Reading Round-Up and Some Thoughts on Wrapping Up Another Non-Compete Case

As the year comes to close, I've come across a few recent articles that merit some brief mention.

***

A prominent early voice in the call for non-compete reform is current Boston University Professor Matt Marx. He drafted a policy paper for The Hamilton Project, titled Reforming Non-Competes to Support Workers, which you can access here.

Professor Marx's paper is worth a read for a number of reasons, including its very informative discussion on the history of non-competes and recent legislative trends. More helpful, though, is Marx's discussion of statistics regarding the ubiquity of non-competes and the impact of contractual restraints on job mobility.

One proposal Marx discusses, which hasn't received as much scholarly attention, is incenting state attorneys general to use general consumer protection or unfair trade practices law to undertake litigation efforts over abusive non-compete practices. Though this has occurred a bit in the low-wage worker context, there's no reason why it couldn't extend outward to address troubling practices directed at additional categories of employees.

***

Speaking of low-wage workers, the Troutman Sanders firm published a short piece entitled The Potential Pitfalls of Using Non-Competes for Low-Wage Workers, to which my reply simply is "yes." If you really feel the need to be persuaded or convinced on this topic, then click here. But I understand if you take a hard pass...

(The Washington Examiner also explores the increasing backlash against non-competes and horizontal no-poaching pacts, particularly in the fast-food industry, in this September piece.)

***

Moving on to other controversial topics, Venable authors Tom Wallerstein and William Abramovitz write that the Defend Trade Secrets Act's ex parte seizure provision is, indeed, constitutional. They appear to have written in response to a New York University Law Review article suggesting otherwise. That article is available for download here.

The Venable folks are correct. In fact, the DTSA provision, which allows for the seizure of instrumentalities used to steal trade secrets without notice to the party in possession of those instrumentalities, is modeled on a similar trademark statutory provision. That provision allows for the seizure of counterfeited goods on an ex parte basis. The procedural requirements built into the DTSA and the Lanham Act specifically address the Fourth Amendment concerns that attend property grabs.

I will repeat what I've said before. The ex parte seizure tool is more interesting from an academic, rather than a practical, standpoint. Some variant of this process was around long before the DTSA was ever law. Let's move on, folks.

***

Now on to another bad non-compete case, just concluded.

Let me start with this. My 6 year-old daughter reads a series of chapter books by author Ron Roy, which are called the A to Z Mysteries. In this series, a trio of aspiring gumshoes (named Dink, Josh, and Ruth Rose) investigate a number of weird mysteries in a fictional Connecticut town. Think of it as a much less violent version of Cabot Cove, Maine. Two things are notable about this A to Z trio of sleuths. First, they most certainly have free-range parents, who are almost never seen and impose little to no restriction on what their kids do. And second, the kids are relentless in their pursuit of understanding facts.

At this point, you're likely asking "what's the point?" Well, I have one.

I just finished yet another case in which a defendant was wrongfully sued for violating a non-compete clause and stealing employer trade secrets. It was immediately clear when I got the case that the plaintiff's attorney made no attempt to discover any basic facts that were alleged uniformly on "information and belief." And to make matters worse, it was even more clear that my client's own attorney was uninterested in investigating these same basic facts.

Instead, as it turned out, counsel both were perfectly content to follow some kind of odd litigation playbook, filing motions, responses, and other filings that did little to address my client's concerns. And let me state this again. Her concern was that the plaintiff got the facts wrong.

It turns out that four months into this case, no one had talked to the two witnesses who knew precisely what facts to confirm and dispel. I was hired, called them the next day, and within literally within hours, the case was dismissed with prejudice. The plaintiff knew it was cooked when it saw my disclosures, because it knew these witnesses would undercut the entire case. We then sought our fees. This matter is now over with a great result for a client who never should have been sued.

This is not to suggest I am great. All I did was what my client had asked. All I did was what the kids in the A to Z Mysteries series did. All I did was call people who knew what happened. Practicing law is not supposed to be some mysterious quest into the abyss, where lawyers operate in a parallel universe from their clients.

What's the lesson? Maybe attorneys should listen more to their clients. Mine had been begging for someone to validate her story, and she had the witnesses ready to do this. The problem is that her former attorneys told her they had a different strategy. Guess what? It was a costly one, despite its patent ineffectiveness. It got them fired.

This anecdote is, unfortunately, far too common in competition cases. Many cases that appear flimsy are in fact flimsy. Attorneys can pick up the phone and call witnesses. Their first reaction should not be to jump on Westlaw and see if a case with a similar non-compete somewhere was dismissed for on some obscure legal basis that does not interest the client and will not interest a judge.

Case Law Update: Riding Circuit

The last few months we've seen a number of interesting decisions from the federal circuit courts of appeal, both on issues of State law and under the federal Defend Trade Secrets Act. These cases not only raise a few interesting legal issues, but they also amplify some practical concerns that lawyers and litigants should be aware of.

Soarus LLC v. Bolson Materials Int'l Corp. (Seventh Circuit)

This short decision from the Seventh Circuit stems from a short commercial non-disclosure agreement in the 3D printing industry. In essence, the dispute stemmed from a patent application carve-out to a broad confidentiality restriction. The defendant, Bolson, sought to acquire and use a type of specialty polymer in its 3D printing process, agreeing in turn with Soarus to keep information about the polymer confidential.

But the NDA contained a carve-out, which said that notwithstanding this intellectual property protection, Bolson was "free to patent and protect any new application" using the polymer in a specific type of process. Bolson in fact did so, leading Soarus to argue that Bolson breached the NDA.

The Seventh Circuit rejected Soarus' argument that no reasonably company would seek to protect confidential information around a new product and also allow that party to file information in a public document with the U.S. Patent Office. Under Illinois law, those subjective expectations could not trump an unambiguous contract provision, which the patent application carve-out was.

A relatively straightforward case of contract interpretation, to be sure. But the practical lesson is important. Commercial NDAs can arise in a number of different situations, including deal evaluations and supply arrangements. The problem is that the forms used for these situations don't necessarily translate, based on the specific business concerns underpinning the relationship. Here, Bolson and Soarus seemed to have addressed how Bolson could have used otherwise protected information in a patent filing. But a much more common situation is to have the parties sign an NDA that may have been perfectly fine for one transaction that is ill-suited to another. These particular nuances can include not only the ability to use information in patent filings, but also restrictions on which employees a party can solicit or hire, whether parties acquire any intellectual property rights or merely have the right to license them, and when the agreement expires.

NDAs are a very common commercial agreement. But the details of the restrictive clauses must align with business expectations. There is an inherent danger in simply copying a template that looks really pretty.

A copy of the opinion is available here.

Dunster Live LLC v. Lonestar Logos Management Co., LLC (Fifth Circuit)

The Defend Trade Secrets Act has only been the subject of a few circuit court decisions. In one from last year, the Tenth Circuit rejected the argument that a moving party could presume irreparable harm when evaluating a preliminary injunction predicated on a DTSA claim. And other decisions haven't told us much at all.

The DTSA reared its head again in Dunster Live LLC v. Lonestar Logos Management, but only in a cameo role. In that case, the defendant sought attorneys' fees after the plaintiff dismissed its trade secrets action without prejudice. The case stemmed from a classic business divorce, but the plaintiff soon ditched its trade secrets claim, opting to streamline its case and refile in state court. The Fifth Circuit found that the defendant was not the "prevailing party," a requirement for fee-shifting under the DTSA's bad-faith provision.

It appears the defendant raised a host of arguments for why it prevailed, but the most intriguing was the idea that the district court denied the plaintiff's preliminary injunction motion. The Fifth Circuit rejected this, holding that "prevailing party status ordinarily requires being ahead when the final whistle blows in a case, not at halftime."

Of interest to readers, the defendant racked up $600,000 in attorneys' fees before the voluntary dismissal order was entered. That's a lot, but not outrageously so if the preliminary injunction resembled a merits trial (which many do). Still, it is understandable why the defendant pulled out all the stops in seeking fees if they achieved some success short of a full win, before the plaintiff called an audible.

A copy of the opinion is available here.

Brand Services LLC v. Irex Corp. (Fifth Circuit)

The Fifth Circuit weighed in on another procedural issue under trade secrets law, one that has split courts and vexed commentators. The issue is whether the preemption clause of the uniform trade secrets act (here, the act was Louisiana's version) means that a plaintiff is barred from pursuing a civil law conversion claim for confidential information that fails to qualify as a trade secret.

In Brand Services v. Irex Corp., the court held that the preemption clause doesn't extend that far. While it's generally non-controversial that a plaintiff cannot sue for conversion of trade secrets, courts have been less willing to extend preemption to confidential information. The issue can be very confusing for lawyers and parties because it is common for claims to meld the two concepts. Often times, plaintiffs will allege something to the effect that the defendant misappropriated "confidential information, including trade secrets." Very infrequently, a plaintiff will demarcate the two in a way that allows a court to understand fully what the plaintiff is claiming as trade secrets and what it is contending as lesser-protected confidential information.

What the Fifth Circuit is saying in Brand Services is that for the latter category, a plaintiff can maintain a conversion claim for civil theft without invoking trade secrets law. That alleviates the burden of proof on some important issues, like reasonable secrecy measures. In Brand Services, the Fifth Circuit was persuaded by some intermediate appellate court law in Louisiana that took a narrower view of preemption. It bolstered its finding by looking to the text of the preemption provision, which does seem to leave open some room for common-law torts related to theft of confidential, but non-trade secret, information. For those interested in examining the range of court cases and the split of authority, footnote 4 to the Brand Services opinion contains an exhaustive range of citations.

A copy of the opinion is available here.

AirFacts, Inc. v. De Amezaga (Fourth Circuit)

The Fourth Circuit's recent opinion in AirFacts, Inc. v. De Amezaga is one of those fairly fact-intensive cases that provide only helpful guidance and not any particular rules or standards. The basic facts are fairly familiar, but for our purposes here one issue of trade secrets law caught my eye.

The employee who was sued sent himself (to a personal email account) a particular spreadsheet on his last day of employment. Part of the employer's trade-secret claim hinged on this fact. The key question: did that act rise to the level of misappropriation (for the document itself earned trade secret status)?

Here, a number of facts compelled the circuit court to adopt the district court's finding of no misappropriation. Those facts were:

• The employee's supervisors told him they might contact him if they had questions about his work;
• The employee testified this is why he sent the spreadsheet to his personal e-mail account;
• The trial judge found him credible.
• The employee did not access the spreadsheet after he left and did not disclose them to any third-party;
• Other employees regularly worked from home, which included using personal email accounts for work purposes.

This particular issue recurs time and again in departing employee scenarios, and as AirFacts demonstrates, the question of liability is intensely fact-specific. What are the lessons to be learned?

From the company's perspective, it could have dealt with this better by instituting policies and procedures that bar the use of personal email for work purposes, by clarifying the ex-employee's obligation at departure, by asking him whether he had anything in his account that was company related, and by conducting a thorough exit interview.

From the employee's perspective (though he won, he still got sued), he could have sought pre-clearance to retain the spreadsheet. That would have eliminated any factual dispute about his authority to send the document to his personal account. And he should not have deleted the sent item from his work folder, which certainly raises suspicion about his intent (though the district court didn't seem to care much).

Many disputes like this end up in court simply due to a breakdown in communication. It is pretty clear that this was not anywhere close to a theft situation. But neither party covered themselves particularly well before litigation ensued.

A copy of the opinion is available here.

Back from Hiatus (Part II): State Law Updates

Last week, I discussed three examples of Illinois courts analyzing similar non-compete issues in very different ways, a post that amply illustrates how difficult it is for lawyers to predict outcomes for clients. It also reminded me of a famous Abraham Lincoln quote: "Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser - in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough."

But to be sure, many people ignore Lincoln and litigate anyway - often with profoundly silly reasons motivating them.

So because we have litigation, we have legal developments and I therefore have a blog that continues to chug along. And you continue to read, meaning I must update you with some new rulings over the past several months.

California:

The infamous, long-running case involving ex-Korn/Ferry International executive David Nosal may have reached its end, with the Supreme Court declining a cert petition and the District Court now having finally decided on the scope of Nosal's restitution to KFI. United States v. Nosal is the most notable case under the Computer Fraud and Abuse Act, which generally criminalizes unauthorized access to protected computers. Nosal had its roots as a garden-variety trade secret case, but it was a criminal prosecution and tested the CFAA's limits.

Ultimately, Nosal secured some victories along the way. But still he will serve a year in prison and pay restitution to KFI. As to the scope of restitution, KFI sought about $1,000,000 in legal fees incurred to assist the Department of Justice investigation. After the Ninth Circuit weighed in KFI, will have to settle for less: $164,000. Still a heavy price to pay for Nosal, who probably deserved a civil suit but definitely does not deserve to spend a year in prison.

Connecticut:

The case of Datto, Inc. v. Falk discussed whether a forfeiture-for-competition clause was reasonable and enforceable. A minority of jurisdictions apply the same, or at least a similar, non-compete standard to these clauses, which (as one might expect) enable an employer to clawback certain benefits if an employee leaves to compete.

Forfeiture clauses range in scope, frequently calling for the forfeiture of unvested stock options but sometimes also calling for the employee to pay back income earned from the exercise of a grant within a certain period before the end of employment. Datto involved a dispute as to whether the cancellation of certain stock options were void because Falk (an ex-Chief Revenue Officer) accepted a position with a competitor.

The court was bound to apply Delaware law on the question of reasonableness, and that law in my view is somewhat confusing. Precedent, in effect, equated true non-competes with forfeiture clauses, finding they accomplished the same results. That's not necessarily true. A forfeiture clause may incent future performance, while a non-compete unquestionably tries to protect a separate economic interest beyond employee loyalty.

Datto illustrates the confusion in its analysis, though the district court judge admittedly was bound by controlling law. He noted, for instance, that the forfeiture clause was reasonable because "[t]his is not a case of an employee who is barred altogether from working for the competition anywhere in the world."

In my opinion, courts ought to use varying levels of scrutiny when examining restraints, similar to the current First Amendment jurisprudence. Specifically, I think that for employment-based non-competes, courts should use the strict scrutiny test (which by and large, they say they do), and for sale-of-business non-competes, they should examine them under a rational basis inquiry.

For mid-tier restrictions, like franchise non-competes and forfeiture clauses like that in Datto, I would use intermediate scrutiny. That test would require courts to determine whether the restrictive means used (e.g., the scope of the event triggering the forfeiture) are substantially related to the interest the restraint is designed to protect. This test, though it may not be perfect, would at least provide courts with a flexible, coherent way to analyze less problematic covenants that lack adhesive properties.

New York:

The New York Court of Appeals answered a significant question of damages related to trade secrets claims in the case of E.J. Brooks v. Cambridge Security Seals. The Court held that a plaintiff's damages cannot be measured by the costs the defendant avoided due to unlawful activity.

If a principal goal of trade secret law is to encourage innovation, then a cost-avoidance theory of damages seems to be a logical means to further that goal. Stated another way, if the misappropriation shortens a product-development cycle and enables X to bring a product to market more efficiently, then X is unjustly enriched by not incurring research-and-development expenses.

In the Court's view, cost-avoidance is inconsistent with a compensatory theory of damages. And under New York law, only the plaintiff's losses count. Cost-avoidance theory resembles unjust enrichment, but because New York has not adopted some variation of the Uniform Trade Secrets Act -- which specifically allows for unjust enrichment-type damages -- the theory is not viable.

The holding, predictably, spurred a long and persuasive dissent. It summarized the pragmatism and utility of cost-avoidance damages, noting that they are "generally much simpler than, and less subject to challenge than, lost-profit damages, which makes them an attractive alternative for plaintiffs who are willing to forego a potentially larger recovery in favor of a smaller, more certain one." (The assumption of a "smaller" recovery reasonably invokes the principle that a developer does not spend X to recover X. Normally, a rational economic actor would spend X to recover some multiple of X.)

A link to E.J. Brooks is available here. I emphasize again that I view this as a distinctly New York rule of law, and not one likely to be adopted across jurisdictions that have embraced a more flexible approach to damages.

South Carolina:

In Hartsock v. Goodyear Dunlop Tires North America, Ltd., the Supreme Court of South Carolina recognized an evidentiary privilege for trade secrets, but held the privilege was "qualified." That means it is different than, say, an attorney-client privilege or one barring self-incrimination. By "qualified," the Court held that a party seeking the disclosure of trade-secret material must show a "substantial need" for it that is relevant to the specific issues involved in the litigation. If a proponent makes that showing, the trade-secret holder still can gain the benefit of a protective order over the compelled disclosure.

The decision is, to be certain, a weird one. This is not really a privilege rule, but rather a rule of discovery that calls upon courts to make a balancing decision. If anything, this rule will create confusion where none should exist.

Texas:

Everything is bigger in Texas, including damages and attorneys' fee judgments. In the long-running case of Quantlab Technologies v. Godlevsky, a federal district court awarded the plaintiff its attorneys' fees in a trade secrets suit for what the court called defense behavior that was "so acrimonious, vexatious, and indefensible that...[it] exceeds any that this judge has seen in his nineteen years on the bench." The case involved stolen technology in the high-frequency trading industry, and the court at various times had sanctioned the defendants for destroying or failing to preserve evidence.

The price for that behavior was a fee judgment of $3,220,205 against each individual defendant.

The plaintiff didn't fare so well in GE Betz v. Moffitt-Johnston. There, the Fifth Circuit held that under Texas law, a company failed prove than ex-employee breached a customer non-solicitation covenant. The employee succeeded despite "highly suspicious" computer activity, including the mass download of data to an external device. But the company couldn't prove that any contacts with customers amounted to solicitation of business, rendering the contract claim unsupportable.

The Fifth Circuit did, however, vacate a large fee award for the ex-employee. Texas law allows an employee sued on a non-compete violation to obtain fees if the employer knows the agreement is overbroad and sues to enforce the agreement to an extent greater than necessary to protect the employer's interests. That's a hard standard to meet, absent some damaging admission or a truly terrible agreement. And the employee here didn't do so. 

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.

The Reading List (2017, No. 21): Levandowski's Gone

Non-Compete and Trade Secrets News for the week ended June 2, 2017

***

Waymo v. Uber

We know what the lead story is: Waymo's suit against Uber. It seems every week produces new drama in the trade secrets case of the year. Why is it such a deal? We're talking about a technological development - self-driving cars - that may be among the most significant in the past hundred years.

Anthony Levandowski - the star engineer behind Waymo's self-driving car technology - has been fired from Uber. Presumably, his termination is a direct result of Judge Alsup's rulings and orders compelling Uber to account for the 14,000 files Levandowski apparently took before leaving Google. That spelled a clear division in where Uber and Levandowski were headed with this dispute.

For a thorough deconstruction of Levandowski's firing, I highly recommend reading John Marsh's excellent analysis. I couldn't do it better and won't try.

Trade Secrets Injunctions

One of the more vexing procedural questions in trade secrets cases is the extent to which wrongful conduct will be enjoined. To be sure, that was one of the flashpoints of Judge Alsup's ruling that effectively barred Levandowski from working for Uber in any competing capacity. But it didn't strictly limit what Uber could do to develop self-driving technology independent of Levandowski.

On a far more mundane level (all cases are more mundane) is Systems Spray-Cooled, Inc. v. FCH Tech, Inc., No. 16 CV 1085, out of the Western District of Arkansas. There, the court grappled with how much competitive activity to enjoin after two ex-employees had misappropriated certain design drawings and pricing information. The misappropriation finding came as a direct result of the defendants' destruction of hard-drive evidence. Without a governing non-compete, the court was faced with how far to extend a trade-secrets injunction. And here, given the evidence destruction, the court carved a middle ground - barring not only the "use" of certain information (assuming it was still available after the destruction) but also some business activity that arose from the misappropriation itself. The court would not go so far as to prohibit the defendants from working in a competitive industry, but did prevent them from using certain designs to develop competing products.

The price for a broader injunction? A $5 million bond.

David Nosal Heads to Washington?

So what's up with this guy? Besides Levandowski and Sergey Aleynikov, few names have become more household in the trade-secrets arena than David Nosal. The ex-Korn/Ferry executive was convicted under the Computer Fraud and Abuse Act for obtaining the password of a current employee. That allowed Nosal and others to access a database containing valuable information on executive search candidates. (For in-depth coverage, read Professor Orin Kerr's analysis here and a lengthier piece in the Harvard Law Review.)

After Nosal's petition for en banc rehearing was denied by the Ninth Circuit, he appealed his CFAA conviction to the Supreme Court. Representing him? Neal Katyal of Hogan Lovells, the former Solicitor General and premier appellate litigator. Nosal's petition for writ of certiorari was filed May 5.

How much does a typical non-compete case cost?

Aside from "is this thing enforceable?" the question I get asked most is "what's this gonna cost?"

What am I referring to? Non-competes and non-compete suits, of course. No easy answers there, because there are a lot of variables at play. Those variables range from the plaintiff's attorney (competent, middler, or bumptious fool) to the scope of the wrongful conduct alleged. Generally, if the case involves a claim of trade secrets misappropriation with what appears to be some kind of a physical taking of information, the litigation is hard to budget.

But what about a garden-variety non-compete case, about a customer here or there or perhaps even a dispute over the type of work the employee is engaging in? Hard to piece together data, but an unreported case out of Washington noted the prevailing employee spent about $53,000. We know that because the appellate court upheld the fee award. That amount seems about right for a case that does not proceed to trial but instead gets resolved on summary judgment.

The case is Gaddis Events, Inc. v. Wu, No. 75227-8-I, and it's available here.

The Reading List (2017, No. 15): Trade Secrets Theft and the Fifth Amendment

Non-Compete and Trade Secrets News for the week ended April 14, 2017

***

The Fifth Amendment and Document Production

The Fifth Amendment, and its guarantee against self-incrimination, plays a role in civil litigation and certainly in trade-secret suits. Claims of theft implicate criminal prosecution both at the federal and state level. And while many prosecutors would decline to get involved in a garden-variety civil dispute, the Sergey Aleynikov and David Nosal experiences we have seen suggest that any line-drawing efforts between civil and criminal fact-patterns are tough for anyone to draw. When it comes document production, the general rule is fairly straightforward: the mere act of producing documents (think stolen plans or diagrams) may be a testimonial act for Fifth Amendment purposes. It may, to that end, be an admission that a person has documents that another claims were stolen.

The big trade secret case of the year is in the Northern District of California between Waymo and Uber. And it centers largely on Anthony Levandowski's alleged downloading of 14,000 documents. The case has taken on a life of its own, with twists and turns arising nearly every day on a host of substantive and procedural issues.

One particular filing of interest, though, is Levandowski's effort to avoid having Uber disclose detailed information about the allegedly downloaded documents. The unusual part of Levandowski's motion is that it does not come at the document production stage; instead, he attempted to claim Fifth Amendment rights in Uber's production of a privilege log concerning a particular "due diligence report" that related to Uber's acquisition of Levandowski's company after he left Waymo.

Levandowski's brief is an interesting take on the Fifth Amendment and the testimonial act of document production. It touches, crucially, on issues of attorney-client and common-interest privilege, given a joint defense arrangement between Levandowski and Uber. Here, Levandowski is trying to say that the joint defense between he and Uber allow him to step into the shoes of Uber and prevent it from disclosing details on a privilege log about the due diligence report. Note that Levandowski is not a party to the Waymo suit, but the conduct that is most relevant involves him directly and the allegedly mass download of Waymo materials. Levandowski's brief is available here.

Yesterday, Judge Alsup denied Levandowski's motion, holding that compelling Uber to produce a conventional privilege log would not violate Levandowski's Fifth Amendment rights. The decision is available here. Judge Alsup found that "mere invocation" of one's Fifth Amendment rights cannot automatically supplant conventional privilege log requirements. To this end, he stressed the need for "targeted factual support" - like a privilege log itself - that lends the Fifth Amendment assertion some plausibility.

Interestingly, Judge Alsup touched on an argument not really advanced but which it seems as though he felt was percolating under the surface. He rejected the idea that Levandowski could claim a privilege if the subject due diligence report was provided to Uber so Uber could see whether Levandowski was arriving with baggage - namely a potential trade secret claim to defend. Judge Alsup noted that one cannot use the attorney-client privilege to cloak wrongdoing through "due diligence." Therefore, as a result of the ruling, Uber will have to place the particulars of the due diligence report on a privilege log for Waymo to see. Whether Levandowski will assert further Fifth Amendment rights to its ultimate production remains to be seen. But I think I know the answer.

Bad Faith in California Trade Secrets Actions

I have an article coming out shortly in the Illinois Bar Journal, and it concerns bad faith in trade secrets disputes. In particular, I discuss Illinois' rule that is akin to a Rule 11 "frivolous pleading" standard. I also discuss the rule that seems to prevail elsewhere - the two-part test used by California courts, focusing on objective speciousness and litigation misconduct. As the Court of Appeal in Vescovi v. Clark makes clear, that test is really a one-part test. Objective speciousness probably is enough, because the litigation misconduct derives from the specious nature of the claim. Vescovi is unpublished, but it's a good read nonetheless. A copy of the opinion is available here.

***

James Flynn of Epstein Becker & Green published a nice piece on Law360 concerning Justice Gorsuch's track record of resolving trade secrets disputes while a Tenth Circuit judge. It is worth a read.

The Reading List (2017, No. 14): Showing Irreparable Harm Requires Actual Facts

Non-Compete and Trade Secrets News for the week ended April 7, 2017

***

Franchise Non-Competes and Irreparable Harm

Disputes over franchise non-competes arise less frequently than employment-based covenants, but they tend to produce some interesting results. Often, they are combined with claims for trademark infringement if franchisees continue to promote their business using the same signage, slogans, or other source indicators that were part of the original franchise relationship. But other times, the franchisee simply ends the relationship and starts a completely separate business in the same territory.

A district court in Nebraska confronted precisely this type of fact-setting in Colorado Security Consultants, LLC v. Signal 88 Franchise Group and denied a preliminary injunction motion brought to enforce a 3-year non-compete. The interesting aspect of the decision, which is available here, concerns the discussion about "irreparable injury," a required element that a plaintiff must prove to establish injunction relief. The court was critical of the plaintiff's conclusory evidence about customer contact. And, at least according to the facts available in this opinion, it appeared the way in which the franchisor elected to end the relationship may have been a contributing factor in the court's denial of its injunction motion. The lesson here is intuitive. If you're asking for injunctive relief, then you need to demonstrate actual, concrete evidence that illustrates how continued competition threatens imminent injury. Abstract statements or mere suggestions of future harm won't cut it.

Bad Faith in Trade Secrets Actions

The bad-faith fee-shifting clause under the Uniform Trade Secrets Act allows for a "prevailing party" to recover fees. By definition, it does not apply to counsel. A successful showing of bad faith by a defendant entitles him to fees only from the plaintiff itself.

Last year, a California Court of Appeal decision in a case called Cypress Semiconductor found that a plaintiff's voluntary dismissal without prejudice did not prevent a defendant from claiming it had been a "prevailing party" for purposes of claiming fees under the bad-faith provision. This past week, the Illinois Appellate Court in an unpublished and non-precedential order disagreed with Cypress Semiconductor. It found that the term "prevailing party" could not include a voluntary dismissal without prejudice. The case is Matrix Basement Systems, Inc. v. Drake.

In the interest of full disclosure, I joined the representation of Tom Drake on appeal after the circuit court had denied his fee petition. Obtaining reversal of an order denying a motion for sanctions is quite difficult under an "abuse of discretion" standard of review, but I felt that Mr. Drake more than deserved a vigorous appeal. The appellate court's order, while not giving us the desired outcome, certainly helped establish that Mr. Drake was the victim of a completely meritless suit that never should have been filed in the first place. The circuit court found that Matrix Basement Systems had indeed lodged allegations against him that were false, but that this alone wasn't enough to warrant sanctions.

***

On his Michigan Employment Law Advisor, Jason Shinn has a more in-depth discussion with practical tips on Estes Forwarding Worldwide v. Cueller, the "Google Drive" access case I discussed two weeks back. The tips he offers are geared towards employers who need to secure web-based storage accounts from improper employee use.

Michael Elkon at Fisher & Phillips has an excellent compliance-oriented post dealing with the hiring of employees from competitors. This lengthy post covers a number of specific questions and procedures employers should be asking and investigating when hiring new employees from competitors.

Korn Ferry, the executive search leader which pursued the high-profile Computer Fraud and Abuse Act case against David Nosal, finds itself on the other end of a competition dispute. Spencer Stuart, a K/F competitor, filed suit in Chicago. This case appears to be more of a garden-variety non-compete dispute, but it involves the defection of a group practice leader - Francois Truc - who earned over $4 million a year from Spencer Stuart.

Munger Tolles & Olson released a 2016 Defend Trade Secrets Act Roundup summarizing DTSA filings and major issues that courts have decided under the law as we approach the one-year anniversary of its enactment.

Finally, Seyfarth Shaw this week flagged a pending bill in Missouri that would invalidate restrictive covenants in the employment setting. House Bill 479 would bring Missouri more in line with the California approach to restrictive covenants, which permits them in connection with the sale of a business. We see legislation creep up like this time and again in the States, but it usually is meant to spark debate that leads to incremental reform. Seyfarth's post on the Missouri bill is available here.

Case Law Update: The Remedies and Civil Procedure Edition

This is a much overdue case law update, so it's a little lengthy. But on the upside, it touches on a number of different subjects from around the country.

Lost Profits

A federal district court in Indiana excluded significant parts of an expert's lost profits testimony in the hotly contested case of CDW, LLC v. NETech Corp. The case arose out of an allegation that NETech lifted out CDW's Indianapolis branch office and suffered millions in losses in "advanced technology" revenue. On a Daubert motion, the district court excluded a financial expert's "yardstick" methodology for predicting what CDW's Indianapolis branch would have earned but for the alleged wrongful conduct by the ex-employees. The ruling effectively excluded opinions that would have established lost profits of over $17,000,000. The district court allowed an alternative formulation of lost profits in a much lower amount to go to the jury.

Equitable Extension

The extension of non-competes past their expiration date (as measured from the date of termination of employment) is one of the most controversial, hotly contested remedies in litigation. As a federal district court in Idaho noted a few weeks ago, judges normally impose this remedy - when it's available - after a jury finding of breach or after a favorable ruling on summary judgment for the enforcing party. But in unusual cases, like that in MWI Veterinary Supply Co. v. Wotton, 2012 U.S. Dist. LEXIS 131784 (D. Idaho Sept. 14, 2012), the court can issue an extension remedy at a TRO or preliminary injunction phase. That finding was important in the Wotton case since the court had to find extension was appropriate to determine likelihood of success on the merits of the case. The non-compete, which arose out of the sale of a business, expired by the time the court addressed the preliminary injunction motion.

Temporary Restraining Orders

An Ohio court refused to grant a temporary restraining order against a departed sales executive in Chart Industries, Inc. v. Spagnoletti, 2012 U.S. Dist. LEXIS 140102 (N.D. Ohio Sept. 28, 2012), because the non-competition covenant contained no geographic or job-scope limitations. Though careful to note that such covenants were not per se unenforceable, the court stated it was important that the employer did not ask the court to impose any sort of limitation on the covenant at the TRO stage that would make it reasonable. The case demonstrates the continued difficulty courts have enforcing non-competes that contain no limiting language whatsoever. Delaware law applied.

Necessary and Indispensable Parties

In non-compete cases, the plaintiff sometimes will elect to forego suing the new employer and will proceed simply against the employee. There are a number of strategic and substantive reasons why this may be the case. The ruling in OneCommand, Inc. v. Beroth, 2012 U.S. Dist. LEXIS 122587 (S.D. Ohio Aug. 29, 2012), shows that a new employer is not a necessary party who must be part of the litigation under Federal Rule of Civil Procedure 19. Even if the plaintiff has potential claims against a new employer (for interference, trade secrets theft and the like), it is not necessary to make that company a party to a breach of contract suit with the employee.

Jury Trial Waivers

The right to a jury trial can be waived by contract if the waiver is knowing and voluntary. Generally, such waivers are strictly construed, however. One question that frequently arises is how far the contractual waiver extends to non-contract claims, like trade secrets misappropriation. A Delaware court concluded that a jury waiver provision in an asset purchase agreement encompassed related tort claims of trade secrets theft, conversion, and common-law unfair competition - reasoning that the "arising out of" language in the agreement was sufficiently broad to include torts intrinsically related to the contract action. The case is Coface Collections North Am., Inc. v. Newton, 2012 U.S. Dist. LEXIS 124342 (D. Del. Aug. 31, 2012).

Attorneys' Fees

Non-compete litigation can sometimes perpetuate itself solely because of fees that are incurred. An illustration of this problem comes from the case of Cumulus Broadcasting v. Okesson, 2012 U.S. Dist. LEXIS 124836 (D. Conn. Sept. 4, 2012). After the parties settled, they left it to the district judge to award attorneys' fees under a provision of the employment agreement that enabled the plaintiff to recover fees enforcing the non-compete.

The court, seemingly none-too-pleased (particularly since it was not allowed to see the terms of the parties' settlement agreement (?)), significantly pared back what the plaintiff thought it was owed. It essentially limited its fees to those incurred to obtain a preliminary injunction. And even that apparently gave the plaintiff only a small slice of what it wanted. The court ripped about $10,000 in fees off what it cost to take the matter to hearing.

The fee award was $80,317 (inclusive of some $21,000 in costs) - about 1/4 of what the plaintiff incurred and claimed it was entitled to. If nothing else, the case highlights for clients what a preliminary injunction can cost. And it further shows that weak non-compete cases can cost a lot more than the value of the benefit received.

Cook County Order on Attorneys' Fees Illustrates Factors Used to Assess Bad Faith

Earlier this year, Judge Mary Anne Mason in the Circuit Court of Cook County awarded attorneys' fees to a prevailing defendant under Section 5(i) of the Illinois Trade Secrets Act. That provision allows for a defendant to recover legal fees if a claim of misappropriation is made in bad faith.

A copy of Judge Mason's Memorandum Opinion and Order in Portola Packaging, Inc. v. Logoplaste USA, Inc. is embedded below. This was not an employee defection case, but rather one which arose out of the ashes of a failed business transaction. I have a similar bad faith fees issue currently pending in the United States Court of Appeals for the Seventh Circuit in the case of Tradesmen Int'l, Inc. v. Black (Nos. 11-3715 and 12-2032). In that case, my clients petitioned the district court for an award of fees following entry of summary judgment.

By and large, the standard by which to examine "bad faith" under the ITSA (or any of its uniform act counterparts) is somewhat ad hoc. Many courts adhere to a two-part objective/subjective test very similar to that discussed in last week's post concerning the Leadscope case out of Ohio.

Judge Mason's opinion is very interesting in that it shows how a trial court judge, following the conclusion of a trade secrets case, will go back over the evidence and compare it to what the allegations revealed. For instance, one of the factors Judge Mason examines is the plaintiff's failure to retrieve copies of confidential information from the proposed acquiring company after negotiations broke down. During the course of the lawsuit, Portola had continued to insist that it did not demand retrieval of confidential documents because it held out hope of rekindling a business relationship with Logoplaste. As no documents revealed Portola's interest in this "rekindling", Judge Mason was not buying the argument.

This demonstrates that factors other than what is pled in the complaint are highly relevant to the bad-faith inquiry. Further illustrative of this is Judge Mason's reliance on evidence of pre-litigation communications where Portola had examined a litigation strategy because "new suppliers that are caught up in litigation can scare potential customers." This type of evidence, arguably irrelevant to what the allegations say, illustrates motive to pursue a competitor not for the hopes of winning a suit, but simply to deter competition altogether.

Portola Packaging v. Logoplaste - Order on Fees

Ohio's Standard for Malicious Litigation Sounds Familiar

I rely entirely on John Marsh of Hahn Loeser to provide details on one of the year's most important competition cases, American Chemical Society v. Leadscope. For this post, the holding is relevant in that it establishes - at least in Ohio - a two-part test for determining when malicious litigation can serve as the basis for an unfair competition claim. That test requires a plaintiff to show:

(1) that the legal action is objectively baseless; and
(2) that the opposing party had the subjective intent to injure the party's ability to compete.

Leadscope involved a claim of trade secrets misappropration over software code. And the standard the Supreme Court of Ohio adopts is strikingly similar to the tests courts use over related claims. Those claims are:

(1) bad faith fee-shifting petition by a defendant under the Uniform Trade Secrets Act; and
(2) sham litigation under antitrust law.

It makes sense all three claims would have similar tests. The UTSA fee-shifting test does vary from state to state, but in the main the Leadscope test constitutes the majority rule. For defendants who feel as if litigation has served no purpose than to deter competition and impose litigation costs, the main theories of recovery are the following:

(1) An independent tort claim like that advanced in Leadscope. The claim may depend state to state, but generally the theories are abuse of process, malicious prosecution, violation of antitrust law, and unfair competition.

(2) Fee-shifting statutes or contract provisions. The UTSA bad-faith fee-shifting clause is one that is commonly invoked, and is not a "claim" in the sense that a full-blown trial would be required to resolve it.

(3) A court's power to sanction, under its inherent authority, as part of the discovery process, or even against an attorney directly for unnecessarily increasing litigation costs.

The upside of option (1) is that, in theory, the recovery is not limited to attorneys' fees. In Leadscope, for instance, the defendants received $26.5 million in compensatory and punitive damages.

Case Update...The Trade Secrets Edition

I've come up with a better way to differentiate between trade secrets (protected nearly everywhere by statute) and confidential information (somewhere protected by the common law; more often, by contract). I may be totally off-base on this, but here goes.

A trade secret is a form of intellectual property whose value can be monetized like a patent or trademark. Confidential information is information that generally is not available to outsiders but which lacks independent value as a firm asset.

(I actually thought of this yesterday while changing a diaper.)

We're in the dead of summer, but the law continues to churn out interesting cases for us nerds to ruminate over.

Inevitable Disclosure in Massachusetts

A preliminary injunction ruling out of the District of Massachusetts rejected a rather expansive view of the inevitable disclosure doctrine. U.S. Elec. Svcs., Inc. v. Schmidt, 2012 U.S. Dist. LEXIS 84272 (D. Mass. June 19, 2012), involved the departure of a national accounts manager who did not have a non-compete agreement with the plaintiff (he actually left to work for a subsidiary two years prior). When a project coordinator followed the manager to a competing electrical distributor, the distributor sued under a variety of theories. Surveying Massachusetts' interpretation of the inevitable disclosure rule, the district court held that the rule is best applied to establish irreparable injury - basically, a protectable interest - supporting a non-competition agreement. It did not approve of using the theory as the foundation for a trade secrets claim. Factually, the claim appeared to be a stretch since the manager had not dealt with the key customer at issue - Dollar Tree Stores - for over two years.

Royalty Damages for Misappropriation

Royalty damages are the back-up plan for victims of trade secrets theft who can't prove lost profits or gains the misappropriator realized. This is a derivative of patent law, and it seeks to figure out a hypothetical licensing price that the misappropriator would pay for the privilege of using the information taken from the owner.

An Arizona court has held that a trade secret owners license fees for other patents and investment costs in developing the trade secret can provide a basis for a royalty award. It also rejected the argument that because a product may never be brought to market - the product involved an intestinal sleeve to treat morbid obesity - damages were inherently speculative. Using corporate finance theory, the court stated that a risky future cash flow is simply discounted with a risk-adjusted rate. The case is W.L. Gore & Assocs., Inc. v. GI Dynamics, Inc., 2012 U.S. Dist. LEXIS 75055 (D. Ariz. May 30, 2012).

Attorneys' Fees In Non-Compete Agreements

What happens when an employee wins a non-compete case and tries to recover attorneys' fees he never was obligated to pay? In my experience, new employers pay the freight on non-compete suits about 1/4 of the time, depending on the employee's value and position within the company. (An executive, for instance, likely will be able to negotiate this as part of his employment agreement.)

In Rogers v. Vulcan Mfg. Co., 2012 Fla. App. LEXIS 8793 (Fla. Ct. App. June 1, 2012), the Court of Appeal of Florida reversed a $0 attorneys' fee award to the employee after he prevailed on the employer's non-compete claim. The fee-shifting clause provided the employee could recover fees "incurred to enforce any term, condition, or provision" of the contract. The court found the clear intent of the clause was that "the loser pays, and the winner does not." It did not matter who the source of the funds was, because the language in the fee provision was passive.

And who said never to use the passive voice??

Indiana's Blacklisting Statute Reinterpreted on Certified Question

I have a handful of favorite moments from my legal career.

One is when I had a state court judge tell me during closing that my legal arguments were about as "helpful as a goose turd on a sidewalk", only to have that judge later get reversed on appeal - on those same goose-turdish legal points.

Another, and perhaps still my absolute favorite, is when I invoked Indiana's Blacklisting Statute to recover attorneys' fees for a prevailing defendant in a trade secrets/non-compete dispute. That statute, enacted around the turn of the century -- the 20th century, mind you -- was meant to provide some means of recovery during a period of hostile, violent activity between companies and burgeoning labor unions. Blacklisting a union or striking employee was a common tactic, and legislatures started enacting reforms to allow for aggrieved employees to recover damages.

Fast-forward 100 years or so, and courts in Indiana started fielding Blacklisting Statute petitions when an employer tried to prevent an employee from competing - usually through an overbroad non-compete agreement or a meritless trade secrets claim. To be sure, the Blacklisting Statute does not look like a particularly good fit, but the language of the statute itself -- viewed narrowly and quite literally -- seems to provide a narrow path to recovery.

Like many other attorneys before me, I saw a path to get my client its fees back under this Statute. And I did, though, I wanted the matter settled rather than decided so no appeal was taken. Turns out, this probably was a good decision.

The Blacklisting Statute, as held by the Supreme Court of Indiana, no longer applies to claims where an employer seeks to preclude an employee from competing.

The Indiana case is Loparex, LLC v. MPI Release Techs., LLC, and the Court seemed to have little trouble concluding that other remedies besides the Blacklisting Statute provided sufficient protection for baseless competition claims. The Court offered a few rationales:

First, the ordinary definition of "blacklisting" -- without question, the purpose of the statute was to prohibit this then-prevalent practice -- contemplated a very specific range of activity, such as circulating a list of people to avoid hiring.

Second, the more general language of the Blacklisting Statute, which clearly contemplates that a trade secrets defendant may have a claim, has to give way to the more specific references of "blacklisting." This is a canon of statutory construction which interests only lawyers, and for that reason, I will say no more on the matter.

Third, the Court found that applying the Blacklisting Statute in an unsuccessful competition suit would create bad policy and a "standoff between the former employer, potential employer, and the employee, and the threat of their own mutually assured destruction would deter everyone from seeking any redress whatsoever."

From my perspective, the real evil in competition litigation is the leveraging of legal fees, often when competitors field an asymmetry of resources. A better approach than applying statutes or torts which do not fit these types of disputes is to either (a) allow for one-way fee shifting clauses in non-compete agreements to be blue-penciled, or (b) encourage the use of a more flexible, realistic inquiry on bad faith fee petitions to determine what the true motives of the plaintiff were in bringing suit.

Is the decision clarifying the Blacklisting Statute correct? Probably. But at least I had my fun while it lasted.

--

Court: Supreme Court of Indiana
Opinion Date: 3/21/12
Cite: Loparex, LLC v. MPI Release Techs., LLC, 2012 Ind. LEXIS 46 (Ind. Mar. 21, 2012)
Favors: Employer
Law: Indiana

Recent Decisions of Interest (No. 6)

This week's Recent Decisions highlights a jury verdict in Arkansas arising out of the sale of an accounting practice. In Creed Spann v. Lovett & Co., 2012 Ark. App. LEXIS 192 (Ct. App. Feb. 1, 2012), the Court of Appeals of Arkansas affirmed a verdict where the purchaser of an accounting firm's client list received $434,777 in lost profits after the seller worked with certain restricted clients following the sale.

The decision does not necessarily break any new ground, but it does highlight a couple of important realities clients need to consider when pursuing or defending non-compete suits.

First, the plaintiff - the acquiring firm - retained a lost profits expert to show the amount of damages which would have been realized had the defendant - the selling firm - not worked with restricted clients. The jury accepted the expert's estimation of damages down to the dollar. It did not appear that the defendants put forth a rebuttal expert, suggesting that the expert witness was highly persuasive to the jury. Because damages are so difficult to prove when they are non-liquidated - such as a projection of lost income - experts are essential to a plaintiff's case. Without one, it is highly likely that a court will be left without a basis to award recoverable damages even in the event of breach.

Second, the plaintiff's legal fees in the case totaled over $250,000, an amount it recovered under Arkansas' prevailing party statute. Compared with the verdict award, the amount of fees incurred is relatively high. However, it was far from unreasonable. Competition disputes cost a lot of money, particularly when discovery focuses on triaging the issue of breach, identifying lost clients, and examining what the defendants did with those clients. Preparing for and presenting experts is costly, as well. The opportunity to resolve a case usually is lost once counsel incurs a substantial amount of these fees. Therefore, the best time to explore a business resolution outside of court is right after the issues have been framed in the suit and before discovery begins.

The Reading List (No. 6)

I'm sick of bad lawyers.

And I'm sick of bad lawyers filing bad lawsuits. Unfortunately, in my area of the legal world - trade secrets and non-compete law - this happens all the time. Lawyers who act as mere shills for their irrational clients. Lawyers abusing the legal process to achieve some ulterior purpose - usually to force a competitor to do something it otherwise would not have to do. Lawyers talking clients into a suit because there is too little legitimate legal work out there, and, well you know, billable hours need to come from somewhere.

It's all very aggravating, and the system has to change. I'm all for civility, but if lawyers abuse the legal system, they need to pay - literally and figuratively.

The sum total of today's Reading List is all of one, a great piece by Matthew Prewitt of Schiff Hardin discussing bad faith fee-shifting liability under the Uniform Trade Secrets Act. Mr. Prewitt outlines some excellent practical, and legal, considerations for clients and lawyers to think about. This should be required reading for any competition lawyer.

The basic problem is pretty simple. Competition law is not easy to figure out, particularly if you don't practice it with some regularity. It moves quick, which leads to inept and poorly planned decisions. And it's emotional, meaning a client can try and mulct a claim out of nothing, which might actually sound convincing on paper. Finally, it's expensive, which leads to parties getting themselves into intractable positions early, with no face-saving way out.

None of this is an excuse; rather, it's an explanation. A lawyer's failure to understand a case is no excuse, and he or she has the obligation to cut and run even if the client doesn't see it the same way. It's rare that actually happens, however. Until there is some meaningful, readily ascertainable remedy for crummy lawyering in this area of the law, the system will continue to allow parties to get away with using the legal purpose not to right a wrong, but to gain a foothold in the market. Not. Cool.

The Weekly Posner (No. 2)

Because damages are often extremely difficult to prove (and because injunction issues are decided early in a case), attorneys' fees often become the driving force in non-compete or trade secret litigation. Indeed, an early litigation thrust usually means that the legal bills hit mid-five or -six figures before the parties even have an idea of what they are in for.

So for any plaintiff or defendant in an unfair competition lawsuit, the ability to shift fees becomes a driving, paramount concern. The basis for fee shifting usually is found in a contract (a prevailing party clause) or the statute under which a party is suing (or much less frequently, a statute of general applicability).

One common method of attempting to recover fees finds its home in the Trade Secrets Act, which contains a fee provision allowing a plaintiff to recover fees if the defendant's misappropriation is "willful." Conversely (and as a mirror image to the willfulness standard), a defendant can obtain its fees if the suit was filed or maintained in "bad faith." Very little in the way of case law helps us figure out a uniform test, despite the fact the Trade Secrets Act is a uniform act adopted everywhere now but New York, Massachusetts, and Texas.

It is appropriate, therefore, to look elsewhere, including Judge Posner's opinion in Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 626 F.3d 958 (7th Cir. 2010), where he surveyed the semantic jumble in determining when fees were appropriate for "exceptional" cases of trademark or trade dress infringement under the Lanham Act.

Much of Judge Posner's discussion in Nightingale Home Healthcare discusses the tort of abuse of process and the stark reality that disputes between competitors are often about litigation costs, not judgment-oriented outcomes. Put another way, parties to litigation often use the litigation as the end itself - not a means to an end. As Judge Posner notes, a new market entrant may have a clearly meritorious claim for infringement against a large opponent, but may find itself bullied into submission through a scorched earth defense strategy (and which has no hope of prevailing). On the other side of the coin, a dominant player in the market may sue a new, much smaller entrant on dubious claims just to force that competitor out of the market under the specter of six-figure legal bills.

This is what drives Judge Posner's standard for defining "exceptionality" for purposes of Lanham Act fee shifting. The same considerations likely would motivate him if, and when, he looked at fee shifting under the Trade Secrets Act. Very little separates trademark infringement from trade secret misappropriation, save for the fact the latter is much harder to define. Trade secrets can be made up on the fly, while marks are registered.

So the public policy behind allowing for fee shifting in the trade secrets context has to be the same as that in the trademark context, and Judge Posner likely would focus on whether and how parties in trade secrets suits used the litigation for improper purposes to ramp up lawyers' fees needlessly. These types of suits are too close of cousins for any other result to make much sense. One potential side issue: his opinion in Nightingale Home Healthcare seems to have more applicability to a defense-side fee petition. The exceptionality standard seems more akin to bad faith, than it does "willfulness." Stated another way, a defendant may be liable for the plaintiff's fees if he intentionally stole something he should have known was secret, even if that defendant did nothing to pile on legal fees or engage in vexatious litigation conduct.

Also of significance in Nightingale Home Healthcare is Judge Posner's feelings on fee petitions themselves. As is often the case, fee petitions are pursued at the tail end of a lawsuit, usually after all the wheat has been separated from the chaff and the merits have been disposed of. In this sense, Judge Posner believes that parties in fee petitions should not engage in an "elaborate inquiry into the state of mind of the party from whom reimbursement of attorneys' fees is sought." Therefore, he would look at objective indicia of exceptionality (or, bad faith, presumably), and determine whether the facts objectively can be shown to demonstrate the use of legal process to heap costs on adversaries.

This is an incredibly important case, for it looks at fee-shifting differently. It requires a court to assess the undercurrent of virtually all competitive litigation: the asymmetry of costs and the use of process itself to achieve something in the marketplace.

Illinois Legislative Update

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.

The Cost of Litigating Competition Cases

One of the inescapable facts about non-compete and trade secrets cases is that the cost of legal services often far outweighs the monetary value of the case itself.

Courts note, rightly so, that a business may justifiably spend a great deal of money to protect trade secret information (of course, that information better be a capital asset of the firm). So a large expenditure of fees even without a significant monetary recovery may still be worth the effort.

Still, clients need to be aware of how much a lawsuit can cost. Three examples from the past year stick out. In Johnson v. Simonton Building Products, Inc., 2011 U.S. Dist. LEXIS 36056 (D. Kan. Mar. 31, 2011), the defendants spent $1.8 million on a trade secrets case and were unable to recover their fees. Conversely, in ICE Corp. v. Hamilton Sundstrand Corp., 2010 U.S. Dist. LEXIS 120500 (D. Kan. Nov. 12, 2010), the plaintiff spent $1.138 million - recovering most of this on a post-judgment fee petition. I point out these two cases because the prevailing market rates in Kansas are not terribly high - $300 or so an hour is market for experienced partners. The third case, from Chicago, is SKF USA, Inc. v. Bjerkness, 2011 U.S. Dist. LEXIS 110275 (N.D. Ill. Sept. 27, 2011), where Locke Lord's fees totaled $1.3 million.

As can be seen, fees on either the plaintiff or defense side easily can reach seven figures. From my own personal experience, I just finished litigating a case to a favorable defense judgment where our fees were about $115,000. However, the plaintiff put little effort into the case and could not to seek injunctive relief. Further, there were few discovery disputes and very little in the way of motion practice. It seems unlikely that I could ever litigate a competition case to final judgment for less than $100,000. In past cases, my defense fees have exceeded $400,000 for similar cases - an amount clients consider high, but courts likely would not bat an eyelash at.

Clients need to be aware that litigating competition cases can be extremely costly. Numerous variables arise, from unreasonable (or, frequently, uninformed) attorneys on the other side to unforeseen developments with a client's business during the litigation. The "X" factors normally involve discovery disputes, e-discovery, and involvement of third-parties (by way of subpoena or depositions). It is extremely difficult to budget for competition cases, and often times the best an attorney can do is budget for discrete events along the way.

Uniform Trade Secrets Act Not Uniform When It Comes to Fee-Shifting

Trade secrets cases raise the specter of fee-shifting. Like many prevailing party statutes, fee-shifting is not automatic in trade secrets cases. Rather, a party must meet a prescribed standard and count on a court to exercise discretion to award fees.

The Uniform Trade Secrets Act has been adopted in all but a handful of states (New York, New Jersey, Massachusetts and Texas). The Act's fee-shifting provision generally has three components. A party can recover attorneys fees in the following situation:

(1) If a claim of misappropriation is made in bad faith;

(2) If willful and malicious misappropriation exists; and

(3) A motion to terminate an injunction is made or resisted in bad faith.

I have no experience at all with the third prong of this statutory provision. My hunch is that the drafters of the UTSA intended it to apply when a defendant moves to terminate an injunction on the grounds that secret material has entered the public domain, and the plaintiff continues to assert protection over the information. I could be wrong, though.

The first two prongs are mirror images of each other. A claim made in bad faith is essentially the flip side of a defendant's intentional stealing of secrets. The analysis is basically the same - was there some intent to harm, either through misappropriating legitimate secrets or advancing a meritless claim?

Some of the states that adopted the UTSA do not have fee provisions. Those states are Alaska, Idaho, Missouri, and Vermont. (Interestingly, Alaska also has no provision for recovery of royalty damages in the event of misappropriation.) Virginia has a fee provision but excludes the clause concerning termination of an injunction.

Keep in mind too that to recover fees, a party must be "prevailing." There are not a lot of cases out there which apply the prevailing party standard to UTSA fee-shifting claims. Many times it is obvious. One question which is likely to arise concerns the interplay of injunctive relief and damages. For instance, if a plaintiff obtains a preliminary injunction, but later fails to obtain any permanent relief or damages at trial, is it "prevailing"?

I don't think there are hard-and-fast rules on this. Nor should there be. Courts should adopt a flexible approach to see whether the plaintiff has practically succeeded. The preliminary relief in trade secrets cases is often the most valuable, and a quick stop to any misappropriation may prevent a plaintiff from showing damages.

Attorneys Fees In Competition Disputes Often Disproportionate to Harm (SKF USA v. Bjerkness)

One of the inescapable truths about non-compete and trade secrets cases is the expense associated with litigating them. In many, if not most, cases, the actual legal fees necessary to pursue a claim and mount a defense are disproportionate to actual quantifiable loss.

This is particularly true where injunctive relief has successfully been obtained, and a defendant may have started competing but where he or she has not been able to pirate away key accounts.

On the one hand, the most practical remedy has been obtained, but going the extra mile and obtaining damages would be exceedingly difficult. This is why many disputes settle at or around the time of an injunction hearing.

For cases where injunctive relief is not pursued or obtained, trying to obtain an actual remedy is quite difficult and may be an exercise in futility. This is particularly true when a plaintiff cannot point to actual accounts it lost.

A recent federal district court case in Illinois demonstated just how out of hand attorneys fees can get in competition cases. In SKF USA v. Bjerkness, the plaintiff prevailed on a trade secret misappropriation claim and obtained a judgment of only $81,068. Prior opinions in the case suggested the plaintiff's damages presentation was not very convincing.

But the plaintiff obtained a key finding - that misappropriation was "willful." That finding allowed them to obtain attorneys' fees under the Illinois Trade Secrets Act. The fee petition sought $1.3 million, representing 2,700 billable hours of time (or about a year and a half worth of work for a normal Chicago attorney to bill). The bulk of that fee petition was granted.

Such a result is not that uncommon. Fees generally are high in unfair competition cases for several reasons.

First, there normally a number of legal issues to address, from enforceability arguments to proper trade secrets identification.

Second, these cases ordinarily are document intensive, both from parties and non-parties (such as customers).

Third, they are hotly contested, and sometimes provoke irrational litigation behavior among attorneys. It is a truism that non-compete and trade secrets cases often are fought just to be fought, and to obtain a greater competitive advantage outside the actual scope of litigation.

Any case assessment must begin with planning for these contingencies and advising clients on what other similar disputes actually can cost.

--

Court: United States District Court for the Northern District of Illinois

Opinion Date: 9/27/11

Cite: SKF USA Inc. v. Bjerkness, 2011 U.S. Dist. LEXIS 110275 (N.D. Ill. Sept. 27, 2011)

Favors: Employer

Law: Illinois