Tuesday, November 19, 2013

Georgia Court of Appeals Discusses Anti-Severability Rules

One of the defining characteristics of a state's non-compete law is its application of the blue-pencil rule. Although several variations of the rule exist, states generally fall into one of two camps: those that readily modify overbroad covenants to make them reasonable, and those that generally frown on modification or blue-penciling.

Georgia historically has been one of the states that enforces only those agreements that are reasonable as written. That is to say, courts cannot modify overbroad agreements to make them enforceable. In essence, Georgia judges will decline to force the parties to accept a contract they could have, but didn't, make.

Georgia law continues to evolve, and a new statute governs contracts entered into after May of 2011. However, it doesn't impact contracts signed before the effective date, and courts will continue to apply the old common law for many years to come.

The Court of Appeals discussed at length the state's anti-severability rule in Lapolla Industries, Inc. v. Hess. As the Court described, the anti-severability rule applies to the following types of restrictive covenants:

  • covenants restricting employment or competition generally in a relevant market;
  • covenants restricting the solicitation of business from actual or potential customers; and
  • covenants restricting the acceptance of business from actual or potential customers.
(There was another type of restrictive covenant at issue in Hess, which I still don't understand after reading it several times and which the Court of Appeals intelligently glided over. Lapolla (the ex-employer) had a non-solicitation covenant that prohibited the employee from soliciting or accepting business from a business competitive with or similar to Lapolla. In other words, the employee could not vend any kind of product or service to a Lapolla competitor. Silly.)  

However, the anti-severability rule does not apply to covenants that either:

  • restrict solicitation or hiring of certain employees or independent contractors; and
  • restrict disclosure of trade secrets or confidential information.
Like many states, Georgia historically has frowned upon so-called market-based restraints, which contain broad prohibitions on working for a competitor in any capacity. Georgia's case law, however, also has applied strict scrutiny to lesser restrictive customer-based restraints, such that a number of appellate decisions strike down clauses that many other states would deem enforceable. For instance, Georgia courts have frowned upon customer-based restraints that prevent an employee from accepting, instead of soliciting, a customer's business. This distinction never has made much sense to me, since it's virtually impossible without the aid of legal process to determine who solicited whom.

The Court also discusses at length in Hess Georgia's reluctance to enforce choice of forum and choice of law clauses in contracts when application of a foreign state's law would lead to a result contrary to Georgia's public policy. In keeping with one of my sacrosanct rules to limit discussion of venue and jurisdiction disputes to an absolute minimum, I will say no more regarding this subject.

Wednesday, November 6, 2013

Even Reprehensible Terms of Service Violations Do Not Yield CFAA Claim

Although the Computer Fraud and Abuse Act frequently has been described as extremely broad in reach, it's also important to recognize its limitations.

One of the most substantive, sweeping limitations involves potential violations of website "Terms of Use" or "Terms of Service." Largely as a result of the case law that has developed out of the Ninth Circuit Court of Appeals, courts have recognized that pursuing a CFAA claim (or prosecuting a CFAA crime) on the basis of TOS violations poses significant problems.

The CFAA, somewhat famously, prohibits access to a protected computer without authorization or (critically) in a manner that "exceeds authorized access." Shoehorning a TOS violation into the "exceeds authorized access" framework has caused a great deal of handwringing among academics, prosecutors, defense attorneys, and judges.

The most well-known case involved Lori Drew, the MySpace Mom who created a fake account to contact a 13-year-old girl with whom her daughter was friends. The girl later committed suicide after corresponding with a person she thought to be a 16-year-old boy, the identity Drew assumed online with the fake account. After the U.S. Attorney's Office prosecuted Drew under the CFAA for a TOS violation, the district court judge threw out the conviction and held that the CFAA - as applied in the case - was void for vagueness. (Professor Orin Kerr represented Drew in this case.)

A similar dust-up ensued in an Oregon middle school recently, when a number of students created fake Facebook and Twitter accounts under the name of their assistant principal, Adam Matot. The students would then invite children to be friends with "Matot", and upon receiving an acceptance of the invitation, they would send the children obsene material (including pornographic images).

Matot's grievance, however sympathetic, simply did not state a CFAA claim for many of the same reasons the government couldn't maintain a conviction against Drew. The TOS violation, under Ninth Circuit law (Matot filed suit in Oregon), was not enough to demonstrate that the children exceeded their authorized access to a computer, since that statutory term restricts only access to a protected computer - not the misuse of information contained within the protected computer.

It is important to remember what function website terms of service play in commerce. As Professor Kerr mentioned in testimony before the U.S. House of Representatives, "[c]ompanies write those [TOS] conditions broadly in part to avoid civil liability if a user of the computer engages in wrongdoing....Those terms are not designed to carry the weight of criminal liability."

The same analysis generally will apply to civil claims involving the CFAA. In a majority of federal jurisdictions, courts will look at whether an individual had permission to use a protected computer in the first place and will not focus on whether the individual's use of information was wrongful.

Friday, November 1, 2013

Aleynikov Turns the Tables on Goldman Sachs Group

Score one for the underdog.

In Sergey Aleynikov's latest legal battle against Goldman Sachs, he emerged victorious. Earlier this month, Aleynikov prevailed on summary judgment and obtained an advancement (that is, prepayment) of legal fees related to his legal defense of state criminal charges brought by the Manhattan District Attorney.

As many readers know, Aleynikov was convicted by a federal district court of violating the Economic Espionage Act related to his alleged theft of Goldman's trade secret high-frequency trading source code. The Second Circuit reversed that conviction - after Aleynikov spent many months in federal prison before the reversal - leading to a quick modification of the federal statute.

Soon thereafter, a grand jury in New York indicted Aleynikov on similar state charges. It's unclear what the DA hopes to accomplish since even if Aleynikov is convicted, he will receive credit for extensive time he served in the federal case. But, now at least, Aleynikov will be able to have Goldman advance his legal fees and forge a defense to the latest round of criminal charges.

Although Judge McNulty called the advancement question a close one, there are several lessons to be learned.

First, the advancement and indemnification rights afforded corporate officers and directors are broad in scope. To that end, any ambiguities are resolved in the indemnitee's favor. Here, although Aleynikov was not an "officer" in the traditional sense (as would be the case for Lloyd Blankfein), the court found Goldman reserved for itself broad discretion to determine who was eligible for fee advancement. In fact, Goldman had advanced fees to 51 of 53 people who applied for it (apparently, one other unlucky soul found himself viewed as equivalent in stature to Aleynikov) over a six-year period.

Second, rights to advancement require an analysis of state corporation law, corporate bylaws, and any governing agreements (such as employment contracts). Advancement rights are treated differently by the states, and often times states make distinctions between officers, directors, and employees. In some states, for instance, a corporate charter must opt-out of advancement for directors, or else it's mandatory. Goldman's corporate bylaws, mandated advancement to officers as long as certain conditions were met.

Third, the key analysis usually turns on whether an individual is a defendant "by reason of the fact" that he was an employee, officer, or director. This is usually where advancement cases turn, although in Aleynikov it wasn't the flash point at all. In Delaware (which most states will turn to for interpretive questions), this requires a court to consider the nexus or causal connection between the alleged wrongdoing (whether civilly or criminally based) and the individual's status. In Aleynikov's case, his theft of trade secrets occurred solely because of his access to them while he was a Goldman employee. To be sure, the act of misappropriation occurred before he quit. Therefore, Aleynikov wouldn't have been able to misappropriate the code (or understood his value) but for the exercise of his official duties as a Goldman employee. Several other courts have found improper pre-termination competitive activity (usually for trade secrets theft or violation of a fiduciary duty) as sufficient to establish the "by reason of the fact" test. Individual obligations arising after service ends, such as a non-compete violation, won't fall within the causal nexus and won't trigger advancement rights. (For this reason, it's exceedingly important for a plaintiff to consider the implications of its allegations and sought-after remedies.)

Simply because Aleynikov is entitled to fee advancement does not mean he is off the hook. If he loses and is found guilty by a Manhattan jury, he'll have to repay his fees - hence, the title "advancement." But he doesn't have to post security as a condition. Advancement is an unsecured undertaking (unless the corporate charter says otherwise), and it's hard to see where Aleynikov would ever have the practical ability to repay if things head further south.

A copy of Judge McNulty's lengthy advancement opinion is contained below.