Friday, November 3, 2017

The Reading List (2017, No. 26): Fee Awards, New Legislation, and Inevitable Disclosure

Non-Compete and Trade Secrets News for the week ended November 3, 2017


Illinois Appellate Court Affirms $1.5 Million Fee Award

In a Rule 23 Order, the Second District Appellate Court affirmed a substantial fee award, nearly $1.5 million, for the prevailing defendant in a fiduciary duty, trade secret, and non-compete case. I had the privilege of representing the defendant, Tom Christofilis, at trial and on appeal. It is truly a pleasure working with someone who is so candid, forthright, and credible that you don't even need to prepare him for his testimony. Good things happen to good people.

The basis of the $1.5 million fee award is rooted in corporate law and in particular the bylaw indemnification provisions that cover former employees, officers, and directors of Christofilis' former employer, Automated Industrial Machinery, Inc. I have written before that corporate indemnity procedures, whether rooted in internal documents like bylaws or through state statute, are the potential game-changer and equalizer in competition suits. It is essential that counsel fully assess the interplay of indemnity when deciding whether and how to pursue competition claims against a former insider. It is just as crucial for defense counsel to understand the legal framework and position his or her client for fee-shifting.

The Appellate Court's judgment here demonstrates the raw power of indemnification, ruling that it covered non-compete, trade secret, and fiduciary duty claims. But to be sure, this case was very fact-specific, and the availability of indemnification depended at least in part on Christofilis' complete success, the sheer breadth of the claims asserted against him, and the anchoring fiduciary-duty cause of action that brought the bylaw provisions into play.

Keep in mind the deferential standard of review applicable in this case. No two indemnification cases are the same. And the trial court retains substantial discretion in making the call as to what claims are and are not indemnifiable, given the pleadings, legal theories, and evidence.

A link to the Rule 23 Order in Automated Industrial Machinery, Inc. v. Christofilis is available here.

New Legislation on Non-Competes

For those interested in legislative updates, Russell Beck's Fair Competition Law blog is a must read. Here are a few links that discuss pending and enacted legislation on non-compete law:

October 21: Russell reports on bills in New York and Pennsylvania concerning very different aspects of non-compete reform.

October 15: Russell discusses bills in several states, including changes to Oregon and West Virginia law. Oregon now bans non-competes for home-care workers, while West Virginia outlaws certain types of physician non-competes. This continues a trend of industry-specific reform, rather than wholesale, across-the-board changes.

The DTSA and Inevitable Disclosure

The Defend Trade Secrets Act contains a crucial limitation on injunctive relief: courts cannot issue an injunction under the DTSA to "prevent a person from entering into an employment relationship." And conditions on a person's employment must be based on threatened misappropriation, not merely on information the person knows. This limitation forms part of the compromise that resulted in the DTSA's near-unanimous passage. And it departs from the law of several states that allow for inevitable-disclosure injunctions that bar employment altogether.

Courts, though, are frequently terrible at applying the doctrine of inevitable disclosure. A perfect illustration comes from the case of Express Scripts, Inc. v. Lavin, where a federal court appears to have applied the DTSA to issue an injunction, at least in substantial part on inevitable disclosure. It could be that the court was loose with its analysis, since it already had found a non-compete agreement to be enforceable. And it could be that the court was relying on Missouri law. But it sure as hell does not help to have a poorly engaged analysis like this, suggesting that the DTSA does not mean what it says.

I reviewed the briefs filed by the plaintiff's law firm (one that must remain nameless). The brief never indicates for the court that the DTSA limits inevitable-disclosure injunctions. It lumps stuff together in a way that I feel is highly misleading. That's troubling, because the court was ruling on a petition for temporary restraining order. More concerning is the court's rote copying of the law firm's brief (down to the word). This amounts to judicial abdication, not bona fide engagement.

Let's be clear: the DTSA does not permit inevitable disclosure injunctions of the kind that the court in Express Scripts may have ordered. This decision carries no weight at all. I'll chalk this one up to an emergency ruling, a busy judge, and sloppy lawyering.

A copy of the ruling can be found online (I refuse to link to it or make your job easy). The case name is Express Scripts, Inc. v. Lavin, No. 4:17-cv-1423 (E.D. Missouri). The case since has settled.

Computer Fraud and Abuse Act

The most significant CFAA case of the past several years has been United States v. Nosal, which made two trips to the Ninth Circuit. The Supreme Court has declined to grant certiorari on Nosal's latest appeal. That cert petition made headlines when Nosal enlisted Supreme Court star litigator Neal Katyal on brief. Reuters discusses the Court's decision not to review Nosal and a separate CFAA case called Facebook v. Power Ventures.

Speaking of the CFAA, it continues to generate fewer cases of interest in light of the Defend Trade Secrets Act and the federal civil remedy now available for trade secret misappropriation. But some cases still wind through the system.

The sharp divide, which stems in great part from Nosal, concerns the application of one statutory term in the CFAA: the meaning of the phrase "exceeds authorized access." In the CFAA framework, this could mean an individual's misuse of protected information in violation of a corporate policy or common-law duty. Or it could mean something far narrower, namely an employee's improper access of files in the more objective sense without regard to state of mind or intent.

In Hedgeye Risk Management, LLC v. Heldman, the United States District Court for the District of Columbia adopted the narrower reading of the CFAA. In effect, it held that the statutory language is not concerned with the purpose for which the employee accessed the computer files. In so doing, the court joins the Second, Fourth, and Ninth Circuits. On the other side of the ledger, the Fifth, Seventh, and Eleventh endorse a purpose-based analysis, with the reasoning of those courts varying to some extent. As the district court in Heldman noted, the D.C. Circuit has not weighed in.


Last week, I had the privilege of presenting at PLI in New York for a conference titled Trade Secrets 2017: What Every Lawyer Should Know. My panel consisted of Audra Dial from Kilpatrick Townsend & Stockton in Atlanta and John Siegal of Baker Hostetler. Our moderator was the great Vicki Cundiff of Paul Hastings. In the company of such luminaries, I felt like one of those fringe candidates on stage at a debate with the audience wondering who the hell I was. But my co-presenters were just terrific, and I thoroughly enjoyed it. For lawyers seeking to learn more about trade secrets, PLI offers a similar program via webcast next week.

Years back, I butted heads with Farmers Insurance in a number of non-competition cases, all of which settled pretty amicably. Apparently, Farmers has more problems to solve in this area, as reported by Insurance Journal. This suit sounds like it fits a familiar pattern in which an employee copied a number of documents and scooted off to a competitor. Of note, it's pending in California, which does have a trade-secret "exception" to its non-compete law.

Forbes has a long article about a burgeoning dispute between Citrix and Egnyte, one that brings to the fore the difficult procedural question that often arises when employees bolt for a California company but don't live in California.

Finally, if you're interested in further reading on an array of subjects, including the Waymo v. Uber case and Defend Trade Secrets Act case updates, I suggest linking to John Marsh's Trade Secret Litigator blog and his October monthly wrap-up. Lots of excellent source material here.

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