The Reading List (2017, No. 7): Claims of Continuing Misappropriation and the Defend Trade Secrets Act

Non-Compete and Trade Secret News for the week ended February 17, 2017

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Choice-of-Forum Clauses

The Illinois case of Aon, PLC v. Heffernan, No. 1:16-cv-1924, shows the difficulty of transferring a non-compete case in federal court when the parties have agreed in advance to a forum-selection clause. This difficult became more pronounced after the Supreme Court's Atlantic Marine decision. And the presence of a California defendant does not appear to alleviate this difficulty. Put simply, a defendant's motion to transfer venue, in the face of a clear forum-selection clause, is the exception and must cite a clear public-interest rationale. The transfer decision in Heffernan is available here.

For those wanting a deeper analytical dive into forum-selection clauses post-Atlantic Marine, please read Professor Stephen Sachs' article in the Hastings Law Journal.

Defend Trade Secrets Act

In my second weekly column of the year, I alluded to the New Jersey case of Chubb INA Holdings v. Chang, No. 3:16-cv-02354, which presented an interesting procedural question about the Defend Trade Secrets Act. Specifically, the case raised the issue of whether the DTSA applies to potential acts of misappropriation that arose before the Act went to effect.

The key fact concerning the DTSA's reach are simple: certain ex-Chubb employees allegedly downloaded critical sales and operational information before leaving Chubb. Importantly, this occurred before May 11, 2016 when the DTSA went into effect. But Chubb alleged something else: that the employees inevitably would use that misappropriated information for their new employer's benefit. And that allegation implicated concerns after May 11. This illustrates that the concept of "misappropriation" embodies three separate and distinct branches of conduct: (1) improper acquisition, (2) improper disclosure, and (3) improper use. Because Chubb (at least in part) relied on the "use" branch, the DTSA claim was viable at the initial filing stage. Put another way, each improper use (if proven) would be a separate wrong and independent of the initial acquisition that enabled the use.

The opinion on Chubb's motion for preliminary injunction (which was denied) is available here.

Contract Acceptance

The Third Circuit Court of Appeals has rejected the argument of two ex-ADP employees, who contended that they did not "agree" to non-compete obligations by electronically accepting stock awards electronically on ADP's website. The non-competes were embedded within the electronic documents that each employee signed online. As with many of these click-wrap agreements, the employees acknowledged reading the contracts. The agreements further noted that the non-compete restrictions were a condition of accepting the stock award. The court had no trouble rejecting the employees' novel defense about contract interpretation. A contrary ruling potentially would have lead to absurd results in other cases.

You can read the Third Circuit's unpublished opinion in ADP, LLC v. Lynch, No. 16-3617, by clicking here.

Judge Gorsuch and Trade Secrets

For Supreme Court watchers, Judge Neil Gorsuch of the Tenth Circuit has written one rather notable opinion that delves into trade secrets law. His discussion of Utah's trade secret statute, and the availability of unjust enrichment damages, comprises only part of his opinion for the 10th Circuit in Russo v. Ballard Medical Products, but it is nonetheless an interesting read.

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A few interesting new law review articles have appeared recently.

Jim Pooley, a former Deputy Director General of the World Intellectual Property Organization, published The Myth of the Trade Secret Troll: Why the Defend Trade Secrets Act Improves the Protection of Commercial Information. Mr. Pooley addresses and refutes many of the arguments advanced, particularly in the academy, against the DTSA.

On the non-compete side, Kristen Almond published in the Louisiana Law Review an extensive analysis of that State's quirky non-compete law. Having advised on Louisiana law recently (and frequently in the past), articles like this are essential for a practitioner's full understanding of the law from all perspectives. The publication is called Equalizing the Threat of Noncompete Agreements: Solutions Beyond Louisiana's Tangled Web of Nullity.

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Finally, next Friday I am speaking at the University of Denver at CLE International's Defend Trade Secrets Act conference. I will be presenting with John Marsh on the topic "The Search for Uniformity and Understanding: Reconciling Differences Among the States." I plan to use my upcoming March monthly column to discuss the CLE International conference and the impressions I gained. Many thanks to Mike Greco of Fisher Phillips, who is chairing this event.

More Rejection by Illinois Courts of Bright-Line Consideration Rule

The federal courts have become the final frontier for Illinois employers looking to enforce non-compete agreements against at-will employees. Those agreements contain embedded consideration problems if the gap between signing and termination dates is less than two years and if the employer cannot point to some other form of consideration beyond the job itself.

With the recent district court decision in Allied Waste Servs. of N. Am. v. Tibble, there is firm momentum in federal court to move away from the two-year, bright-line rule that two of the five appellate courts have established. The Supreme Court of Illinois twice has refused to weigh in on the matter, apparently content to let this issue play out in the other appellate districts.

Allied Waste breaks no new ground and largely follows the reasoning of other federal district courts, the most persuasive of which is Judge McDade's thoughtful opinion in Cumulus Radio Corp. v. Olson. The essence of these cases is that consideration is too fact-intensive for bright-line rules and that courts should consider the totality of the circumstances (e.g., method of termination, length of at-will employment, conditions of employment).

Indeed, one could argue that Allied Waste is not all that relevant, since it appears the account executive also received a salary bump, greater bonus potential, and promotion in conjunction with his non-compete agreement. Put differently, this really wasn't a classic case in the mold of Fifield and the other disputes that truly center on "continued employment as consideration."

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Having now read and thought about these consideration cases for nearly three years, I am warming to an alternative way of thinking of how the consideration question could be resolved. I developed three rules of thumb, which are more or less working concepts and not specific proposals at this point. They seek to balance important interests related to contract formation with the need to avoid bright-line rules, which remove the important function of judicial discretion.

First, if the contract recites the consideration granted for the restrictive covenant, then it should control and the employer may not introduce evidence to contradict (or even supplement) its own agreement. This requires no more than a plain reading of the agreement and informs how the court will proceed with further analysis over the consideration issue.

Second, if the contract is silent or ambiguous as to consideration, then a court may consider extrinsic evidence of specific consideration that would support the agreement. Here, the employer would need to identify something tangible and concrete as opposed to an after-the-fact reconstruction of an individual's employment status that may not have anything to do with consideration for the restrictive covenant.

Third, if the consideration is continued employment and the employee is terminated, then the court should find as a matter of law that the consideration is illusory. This should be an obvious, black-letter principle that poses none of the problems sometimes associated with bright-line rules.

Fourth, courts should conduct limited evidentiary hearings to resolve consideration questions at the earliest possible moment, much like they do now with jurisdictional discovery. The issue of contract formation is essential and requires prompt resolution in a way that is divorced from the other issues that attend non-compete disputes. If the court finds that the consideration given was not adequate in light of the specific restraints, then the court should enter a judgment on the contract in the employee's favor immediately. In this regard, employers who use very broad restraints but only support themwith nominal or potentially meaningless consideration (like continued employment) likely will suffer an early defeat before broad expensive discovery begins.

Alabama and Washington Experiences Show Difficulty With Contract Formation Questions

One of the more difficult problems for employers to address is one of simple practicality:

How and when do I notify someone that she has to sign a non-compete agreement?

This sounds simple, but it's not an easy question to answer. Particularly with closely-held companies, a business may not have robust or sophisticated human resources help. They may hire infrequently. And they may not want to deal with their outside counsel to keep costs down. They may think of a non-compete at the 11th hour, before an employee has started but after she has committed to the relationship.

Or, just as frequently, the employer may decide to have her sign a non-compete after the employer has begun work. Because of the perceived "need to please," an employee may feel compelled to sign the agreement without a second thought.

These scenarios raise complicated issues of contract formation: when exactly do you have a contract and is there consideration for it?

The recent experiences of two states - Alabama and Washington - illustrate the challenges posed.


Alabama has a strange contract formation rule. It has a statute that courts have interpreted to validate non-compete arrangements only if they are "signed by an employee." That requirement is somewhat anamolous because a prospective employee who has been offered employment but who has yet to start is not "an employee" able to sign an enforceable contract. This very paradigm rendered a non-compete unenforceable in Dawson v. Ameritox, Ltd., 2014 U.S. Dist. LEXIS 801 (S.D. Ala. Jan. 6, 2014). This somewhat runs counter to advice that attorneys often dispense, which is to tell an employee beforehand of the non-compete to give that person adequate time to consider it.


Contrast this with a jurisdiction like Washington which has a fairly strong consideration rule. Like many states, Washington states that an employee may sign a noncompete when hired (such that the employment itself is consideration). But if she signs it at some time after hire, then the employer must provide fresh, independent consideration. The Court of Appeals of Washington reaffirmed this rule in McKasson v. Johnson, 2013 Wash. App. LEXIS 2848 (Wash. Ct. App. Dec. 17, 2013). The key point here is preparedness; the employer must ensure the agreement is signed at the start of the relationship.

So, what to do? The most important task for any corporate counsel or in-house attorney to do is to determine what kind of consideration rules a particular state has concerning non-competes. The Alabama rule, to be sure, is odd. The rule in Washington is far more common. And then there are plenty of states where continued employment will suffice, in which case the concerns about contract formation are not quite as paramount.

These rules are important because they override any issues pertaining to a contract's scope or whether an employee even committed a breach. They determine whether there is a contract to begin with.

Applying the Logic of Empro to Non-Compete Cases

One of my favorite opinions is Judge Easterbrook's decision in Empro Mfg. Co., Inc. v. Ball-Co Mfg., Inc., 870 F.2d 423 (7th Cir. 1989). It's classic Easterbrook: short, clear, rooted in public policy, and beautifully persuasive in the way it resolves an issue that divided courts. Judge Easterbrook himself has said that he is surprised Empro still has enduring impact more than 20 years after he wrote it.

The case dealt with pre-closing liability, addressing what legal obligations parties to a business transaction have to each other when they reach a preliminary agreement (that is, a letter of intent) with details to be ironed out later. Judge Easterbrook applied an objective theory of contract law, finding that the parties' "intent" is grounded in the contract terms they use, not some ephemeral, or subjective, "meeting of the minds." Written terms are the best expressions of intent; the parties tend to forget, or selectively interpret, what they said leading up to the contract signing.

Okay, so on its face, the case has nothing to do with non-competes. Or does it?

Non-compete agreements are one of main areas of litigation that deal with common-law (not UCC) contract rules. General principles of contract construction often are front-and-center in non-compete litigation. And, from my experience, non-compete cases bear a tang of similarity to the Empro problem. Let me explain three situations in which the parties' subjective expectations - expectations which often are not contained in a contract term or condition and which arise pre-closing - can become an issue in litigation.

Preliminarily, it's important to keep in mind that non-competes usually are standardized agreements that are applied (perhaps slightly modified) throughout an organization. This is a good thing, as form agreements reduce transaction costs - savings that are passed down throughout the company in the form of better bonuses, commissions, and salary increases. But because agreements are standardized, they often are not tweaked when an employee is brought on board. So pre-signing discussions or "terms" may not make their way into a final signed document, even if the new employee and his recruiter (usually a mid-level manager or human resources officer) have some preliminary understanding of what is expected. This is the Empro problem through and through. Here are three paradigms:

1. The scope of restricted customers. This problem creeps up often. A sales employee who accepts a job may have a garden-variety customer non-solicitation covenant. He or she may think that any customer brought to the new company should be exempted from the restriction. After all, the employer may do nothing to facilitate the relationship. But unless something is written in the contract to express this intent objectively, the employee will have to defend on reasonableness - a much more arduous task than defending on breach.
2. Policy on enforcement. I've had many employee clients come to me after a lawsuit has been filed and who have said something along these lines: "When I was hired, I was told as long as I avoid my top accounts, the company wouldn't come after me." This may persuade an employee to join, but it's certainly not a binding statement and shouldn't even be admitted into evidence. Still, it is an unfortunate reality of non-compete cases when an employee seeks broad, irrelevant discovery into the company's "policy" of enforcement, either in whole or in part.
3. Indemnification. What happens when an employer tells an employee that it will "cover" any litigation costs incurred as a result of hiring him or her away? The best protection for an employee is to make sure the indemnity is contained in some agreement - usually the new employment agreement or a separate indemnity contract. Often, though, employers won't write in such an obligation. If litigation ensues, the employer may feel differently about spending money on lawyers. For starters, the employee may not perform up to anticipated standards, so the marginal cost of retaining that employee through a lawsuit is prohibitive. The litigation itself could be expensive. And it could go south quickly, particularly if a restraining order is entered. An employee's expectation to receive a continued defense, or even salary indemnity, may not be binding if a contract does not contain a term confirming this expectation.

These problems may give rise to other defenses. But Empro would seem to significantly undercut alternative theories of recovery or extra-contractual defenses. The beauty of a case like Empro is its certainty and clarity. In a perfect world, parties would set forth all the material terms and conditions rather than rely on pre-contract expectations. The world of non-compete litigation is not perfect, though, and these issues creep up repeatedly. An Empro-like analysis would go a long way towards simplifying litigation. 

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

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.

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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

Failure to Present Employee With Contemplated Non-Compete Agreement Fatal to Employer's Claim (Workflow Solutions v. Lewis)

Can an employer seek a court order requiring an employee to sign a non-compete agreement he previously agreed to execute? The answer is, and should be, no.

On a couple of different occasions this year, courts have weighed in on a strange issue going more towards contract formation than enforceability. The Second Circuit in a high-profile dispute involving IBM refused to enforce a non-compete against an employee who never manifested his intent to be bound. Earlier this week, I wrote about a bizarre Louisiana case where an employer tried to enforce an agreement against an employee who only signed a non-compete not personally, but only in her capacity as a representative of the employer.

Today, it is worth pointing out a Virginia case that deals with a more common scenario, although the facts of this case are a little more unique. In 2003, Mark Lewis resigned from Workflow Solutions, LLC, a nationwide print broker. Lewis apparently resigned under contentious circumstances, and the general allegation appears to be that he engaged in pre-termination solicitation of accounts. Several months later, Lewis and Workflow Solutions reached a settlement agreement whereby he agreed to continue working on an at-will basis for a six-month trial period, after which he could continue if the parties mutually agreed to do so. The agreement specifically contemplated that at the end of the probationary period, Lewis would have to sign a non-compete similar to what he previously signed (and apparently breached).

Lewis did continue to work at Workflow Solutions, for several years in fact. But he never signed the non-compete (which was an exhibit to the settlement agreement) and there was no indication the employer pushed him to execute it. When Lewis left to compete in 2008, Workflow Solutions sued to compel him to execute the non-compete contract and have him bound to the same.

The court dismissed the case, finding that the allegations could not possibly sustain a claim against Lewis. As a matter of contract construction, the court held that it could not bind Lewis to a contract he never signed. The settlement agreement contemplated that his signature on a new agreement was essential, and the employer simply never demanded it. Under those circumstances, the court was powerless to enforce anything.

Lewis and his counsel deserve credit for not agreeing to a non-compete in the first instance as a key term of the settlement agreement. There is no indication why Workflow Solutions capitulated on this when the dispute arose in 2003 or 2004, but it would seem that it should have demanded Lewis sign a non-compete and not agree to address the issue sometime down the road. It is possible that Lewis had leverage - perhaps his original agreement was unenforceable or Workflow Solutions created a problem on its own that would have made enforcement difficult. But the case illustrates a powerful lesson for employers: If you want a valid non-compete agreement, obtaining a signature on the document is always advisable...

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Court: Circuit Court of the City of Norfolk, Virginia
Opinion Date: 12/12/08
Cite: Workflow Solutions v. Lewis, 77 Va. Cir. 186 (Va. Cir. Ct. 2008)
Favors: Employee
Law: Virginia

Louisiana Affirms Common Sense Rule That Non-Compete Cannot Be Breached In Absence of...Actual Agreement (Action Revenue Recovery v. eBusiness Group)

In what may be the year's dumbest non-compete case, a Louisiana appellate court has affirmed a judgment that an employee did not violate a non-compete agreement she did not sign.

Though that sentence may appear confusing, it is the essence of the holding in Action Revenue Recovery, LLC v. eBusiness Group, LLC. The plaintiff sued to enforce a non-compete agreement its general manager did not sign, and indeed refused to sign. The employer's theory - bizarre as it was - rested on the notion that the employee signed agreements for other employees as a representative of the company, and therefore that she had to be bound individually to those trade restrictions.

Surprisingly, there was no discussion of frivolous litigation or fee-shifting in the appellate decision, but it is hard to believe this lawsuit could have had a good-faith basis in law or fact. The case is notable in one substantive respect. The non-compete - had it been signed - did not contain a reasonably specific geographic term under Louisiana statute. That law requires that the non-compete identify the parishes or municipalities to which it applies; otherwise, the contract is invalid.

In this case, the non-compete agreement the employee did not sign only described the restricted territory as applying to "all parishes [plaintiff] covers on a like business in said parishes or counties." Aside from being virtually unintelligible and gramatically challenged, the non-compete failed for lack of specificity.

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Court: Court of Appeal of Louisiana, Second Circuit
Opinion Date: 9/19/09
Cite: Action Revenue Recovery, LLC v. eBusiness Group, LLC, 17 So. 3d 999 (La. Ct. App. 2009)
Favors: Employee
Law: Louisiana

Executive's Ambiguous Acceptance of Non-Compete Prevents Enforcement by IBM (IBM v. Johnson)

Non-compete disputes almost always turn on whether the agreement is reasonable or supports a legitimate business interest.

Rarely do they depend on whether the contract was signed in the first place. But that was in fact the principal issue in another case involving IBM and a high-level executive. This case involved the departure of David Johnson, IBM's former Vice-President of Corporate Development, who left IBM earlier this year to take a position as Senior Vice-President of Strategy with Dell, Inc.

IBM immediately filed suit seeking preliminary injunctive relief against Johnson for breach of a non-competition agreement that was purportedly signed back in 2005. Johnson defended on the basis that he never properly signed the contract - and never intended to be bound to the same. The district court agreed and denied IBM's request for injunctive relief, opining that IBM faced a near insurmountable case at a trial on the merits.

Johnson, a highly paid and long-time IBM employee, was clearly reticent to sign a non-compete agreement for one overriding reason: he had foregone an opportunity to become a general manager at another technology company in reliance on assurances he received that a similar opportunity would be made available to him at IBM. That opportunity never came to pass.

In 2005, IBM began requiring its executive to sign non-compete agreements as a condition of receiving equity grants. Johnson attempted to buy as much time as possible and delayed signing his contract. Eventually, he pulled what turned out to be a brilliant move - he signed the agreement on the line designated for IBM.

Johnson returned the document to IBM, and it was clear this caused a great deal of confusion among human resources employee and in-house lawyers. In reality, Johnson's move could have backfired because, as the court noted, his ambiguous "acceptance" of the non-compete agreement meant that he assumed the risk of how IBM responded. Put differently, IBM's reaction was critical to determining whether the agreement had ever been truly accepted as a matter of New York contract law.

So what did IBM do? They repeatedly tried to get Johnson to sign his agreement again, imploring him on several occasions to return a properly executed contract and threatening to withhold equity grants. In short, IBM clearly believed Johnson had not intended to be bound when he signed the non-compete on the wrong line.

Johnson himself testified he did this simply to buy more time. IBM's general counsel even told Johnson to save any documentation from human resources about its efforts to get him to sign another contract. The facts demonstrated that IBM's reaction to Johnson's ambiguous acceptance was clear. No one believed he had intended to be bound by the non-compete, and no one believed his clever misdirection created a binding contract.

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Court: United States District Court for the Southern District of New York
Opinion Date: 6/26/09
Cite: IBM v. Johnson, 629 F. Supp. 2d 321 (S.D.N.Y. 2009)
Favors: Employee
Law: New York