Monday, November 30, 2015

Supreme Court Decides Not to Step Into Planned Parenthood's Trade Secrets Fray

The interplay between trade secrets and the public interest has deep roots in the law, but presents a thorny issues for courts to address.

In recent years, trade secrets law has been at the forefront of the public's concern over fracking technology and in particular the chemical composition data that oil and gas providers may have to make available. Recently, The Wall Street Journal ran an article concerning the software known as TrueAllele - described as a high-tech computer program that helps law-enforcement officials sort out complex mixtures of DNA at a crime scene. The scientists behind the program is resisting defense attorneys' requests to see the source code of the program, claiming it is a trade secret.

Last year, the intersection of trade secrets law and the public interest reached the headlines when the First Circuit held that Planned Parenthood need not release its Manual of Medical Standards and Guidelines based on Exemption 4 to the federal Freedom of Information Act. The suit arose when New Hampshire Right to Life issued a FOIA request to the Department of Health and Human Services after Planned Parenthood received a federal grant. The suit was partly a reverse-FOIA action, whereby Planned Parenthood sought to prevent HHS from releasing portions of documents that HHS had determined were not exempt from disclosure.

The First Circuit had held the Manual (and related pricing information) was subject to Exemption 4. Under the circuit's applicable test, Planned Parenthood did not need to demonstrate actual competitive harm. Instead, it only had to show "actual competition and a likelihood of substantial competitive injury in order" to bring the information within Exemption 4. Further, courts need not conducted a "sophisticated economic analysis of the likely disclosure."

The Supreme Court declined to weigh in and interpret the First Circuit's test concerning Exemption 4, but this denial of certiorari was not without its own headline. Justice Thomas and Justice Scalia dissented from the denial of the cert petition, with Justice Thomas stating that "Courts of Appeal have embraced varying versions of a convoluted test that rests on judicial speculation about whether disclosure will cause competitive harm to the entity from which the information was obtained."

Justice Thomas' statements are somewhat curious, because trade secrets law does not demand an actual demonstration of harm before protection ensues. Indeed, the very test associated with preliminary injunctions necessitates some degree of "judicial speculation" concerning disclosure. But that speculation must be grounded in factual support. It is unclear whether he advocates a very narrow application of Exemption 4 that would call for some broad assessment of actual, as opposed to likely, harm. Regardless, the circuit courts' apparent inconsistency in applying Exemption 4 is the focus of Justice Thomas' dissent and serves as a microcosm of the conflicting interests often at stake in trade secrets disputes.

Tuesday, November 24, 2015

Illinois Revitalizes "Old" Rule Concerning Limits on Confidentiality Agreements

Attorneys in Illinois have assumed for many years that non-disclosure agreements do not need a time limit on them.

That assumption is now conclusively incorrect.

The genesis of the problem comes from the Illinois Trade Secrets Act, which provides as follows:

...a contractual or other duty to maintain secrecy or limit use of a trade secret shall not be deemed to be void or unenforceable solely for lack of durational or geographical limitation on the duty.

The ITSA passed the General Assembly in 1985, and after that point in time, a smattering of cases dealt with the reasonableness of non-disclosure covenants and seemed to endorse them without much analysis as to scope.

But in 1985, around the time the ITSA went into effect, a case called Cincinnati Tool Steel Co. v. Breed held that durational and geographic limitations are required for a confidentiality agreement. A few subsequent cases followed Cincinnati Tool Steel, but not many and the issue was rarely litigated.

(As a potentially interesting aside, "Cincinnati Tool Steel" was not some company based in Cincinnati, Ohio but simply took its name of the president, Ronald Cincinnati. Pardon me for being somewhat of an onomastic snob, but whenever I think of this case, I cannot help but be reminded of James Spader's portrayal of Robert California in The Office, a fantastically geographic-oriented surname.)

Two recent cases, though, have revitalized Cincinnati Tool Steel. In the Appellate Court of Illinois, the case of AssuredPartners, Inc. v. Schmitt (from October 26) held that an unlimited non-disclosure covenant, both in terms of its duration and in terms of the information that fell within the terms of the covenant, was unenforceable. In particular, the court warned that such a broad covenant drastically limited the employee's ability to work in the relevant industry because it prevented him from using any knowledge he gained while employed with AssuredPartners, despite his prior work experience in the industry and regardless of whether he gained that knowledge because of his employment.

The second case, Fleetwood Packaging v. Hein, comes from the Northern District of Illinois, where Judge Tharp invoked the rationale of Cincinnati Tool Steel to conclude a non-disclosure agreement that lacked a temporal and geographic scope was unenforceable. Responding to the argument concerning the ITSA clause cited above, Judge Tharp found that it only applied to contractual restrictions that limited the use of trade secrets - not confidential information.

The reasons for demanding limitations on non-disclosure covenants are sound and generally hinge on two policy rationales.

First, as AssuredPartners recognizes, the presence of a non-disclosure covenant that is unlimited in scope can have a drastic chilling effect and can raise the possibility that an employer will attempt to bootstrap what should be a narrow restriction into a much broader non-compete that the parties never signed. Just as problematically, the relatively undefined nature of confidential information (which by definition is at least partly subjective) can leave an employee twisting in the wind if she stays in the same industry as her prior employer (which most employees do).

Second, it is awfully difficult (if not impossible) for an employee to know what remains confidential after she has left. Much ephemeral business information can lose value quickly. If corporate strategies shift, then a strategic plan that is a few years old may be of no use to anyone. Only insiders should know what remains confidential. Those who no longer are providing services to a company have no reason to know whether certain information retains some confidentiality. Therefore, it makes sense to require some reasonable limit on scope so that an employee is not left uncertain as to what she can disclose about her past work.

Allowing unlimited agreements to protect trade secrets, while certainly a fine distinction, is consistent with public policy. The challenge, of course, is to parse viable trade secrets (which should be more specific and more obvious) from general confidential information  (which likely is categorical and less obvious).

Thursday, November 19, 2015

Pennsylvania Follows Trend in "Consideration" Cases

The subject of consideration is the new frontier of non-compete disputes.

Although Illinois is at the forefront of this burgeoning consideration debate, other states increasingly have begun exploring the concept of what exactly an at-will employee receives in exchange for agreeing to a non-compete agreement. This "exchange" is the fulcrum of consideration, a legal term that ensures the enforceability of a contract obligation.

Pennsylvania, like other state supreme courts, has waded into the arena, albeit with an arcane and interesting twist to the legal problem. Yesterday, the Supreme Court of Pennsylvania in Socko v. Mid-Atlantic Systems of CPA, Inc. held that an employee can challenge a restrictive covenant agreement signed after the start of employment on the grounds that it lacks consideration, even if the agreement contains specific language that the employee "intends to be legally bound."

Why does that intent-to-be-bound language matter?

Pennsylvania is the only state to adopt something called the "Uniform Written Obligations Act." Consider, for a second, whether a statute can be uniform if 1 out of 50 states has enacted it. The Act provides that a written promise:

shall not be invalid or unenforceable for lack of consideration if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound.

The challenge for the Supreme Court of Pennsylvania was to harmonize this very old statute with the general common-law principle that says an employee who signs a restrictive covenant after the inception of employment must receive new consideration beyond employment itself. This rule generally requires an employer to provide something tangible such as a promotion, a bump in pay, or some severance benefit. Continued employment never suffices in Pennsylvania.

The Court, facing a somewhat daunting challenge, did its best to reach what it felt was the right result, consonant with years of legal decisions in the restrictive covenants area. It concluded that, despite the plain language of the Act, extending it to contracts in restraint of trade would be "unreasonable." The Court considered the "historic background regarding" non-competes, as well as their "unique treatment in the law." Therefore, even if non-compete contracts include the mandated "intends to be legally bound" language, an employee still can challenge the agreement on the grounds that it lacks consideration.

The main canon of statutory interpretation that the Court had going for it was the strict construction rule. That rule generally states a statute in derogation of the common law must be strictly construed. Applied to non-competes, the Court traced the history of these "unique" agreements and the special issues pertaining to consideration that the law had afforded them.

The case is perhaps not a model of how to resolve questions of statutory construction. Nevertheless, it continues a clear and definite trend. In the last several years, courts seem to be pivoting away from examining whether an employer has a legitimate business interest to protect through a non-compete and towards looking at whether there even is consideration at all. To be sure, questions of reasonableness and protectable interest are vitally important in cases like this. But the consideration issue is fundamental to the issue of contract formation in the first place and often results in a rapid disposition of the suit.