Legal Developments In Non-Competition Agreements

Illinois Legislative Update

2012-02-10T21:16:00.002-06:00

The Weekly Posner shall return next week. In the meantime, an important new bill has been introduced in the Illinois General Assembly.

Unlike most of the hair-brained pieces of legislation we see coming out of Springfield, this one actually makes some sense.

House Bill 5198, introduced by Rep. Daniel Biss (D-Skokie), would amend the Code of Civil Procedure to allow a circuit court to shift attorneys' fees to a prevailing defendant if a contract under which a plaintiff sues allows for the plaintiff to recover fees.

These one-way fee-shifting clauses are prevalent in many employment non-compete contracts (they are also common in leases and loan documents, which probably is what prompted the bill). If the bill passes, a prevailing employee would have a path to recover fees. Right now, unless a claim is made in bad faith or a fee clause is mutual, that path is exceedingly narrow, if it exists at all.

I wrote last year about one-way fee-shifting clauses. Rep. Biss' bill is similar to general legislation found in California, Montana, and Washington.

Recent Decisions of Interest (No. 4)

2012-02-09T16:38:00.004-06:00

This week's installment focuses on just one decision - the first pronouncement from the Appellate Court of Illinois following the Supreme Court's decision in Reliable Fire Equipment Co. v. Arredondo last year.

Of course, the decision was unpublished - an annoying trend in the Appellate Court. The Second District reversed and remanded a defense judgment on the grounds that the circuit court did not correctly apply Reliable Fire and instead analyzed the case under an outdated framework which that case rejects.

The case involved a common fact pattern. Hair stylist signs non-compete with a defined geographic territory. Hair stylist leaves. Hair stylist breaches by joining salon in prohibited territory. Jilted employer sues. Little more in the way of factual background is needed, except that the circuit court applied the right test then existing at the time of its judgment.

On appeal, the Second District held that Reliable Fire does indeed apply to a case which was decided under the prior regime but which was appealed during the time Reliable Fire was issued. The primary rationale, from what I can tell, is that Reliable Fire - in truth- did not change anything. It clarified a standard that long existed but which appellate courts got in the habit of misapplying.

So in that regard, the Appellate Court followed the general rule that a court opinion applies retroactively, as well as prospectively. None of the exceptions to this rule fit, primarily because nothing in Reliable Fire indicated it should apply prospectively only. Indeed, that would be illogical since the Supreme Court, in its own mind, really did nothing to change the law but only rejected the appellate courts' gloss on the applicable non-compete test.

Consistent with Reliable Fire, the circuit court on remand did not need to try the case over but could, in its discretion, allow for additional submissions and briefs necessary to address the issues and develop an appropriate record for decision.

Court: Appellate Court of Illinois, Second District

Opinion Date: 2/3/12

Cite: Hafferkamp v. Llorca, 2011 IL App (2d) 100353U

Favors: Employer

Law: Illinois

The Reading List (No. 4)

2012-02-07T15:30:00.005-06:00

If you don't learn something from this week's reading list, blame yourself.

A lot of good stuff today, which covers a wide swath of non-compete law.

First up is an excellent summary piece titled "Top 10 Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law" from Seyfarth Shaw. The article is a few weeks old and takes an in depth look at key legislation, a number of state supreme court cases, and high profile jury verdicts. Though some of these topics have been the subject of my blog posts, a number of them do not appear here at all.

Next comes Russell Beck of Fair Competition Law with a January round-up covering a fair amount of ground across the United States. I can't do this justice by summarizing. Just go there, read for yourself Russell's excellent survey of new cases and developments.

The subject of broadcast non-competes is an interesting topic on which I have written before. Wiley Rein's post from December summarizes the issues very well and notes which states have legislation concerning broadcast industry employees.

Finally, on the transactional side, Business Valuation Update published an article by Gary Trugman of Trugman Valuation Associates, Inc., which provides an 11-factor checklist for valuing non-competition covenants as part of a corporate divestiture or sale of a professional practice. Trugman notes an eight-step approach to obtain a correct valuation of the covenant followed by an 11-factor checklist used to determine the economic reality of the covenant. A free copy of the Trugman article can be found on Business Valuation Resources site, though you may need to provide an e-mail address to obtain a log-in and password.

The Practical Lawyer (No. 2): Confirming The Reason for Termination

2012-02-03T17:32:00.004-06:00

December and January always result in a rush of severance work for me, both in terms of drafting contracts for my employer clients and reviewing them for employees.

This week's "Practical Lawyer" is no more than a simple drafting tip. On the employee side, it is important to try and obtain a representation in the severance contract that the employee was terminated without cause. (If he or she were terminated for cause, it is highly unlikely that a severance agreement is even in play.) What is the reason for including this provision? There really are two.

First, it means an employer won't be able to contest unemployment.

Second, it can help the employee find a new job without worrying about a non-compete clause. Many employment contracts provide that non-competes are enforceable only if an employee quits or is fired for cause. An acknowledgment by the employer that the employment was terminated without cause is an admission and would not allow for enforcement.

In some states (New York and Montana), termination without cause means an employer cannot enforce the non-compete agreement regardless of the triggering language in the contract. In most states, it is a factor a court will weigh when considering whether enforcement is reasonable.

Even reaffirmation of a non-compete within a severance contract may not allow an employer to enforce. For starters, courts recognize the difficult economic choice an employee is in when presented a severance. Further, the consideration for the payment is not necessarily the reaffirmed non-compete, but rather the release the employer obtains in the severance contract. Every employee situation is different in terms of assessing what consideration the employer truly received for the severance payment. Finally, the amount of the severance may have an impact. Reaffirming a covenant for two weeks severance pay won't impress a court if it is asked to enforce a non-compete. A year's pay may be a different story.

Employees, therefore, should always request that an employer agree in a severance document that termination was "without cause." In most circumstances, the employer should have no issue with this and should consent to it.

Recent Decisions of Interest (No. 3)

2012-02-02T18:43:00.002-06:00

This week...a ubiquitous trade secret problem and two cases concerning non-compete drafting.

General Patent Corp. v. Wi-Lan, Inc., 2011 U.S. Dist. LEXIS 134625 (S.D.N.Y. Nov. 22, 2011). In denying a plaintiff's motion for preliminary injunction, a New York federal district court dealt with one of the most common issues in trade secrets litigation - the lack of specificity concerning what was misappropriated. The case gives a laundry list of generalized information too lack in detail to survive trade secret scrutiny at a contested evidentiary proceeding. Though New York has not adopted the Uniform Trade Secrets Act, the common law factors it uses to assess trade secrets claims are similar to those that UTSA states consider.

The decision in Murphree v. Yancey Bros. Co., 311 Ga. App. 744 (2011), has to be viewed in light of Georgia's employer-friendly common law prior to the time the legislature passed its sweeping amendments last year. For covenants decided under the common law, it is impermissible to prohibit an employee from merely accepting business from his or her former customers. A non-compete or non-solicit clause must only prohibit so-called active solicitation. In this particular case, the Court of Appeals of Georgia had no issue with the covenant's use of the term "solicit, divert or take away", ruling essentially that each of those was a synonym. Other cases seem to suggest that merely accepting unsolicited business from an account falls within the term "divert."

Ophir-Spiricon, LLC v. Mooney, 2011 U.S. Dist. LEXIS 135608 (D. Utah Nov. 23, 2011), dealt with a non-compete covenant I see more and more frequently. The covenant did not require the employee from working for a competitor. Rather, it prohibited him from entering employment competitive with his former employer if such employment would "inherently require" him to reveal or use any confidential information or trade secrets. Though these covenants may narrow the non-compete a bit, they lead to vast uncertainty. An employee (like the one in this case, apparently) may legitimately believe that he is complying to the letter if he avoids certain activity - say, taking customer lists or directly contacting his old accounts. However, the employee is at the mercy of his former employer's interpretation or subjective belief as to what the new employment "inherently requires." In such circumstances, it is critical that the employee and his new employer work to create a detailed job description and enter into an agreement concerning what acts the employee is not allowed to engage in during the restricted period.

The Reading List (No. 3)

2012-01-31T22:41:00.005-06:00

Several good articles this week, ranging on topics from customer relationships, to the Computer Fraud and Abuse Act, to bad faith trade secrets claims. I did not include any editorials on the mud-slinging affair in the Florida primary.

So here is this week's reading list.

Justin Beyer of Seyfarth Shaw writes on Hill v. Best Medical, a total disaster of a case in Pennsylvania. The district court shifted attorneys fees to the prevailing counterdefendant, after Best Medical lodged specious claims of trade secrets misappropriation. Justin summarizes the key facts relied upon by the court in finding evidence of bad faith.

Brent Cossrow of Fisher & Phillips discusses a new CFAA case and the ongoing divergence of circuit court opinions on whether the federal statute is intended to federalize acts against so-called faithless employees.

Epstein Becker Green published a paper discussing New York's reluctance to enforce non-compete provisions designed to protect customer relationships. A pdf version of the article is available in EBG's blog post here.

Finally, John Shonkwiler of Novak & Macey in Chicago was recently interviewed by Smart Business and discusses how managing e-mail properly can save time and litigation expense. This may not relate directly to non-competes, but the issues John discusses in this article are part of most non-compete disputes. If his advice is not taken, a client could find its discovery expense much higher than is necessary.

The Weekly Posner (No. 1)

2012-01-27T20:00:00.003-06:00

I met Judge Richard Posner when I was in law school. I was chairing a moot court competition at the University of Illinois, and we somehow convinced RP to serve on a distinguished panel for our 2L contestants. What struck about him then is that he is a lot more normal in person than you would expect.

Judge Posner writes faster than I can read. His books touch on diverse subjects such as economics, plagiarism, and sex. His legal opinions are among the most influential of any jurist living today. He hasn't written a whole lot about non-competes or trade secrets, but he doesn't have to in order to earn a bi-weekly slot here. Something can be gleaned from each of his opinions which may be relevant to a non-compete attorney. That is what I am attempting to deliver here.

The first installment of The Weekly Posner comes from a recent Seventh Circuit opinion called ATA Airlines, Inc. v. Federal Express Corporation. The court overturned a jury verdict of over $65,000,000 in favor of ATA in a contract dispute with Fed-Ex. The particulars of the dispute are interesting strictly from a contract formation perspective. The more enduring part of the opinion however is Judge Posner's castigation of ATA's damages analysis.

The court blistered ATA's counsel for not understanding linear regression analysis, which was used by an expert witness to come up with a statistical model of damages. Regression analysis is a modeling technique which explores a causal relationship between dependent and independent variables. It is really complicated stuff, and even my one semester of Statistics at Ohio State would not be nearly enough for me to understand it without an intensive refresher course.

Judge Posner understands it, though. And when he went up against ATA's lawyer, bad things happened. In the Seventh Circuit opinion, Judge Posner noted the failure of the ATA attorney to explain in plain English just what the expert's evidence actually meant. The last paragraph of the opinion says it all: "If a party's lawyer cannot understand the testimony of the party's own expert, the testimony should be withheld from the jury." The Seventh Circuit reversed a $65 million judgment and directed the district court to dismiss the case with prejudice.

For years, the Seventh Circuit - Judge Posner in particular - has been crucifying parties who show up with junk science theories of damages. I have such a case which is in the Seventh Circuit right now, where my opponent had not one clue what its alleged "damages" were. The lesson here is clear: if you are a plaintiff in a business case, you better think through your damages theory from every conceivable angle. If you don't, you're liable to end up with one of Judge Posner's opinions breathing down your neck.

Recent Decisions of Interest (No. 2)

2012-01-26T17:13:00.011-06:00

Today, a decision out of Georgia (always a good source of entertainment), a New York court opinion on non-recruitment clauses, and an Ohio case on trade secrets.

Paragon Techs., Inc. v. Infosmart Techs., Inc., 312 Ga. App. 465 (2011). In a technology staffing contract, a covenant that prohibited the staffing provider from working directly with the contractor's client for a period of one year was unreasonable under Georgia law. The reason? This arms' length contract was still judged under the strict scrutiny standard, which invalidates covenants prohibiting unsolicited work with a client.

Renaissance Nutrition, Inc. v. Jarrett, 2012 U.S. Dist. LEXIS 2490 (W.D.N.Y. Jan. 9, 2012). A federal court in New York held that under New York law, a non-recruitment provision barring solicitation of employees must be judged under the traditional three-part restrictive covenant analysis. However, the court also stated that because a non-recruitment covenant does not impinge on an individual's livelihood, it is "inherently more reasonable" than non-compete covenants. This follows the trend in most states. It is surprising that so few cases in New York, which generally produces the most non-compete opinions, have weighed in on the issue.

Finally, we have Columbus Bookkeeping & Bus. Svcs., Inc. v. Ohio State Bookkeeping, LLC, 2011 Ohio App. LEXIS 5655 (Ct. App. Dec. 30, 2011), where the Court of Appeals of Ohio reversed a preliminary injunction in a trade secrets case. The plaintiff had claimed that its list of clients was a trade secret, and that by competing for those clients, the defendants misappropriated trade secrets. The trial court agreed and imposed, in effect, a non-compete as to those clients.

The Court of Appeals found this to be an abuse of discretion, noting that "plaintiff seeks...to enforce a non-existing noncompetition agreement against defendants by invoking the statutory provisions governing trade secrets." The trial court's order was amplified by the expiration date it placed on the defendants' ability to service customers, as the Court of Appeals found that this was more in line with what courts would do for non-compete agreements (which have expiration dates).

A true trade secret should be protected for as long as it is secret and valuable. Finally, the court correctly found that client lists are usually trade secret when accompanied by a host of other non-public data, such as contact information and other particulars known as a result of the client relationship.

The Reading List (No. 2)

2012-01-24T08:59:00.003-06:00

A couple of weeks ago, I read "Making Your Case" by Justice Antonin Scalia and Bryan Garner, the latter being sort of the Steve Jobs of the legal writing industry.

On page 62, the authors discuss brief writing and quote Judge Frank Easterbrook (right) of the Seventh Circuit, who says:

"The best way to become a good legal writer is to spend more time reading good prose. And legal writing ain't that! So read good prose. And then when you come back and start writing legal documents, see if you can write your document like a good article in The Atlantic, addressing a generalist audience. That's how you do it: get your nose out of the lawbooks and go read some more." (Incidentally, Judge Easterbrook's brother, Gregg, is a well-known writer on a variety of subjects (including football) who was published in the February edition of The Atlantic.)

Awesome advice. With some exceptions, the legal writing I see is poorly framed, drab, and mind-numbing.

So I start today's reading list suggesting a great non-legal article. In the February edition of Harper's, Barry C. Lynn writes about the impact of "new monopolies" on free competition. In "Killing the Competition", Lynn discusses the much-ballyhooed pact among the Silicon Valley tech companies not to hire each other's employees.

Interesting news item here in Velo News describing a trade secret/employment contract dispute between Specialized and Volagi. Employees of well-known road bike manufacturer Specialized left to start their own firm, and Specialized claimed that they not only stole trade secret information but also used their former employer's time and resources to start a competing enterprise. Though Specialized prevailed on one claim (and received $1 in damages), Volagi claimed victory and noted the more than $1m in legal fees spent by Specialized. The article highlights the difficulty of proving damages in competition disputes and further illustrates the high legal fees associated with contested litigation in this area.

Finally, Michael Elkon from Fisher & Phillips discusses the use of non-compete agreements in college football contracts. The article points out some very astute policy implications. I wrote on this topic in December 2010 when Bobby Petrino inked his new deal at the University of Arkansas.

The Practical Lawyer (No. 1): A Client Gives Me a Drafting Tip

2012-01-20T09:09:00.004-06:00

One of the most important pieces of advice I can give any lawyer is very simple (and maybe very obvious): listen to your client.

Many of my clients are small business owners. As corporate counsel, it is critical for me to understand the dynamics that affect my clients' business operations. This week, when working on a draft non-compete agreement, a client caught something that was missing from the form document off of which I start the drafting process.

A provision that deals with cloud computing.

It is standard procedure in my non-compete agreements to have some provision calling for the return of business materials upon termination of employment. Those clauses also call for an inspection opportunity, such that an employer can verify company data isn't maintained on personal thumb-drives, tablets, or smart phones after termination.

However, my form agreement did not mention cloud computing or cloud storage. By now, most attorneys are aware that documents and data can be stored in the cloud. Cloud storage basically means that information is stored online in a pool hosted by a third-party. It provides employees the opportunity, for instance, to access information following departure even if their personal laptop or tablet device appears "clean." It is similar (and far more advanced) than the situation involving employees who have old company e-mails maintained in a web-based e-mail system, which provides ease of access.

Employers should consider restricting the ability of employees to store documents in the cloud. In my opinion, the availability of easy-to-use cloud storage platforms (such as iCloud) creates a potential problem that employment agreements may not address.

Recent Decisions of Interest (No. 1)

2012-01-19T21:50:00.009-06:00

My regular Thursday column will survey recent decisions across the United States which touch upon non-compete or trade secret issues. The four cases I chose this week touch on a wide variety of issues, including those relevant to the corporate counsel drafting non-compete clauses.

AMG Nat'l Trust Bank v. Ries, 2011 U.S. Dist. LEXIS 149130 (E.D. Pa. Dec. 29, 2011). The court, applying Colorado law, found that a liquidated damages provision in a two-year non-compete, which called for payment of ten times the annual gross fees for each wrongfully solicited client, was voidable as a matter of law. I drafted two liquidated damages clauses this week for clients, and my advice is always the same: be able to justify the methodology you select under oath. The more random and arbitrary a clause looks, the more likely a court simply will strike it.

ISCO Indus., LLLC v. Erdle, 2011 U.S. Dist. LEXIS 148907 (E.D.N.C. Dec. 28, 2011). A North Carolina court denied entry of a preliminary injunction motion against a sales employee in the piping distribution business. The employee's covenant was not narrowly tailored to restrict him from selling only products or services competitive with those offered by the ex-employer. This further illustrates why attorneys must be careful in considering the scope of the non-compete restriction. Using hypothetical scenarios during the drafting process can help identify problems of overbreadth.

WIT Walchi Innovation Techs., GmbH v. Westrick, 2012 U.S. Dist. LEXIS 1847 (S.D. Fla. Jan. 6, 2012). A court issued an ex parte temporary restraining order against an employee who allegedly stole a laptop containing proprietary source code and programming for a software product. The court issued a broad evidence preservation order and ordered immediate return of the stolen laptop computer. No commentary necessary here. Firsthand evidence of outright theft of property warrants mandatory injunctive relief, even on an ex parte basis.

Pellerin v. Honeywell Int'l Inc., 2012 U.S. Dist. LEXIS 3781 (S.D. Cal. Jan. 12, 2012). A district court in California sustained a defense objection to the retention of a trade secrets expert on the basis that the expert was a former employee of the defendant. Such objections, usually made under the terms of protective order, are common when the expert may have had prior access to an adversary's confidential information. It may be impossible in such circumstances for the expert to provide legitimate, untainted opinion testimony.

The Reading List (No. 1)

2012-01-17T09:29:00.004-06:00

As I wrote last week, every Tuesday I will be posting links to other articles of interest. This is the first installment of The Reading List, and I encourage my readers to visit these informative articles from other authors.

Ted Olsen of Sherman & Howard writes on an interesting social media case, involving an employer's posting of entries on its employee's Twitter and Facebook sites. As this article aptly describes, the law and theories under which parties can sue is still evolving and it is not entirely clear what personal and property rights are protected.

Seyfarth Shaw discusses New Jersey's adoption of the Trade Secrets Act in a post here. The actual legislation can be found here.

Rob Radcliffe writes on the proliferation of non-compete agreements in the medical device industry, citing his past experience with a particular party and the trends in overall health care spending. As Rob notes, some companies have developed reputations for being very aggressive in filing or pursuing non-compete actions against ex-employees. Rob notes that one such employer is Synthes Medical.

Chicago Tribune business law writer Ameet Sachdev discusses the Illinois Supreme Court's decision in Reliable Fire Equipment v. Arredondo. Surprisingly, he concludes by saying that labor attorneys representing both management and employees have favorable reviews of the decision. My experience is the opposite.

MIT News contains an article on the impact of non-compete agreements on engineers. The article also cites a detailed academic study recently published in the American Sociological Review, which notes that roughly one-third of technical employees bound by non-compete agreements leave their industry altogether.

New Jersey Adopts Uniform Trade Secrets Act

2012-01-11T20:05:00.003-06:00

On January 9, Governor Chris Christie signed the New Jersey Trade Secrets Act into law. This Act is modeled after the Uniform Trade Secrets Act. With this legislation now in effect, only three states - Texas, Massachusetts, and New York - have yet to adopt the UTSA.

The New Jersey version of the Act is very similar to other statutory schemes adopting the UTSA. While the definition of "trade secret" is different, and a little broader, than other states, the basic foundation of trade secret law is still on par with the vast majority of states.

The passage of the UTSA does work a couple of changes. First, preemption now will apply and common law tort claims based on trade secret misappropriation likely will be barred. Second, the UTSA will allow an aggrieved party the opportunity to recover so-called "royalty" damages, a theory previously unavailable under the common law. Previously, a trade secrets plaintiff only could recovery money upon a showing of lost profits or under an unjust enrichment theory. Similarly, a royalty injunction is available, which allows a misappropriating party to use a trade secret into the future provided it pays a reasonable royalty to the trade secret owner.

Finally, the fee shifting provisions common to trade secrets claims - to the plaintiff upon a showing of willfulness, and to the defendant upon a showing of bad faith - will apply.

The New Jersey statute takes effect immediately, though it does not apply to claims of misappropriation arising before January 9, 2012.

Bring on 2012 - A Time for Change

2012-01-10T11:09:00.004-06:00

I'm not sure whether Ron Paul is going to get elected President or not (though I have a strong hunch), but 2012 is sure to bring in a great deal of change.

I, for one, like change. I think it's healthy, good, and invigorating. There is nothing more annoying to me than someone who continues doing the same thing over and over again and justifies it simply by saying "that's how I've always done it." I see this all the time with lawyers, who justify bad work product based on prior practice. This hasn't worked for the Chicago Cubs, and it's not a defense. If something sucked ten years ago, it almost certainly still sucks.

So how does the idea of change affect my blog for 2012?

Here's how. Starting next week, I will publish three regular columns per week which will follow a similar theme.

On Tuesdays, I will publish "The Reading List", a quick reference guide to articles I have read from other attorneys and commentators. A lot of my colleagues publish great websites and I want my readers to see other perspectives and points of view.

On Thursdays, I will publish "Recent Decisions of Interest", which is a more condensed version of the case summaries I frequently post. My goal is to provide more content and more cases in a slightly less jargony format. If there is a truly significant decision that merits further discussion, I may write separately on that. I also intend to include issues that relate to employee transition disputes, but not necessarily decisions touching specifically on non-competition agreements. Summaries and posts may include references to social media and commission disputes.

On Fridays, I will alternate between "The Practical Lawyer" and "The Weekly Posner." The former is intended to follow the theme and style of many former columns, because I have received a tremendous amount of positive feedback from clients and fellow lawyers for my prior posts. I won't necessarily to discuss some groundbreaking decision or interesting new non-compete case. Rather, I will impart to my readers what issues I typically see when representing clients and how to begin thinking about them.

The latter will be somewhat of a novel twist for this site, since it won't directly touch on non-compete law. But, (just as it sounds) "The Weekly Posner" will discuss a case or article from the leading jurist in America, Seventh Circuit Judge Richard A. Posner. Judge Posner has had a tremendous influence on my legal career and the way I think about cases and issues. Any attorney who litigates a business case ought to know how Judge Posner has ruled or approached issues in the past. This column will be sort of a tip-of-the-hat to him.

As the year goes, I expect I may revert to my old ways and break from this format on occasion. However, I want to keep this site fresh and interesting and hope that you will enjoy what I provide in 2012.

2011: Year-End Review, Part II

2011-12-31T09:10:00.004-06:00

I decided to augment my year-end review this year with a different tone and message. In the past, I have confined my end of the year analysis to a true summary of what legal developments we saw in the area of non-compete law during the prior twelve months.

But upon reflection of the year that is now behind us, I wanted to share some personal thoughts about what I have seen representing clients in lawsuits and non-compete disputes.

In 15 years of practice, I have never been more bothered and disturbed by the role attorneys play in facilitating their clients' grievances, rather than resolving them. Competition disputes are a little bit different - actually, a lot different - than other ordinary suits. More than frequently, they are not about righting a wrong or recovering some liquidated debt. Rather, they are intensely personal, strategic, and improperly pursued. I have written before on the range of legal fees often generated in these cases and what factors go into those ranges. Clients and potential new clients are sometimes shocked to hear this, but it is much better for them to know at the outset.

In 2011, I tried three non-compete cases to final judgment - two victories and one defeat. And on each occasion, the court ultimately got it correct. The attorney I lost to was one of the finest and most honorable attorneys I have met, represented his client well, and worked well with me to get a non-compete case tried to final judgment in a remarkable 35 days. This is what lawyers should aspire to. I left the case sad for my client, but emboldened in my belief in the system and that some attorneys just "get it."

Along the way, however, I witnessed lawyering that was the complete opposite. To sum it up eloquently, the representation I saw this year from a wide range of lawyers was fucking horrendous.

Lawyers seem to forget that they have obligations not only to the clients they represent, but also to the court and opposing counsel. In competition cases, these considerations seem to get swept under the rug all too often. Competition suits have the potential to be strategic - that is, not meant to redress a true grievance, but to gain foothold in the marketplace and to impose litigation costs on a competitor. This in and of itself is wrong. Many lawyers, however, could care less.

The law provides some redress for parties who are the victims of frivolous or strategic lawsuits (and, that term means both suits that were not well-grounded from the start, but also - and especially - those that were filed and maintained for some ulterior purpose), but the avenues to gain just compensation are exceedingly narrow, difficult to prove, and cost inefficient. My experience is that courts are impermissibly hostile to fee-shifting petitions, wary of counterclaims, and unwilling to view the motive behind lawsuits with a jaundiced eye.

Just three illustrations from this year to show what I have experienced firsthand.

I litigated a trade secrets injunction case in state court where the plaintiff, my opponent, had no idea what its trade secret was and ultimately concluded it was his "overall business model." (It was about halfway through a preliminary injunction hearing when the plaintiff finally decided this.) Aside from the fact my client was not even in the same line of business and never took anything from the plaintiff, the plaintiff and its lawyer pursued us anyway and forced a young man to spend $20,000 in personal savings to clear his good name. The court denied our motion for sanctions, which the plaintiff did not even defend.

I also prevailed in a federal court non-compete/trade secrets case where my opponent could not identify how it was ever harmed or injured as a result of what turned out to be business activity in a completely separate market outside the geographic scope of my clients' non-compete agreements. My fee petition for $100,000 is now pending, and my adversary has bitched, whined and lied that I failed to disclose information about my opponent's damages (not sure how this is even possible) and that I confused a deposition witness (is this a compliment or a complaint?).

In another trade secrets case, my opponent filed a claim in a complex industry, claiming that certain technology know-how components (each of which were clearly in the public domain) gave rise to an inevitable disclosure case. The suit, in essence, was a forced hostile takeover of a corporate competitor by virtue of a dubious trade secret claim, and resulted in a large settlement just so the defendant could move on with its business and close its debt financing. At no point did the plaintiff show any interest in what its trade secrets were (its theory changed three times before the first witness was deposed), but the lawyers managed to rack up millions in legal fees.

Victims of lawsuit abuse can always pursue claims for attorneys fees, abuse of process, malicious prosecution, and antitrust violations. But they are hard to prove, perhaps intentionally so. More problematically, lawyers these days seem more interested in charging their clients, building their books of business, and collecting fees, rather than doling out sound advice and pursuing cases to recover compensation.

There are simply too many attorneys chasing too little work, encouraging clients to take on stupid lawsuits for the sole purpose of litigating. Too infrequently, lawyers give little thought to how they will win a case. Litigating is enough until they get their ass handed to them or force their client to settle (usually after most of the fees have been charged and collected) right before trial.

I don't want to give the impression that I won't pursue a case for a client who has been truly wronged. In the past two years, I have been lead counsel for a plaintiff on only five cases - a mere fraction of how many times I defend clients in competition suits. But in those five suits, I know what I am doing and my clients damn well know I investigated the case before I filed it. I don't pretend to know everything, and I have had my share of disappointments. However, I have never used a competition suit for some ulterior purpose. Unlike many of my opponents, I can look myself in the mirror and say that I understand what the profession means.

Faces of Lawsuit Abuse

2011: Year-End Review, Part I

2011-12-29T13:27:00.012-06:00

I put a fair amount of effort into this blog, but I try to go the extra mile in my year-end review. I went back and read my material from prior years, and I am proud of the content I have provided my readers as we have turned the page on another year.

So this year, I am going a step further and dividing my column in two parts. This installment features some notable developments in competition law and some links to suggested reading. The second installment will be a lot different, and I hope you find it valuable too.

As I look back on 2011, there were five significant developments (four of which I wrote about) in non-compete and trade secret law.

1. Supreme Court of Illinois "Reaffirms" Reasonableness Test. Courts in Illinois have struggled for 3 or 4 years to determine what test to apply to non-compete agreements. Due to a district split, the Supreme Court had little choice but to take Reliable Fire Equipment v. Arredondo to clarify the law applicable to covenants. As it turns out, the opinion in Reliable Fire was not all that illuminating, but it reaffirmed the tripartite reasonableness test that is common to many states and further held that an employer must demonstrate a protectable interest. The biggest change is that the protectable interest is to be assessed under a "totality of the circumstances" approach - a notable departure from a rigid test that lawyers and courts frequently struggled with. I wrote about this decision earlier this month. The defendants in that case have petitioned the Court for a finding that the ruling applies prospectively only. I will update the blog when the Court rules on (denies) that motion.

2. Texas Supreme Court Expands Permissible Scope of Non-Competes. In July, I wrote about Marsh USA v. Cook, an important Texas Supreme Court case which completed a long revamp of Texas law. Essentially, Texas has now migrated away from an analysis based on whether a covenant was "ancillary" to an employment contract and focused more on whether it is reasonable to protect a legitimate business interest. In Marsh USA, the Court determined that the provision of stock options (as opposed to confidential information) was the type of consideration that could support a non-compete. The best part of the case, though, is Justice Willett's scholarly and beautifully written concurring opinion. It should be required reading for any judge before he or she examines a non-compete case.

3. Georgia's New State Law Takes Effect. After some fits and starts, Georgia's new non-compete statute took effect earlier this year. Though the law only applies to contracts entered into after a certain date, Georgia now goes from being a notoriously employee-friendly state to one more neutral in how it assesses non-competes.

4. Colorado Allows for Continued Employment to Serve as Valid Consideration. The issue of whether continued employment can serve as sufficient consideration for a non-compete is one of my top wedge issues - those that clients often don't grasp and which are the subject of disagreement among states. Earlier this year, Colorado joined a majority of states in concluding that continued employment can constitute sufficient consideration.

5. Massachusetts Courts Expand Trade Secret Proteciton. This is not an issue I wrote about, but it is worth reading Russell Beck's discussion on the Fair Competition Law blog of Specialized Technology Resources v. JPS Elastomerics. Massachusetts has not enacted the Uniform Trade Secrets Act, and Section 93A is its general unfair competition statute. This case appears to give employers some more ammunition for obtaining damages and attorneys' fees against employees who misappropriate trade secret material and use the same after the employment relationship ends. Prior case law had been unclear as to how (or whether) employers could invoke this statute against departing employees.

So that's it for the traditional year-end wrap. Next up, a different and more personal take on 2011.

Iowa Appellate Court Addresses First Sale of Business Non-Compete Case In Over 70 Years (Sutton v. Iowa Trenchless)

2011-12-28T13:21:00.006-06:00

Sale of business non-compete cases do not often end up in the appellate courts because they are so frequently enforced. While the contract still technically amount to restraints of trade, the level of scrutiny applied by courts is far more lenient than in employment cases.

The Court of Appeals of Iowa took its first sale of business case in more than 70 years and reaffirmed the long-held principle that courts grant a greater "scope of restraint" in sale of business non-competes than in other adhesive contracts. Interestingly, the court stated the "reasonableness" test is the same, "it is only the application of the test that is different." The court even noted that as long as the area covered by the non-compete was coextensive with the company's line of business, an unlimited duration still could be acceptable.

The Iowa court's formulation of the reasonableness test is similar to that in other states. Some courts will, for instance, presume that a protectable interest exists. Many states shift the burden of proof to the party challenging the covenant, in essence requiring him or her to demonstrate unreasonableness. In a normal employer-employee context, the burden often is on the employer to show why the protections are needed.

Interestingly, in the trial court, the employee - Sutton - sought a declaratory judgment that the non-compete was unenforceable. The employer counterclaimed for breach of contract. Both the trial court and appellate court found that the employer failed to establish an actual breach because it could not prove damages.

In reversing the trial court's grant of declaratory relief, however, the court found that Sutton actually had to reimburse the employer's attorneys' fees under a prevailing party provision of the contract, even though the employer never established breach. Sutton, therefore, may have been better off waiting to see if his ex-employer sued him, rather than filing a preemptive suit for declaratory judgment.

Court: Court of Appeals of Iowa

Opinion Date: 11/23/11

Cite: Sutton v. Iowa Trenchless, LLC, 2011 Iowa App. LEXIS 1359 (Iowa Ct. App. Nov. 23, 2011)

Favors: Employer

Law: Iowa

Missouri Among States Which Disapproves of Equitable Tolling (Whelan Security Co. v. Kennebrew)

2011-12-28T09:39:00.007-06:00

One of the most important procedural issues in non-compete disputes is the idea of equitable tolling. This doctrine essentially allows a court to toll, or stay, the time remaining on a non-compete agreement during the period in which the employee is in breach.

There is a problem, however, with this doctrine. It's not always available, and the remedy is highly dependent on what state's law governs the agreement.

Lawyers need to look at two primary issues. First, does the agreement expressly provide for equitable tolling? If so, then basic principles of contract law should allow a court the power to toll the time remaining on a non-compete if an employee is found in breach. Second, if the agreement is silent on this issue, does the state common law allow for tolling as a default rule?

Ohio, for instance, is a state which allows equitable tolling. In Illinois, it seems as if the courts will not approve of it absent a clear contract provision, but at least one older case suggests the remedy might be available in certain circumstances. Many states simply hold the doctrine is not available.

Missouri is one of the states falling into this last category. The Court of Appeals of Missouri recently reaffirmed this principle in Whelan Security Co. v. Kennebrew, and cited several prior cases as support for its holding. The case, incidentally, also involved the reversal of a summary judgment in favor of the employee on the grounds that the non-compete was facially overbroad. Since the court had to consider the merits of the case, including the protectable interest at stake and the reasonableness of the agreement, the issue of injunctive relief came up in the court's opinion.

The court found that the employer still had a claim for damages, but that injunctive relief was not available given the lapse of the non-compete period. The court noted the equities of its reasoning: "This would avoid the injustice of penalizing Kennebrew by effectively terminating the security guard business that he has established and built since 2009."

For employers, it is essential to seek injunctive relief, if at all, right away. Waiting until a defendant has established its business raises numerous equitable issues, not the least of which is the potential harm to third-parties and the specter of a double recovery.

Court: Court of Appeals of Missouri, Eastern District, Division One

Opinion Date: 11/29/11

Cite: Whelan Security Co. v. Kennebrew, 2011 Mo. App. LEXIS 1590 (Mo. Ct. App. Nov. 29, 2011)

Favors: Employee

Law: Missouri

Are Signatures Required on a Non-Compete Agreement? (U.S. Risk Mgmt. v. Day)

2011-12-23T09:56:00.005-06:00

Readers might be surprised how often employers fail to tie up the loose ends on basic personnel matters. I have seen on more than one occasion a non-compete agreement which fails to contain one or even both signatures. Of course, when a dispute arises, it is difficult for lawyers to turn back the clock and figure out why this was the case.

A case from earlier this year in Louisiana addressed an employee's argument that his non-compete was not binding because the employer never signed it. The agreement even said that it was only effective upon "execution." The court held, however, that a genuine issue of fact concerning contract formation existed, and the suit could not be dismissed at the pleading stage.

A couple of thoughts on this, and similar issues:

First, as the Louisiana court held, "execution" of a contract can mean signing or performance by both parties. Therefore, just as a I wrote yesterday, I would not get too hung up on formalities.

Second, contract formation may be a bigger issue if the employee (rather than the employer) fails to sign. An employee after all is the party to be bound under a non-compete, and the employer's obligations are usually not extensive.

Third, it is important to look at extrinsic facts. If there truly were a dispute over whether the employee consented to the non-compete terms, then the failure to tie up formalities may express the intent that no agreement was ever reached.

On this last point, it would be important to examine pre-hiring communications, an employee's voiced objections to certain terms, and other similar facts. In many cases, the employee may balk at the proposed non-compete and begin work anyway. If the issue is left hanging without any resolution, the court could conclude no meeting of the minds occurred even if the employer subjectively believes the employee had to sign the non-compete to remain employed.

Court: Court of Appeal of Louisiana, Fourth Circuit

Opinion Date: 9/28/11

Cite: United States Risk Mgmt., LLC v. Day, 73 So. 3d 1100 (La. Ct. App. 2011)

Favors: Employer

Law: Louisiana

Stealing a Non-Compete Agreement May Not Do You Any Good and It Could Land You In Jail

2011-12-22T11:51:00.007-06:00

A man in Wisconsin who wanted to open up his own karate studio has been charged with a felony after trying to break into his former employer's work and steal a non-compete contract. The story can be found here.

Obviously, this was pretty stupid. But it likely would not have done much good even had this novice criminal pulled off his caper.

For starters, a missing non-compete hardly means a court cannot find one existed. I wrote about a similar case in Rhode Island exactly three years ago. A trial court certainly can consider evidence from knowledgeable people that an employee did in fact sign a non-compete. Helpful testimony would include the following:

(1) Facts indicating that a new employee must sign the contract as part of an established process at the time of hire;

(2) Evidence an agreement was sent to an employee;

(3) Evidence that personnel files were regularly audited to make sure agreements were on file; and

(4) Some admission by the employee that he signed the agreement.

My impression is that clients, particularly those who are new to litigation, are too enamored with formalities and technicalities. Courts (and rules of evidence) aren't that myopic.

I have had at least one case where my client (the employer) felt an ex-employee stole his non-compete agreement, and we have every reason to think he did. Of course, we did not have the direct evidence which landed our Wisconsin friend with a felony charge. But the judge in our case was willing to consider extrinsic evidence that an agreement was in fact reached.

The case of the missing non-compete, however, should not be an issue. Important documents should be saved (and backed up) electronically.

Supreme Court of Oklahoma Describes Limited Circumstances for Non-Solicitation Enforcement (Howard v. Nitro-Left Techs.)

2011-12-18T08:08:00.003-06:00

Oklahoma is one of three states which bans non-competition agreements, the other being California and North Dakota. However, Oklahoma law allows for the limited enforcement of non-solicitation covenants.

The Supreme Court of Oklahoma in Howard v. Nitro-Lift Technologies recently clarified this standard, holding that a non-solicitation covenant may only restrict an employee's solicitation of "established" customers. This means that a covenant which bars solicitation of past customers, for instance, is overbroad. Interestingly, the Court also disapproved of a covenant which left undefined the term "customer," stating that it "might stretch to encompass temporary or single-event relationships." A market-based non-compete will never be enforced against an employee.

Employers in Oklahoma are on clear notice of what their covenants should look like. The state legislature and courts have clearly confined the restrictions to a narrow class of activity restraints. Based on the recent Howard decision, employers also should clarify their definition of "customers" so that it does not reach beyond "established customers" as required by Oklahoma law. While this may be unsatisfying for some employers, at least everyone knows the extent of what courts will enforce. The same cannot be said in virtually every other state.

Court: Supreme Court of Oklahoma

Opinion Date: 11/22/11

Cite: Howard v. Nitro Left Techs., LLC, 2011 Okla. LEXIS 107 (Okla. Nov. 22, 2011)

Favors: Employee

Law: Oklahoma

Court Holds Pictures of Dead Bodies Are Not a Trade Secret (Kenyon Int'l Emergency v. Malcolm)

2011-12-15T11:52:00.007-06:00

I have nothing more to add to this post than the title itself.

Court: United States District Court for the Southern District of Texas

Opinion Date: 12/13/11

Cite: Kenyon Int'l Emergency Svcs., Inc. v. Malcolm, 2011 U.S. Dist. LEXIS 143437 (S.D. Tex. Dec. 13, 2011)

Favors: Employee

Law: Texas

California Court Summarizes Policy Behind Early Trade Secret Identification (North Am. Lubricants. v. Terry)

2011-12-12T08:29:00.004-06:00

One of the big fights in trade secrets concerns proper identification of that which the plaintiff claims has been improperly taken, used, or disclosed.

Unlike the subject-matter of other intellectual property claims or contract claims, the trade secrets subject to protection are often unknown - even to the alleged misappropriator. For this reason, courts have noted that trade secrets cases are qualitatively different and impose on the plaintiff some obligations not seen in other areas of the law.

Many states have a common-law pre-discovery disclosure rule, and California has one by statute. Even those states which do not have hard-and-fast rules seem to suggest that a sequencing of early discovery is appropriate to allow a defendant to understand the claim in greater detail.

The policy justifications for early trade secrets identification were summarized succinctly in a discovery order in North American Lubricants Co. v. Terry. Identification serves four primary purposes:

(1) It promotes "well-investigated" claims and dissuades the filing of meritless trade secrets complaints;

(2) It prevents plaintiffs from using the discovery process as a means to obtain the defendant's trade secrets;

(3) It assists the court in framing the appropriate scope of discovery and in determining whether plaintiff's discovery requests fall within that scope; and

(4) It enables defendants to form complete and well-reasoned defenses, ensuring that they need not wait until the eve of trial to effectively defend against charges of trade secrets misappropriation.

In the North American Lubricants case, the court gave some examples of improperly identified trade secrets. They were: the plaintiff's "business model," its "business plan," and "marketing materials."

Defendants in trade secrets cases should take one of two approaches to identification. First, it could move for some sort of sequencing of early discovery to require that the plaintiff paint a clearer picture of its claimed trade secrets. Second, it should serve an early interrogatory on the plaintiff that at least requires the plaintiff to respond first and embark on the task of identification.

Court: United States District Court for the Eastern District of California

Opinion Date: 11/18/11

Cite: North American Lubricants Co. v. Terry, 2011 U.S. Dist. LEXIS 133672 (E.D. Cal. Nov. 18, 2011)

Favors: Employee

Law: Arizona

Michigan Appellate Court Upholds 3-Year Injunction In Absence of Non-Compete (Actuator Specialties v. Chinavare)

2011-12-11T10:18:00.003-06:00

My employer clients often ask whether competitive activity can be stopped in the absence of a non-competition agreement. My answer is always the same: unless you can show some truly "unfair" competitive activity, your chances of obtaining an injunction are about zero.

What does "unfair" mean in my standard response? Two things: (1) true competitive activity (such as diverting business) during the term of employment; and (2) improper taking of truly sensitive business information. This "headstart" injunction is hard to achieve and is usually reserved for cases which are highly one-sided in terms of the facts.

Under the Uniform Trade Secrets Act, a court has the power to enjoin business activity for a reasonable period of time to eliminate the competitive advantage caused by the misappropriation. This time period necessarily will vary based on the facts of each case. A recent case from Michigan illustrates that this headstart period can be quite lengthy.

In Actuator Specialties, Inc. v. Chinavare, the Court of Appeals of Michigan affirmed a three-year injunction which prohibited the defendant from working for a competitor after the evidence showed he had accessed computer files of his ex-employer close to the time of his termination. After the lawsuit was filed, and a TRO was entered, it appeared the defendant continued to upload these files to his new employer's server and copied allegedly the content of sensitive documents to fulfill customer orders. The court also noted that one of the USB drives onto which the defendant copied information could not be located.

In light of these facts, the court affirmed what effectively amounted to a three-year industry non-compete. These types of rulings are somewhat unusual (though not unprecedented). In my opinion, a trial court which enjoins competitive activity to this extent has to make a finding that a defendant has been less than forthright or demonstrated a willingness to ignore or circumvent court orders.

Courts in equity will often look to which party is wearing the "white hat", and in cases involving the systematic taking or use of truly confidential information, it is hard for the defendant to achieve this "white hat" status. In cases where a defendant has improperly accessed or taken data, it is best that counsel for the defendant put the issues to rest right away. This would involve returning information, scouring potential sources where such information may have been copied, and ensuring that no such information has been used in the business. Otherwise, a defendant will be hard-pressed to convince a trial court that his or her former employer needs no ongoing protection.

Court: Court of Appeals of Michigan

Opinion Date: 12/1/11

Cite: Actuator Specialties, Inc. v. Chinavare, 2011 Mich. App. LEXIS 2133 (Mich. Ct. App. Dec. 1, 2011)

Favors: Employer

Law: Michigan

Assessing Reliable Fire and Non-Competes In Illinois

2011-12-03T13:59:00.006-06:00

The Supreme Court's opinion in Reliable Fire Equipment was not much of a surprise. It seemed fairly clear the Court would establish that Sunbelt Rentals v. Ehlers was wrongly decided and that an employer needed to establish a legitimate business interest to support a reasonably drafted non-compete agreement.

The Court did just that, holding that the traditional three-part reasonableness framework holds and that courts must consider the totality of the circumstances in assessing whether the restraint is no greater than necessary for the employer's protection.

Though the decision left much to be decided and provided no real direction for future cases, a couple of principles were clarified.

First, the Court reaffirmed the long-held principle that total and general restraints of trade are void as against public policy. Therefore, an employer still must ensure that its non-compete agreements contain sensible limits in terms of activity, time, and territory. A complete ban on working in an industry will undoubtedly fall within Reliable Fire's purview of illegal "general" restraints.

Second, prior precedent in Illinois discussing legitimate business interests remain good law. Accordingly, employers may still rely on cases discussing the protectable interests of confidential information or customer relationships to demonstrate that a covenant is reasonable. They won't, however, be constrained by a rigid, formulaic test. Many cases, though, finding no protectable interest in ordinary customer relationships probably are of limited value.

Third, the Court stated that the three-part reasonableness test is "unstructured." In reality, this means trial courts will end up considering the following: (a) the language of the covenant; (b) its impact on the employee's livelihood; (c) whether non-parties or the public are harmed (this usually will involve a highly specialized service); and (d) whether the stated interest bears a nexus to the restrictions.

Employers will have some room to be creative in establishing a legitimate business interest. Such interests could include: (a) special training; (b) extraordinary or unique services (as in the case of a well-known CEO); (c) ability to influence critical vendor or supply chain relationships; or (d) disintermediation. In truth, employers have always asserted these interests, usually trying to bootstrap them into the categorical test, which is now just a guidepost rather than a dispositive inquiry. An article on the decision in Crain's can be found here.

Interestingly, last week the Supreme Court of Montana, in Wrigg v. Junkermier, Clark, Campanella, Stevens, P.C., addressed a very similar issue as that presented in Reliable Fire Equipment and held that an employer must "establish a legitimate business interest as a threshold step to [a court's] analysis of the reasonableness of the covenant." In that case, the Court held that an employer could not establish a protectable interest when the employee was involuntarily terminated. Prior decisions (of which there are few in Montana) did not come right out and discuss the protectable interest requirement, an issue similar to that in Illinois which led to the appellate district split.

I am not aware of any states which do not require courts to look at the protectable interest asserted.