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.