Tuesday, August 30, 2016

Illinois Bans Non-Compete Agreements (Sort of...)

2016 is shaping up as another busy year on the legislative front (don't tell Massachusetts, though).

Earlier this month, Governor Bruce Rauner signed into law the Illinois Freedom to Work Act, which bans covenants not to compete for low-wage employees. That term means those workers who earn the greater of the prevailing minimum wage or $13.00 per hour. This forever may be known as the Jimmy John's Bill, since during the debate over the law Attorney General Lisa Madigan sued Jimmy John's for requiring sandwich shop employees to execute non-competes (barring employment within three miles of their location).

The new Freedom to Work Act does not contain any investigative mechanism. Originally, the Senate version of the bill would have enabled the Department of Labor to investigate the use of employee non-competes, with appropriate penalties to follow for failing to comply with an investigation or for failing to keep adequate records. This means that Attorney General Madigan is likely to follow through on her pledge to root out the use of oppressive non-compete agreements, perhaps in similar retail, non-traditional restrictive covenant environments like Jimmy John's.

Private litigants can pursue declaratory relief when there is a justiciable controversy over their own non-competes. A largely unresolved question (now that the Jimmy John's case has settled) is whether the Attorney General or a private litigant can use the Consumer Fraud and Deceptive Business Practices Act as an alternative means to challenge an unenforceable non-compete arrangement as an unfair trade practice. That law would at least provide a route for the recovery of legal fees. If the Attorney General sues, a violation of that law could result in the imposition of a civil penalty up to $50,000.

Monday, August 22, 2016

Contract Overreaching and the DC Circuit's Quicken Loans Decision

A great deal has been written about the D.C. Circuit Court's decision in Quicken Loans, Inc. v. NLRB. That case enforced the National Labor Relations Board's order striking down portions of an employment non-disclosure clause and related non-disparagement provision.

The court's strongly worded ruling, which can be found here, provides a template for how employer can get into trouble by trying to coerce certain behavior in the workplace - even if that workplace is not unionized. Indeed, the NLRB's foray into non-union activity is one of the more notable employment law developments over the past few years. Quicken Loans just brings together many of these policies in a judicial opinion from the nation's most important appeals court.

To take a step back, Section 7 of the National Labor Relations Act enables employees to engage in concerted activities for the purpose of collective bargaining. These guaranteed rights, so the reasoning goes, allow employees to communicate about forming a union and about improving the terms and conditions of their employment.

So how do non-disclosure and non-disparagement clauses fit into this equation? As for the former, many restrictions contain overly broad definitions of "confidential information." The Quicken Loans policy was no different; it prohibited use of non-public employee information and all personnel lists (including e-mail addresses, cell phone numbers, and the like). The court of appeals easily found that this type of information "has long been recognized as information that employees must be permitted to gather and share among themselves and with union organizers in exercising their Section 7 rights."

As to the latter - non-disparagement clauses - Quicken Loans stumbled when it barred employees from criticizing the company in any oral or written statement, including any internet postings. Calling this clause a "sweeping gag order," the court had little trouble concluding it too violated the NLRA. Its internal procedure designed to enable employees to redress complaints did not provide any kind of a safe harbor since it, by definition, forbade a public airing of grievances.

The Quicken Loans decision certainly underscores the need for employers to stop with the overreaching. Indeed, many of these paternalistic clauses find their way into employment contracts with almost no forethought. Lawyers who encourage corporate clients like Quicken Loans to load up on prophylactic policies often ought to consider what message is being sent and what precisely there is to gain.

As a general rule, then, employers should not be enacting policies, handbook statements, rules, or form agreements that do any of the following:

  • Broadly define "confidential information" to include employee data of the kind typically needed for employees to communicate with each other about the terms and conditions of their employment;
  • Bar employees from criticizing the employer;
  • Prohibit employees from disclosing the terms of their employment, such as salary and benefits; and
  • Prohibit employees from disclosing the terms of their restrictive covenants.
This last point is something I see quite often. Frequently, I see contracts that prevent an employee from revealing that she has a non-compete and what it says. I don't get this. Why? What's the point? Is it included because some lawyer read somewhere that it might be a good idea? Is that a sufficient reason?

Much of the law is, quite frankly, common sense. If it sounds off, it probably is. No doubt many management and employment attorneys are up in arms about Quicken Loans, but read it. The court speaks in somewhat caustic terms. You get the sense they're saying this wasn't a close case. Attorneys shouldn't run into the problems noted in Quicken Loans if they simply apply real-world experience and understand that not every remote unrealized fear needs to be embodied in a contract term. 

Friday, August 12, 2016

The "Access and Opportunity" Argument and Evidentiary Burdens

In my last post, I discussed another bad-faith ruling in the context of misguided, opportunistic trade-secrets litigation.

When discussing that particular case, I raised the prevalence of the "access and opportunity" theory and how the use of that particular theory (and the simplistic building blocks upon which it's based) can walk a plaintiff right into a bad-faith fee claim.

This post, somewhat of a follow-up to my prior one, discusses a recent Fourth Circuit decision called RLM Communications, Inc. v. Tuschen, in which the court (applying North Carolina law) discussed the burdens of proof associated with an access-and-opportunity claim. To remind readers, an access-and-opportunity claim is one where the plaintiff's reasoning is based entirely on circumstantial evidence that pieces two innocuous facts together to lead to a conclusion. That is, the employee had access to certain trade secrets and s/he now works at a company where she would have the opportunity to benefit from using those secrets; therefore, s/he has misappropriated them.

For starters, "access and opportunity" might be called "inevitable disclosure" without the help of steroids. Typically, an inevitable disclosure claim rests on a trigger fact - that is, some suspicious fact that creates a needed evidentiary link to bolster an access-and-opportunity claim. One example might be suspicious work activity in the day or two leading to a resignation.

The Tuschen court addressed a North Carolina statute that allows an employer to establish a prima facie case of trade secret misappropriation by showing knowledge of the secret and an opportunity to disclose it. According to the court, proving these facts alone did not enable the employer to survive summary judgment. In the critical passage, the court notes:

"In the employment context, if knowledge and opportunity suffice for a prima facie case of misappropriation, then an employer can state a prima facie case against its employee merely by showing that it gave the employee access to its trade secrets. The employer therefore can force such an employee to go to trial on a misappropriation claim - unless the employee can rebut the prima facie case."

The court dealt with the burden-shifting question by finding that North Carolina courts would require employers to do more. Either the acquisition of the trade secret was through an abuse of access (which would seem to fit within the plus-factor, inevitable-disclosure analysis I describe briefly above), or the employer must come forward and rebut an employee's showing that the acquisition of the trade secret was gained through the consent of the employer. This, too, would require some form of abuse or misuse of company access to take proprietary information.

An alternative way of saying this is that, for summary judgment purposes, knowledge and opportunity is not enough. An employer must present evidence beyond this to raise an inference of misappropriation.

The decision is a fairly interesting read in that it discusses burden-shifting much like courts assess claims of employment discrimination. The larger question the court addresses, though, is that weak trade secrets claims are perfectly suited for summary determination short of trial. Clearly the court was concerned about simplistic reasoning and the piling of unreasonable inferences - when the price for that stretched logic is forcing an employee to go through the pains of an arduous trial.

Thursday, August 4, 2016

Bad-Faith in Trade Secrets Litigation and the "Access and Opportunity" Argument

Admittedly, one of my go-to topics is bad faith in the context of trade secrets litigation - if for no other reason than I've seen it time and again in my experience representing defendants.

Most of the rich, intelligently discussed bad faith cases come from California courts, which hear a disproportionate number of trade-secrets suits to begin with. And that state's strong rejection of the inevitable disclosure doctrine gives it ample opportunity to chastise plaintiffs for pursuing defendants (usually ex-employees) on a spurious "access and opportunity" theory of wrongdoing.

That theory is becoming more and more prevalent. The reasoning is utterly fallacious, of course. It goes something like this:

Employee X had certain responsibilities, all of which encompassed some trade-secret knowledge, and now she works at Employer Y in a similar position. Therefore, X must be using the trade secret for Y's benefit.

Though some litigants (let me digress into a Trumpian "believe me, I litigate against them and see this all the time, folks") dress up the theory a bit more with meaningless ancillary facts, those facts are not elemental - meaning that if proven they still can't close the deal.

The "access and opportunity" doctrine is one that hasn't necessarily received uniform treatment by courts (more on this in my next post, a very informative Fourth Circuit opinion). Some give it more credence than it clearly is due. But increasingly, courts seem apt to reject it as overly simplistic and little more than a backdoor attempt to impose a non-compete agreement where the parties never bargained for one.

I really enjoyed reading RBC Bearings v. Caliber Aero, 2016 U.S. Dist. LEXIS 100521 (C.D. Cal. Aug. 1, 2016), from the Central District of California, where the plaintiff got whacked for $130,000 in fees for pursuing a trade-secrets claim in bad faith. The case is a good read because it systematically walks through how courts assess bad faith. (Another digression: The $130,000 in defense fees is right in the wheelhouse of what I have seen in garden-variety employee trade secrets cases that go to judgment and that do not involve highly technical concepts. For technical trade secrets, the fees normally are quite a bit higher.)

Courts first look to see whether the case was objectively specious, meaning that it was notable or stood out for its weakness. As in many cases, the plaintiff in RBC Bearings couldn't prove an act of misappropriation. The "access and opportunity" theory was patently deficient because that conclusory leap is not enough to establish that an insider misappropriated anything at all. To compound the problem, RBC Bearings' identified trade secrets (a list of customers) were publicly displayed (on the plaintiff's website). Problem.

In California, courts then look to subjective purpose, in addition to the weakness of the claim. This is still troubling, to me, because requiring a defendant to prove an improper purpose is exceedingly tough. But to its credit, the RBC Bearings court did go through a rigorous analysis focusing on a few different factors that suggested an improper motive: satellite litigation that suggested an intent to run up legal fees for the defendant, evidentiary shortcomings (which is usually duplicative of the objective speciousness requirement), and improper settlement demands.

The last factor is a very interesting one, because plaintiffs often are careless with demanding money in trade-secrets claims even when that demand is not provable in court. Not all settlement communications, remember, are privileged. They are to the extent one tries to use that communication to prove liability, but they aren't to ascertain whether bad faith exists. Plaintiffs who use litigation as a weapon often fall into this trap because they want to show how tough they are. Counsel who reflexively parrot what his or her client says about demanding an exorbitant amount to compromise a claim walk right into a trap, particularly at the time of fee-shifting. The RBC Bearings court specifically discusses counsel's ethical obligation to make a good-faith settlement demand and not one that is divorced from an evidentiary analysis. This is something I've never seen discussed before in such stark, yet pragmatic, terms.

Also of interest was the court's assessment of plaintiff's counsel. Aside from the unprofessionalism of demanding a settlement payment that would not be provable and pursuing a crappy case, the court was clearly bothered by counsel's inability or unwillingness to cite precedent accurately. I am experiencing this same problem in a protracted case where counsel repeatedly misstates the record, trial evidence, or case law - to the extent that it's obvious he thinks no one will call him on it. Credibility is all a lawyer has. And in RBC Bearings, the court made clear that a lack of credibility informs a bad-faith finding.