Much Overdue Case Law Update, Part I

It has been a while since I surveyed new reported decisions. So over the next few weeks, I'm going to summarize very briefly some of the cases I've seen that piqued my interest. The topics are varied, which is kind of the point.

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Non-Recruitment Clauses in Georgia

Georgia courts have proved to be tough venues when it comes to enforcing restrictive covenants. The prevailing rule of non-severability (for older agreements) generally means that an unenforceable restrictive covenant will void other similar covenants, even if they (standing alone) might be considered reasonable.

But as the Court of Appeals in Georgia recently noted, this non-severability rule does not apply to non-recruitment/no-hire provisions that bar employees from soliciting co-workers. Simply put, those types of restraints to do not rise to the upper tier of restrictive covenants. And so a void non-compete will not invalidate a reasonable no-hire clause. Other courts in other States seen to equate no-hire clauses with more restrictive covenants.

The case is CMGRP, Inc. v. Gallant, and it's written by Twitter star Chief Judge Stephen Dillard. A link to the opinion can be found here.

Seventh Circuit Discusses Sale of Business Non-Compete Dispute

The Seventh Circuit hears about one or two non-compete cases per year. They generally involve questions of Indiana, Illinois, or Wisconsin law. And those States have non-compete laws that are interesting and nuanced.

But E.T. Products, LLC v. D.E. Miller Holdings, Inc. did not require the court to delve much into substantive State law (here, Indiana) because the case hinged on whether certain activity amounted to a breach of the non-competition clause. The case involved a business acquirer's attempt to enforce a sale-of-business non-compete against the seller, after the seller rendered post-closing assistance to the acquirer's distributor. The court found that the seller's conduct did not amount to prohibited competition, saying that "a firm whose sole conduct in the relevant market consists of distributing one manufacturer's product plainly isn't that manufacturer's competitor." The court also noted the seller terminated its relationship with the distributor and rendered no assistance at all once the distributor began competing on some product lines. The facts, as the court recited them, amply demonstrated the defendant's good faith and intent to adhere to the non-compete. The pursuit of the case appeared to be vast overreach.

The opinion, written by Judge Diane Sykes, is available here.

The Protocol for Broker Recruiting and "Good Faith"

Those of us who represent advisory firms and financial advisors have a good deal of familiarity with the Protocol for Broker Recruiting. But many don't. The Protocol's design is to foster client choice, a recognition of the intensely personal nature of the advisory relationship. More broadly, the Protocol represents an industry solution to expensive, uncertain non-compete litigation - in effect, a contractual way around flexible legal standards being applied by judges who generally lack deep knowledge of particular industries.

The Protocol's basic tenets allow an advisor to avoid liability if she takes client information to her departing firm (generally, it must be related to those clients she serviced and the information must be provided to her firm on departure). If followed in good faith, the employee will not be bound by any contractual restrictive covenant or held liable under trade secrets law pertaining to the taken (and disclosed) client information and subsequent solicitation efforts of those clients.

The term "good faith" is a bit nebulous and fact-specific. If an employee engages in bad faith, the she cannot avail herself of the Protocol and courts default back to any signed agreement the employee has. The district court decision in UBS Financial Svcs., Inc. v. Fiore, No. 17-cv-993, 2017 WL 3167321 (D. Conn. July 24, 2017), contains a lengthy discussion of good faith in the context of advisor departures. Ultimately, it found that despite some wrongful behavior, the defendants did not forfeit the Protocol's protections since their notice was proper and they took only information pertaining to their client lists. The court focused on the fact that UBS still had all the information it needed to contact the same clients.

In the past, courts have found that the Protocol did not apply when employees took information beyond what was allowed, altered information in a client database, or deleted contact information in a work e-mail account. Like most good-faith inquiries, each case turns on its facts. The Fiore decision is interesting and well worth a read because it is not particularly clear cut factually. The departing defendants complied with the Protocol in the most crucial ways but still did some things that appeared designed to hinder UBS' ability to retain its wealth-management clients.

Georgia Ruling Illustrates Difficulty with Relying on Blue-Pencil Rule

One of the issues I see most frequently when litigating non-compete disputes involves what's known as the blue-pencil rule. The rule actually has a few separate iterations to it, but for the layperson it's the idea that a court might be able to revise or narrow an overbroad agreement and still enforce it (or at least part of it).

(I wrote a state-by-state guide to the blue-pencil rule more than 8 years ago. It may not be entirely accurate now, as I don't routinely update old posts. It remains one of my most viewed pages, with nearly 40,000 unique viewers having read it (i.e., clicked through to it)).

Advising clients about how courts may deploy the blue-pencil rule is a challenge because in many places - including Illinois -its use is discretionary. This makes rendering predictions somewhat challenging, particularly since very few non-compete scenarios are alike.

There's also a separate problem. My experience is the rule is somewhat judge-specific. By that I mean, different judges apply the rule with different philosophies in mind. Many (most?) don't like to insert themselves in the contract drafting process. Others see themselves as arbiters of equity, charged with a more activist role to do "what's right" under the circumstances. Unless you have direct experience on the precise issue with the same judge, that makes predictive counseling an enormous chore.

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The reason I write on, and revisit, this topic now is due to two separate events. First, from Georgia, we encountered LifeBrite Laboratories, LLC v. Cooksey, No. 1:15-cv-4309. In that case, the district court evaluated the blue-pencil rule in Georgia in light of the 2011 change to Georgia law. Previously, courts had not allowed any sort of blue-penciling. If a covenant was overbroad, the entire thing failed. Georgia's new law gave courts the ability "to modify a covenant that is otherwise void." But the court noted that the new law did not define the term "modify."

It had a choice. Did the term mean to remove offending language or make substantive changes of the court's own accord? The court, having relied on Georgia's common law before the statutory change, chose the former and not the latter. I would guess this came as a surprise to Georgia lawyers, many of whom likely assumed "modify" granted the court broader discretion. I don't think we've heard the last on this subject. LifeBrite isn't controlling in Georgia state courts.

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I also write because of an appeal I have pending in Illinois. At least one district of the Appellate Court of Illinois has explained its law of severability in terms of non-compete agreements. I happen to have the very issue pending before the same district, so we'll see if the court expounds on its prior case law. The law of severability states that even if some part of a contract is unenforceable, a court may enforce the rest of the agreement "in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange."

The italicized language has been held to ruin an entire non-compete when one clause is unenforceable. That means, for instance, that an overbroad customer non-solicitation covenant could imperil an otherwise enforceable non-disclosure agreement. Or vice versa. And given the crackdown in Illinois on overbroad non-disclosure agreements, I expect the law of severability may rear its head time and again.

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As a quick primer, recall that there are several permutations to blue-penciling and severability. The terms are important:

1. Blue-penciling. This doctrine is what the Georgia court in LifeBrite endorsed. A court can remove offending language and save the balance of the covenant. That would mean, for instance, deleting a particular county in which the employee never worked but which is part of the restriction.

2. Equitable modification/Reformation. This is a broader doctrine, which allows courts to rewrite an overbroad agreement. It is less technical and interjects the court in the drafing process.

3. Red-penciling. This is a very strict, pro-employee doctrine. If the covenant is overbroad, the court will strike it and not change it in any respect. Nevada is a red-pencil state, as we found out last year.

4. Severability. As discussed above, this doctrine means a court can strike an entire restrictive covenant but save the rest of the agreement. In Illinois, I think it's at best an open question now how the law of severability applies to restrictive covenants. Probably case-by-case, depending on the language of the agreement.

5. Step-Down Clauses. A step-down clause provides that if a court determines one covenant is unenforceable, then a different term or restriction applies. For instance, a step-down clause may say that "if the court determines an 18-month non-solicitation restriction is overbroad, then the parties expressly agree to a 6-month covenant in its place." This, in theory, eliminates the court's job in rewriting a contract. I wrote once on this topic. Notably, the district court in LifeBrite stated it would have enforced a step-down clause providing an alternative provision to the overbroad clause that rendered the agreement unenforceable. (See FN 78 at page 21).

The Reading List (2017, No. 6): Surprise Result on Blue-Penciling Rule in Georgia

Non-Compete and Trade Secrets News for the week ended February 10, 2017

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Georgia Blue-Penciling of Restrictive Covenants

Last December, a federal district court in Georgia limited courts' ability to modify overbroad restrictive covenants. More on this significant case in my end-of-the-month column, but LifeBrite Labs. v. Cooksey, No. 1:15-cv-4309, merits a brief mention this week.

The court held that Georgia's relatively new state statute concerning non-competes, which permits courts to "modify a covenant that is otherwise void and unenforceable," allowed it only to excise language that rendered the agreement overbroad. In other words, courts could not rewrite the contract, or supply it with any new terms, as part of its statutory ability to modify agreements. The court relied principally on Georgia's existing case law in the sale-of-business context and the rule that it must construe statutes in derogation of the common-law narrowly. Put simply, "modify" means blue-penciling. The opinion and order, with its very insightful analysis, is available here.

(FordHarrison also comments on this case in its Non-Compete News.)

Military Contractor Trade Secrets

The Eleventh Circuit Court of Appeals has reversed a summary judgment of a trade-secrets claim between military contractors, Advantor Systems of Florida and DRS Technical Services, Inc. The disputed technology involved intrusion detection systems that Advantor originally sold certain United States Air Force bases. When the Air Force elected to consolidate its security systems across all AF bases, Advantor was left out in the cold. DRS won the contract and dumped Advantor as a potential sub-contractor during negotiations. The parties had signed a transactional confidentiality agreement and a one-year "no direct hire" agreement that precluded either from directly soliciting the other's employees.

The ruling is rather lengthy (53 pages) and since it's unpublished, it does not merit an extended discussion. However, it is worth reading the passage where the court of appeals reverses summary judgment on the trade-secrets claim based on the Air Force's disclosure of technical manuals and drawings to DRS. Those manuals were necessary for DRS' continued service of Advantor equipment previously sold to the AF (recall that Advantor used to supply systems to several, but not all, AF bases). The analysis discusses a rarely litigated question concerning the term "misappropriation": whether the defendant (DRS) had "reason to know" that a third-party (AF) had some limitation on its ability to disseminate information obtained in confidence (from Advantor).

A copy of the Eleventh Circuit's unpublished opinion is available here.

Choice-of-Law Clauses

California courts have continued a trend of invalidating choice-of-law clauses with regard to employee restrictive covenants. The general principle is that courts will enforce such clauses unless the contractually chosen law is "contrary to the fundamental policy of the forum state." In Stryker Sales Corp. v. Zimmer Biomet, No. 1:16-cv-01670, a California federal district court found a public-policy rift between Michigan and California law concerning non-competes. No surprise there. Michigan is a fairly typical state when it comes to non-compete law, employing a reasonableness test to restrictive covenants. But California bars them almost entirely, which led the court to invalidate the choice-of-law clause in Stryker Sales.

This case illustrates why obtaining the proper forum, and enforcing forum selection clauses, is so crucial to non-competes directed at parties with some California connection. The original action was brought in Michigan, but venue wasn't proper there. A copy of the decision is available here.

Restoration Hardware Trade Secrets Suit

Multiple outlets have reported on a trade-secrets suit between Restoration Hardware and Crate and Barrel. The Complaint, filed in California state court, alleges that Crate and Barrel CEO and former Restoration Hardware employee Doug Diemoz tried to hire other RH executives in violation of a no-hire agreement. According to the Chicago Tribune, Diemoz is alleged to have used Gmail to communicate with RH employees, stating in one such e-mail "that damn non solicitation!" Diemoz' supposed recruitment allegedly ties into another employee's downloading of confidential information about RH's food and beverage operations in Chicago.

The crux of the trade-secret allegation is a little odd. RH seems to be claiming that Crate and Barrel is attempting to replicate its "model" of providing food-and-beverage services in conjunction with its other retail offerings. I suppose that something about the roll-out of those operations could be secret, but it seems like an allegation primed for a reverse-engineering defense. RH's pilot program was launched at the Three Arts Club in Chicago. Before its conversion (it was badly rundown), I lived at the Three Arts Club for a summer in my early 20s and consumed an untold number of alcoholic beverages - not the coffee drinks RH is now peddling to its shoppers.

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In other news, Holland & Hart reports on a $5.175 million trade-secrets verdict it obtained in Utah on behalf of Hydro Engineering, Inc. against Riveer Environmental. The case stemmed from Riveer's hiring of a key salesperson who had a non-compete with Hydro. The verdict summary illustrates, once again, that e-mail communications among the defendant's employees were central to the plaintiff's proofs.

Georgia Court of Appeals Discusses Anti-Severability Rules

One of the defining characteristics of a state's non-compete law is its application of the blue-pencil rule. Although several variations of the rule exist, states generally fall into one of two camps: those that readily modify overbroad covenants to make them reasonable, and those that generally frown on modification or blue-penciling.

Georgia historically has been one of the states that enforces only those agreements that are reasonable as written. That is to say, courts cannot modify overbroad agreements to make them enforceable. In essence, Georgia judges will decline to force the parties to accept a contract they could have, but didn't, make.

Georgia law continues to evolve, and a new statute governs contracts entered into after May of 2011. However, it doesn't impact contracts signed before the effective date, and courts will continue to apply the old common law for many years to come.

The Court of Appeals discussed at length the state's anti-severability rule in Lapolla Industries, Inc. v. Hess. As the Court described, the anti-severability rule applies to the following types of restrictive covenants:

• covenants restricting employment or competition generally in a relevant market;
• covenants restricting the solicitation of business from actual or potential customers; and
• covenants restricting the acceptance of business from actual or potential customers.

(There was another type of restrictive covenant at issue in Hess, which I still don't understand after reading it several times and which the Court of Appeals intelligently glided over. Lapolla (the ex-employer) had a non-solicitation covenant that prohibited the employee from soliciting or accepting business from a business competitive with or similar to Lapolla. In other words, the employee could not vend any kind of product or service to a Lapolla competitor. Silly.)  

However, the anti-severability rule does not apply to covenants that either:

• restrict solicitation or hiring of certain employees or independent contractors; and
• restrict disclosure of trade secrets or confidential information.

Like many states, Georgia historically has frowned upon so-called market-based restraints, which contain broad prohibitions on working for a competitor in any capacity. Georgia's case law, however, also has applied strict scrutiny to lesser restrictive customer-based restraints, such that a number of appellate decisions strike down clauses that many other states would deem enforceable. For instance, Georgia courts have frowned upon customer-based restraints that prevent an employee from accepting, instead of soliciting, a customer's business. This distinction never has made much sense to me, since it's virtually impossible without the aid of legal process to determine who solicited whom.

The Court also discusses at length in Hess Georgia's reluctance to enforce choice of forum and choice of law clauses in contracts when application of a foreign state's law would lead to a result contrary to Georgia's public policy. In keeping with one of my sacrosanct rules to limit discussion of venue and jurisdiction disputes to an absolute minimum, I will say no more regarding this subject.

Old Georgia Law Still Invalidates Many Restrictive Covenants

When the Georgia General Assembly passed the Restrictive Covenant Act in 2009, it substantially changed the playing field between employers and employees. Under the common law, it was exceedingly difficult for employers to enforce anything but the most perfectly worded and narrowly tailored covenant. Cases repeatedly failed on the facial ambiguity or overbreadth of the covenant, leading to judicial invalidation. And the blue-pencil rule was not available to save overbroad (even slightly overbroad) contracts.


But the new Act did not become effective until 2010 and only applies to contracts entered into after November 3, 2010. A great many employees and independent contractors signed agreements well before that, and their enforceability continues to be subject to the old common law.

A recent district court summary judgment decision illustrates how strict this old common law actually is.  The case involved a dispute in the credit-card merchant processing industry. This is a rapidly growing market where companies provide merchants - often, retailers - a wide range of credit-card processing services. Those services range from simple payment processing to mobile processing to "tokenization" (a fancy way of saying that the processing company will enable merchants to store credit card data safely and securely).

The defendant was an independent contractor who marketed the processor's services to merchants for a fee. In his Independent Contractor Agreement, he agreed to two broad covenants:

(1) An in-term non-compete restriction that prohibited him, during the term of his relationship with the plaintiff, from entering into agreements to solicit merchants for the merchant-acquiring program of any bank or third-party financial institution, or from entering "into any relationship with any organization...that would effect an indirect relationship with any" organization.

(2) A 5-year, post-termination non-solicitation restriction that prevented him from calling on the plaintiff's customers, regardless of whether he had a relationship with those customers.

The district court had little trouble under Georgia common law striking down both clauses. The ruling on the non-solicitation covenant was not much of a surprise, since Georgia law (like some other states) generally does not look favorably upon non-solicitation covenants that extend to customers the employee did not serve - particularly when there is no geographic restriction. And the 5-year term was well beyond the 2-year rule Georgia courts long have advocated.

The more surprising aspect of the ruling is the fact the court struck down the in-term non-compete arrangement. It held the general rules pertaining to non-compete agreements apply, even though it did not prohibit any post-termination activity. In-term covenants rarely are litigated because in an at-will environment, employees (or, as here, independent contractors) simply terminate the relationship before leaving to compete.

The court, though, struck the non-compete and held that its activity scope was unreasonable - mainly due to the quoted, italicized language above. The court found that the prohibition on the defendant from entering "into any relationship" with a bank was ambiguous and ill-defined. In reality, it didn't appear to be as broad as the court held. Rather, it seems the clear intent of the covenant was to prohibit the defendant from entering into a similar arrangement with another credit-card processor while he was soliciting merchants for the plaintiff. The language of the non-compete which the court deemed problematic only appeared to further restrict the plaintiff from circumventing this fairly clear covenant in a more indirect manner.

Still, the ruling indicates that courts often are troubled by restrictive covenants and their impact on competition as a whole. I've written before about how judges sometimes will gloss over a contract's intent to find an ambiguity, even though it's questionable such an ambiguity exists. That seems to be what happened here as well.

Supreme Court of Georgia Rejects Independent Claim for "Inevitable Disclosure"

The "inevitable disclosure" doctrine is one of the most discussed, controversial topics in unfair competition law. The commentary among academics and bloggers reminds me of the ongoing debate over the proper scope of the Computer Fraud and Abuse Act.

All but two states have adopted some version of the Uniform Trade Secrets Act, but there is little uniformity when it comes to applying the inevitable disclosure doctrine. Reduced to its essentials, the doctrine allows a plaintiff to substitute the concept of "inevitable disclosure" for actual or threatened misappropriation.

The Supreme Court of Georgia is the latest to weigh in on the application of the doctrine and held in Holton v. Physician Oncology Svcs, LP that a plaintiff cannot maintain an independent claim for misappropriation by relying solely on the idea of inevitable disclosure. The Court did not address whether:

1. the doctrine can be applied to support a claim for "threatened" misappropriation of trade secrets (which is contemplated by the very text of all trade secrets statutes); or
2. the doctrine can be applied to support a protectable interest as part of a non-competition covenant.

Companies seeking to assert trade secrets claims should, for the most part, do all they can to avoid pleading inevitable disclosure. From my perspective, it's a theory of last resort in that actual or threatened misappropriation (even if the threat is indirect or implied) is a far easier concept to present, particularly when requesting a disfavored remedy like an immediate injunction. Eric Ostroff essentially notes the same in his blog post discussing Holton.

The reluctance to invoke inevitable disclosure is not as pronounced when a company is seeking to enforce a non-compete. The theory of inevitable disclosure is much more appealing when it's used demonstrate that an actual, protectable interest supports the contractual restraint. Non-compete law is more objective and forward-looking. Because parties have contracted in advance for a certain type of restriction, it makes little sense for a company to have to wait for actual misappropriation of company secrets to enforce the agreement in court.

Georgia Case Demonstrates Importance of Addressing Choice of Venue and Law Clauses

Readers know from prior posts that Georgia is one of the "red-flag" states when it comes to non-compete disputes.

Non-compete contracts entered into before the ratification of a constitutional amendment in 2011 are governed by the common law, and that body of law remains exceedingly treacherous for companies enforcing covenants.

A recent Georgia appellate case illustrates why procedural choice of venue and choice of law rules are vitally important.

The case of Carson v. Obor Holding Co., LLC yields a fairly common fact-pattern. Carson wore two hats for Obor Digital, a company that supplies staffing and software services in the defense industry. He was a member of the holding company (the defendant in the case) and an employee of the operating entity (not a defendant). He resigned in April of 2011, claiming "constructive discharge" by virtue of a reduction in his commissions. He then immediately filed suit in Georgia state court seeking an injunction against enforcement of the restrictive covenants contained in the Holding Company operating agreement.

The trial court dismissed his case, finding a Florida choice-of-forum clause was valid. That contract also required application of Florida law. Florida, in direct contrast to Georgia, is an exceedingly friendly enforcement state.

The Court of Appeals of Georgia reversed and held that the forum selection clause was invalid. It is important to note that courts won't invalidate forum selection clauses simply because one state's law (here, Georgia) is more favorable to employees than another state's (here, Florida). Rather, the difference has to implicate some fundamental public policy.

Florida tends to pose special problems with choice-of-forum and choice-of-law clauses if the suit is brought in another state. This is so for two primary reasons. First, Florida has a mandatory blue-pencil rule, requiring courts to modify overbroad covenants to the extent necessary for protection of the enforcing party. Georgia (pre-2011) is the exact opposite, essentially adopting an all-or-nothing policy. Second, Florida disallows a court from considering any employee hardships - economic or otherwise - that may result from enforcement. Georgia requires courts to consider such hardships in the balancing analysis. (Illinois adopted a similar rationale a few years back to invalidate Florida choice-of-law provisions in non-compete cases pending in Illinois courts.)

Turning to the substance of the covenants, Obor Holding's operating agreement had the following deficiencies in the restrictive covenants:

(1) The non-disclosure covenant did not define "confidential information," and it barred use of confidential information in perpetuity. Georgia law holds this is invalid if the non-disclosure for non-trade secret information is unlimited. (This is ridiculous, but maybe more on this in another post.)

(2) The non-solicitation covenant was not limited either (a) to a discrete class of customers, or (b) territorially. It also barred Carson from accepting business from a customer. Georgia cases hold that non-solicitation covenants that bar this so-called "passive solicitation" are invalid. (Again, stupid. How can an enforcing party know who contacted whom?)

(3) The non-compete covenant was invalid because it applied throughout the country and had no discernible territory limitation and because it had no activity scope tied to it. That is, it barred any affiliation with a competitor, not just some particular competitive conduct.

Because of the fundamental difference in how Georgia and Florida courts view non-competes, the Court of Appeals found that the operating agreement covenants violated Georgia public policy and that a Florida court would enforce them (at least to some extent). That means that, in Georgia, the choice-of-venue clause was invalid. A Georgia court had to hear the case and had to apply Georgia law. IIt must be nice to be a Georgia non-compete lawyer. No shortage of cases. And plenty of contract rewrites given the change in the law in 2011.

Other states that will pose similar procedural problems like this are Wisconsin, Oklahoma, North Dakota, and California. States that are viewed as more employee-friendly may not have robust public policy considerations that require courts to override choice-of-forum and choice-of-law clauses.

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Court: Court of Appeals of Georgia
Opinion Date: 11/20/12
Cite: Carson v. Obor Holding Co., LLC, 2012 Ga. App. LEXIS 971 (Ga. Ct. App. Nov. 20, 2012)
Favors: Employee
Law: Georgia

Case Law Update: Source Code "Crimes", The Duty of Loyalty, and Trade Secrets Preemption (My Favorite!)

The year continues to churn out some interesting cases, and they're getting a bit tough to keep up with. Here is a brief survey of some developments I found this past week, broken down by general topic. As you can tell from the title, there is a trade secrets preemption case to report on. I am, for some reason I cannot figure out, oddly fascinated by this procedural topic. This is not something to emulate or be proud of. But it is what it is. Here we go...

Trade Secrets


The Supreme Court of Georgia, in Robbins v. Supermarket Equipment Sales, LLC, 290 Ga. 462 (2012), adopted what I call broad form preemption under the Uniform Trade Secrets Act. Preemption is the idea that if you're claiming trade secret protection, that's your sole remedy; you can't default to some other common law tort as an alternate theory of recovery. In Robbins, the Court held that because the plaintiff alleged certain design drawings for refrigeration "skins" (incidentally, no clue what this is) were trade secrets, the trial court could not award injunctive relief under another equitable theory once the plaintiff failed to prove its trade secrets case. Significantly, the Court stated that because "the drawings were not ultimately found to be trade secrets under the [UTSA] did not make the preemption clause inapplicable." This is the correct result, but by no means are other states in accord.

Employee Duty of Loyalty


In most states, an employee owes a duty of loyalty to an employer. This is different than a "fiduciary" duty, which is accorded somewhat of a special place in the law - reserved in the corporate context for senior officers, directors, and shareholders.

The stinger on duty of loyalty claims is the idea of salary forfeiture. That is to say, an employer may be able to clawback salary paid during a period of disloyalty. Easier said than done. A recent case out of Alabama demonstrates why. In AK Steel Corp. v. Earley, 809 F. Supp. 2d 1326 (S.D. Ala. 2011), the court granted summary judgment in favor of a claim made against several employees for breach of the duty of loyalty. The case was decided under Ohio law, which has adopted the "faithless servant doctrine." The doctrine allows for salary forfeiture only if the acts of disloyalty "permeated" the employee's service. In that case, the employer could not show any active competition prior to termination, meaning that the transfer of a few files did not rise of the level of pervasive disloyalty required for salary forfeiture.

On to Missouri and another duty of loyalty case, Western Blue Print Co., LLC v. Roberts, 2012 Mo. LEXIS 93 (Mo. Apr. 17, 2012). This case arose in a somewhat familiar fact pattern. Roberts was a branch manager for Western Blue, a document management service company. One of the largest clients of the company was the University of Missouri. After obtaining the university contract, Western Blue had to subcontract a portion of the business to a certified minority business enterprise. At this point, Roberts took an interest in an MBE contractor but never disclosed it to Western Blue. In fact, she was approached later about it and denied any arrangement with the subcontractor at all.

When the relationship fractured, Roberts actively worked for the subcontractor, orchestrated the mass exodus of Western Blue employees, recruited them to work for the subcontractor, and bid on - and won- the university contract. This resulted in Western Blue's closure of the branch office. Western Blue sued, won $600,000 in damages, and nearly $250,000 in legal fees. On appeal, the Supreme Court of Missouri reversed, holding Roberts was not a top corporate official of Western Blue and therefore not a fiduciary. Central to the Court's reasoning was the absence of any non-compete agreement between Western Blue and Roberts, and the fact that the knowledge she obtained was simply the product of what she naturally would acquire during the course of her job. For reasons I can't figure out, Western Blue abandoned at trial a separate claim for breach of the duty of loyalty, a duty which is ascribed to regular employees.

Given the facts, this is an unusual result. The Court carefully parsed certain facts to hold Roberts did not violate any pre-termination duty not to compete with Western Blue. It overlooked some essential facts that clearly suggested she was less than forthright and might have gained a head-start when working for the subcontractor. Had Roberts been bound by a reasonable restrictive covenant, the case would have turned out completely different. Or perhaps, Roberts never would have done what she did. To put it mildly, she found a narrow path - a very narrow path - to victory.

Economic Espionage Act


The Second Circuit overturned the conviction of former Goldman Sachs programmer Sergey Aleynikov in U.S. v. Aleynikov, 2012 U.S. App. LEXIS 7439 (2d Cir. Apr. 11, 2012). The man with the name similar to pick-your-Chicago Blackhawks-defensemen from the late '90s had been convicted under various federal statutes, including the Economic Espionage Act when he uploaded source code relating to Goldman's high frequency trading operations. Aleynikov took the source code with him to Teza Technologies in Chicago, where he more than doubled his salary. After conviction in the District Court, his prison term was set at more than 8 years. (Interestingly, there was related non-compete litigation in the Circuit Court of Cook County between Citadel Investment Group and Teza.)

The circuit court found the EEA did not apply, because Goldman's HFT system was not produced for or placed in interstate or foreign commerce. Goldman kept the system confidential and had no intention of selling it or licensing it to anyone. Therefore, by the terms of the EEA, the indictment was improper. The concurring opinion is interesting, as it suggests that Congress ought to revisit the EEA so that its terms reflect its intent.

Recent Decisions of Interest (No. 3)

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

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

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

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

Recent Decisions of Interest (No. 2)

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

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

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

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

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

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

A Summary of Georgia's New (Employer-Friendly) Non-Compete Statute

Loyal readers of my blog (yes, there are quite a few!) surely know that there are a handful of red-flag states out there which have unique non-compete rules. Georgia, historically, has been such a jurisdiction. Employees have met with a high degree of success in challenging non-compete obligations, often succeeding because covenants are facially overbroad and capture too much competitive activity.

All that changed with the passage of a new statute in Georgia, which recently went into effect. The new statute is decidedly more employer-friendly. Because the new law only affects covenants entered into after its effective date, employers now have a strong incentive to redraft agreements and bind key employees to new covenants.

The changes are fairly extensive, so I will summarize some of the main points that I would expect to come up frequently.

(1) Class of employees: non-competition agreements can be enforced against employees who regularly solicit customers, regularly engage in sales, perform the duties of a "key employee", or supervise others.

(2) A term will be presumed reasonable if it is (a) 2 years for employees, (b) 3 years for arms-length business transactions (such as a license or franchise agreement), and (c) 5 years for a sale of business.

(3) Non-solicitation covenants need not have an express geographic territory tied to them.

(4) Burden of proof: the employer will need to establish that the covenant protects a legitimate business interest, which is expansively defined and includes goodwill, confidential information, customer relationships, and specialized training. If the employer demonstrates the covenant meets the statutory terms, the burden shifts to the employee to show it is unreasonable.

(5) Blue-pencil rule: the impetus behind the statute was Georgia's strict rule prohibiting any modification for overbreadth, which also generally resulted in an entire covenant being struck down as void. Courts are now empowered to modify overbroad restraints.

Again, keep in mind, the old Georgia law is still relevant because the law is not retroactive. Employers would be well advised to have their agreements audited and redrafted to suit the new law. Prospective employees must now pay careful attention to their agreements and be vigilant about negotiating terms. They can no longer count on courts to save them from a bad deal.

Georgia Voters Approve Constitutional Amendment

Yesterday, Georgia voters overwhelmingly approved a constitutional amendment that has the practical impact of enabling courts to more readily enforce non-competition agreements. The voters approved the measure with 67% in favor of the amendment.

Previously, the Georgia legislature passed a law codifying the new statutory requirements for non-compete agreements. Because of the way Georgia's constitution was written, however, an amendment was needed to enable the law to take effect. The new law will be effective as soon as the Secretary of State certifies the election results.

The law does not contain any retroactivity provision, so existing contracts will be analyzed under the law as it exists prior to the amendment. This has happened several times before following legislative action, as courts in Florida and Michigan, for instance, had to assess covenants under different standards depending on when the contract at issue was signed.

More on the substance of the Georgia law to follow later in the week (or next), but there are a few notable changes, the most significant of which is that courts will be allowed to blue-pencil employment non-compete contracts. One can certainly expect Georgia employment law attorneys to be busy rewriting non-compete agreements for their clients.

Georgia Non-Compete Reform Up To Voters In November

It seems like non-compete reform in Georgia has been a slow marathon, but the finish line appears to be in sight.

As readers of this blog probably have found out, Georgia is one of those employee-friendly states where non-compete agreements are enforced much less frequently than in other jurisdictions. The reason largely has to do with Georgia's strict blue-pencil rule, which ends up invalidating a good percentage of contracts on technicalities. Even the slightest degree of overbreadth can render the entire agreement void and unenforceable.

The Georgia legislature has approved a constitutional amendment that will change non-compete law should voters ratify it in November. A simple majority is required for the constitutional amendment to take effect, which then will make non-competes easier to enforce and yield a lot less handwringing by attorneys who draft them.

There are a number of revisions that will go into effect if the amendment passes, including a grant of authority to Georgia courts to blue-pencil covenants. In addition, non-solicitation clauses can include a prohibition on acceptance of business from clients. This would overturn a line of Georgia cases that ruled such a restraint on so-called "passive" solicitation is overbroad and void against public policy. The law also sets presumptively reasonable non-compete durations: for employment, 2 years; for franchisee or distributors, 3 years; and for a seller of a business, the longer of 5 years or the time during which payments are made for the sale.

Finally, the law only applies to new agreements entered into after the effective date. Agreements existing before the effective date of the law would be examined under the old law. Georgia business attorneys should gain a nice stable of employment contract drafting work over the next year or so, assuming this constitutional amendment passes.

Georgia Appellate Court Finds Non-Compete Incident to Stock Purchase Agreement Is Subject to Lower Degree of Scrutiny (American Control Sys. v. Boyce)

Not all non-compete agreements are subject to strict scrutiny. Most covenants contained in employment contracts are, but that is not always the case.

A recent case out of Georgia illustrates an interesting exception to this rule.

Four shareholders, including Boyce, owned a computer services company from 1995 to 2001. In 2001, Boyce and one other shareholder sold certain shares to an LLC, which gained control of the company following the sale. In connection with the stock purchase agreement that Boyce signed, he entered into a new employment contract with the company, American Control Systems. His employment agreement contained an industry non-compete covenant, as well as a non-solicitation and non-disclosure agreement.

Several years later, Boyce resigned to work with his wife's information technology company. ACS filed suit, claiming his employment violated the non-competition covenant. Boyce argued for strict scrutiny of the covenants, claiming they were overbroad under Georgia's highly favorable law governing employee non-competes.

ACS disagreed and argued that strict scrutiny did not apply, contending the covenants were executed in connection with a stock purchase and should be subject to the sale-of-business analysis of low scrutiny. In Georgia, a sale-of-business covenant can be blue-penciled or reformed to make it reasonable. That is not the case with employment covenants. Classification of a covenant, therefore, can be outcome-determinative in a state like Georgia.

The Court of Appeals agreed with ACS, finding that although the covenant was contained in an employment agreement, it was a condition precedent to the stock purchase agreement between Boyce and the majority shareholder. Also relevant to the court's finding was Boyce's status as an existing shareholder and the fact he was in a relatively similar bargaining position as the covenantee.

Attorneys analyzing the enforceability of non-competes always must examine context. If the covenants were typical at-will employee covenants, strict scrutiny usually applies. If they were executed in connection with a business transaction, then it is far more likely a different reasonableness standard will apply.

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Court: Court of Appeals of Georgia, Third Division
Opinion Date: 3/29/10
Cite: American Control Systems, Inc. v. Boyce, 694 S.E.2d 141 (Ga. Ct. App. 2010)
Favors: Employer
Law: Georgia

Employees' Non-Competes Executed In Sale of Business Subject to Lower Scrutiny (Mohr v. Bank of New York Mellon Corp.)

It is common in the sale-of-business context for the seller's principal to stay on as an employee of the buyer for a period of time following closing. Particularly in professional services firms, it is essential to the transition of the business that the seller be affiliated in some way to help migrate accounts and relationships to a new firm.

As one would expect, the buyer in such a deal has a right to have its financial investment in the acquisition protected, and it is common for lengthy non-competes to be issued. When the seller's principal stays on following sale, the most prevalent approach is to have the seller sign a long-term employment contract with a covenant not to compete triggered upon one of two events. Normally, the contracts are written so the covenant runs from the longer of (a) a period from the closing date, or (b) termination of the seller's employment.

Because the non-compete often is issued in the context of an employment contract, sellers sometimes argue that it is subject to the employee rules governing non-competes - which are far more exacting than those involving covenants in the sale of a business. This is exactly what happened in the dust-up between Bank of New York and two employees who had sold their investment management firm to BONY in 2003.

A federal court in Georgia bought the employees' argument and determined that the non-competes were employment covenants subject to strict scrutiny. In Georgia, this is a key issue because the blue-pencil rule does not permit any modification of employee non-competes and (at least for the time being) Georgia law is very employee-friendly on the issue of what types of restraints are reasonable.

That is not quite the same in the sale-of-business context. Even in Georgia, where covenants are highly disfavored, sale-of-business non-competes are subject to a much lower degree of scrutiny and can be blue-penciled.

The Eleventh Circuit in Mohr v. Bank of New York reversed the district court's finding that a non-compete contained in an employment contract executed at the same time as an asset purchase agreement was subject to strict scrutiny. Instead, the court found the multiple cross-references among the contracts, the incorporated terms and definitions, and the overall purpose of the transaction resulted in a "unitary contractual scheme in which [BONY] sought to purchase both the clients lists owned by [the seller] and its goodwill, that is, the client relationships." Accordingly, the covenant was subject to far less scrutiny.

Attorneys who represent buyers in business transactions where the seller is staying on certainly would be well-advised to make reference in the employment contract that it is ancillary to the sale of a business. Also, a signed employment contract or covenant not to compete ought to be a scheduled seller delivery at the time of closing. This should remove any doubt as to whether the covenant is characterized as ancillary to employment or a sale of business.

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Court: United States Court of Appeals for the Eleventh Circuit
Opinion Date: 3/24/10
Cite: Mohr v. Bank of New York Mellon Corp., 2010 U.S. App. LEXIS 6309 (11th Cir. Mar. 24, 2010)
Favors: Employer
Law: Georgia

Legal Precedent Thin on Whether Employee Can Seek Injunctive Relief Preventing Enforcement of Invalid Non-Compete (Frank v. Wesco Distribution)

At least ninety percent of all non-compete disputes start with an employer filing a lawsuit and seeking some form of injunctive relief to prevent a further breach of contract. It is the rare case where an employee initiates a claim against an ex-employer, where the preferred remedy is a declaration that the non-compete is invalid.

The employee-side claim can arise in a number of situations. Perhaps an employee's non-compete concerns a forfeiture-for-competition covenant, in which the employee needs to determine the validity of an agreement before risking forfeiture of stock options or deferred compensation. In some cases, a non-compete term could be lengthy enough that the litigation won't run its course by the time a non-compete expires. And in other cases, the employee may use the litigation as leverage to effectuate a settlement on less restrictive terms. But in all of these cases, the relief available to an employee is fairly narrow and does not pose any immediate problem for the defending employer.

I recently litigated a case where I represented an employee who filed a declaratory judgment claim seeking to have his non-compete invalidated on grounds of overbreadth. After four lengthy months, we prevailed and my client was able to take the job that - mercifully- had not been filled while the litigation was pending. For (mostly) tactical reasons, though, we initially aimed for another remedy - a preliminary injunction prohibiting the employer from attempting to enforce the non-compete agreement or interfere with any prospective job opportunities through threats of enforcement.

The trial judge denied my emergency petition, not on the grounds that such relief was automatically unavailable but rather on practicality. He did not feel the injunction, if granted, would cause the prospective employer to hire my client. My personal view on this is that the judge may have been correct; I'm still not sure. The issue, though, is not easily resolved.

We as lawyers are not guided by much in the way of precedent on this issue. I have located only four reported decisions approving of an injunction in the scenario I have just described: Brenneman v. NVR, Inc., 2007 U.S. Dist. LEXIS 12761 (S.D. Ohio Feb. 9, 2007), Bryan v. Hall Chemical Co., 993 F. 2d 831 (11th Cir. 1993) (Georgia), Caras v. The American Original Corp., 1987 Del. Ch. LEXIS 467 (Del. Ch. July 31, 1987), and a recent appeal (cite below) in New York, Frank v. Wesco Distribution, Inc. Because so few disputes arise in this procedural posture, I don't expect we'll see cases like Wesco Distribution all that often. But attorneys representing employees should be aware of them nonetheless.

As a practical tip, however, I would recommend that any lawyer seeking preliminary injunctive relief like this clearly define what he or she wants the court to do. Simply asking the court to bar an employer from "enforcing" a non-compete probably is too broad of a request and almost sounds like it is asking for a court to enjoin a future court proceeding (perhaps in a different venue or in a different court system). The better practice, it seems, is to request (in addition to this) that the court prohibit the ex-employer from interfering with a specific job opportunity or from representing to third-parties that an employee is barred from working on account of a non-compete agreement.

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Court: Supreme Court of New York, Appellate Division, First Department
Opinion Date: 12/22/09
Cite: Frank v. Wesco Distribution, Inc., 892 N.Y.S.2d 348 (N.Y. App. Div. 1st Dep't 2009)
Favors: Employee
Law: New York

In-Term Non-Compete Clause In Franchise Agreement Held Void (Atlanta Bread Co. v. Lupton-Smith)

There are two rules you can generally count on in most states:

(1) Non-compete clauses in franchise agreements generally will be subject to lower scrutiny than those in employment contracts; and

(2) In-term covenants are far less problematic than post-term restraints.

However, these rules do not apply when Georgia law is at issue.

In Atlanta Bread Co. v. Lupton-Smith, the Supreme Court of Georgia held that a covenant not to compete contained within a franchise agreement which barred a franchisee from acquiring any interest in another bakery/deli business while the agreement was still in effect failed to pass muster under the strict scrutiny standard applicable to employment non-compete agreements.

Effectively, the Court held there is no distinction in the test to be applied to covenants in franchise arrangements and employment contracts. Most courts would disagree - reasoning that no franchisor would enter into such a relationship unless its business goodwill were protected for a period of time following expiration of the agreement.

The aspect of the case that is even more unique is the lack of any distinction under Georgia law between in-term and post-term covenants. Clauses which bar someone from competing during the term of a franchise (or employment) contract are usually far less problematic, and are somewhat derivative of general agency or fiduciary duty law. In fact, some courts do not even consider them restraints at all.

In Georgia, there is no functional difference. To be fair, the Supreme Court was somewhat hamstrung in this case as past precedent set forth a fairly clear, well-established rule that in-term covenants followed the strict scrutiny standard applicable to post-term restraints.

As readers may know, Georgia statutory law has changed to allow for more equitable application of non-compete agreements, particularly the blue-pencil doctrine. Still, because Georgia's constitution bars the legislature from authorizing a restraint of trade, that new law may not be effective until some act is taken to amend the state constitution.

UPDATE X1: The Atlanta Journal-Constitution comments on the Atlanta Bread case here.

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Court: Supreme Court of Georgia
Opinion Date: 6/29/09
Cite: Atlanta Bread Co. Int'l, Inc. v. Lupton-Smith, 285 Ga. 587 (2009)
Favors: N/A
Law: Georgia

Georgia Case Highlights Strict Application of Blue-Pencil Rule (Global Link Logistics v. Briles)

Legal practitioners in Georgia may not see non-compete rulings like this for much longer. As reported extensively in Seyfarth Shaw’s blog, Trading Secrets, the Georgia legislature may be on the move with respect to recasting employee non-compete law.

The pro-employee bent to Georgia’s law deals with the blue-pencil rule; any overbroad provision can kill a non-compete agreement. From this practitioner’s viewpoint, some of the handwringing over the blue-pencil rule is way overblown. Lawyers responsible for drafting these contracts ought to be more pragmatic. If an employee has an overbroad contract, at least he or she has a predictable result should the agreement be challenged. The fluidity associated with the blue-pencil rule yields uncertainty.

In Global Link Logistics v. Briles, the employee's non-compete barred him from working for a competitive business for two years in any capacity whatsoever. It was this last part - the lack of any activity restriction whatsoever – that doomed his former employer.

In Georgia, like Illinois and many other states, a non-compete must be reasonable in terms of (a) time, (b) geography, and (c) scope of activity. As to the third reasonableness component, the non-compete should put some parameter on the type of work that is off-limits. Generally, if there is a reasonable nexus between the employee's actual job function and the restricted job classification in the non-compete, a court is likely to find it reasonable. Patently overbroad clauses that bar a wide range of job activities or a complete ban on working in an industry, however, won’t cut it under Georgia law or the law of many jurisdictions.

So Briles’ non-compete failed. The result was obviously correct. The better analysis for non-compete agreements is to put the employer under an obligation to draft it reasonably and suffer the consequences for shoddy work. If a blue-pencil rule is sanctioned by a court, it at least ought to have some bite - such as foreclosing the opportunity for damages or fee-shifting to the employer.

Conducting an analysis based on the rule of reason (itself an antitrust derivative) is more preferable than having have courts get wrapped up in the fact-intensive, expensive process of determining whether a legitimate business interest supports the covenant. That rule has led to inconsistent and, frankly, bizarre results.

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Court: Court of Appeals of Georgia, First Division
Opinion Date: 2/18/09
Cite: Global Link Logistics, Inc. v. Briles, 674 S.E. 2d 52 (Ga. Ct. App. 2009)
Favors: Employee
Law: Georgia

Georgia Legislature Considering Non-Compete Reform

Add Georgia to the ever-growing list of states intent on reforming non-compete laws.

In recent years, Idaho and Oregon have passed significant legislation, and Massachusetts is contemplating an outright ban on non-competes. Georgia is unquestionably one of the five most employee-friendly states in terms of non-competes - up there even with California and Montana.

A copy of the Georgia House of Representatives Final Report on non-compete reform can be found by clicking here. Seyfarth Shaw's blog, Trading Secrets, contains an excellent discussion of the legislative action down in Georgia.

Georgia Court Dismisses Computer Fraud Claim for Failure to Allege "Damages" (Andritz v. Southern Maintenance Contractor)

In 1996, Congress dramatically extended the reach of the Computer Fraud and Abuse Act by extending jurisdiction over any fraud claim involving a "protected computer", that is, one used in interstate commerce. The result has been a de facto federalization of trade secrets and unfair competition cases, whereby companies file suit against defecting employees in federal court for computer fraud, trade secrets and, often times, breach of a non-competition covenant. Because pre-departure activity frequently involves an employee's use of a computer - normally to access business information - CFAA claims are part and parcel of unfair competition cases these days.

Over the past several years, court decisions have begun to emerge out of federal district and circuit courts interpreting the reach of the CFAA. Many of those decisions involve the application of the statute's jurisdictional requirement that an aggrieved plaintiff show "damage" or "loss." Under the CFAA, "damage" has a specific meaning: "any impairment to the integrity or availability of data, a program, a system, or information that causes loss aggregating at least $5,000 in value during any 1-year period..." The "loss" component is even more narrow; it basically means damage assessment and data restoration costs. It also includes lost revenue from service interruption.

In a recent Georgia federal district court case, the court addressed an (a)(4) claim, known in legal circles as a claim for "unauthorized access with intent to defraud." The court held that neither "loss" nor "damage" can be interpreted to mean "lost revenue caused by the misappropration of proprietary information and intellectual property from an employer's computer." The Eleventh Circuit apparently has not opined on the issue, and the court granted the defendants' motion to dismiss under Rule 12(b)(6) for failure to state a CFAA claim.

This issue has a somewhat tortured history in federal court. Illinois cases out of the Northern District of Illinois yield conflicting results on whether impairment of data in the form of trade secrets theft is qualitatively the same as deleting or destroying that data. Other courts, including a district court within the Eleventh Circuit, hold that misappropration of such data constitutes legal impairment under the CFAA. The parameters of this statute continue to develop, often times with confusing results.

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Court: United States District Court for the Middle District of Georgia
Opinion Date: 1/07/09
Cite: Andritz, Inc. v. Southern Maintenance Contractor, LLC, 626 F. Supp. 2d 1264 (M.D. Ga. 2009)
Favors: Employee
Law: Federal