Non-Compete and Trade Secrets News for the week ended November 10, 2017
Vicarious Liability Ruling in Waymo v. Uber
For those of you following the driverless car technology trade secrets lawsuit between Google and Uber, I urge you to take a break from the day-to-day litigation filings. They're interesting, to be sure. But they ain't as interesting as this article in The Verge about the judge presiding over the case, William Alsup. I can't do it justice. Read it. It is stunning.
On to more mundane topics in this case: vicarious liability. One of the defendants, Otto Trucking, is out of the case. Judge Alsup granted its summary judgment motion, soundly rejecting Waymo's theory of vicarious liability for the actions of its founder, Anthony Levandowski, the former star engineer whose mass download of files is the heart of Waymo's suit. The court specifically relied on Waymo's strategy to divide and conquer, an effort that kept its claims against Levandowski out of court and the other defendants out of arbitration. As Judge Alsup stated, Waymo could not treat the two as "fungible targets."
The issue of vicarious liability doesn't arise much in the case law, at least in terms of nuanced legal analysis. One line of cases holds that respondeat superior, or vicarious liability, is not available under the Uniform Trade Secrets Act on the grounds that it is a common-law remedy preempted by the statute. Other cases take a more flexible, case-by-case approach, relying on the equities. Judge Alsup's idiosyncratic opinion avoids this discussion entirely, and it's bereft of a single case citation. That doesn't make it uninteresting or even wrong.
To me, the better approach - one textually consistent with the state and federal statutes - is to assess each defendant separately and to determine whether the relevant conduct for each amounts to misappropriation. This is, I think, what Judge Alsup is saying. He eschews any reference to statutory preemption, but it's just a different way of getting to the same result.
Maryland Non-Compete Agreements
Judge Paul Grimm, another total judicial rock-star, struck down a five-year, market-based non-competition clause against a high-level engineer, a ruling summarized in Allied Fire Protection, Inc. v. Thai, 2017 WL 4354802 (D. Md. Oct. 2, 2017). The particular non-compete had the feel of being an amalgamation of form clauses, designed specifically to instruct lawyers on how not to draft non-competes.
For starters, the duration was five years - something sure to align the court with the affected employee. Those limits may be acceptable in the sale-of-business context, where there's equal bargaining power, but they almost never have any justification for at-will employees. Then the employer decided to bar the employee from working in a "similar" business with any of the plaintiff's former, current, or future clients. No parameters. No illustration of why. No common sense.
Judge Grimm's ruling that the non-compete was not tailored to protect a business interest, in the main, is not surprising. But it is significant that it arose in the context of a motion to dismiss, and not after the evaluation of evidence at the injunction or summary-judgment stage. These kinds of early, case-dispositive rulings happen all too frequently, but they embody a pragmatic approach sorely needed in litigation featuring an asymmetry in resources. Judge Grimm was careful to note the lack of allegations demonstrating the need for such broad covenants, a point that enabled the early dismissal.
Practice tip: if you're an employer, never lead with a frivolous argument. For reasons that confound, the employer decided it was a good idea to challenge the removal petition - the case originated in State court - on the grounds that removal jurisdiction violated Article I, § 10 of the United States Constitution - the so-called impairment-of-contracts clause. But as Judge Grimm noted, that clause applies to the States, not the federal government (and it was, after the federal government's jurisdiction that was challenged constitutionally). This approach to argument does nothing to endear one to the court.
Forum-Selection Clauses Following Atlantic Marine
On to a more challenging venue issue.
Venue, jurisdiction, and choice-of-law are heavily litigated procedural issues in non-compete and trade secrets litigation. Though it may seem like in-the-weeds, lawyer drivel, questions of procedure can be consequential. For instance, a few years back, Illinois courts held that Florida choice-of-law clauses are unenforceable because they contravene public policy. If that issue weren't litigated, cases may have come out differently.
Venue clauses may be equally as important. The Supreme Court, in Atlantic Marine Construction Co v. U.S. District Court, endorsed forum-selection clauses and has held courts must honor them in all but the most unusual cases. Practically, that means that only certain public interests (outside of any interests the litigants assert) will justify a transfer when a forum-selection clause is present. That means litigants cannot get out of a choice-of-venue clause if it is inconvenient to them. Predictably, district courts have followed Atlantic Marine and have cut back on the number of transfer orders in federal non-compete cases.
The Third Circuit, this Summer, addressed a difficult question under Atlantic Marine: how should courts apply the ruling when some, but not all, defendants are bound to forum-selection clauses that designate different federal districts? Get ready for some freakin' procedure, folks...
According to the court, there's a four-step inquiry (always a BAD sign). First, courts will apply Atlantic Marine to parties with forum-selection clauses, meaning their claims may be severed and transferred to the agreed-upon forum.
Second, courts then consider public and private interests related to the non-contracting parties (such as a corporate defendant with no direct contractual relationship to the former employer). Here the factors may suggest that the same forum is appropriate for both the contracting and non-contracting parties. And that may be enough for the court to kick or keep the whole action.
Third, if the court finds that the first two steps point in opposite directions, then it must consider severing the claims. That means that a court may need to transfer the action as to some defendants while retaining jurisdiction over others. For instance, a court may lack personal jurisdiction over a non-contracting defendant. It couldn't keep the case, in that instance, for efficiency reasons.
Fourth, if the issue of severance is not clear, then the court must evaluate "efficiency" interests and the non-contracting parties' private interests. Here, a court could find that public interests "overwhelmingly" outweigh the parties' interest in upholding the venue clause and thereby decline to enforce it.
The application of this four-step approach is fairly intricate, but the circuit court's analysis will resemble many of the same issues that arise in multi-defendant non-compete litigation, where individuals have forum-selection clauses and the new employer operates in a venue remote from the contractually chosen one. A link to the opinion is available here.
I am not sure I understand the point of drafting worthless, uninteresting blog posts. But if you are a blogger (or aspiring to start one), then I would highly recommend reading the latest entry on the Employment Trial Report. It's a classic example of what not to do. This post caught my eye when it showed up in a blast e-mail through Lexology and purported to "analyze" a $6.8 million trade-secrets judgment in California. Sounds f**kin' awesome, bruh!
No. For starters, don't waste everyone's time talking about a default judgment involving a defendant who has no legal representation and who "failed to participate in the subsequent damages proceedings." What is the takeaway there? It's good to have a lawyer? It's advisable to contest damages? It's best to show up in court for a hearing?
And then don't tell us how the judgment demonstrates that companies "need to be vigilant and act quickly and decisively when it appears" there's theft by an insider. Has anyone ever counseled an employer that, in such a situation, companies should be sluggish and move slowly and equivocally?
Sorry, but you clog up the blogosphere and so you deserve some opprobrium. Take a stand. Say something interesting. Offer a viewpoint. Don't spew drivel. And I could care less if the mandate from the firm's Executive Committee was to fill up the site with more posts...
Thad Felton over at Greensfelder in Chicago writes about the Attorney General's non-compete lawsuit against Check Into Cash of Illinois, Inc., calling the move "somewhat unusual." A better description would have been "entirely appropriate." The Freedom to Work Act, signed into law effective January 1, 2017, bars employers from using covenants not to compete against so-called "low-wage employees." This is a move that has gained traction across the United States, as State legislatures seek to pare back the use of overbroad restraints that do nothing to promote economic freedom and serve only to stifle competition.
According to the Attorney General's suit, brought under the Freedom to Work Act, the common law, and the Consumer Fraud and Deceptive Business Practices Act, the affected employees were store clerks, assistant managers, and managers, many of whom were paid on an hourly basis. The non-compete, recited in a pain-staking block quote, is oppressively overbroad and disconnected to any legitimate business interest. It's obviously unenforceable, despite the thatchy, semantic jungle in which the contractual language is buried.
A copy of the Attorney General's complaint is available here.