Friday, June 24, 2016

More Rejection by Illinois Courts of Bright-Line Consideration Rule

The federal courts have become the final frontier for Illinois employers looking to enforce non-compete agreements against at-will employees. Those agreements contain embedded consideration problems if the gap between signing and termination dates is less than two years and if the employer cannot point to some other form of consideration beyond the job itself.

With the recent district court decision in Allied Waste Servs. of N. Am. v. Tibble, there is firm momentum in federal court to move away from the two-year, bright-line rule that two of the five appellate courts have established. The Supreme Court of Illinois twice has refused to weigh in on the matter, apparently content to let this issue play out in the other appellate districts.

Allied Waste breaks no new ground and largely follows the reasoning of other federal district courts, the most persuasive of which is Judge McDade's thoughtful opinion in Cumulus Radio Corp. v. Olson. The essence of these cases is that consideration is too fact-intensive for bright-line rules and that courts should consider the totality of the circumstances (e.g., method of termination, length of at-will employment, conditions of employment).

Indeed, one could argue that Allied Waste is not all that relevant, since it appears the account executive also received a salary bump, greater bonus potential, and promotion in conjunction with his non-compete agreement. Put differently, this really wasn't a classic case in the mold of Fifield and the other disputes that truly center on "continued employment as consideration."


Having now read and thought about these consideration cases for nearly three years, I am warming to an alternative way of thinking of how the consideration question could be resolved. I developed three rules of thumb, which are more or less working concepts and not specific proposals at this point. They seek to balance important interests related to contract formation with the need to avoid bright-line rules, which remove the important function of judicial discretion.

First, if the contract recites the consideration granted for the restrictive covenant, then it should control and the employer may not introduce evidence to contradict (or even supplement) its own agreement. This requires no more than a plain reading of the agreement and informs how the court will proceed with further analysis over the consideration issue.

Second, if the contract is silent or ambiguous as to consideration, then a court may consider extrinsic evidence of specific consideration that would support the agreement. Here, the employer would need to identify something tangible and concrete as opposed to an after-the-fact reconstruction of an individual's employment status that may not have anything to do with consideration for the restrictive covenant.

Third, if the consideration is continued employment and the employee is terminated, then the court should find as a matter of law that the consideration is illusory. This should be an obvious, black-letter principle that poses none of the problems sometimes associated with bright-line rules.

Fourth, courts should conduct limited evidentiary hearings to resolve consideration questions at the earliest possible moment, much like they do now with jurisdictional discovery. The issue of contract formation is essential and requires prompt resolution in a way that is divorced from the other issues that attend non-compete disputes. If the court finds that the consideration given was not adequate in light of the specific restraints, then the court should enter a judgment on the contract in the employee's favor immediately. In this regard, employers who use very broad restraints but only support themwith nominal or potentially meaningless consideration (like continued employment) likely will suffer an early defeat before broad expensive discovery begins.

Friday, June 3, 2016

Texas Supreme Court Addresses Trade-Secret Access

Within the trade-secrets community, the case of In re M-I, LLC has been percolating for some time. The case (the procedural nuances of which are immaterial to this post) addressed the question of whether a trial court may exclude a defendant's party representative from the courtroom when the plaintiff disclosed the details of the allegedly stolen trade secrets.

A few weeks back, the Supreme Court of Texas held that when confronted with such an issue a trial court must conduct a balancing analysis to determine whether exclusion would violate the Fourteenth Amendment's guarantee of due process. Those balancing considerations include the following:

  1. The degree of competitive harm that the plaintiff may incur from disclosure, which necessarily entails some analysis of the merits.
  2. The degree to which the defense would be impaired by the witness' exclusion.
  3. The witness' role in the organization and whether he would have "specialized expertise that would not have been available to" outside experts.

I am somewhat concerned that the In re M-I balancing "test" suggests that a defendant must retain an expert to evaluate the particular trade secrets at issue. That itself would appear to limit access to many defendants unable to pay for experts (paying for lawyers is bad enough). I doubt that the case can be read as setting forth a categorical rule in that regard, and in situations about court access the better approach is to let judges judge and make discretionary calls without being hemmed in by specific standards that may not fit each case. The basic problem in In re M-I is that the trial judge never considered any countervailing interests that the plaintiff had in protecting the secrets during the court proceeding.

It is a little curious that the Court in its Fourteenth Amendment analysis never cited E.I. duPont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917), when Justice Holmes addressed the exact same question as that presented in In re M-I. There, Holmes (citing no authority at all) noted that:

"the judge who tries the case will know the secrets, and if in his opinion and discretion it should be advisable and necessary to take in others, nothing will prevent his doing so. It will be understood that if, in the opinion of the trial judge, it is or should become necessary to reveal the secrets to others it will rest in the judge's discretion to determine whether, to whom, and under what precautions, the revelation should be made."

That simple formulation is much more sound and simple to understand that the Texas Supreme Court's analysis. But perhaps they ultimately reach the same destination.

As best illustrated by Masland, this is hardly the first time courts have addressed the particular question of access. The Ninth Circuit, and courts in California, previously have followed the same analysis as that in In re M-I. They focus, for instance, on whether the excluded witness has some involvement in competitive decision-making functions. So, for instance, an in-house patent attorney may be prevented from seeing particular secrets, because (as the Court in In re M-I put it) he "could not resist acting on what he may learn."

The Court's observation on this point, though, does not amount to a tacit endorsement of the "inevitable disclosure" doctrine, as at least one commentator has suggested. The inevitable-disclosure theory is used to demonstrate a required element of a claim - misappropriation - whereas the balancing test articulated in In re M-I simply follows a long-held rule of due process and a more recent rule under the Uniform Trade Secrets Act that courts should deploy measures in litigation to protect the actual secret being litigated. Shoehorning this common-law and statutory recognition about protective measures courts may take during litigation into a broad substantive rule that few courts endorse would be a profound mistake.