Tuesday, October 29, 2013

Inevitable Disclosure Theory Not Available as a "Stand-Alone" Claim

Ever since the Seventh Circuit decided PepsiCo v. Redmond in 1995, there has been an almost insatiable desire for plaintiff's attorneys to apply the "inevitable disclosure" doctrine to claims of trade secret theft.

As I've written before, the doctrine serves as a proxy for actual misappropriation and is based on the idea that despite one's best intentions he cannot serve in a particular employment position without relying on specific trade secret knowledge gleaned elsewhere.

The concept is similar to a party's request for a broad manufacturing or production injunction, akin to what the court ordered in the now-famous case of E.I. duPont v. Kolon Industries. So the theory goes, if a party has incorporated a stolen secret process into its manufacturing line and cannot help but rely on that process, then a mere "use or disclose" injunction plainly is insufficient. A broader, prophylactic order prohibiting conduct related to the trade secret is necessary to protect it.

It is important to understand the limits and parameters of the inevitable disclosure doctrine. It is not a stand-alone claim for relief, as a federal district emphasized in Janus et Cie v. Kahnke, 2013 U.S. Dist. LEXIS 139686 (S.D.N.Y. Aug. 29, 2013). It is a means to obtain a preliminary injunction under state trade secret law or to demonstrate a protectable interest for purposes of enforcing a non-compete agreement.

This means, for all intents and purposes, two things. First, if a plaintiff asserts a claim based on the inevitable disclosure theory without moving for a preliminary injunction, then the claim isn't plausible. Second, a plaintiff almost certainly won't be able to obtain damages (or fees) under state trade secrets law absent some actual misappropriation.

The inevitable disclosure doctrine is a very narrow path to secure injunctive relief, and the court's stringent four-factor test to award such relief typically guards against unduly speculative, factually empty cases. On top of that, the states treat the inevitable disclosure doctrine in different ways, with some adopting what many believe to be a "pure" form of relief and others limiting the doctrine substantially or declining to adopt it altogether.

Thursday, October 17, 2013

So, What Is a "Solicitation"?

One of the most frequently asked questions I get when advising clients is deceptively complex:

What does it mean to solicit a client?

On its face, this probably sounds like it should be an easy question to answer. However, it's really not. Since courts are hesitant to enforce broad non-compete agreements (particularly as to sales persons), many disputes hinge on the applicability of a customer non-solicitation covenant. The scope of those covenants can range from the very broad to the much narrower, both in terms of the type of activity prohibited and the customers covered by the prohibition.

A broad non-solicitation covenant reads something like this:

Employee agrees for a period of one year not to solicit, contact, or provide services to a Restricted Customer for the purpose of providing Competitive Products.

A narrow non-solicitation covenant usually reads this way:

Employee agrees for a period of one year not to solicit or entice away a Restricted Customer for the purpose of providing Competitive Products.

The difference between the two is that the narrow covenant does not prohibit so-called "passive" solicitation, where a client reaches out to the employee. As a practical matter, these more narrow covenants lead to just as much litigaton because most times an employer won't know who contacted who. But it will justifiably be concerned about the fact the employee is continuing to work with the client. It only will be able to discover what actually happened through the litigation process.

In these cases involving narrower covenants, the issue of breach often hinges on whether the employee actually solicited the customer, or whether the customer sought out the employee. The First Circuit's recent opinion in Corporate Techs., Inc. v. Harnett illustrates a common fact-pattern and rejected a bright-line "initial contact" test. In that case, the ex-employee's new company sent out a blast announcement that piqued the curiosity of a targeted group of customers that happened to fall within the terms of the employee's non-solicitation covenant. Upon receiving that announcement, customers started contacting the ex-employee.

The court specifically noted that "initial contact" is somewhat amorphous and "can easily be manipulated" depending on the facts of a particular case. This is particularly so with businesses where the selling cycle is long, such that the initial contact would be "unlikely to bear fruit in the absence of subsequent solicitation." It had little trouble affirming a preliminary injunction that enforced the non-solicitation covenant.

The takeaway from cases like Harnett is that employees must understand that the issue of "solicitation" is intensely fact-laden and that it's awfully hard to play cute and end-run the contract. Courts will need to consider how employees typically communicate with customers, and whether the employee set in motion a chain of events designed to lead to contact by the customers themselves. Targeted announcements are an obvious invitation to cause a customer to contact the employee and present a fairly easy case for determining that a solicitation has occurred. Even more problematic are personal e-mails, LinkedIn invitations to connect, and other one-on-one activity that suggests an effort to continue a business relationship.

Tuesday, October 15, 2013

Illinois Supreme Court: Fifield Stands

When the Appellate Court of Illinois ruled in Fifield v. Premier Dealer Services, Inc. that an
employer needed to provide consideration beyond mere employment itself to validate a non-compete, most business (read: management-side) attorneys thought this decision was a misread that was inevitably headed for reversal.

Not so.

The Supreme Court of Illinois has denied the Petition for Leave to Appeal that Premier Dealer Services filed after Fifield prevailed on his consideration argument. Anyone following this blog knows I have been critical of the Fifield holding to the extent it applies broadly to employees who choose to leave their employment voluntarily and in its rather arbitrary setting of a two-year period in which an employee must remain employed for the employment itself to constitute sufficient consideration for the non-compete.

But now that Fifield stands, what impact will this have? Here's several implications:

(1) Venue fights are inevitable. The Appellate Court has five districts. The First (from which Fifield hath sprung) is by far the largest and includes Cook County. However, many employers operate in other counties that are both nearby and outside the First District. Look for employers to enforce covenants outside Cook County and include choice-of-venue clauses in contracts that get them out of the First District.

(2) A potential conflict may be looming. I have heard stories of employers in other districts (namely, the Fourth - generally viewed as the most friendly towards enforcement) setting up lawsuits to create a conflict with Fifield. It will be worth watching if an employer has a suit disposed of quickly to get it to the appellate court and potentially create a district split. This would enhance the chances for the Supreme Court to take a case, much like it had to do with Reliable Fire Equipment Co. v. Arredondo a few years back.

(3) Employers will look to rewrite their agreements. Now that the consideration rule effectively grants at-will employees the opportunity to void their non-competes for a two-year period after the start of employment, employers are scrambling to fix contracts. My experience is that this new decision may mean employers will create contracts that contain consideration in the form of: (a) a guaranteed term of employment; (b) a severance or garden-leave option triggered post-termination; or (c) a signing bonus that is irrevocable.

(4) Some legislator will introduce something in January that addresses this. (Note: This is not a real implication because most proposed legislation never goes through committee, and this wouldn't generate any attention at all. At least that's my opinion.)

For several years, the playing field in non-compete suits was whether the employer had a legitimate business interest to protect. Now, it will be the question of contract formation entirely - whether the employer ever provided enough consideration to make the non-compete enforced at all.