Wednesday, December 31, 2014

2014: The Annual Year-In-Review Column

I read many law blogs, and inevitably at the end of the year I come across posts that say what a monumental year it has been for legal developments in this area or that. Usually, that's an exaggeration.

And it would be misleading to say that 2014 was significant for non-compete law. Because it wasn't in the slightest.

Still, there were noteworthy cases and developments that draw the attention of practitioners, and which are worth a brief recap. So, in the tradition of this blog, I present my annual Year-In-Review for 2014 with the top five developments over the past twelve months:

5. Texas Supreme Court Weighs In on Forfeiture-for-Competition Clauses. Although I did not write about Exxon Mobil Corp. v. Drennen, it is nonetheless a significant state supreme court case worth reading. The Supreme Court of Texas usually produces interesting opinions on non-compete law, but we haven't seen any for a couple of years. This year, Drennen was the most notable decision from state supreme courts, and it didn't disappoint. The case involved the enforcement of a forfeiture provision in an employee incentive compensation plan. The Court found the provision was not contrary to Texas public policy and did not constitute a covenant not to compete. Accordingly, it allowed for Exxon to apply New York law. That state's well-developed "employee choice" doctrine allows for enforcement of a forfeiture provision without regard to a reasonableness analysis. The case brings into play many procedural issues that counsel must know, particularly choice-of-law clauses and the proper construction of what many believe to be indirect non-compete provisions that deter (but don't prohibit) competition. A copy of the case is available here.

4. Aleynikov Loses in the Third Circuit. Sergey Aleynikov is a mainstay on my end-of-the-year column, which is somewhat hard to believe. His legal troubles began with his departure from Goldman Sachs for Teza Technologies in June of 2009. Allegedly, Aleynikov misappropriated part of Goldman's high-frequency trading source code by placing it on a remote server (in Germany, which doesn't sound good but is actually quite meaningless). That led to a criminal conviction (overturned by the Second Circuit), a near-unanimous amendment to the federal Economic Espionage Act (think about getting Congress to agree on anything), a subsequent indictment by the Manhattan District Attorney (for which Aleynikov is not likely to serve any time), and a parallel lawsuit Aleynikov filed to have Goldman advance his legal expenses in the state criminal case. Aleynikov originally prevailed at summary judgment on his advancement suit (critically important, since he could have Goldman pay for his defense). That last piece of his litigation odyssey was the subject of a Third Circuit opinion, which I discussed on October 16. Aleynikov had his advancement victory overturned in a decision that I found poorly reasoned and inconsistent with the summary nature of advancement rights. I expect that a year from now we may have Mr. Aleynikov in our year-end list again, and I anticipate discussing what happened with his state criminal case for computer crimes. Aleynikov also made his way into popular culture, as his legal troubles inspired Michael Lewis's fantastic book Flash Boys.

3. DuPont's Trade Secret Verdict Overturned on Appeal. One of the largest verdicts of the past several years involved a trade secrets case. The dispute involved trade secrets DuPont owned with regard to Kevlar, a para-aramid fiber found in a variety of materials including tires, body armor, and cell phone cases. DuPont filed a trade secrets claim against Kolon Industries that resulted in a $920 million verdict and a 20-year production injunction against Kevlar. The civil case prompted criminal charges against Kolon and some of its employees. The Fourth Circuit, in reversing the jury verdict, questioned some of the evidentiary rulings the district court made concerning DuPont's purported public disclosure of materials related to the trade secrets. (Lesson on appeal: it probably doesn't hurt to have Paul Clement represent you on appeal. Whatever Kolon paid him, he earned it.)

2. Federal Trade Secrets Legislation Looms. I am required to include this in my list. Congress considered two separate pieces of federal legislation. The Defend Trade Secrets Act of 2014, which originated in the Senate, and the Trade Secrets Protection Act of 2014, which originated in the House of Representatives. For years, commentators and legislators have been pushing for a federal trade secrets remedy, perhaps because it's the only branch of intellectual property law that lacks a true federal legislative framework. Trade secrets also are increasingly important to the economy, a fact crystallized by patent decisions the Supreme Court has issued recently. I am not a wild proponent of federal legislation in this area, but I've come to accept it as inevitable. For a recent recap, see Russell Beck's excellent post from December 13, which summarizes the bipartisan efforts to federalize trade secret law and which also reports on recent House action on the Trade Secrets Protection Act of 2014. This time next year you can expect I'll discuss actual legislation that passed Congress.

1. State Courts Take Up Consideration Issue in Non-Compete Agreements. In my 500th Blog Post, I wrote that the future of non-competes would pivot towards the issue of consideration and away from reasonableness. Many non-compete disputes involve at-will employees, and courts are beginning to grapple with what exactly qualifies as legal consideration to support a restraint of trade - particularly when an employee can be let go at any time. I believe this issue will continue to vex courts and legislatures. I have been a notable critic of Fifield v. Premier Dealer Services, an Illinois appellate case that seemed to legislate a bright-line, two-year rule for employment serving as consideration for at-will employees' non-compete agreements. The decision is clearly bad in the judicial sense, but perhaps not awful from the policy perspective. And since the court decided it, other states have taken up similar (though not identical) consideration issues for at-will employees. The Pennsylvania Supreme Court will hear an appeal in Socko v. Mid-Atlantic Systems of CPA, Inc. and decide whether continued employment can serve as consideration for an at-will employee's non-compete. Earlier this year, the Wisconsin Court of Appeals certified the same question to the state supreme court in Runzheimer Int'l Ltd. v. Friedlin, which was the subject of my May blog post. And, the Supreme Court of Kentucky in Charles T. Creech, Inc. v. Brown issued an employee-friendly ruling this year, finding continued employment was insufficient to support an employee's non-compete agreement. The decision was poorly reasoned and confusing for employers to apply, since the Court seemed to indicate it was a fairly fact-specific decision. Regardless, it is now clear that many states are interested in just what consideration at-will employees must receive to be bound by post-termination non-competes. This issue will filter through the courts next year.


Finally, many thanks to all who continue to follow me and offer their words of encouragement. In 2015, I will try to post once per week - every Friday. This year, I did not post as frequently as I would like, but I am going to try and keep this going at least through the end of next year. Aiming for one post every week will be ambitious, but I am sure I can find enough material to keep the content fresh and insightful.

Wednesday, December 17, 2014

Three Anti-Trust Cases Non-Compete Lawyers Must Know

Many non-compete attorneys think that damages are the tail wagging the dog during the lawsuit. The reason is simple, but not intuitive: plaintiff's attorneys give very little thought to how to prove damages. Instead, they are focused - too much so - on unearthing every conceivable fact about liability.

So the case law - let alone scholarship - on damages in non-compete suits is thin at best. There are a handful of state law cases that intelligently discuss the issue, and a few recent decisions out of the federal circuit courts that do the same. But the relevant body of law doesn't really exceed maybe 30-40 decisions. Given the proliferation of non-compete litigation, this is truly startling.

The biggest obstacle for plaintiffs is tying conduct to particular loss, with defendants often taking the position that it didn't really cause any competitive loss because the plaintiff was going to lose sales or market share anyway. So where does one turn, particularly from the perspective of one trying to come up with a theory of recovery that avoids this common defense attack?

The logical starting point is an old line of cases from...the Supreme Court.

The cases come from Sherman Act and Clayton Act disputes, which deal with monopolization and price discrimination claims. Non-compete disputes are really restraints of trade, and attorneys don't often think to look to federal anti-trust law for guidance. Particularly in the damages realm, that's a valuable source of information.

Story Parchment

The first case is Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931), which dealt with a conspiracy to monopolize trade in vegetable parchment. The conspiracy involved the effort of several parchment companies to lower their prices below cost, forcing the plaintiff to lower its price. The Court's damages analysis disapproved of a tactic that resembles what many defense lawyers in non-compete cases often attempt to do: speculate that absent the conspiracy to fix prices below cost, the prices would have dropped anyway. This is not at all different than the defense position that "the customer would have left even if I hadn't solicited it away."

The key part of Story Parchment is its articulation of the wrongdoer rule. This is the passage: "Where the tort itself is of such a nature as to preclude the ascertainment of damages with certainty, it would be a perversion of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from making any amend for his acts." The Court recognized, in other words, that some cases by their very nature do not allow for the plaintiff to prove damages with any certainty. As long as the fact of damages is certain, there is nothing wrong with speculating as to amount.


The second case, Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251 (1946), involved a Sherman Act claim. The case concerned an alleged conspiracy among movie theaters and distributors to show particular films before some independent exhibitors. The idea here was that the preferred release system harmed the independent exhibitors, who suffered lost sales from not exhibiting a hot new movie. With respect to damages, the plaintiff used a comparison of prior years' profits when he could show first-runs with those when he wasn't able to due to the illegal conspiracy.

The defendants balked at the speculative nature of the damages presentation, The Court relied on Story Parchment and found that "the wrongdoer shall bear the risk of the uncertainty which his own wrong has created." When dealing with claims based on illegal restraints of trade, in other words, it is difficult to ascertain damages and figure out what would have happened under "freely competitive conditions." The Court then appeared to go further and stated that "the wrongdoer may not object to the plaintiff's reasonable estimate of the cause of injury and its amount, supported by the evidence, because not based on more accurate data which the wrongdoer's misconduct has rendered unavailable."

The last passage in Bigelow teaches that if the plaintiff presents a damages picture, or reconstruction of what it expected to earn after a non-compete violation, the defendant (even while denying liability) still must portray an alternative picture.

Truett Payne

The final, most recent case is J. Truett Payne Co., Inc. v. Chrysler Motors Corp., 451 U.S. 557 (1981), a price discrimination case under the Robinson-Patman Act. The case dealt with a simple set of facts whereby Chrysler appeared to set a sales incentive program up in such a way as to pay one Alabama dealer less than others. The Court's statement on damages is not as complete as in Bigelow or even Story Parchment, probably because the lower courts' hadn't flushed out liability as the other cases had.

The Court did, however, endorse the wrongdoer rule and in particular noted the before-and-after comparison that the plaintiff presented in Bigelow. It is this same before-and-after presentation that often draws the ire of non-compete defendants. With the Court's endorsement of it, that line of attack may not be as strong as defendants think.


The Court's anti-trust cases are under-appreciated when applied to non-compete disputes. The wrongdoer rule derives from this line of anti-trust cases, where the claim itself means there has been a competitive injury. Regardless of what one thinks of non-compete law, a finding of liability is, by definition, a competitive injury.

While plaintiffs cannot engage in unreasonable speculation or make improper assumptions, the wrongdoer rule reflects a policy judgment that defendants cannot erect a roadblock to a damages case by relying on the very uncertainty they have created.

Friday, December 12, 2014

Third District in Illinois Follows Fifield's Consideration Rule

Business lawyers have discounted the much-bastardized decision in Fifield v. Premier Dealer Services, Inc. as unmoored, largely because it seems to be one-of-a-kind and pulled from the ether.

With the exception of a few federal district court opinions (which aren't authoritative), the validity of the Fifield case largely has been confined to the blogosphere and to those state trial courts which probably are trying to figure it out.

To take a step back...

Fifield rewrote the rules on what kind of consideration an employer must show to enforce a non-compete agreement in Illinois. For an at-will employee (that is, those workers who have no contract for a set term), Fifield says the employment itself only provides consideration for the non-compete if the employee remains on the job for two years-plus. The rule is meant to reflect that an at-will employment arrangement is somewhat illusory; an employer could trick an employee into an onerous covenant with the hope of a long-term relationship, yet pull the rug out quickly. Fifield makes no distinction between terminations that are involuntary and those an employee initiates.

Yesterday, Fifield gained a large measure of credibility when a separate district of the Appellate Court of Illinois (the Third District) followed it and endorsed the two-year consideration rule. The case is Prairie Rheumatology Associates, S.C. v. Francis, 2014 IL App (3d) 140338, linked here, and the facts aren't really any different than Fifield itself.

The analysis is predictably non-academic and thin. The court endorsed the Fifield rule to vacate a preliminary injunction against a physician who signed a 2-year, 14-mile non-competition agreement at the start of her employment. She resigned 15 months after the start of her practice and officially separated within 19 months. Fifield precluded enforcement.

Francis gives Fifield a much-needed injection of credibility. Many, including me, were highly critical of Fifield. (I was more aghast at is reasoning and rather glib conclusion, and not so appalled at the disposition). Having a second branch of the Appellate Court endorse Fifield creates some momentum and likely will encourage other districts (there are five) presented with the question to follow suit.

The Fourth District is the most likely to distance itself from Fifield, and it likely will need to do so for the Supreme Court of Illinois to intervene. The Supreme Court declined to hear Fifield, which one could read as a tacit endorsement of the holding.

Tuesday, November 25, 2014

2014 AIPLA Trade Secret Law Summit Is Nearing

For those attorneys who follow this blog, I encourage you to consider attending the American Intellectual Property Law Association's Trade Secret Law Summit. The event will be held on December 4 and 5 at Intel Corporation in Santa Clara, California. You still can register for this event, and you do not need to be a member of the AIPLA to participate.

Registration information is available at this link.

The program for this year, much like last, is simply outstanding. The complete CLE outline is available on the AIPLA's registration information page. If you read through the outline, it is easy to see why trade secret and non-compete lawyers should not miss this event.

I am pleased to be moderating the last session of the 2-day event, Perspectives from the Bench: How State and Federal Judges View the Growth and Scope of Trade Secrets Disputes. I will be joined by the Honorable James Ware (Ret.), who previously was the Chief Judge of the Northern District of California. Also on the panel is the Honorable James Kleinberg (Ret.), a former California Superior Court judge in Santa Clara, County.

Thursday, November 20, 2014

Supreme Court of Arizona Gives Trade Secrets Preemption a Narrow Construction

Perhaps the most boring question in all of trade secrets law generates a lot of commentary, particularly in the blogosphere.

The question is whether the displacement provision of the Uniform Trade Secrets Act applies to claims based on misappropriation of confidential information that isn't valuable enough to meet the trade secret definition. If that's not scintillating, I don't know what is.

If you can contain your excitement, know that courts take differing points of view on this and so the question is somewhat significant to nerds. I gave my view on this a few years back, summarizing the policy rationale for taking a broad view of preemption - one that would displace claims based on misappropriation of confidential information.

The Supreme Court of Arizona yesterday disagreed with me (who doesn't?) and found that a narrow view of preemption was appropriate, relying heavily on the text of the UTSA provision which states that preemption doesn't affect "other civil remedies that are not based on misappropriation of a trade secret." The case is Orca Communications Unlimited, LLC v. Noder, No. CV-13-0351. (This is the Scalia-Easterbrook-Garner school of textualism at its best, revealing just how influential that cadre has been at influencing law over the past 20 years.)

The defendant made some of the same arguments about the absurdity of narrow-form preemption that I have made before. There are many good reasons for broadly interpreting preemption, including some the Arizona court cited and rejected - the uniform structure the UTSA creates for dealing with claims of data misappropriation, the specter of greater punitive damages for misappropriating less valuable types of information. To me, the soundest rationale lies in the incentives that underlie preemption.

If parties have a common-law claim for misappropriation of confidential information, why would they subject themselves to having to prove that it's a trade secret? I cannot understand this. The remedies available to a trade-secret holder aren't materially more significant. The damages theories (aside, possibly, from a royalty-based theory) are not all that different than those found in tort law. But to prove the existence of a trade secret, you must show how the information derives value from being secret and rigorous security measures. Allowing a plaintiff to default to a common-law theory for virtually the same type of information would provide no incentive for a business to undertake secrecy measures.

Just as problematically, in many jurisdictions, this would enable a plaintiff to bring claims in the alternative (i.e., it's a trade secret, but if not, then it's confidential). This alternative pleading scheme, which narrow-form preemption openly invites, undermines the entire purpose of the displacement clause.

Tuesday, November 11, 2014

Unpacking Bad Faith

A very smart lawyer at a very large firm once told me something very convincing.

All the good stuff lies in the privilege log.

The notion of "bad faith" prompted this comment. And by bad faith, I generally refer to the defense perception that many competition cases simply are motivated by a piling on of litigation costs - usually from an established player onto a start-up or nascent rival. As bad faith is often the standard for fee-shifting - certainly under state trade secrets law - then the concept becomes important for building a defense.

The problem for many defense lawyers (and more importantly, their clients) is proving bad faith. The concept smacks of deception, and by its nature the source of its proof largely is outside the control of the defense. On rare occasions, the defense will uncover a smoking gun - this usually is an e-mail, by the way - or a document that suggests an improper purpose behind the lawsuit. That purpose would be to achieve something other than a victory on the merits or a legitimate settlement of a valid claim.

A problem that has vexed me for some time is how to unpack bad faith through discovery. It's a knotty issue, with proof often a patchwork maze of inferences here and there from poorly conceived claims or simple lack of proof. But even a crummy case on the merits might not equate to "bad faith."

Is there something else? Some other way to prove it?

I have talked before about lawyer involvement in perpetuating bad faith claims as a major issue that underlies competition lawsuits. Lawyers often assume their clients' identities and are complicit in maintaining claims that fill up the courts for no legitimate reason. Because competition disputes are amenable to discovery morasses, this is a serious issue. Another serious issue is incompetence. Competition law is not easy, nor intuitive. And many lawyers simply don't understand the law very well. Add to that the declining market for legal services, and attorneys able to grab a competition case see a source of fee revenue for the taking. It's a toxic brew.

So recalling what my colleague said about privilege, is there a way to circumvent it? There might be. It's called the "crime-fraud" exception. Lawyers and clients labor under a terrible misconception of privilege. It is the exception and not the rule, so it's carefully scrutinized and particularly favored. This is particularly so since it's antithetical to the goal of the adversarial process: to find out the truth when reaching a result.

The essence of the crime-fraud exception is fairly straightforward: a lawyer does not render professional services if she is assisting the client to perpetrate a crime or a fraud. In some places, courts give "fraud" a rather broad interpretation. It follows, then, that if a lawyer is facilitating a frivolous suit, then her discussions with her client about how to achieve this should be discoverable. This may loosely be called a "fraud upon the court" (though I recoil at that term), or something akin to fraud.

The procedural hurdle is that the party seeking discovery must advance a preliminary showing of bad faith. This is no small feat. But if a party can present this, then it may ask the court to review otherwise designated privileged material. This in camera review (likely, of attorney-client e-mails) will enable the court to act as a gatekeeper and ferret out truly privileged materials that don't further the fraud.

But communications where a client seeks counsel's assistance in perpetuating a frivolous claim are not privileged and should be disclosed. This rule makes sense when one considers that counsel have an ethical duty to the court, as well as her client. And it further makes sense when one realizes courts have the inherent authority to control their docket and advance cases towards a speedy, just resolution. If a lawyer is assisting a client perpetuate a nonsense claim, why should this help be immune from disclosure?

Tuesday, November 4, 2014

Aleynikov's Observations on Juries

Jurors called to serve look forward to the possibility of drawing an exciting (even if tragic) case.

Non-compete cases are not exciting.

At least by the average layperson's standard.

This is why the specter of a jury trial may cause parties to rethink whether to take the case to trial. From a plaintiff's perspective, it could fear that it will put the jury to sleep explaining a legitimate business interest and the importance of profit margins. And there is the almost inevitable risk that the jury will be flummoxed by an esoteric, confusing damages presentation. Defendants often harbor the same doubts about jury trials, because one or two bad facts could case a jury to form an opinion on liability quickly and then take the plaintiff's mere say-so as evidence.

Consider this from the trial of Sergey Aleynikov, as recounted in Michael Lewis's book Flash Boys: "...when [Aleynikov] looked over, he saw that half the jury appeared to be sleeping." Aleynikov, as we know, was the programmer who left Goldman Sachs' high-frequency trading desk for Teza Technologies - and, in doing so, brought on a slew of litigation that seemingly touched every jurisdiction on the East Coast. And Aleynikov's case had that dose of intrigue that most competition cases don't - computer code deposited in Germany and the specter of Wall Street trading.

Employers often combat the uncertainty of a jury trial with a contractual waiver (enforceable in federal courts and in most states) or a clause requiring the merits to be dealt with in arbitration. The former preserves the availability of appellate review, while the latter allows for companies to conduct their disputes in a quasi-private manner and with more control over the process.

An interesting question, which seems to have generated almost no decisions, is whether a third-party is bound by a jury trial waiver clause. Suppose an employee waives his right to a jury trial, but his new employer is a defendant on a related tort claim for inducing a non-compete violation. Can the plaintiff invoke the jury trial waiver against the third-party?

I don't think so.

Although there is some authority for extending choice-of-law and choice-of-venue clauses to non-parties, jury trial waivers seem different. For one, the right to a jury trial is embodied in the Constitution, though not incorporated to the States. In addition, state constitutions typically have some additional constitutional guarantee. Therefore, the nature of the right seems qualitatively different - even if for reasons that don't appear to extend beyond mere tradition alone.

Thursday, October 23, 2014

Seventh Circuit Appeal Downplays Fifield Consideration Rule

The federal case of Instant Technology LLC v. DiFazio is somewhat of a rare breed in that the parties tried the case to the end. Most business disputes settle, frequently after an initial injunction hearing, and this generally holds true when the case arises from an acrimonious divorce (as was certainly the case with the key players in DiFazio).

I wrote last year on the case, primarily because the district court followed the Illinois Appellate Court's ruling in Fifield v. Premier Dealer Services, Inc. and invalidated several non-compete agreements on the grounds that the employees were not employed for the required two years to vest the contracts with consideration. (Remember, for at-will employees in Illinois, Fifield established the two-year rule if the sole consideration was the job itself.) On the facts in DiFazio, the case appeared to have some strengths for the plaintiffs, but like many non-compete disputes, the facts only get you so far. There's still the law to deal with, not to mention judicial distaste for these types of cases. Instant Technology had trouble during its bench trial on a number of fronts, including its presentation of damages.

Seeing that the case went up on appeal, I was interested to see what role the Fifield rule would play in the Seventh Circuit. Instant Technology's brief is now in.

Fifield appears to have taken a back seat, though that's not to say the Seventh Circuit won't issue some kind of analysis or statement about how the Supreme Court of Illinois might weigh in. The brief is long, but only a few pages mention Fifield. And the analysis seems intentionally thin. The reason could be that the employees who presented Instant Technology with a Fifield problem appear to be secondary players. Many appellate lawyers will abandon issues on appeal so that the reviewing court does not get too lost in a sea of issues.

Interestingly, Instant Technology shifted gears after losing its bench trial and hired a new law firm, Much Shelist, to represent it on appeal. That firm, ironically, represented the winning party in Fifield and helped create the two-year rule that now presents some problems for Instant Technology.

Instant Technology detoured around Fifield in an interesting way. Essentially, it argued the Supreme Court might use its overall "totality of the circumstances" to assess not only whether the covenant is reasonable, but also whether the contract has sufficient consideration. It gave an example from the facts of the case itself. One of the employees apparently had a prior stint with Instant Technology. In the employer's view, this prior employment should be a factor bearing on whether the new contract contains enough consideration.

I find it fairly unconvincing that a court would use the overall reasonableness test to assess the adequacy of consideration because it conflates two separate inquiries. The "totality of the circumstances" approach is a judicial check to weigh the contract terms with the asserted business interest. There's nothing from the Supreme Court's precedent that suggests it's meant to apply to an issue of contract formation. Furthermore, combining the consideration argument in the manner Instant Technology proposes would allow an enforcing party to use the same facts for multiple purposes. This is improper bootstrapping. Put another way, the facts that help an employer illustrate a protectable interest cannot also help it show the contract was formed properly.

Consideration should address what an employer gave up or what an employee gained by signing the contract. Fifield holds that the job itself only sometimes can be consideration because that job can be taken away. Take an example: if an employer agrees the employee only can be terminated for cause (with severance rights for a termination without cause) for a period of two years, then it's giving up a core element of the traditional at-will relationship. That's consideration. Determining whether the employee received access to customers or confidential information is not a consideration issue because it's tied intrinsically to whether the covenant terms are reasonable. Instant Technology's position would meld the two, and I think that's inappropriate.

I have said before that I am no great fan of Fifield, but I don't think we can fix it by creating more confusion in this area of the law.

Thursday, October 16, 2014

Aleynikov Strikes Out in the Third Circuit

About a year ago, I wrote about Sergey Aleynikov's win against Goldman Sachs Group (at least as far as legal fees are concerned). The ex-Goldman computer programmer won an expedited summary judgment proceeding in New Jersey federal court on a claim for fee advancement. His advancement claim related to an ongoing state court criminal case arising out of his alleged theft of Goldman's computer source code, which was used to run its high-frequency trading operation.

"Advancement" is a fancy way of saying that a corporation, under some circumstances, agrees to front legal fees to an officer or director who is part of a proceeding related to his corporate service. Think of a shareholder derivative suit brought against individual directors, in which the claim is for breach of fiduciary duty arising from a proposed business sale. Those directors need assurances not only that the company will cover their expenses if they win but also that the company will pay fees as they're incurred. That's advancement.

Aleynikov's advancement claim against Goldman was somewhat (though only somewhat) unusual since he was in an adverse position to Goldman. After all, they have claimed Aleynikov stole source code with malicious intent. Actually, more than "claimed." His litigation journey (in several states, civil and criminal) is nothing short of remarkable. And for those interested in the non-Goldman side of this, read Michael Lewis' Vanity Fair piece which was published around the time Aleynikov scored his initial win on legal fees. Aleynikov's story inspired Lewis' fantastic new book Flash Boys, which explores the rise of high-frequency trading and the "Army of One" IEX dark pool exchange.

Aleynikov's victory in New Jersey was predicated upon the specific language of Goldman's bylaws, which provided advancement rights to its "officers." Unfortunately, the bylaws weren't terribly clear, and the district court had to contend with competing interpretations of who qualified as an "officer." Aleynikov won in no small part due to Goldman's own drafting problems. This normally is a fair trade. Ambiguities are construed against the drafter; no one even participates in drafting bylaws except the company so there's no apportioning of blame. Arms' length contracts they are not.

The Third Circuit, though, reversed the grant of summary judgment and held that a jury must sort this ambiguity out. That is, did Goldman really intend to include Aleynikov as an officer? It would seem that Goldman will have the upper hand on this question, particularly if Judge McNulty admits evidence of his underlying "offenses" against Goldman (which he shouldn't).

Without belaboring the reasoning, the circuit court effectively found Aleynikov could not benefit from the "no ambiguities" rule because the rule doesn't resolve whether a party has any rights to a contract in the first place. It's only intended to supplant a dispute over the extent of those rights.

The ruling is muddled, confusing, and leaves more questions than it answers. For one, it's not clear how a fact-finder is supposed to sort through this ambiguity. The case is almost uniquely unsuited to a jury's fact determination. Both Goldman and Aleynikov can offer self-serving testimony about what the intent of the provision should be. But that's likely a wash. There are no negotiations to fall back on, since bylaws are not negotiated.

The closest the Third Circuit could come to providing guidance is this bizarre passage: "...resort to extrinsic evidence regarding course of dealing and trade usage to resolve the ambiguity does not seem inappropriate even where Goldman unilaterally drafted the agreement." What this "course of dealing" possibly could be is anyone's guess. The clause "does not seem inappropriate" is hardly a ringing endorsement.

Corporations have great control over how to draft indemnification and advancement provisions. Allowing a case like this to proceed to trial not only undermines the advancement remedy (for it must be expedited to be worth anything) but it encourages poor drafting. It's hard to see how any individual officer or director ever could supply evidence of "course of dealing" to counter what a company would offer in terms of its drafting intent.

Aleynikov lost this one. But he shouldn't have.

Monday, October 13, 2014

My 500th Blog Post

The original title of this post was simply: "Thank you and goodbye."

I have a lot of other stuff I want to do. Write law journal articles. Perhaps start another blog. Do more pro bono work. Learn how to ski. Experiment with vegan cooking.

So ending this at number 500, nearly 6 years after I started, seemed like the right thing to do. And it seemed like the right time, as I just concluded a big trial with immensely satisfying results. (Read here for the news story.)

But I am not ready to let go just yet. So I've decided my readers are stuck with me for a little bit longer. It may be for another 100 posts. Maybe until the end of the year. Who knows? This blog is mine, and I get to decide when I've said all I wanted to say.

So for Number 500, I get to say some things that are on my mind. I'll keep it big and profound.

The Future of Non-Competes

I believe we're close to an inflection point. Having observed the proliferation of non-compete cases and non-compete contracts, I worry about fatigue. I am not "for" or "against" non-competes in the sense that many attorneys are. There are two sides to the difficult questions these contracts pose, and I recognize the arguments are compelling. And when I speak of "fatigue," I am concerned that courts are so accustomed now to these disputes that they view them with less urgency. In this respect, companies don't think through what they're trying to protect and how they're going about it. This is true of both large and small companies, though more so with small ones. Drafting errors abound, and it's somewhat disheartening to see a standard form used for employees with vastly different responsibilities. This, more than anything, causes judges to roll their eyes.

In terms of the inflection point I see on the horizon, I believe the law may be pivoting towards a closer analysis of consideration for at-will employees. Those of us in Illinois can blame the Fifield decision for helping spur this on, but perhaps it's not a bad debate to have. Corporate counsel need to start thinking carefully about the overall structure of non-compete arrangements, and how the issue of consideration might look in an enforcement action. Merely invoking "continued employment" may not be good enough as courts continue to scrutinize enforceability. I personally believe that employers will have to start providing truly meaningful consideration to obtain non-compete agreements. Though consideration costs money, the more thoughtful use of consideration may actually eliminate disputes, as employees will be less apt to challenge the contract on enforceability grounds.

Trade Secrets and the Federal Question

The question of whether we will have a federal trade secrets statute is the hot topic for me and other nerds in my industry. It's truly a debate only a lawyer could love. I believe we'll get some federal legislation in the near future, and the difference between the House and Senate trade secret bills is not significant enough to comment on further. If we get a very watered down bill passed, then perhaps many trade secrets claims will remain in the state courts.

Trade secrets law historically has been the domain of state courts, and I'm somewhat concerned about removing this wholesale (in effect) to federal court. As a practical matter, though, a sizable number of these cases are ending up in federal court anyway under either diversity jurisdiction or as part of a computer fraud case.

Expanding trade secrets law into a federal claim, though, in effect will dump most non-compete cases into federal court, too, since the two theories often go hand-in-hand and the non-compete actions will be part of a federal court's supplemental jurisdiction.

Federal courts may be better equipped, particularly with good magistrates, to handle the increasingly complex discovery issues that trade secrets cases present. Most state courts don't have the resources to manage fast-moving discovery fights or block out time for emergency injunction hearings. Federal courts are busy, but they have the capacity to handle difficult trade secrets cases better than state courts.


The amount of blogs on the subject of non-compete and trade secret law really has exploded. I am not sure how I feel about this. This probably is related to the vast interest in this area of the law, the number of interesting topics on which to write, and the fact lawyers seem now to understand the impact blogging can have.

I started this blog in 2008, so I'm a relative veteran but I now find my voice is fairly diluted. Most bloggers end up quitting fairly quickly; others run out of things to say; and for still others, the demands of the job simply cause the blog to get shifted down the priority list. At times, I worry about falling in the last category. I don't ever want this blog simply to be exclusively a sort-of law school case analysis, where I simply talk about a decision. I'd rather comment on the practical impact of disputes, how issues affect clients, and important developments.

I think blogging for lawyers, in this area or otherwise, is definitely here to stay. This is still a great tool for lawyers and, more importantly, for clients to learn the basics of the law without paying legal fees.That's why I will, in the relatively near future, post my last entry here and start a blog. I may start a new blog, because I love to write. I just don't want this site to retread old ground and say things I've already said.


Finding a non-compete specialist is not necessarily that critical for clients. In my opinion, the qualities that make a good attorney by and large carry over to those who represent individuals or companies in competition suits. I do believe that in this area of the law an attorney who writes well is essential. Having someone who is a good trial attorney and presents will in court is crucial, but because many injunctions are decided on the paper, clients need to have counsel who write clearly and understandably.

Also, lawyers have to develop a deeper understanding of the business that is the subject of the dispute. Unlike many areas of the law, competition suits require that the lawyer have a thorough knowledge of the industry and how the pertinent facts fit into the competitive landscape. I frequently see lawyers fumble around with terminology or key business concepts that tend to diminish their credibility. Unfortunately for clients, it does cost a bit more for the attorney to feel as though he or she is sufficiently knowledgeable about the industry as a whole to represent well in court.


This is an area of the law that continues to divide judges, state and federal alike. Many judges have visceral feelings about enforcing non-competes. This is part of the reason so many non-compete suits settle relatively soon after they start. The lawyers often appear in court quickly after the case is on file, and they then have an excellent opportunity to gauge the judge's reaction to the merits. Contrast a typical Title VII case where a judge may not have an opportunity to assess the merits for 2 years from the filing date.

So a judge's perception of the merits may be colored by where he or she falls on the policy continuum: freedom to compete vs. freedom of contract. Unquestionably, though, the judge will look to whether one of these three crucial factors is at play: (1) the misuse of confidential data or trade secrets; (2) whether there is some bad-faith activity by the employee during the exit process (such as diverting business or parking new clients on the sideline); or (3) the presence of direct solicitation of valuable accounts post-termination in violation of a contract provision.

When one of these facts is in the lawsuit, the defense will have a tougher time prevailing. When all three are absent, the plaintiff is going to face an uphill battle explaining what the injury is and how it is damaged.

Thank You

For those of you who continue to read, thank you. Keeping this blog fresh and full of new content after 6 years and 500 posts is a lot of work but a rewarding challenge. If you have any suggestions or comments, I always invite feedback. Feel free to e-mail me directly at

Thursday, September 25, 2014

Advancement Rights Percolate Beneath Delaware Trade Secrets Lawsuits

Assume you represent a company and suspect a departed executive is competing unfairly by using the company's trade secret information. Further assume you have a case with, at least at first blush, a strong set of facts and a motivated client which wants to move quickly. But like most trade secrets cases, the suit is going to cost a lot of money and take a great deal of discovery to resolve.

How do you feel about advising your client that it may need to pay the ex-employee's legal fees as the case proceeds?

This is the reality of trade secrets lawsuits, particularly against former officers and directors of Delaware corporations. Delaware has a broad public policy that encourages individuals to serve in officer and director roles. To entice that service, Delaware corporate law allows, and virtually all company bylaws adopt, broad advancement rights.

So what is "advancement"?

The concept simply refers to a corporation's obligation to front (or, advance) legal expenses that an officer or director incurs by reason of her service to the company. Unlike indemnification, advancement means that an officer or director may have a right to receive regular payments to defray legal expense as the proceeding develops over time.

Importantly, this advancement right even can apply when the officer or director sits in an adversarial position to the company, as the officer or director would in a trade secrets misappropriation case. I have highlighted above the phrase "by reason of" because it is central to many disputes over whether an individual is properly entitled to advancement of legal fees.

Delaware courts have provided a helpful definition for this key phrase: it simply means there must be a "causal connection" between the underlying proceedings and one's official corporate capacity. See Homestore, Inc. v. Tafeen, 888 A.2d 204, 214 (Del. 2005).

There are a growing number of cases that apply the official capacity test to trade secrets cases. The courts finding advancement rights in these cases reason that where a claim is based on misuse of confidential information learned in an individual's official corporate capacity, that claim is one that qualifies as being brought "by reason of" her service to the company. There are several cases that address this, and most look at the nature of the allegations found in the underlying complaint. An example for practitioners comes from Pontone v. Milso Indus. Corp., 2014 Del. Ch. LEXIS 152 (Aug. 22, 2014), a fairly common dispute between a company and a former officer, who competed after his non-compete agreement ended. The core allegation dealt with the officer's purported misuse of trade secrets to lure away customers and employees of the former employer.

The overarching rationale that allows for advancement is that a corporate officer would not have had access to confidential information but for her service to the company. This, courts reason, provides the essential link between the challenged conduct and the official capacity needed to meet the "by reason of" language that virtually all Delaware corporations have in their bylaws.

The advancement rights that are likely available may be limited to officers and directors, as opposed to employees. But it is essential to parse carefully the language of the state's enabling statute and the corporate charter and bylaws to see who qualifies for advancement and what the precise conditions are for receiving advancement. Though many states will follow Delaware case law, there is variation among the statutory provisions and a high likelihood that a non-Delaware entity will not provide for broad advancement rights.

So for those attorneys who are filing trade secrets cases, it is essential to evaluate the potential for advancing your adversary's costs along the way. In effect, this could double your client's litigation expense.

Thursday, September 18, 2014

A Fool's Errand: Seizing Instrumentalities of Trade Secrets Theft

There is much debate about the companion pieces of legislation introduced in Congress that relate to trade secrets law.

Those two proposed laws are known as the Defend Trade Secrets Act of 2014 (the Senate version) and the Trade Secrets Protection Act of 2014 (the House version). The debate often centers around whether it is sensible for Congress to federalize a branch of law traditionally reserved to the States, under which a well-established body of case law already exists. There also is the perception that federal courts provide muscle that state courts cannot, and that in certain states overly taxed judges do not have the resources to handle complicated discovery disputes and the sheer pace of trade secrets litigation.

One area of friction that is starting to gain some attention concerns the federal proposal to allow for ex parte seizure orders in trade secrets cases - something that commands almost no attention at the state level. Seizure orders are common in copyright and trademark cases because the infringing good (a pirated movie, for instance) is itself a reflection of the wrong. In trade secrets cases, however, the device used to store a stolen secret - a hard-drive or a server - may have (indeed, likely has) a mostly legitimate, non-infringing purpose. The DTSA attempts to incorporate the provisions of the Trademark Act in regards to seizure order, but this fails to recognize the vast difference in the type of intellectual property which trademark law is intended to protect compared with trade secrets law.

The TSPA is, to be certain, more mindful of the problems associated with the ex parte seizure order. But in trying to be more balanced (ostensibly), the TSPA deploys a weird seven-part test that an applicant must show on an ex parte basis. As if district court judges need more seven-part tests to apply.

Part one of the test specifically requires an applicant to show that a temporary restraining order would be ineffective because the responding party would evade it. Yet, the law clearly allows federal courts to issue orders directed at parties to preserve relevant evidence. And the destruction of evidence not only leads to sanctions, but it's also a criminal act. The built-in deterrent from the common law is so strong that part one of the test is almost self-defeating. Then, there's part six of the test, which separately requires an applicant to show that the responding part would "destroy, move, or hide the property" subject to the seizure order. I have thought about this too much and still cannot see how this is any different than the part one, but I suppose someone will come up with a reason. The only "benefit" I can see is that it gives an associate three more pages of briefing to come up with in the ex parte motion.

The seventh part of the test is downright bizarre, as it states that the applicant cannot have publicized the requested seizure. This raises the obvious question of what constitutes a publication. If a company needs to reassure investors, lenders, or clients that it is taking steps to remedy trade secrets theft that includes the application for a seizure order, it seems unusual to penalize the company for such a practice and remove an otherwise viable remedy the statute provides. There's no policy rationale to discourage publication.

In opposing the new federal legislation, a group of 31 law school professors stated that they were "concerned the TSPA requires a level of secrecy about court rulings that is unprecedented." I don't believe that's the case at all, since nothing in the TSPA requires the impoundment of court orders relating to ex parte seizure applications. My concern is that existing law covers any concerns Congress may have. And the new law may stand in the way of applying that time-tested law relating to preservation of relevant evidence, expedited discovery, and the use of court-appointed neutrals to image and copy digital storage media.

I have been relatively ambivalent when it comes to federalizing trade secret law. But any law that allows for the use of ex parte seizure orders is pushing me towards favoring the current state law regime. This is simply a poor fit for a branch of intellectual property law that is qualitatively different than trademark and copyright.

Monday, September 15, 2014

A Non-Compete Damages Overview

Companies that enforce restrictive covenants against ex-employees often face an uphill battle in proving damages resulting from a breach. It is for this reason that in the vast majority of cases a plaintiff focuses primarily on securing an injunction right away. It also is fairly clear that unless a new employer has aided the breach in some respect (for which it could be liable to an equal extent as the breaching employee) that an individual likely does not have the ability to pay a monetary judgment.

Still, it is important for plaintiff's counsel to understand the damages landscape and how to value a case. In this regard, the following damages theories might be available in a non-compete dispute:

  1. Lost profits - The conventional method of proving contract damages is through a showing of lost profits. By definition, lost profits are speculative to a degree because they seek to project a model of economic activity in a counter-factual world. Put another way, but for the breach of the restrictive covenant, what profits would the employer have earned? Lost profits claims are delimited by the "reasonable certainty" rule, which means that a plaintiff must establish loss to a reasonable degree of certainty. Many courts confuse this rule's application. Generally speaking, it applies to the fact of damage. And once a plaintiff shows some damage, it is entitled to greater latitude in quantifying the harm - particularly where the employee's conduct has impeded quantification. In non-compete cases, a party may attempt to prove lost profits by projecting a picture of future sales from diverted or impaired customers.
  2. Restitution - Although lost profits is likely the preferred route to establish damages, the concept of restitution also may apply in non-compete suits. Many courts hold that if a plaintiff's lost profits (or reliance) damages are unavailable due to the uncertainty in measuring the loss, a plaintiff can recover in restitution. The term simply refers to the plaintiff's interest in having restored to it any benefit the defendant achieves. Non-compete cases present an obvious case for restitution damages when a new employer has benefited from an employee's breach. The damages simply may be the new employer's own profits that are tied to the employee's breach, not those the ex-employer would have earned absent the breach.
  3. Liquidated Damages - I have written extensively, both in this blog and in published journals, regarding the benefits of using liquidated damages clauses in non-compete agreements. The idea is that an employer can predetermine its damages by setting forth a formula in a contract. That formula then would apply if (a) it's a reasonable measure of damages, (b) the potential loss is difficult to quantify, and (c) it is not intended as a penalty to coerce contractual performance. Many cases find that non-compete contracts are well-suited to liquidated damages clauses. The reason is that the interest a non-compete protects is largely intangible. Therefore, proving specific, monetary loss always will be difficult. Drafting is essential, with the employer bearing a significant burden to show that its damages formula is reasonable. Employers would be well-advised to create a working damages model based on objective criteria that will stand up in court to the inevitable defense challenge.
  4. Goodwill Impairment - The concept of "goodwill" is intrinsically tied to non-compete cases because many times the contract protects this intangible business interest. Goodwill is nothing more than a company's expectation that its customers will remain with the firm. Since a non-compete violation can result in a permanent loss of customers beyond the covenant's duration, a damages analysis relying on goodwill impairment is another possible means of recovery. In some respect, it overlaps with a projection of future profits so the two analyses shouldn't result in a duplicate damages claim. Although expert testimony is not needed to prove lost profits, it likely would be required if a plaintiff sought to prove goodwill impairment. The reason is that any goodwill impairment analysis should incorporate some sort of regression analysis to explore the relationships among variables that may affect a business's going-concern value.
Assessing damage in a non-compete case frequently is an afterthought. Counsel for both plaintiff and defendant should examine exposure as quickly as possible, even if the facts concerning liability will be the initial focus in the case.

Friday, August 15, 2014

At a Preliminary Injunction Hearing, How Likely Is an Employer to Win?

There are problems with statistical analyses. One of them is that the data sampling size may not be reliable or that the parameters established tend to skew results.

I am no statistician, but I have enough of a background to be dangerous. I decided to conduct a fairly rudimentary analysis of reported non-compete decisions so that I conclude how likely companies were to obtain a preliminary injunction in non-compete disputes at a contested hearing. This is a very narrow inquiry.

Because I only have so much time (and a trial in 10 days), I tried to obtain the best data I could, realizing full well that it was simply a subset of the actual number of decisions floating somewhere in the public domain. But I believe my data is more reliable than those used to predict a presidential, here goes.

Conclusion: At a contested hearing, employers successfully obtain a preliminary injunction to enforce a non-compete agreement about 60% of the time.

Data Summary: I reviewed a sample of federal district court cases from July 2013 through August 14, 2014. I specifically limited my search to exclude appellate decisions (which would review the grant or denial of an injunction) and to exclude state trial court reports, because only a handful of states publish them online. Since federal courts issue opinions that follow the same general format, I found this to be the most reliable source of information. Finally, I only looked at preliminary injunction decisions after contested hearings, where the matter was fully briefed and the court had to decide issues of fact and law.

During this one-year window, I excluded the following from my analysis:

(1) Controversies between franchisors and franchisees (of which there were a significant number);
(2) TRO rulings, because those often times contain a sparse record for the court to consider and may not really be "contested" in the evidentiary sense;
(3) Non-compete issues arising out of a purchase or sale of a business; and
(4) Decisions that dealt only with trade secret enforcement.

I also took a subjective look at the case if the court was split (or granted the injunction only in part). That is, I made a qualitative assessment as to what kind of relief the moving party obtained and what it actually got after a hearing. If the party successfully enforced a key part of a restrictive covenant, I counted this as a favorable outcome for the employer. If it lost and only was able to enforce a non-disclosure covenant, I determined this to be a favorable outcome for the employee.

Other Observations: The data set was limited to 23 comprehensive decisions. This seems like a small number, but again, the parameters that I chose were very narrow and focused only on contested injunction hearings over a narrow span of time. I assessed what I believed were the court cases that met all the criteria in which I was interested in assessing. Though I expected to see 50 cases, the 23 I selected came from all across the country with both employer-friendly jurisdictions (Florida) and employee-friendly states (California) represented.

The conclusion of a 60% victory rate for employers after an injunction trial is, frankly, a little higher than I expected. This is so for a few reasons: (1) the difficult injunction standard employers must meet; (2) the hesitancy of courts to enforce restraints of trade; and (3) the perception that employees quickly settle obvious cases where the facts are bad. If all these are true, then I would think that contested hearings would skew in favor of employees. Apparently, not so.

Interestingly, I found no real clear pattern from the results. I found cases where courts refused to enforce agreements despite seemingly clear evidence of data theft, and cases where an employer enforced an agreement that appeared overly broad. There was no unifying theme among the decisions. This fits with the highly fact-intensive nature of these disputes.

All this underscores the fact that results are not predictable. I believe it is difficult to benchmark success when parties let a judge decide, and that it would be irresponsible to conclude that a party's chances of success ever are much greater than 50-60% even on the strongest facts.

Wednesday, August 13, 2014

Will the Seventh Circuit Weigh In On the Fifield Rule?

The body of work following the decision in Fifield v. Premier Dealer Services is somewhat scattered at best. Federal courts are divided on whether it represents the law in Illinois, with courts taking divergent views.

As most readers may know by now, Fifield stands for the proposition that a covenant not to compete signed by an at-will employee requires at least two years of continued employment for that to constitute sufficient consideration. The key aspect of Fifield is that this consideration rule applies even when an employee signs a covenant at the start of employment, rather than during the course of employment. An undecided issue is how Fifield applies to lawsuits outside Illinois' First District (that is, Chicago).

The Seventh Circuit, though, is primed to weigh in. The plaintiff in Instant Technology LLC v. DiFazio has appealed its loss to the circuit court, and one of the central features of the district court's holding was that Fifield barred the non-compete claims. The district court judge discussed Fifield at length in his memorandum opinion. My discussion of the district court ruling is here.

The plaintiff in Instant Technology is due to file its appellate brief in a few weeks. I will look forward to reading how much it attacks the reasoning from Fifield and whether the two-year rule is likely to be a central feature of the appeal.

Tuesday, August 12, 2014

In Non-Compete Suits, Is the Employee's Age Relevant?

It's a given that courts consider a wide range of facts - perhaps too wide - when ruling on enforcement actions. Already burdened with figuring out the competitive inflection points between warring companies on a truncated record, courts also must balance a completely unrelated issue. Hardship. As in, how would enforcement of a non-compete through a court order harm an employee?

This inquiry, part of the widely used "rule of reason" test, mandates a look at softer facts that really have nothing to do with the merits of the case. Instead, the collateral inquiry all but invites the court to take into account evidence that is highly personal .

This begs a question that few courts tackle head-on. How relevant is age?

I started thinking about this after I read an article by Josh Zumbrun from the July 14 Wall Street Journal ("Lower Job Churn Hurts Young Workers" at p. A2). The article describes a compelling economic rationale for mobility among younger workers, and consequently could be an endorsement that younger workers should be released from non-compete enforcement. The article discusses Federal Reserve Chairwoman Janet Yellen's concern over the lack of mobility among younger workers. The following passage is particularly illuminating:

By hopping from employer to employer, especially early on, workers find jobs better-suited to their skills, build their resumes, bid up their salaries and boost lifetime earnings prospects. They eventually settle down and change jobs less frequently.

Sounds reasonable.

Is this a consideration, though, for courts? It could be, depending on the strategic direction a defendant wants to take. In the context of non-compete battles, time is of the essence and a defendant spends a lot of time reacting. It's conceivable that a defendant could obtain an opinion from a labor economist on the issue of hardship, although that is a hefty expense few can afford.

I used to think of the age factor from a different perspective. Older workers tend to be less mobile and not as attractive on the open market. That could militate against enforcement, since courts occasionally (perhaps rarely) comment on this when looking at the hardship issue. The Wall Street Journal article sort of flipped my thinking and takes a longer term view of the economic impact of not changing jobs.

The tension is interesting because courts used to confront fact patterns where the older, seasoned worker developed goodwill, sales contacts, and enough embedded knowledge that her move to a competitor seemed most likely to pose a threat. In our more technology-driven economy, though, it often is the younger worker who imparts the most value to a company or who is more likely to innovate by developing a new product or service. The economics of job mobility could be seen as militating against non-compete enforcement for these younger, valuable workers.

Thursday, July 17, 2014

NYT Article Adds Grist to the Mill Over Non-Compete Debate

Camp counselors. Hair stylists. Yoga instructors.

These are not the occupations lawyers usually think of when the topic of non-compete enforcement comes up. We normally envision a dispute concerning the mobility of an executive sales manager, a software engineer, or a seasoned product developer.

But many employees in retail professions have to confront non-competes as well. The June 8 New York Times article, "Noncompete Clauses Increasingly Pop Up In Array of Jobs," addresses the ever-expanding use of non-compete agreements and its impact on mid-level professionals.

In fact, the illustration of the 19 year-old camp counselor bound to a non-compete in her summer employment agreement is ridiculous. The owner's justification for such a restriction is laughable:

"Our intellectual property is the training and fostering of our counselors, which makes for our unique environment. It's much like a tech firm with designers who developed chips."

Um, no it's not.

This type of reasoning would, of course, justify the use of non-compete clauses for any employee in any work environment. But the summer camp proprietor's comment illustrates the problem with an employee's ability to challenge the enforceability of that agreement. She would need to show the lack of a legitimate business interest worthy of protection. And the rub is this: that's awfully expensive to prove.

Business owners always will provide some rationale for why their business is unique or how it invests significantly in human capital. And these flimsy, self-serving assertions of a legitimate business interest often carry the day with judges who simply don't have the time to take a deeper dive into what exactly it is the employer is trying to protect. An employee trying to fence with her ex-employer on this issue is hamstrung by the cost of litigation.

The ubiquity now surrounding non-competes, particularly as they are applied to mid-level retail-oriented employees, ultimately could produce a boomerang effect. If non-competes become too widespread, policymakers will search for legislative solutions. Courts will question how the pervasive use of covenants squares with the widespread rule that they should protect only against unfair, not ordinary, competition.

There can, in fact, be too much of a good thing.

Monday, June 23, 2014

Supreme Court of Kentucky Finds Continued Employment Is Insufficient Consideration for Non-Compete

The enforcement of non-competes is most troublesome in the at-will employment context. This is a recurring topic on this blog, and countless others. Courts have taken divergent approaches to analyzing the consideration issue.

Generally, the rules concerning enforcement of covenants for at-will employees fall into one of three categories:

(1) Continued employment is sufficient to enforce a covenant not to compete against an at-will employee if she signs it after the start of employment. This may be the majority rule, although I haven't broken it down state-by-state.

(2) Continued employment is insufficient to bind an at-will employee to a newly presented covenant not to compete unless the employee receives some true, real advantage in connection with signing the contract. A substantial minority of states, including Minnesota, adopt some variant of this rule.

(3) Even if an at-will employee signs a non-compete at the start of her employment, continued employment is insufficient unless the employment continues for a substantial period of time. This is Illinois' outlier Fifield rule.

Recently, the Wisconsin Court of Appeals certified a legal question to the state supreme court for review, concluding that existing case law relating to consideration was hopelessly in conflict. And just last week, the Supreme Court of Kentucky weighed in on the "continued employment" rule - with an opinion that seems to be of little value.

The Court held that continued employment was insufficient consideration to enforce a covenant not to compete that an at-will employee signed. The case is Charles T. Creech, Inc. v. Brown. Ultimately, though, the opinion does not seem to provide any rules. Instead, the Court simply found that given the particular facts of the case, the relatively broad non-compete lacked consideration. That in and of itself seemed odd, since the parties didn't conduct must discovery.

Although the opinion has flaws, it's still useful for what the Court determined to be significant in regards to the consideration inquiry. It honed in on the following factors:

(1) The employer undertook no new obligations in the contract.
(2) The contract lacked any indicia of an employment agreement, such as provisions relating to salary, benefits, and conditions of discharge.
(3) Brown, the employee, was a 16-year employee with pre-existing experience in the industry, meaning he didn't receive specialized training in response to signing the non-compete.
(4) Brown was not promoted and did not sign the agreement in connection with any real new advantages, such as a bump in pay or some access to new training or new information. The employer seemed to demote him.
(5) Most unusually, the employer did not threaten Brown with termination if he refused to sign the agreement. (It's hard to see how a counterfactual would be more persuasive evidence of consideration.)

While the result in the employee's favor may be appropriate given the other problems with the non-compete, the opinion does nothing more than leave a murky area of the law even cloudier. The Court gave no rule - and only hinted at a standard. Therefore, employers still don't have clarification on what they would need to provide at-will employees in the way of proper consideration to support a non-compete covenant.

The best practice still is to afford an at-will employee with some real, tangible advantage that a court will be able to grasp. The concept of continued employment is somewhat nebulous and in certain circumstances illusory. It makes enforcement difficult, particularly with long-term employees. Potential benefits could include:

(1) A raise, bonus, or promotion.
(2) The ability to terminate only for cause.
(3) Severance if the employer must terminate without cause.

In many states, any one of these would vest a non-compete with consideration. In my view, it also is beneficial to include the covenants in a more robust contract of employment, as opposed to a stand-alone document.

Monday, June 16, 2014

Anti-SLAPP Motions and Private Contract Disputes

One of the burgeoning issues in employee competition disputes is the applicability (or inapplicability) of state Anti-SLAPP statutes.

These statutes generally provide an expedited mechanism for an individual who is sued for petitioning the government or exercising her free speech rights to dismiss a retaliatory suit and obtain damages or attorneys' fees. Increasingly, individuals are using Anti-SLAPP statutes in the context of competition claims that employers bring.

I previously have discussed special problems that arise in the context of so-called "whistleblowers" and the intersection of trade secret law. Although this may provide a compelling factual scenario for the application of Anti-SLAPP motions, individual defendants generally have met with a fair amount of resistance in their efforts to use this statutory mechanism to cut off trade secrets claims.

By and large, Anti-SLAPP laws require a petitioning defendant (assumed here to be an ex-employee sued on some competition-related claim) to show that his or her activity involved a matter of public concern or public interest. For instance, the Court of Appeals of Washington recently found that an ex-employee's post to a job board that warned potential employees about his ex-employer's security practices did not involve a matter of sufficient public concern to invoke that state's Anti-SLAPP law. Alaska Structures, Inc. v. Hedlund, 2014 Wash. App. LEXIS 933 (Wash. Ct. App. Apr. 21, 2014).

Generally speaking, courts seem adverse to applying Anti-SLAPP laws to matters that involve private contract disputes, such as a claim for breach of a non-disclosure agreement. This is not to say fact patterns that overlap with a competition claim can't arise, but the employee's conduct generally must implicate some or all of the following:

  • The matter must be of interest of concern to a substantial number of people. An example would be a disclosure about an issue concerning consumer product safety;
  • There must be a close tie between the employee's statements, disclosures, or conduct and the public interest itself. For instance, an employee's disclosure of material must be directed towards the public good and not purely for some personal gain.
  • The individual's conduct should not be mere ammunition-gathering in a fight with her ex-employer. There must be some objective indication the employee is pursuing a matter of larger public concern.
I am not totally unsympathetic towards individuals' efforts to use Anti-SLAPP laws, but there is a disturbing overuse of these laws in private competition disputes. While an aggressive counterattack can shift the narrative of the case, it also has the potential to backfire and force parties to double-down in litigation. I do believe there is a greater role courts should play in scrutinizing competition cases that appear to be motivated out of pure spite or for no justifiable effort to recover something of value (that is, something that clearly outweighs the costs of litigation itself). But the Anti-SLAPP laws should be a rarely invoked tool in the judicial toolkit.

Thursday, June 12, 2014

Unreasonable Settlement Demands Illustrate Bad Faith In Trade Secrets Cases

Most attorneys believe everything said in a settlement letter is privileged through the Rules of Evidence.

This is decidedly not so.

The purpose of the evidentiary privilege is to preclude a jury from concluding that an offer to resolve a case suggests liability (on the part of the defendant) or weakness (on the part of the plaintiff). In trade secrets disputes, though, settlement statements that rise to the level of specious demands are not protected because they don't pose a risk of prejudicing a jury.

Trade secrets cases can go south in a hurry unless a plaintiff has done serious homework. And even if there has been a misappropriation, many times the plaintiff will have no shot at proving damages. That, however, does not preclude a plaintiff from making an outrageous demand. There are a number of courts that have assessed unreasonable settlement positions in the context of bad faith fee petitions for prevailing defendants.

An interesting, though non-precedential, decision from the Court of Appeal of California in Aerotek, Inc. v. The Johnson Group Staffing Co., Inc., affirmed a bad faith fee award of over $700,000. The court specifically looked at unreasonable settlement demands the plaintiff made, including a demand following a loss at trial, as evidence of bad faith.

Also of interest to the court:

  • An expert's apparent unawareness that one of the customers on which he based his lost profits calculation was no longer in business; and
  • A third-party witness's testimony that a plaintiff representative talked about the plaintiff's deep pockets and intent to shut the defendant's business down.
The interesting part of the case was the fact that the plaintiff actually won at the first trial, and the defendant stipulated that the customer list at issue was in fact a trade secret. Under such facts, its unusual to see a court find bad faith on the part of the plaintiff in bringing the case.

However, in California, there already is a strong public policy favoring open competition. Judges tend to view these cases more skeptically to begin with, and a case that might appear somewhat close still can yield a bad faith finding in California. Ultimately, it was clear that the plaintiff in Aerotek had a foundering case and doubled down. Maintaining a bad case will not endear any plaintiff's lawyer to the judge.

Monday, June 9, 2014

What Happens In Bankruptcy...Does Not Necessarily Stay in Bankruptcy.

The unfortunate reality of many non-compete lawsuits is that the parties face a vast asymmetry in legal resources. While individuals suing companies in court is hardly a novel concept, an individual usually stands something to gain - money - if she wins. A non-compete defendant is in no such similar position.

As a result, bankruptcy looms as a potential "option" for defendants in a good percentage of non-compete cases. Most defendants don't realize that there's a significant chance that a damages award may not even be dischargeable, though this depends on a host of factors. Blanket statements or conclusions can't be made.

Another vexing issue is a company's ability to pursue injunctive relief to protect customer goodwill or confidential information, even if a non-compete defendant has filed a bankruptcy petition. The most obvious step for companies to take is to file a lift-stay motion. This refers to the fact that all litigation against a debtor is "stayed" (or halted) once he or she files a petition.

Bankruptcy laws serve to relieve an honest debtor from the weight of his financial obligations and give him a fresh start in business life. Injunctive relief, though, is not a matter that impacts the administration of a bankruptcy estate, so courts often confront a company's attempt to lift the stay so that it may seek to pursue an injunction and protect against the loss of customers or trade secrets. Because damages are difficult to prove, injunctive relief still is the preferred remedy for most non-compete plaintiffs.

Since bankruptcy laws do not give a debtor a shield to misappropriate assets or customer relationships, under what circumstances will a court grant an employer's lift-stay motion and allow it to proceed forward with its case outside of bankruptcy?

There are several factors courts have examined in the past, though there is no uniform set of rules:

(1) Likelihood of success - This seems rather obvious, but it poses serious challenges for bankruptcy judges. If a bankruptcy judge weighs in on the merits (even if it's not a decision or judgment), then there is a substantial risk that the court hearing the underlying dispute will be influenced by another judge's thoughts. This is a particularly acute concern when the non-compete case is in state court.

(2) Prejudice to debtor - The most obvious hardship is the cost of litigation. However, in the past, bankruptcy courts haven't found that this practical reality is a significant prejudice factor that would justify a denial of relief.

(3) Prejudice to the estate - In a garden-variety employee matter, the bankruptcy estate rarely has an interest in the non-competition covenant. Put another way, the contract is not an estate asset.

(4) Harm to the moving party - In the decisions addressing lift-stay motions, most courts find that the potential harm to the ex-employer (i.e., loss of customers or impairment of trade secret rights) is the most important factor to consider. Courts seem receptive to the notion that it is impermissible to use the bankruptcy laws offensively to continue violating unexpired restrictive covenants.

It also is important to keep in mind that considerations of lifting a stay are different in Chapter 11 or 13 cases when enforcement of a covenant not to compete may affect a debtor's ability to reorganize and earn income. However, in a typical Chapter 7 case, a bankruptcy court is unconcerned with a debtor's ability to generate post-petition earnings because those earnings are not estate property.

Wednesday, June 4, 2014

An Illinois Federal Court Now Pivots Towards Supporting Fifield

I wrote previously about the hostile reception Fifield v. Premier Dealer Services, Inc. had received in Illinois federal courts, which is set forth in my March 6 post "Fifield, Federal Style." Since that time, I have presented at two seminars in which I predicted that a fissure between how state and federal courts perceived the Fifield consideration rule may encourage the Supreme Court of Illinois to take the issue up when it inevitably resurfaces.

Perhaps, I am wrong.

One federal judge in Chicago has disagreed with his federal court counterparts and endorsed Fifield. The case is Instant Technology, LLC v. DeFazio, No. 12-cv-491. Judge Holderman declined to follow the lead of Chief Judge Castillo in Montel Aetnastak, Inc. v. Miessen (and Judge Feinerman in another case) and found that the Supreme Court of Illinois would, indeed, follow the two-year consideration rule from Fifield.

As readers of this blog know all too well by now, Fifield holds that for at-will employees new or continued employment must last at least two years for the employment to serve as consideration supporting a non-compete agreement. It's clear from Fifield that this two-year rule applies to both non-compete and non-solicit covenants, but it almost certainly does not extend to confidentiality restrictions.

Judge Holderman relied on Judge Posner's opinion in Curtis 1000, Inc. v. Suess to justify why Fifield represents the law in Illinois. That case discussed the fact that employment in the at-will context often is illusory because the employer retains full discretion to take away the consideration without fear of liability. Also important to Judge Holderman's analysis were two recent Illinois circuit court decisions that appeared to endorse Fifield. It's rather unusual to see a federal court rely on and cite to unreported trial court cases as support for a ruling. But such is the terra (in)firma that Fifield graced us with.

As I recently wrote, the Supreme Court of Wisconsin is addressing an important question of law concerning consideration for non-competes in the at-will employee context.

Monday, May 19, 2014

Supreme Court of Wisconsin to Address Key Consideration Issue

The Court of Appeals of Wisconsin certified an important question to the state Supreme Court concerning restrictive covenant law:

Is consideration in addition to continued employment required to support a covenant not to compete entered into by an at-will employee?

The case is Runzheimer Int'l Ltd. v. Friedlin, 2014 Wisc. App. LEXIS 342 (Ct. App. Apr. 15, 2014). The question, to be sure, is a recurring one across the states. This is for a few reasons.

The policy rationales for and against a consideration rule lie in tension with one another. On the enforcement side, employers say that because they can terminate at-will employees without liability, there's no true distinction between a covenant signed at the start of employment and those signed mid-stream (or, as an afterthought). Conversely, employees legitimately can argue they face a disparity in bargaining power and feel serious economic pressure to sign a contract just to keep their job.

Wisconsin courts haven't really addressed this issue head-on, which is surprising given that state's volume of non-compete disputes and its well-known pro-employee bent. The few cases - none directly on point - push courts in opposite directions, which is reflective of the policy tension I just discussed. Decisions from other states aren't helpful, because there's no uniform rule. The pro-employee cases make just as much sense as the pro-employer cases. (Not surprisingly, the Court of Appeals did not discuss the analysis from Illinois' much-maligned Fifield decision, probably since there is no analysis in that case to rely on.)

From my perspective, it's a bit myopic to say no consideration is required simply because the at-will relationship is fluid and starts anew each day. This is a theoretical argument and ignores a couple of realities.

First, it assumes freely terminate people when they view them as valuable. There's no empirical support for this. I am not aware of employers firing employees en masse only to rehire them with a non-compete. Not only would such a practice impair goodwill, but it actually would raise the specter of liability for unemployment costs. The pro-employer theory neglects to consider marketplace realities and the intangible harm to reputation that could arise.

Second, an employee may accept a job with Company X in reliance on the fact X never asked him to sign a restrictive covenant. Presumably, that impacted his decision to forego other jobs. Those lost (irretrievably) opportunities should be accounted for at least to the same degree as the theoretical "fire-rehire" justification.

In the final analysis, I'm not a huge fan of "continued employment" as a consideration theory. It seems wishy to me, and employers ought to come up with something better - a promotion, a new commission opportunity, a bonus - to justify binding an employee to a significant work restriction.

Tuesday, April 22, 2014

Supreme Court of Wyoming Issues Important Trade Secrets Decision Related to Fracking

One of the hot new frontiers in trade secrets law involves an industry, not a legal question. There is no question the fracking industry is controversial. On the one hand, state legislatures view hydraulic fracturing as a potential boon to local economies. On the other, the very nature of this process causes much hand-wringing and cause for concern among environmental advocacy groups.

Hydraulic fracturing occurs when operators inject pressurized fluids into rock layers to release petroleum or natural gas. Fracking companies often believe the chemical compounds used in the fluid injection process are trade secrets. This causes a natural tension when public interest groups seek to discover what kind of chemicals are being inserted into local aquifers.

The case law applying trade secrets concepts to fracking is new and largely undeveloped. In the most significant decision to date, the Supreme Court of Wyoming addressed what trade secret definition should apply to a request for disclosure of an operator's chemical compounds. In Powder River Basin Resource Council v. Wyoming Oil and Gas Conser. Comm'n, the Court held that the most stringent trade secrets definition should apply. (The opinion is contained below.)

It considered three alternatives:

(1) The Uniform Trade Secrets Act definition, with its now ubiquitous two-part formulation;

(2) The Restatement (Third) of Unfair Competition definition, found in Section 39, which generally is viewed as less rigorous than the UTSA standard; and

(3) The federal Freedom of Information Act definition.

The Court ultimately chose the FOIA definition. It defines trade secret as "[a] secret, commercially valuable plan, formula, process, or device that is used for the making, preparing, compounding, or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort."

The italicized clause limits trade secrets to the productive process and would exclude a wide range of commercially valuable information that often times is at issue in competitive disputes. The Court's justification makes some sense. The broader UTSA and Restatement definitions are geared towards providing a remedy for unfair competition in private disputes. And a more definition would render meaningless the protection FOIA affords "commercially valuable" information.

The FOIA definition, which should lead to more disclosure, is meant to balance ownership of a true trade secret with the public's right to access documents affecting matters of public interest. In those states with fracking laws and regulations, operators normally have the chance to show administrative agencies that their chemical compounds or formulas are trade secrets. The decision in Powder River Basin will provide appropriate guidance to other courts that are called upon to evaluate a challenge to any administrative decision that favors fracking operators.

Friday, April 18, 2014

Contention Interrogatories In Trade Secret Cases Demand Strict Compliance

Yesterday, I gave a lengthy presentation to the American Intellectual Property Law Association's Trade Secrets Committee. The bulk of my presentation dealt with the knotty issue of properly identifying trade secrets in litigation.

Many trade secrets cases stall out due to deficient identifications. Since trade secrets are unlike other forms of intellectual property in that they are not listed in the public record, a plaintiff controls the identification of its property. In litigation between competitors, a plaintiff frequently will attempt to hide its secrets - yes, the crux of the claim itself - from the defendant. This leads to many disputes over whether the plaintiff properly is identifying its trade secrets in discovery. Sometimes the dispute occurs quite early, but other times it can take months or years before the identification issue reaches an inflection point.

As I was preparing for my presentation yesterday, I took a scan through some recent cases on the identification question. If you're looking for a fertile area of legal research, this is it. The federal district courts seem inundated with questions about whether a plaintiff is properly identifying its trade secrets during litigation. And the cases yield few hard-and-fast rules.

But, as I am sometimes prone to do, I found a case on the identification question that I hadn't seen before. The case, Safety Today, Inc. v. Roy, 2014 U.S. Dist. LEXIS 17116 (S.D. Ohio Feb. 11, 2014), addressed a plaintiff's attempt to answer a customer trade secrets identification interrogatory by referencing documents produced in the case. This sometimes is permitted under Federal Rule of Civil Procedure 33(d).

But the Safety Today court said no, a plaintiff could not use the Rule 33(d) mechanism to "identify" its trade secrets in response to a contention interrogatory. It did say that in some unusual cases a court could permit this approach. For instance, if the trade secret is entirely contained within a document - say a customer list, or an engineering drawing - then a Rule 33(d) reference may be appropriate. The secret, though, would have to be really narrow.

The case dealt with an entirely different factual matrix that did not lend itself to a bald document reference. In fact, the court called it a "typical case" involving ex-employees and stated specifically:

"Only the employer will know what portion of that myriad information known to its employees can legitimately be claimed as a trade secret, and no amount of record production can provide the appropriate answer to the question."

The court examined a largely undifferentiated set of documents the parties produced and noted that it was not at all apparent from the production what was secret and what was not. In other words, the defendant still would have to guess at what bits of information the plaintiff claimed as trade secrets. It was, indeed, the typical case where the trade secrets are not evident to anyone from the face of a particular document.

This illustrates the burden a plainitff in a trade secrets case usually will face. When answering an interrogatory, it is essential to take that obligation seriously and not reflexively punt to documents the parties otherwise produce. This approach may just raise more questions and do more harm than good.

Ultimately, a plaintiff ought to be under a strict burden to do its homework and prepare its case for trial. If it cannot grasp its own trade secrets and is not willing to put the time in to do so, that usually portends a much larger, strategic problem.

Friday, March 21, 2014

"Embedded Knowledge" and the Trade Secret Gap

For anyone (lawyer or otherwise) interested in the tensions associated with employee mobility, a truly must-read is Talent Wants to Be Free, by Orly Lobel.

Professor Lobel discusses a wide range of issues associated with talent and knowledge flows, and she incorporates thoughts that transcend the law and devolve into economics and sociology. The book is, to say the least, thought-provoking even for those who may choose to disagree with some of her conclusions. There's a particular issue that Professor Lobel discusses that touches upon one of competition law's great tensions.

In my judgment, one of the most difficult areas of the law for lawyers, judges, and clients is drawing a distinction between two concepts: general skill and knowledge (which is not protectable) and a trade secret (which is). Consider the following from an Illinois decision some twenty years ago:

"General skills and knowledge acquired in the course of employment...are things an employee is free to take and to use in later pursuits, especially if they do not take the form of written records, compilations or analyses." Passage quoted from Colson Co. v. Wittel, 569 N.E.2d 1082, 1087 (4th Dist. 1991).

This is somewhat (largely?) unhelpful for two reasons. First, it's so obvious that we shouldn't feel the need to use it as a guidepost or legal marker. Second, the notion of "general skills and knowledge" suggests a disconnect from experiential information or data the employee may have obtained by reason of his or her employment with a business. Put another way, GSK sounds like information an employee may acquire just by virtue of being in a particular field and that generally may be available to anyone, but not of any real use to people who are engaged in other occupations.

This disconnect is troubling when trying to parse out what kinds of information a business can protect by contract or through assertion of a trade secret right. A passage in Chapter 4 of Professor Lobel's book gets closer to solving the disconnect and bridging the ideas of general skill and knowledge, on the one hand, and trade secrets, on the other.

She talks of "embedded knowledge." Here's how she puts it in context:

"Knowledge that is embedded comes from experience, from learning by doing or observing; this kind of knowledge is difficult to codify and write down. Embedded knowledge (also known as tacit knowledge) is learned informally through direct and repeated contacts."

This formulation actually gets us closer to determining what is protectable and what is not, but only if we say embedded knowledge is something only an enforceable non-compete can safeguard. In other words, we should be careful not to lump in embedded knowledge with the amorphous (some might say rudderless) definition of a trade secret.

Examples of embedded knowledge likely include a person's familiarity with key contacts and customer requirements or buying habits. It also may include the odd concept of "negative know-how" (that which isn't effective). It certainly includes pricing patterns or strategies. Perhaps, too, it encompasses knowledge of which particular vendors are reliable or can lead to efficient sales distribution. To be sure, this will be company-specific data; they're not "general" in the fair sense of the word.

Professor Lobel also makes the point that "embedded knowledge" doesn't spread with great accuracy. Again, from Chapter 4:

"As you can imagine by now, the way tacit knowledge spreads depends on the shape of the network and the complexity of the information being diffused. When knowedge is transmitted, it usually does not diffuse accurately and flawlessly across companies."

This is another way of saying that embedded knowledge can be (and likely is) fleeting or ephemeral; it changes, in other words.

Consider this example. An employee is charged with developing a new product and has his hands in various business units that may impact the development of the good before it's rolled out publicly. If that employee leaves, he may have knowledge that his former company still is rolling out the product. But much likely has changed since his departure. Perhaps the company switched vendors, changed chemicals that go into the product formulation, or had to purchase new equipment (thereby decreasing the amount of months it would take to generate a positive return on investment).

It is entirely reasonable that the employee would not know anything about these developments, even if he had day-to-day involvement in the product for a long time while he was there. To Professor Lobel's point, if he then used his prior information about the product (his embedded knowledge) in a new position with a new company, it's likely to be inaccurate. That is to say, the passage of time and fluidity of useful information reshapes the employee's knowledge in such a way as to render it less valuable and even counterproductive to a competitor.

A trade secret, by contrast, shouldn't face the diffusion problem. The central point of a trade secret is that it's a patent substitute. An owner achieves an economic advantage (possibly in perpetuity) by keeping the information secret, rather than gaining a limited monopoly through the patent system. If that's the case, then the trade secret should be something the firm can monetize. Embedded knowledge, by contrast, is that which shifts and is not capable of monetization.

An alternative way for lawyers and judges to look at whether something meets the definition of a trade secret may be to get away from the mutli-factored standard that yields more questions than answers and determine whether, in Professor Lobel's words, it can "diffuse accurately and flawlessly across companies."