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.

Tuesday, September 6, 2016

Ohio Case Proves It: The Inevitable Disclosure Doctrine Is Inherently Unworkable

Trade secrets theft is a serious thing. We all know that by now.

Equally serious, though, is a charge of trade-secrets theft that proves totally unfounded. Meritless claims deter entrepreneurship, limit outside investors, ruin customer and vendor relationships, and cause significant litigation expenses that detract from a firm's operational success.

The inevitable disclosure doctrine is like a gateway drug to specious claims. I have written so extensively on the subject that I am kind of tired of reciting the basic rule, but it goes something like this: a plaintiff can establish its right to injunctive relief by showing that a defendant's use of trade secrets is inevitable. (Let's fully and finally dispel with the uncontroversial proposition that the inevitable disclosure doctrine can be used for anything other than securing an injunction.)

The problem, though, is that the rule is not workable. It lacks standards. It is overused. And it appears to be enforced by no more than a particular judge's subjective determination as to how far it is intended to reach. That's not a rule. That's a sham.

To illustrate this truism perfectly, just read the relatively short injunction opinion in Polymet Corp. v. Newman, No. 1:16-cv-734, out of the Southern District of Ohio. Polymet is in the business of manufacturing something called "hot extruded wire." It had some patents over its process and apparently is a market leader, selling to companies like General Electric, Rolls Royce, and Pratt & Whitney.

Danny Newman apparently worked in several different roles for Polymet for 15 years, from shipping-and-receiving, to purchasing, to sales. He signs no non-compete and no confidentiality agreement. Newman then decides to leave, which was his right to do. He starts his own business to manufacture and sell hot extruded wire, called Element Blue.

Polymet sues him and has no evidence that Newman took anything with him, and no evidence that Element Blue's products are identical to or even substantially similar to what Polymet sells. Instead, it pointed to "circumstantial evidence" that trade secret disclosure was inevitable. That "circumstantial evidence"? How about this:

  1. Newman made plans to form Element Blue while still an employee.
  2. Newman sold hot extruded wire to the same customers.
  3. Newman used a few Polymet vendors and a former Polymet distributor.
And for the Southern District of Ohio, this was apparently enough to lead it to believe that Newman and Element Blue should be enjoined under the inevitable disclosure doctrine.

As wrong as that judgment appears to be (I didn't hear the evidence, but if there was stronger evidence for Polymet, why not cite or allude to it?), the analysis really goes off the rails when applying the inevitable disclosure doctrine.

The whole f*cking point of the doctrine, it appears to me, is that it should provide a restrictive covenant-like remedy. In other words, if the threat of disclosure is that significant - inevitable, it might be said - then the trade-secret holder ought to get the appropriate form of relief. In the Polymet case, that would mean preventing Newman and Element Blue from manufacturing and selling competitive products.

Is that what the court did? Nope.

Instead, it takes a far more confusing path that only will invite future disputes. It bars the defendants from using "Polymet's confidential, proprietary or trade secret parameters, processes, or procedures, and Polymet's confidential pricing and product development strategies for their own benefit." Talk about vague. On that scope, Polymet is sure to be haranguing Element Blue endlessly about what type of process it's using to manufacture its products. The lack of any ascertainable scope also enables Polymet to just shift its trade-secret theory to whatever it learns Element Blue would be doing.

Even the defendants may have been better off facing a broader production-or-sale injunction, if for no other reason that to eliminate the fees associated with a contempt hearing down the road (which on this order seems, dare I say it again inevitable).

The court undermined the very basis of the inevitable disclosure doctrine at the end of its order, finding as follows:

"[P]rohibiting Element Blue from making hot extruded wire, which would effectively shut down the company, is a bridge too far given the current lack of any direct evidence of misappropriation of trade secrets at this time."

That actually might best describe the inevitable disclosure theory - a "bridge too far." To engage in this sort of too-cute-by-half analysis undermines the theory itself. What's really going on here is obvious: the court saw the superficial appeal to the doctrine given the facts, and then when it came time to apply it, the court pulled back entirely from the main point of the doctrine. Through its disjointed analysis, the court illustrated and proved all the shortcomings of the inevitable disclosure theory.

The Polymet case serves as a reminder of why inevitable disclosure almost never works. It is highly unfortunate to have a case like this hanging out there on such weak facts. I continue to believe that the doctrine is properly applied as a rationale for why a narrowly tailored, reasonably drafted non-compete should be enforced. And in no other circumstances.