may be intended to discourage litigation, but only invite it, as they fail to create objective rules.

Thursday, June 6, 2013

Episode 10 of Fairly Competing: Trade Secrets, Back to Basics Part 1

Episode 10 of the Fairly Competing podcast is now available for listeners and subscribers.
In this episode, John Marsh, Russell Beck, and I conduct the first part of our trade secrets boot camp.

John, Russell, and I discuss particular types of trade secrets, from those commonly recognized to those that are more difficult to define and uphold in court. We also compare and contrast trade secrets with other forms of intellectual property, discuss the benefits of conducting a trade secrets audit, and talk about the differences between trade secrets and lesser protected confidential information.

Part 2 of Trade Secrets, Back to Basics focuses on security measures and will be available soon to listeners.

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

Tuesday, June 4, 2013

Deter Cyber Theft Act Would Augment Federal Policy Against Industrial Espionage

Last month, a group of bipartisan senators introduced the Deter Cyber Theft Act (S. 884, a copy of which is embedded below).

This legislation follows a long series of recent developments that makes clear one thing: our Congress can actually find common ground on a public policy issue.

Federal policy is shifting towards greater recognition of trade secret rights and their collective value to American enterprise. Last year, Congress enacted the Theft of Trade Secrets Clarification Act in almost unprecedented fashion to close a loophole created by the oft-discussed (here and elsewhere) Aleynikov case.

The Obama Administration has been more active than any administration in memory at preventing industrial espionage from foreign governments and actors. It has published a comprehensive strategy to mitigate the theft of trade secrets from U.S. companies. The Administration also invited public comment on its trade secrets legislative strategy. And in 2012, Senator Chris Coons introduced the Protecting American Trade Secrets and Innovation Act. That law would have, in effect, created a federal civil cause of action for trade secrets theft.

The latest building block in this comprehensive effort at the federal level is the Deter Cyber Theft Act, which would (if enacted) require the Director of National Intelligence to create a foreign watch list, identifying countries that engage in industrial or economic espionage.

The proposed law would require the DNI to:

  1. Identify the types of technologies that rogue states target.
  2. Disclose what was being used to steal or appropriate U.S. technologies.
  3. Name foreign governments, and foreign companies, that were active in industrial or economic espionage.
There are other interesting elements here. A rogue state would include not only those that target U.S. industry through government action, but also those that "fail to prosecute" or otherwise permit industrial espionage through priveate enterprise.

The centerpiece of the law is the import ban. The Act would require the President to direct U.S. Customs to exclude from entry into the United States any article that incorporates misappropriated technology or "to protect the Department of Defense supply chain." Finally, the law is broad enough to extend beyond trade secrets, and expressly includes "proprietary information." Section 2(7) of the proposed legislation gives non-exhaustive examples of proprietary information that would be protected under the Act, and it's broad enough ("commercially valuable information") to encompass just about anything U.S. business or government maintains that's not generally available in the public domain - regardless of whether it meets the statutory definition of a "trade secret."

This latest legislative effort is largely in response to a series of high-profile incidents involving China. Just about every week or so, we hear a new story about a hacking incident, whether at the New York Times to track dissidents or to infiltrate the Pentagon or American businesses to appropriate industrial and defense secrets.

Senator Carl Levin, a sponsor of the bill, targeted China in his comments following introduction of the Act. And given the momentum created last year with an otherwise divided Congress, it's hard to envision much dissent over this legislation.