Friday, December 30, 2016

Year-End Extravaganza (Part 4): Top 10 Books (Non-Compete) Lawyers Should Read

As the son of an English teacher and a school superintendent, there never was much doubt that I'd be a reader - either by volition or conscription. I was the kid who had "summer reading lists," which admittedly at the time seemed oppressive and unreasonable. However, I got over it. I took to reading books at an early age, a habit I'm sure steered me to choose law as a career. I've never gotten over it, and doubt I ever will.

I'd thought I'd end this crap-show of a year on a somewhat lighter note. I decided to list ten books that I think lawyers should read. This is nothing more than a catharsis, a way to divert us from the everyday grind of what we do. I appreciate those who read my blog and hope I've provided some interesting content for you. The year-end post, the last post, gets to be mine. Pardon the self-indulgence.

The first half of this list is geared (however slightly) to non-compete lawyers, and I explain why below. The second half of this list is not at all specific to my practice of law, but the books (both fiction and non-fiction) provide valuable lessons for attorneys of all stripes. Think of this as my gift to you. You're welcome...


10. Flash Boys (Michael Lewis, 2014). Anyone who has followed trade secrets law knows the plight of ex-Goldman Sachs programmer Sergey Aleynikov. His use of Goldman's proprietary computer code (many call it "stealing") sparked two criminal prosecutions and a separate civil suit. Along the way, Aleynikov almost single-handedly managed to cause Congress to change how federal law deals with the theft of products that affect interstate commerce. Flash Boys is not my favorite Michael Lewis book (try, Boomerang). But Aleynikov inspired Lewis to delve into the largely opaque world of high-frequency trading, which itself is punishingly secretive. And Lewis has an uncanny ability to deconstruct technical, difficult subjects and break them down into understandable terms that a layperson can understand. That's a gift lawyers should try to emulate in their oral and written presentations.

9. Worse than the Devil (Dean Strang, 2013). Dean Strang is one of the legal stars of the Netflix series, Making a Murderer. Before that series exploded, Strang published this concise study of the 1917 bombing of the Milwaukee Police Station and the ensuing trial of several Italian anarchists. The story in its own right is quite interesting, if for nothing more than the quick rush to judgment of a class of immigrants seems all too real in today's world. But principally, I recommend the book for its 6-page Preface. It's perhaps the best example of persuasive legal writing I have ever read. Non-compete lawyers must be good writers, because so much of our most critical work is done on written submissions to the court. If you want a legal writing primer, read this short passage.

8. Point Made: How to Write Like the Nation's Top Advocates (Ross Guberman, 2011). On the subject of legal writing, I veer into the technical with this selection. Legal writing books and blogs are ubiquitous now. But with apologies to Bryan Garner, I think Ross Guberman has the most bang for the buck with Point Made. The format of this book is really effective. He breaks down all the components of effective legal writing - structure, thematic elements, persuasion, language - with specific examples from top advocates' briefs. Lawyers earn their living by being effective writers. Too many fall well short. Guberman's book is a fantastic nuts-and-bolts of how to write well.

7. Talent Wants to be Free (Orly Lobel, 2013). Professor Lobel's book has received mention on this blog and is well-known to lawyers who practice in the field of restrictive covenants and trade secrets. Talent Wants to be Free is valuable for how accessible it is and for how it challenges much of the conventional wisdom that girds this area of the law. It is useful for anyone who practices in this field simply because lawyers will gain a better, macro understanding of economic and labor-market forces that create so much tension between the freedom to contract and the freedom to compete. This book forces the reader to think big, which is a quality lawyers too often lose in the heat of a particular battle.

6. Wonder (R.J. Palacio, 2012). Speaking of qualities many lawyers lack...empathy. This is the reason I chose Wonder - one of my all-time favorite books. It's a children's novel based around the story of Auggie Pullman - a 10 year-old boy with a severe facial deformity who for the first time is headed off to school. It's very rare that I read a book and think "everyone should read this." Wonder, however, is one of those books. Remember: children's books are not just for children. Back to empathy (which is the obvious theme of the book), it's a particularly important quality for lawyers to have in the field of non-competes and trade secrets. Many who pursue spurious and vindictive claims simply fail to understand the damage their conduct has on peoples' careers. I'll chalk it up to the never-ending quest to aggrandize legal fees, a shameless part of our profession.


5.  Fahrenheit 451 (Ray Bradbury, 1953). My mom - the English teacher - hates this book. I mean, really hates it. Dystopian novels are not for everyone, but I chose Fahrenheit 451 because it embraces a rejection of conformity. Our profession is undergoing a sea-change in the attorney-client relationship, the way in which we communicate, obtain fees for our work, and deliver services to our clients. Lawyers who blindly accept things the way are and always have been are doomed to fall behind in a declining profession. Fahrenheit 451 reminds lawyers they should embrace change and reject the fealty to tradition.

4. Sex, Drugs and Cocoa Puffs: A Low-Culture Manifesto (Chuck Klosterman, 2003). Because lawyers are uptight and need to laugh. This book will do it. Enough said.

3. Reflections on Judging (Richard A. Posner, 2013). I'm pissed off at Judge Posner. I think he has taken some unnecessarily gratuitous shots at judges and lawyers over the past year. His questioning at oral argument can be over the top. But, he still is the most influential judge in my lifetime not named Scalia. What he says is important, even if it's not how I would like to see him express it. I have read several of his books, and many I find to be inaccessible and unnecessarily dense (such as How Judges Think). However, Reflections on Judging is the one I recommend the most. He explores practical problems, such as the impact of technology on judging, as well as the theoretical, such as the flaws in the Scalia/Garner interpretive model. He also discusses problems that are less obvious, such as judges' reluctance to grapple with facts. Overall, this is a good read by a really important jurist. I wouldn't recommend this book to everyone. But lawyers? A definite must read.

2. Zeitoun (Dave Eggers, 2009). The aftermath of Hurricane Katrina is still one of the most disturbing events I can recall and one which I fear is still largely untold. Zeitoun explores this through the eyes of a Syrian Muslim, a businessman who stayed in New Orleans and toured the city in his canoe. Many themes of criminal and civil justice permeate this wonderful non-fiction account, including anti-Islam sentiment and the authoritarian governmental response to human suffering. This book exposes how Americans easily can lose their cherished civil liberties, ones that many of us take for granted.

1. The Fountainhead (Ayn Rand, 1943). Since this is my list, I get to pick my favorite book as one I think all lawyers should read. This novel about individualism certainly has great appeal to lawyers (Roark, the protagonist, is an architect). It is particularly appealing for attorneys who do not always embrace popular causes or represent popular clients. To me, the novel always has stood for its theme of individual self-determination. I can think of few greater lessons for lawyers to take than to stand up for one's beliefs (or her belief in her client), even at risk of public condemnation.


I hope this detour (or left-turn) has been interesting. I'll be thrilled if one of you decides to read one of these books simply upon my mere suggestion.You won't be disappointed.

In the meantime, get the hell out of here 2016. You really sucked.

Friday, December 23, 2016

Year-End Extravaganza (Part 3): Top 10 Developments in Non-Compete and Trade Secrets Law for 2016

The first two installments of my year-end review were designed to be pragmatic, to offer my perceptions of the most common mistakes made in employee competition disputes. The third installment is more traditional and recaps the year's top legal developments throughout the country concerning non-compete and trade secrets law.

10. California amends Labor Code provision affecting non-competes. Advising clients on non-compete issues is much more involved than just analyzing the restriction's scope. It's also about assessing clauses that are secondary to the agreement, namely provisions governing arbitration, fee-shifting, choice-of-law, and choice-of-venue. These clauses take on added importance when non-compete issues arise for California residents because that state bans non-compete contracts. Some courts have allowed non-competes against California residents when the underlying contract contains both a forum-selection clause mandating venue outside California and a provision requiring application of another state's laws. Seeking to close this rather narrow but significant loophole, California's legislature has tightened the Labor Code and will give employees the option to void these important contract provisions. For more, read my October 18 post on this development.

9. States limit enforcement of physician non-competes. States have a patchwork of exceptions to their general statutory or common-law rules governing non-competes. Lawyers are exempted, but there's no real rhyme or reason to other industry-based exemptions. This year was full of legislative activity, once again, including categorical bans on non-competes for workers in specific industries. Both Connecticut and Rhode Island limited the enforcement of non-competes against physicians. My July 11 summary on the Connecticut law can be found here, and the discussion concerning Rhode Island's legislative change is available here.

8. Utah changes non-compete law. Aside from categorical bans, other states limited the circumstances in which companies could enforce non-competes. Utah enacted the Post-Employment Restrictions Act, limiting non-competes to a duration of one year. Employees also have the right to seek legal fees for defending an enforcement action if the agreement is found to be unreasonable. The development is particularly noteworthy, since Utah is the reddest of red states politically. However, unlike dysfunctional state legislatures in North Carolina and Illinois, Utah's actually works quite well and develops legislative compromises on even the most difficult areas of public policy. Please read my May 6 post for a more detailed discussion of the new state non-compete law.

7. Ninth Circuit closes the book on Nosal computer fraud dispute. The most well-known case brought under the Computer Fraud and Abuse Act, to date, has been United States v. Nosal. The Ninth Circuit now has issued two significant appellate rulings, which interpret key provisions of the CFAA. In the first go-around, Nosal scored a win, prevailing on a narrow interpretation of the statutory term that one can be held liable when he "exceeds authorized access" to a protected computer. The second time around, Nosal was not as fortunate. The Ninth Circuit in Nosal II found that the former Korn Ferry executive violated the CFAA's proscription on accessing a computer "without authorization" when he obtained an employee's password to access a database containing information on executive search candidates. The lengthy opinion (which features a strong dissent) has produced a lot of commentary and even a revised opinion. My thoughts on the case can be found in my July 25 post here.

6. Feds seek to limit "no-poach" agreements. In October, the Department of Justice and the Federal Trade Commission issued its Antitrust Guidance for Human Resource Professionals concerning a topic that is well-known to large technology companies: horizontal employee "no-poaching" agreements. The DOJ and FTC have pledged to criminally investigate these arrangements, which serve to restrict labor markets even in employee-friendly jurisdictions in California. Whether this initiative changes with a new administration is a question that would yield rank speculation. The incoming president has been fairly vocal about investigating antitrust complaints, and he has no love for Silicon Valley. My November 14 post on this topic can be found here.

5. NLRB continues to scrutinize non-disclosure contracts. One of the more unforeseen developments over the past couple of years has been the interest the National Labor Relations Board has taken in policies and contracts that limit union organizing activity. Some sources of the friction between private companies and the NLRB are handbook policies, employment contracts, and severance arrangements. This year, in Quicken Loans, Inc. v. NLRB, the United States Court of Appeals for the District of Columbia enforced an NLRB order that struck down overbroad non-disclosure clauses and non-disparagement covenants. Private enforcement actions, such as the recent John Doe v. Google case, may be the next litigation frontier in this arena. My August 22 summary of the Quicken Loans opinion is available here.

4. Nevada rejects blue-pencil doctrine. The most significant state court ruling on non-compete law came from a state that rarely has waded into the fray: Nevada. In a thoughtful opinion, the Supreme Court of Nevada soundly rejected the blue-pencil doctrine (a judicially-created doctrine of equity used to modify or rewrite overbroad non-compete agreements). This ruling places Nevada squarely in the minority, but it's indeed a vocal and persuasive minority. The case is Golden Road Motor Inn, Inc. v. Islam. You can read my July 28 post on the decision by clicking here.

3. Attorneys General step up scrutiny on oppressive non-compete contracts. This could be called the Year of Jimmy John's...and not just because my daughter begs to go there all the time. The sandwich chain thrust itself into non-compete law by requiring low-level employees to sign broad restrictive covenants. This profoundly silly policy was a public-relations disaster and caused state attorneys general to intervene. Ultimately, Jimmy John's had to pay the State of Illinois a $100,000 settlement. Attorneys General in New York and Illinois have pledged to investigate other firms' misuse of broad non-competes into the coming year. Presumably, they will target companies that require broad restrictions throughout the corporate hierarchy, irrespective of employees' ability to cause any harm. My August 30 blog post discusses enforcement actions in Illinois.

2. White House issues non-compete "Call to Action." In October, the White House released its Call to Action and urged state lawmakers to adopt significant reforms to non-compete law. The proposal generally implores states to do three things: (a) ban non-competes for low-wage workers, those who do not have access to trade secrets, and those are who are laid off; (b) require upfront disclosure about non-competes and additional tangible consideration (beyond mere employment itself) for employees who sign them; and (c) adopt a strict red-pencil doctrine that would eliminate a court's discretion to rewrite overbroad agreements. My discussion from October 28 on the White House's Call to Action can be found here.

1. Defend Trade Secrets Act becomes law. Well, at least number one this year was easy. The Defend Trade Secrets Act, long in the works, amends Title 18 of the criminal code and creates a private right of action in federal court for trade secret misappropriation if the trade secret is related to a product or service used in interstate commerce. The DTSA largely tracks existing state law, but it provides the federal muscle that sometimes is necessary in cases of theft. Of the unique statutory provisions in the DTSA, the ones likely to garner the most attention are its express rejection of the inevitable disclosure theory of misappropriation (still a viable theory in some states), the provision enabling ex parte seizures of items (such as laptops) used to commit trade secrets theft, and a clause protecting whistleblowers. As of time of this post, we have one Colorado case that discusses the scope of available injunctive relief and one from Massachusetts that involved the whistleblower provision. 2017 should yield a trove of cases addressing key aspects of the law.


So, yeah. Pretty big year. In a few days, the final installment on my year-end extravaganza.

Thursday, December 15, 2016

Year-End Extravaganza (Part 2): Top 10 Mistakes Employers Make in Competition Lawsuits

Last Thursday, I wrote the first of my four-part year-end review column. The focus was on mistakes employees make when they leave to join a competitor. This week, I look at the flip-side: mistakes, fumbles, and foibles that employers make when pursuing competition claims.

  1. Litigating based on emotion rather than outcome. Competition claims against ex-employees tend to have a great deal of emotion simmering beneath the surface. Those stem from feelings of loyalty and betrayal. Although the first inclination may be to sue, exact revenge, and send a message, employers that pursue litigation for this purpose inevitably set themselves up for failure. Mistakes often reveal themselves through angry deposition testimony and even outright dissembling about key facts. Employers who let emotion guide their decision-making fail to recognize case weaknesses and end up making poor tactical decisions throughout the case.
  2. Focusing too late on damages. Judge Richard Posner - in one of his seemingly never-ending criticisms of lawyers - believes attorneys in patent cases focus too much on liability and not enough on damages. This time, I agree with him. The same conundrum is true of counsel representing companies in non-compete and trade secret litigation. The fascination with obtaining liability facts devolves from the insatiable appetite lawyers have to load up on the low-hanging fruit and avoid tackling tough issues. Damage theories can be quite tough, and the specter of proving damages is outside many lawyers' comfort zone. Oddly enough, damages rules are flexible enough to give plaintiffs' counsel ample room to be creative, particularly in trade secrets cases. But my experience has been that most of the time, plaintiffs get a start way too late in the game.  
  3. Declining to have a litigation point-person. Representing employees has its many challenges, but it usually is easy to get information from them. A lawyer has one client and one person to keep under control. Representing an organization, though, is tough. Many different people in the company could have access to important documents and knowledge of key facts. Outside counsel can feel as though they are herding cats trying to marshal those diffuse resources. That's why it's key for attorneys to have one point-person within the company, who is preferably not a lawyer, to serve as the point-person for litigation. That individual must have authority, have a vested interest in the outcome, retain organizational credibility, and be responsive. In many cases, however, it is apparent counsel is running the show and simply has no one to coordinate the fact-gathering and strategic effort within the company.
  4. Overlooking lower-level employees. One problem that stems from a company's failure to appoint a non-lawyer point-person is that mid- and entry-tier employees may possess vital information that somehow goes undetected until it's too late. This person could have vital knowledge concerning trade-secret security measures, customer contacts, or dealings with the ex-employee. But my experience has been that companies who litigate competition cases poorly rely too much on executive-level employees and ignore those who have a better pulse as to what actually happens in the trenches.
  5. Ignoring third-party impact. Since competition suits should be about loss of business, it stands to reason that third-parties - those who supply that lost business - will play a vital role. Employers who sue ex-employees may not realize where the loyalties of these third-parties lie. When credibility issues are paramount, courts will often make decisions based on which of the non-interested witnesses (i.e., third-parties) are more credible. If they are not aligned with or even hostile to an employer, then this can redound throughout the entire case. Relatedly, companies may not realize the impact that mere litigation will have. Even if customers were inclined to remain with the employer, the litigation itself may be so upsetting or costly that it causes them to leave altogether.
  6. Failing to follow basic exit procedures. A company's mistake in litigation may stem from prophylactic steps it could have taken before the lawsuit to avert a costly suit. Those include: (a) sending effective, call-to-action reminder letters to the departing employee; (b) conducting a simple exit interview; (c) disabling a departing employee's access to sensitive database material; and (d) examining Outlook items or dedicated work computers for information the employee may have taken. Even if a suit eventually arises, a company's sloppy handling of departure procedures can feed into a damaging narrative at trial - that the company was unconcerned about keeping information confidential.
  7. Short-cutting discovery answers. Employees usually do a pretty good job of taking discovery seriously. Employers? Not so. They tend to revel in boilerplate objections and offer answers that simply may get the job done. Those short-cuts inevitably come back to hurt later in the case. To be blunt, companies want to use litigation to their advantage but do not want to bear the burdens that come with litigation. I saw this earlier this year, when a plaintiff gave a half-hearted, misleading answer to a damages interrogatory. It clearly thought it could get by with doing the bare minimum, and in doing so undermined its credibility. This ultimately hurt the company badly in settlement talks, resulting in a resolution far less favorable than it could have been.
  8. Not telling a story. Trials - like elections - are really no more than telling a story. Abraham Lincoln used to remind young lawyers to be be storytellers. A lawyer should be striving to presents a more compelling story than her adversary. Without a common unifying theme, a plot really, then a trial just devolves into a disorganized and clumsy presentation of facts with no cohesion. Employment competition cases usually have a lot of facts. But employers frequently make the mistake of trying to dump too many disparate facts into a trial, even if they have no connection to the dispute.
  9. Oversimplifying the claimed trade secrets. A lot of frivolous competition cases have at their heart a broad, generalized description of stolen trade secrets. Many times, this is easy to spot. Here are the tell-tale signs: (a) active resistance to disclosing the information allegedly stolen; (b) broad, unintelligible descriptions of the trade secrets at issue; (c) hedging and qualifying as to what the information at issue actually is; and (d) outright speculation as to how anything was stolen. Lawsuits that have any of these features are doomed to fail, usually during discovery when courts intervene and demand the plaintiff do more.
  10. Discounting contract defects. Little-known fact about non-compete disputes. Um, sometimes the contract's not enforceable. You may have heard this. The case reporters are full of such cases. Non-compete suits that go bad for companies often have a defective contract - whether on consideration, reasonableness of the terms, or some other drafting problem. Many employers, however, double-down on their contracts, sure that they must be fine and that a judge will understand this. Not so. A bad contract can ruin a lawsuit, even if the employee doesn't entirely have clean hands.
Next week on the year-end review, the top 10 developments in non-compete and trade secrets law during 2016.

Thursday, December 8, 2016

Year-End Extravaganza (Part 1): Top 10 Mistakes Employees Make When Leaving to Compete

This year, I'm going out with a bang.

The end of each calendar year presents bloggers like me with an opportunity to go big and to avoid being too...meta. I've traditionally featured Year-End Top 10 lists each year since 2008 when I first started writing this blog.

No different, this time around. Let's face it, 2016 sucked in a lot of ways. So to try and get a running start for 2017, I thought I'd do four year-end columns. Think of it as sprinting the last mile of a 10k or buying your spouse a really expensive stocking stuffer. Some of my posts will be in the mold of what I've done in the past, and one is something different that I thought of while driving home last night that adds a bit of a twist to my year-end tradition.

The first installment of this year-end review tries to summarize a lot of what I write and what I observe in my day-to-day practice: common mistakes that employees make when jumping ship. Here are the top 10:

  1. Getting legal advice from a friend. I've heard some variation of this many times: "I coach basketball with this guy, and he told me that Illinois is a right-to-work state and that noncompetes aren't enforceable." There are about ten things that irk me in that sentence, but the big picture is this. Your pal, even if he draws up brilliant in-bounds plays during timeouts, shouldn't be giving you legal advice on a difficult area of the law. He may be shrewd when it comes to how to get out of a traffic ticket, but not so much when figuring out noncompetes. Virtually any street-lawyer advice is sure to be misguided, incomplete, and flippant.
  2. Seeking legal advice too late. This mistake is related to the first one. The individual clients I've been able to help the most come to me early, often when they're exploring whether to take a new job or even whether to interview for a new job. An attorney hardly can mitigate risk (and cost) when his or her client already has done eight bad things on the way out the door.
  3. Forwarding e-mails to personal accounts. Speaking of bad things, the timeless practice of forwarding work e-mails to a personal web-based account has fostered more litigation and more disputes than just about anything I know. By now, one would think that either technological innovation or common-sense would have kicked in, but apparently we're all too lazy. In any event, this short-cut to a competitive edge (a) harms an employee's credibility, (b) is easy for a court to understand, (c) pisses off the employer, (d) is never easy to explain, and (e) requires virtually no effort on the employer's part to discover (even deleted Outlook items can be recovered without hiring a forensic expert).
  4. Making assumptions about "personal" information. Related to the e-mail thing. Employees often want to download or copy personal information from a work computer to a separate device. It's amazing to me how many employees keep their tax returns, little league stats, and kids' pictures on their work computer. Why? But anyway, those who do often decide they'll just transfer data without informing management. The problem is that, even when innocent, the employer may not know what data the employee is moving to a personal device. In a notorious competition case, an employee hid his employer's trade secrets in a file called "chocolate chip cookie recipe" and downloaded those for his own use. So employers are not just going to look at file names and assume that nothing bad happened. Just as problematically, employees may start out with the intent to move some personal information but they often blur the line between personal and professional. Simply because you worked on that spreadsheet doesn't mean its yours. But often there's an insatiable desire to take this information, particularly since it's so easy to do so. Regardless, any sort of data transfer or personal device plug-in is going to look suspicious. Here's an idea: just ask human resources to watch or help you with getting personal information off the work computer. Not hard.
  5. Failing to obtain agreements. This one often shocks me. Many employees never keep agreements they sign, even though they know of them and know they're important. And many never request their agreements upon departure. Employees have a right to access their personnel file (in Illinois, if not in other states) and need to know their legal obligations. Fear of tipping off an employer about post-departure plans is really a crummy excuse for not understanding those obligations.
  6. Trusting new employer's advice. We've established that employees often seek legal advice from their non-attorney friends. Just as often, they vet their non-compete only with the new employer. Here's a newsflash. That employer may not be any more informed than the buddy you coach basketball with. It may not have sophisticated legal counsel. It may not even have legal counsel. And it certainly is not going to look at all the relevant legal, economic, and practical issues from the employee's perspective. The employer may, after all, make a calculated risk that the employee can bring in new clients, and if legal action results, well, then, it could decide to just cut the cord and fire the new worker it assured had nothing to worry about.
  7. Telling clients of future plans. This is a very common problem with sales employees. Clients tend to view their sales person as a key point of contact. That's why, in fact, courts will enforce reasonable restrictive covenants. Employees often find that it's harmless to tell contacts of an impending departure. Many times, they go beyond merely informing them of the departure and want to ensure that the relationship continues. Not only does this type of communication provide an employer with much-needed evidence of competition, but it also could be a breach of the duty of loyalty (which exists independent of any contract). After all, an employee owes a strict duty of loyalty through her last day of employment. Pre-termination planning often is viewed as disloyal under the law.
  8. Lying about departure plans. I would estimate that at least 40 percent of competition disputes have this as a common fact. Employee tells employer during an exit interview something along these lines: "No,  I'm not going to stay in the industry. My brother-in-law and I are starting a real estate company." Not. Good. That may have the short-term benefit of throwing the employer off the employee's scent for a week or two, but inevitably the employer will find out what's happening. And, even if there are legitimate challenges to a non-compete, this type of dissembling will hurt an employee's credibility very badly.
  9. Burning bridges on the way out. The time period between notice and departure is particularly harrowing. For many employees, it's not a period to ensure the company has a smooth transition of accounts or projects in the pipeline. It's about settling scores and airing dirty linens. It's a time to tell the boss she's incompetent and lazy. It's a time to complain about the holiday party, the expense reimbursement program, the crappy health insurance plan, and how no one knows just what the hell Bill in accounting does every day. Though perhaps it seems petty and trite, this type of score-settling behavior only encourages an employer to seek a pound of flesh when it can.
  10. Not telling counsel the "bad" facts. Even in strong cases, bad facts exist. Every one. Employees, who often have no experience with legal counsel, have a perverse sense of counsel's role. We're not cheerleaders. We're advocates, but our job is to provide counsel. If an employee hides bad facts or provides an explanation that is unreasonably dismissive (or, just as often, incomplete), we can't counsel. When those bad facts come out (as they always do), then the relationship between lawyer and client can suffer immeasurably. The best clients put all the facts on the table, explain them to their lawyer, and work with their lawyer to counterbalance those bad facts with ones more material to the dispute.

Next up on the year-end review, you guessed it...Top 10 Mistakes Employers Make in Competition Lawsuits.

Tuesday, December 6, 2016

Colorado Court Interprets Key Remedies Section of Defend Trade Secrets Act

With only a life span of a few months, the new Defend Trade Secrets Act has produced very little in the way of interesting case law. That's hardly a surprise at this point.

For the most part, the DTSA does not change substantive state law concerning trade secrets and how one may "misappropriate" a trade secret. The statutory differences, by and large, concern the scope of available remedies. And of course, the muscle that federal courts provide is the principal value that the new statute offers. (For more discussion on litigating in federal versus state court, see my post immediately preceding this one.)

This past week, a federal district court in Colorado offered perhaps the most in-depth look yet into the DTSA. And not surprisingly, the core aspect of the opinion concerns statutory remedies, particularly those relating to injunctions.


Injunctive relief is a default remedy for actual or threatened misappropriation. But injunctions that prohibit merely using or exploiting trade secrets are only so helpful. For one, monitoring that type of order is almost impossible. And just as problematically, trying to define what exactly is prohibited from "use" is an exercise sure to drive lawyers and judges nuts.

To be certain, injunction clauses under the DTSA and state statutory law are not so confining for aggrieved trade-secret owners. State laws don't set precise boundaries on how far injunctions can go. So a late addition to the DTSA drew quite a bit of attention when it appeared to do just that. Section 1836(b)(3)(A) of the DTSA contains two provisions that seem to limit broader conduct-based injunctions - that is, injunctions that extend beyond prohibitions on using trade secrets.

First Exception. The first expressly states that an injunction order may not "prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows." That provision is a clear, direct shot at states that endorse injunctions under the theory of "inevitable" disclosure - something broadly akin to a non-compete agreement.

Second Exception. The second DTSA provision says an injunction cannot "otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business." This simply means that plaintiffs cannot invoke the DTSA to secure more expansive injunctive relief than some employee-friendly states would allow when enforcing non-compete agreements.


Engility Corp. v. Daniels (a copy of which is embedded below) brought these two exceptions into play. The case was a fairly typical employment-related trade secret dispute, which arose when two employees of Engility - a former division of L-3 Communications - left to form their own business. The relevant market is somewhat technical in that it concerned the sale of military communications equipment and a related network. The facts giving rise to claims of trade secret theft arose largely from one employee's retention of data pertaining to this market and his shifting story about what he did with that data for a few weeks after termination.

Engility sought more than a use-based injunction. Although it had no non-compete agreement with the employee, Engility wanted the court to prevent the ex-employees and their new firm from working with a particular military customer. The court's challenge was to apply the DTSA, and its limiting language concerning injunctions, to this particular request.


The court found that the first remedial limitation did not apply, principally because the ex-employees formed a new business. In the court's words, the DTSA gives "no indication that 'employment relationship' encompasses the role of an outside contractor," which the new entity would be to the military customer that was the focal point of the injunction request. It might have been easier, however, if the court simply stated that the exception did not apply because the employer did demonstrate a likelihood of actual or threatened trade-secret misappropriation.

The court then turned to the second exception and found that Colorado state law independently did not bar the customer-based restraint. The question was significant, because Colorado state law is much more restrictive of non-compete use than many other states. Here, however, the court relied upon state statutory law that allows non-compete agreements to be enforced "for the protection of trade secrets." Applying this provision, the court was able to issue a broader conduct-based injunction under the DTSA since Colorado law allowed it to the extent necessary to protect trade secrets.


The Engility decision is instructive for how the new remedies provision of the DTSA may apply in practice. Its applicability, however, may be somewhat narrow for difficult future cases. The facts of Engility established a firm basis for the court to conclude that the employee engaged in actual or threatened trade secret misappropriation - at least at the preliminary injunction phase. With those facts determined, the court didn't really have a tough call in applying the two DTSA injunction exceptions.

The much harder cases will come when employers are unable to present facts that look like theft or misuse of confidential information. The DTSA statutory exceptions should be sufficient to weed out these weak speculative claims, based largely on a theory that an employee inevitably will use something secret. That is why those exceptions are there. Broad conduct-based restrictions under the DTSA won't survive unless employers show facts in the mold of those described in Engility.

Tuesday, November 29, 2016

Competition Claims: Federal versus State Courts

This post largely is inspired by a YouTube video I watched recently by Jonathan Pollard, who discusses the importance of litigating trade secrets in federal court - particularly if you're a defendant.

Jonathan's 15-minute discussion is a great way for clients - particularly individuals - to understand some of the procedural aspects of litigation. Often times, it is the procedure where disputes like this are decided. And unfortunately, in the world of litigation, procedure tends to be opaque and something we as lawyers merely gloss over.

Having litigated non-compete and trade secret claims for nearly 20 years, I can say with a fair amount of certainty that my work has been split equally in state and federal court. I suspect that the enactment of the Defend Trade Secrets Act last year will slowly start to tilt that equation towards federal litigation.

Here are the biggest differences I have noticed over the years between litigating competition claims in federal versus state courts:

  1. Attention to the Merits. The quality of judges in the federal system is - on the main - higher than in state court. This is a pretty uncontroversial generalization to make. Many state court judges are terrific, and some of the best judges I've ever appeared before are products of the state court system. Apart from that, however, state court judges have a higher case load than their federal counterparts. Many state court judges in Illinois have nearly 1,000 cases assigned to them. By contrast, the average number of cases filed per judgeship in federal court is 412. Many judicial districts vary in terms of the time from filing to disposition. But on average, it is fair to say that a federal court judge has fewer assigned cases to her docket than does a state court judge. Therefore, they can devote more attention to fewer cases.
  2. Help. Federal judges also have a staff of law clerks, which Jonathan describes in his video. This is an enormous benefit to litigants in emergency injunction proceedings. Quite honestly, even the most astute well-intentioned state court judge isn't going to have the time or resources to evaluate a TRO or preliminary injunction submission with the kind of attention it probably deserves. This certainly is the case with disputes in highly-technical fields or which require analysis of electronic evidence.
  3. Hearings. Part of the reason state court judges seem so busy is that they spend more time on routine hearings, status calls, and motions in court. This clogs up the available time for review of documents in chambers, legal research, and thoughtful analysis of contested cases. State judges have no one to draft written orders or opinions, and very rarely do so even on contested dispositive motions. For that reason, too, status court judges are generally much more reliant on oral argument and on in-court presentations by the litigants. In federal court, even contested preliminary injunctions may be resolved solely on the papers rather than on in-court live witness testimony. This, mind you, is not necessarily a benefit of federal court proceedings, though it certainly reduces cost. Often a strong case can come alive in a courtroom and appear more milquetoast solely when considered on the written submissions.
  4. Presumptions. The best point Jonathan makes in his video is that many state court judges start with a firm presumption that the plaintiff is correct. One of the reasons this is the case is that state courts are filled with rather form-oriented and even mundane disputes (often with pro se litigants on the other side) where the merits are not contested. Examples are collection disputes, evictions, and mortgage foreclosures. For judges who handle those calls, it's understandable to have a pro-plaintiff bent when the plaintiff is almost invariably the winner. Non-compete and trade secret cases are not susceptible to easy handicapping, and if anything, the merits may tip in favor of the defense.
  5. Scheduling. Federal courts operate with a set of procedural rules that are clear, demanding, and inflexible. The rules require early conferencing and discussion of proposed case management, and courts enter scheduling orders that can be changed only on good cause. State courts are notorious for continuances and delays, although that trend seems to be changing. In Illinois, most practitioners ignore our nominal case management rule (sort of a hybrid between Federal Rules of Civil Procedure 16 and 26). Judges seem not to care too much about it.
  6. Cost. Because of the demands in federal court (such as for pre-trial orders and expert witness disclosures), many view federal litigation as more expensive. My experience is precisely the opposite. I think the clear nature of the procedural rules, combined with judges' reluctance to blindly continue cases and fewer mundane court appearances, creates a construct in which attorneys can and should litigate disputes more efficiently. Federal courts also have magistrate judges before whom parties to a civil case can consent to have the case heard. 
  7. Fee-Shifting. Federal court tends to work better because the defense has greater opportunities for fee-shifting. State court judges are elected officials and face retention every six years. They invariably are the product of local bar associations and simply are loathe to ruffle feathers and sanction intransigent litigants. Federal court judges are appointed for life and have no allegiance to counsel. The Federal Rules of Civil Procedure also contain a number of different mechanisms that make fee-shifting appropriate, particularly when parties are unreasonable in serving or responding to discovery. This deterrent effect tends to reduce litigation cost because parties and counsel simply do not want to expose themselves to fee-shifting - even for discrete discovery dust-ups. In state court, sanctions are handed out so infrequently that delay and distraction seem to be the norm. When a party faces a disparity of litigation resources, this can be crippling.
Is there a clear-cut solution to where a plaintiff or defendant would rather litigate? It would seem to lean pretty strongly towards federal court. But as Jonathan notes, it's particularly crucial for defendants. 

Tuesday, November 22, 2016

Employee Training and the Value Proposition of Non-Competes

The best part of the current debate over non-compete agreements is not that we're nearing a consensus: it's that we're having the debate.

With the White House's Call to Action, and the research that led to this unprecedented move, commentators have begun to explore why firms have non-competes in the first place. The answer usually is that many view non-competes as protecting trade secrets, customer relationships, or training investments.

In the main, those all sound rational, depending of course on the firm's line of work and the employee's ability to inflict damage after leaving. My personal views on this largely have not changed in the nearly 20 years I have been practicing in this field. I summarize them as follows:

  1. Non-competes should not be per se invalid and should be reserved for those at the highest levels of the company.
  2. Businesses use them indiscriminately without considering their benefits and drawbacks.
  3. A garden-leave approach, which provides tangible benefits to employees during the restricted period, is economically efficient and the preferred template for businesses to use.
  4. Courts should not enforce non-competes when there is a termination without cause.
  5. The judicial reformation or "blue-pencil" doctrine is inappropriate and creates poor incentives. It should be banned.
  6. Less onerous restraints, such as non-disclosure agreements, most often provide sufficient protection.
What is notable about my list, though, is that it doesn't really account for the employers' incentive to train workers. Do non-competes actually facilitate training by encouraging firms to devote scarce resources to developing employees' skills? Would firms continue to train employees if non-competes were not allowed?

There are a couple of different viewpoints on this.

In a Wall Street Journal op-ed, Jason Furman and Alan B. Kruger discussed "monopsony" power and the use of non-competes. They note that "[i]f monopsony power creates barriers to workers switching jobs, it can slow labor turnover, reducing dynamism and innovation." They then cite the now-commonly approved benchmark that nearly 20% of workers have signed a non-compete agreement. (There are about 1,500 non-competes suits per year, according to Evan Starr.) Noting that nowhere near that many workers have access to trade secrets, Furman and Kruger conclude that "[t]here is no reason why employers would require fast-food workers and retail salespeople to sign a noncompete clause - other than to restrict competition and weaken worker bargaining power."

The counter to this monopsony argument focuses on the employer's inability to recapture training costs without a non-compete agreement in place. The analysis does not focus on trade secret access.

Hoover Institute fellow, David Henderson, summarizes his thoughts in a rebuttal to the Furman/Kruger rationale. Simply put, Henderson notes that an employee who receives training may be able to obtain a higher wage elsewhere than that which the employer is willing to offer. While carefully stating that he is not endorsing non-competes, Henderson clarifies the "training" rationale for why a low-wage worker may be subject to a non-compete.

However, I find this theoretical rationale misses the mark. First, American businesses long have assumed the responsibility for educating their employees. It seems illogical that they would fail to do so merely because of the possibility of future competition. Second, formal training is no panacea. Most effective training occurs on the job, through the collective experiences of day-to-day work and a general exposure to the marketplace. Courts long have concluded that general skills and knowledge are not protected interests.

Quantifying training, too, is nearly impossible and cannot be reduced to a mathematical equation that will conclusively demonstrate whether non-competes incent or deter training. If quantification were possible, then training repayment agreements - or quantifying damages based on such a hypothetical contract between market competitors - would seem to be a better solution than broad non-compete enforcement. Could we even envision a new regime where a repayment model supplants an enforcement model? I doubt it, but it makes for an interesting discussion.

The bigger problem, though, may be reciprocal use of non-competes and the development of industry standards, using some sort of an anti-trust "relevant market" analysis. A firm, for instance, may not be inclined to use a non-compete but does so only in response to its direct competitors' pre-existing inclination to do so. In that sense, the reluctant firm is only trying to avoid the free-rider problem: if competitors see that the reluctant firm has no non-compete regime with its workforce, those competitors will be less willing to invest in appropriate employee training, thereby lowering production costs. This explanation for why firms use non-competes in a blanket fashion actually seems to prove what Furman and Kruger are saying: monopsony power stems from artificial means to restrict competition, that being an industry-wide practice of using non-competes in the first instance.

If anything, therefore, the attempt to justify non-competes on the basis of protecting training costs seems to explain why so many workers without the ability to harm their employers are subjected to them. 

Monday, November 14, 2016

No-Poaching Agreements, Antitrust Guidance...and DJT

A few years back, the Department of Justice launched an antitrust action against several technology giants, including Apple, Google, Intel, Pixar, and others. The action was based on the Sherman Act and alleged that these employers committed a "per se" violation of the antitrust law when they agreed not to cold-call each other's employees.

These so-called no-poaching agreements were bilateral agreements that, according to the DOJ, eliminated a form of competition - the market to retain and hire employees. Those agreements reduced employee mobility and deprived workers of the opportunity to achieve higher wages and benefits. The particulars of the  restraints were embarrassing for a number of big names in the technology industry (and featured a couple of famous e-mails from the late Steve Jobs). The significance of the horizontal no-poaching agreements was particularly acute for many workers (who later filed a civil class action), since California bars vertical non-competition agreements between employer and employee.

In October of this year, the Department of Justice's Antitrust Division, in conjunction with the Federal Trade Commission, released its Antitrust Guidance for Human Resource Professionals. That document clarified the DOJ's intent to criminally investigate "allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each others' employees." The DOJ's guidance also makes repeated reference to "naked" agreements not to poach employees, meaning those that "are separate from or not reasonably necessary to a larger legitimate collaboration between the employers." Those naked restraints are per se invalid, a violation of antitrust law, and will be deemed so "without any inquiry into [their] competitive effects."

So what does this mean in practice? While the parameters of the DOJ's guidance are not set in stone,  I think it's possible to glean a few guiding principles for typical no-poaching scenarios.

  1. M&A Due Diligence. No-poaching agreements are fairly common when an acquirer begins its due diligence of a potential target. Term sheets, letters of intent, and even transactional non-disclosure agreements often contain some form of no-hire clauses. These should be outside the DOJ's antitrust framework. However, the better approach is to limit the scope of these no-hire arrangements to key employees who play a material role in the due diligence process and to a reasonable period of time - say, 6 to 9 months past the time the deal falls apart.
  2. Litigation Settlements. No-poaching agreements very frequently arise during litigation (or threatened litigation) between competitors, usually over trade-secret theft allegations or a dispute over a group of employees' non-compete agreements. Nearly all of those cases settle before trial. In many settlement agreements, a plaintiff demands that the defendant employer agree not to hire the plaintiff's employees for a period of time. These types of agreements likely are unlawful. Nothing in the DOJ guidance contemplates that this type of restraint is "reasonably necessary to a larger legitimate collaboration," and indeed it would seem to be the very type of horizontal agreement with a vertical impact - on non-party employees.
  3. Business-to-Business Transactions. Somewhere in between these two paradigms are more run-of-the-mill contractual arrangements between companies who aren't necessarily competitors. Many technology staffing contracts feature some iteration of no-hire/no-poaching clauses. Others do as well, including some service-oriented relationships that look like a poor-man's joint venture. A number of my clients, for instance, provide professional consulting services that require their employees to work closely with a manufacturer or supplier to enhance or develop new products. Because of the close relationship developed among the two companies' employees (and their exposure to each other's business), the perceived need for a no-poaching agreement becomes obvious. I think these will likely be okay, but again a narrow scope with a short time limit is essential. Moreover, each beneficiary of a no-poaching agreement will need to illustrate why the no-poaching agreement is critical to the relationship. That these agreements are usually not between competitors is helpful to, but not dispositive of, the antitrust analysis, since the relevant market is the employment marketplace - quite broad indeed.
The DOJ's guidance is helpful to an extent, but like much of antitrust law, the parameters are not well-defined. With the incoming administration and the change in leadership at the DOJ, there is even greater uncertainty whether no-poaching agreements will warrant serious civil or criminal scrutiny. My belief is they probably won't because DJT seems to be a fan of broad and obviously invalid non-compete agreements. But the new President has (at least publicly) taken some populist positions as it concerns antitrust law.  

Tuesday, November 8, 2016

A Response to the Jackson Lewis White Paper on Non-Compete Reform

I was quite interested to read a self-styled "white paper" publication this week from the management-oriented firm Jackson Lewis. That publication, titled White House Continues Attack on Non-Compete Agreements, was of obvious interest to me since I wanted to see how other practitioners viewed the Call to Action released last week. And in particular, I was interested to see how thought-leaders would respond to the White House's suggested calls for reform at the statewide level concerning non-compete enforcement.

Before reading the Jackson Lewis publication, I was encouraged by the tone and substance of other posts, including one from Eric Ostroff's excellent blog, in which he acknowledged the overuse of non-compete agreements. Eric suggested deploying an evidentiary presumption against certain non-competes, rather than categorical bans. While I disagree that this is sufficient, it is certainly an alternative, incremental step towards reform that state legislators may consider in the coming years.

A lengthier read comes from Russell Beck, who holds great leverage on this issue since he is one of the premier private practitioners in the field and one whose work the White House has cited in its reports. In his post, Russell even offers a number of links to terrific empirical research studies on the use of non-competes, which themselves discuss litigation trends statistically, the growth of non-compete use in the workforce, and the true economic impacts of non-competes on employee incomes.


Against that backdrop, the Jackson Lewis paper was a disappointment. The publication seems less interested in provoking thought and reasoned discussion on non-compete reform, and more intent on sending the message that reform is unnecessary in the first place because everything seems to be working just fine. Blog posts that serve to advertise a firm and cater to a client base are what they are (and there's a f**king lot of them); I just happen to think they're not worth anyone's time.

The paper contains a number of unsupported or overly simplified conclusions, a couple of which are worth a further look. For starters, the post concluded that the May 2016 White House Report (titled Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses) "mostly excoriat[ed] employers' use of non-compete provisions in the United States." That's obviously wrong and a misread of the White House Report.

The report sought to identify the main areas of non-compete misuse (and if Jackson Lewis thinks there's no misuse, its lawyers have their collective heads in the sand) and to provide an analytical framework for how to balance two twin concepts: the freedom to contract and the freedom to work. Pointing out the misuse of non-competes is part and parcel of the difficult balance courts and legislatures struggle with. And all attorneys have an obligation to understand this.

The White House report's conclusion even noted that "non-compete agreements can play an important role in protecting businesses and promoting innovation. They can also encourage employers to invest in training for their employees." The document is far from an excoriation on non-competes in the main, but rather an excellent synthesis of data and state practice to see how to balance interests that lie in tension. That balancing efforts starts with incremental reform at practices that foster abuse and misuse.

The Jackson Lewis paper then says the White House's more recent Call to Action (which largely relied on the May 2016 report) "appear[s] more conclusory than based on empirical evidence." Earlier, the post even noted the reliance on limited, non-public studies. The authors, however, must not have looked at the Administration's publications. In fact, the more detailed report identifies a number of research studies (that are actually well-known and widely-discussed in the field), which directly led to the White House's conclusions and suggested areas of reform. In short, the White House report is not a half-cocked one-off. It's based on significant empirical research.

On this score, a couple of studies are worth mentioning. The obvious starting point for anyone interested in a serious discussion of reform is AnnaLee Saxenian's 1994 work called Regional Advantage: Culture and Competition in Silicon Valley and Route 128. That publication notes the disparate paths taken by the Boston research corridor and Silicon Valley, stemmed in large part by knowledge flows and spillovers that spurred innovation in California. My favorite read in this area followed Saxenian's book. Matt Marx and Lee Fleming published Non-compete Agreements: Barriers to Entry ...and Exit?, which you can find here. I have attended talks by Professor Marx, who is not a lawyer but who captivates a room full of them on the most esoteric of material. The Marx/Fleming paper is enormously influential and it looked at the significant financial cost to engineers who were bound by non-competes. It should be required reading for CEOs - and the lawyers they hire.

And finally, if anyone is interested in synthesizing the research to determine the true impact non-competes have on economic liberty, I highly recommend Alan Hyde's article called Should Noncompetes Be Enforced? The Hyde paper, available through the gold-standard Cato Institute, discusses the Silicon Valley experience at length but also extols the benefits from knowledge spillovers that employees can bring when changing firms. (Word to the wise: knowledge spillovers ain't bad, and contrary to what many lawyers think, free-flowing information does not equate to misappropriation.)


In the larger picture, non-compete enforcement presents one of the most difficult balancing exercises required in the law between two freedom-oriented concepts: contracting and employee mobility. And one of the largest problems in reconciling this balance is that one of the players (the average worker) faces an enormous disparity in bargaining power. That reality necessitates an honest, intelligent discussion on reform to restore balance.

Reform can come by engaging in the very type of debate the White House has advocated. Reform, too, may come from a different source that is mentioned only rarely. Industries can create their own set of best practices to facilitate the competition for talent while balancing rights to "excludable" or secret information. We have seen this with the financial services' Protocol for Broker Recruiting, a sort of private legislative solution meant to drive down legal fees and set the parties' expectations ex ante. In my opinion, this - along with targeted reforms (garden-leave and red-penciling) - is the best answer to balance out the competing interests at stake when regulating employee mobility. Perhaps this too is part of the reform the White House wants to initiate. Lawyers can play a large role in facilitating private legislation. But they need to start acknowledging the problem and be part of the solution.

It is not a viable option, however, for law firms that represent management to downplay the need for reform in the first place. In large part, those firms have contributed to the skepticism of non-competes by failing to understand the countervailing interests that are at play. The irony is that their management-driven practices, and the fees that keep the law firm engine running, could imperil non-competes altogether.

Friday, November 4, 2016

Louisiana's Rather Unusual Non-Compete Exemption

My last post, and many other fine posts circulating in the blogosphere, commented on the White House's call to action concerning non-compete reform. That effort was a thoughtful initiative that should drive discussion at the state level for the foreseeable future.

Of all the areas of reform the White House suggested, the one that is relatively undefined is the idea that certain classes of workers should be exempt from non-competes altogether. The "public health and safety" language the White House used clearly is meant to include nurses and physicians, but there's very little meat on the bone beyond this very broad principle.

I can tell you one occupation that I believe the White House did not mean to include by way of a categorical exemption: car salesmen.

Yet, oddly enough, in Louisiana, car salesmen are indeed exempt - statutorily - from enforceable non-competes. Louisiana is a relatively exacting state when it comes to non-competes in the first place. But just how the legislature decided that car salesmen merited their own exemption is a true oddity. This week, the Third Circuit Court of Appeal held that a dealership could not circumvent the statutory language by claiming a former employee was performing sales management duties. In addition to relying on the plain language of the statute (and the clear legislative intent), the court noted that all sales employees perform at least some management duties.

I truly hope this is the last time I feel compelled to discuss the nuances and interpretations of this particular statute.

Friday, October 28, 2016

A Turning Point on the Use of Non-Compete Agreements

I have a friend named Chris and a brother-in-law named Mike.

Both are great salesmen. They are likable, great with clients, and work either in a personal services or technology business. They have moved jobs, though, fairly frequently over the time I've known them. They're in demand, rightfully so. They're smart and good at what they do.

And both steadfastly refuse, ever, to sign a non-compete agreement. It hasn't hurt them a damn bit.


Why do I bring this up? Well, first, many people I work with are just like Mike and Chris. Yet only a fraction take the approach my friends do. Just because an employer or prospective employer asks you to sign a non-compete doesn't mean you should. People aren't sheep, and we're not fungible commodities. Many people are afraid of confrontation. However, employers do not have all the leverage, even if it might appear that way. Though some may claim to need a non-compete of some kind, there's always room to negotiate and often times room to refuse to sign altogether. If the agreement's non-negotiable, then maybe you're better off finding a job elsewhere. Who'd want to work for that company?

Those are entirely reasonable approaches, and a great many employees have the ability to pick and choose among good and bad employers. People like Chris and Mike.

But not all do. Some people don't have marketable skills, are just entering the workforce, or face a shortage in the potential firms able to offer a decent job at a decent salary. And in those circumstances, bargaining power goes down. Dramatically. An employee may subjectively know she shouldn't sign a non-compete, but truth be told, she needs the f*cking job.

There are probably more people like that than there are workers like Chris and Mike. When it comes to non-competes, they live and work in the shadows.


It is these shadow employees that leads us, in my opinion, to a pivotal moment in how firms use non-competes, let alone enforce them. There's a move afoot by state attorneys general to police the overuse of non-compete agreements, as we've seen with the Jimmy John's fiasco and Eric Schneidermann's efforts in New York to stop the anti-competitive madness. There may even be a path for individual "private attorneys general" to do the same sort of thing under state deceptive trade practices law - with the prospect of fee recovery there for the taking.

Throughout my time writing this blog, I've advocated for reform. But the complex nature of non-compete law means that incremental reform is how the ball must get rolling. In Illinois, the General Assembly and Governor Bruce Rauner passed common-sense legislation that banned non-compete agreements for low-wage workers. This is the ideal sort of starting point to clear out some of the underbrush.

The White House added a new substantive layer to the reform discussion this week by urging state lawmakers to adopt meaningful changes to non-compete law. This initiative is somewhat remarkable, because there's really no suggestion that federal legislation is on the way. (The proposed MOVE Act, which is limited in scope, has gone nowhere. My post from last year discussing the legislation, a direct response to the Jimmy John's imbroglio, is available here.) Instead, the federal government is calling on state lawmakers to act and implement best practices with regard to non-compete law.

Those best practices cover three basic areas:

  1. Ban non-competes for certain classes of employees. According to the White House, classes would include "low-wage" workers, those who work in occupations that "promote public health and safety," those without access to trade secrets, and those who are laid off or terminated without cause.
  2. Improve transparency. This approach would advocate for upfront disclosure about non-competes before the start of the employment relationship and to require some tangible consideration (such as garden-leave or a signing bonus) beyond the mere continuation of employment. Some states now - New Hampshire and Oregon - have implemented advance notice laws that help mitigate the adhesive nature of non-compete agreements and, in theory, enable workers to evaluate competing job offers before having a non-compete sprung on them when they start work. 
  3. Incentivize fair drafting. The White House has promoted the "red pencil" doctrine, which would void an entire agreement if certain provisions are unenforceable. This approach would prevent an employer from stepping back into a reasonable contract it could have drafted but chose not to. As my prior posts illustrate, state law is all over the map with regard to partial enforcement of overbroad non-competes.
In my opinion, these reforms are spot on. My advice to state lawmakers would be to prioritize the areas the White House has identified, with an immediate focus on banning non-competes for low-wage workers, similar to what Illinois has accomplished, and those terminated without "cause," as defined consistent with other employment provisions in state law (e.g., eligibility for unemployment compensation). Once we've made progress in those areas, states can turn their attention to implementing more nuanced reforms - such as requiring garden-leave clauses, limiting the ability of judges to "equitably reform" overbroad contracts, and outlawing non-competes for certain types of industries.


For further information, please read Russell Beck's comprehensive post (with great links) at Fair Competition Law. The White House's Policymakers' Guide to State Policies is very well-done, readable, and hits all the major discussion points.

Tuesday, October 18, 2016

Changes on the Horizon: Venue and Choice-of-Law Provisions in California Contracts

One of the most vexing procedural issues in recent years has been what to do with out-of-state litigation against a California employee. The contractual framework usually goes something like this:

  1. California resident has a non-compete covenant in an employment contract.
  2. California resident leaves to compete.
  3. The contract contains a choice-of law and choice-of-venue provision that applies some other state's law.
  4. That other state's law is more employer-friendly than California.
  5. Litigation commences in the contractually selected state.
  6. And sometimes, the employee files satellite litigation in California to get around the contractual framework.
Unfortunately, courts have not resolved these questions in a consistent manner. Some states, like Illinois and Delaware, appear to give primacy to California's overarching public policy interest embodied in its long-standing statutory prohibition on non-competes. Other states are more willing to enforce the venue and choice-of-law provisions despite that well-known California policy.

The question may get easier to resolve next year, when Section 925 of the California Labor Code goes into effect.That law will bar the procedural hurdles California employees sometimes face and give him or her the option to void contractually agreed-to venue and law provisions. An aggrieved employee also may recover fees arising out of this procedural dispute and may obtain an injunction in California against parallel litigation in another state.

Section 925 contains a potentially broad exception, stating that it "shall not apply to an employee who is individually represented by legal counsel in negotiating the terms of an agreement to waive any legal right, penalty, remedy, forum, or procedure for a violation of this code." In other words, if an employee engages counsel and waives Section 925 (and presumably gets some payment for that waiver), then the employee cannot undo the change after the fact.

By its plain language, the Section 925(i) exception does not apply to any individually negotiated agreement - only those where the actual agreement results in an express waiver of a challenge to foreign venue and choice-of-law rights.

Section 925 represents a legislative solution to a potentially serious problem of interstate comity involving California residents. In fact, it's exactly what I advocated for in a post nearly four years ago - which you can find here. I choose to be positive and will assume that the fine legislators in California relied on my blog post in crafting Section 925.

Tuesday, October 11, 2016

Non-Competes Gone Wrong: The Unneeded Belt-and-Suspenders Approach

When you have reviewed as many non-competes as I have, it doesn't take long to spot major red flags. They often times arise in the context of at-will employment contracts for regular, average, run-of-the mill employees who do not serve in an executive capacity. Indeed, the oddity is that this group of contracts for people who pose the lowest threat tends to be the most oppressive and poorly drafted.

Here are the 7 most common red flags associated with unreasonable non-compete contracts:

  1. A broad non-compete clause that prohibits work in an entire industry, with no limiting condition narrowing the covenant to a specified group of jobs.
  2. A vague definition of a "competitive business," which is sometimes nominally used to define the scope of the non-compete restriction.
  3. A broad geographic scope that may be commensurate with the employer's line of business, but not with where the employee has developed her sphere of influence.
  4. A non-solicitation covenant that contains a broad, untethered definition of "customer."
  5. A non-solicitation covenant that extends to prospective customers who never developed a relationship with the employer.
  6. A confidentiality clause with no time limit.
  7. A confidentiality clause that contains an overbroad definition of "confidential information," suggesting it can be a backdoor non-compete clause that extends in perpetuity.
These covenants - particularly when applied to mid-tier employees - are frequently not litigated because the cost of doing so is prohibitively high for the employee. To be sure, most employees will make a rational economic choice to incur those costs only if (a) the new employer is willing to subsidize the effort (rare), or (b) the potential long-term gain from invalidating the agreement exceeds the sum of (i) litigation costs and (ii) discounted risk of a non-indemnifiable damages judgment (more rare). Frankly, the economics often just don't work.

When these agreements do make their way into court, judges will notice the seven red flags I identified above. My experience is that they're willing to overlook one or two as the work product of an overzealous attorney. However, when several (or sometimes) all of these factors are present, courts are inclined to strike the agreement and view it as a blatant overreach on the employer's part.

Sometimes this occurs at the earliest stages of litigation before the expensive discovery process begins. This is what occurred in Seneca One Finance, Inc. v. Bloshuk, No. 16-cv-1848, 2016 U.S. Dist. LEXIS 138866 (D. Md. Oct. 6, 2016), a case in which 6 of the 7 red flags were present in an employee's non-compete agreement. The Maryland court had little trouble tossing the case after the employee sought an early dismissal.

One of the structural impediments to non-compete litigation is the relative unwillingness of many judges (the Maryland court being an exception) to dismiss cases early. I have been an advocate of "quick-look" proceedings in non-compete litigation as a means to tease out facially overbroad agreements and those where consideration is sorely lacking. This process cuts against the design of our adversarial system where, for better or worse, the civil discovery process weeds out cases through sheer attrition.

The problem, in my mind, is that discovery attrition can work in cases where the parties are on a level playing field to litigate (many patent cases), or where the party with a relative lack of resources has the ability to recover monetary damages (discrimination or personal injury cases). In a non-compete dispute, neither of those fact patterns is usually present. And if we're to maintain a system where the freedom to compete and the freedom to contract stand in equipoise, then a quick-look system may be the only route to achieve that.

Thursday, October 6, 2016

No Good Deed Goes Unpunished

The high-frequency trading business is nothing if not opaque. Noted author Michael Lewis shone light on it in the wonderful book Flash Boys. And the industry gave us Sergey Aleynikov, who has managed to contribute mightily to the area of trade secrets and corporate indemnification law over the past decade.

The HFT world, when it comes to non-competes, is predictably ahead of the curve. Having represented many quants and traders, something of an industry standard has developed. And I'm not sure it has been replicated elsewhere.

HFT non-competes often work like this. Employee signs an employment agreement that contains salary, bonus eligibility, and non-compete restrictions, along with the panoply of confidentiality clauses and invention assignment provisions you would expect in a business that thrives on opacity.

For starters, HFT firms don't really need customer-based clauses because they have no customers. So the non-compete is a true industry-wide restriction, justified largely on the basis that the firm's business model is proprietary and the employees are privy to a wide range of non-public trading strategies and confidential information.

The non-compete, though, shifts. It does so based on the company's election, at the time of termination, as to how long it will last. Typically, the HFT firm agrees to pay the employee his or her salary (or some percentage of total income) during the selected period. In my experience, the period can last 0, 3, 6, 9, or 12 months. And, according to a typical HFT contract, the company decides and notifies the employee of the non-compete term, paying the employee what amounts to garden-leave during that period of time.

This seems relatively uncontroversial (some might even say it's fair). But as shown by Reed v. Getco, LLC, a Chicago HFT firm, Getco, deviated from this model. Its contract contained a six-month non-compete clause, with consideration of $1 million payable to the employee during the term. When Reed quit, Getco advised him that his non-compete term was "zero months and/or is waived. You will not receive any noncompete payments."

Reed then sat out and did not compete for more than six months, seemingly abiding in full with his contractual covenant. He then sued for the noncompete payment. The appellate court found he was entitled to it. The court did not allow Getco to rely on boilerplate contract provisions concerning "waiver" and "modification," finding apparently that Reed had a contractual right to the $1 million - which he earned by complying with a non-compete Getco told him it was not going to enforce.

What is not clear from this opinion is whether Getco's agreement incorporated the industry standard non-compete that shifts, based on the employer's election. It appears that Reed negotiated something separate than that. So at first blush, I am not sure the Reed decision does much to upend the HFT business model for enforcing non-competes.

To that end, HFT firms still may be able to get away with their shifting non-compete term, provided that the contract makes it clear the payment is optional and dependent on the firm selecting an appropriate non-compete period. Getco may have been thinking that it would treat Reed like other employees - and simply forgot that his contract was much more custom.

Wednesday, September 28, 2016

Research Firm, With No Customers, Cannot Enforce Non-Compete Agreement

When asked by clients how a court will react to a non-compete, I only can do so much.

Responsible lawyer make no guarantees. They lay out a range of options and distribution of outcomes, emphasizing what's most and least likely to occur based on experience. This is particularly the case when assessing non-compete and competition disputes. Those disputes place squarely into tension competing principles: the freedom to contract and the freedom to compete. So with great regularity, courts have to reconcile these principles and do so in ways that can lead to unpredictable results.

One of my central messages to clients is that courts and attorneys need to understand the ins-and-outs of the actual business in order to place these policy questions into focus. Some businesses, to be sure, are understood by most judges: accountancy, staffing, physicians, to name a few. Others are far more opaque: financial services and technology come to mind.

A perfect example of this came up in the recent case of CytImmune Sciences, Inc. v. Paciotti, a non-compete dispute out of Maryland. There, the district court refused to enforce a non-compete agreement of a diagnostics company that was engaged only in research and development. It had no product to bring to market. According to CytImmune's website, it has been around since 1988 and has "transitioned from a successful diagnostics company into a clinical stage nanomedicine company with a core focus on the discovery, development and commercialization of multifunctional, tumor-targeted therapies."

That's a lot of syllables. And without the appropriate industry background, I'm not capable of articulating further what CytImmune does. And that likely was part of the problem with its attempt to enforce a broad non-compete against a senior manager. CytImmune had no customers and no goodwill to protect, though it predictably could have argued that its research had trade-secret value. When the district court refused injunctive relief, it focused on this truism about a company with no market presence.

Another recurring problem appeared. The non-compete lacked ascertainable terms, by preventing competition in markets in which the company contemplated entering. I often see this unneeded qualifier, which can unnecessarily broaden an otherwise enforceable agreement. In an obvious need to use a belt-and-suspenders approach, companies seem not to be satisfied with defining the actual competition and instead broaden it to technologies, products, or markets in which they "may" engage or "anticipate" engaging in.

All this simply gives a skeptical court another reason to strike down broad agreements. This point reminds me of something else I often tell clients: the fewer words your non-compete contains, the better.

Friday, September 23, 2016

Deconstructing the Trump Campaign's Non-Compete Agreement

The inspiration for this post comes from Donna Ballman's terrific blog and her latest post today, titled "Trump Campaign Noncompete Agreements May Break Multiple Laws."

It probably comes as no surprise that Trump's noncompete agreement sucks and is woefully inadequate. Once you wade past the grammatical errors, the contract contains the typical, rote litany of promises not to disclose any "confidential information," not to disparage Trump, not to solicit anyone associated with Trump, and not to provide "competitive services. Absolutely no one is shocked that he has campaign workers sign these.

But given that this is not really a business agreement, and really a political one, let's try to apply some of the utterly inane provisions in this contract to the general legal principles we've come to understand.

  1. The non-disclosure covenant. The longest provision of Trump's contract is a non-disclosure clause, which surprises absolutely no one. It has no time limitation, which is a red flag in many states and would render it unenforceable, for instance, against a campaign worker/volunteer in Illinois. (Incidentally, not sure who in the Trump campaign exactly signs this piece of paper, but given what we know, presume everyone.) The definition of "Confidential Information" is truly rich since it is circular in that it applies to all information of a "private, proprietary or confidential nature." Then it goes further and applies to information "that Mr. Trump insists remain private or confidential." With that qualifier, the mind truly reels. As you might expect, it gets better. If Mr. Trump so elects, confidential information can extend to "any information with respect to the personal life, political affairs, and/or business affairs of Mr. Trump." There are no carve-outs for information that is within the public domain so it may be hollow, but it is worth noting that Mr. Trump includes as non-exclusive examples of "Confidential Information" such idiotic categories like his relationships (a voter interviewed on Comedy Central?), alliances (Sarah Palin?), decisions (to build a wall?), strategies ("....."), and meetings ("Sept. 26 Debate against H. Clinton"). Unenforceable.
  2. Non-disparagement. Predictably, this too is a real beauty. Trump requires that anyone working on his campaign never "disparage publicly" Mr. Trump. Hypothetically, if he is elected President and it's a disaster, a former campaign worker could not criticize his term in office. It also applies to any Family Member of Trump, including his children. So if you work on Trump's campaign, and Tiffany Trump's singing career does not go great, you cannot criticize her on Twitter. Unenforceable and non-sensical.
  3. Non-solicitation. This one, actually, is hard to read. The Trump campaign has no customers, unless you consider a voter a customer. So it smartly leaves that term out. But a campaign worker may not solicit another worker "for hiring" until the campaign is over. So if you're a Trump campaign worker and meet another campaign worker, you cannot hire him/her for any type of work until the campaign is over, even if that work has nothing to do with politics. Unenforceable and almost incoherent.
  4. Non-compete. The best for last. A Trump campaign worker cannot assist anyone for federal or state office besides Trump, whether for compensation or as a volunteer. Therefore, a campaign worker cannot contribute to a candidate for state representative. He or she cannot host an event for that person. He or she cannot put out a yard sign for that person. And he or she cannot seek to encourage another voter to vote for that person. Unenforceable and just plain idiotic.

On the upside, you get an arbitration clause, a favorable New York choice-of-law clause, and the possibility of fee-shifting if you prevail. Plus, and this is truly priceless, you get a piece of paper with the signature of the one and only "Donald J. Trump, President." Presumably, of his campaign and not the entire United States.

A copy of the Trump non-compete is available on my Scribd site here.

Rhode Island Bars Physician Non-Competes

Only rarely do courts strike non-competes on the final element of the three-part reasonableness test: whether enforcement would be contrary to a public interest.

Earlier this year, a Rhode Island court followed Massachusetts' lead and held that a physician non-compete could not be enforced through injunctive relief. The court believed "the strong public interest in allowing individuals to retain health care service providers of their choice 'outweighs any professional benefits derived from a restrictive covenant.'" Med. & Long Term Care Assocs., LLC v. Khurshid, 2016 R.I. Super. LEXIS 39 (R.I. Super. Ct. Mar. 29, 2016). Khurshid did not, however, rule out the possibility of a damages award for a breach. Its ruling was tailored to the injunction the medical practice sought.

It didn't take long for the other shoe to drop.

In July, Rhode Island banned physician non-competes in their entirety - meaning that the narrow escape hatch for employers to seek legal relief has closed (at least for contracts signed after the law's effective date of July 12, 2016. It is likely that contracts entered into before this date are governed by the common-law, which still may bar injunctions but may not prevent a damages award.

Public policy arguments like the one advanced in Khurshid (and in other states for that matter) are difficult to make. Normally, statements of public policy come through constitutional provisions, statutory text, or a widely and universally declared judicial policy. In the context of non-compete arrangements, lawyers generally are not bound by them due to the Rules of Professional Conduct. Physicians have met with some success in Rhode Island in elsewhere due to the public interest in fostering the doctor-patient relationship. Investment advisers, on the other hand, are susceptible to non-compete enforcement, as are accountants. Other states carve out certain professions through legislative fiat, such as the relatively recent Hawaii law that bans non-competes for tech workers.

Public policy arguments are indeed difficult to make in the normal case because trial court judges do not set policy. And most non-compete disputes are quite fact-intensive. It is unusual to see blanket, categorical exclusions for enforcement.

Monday, September 12, 2016

Illinois Appellate Court Announces a "Test" to Evaluate Bad Faith in Trade Secrets Claims

In Conxall Corp. v. iCONN Systems, LLC, the First District Appellate Court of Illinois set forth what only loosely can be described as a "test" for determining when a party maintains an action for trade secrets misappropriation in bad faith.

If my frustration is not yet overt, let me be overt: I'm frustrated.

Our appellate court has struggled mightily with business and competition issues in recent years, notably with an unnecessary fissure among courts regarding whether an employer must show a protectable interest to support a non-compete (answered yes) and then again regarding whether employment itself is sufficient consideration for an at-will employee's non-compete (answered no, but yes if employment lasts two years, with almost all federal courts just categorically saying yes, but with some saying no).

Conxall addresses a question no reported Illinois descision has had to confront yet: how do you determine bad faith in trade secrets claims? The decision is a jumbled mess of three opinions, with the concurrence actually producing the legal standard to answer that question (to get there, you must read the dissent, which agrees with the concurrence in part).

In my judgment, there really are only two possible tests for determining bad faith. One is the Octane Fitness test, which comes from a Supreme Court patent case a few years ago outlining the fee-shifting standard under Section 285 of the Patent Act. Why pertinent? Since the Uniform Trade Secrets Act's fee-shifting clause stems from the Patent Act (per the commissioners' comments), it only makes sense to look to Octane Fitness for guidance. That case holds that fees are recoverable if the case "stands out from others with respect to the substantive strength of the litigating party's position...or the unreasonable manner in which the case was litigated."

Put differently, a patent defendant gets its fees if the plaintiff's case sucked or the plaintiff's attorneys acted like pricks.

If courts don't go with Octane Fitness, then the logical test is the two-part standard California courts apply and which many others have adopted. Why California? Because it has by far the most experience with trade secrets cases, and because the test has worked in application. That test simply looks at whether the claim is objectively specious and whether there is evidence of subjective misconduct. Again, seems reasonable and relatively easy to apply, with needed flexibility but actual, you know, standards.

So which did Conxall choose? Um, neither. (The court didn't bother citing Octane Fitness and suggested federal courts were asleep at the wheel by adopting California's standard.)

The court held that the standard for determining bad faith is either (1) whether the pleadings, motions or other papers violate Rule 137 (the equivalent of Federal Rule of Civil Procedure 11), or (2) whether the party's conduct violated the spirit of Rule 137, which is to prevent an abuse of the judicial process. Part one of this "test" offers nothing, since as the court acknowledged, a separate statute already provides for fee recovery. In that sense, the legislature would never enact a fee-shifting clause that entirely and perfectly overlaps with another law.

The court then unhelpfully suggested that Rule 137 cases may provide guidance, but that courts shouldn't be limited by those precedents. No clue what that means. And then the court further suggested the California test was "less strict" than the test that it set forth. But it never explains how an objectively specious action with some evidence of subjective misconduct is "less strict" than an action that looks like an abuse of process.

Welcome to the semantic jungle.

By comparing its bad faith test to what California uses, the Illinois courts provide virtually no guidance to litigants in determining what conduct will allow a defendant to recover fees. Under transitive reasoning, California precedents become unhelpful and a trial court judge will be hard-pressed to even view them as authoritative. And by focusing trial courts (confusingly, but still focusing nonetheless) on a pleading standard, the appellate court ignored one major truism of trade secrets law.

Bad faith is almost never defined by a four-corners look at the pleadings. Crappy trade secrets cases often have marvelous complaints. Along the same lines, as one of Conxall's justices described, bad faith usually is exposed at trial - even after summary judgment - when a withering cross-examination reveals a case's deficiencies.

The very reason that trade-secrets suits are so punishing is that a court has no incentive to resolve them before trial. They come alive in the courtroom, when the case weaknesses are fully exposed and the plaintiff has nowhere to run. By looking to the pleading rules, the court has done defendants with strong positions on the merits a grave disservice.