Case Law Update: Riding Circuit

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

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

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

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

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

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

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

A copy of the opinion is available here.

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

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

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

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

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

A copy of the opinion is available here.

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

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

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

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

A copy of the opinion is available here.

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

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

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

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

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

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

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

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

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

A copy of the opinion is available here.

Cleaning Up the Janitorial Mess

Somewhat predictably, the reaction to C&W Facility Services non-compete lawsuit against janitorial employee Sonia Mercado was swift and severe.

I wrote about this last week, offering my opinion on a number of different facets to this ill-advised lawsuit. This dispute got mention not just on the nerdosphere, but also mainstream outlets including the Financial Times and the Washington Post.

After the Post published its piece, Cushman & Wakefield (an affiliate of C&W) issued a statement withdrawing the case and apologizing to Ms. Mercado. It also offered to pay her the bonus she had given up in an attempt to avoid triggering the non-compete. Here's the apology:

"Following recent media reports related to the use of restrictive agreements with our janitorial staff, we have completed a review of the circumstances. While we do have restrictions with a select number of salaried managers, we have found that this policy was incorrectly applied in this instance. We are taking action to correct this situation. We sincerely apologize to Ms. Mercado. Restricting the employment of hourly workers is inconsistent with our policies and contrary to our values as an organization.”

There are two ways to view this. First, C&W may have just tried to pull a fast one and then issued an apology when it got caught in a media firestorm. That's probably the most plausible. Second, someone at C&W may have authorized counsel to take action without clearing it through the appropriate channels. That, too, is quite plausible. At least, that's the narrative C&W's statement seems to be trying to sell.

I maintain, as do others, that Ms. Mercado was never a real target. She was a pawn, used as part of a tactical gambit against C&W's competitor. (To continue the dorky chess analogy, she became a passed pawn ready to mate the other side until it resigned.) This happens far too often in non-compete litigation, when one individual gets caught in the crosshairs of a much larger message-sending dispute. Common or not, that is not an appropriate use of legal process.

In the end, it is at least gratifying that this story had a just ending to it. But it never should have been written in the first place.

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One noteworthy item. The Fifth Circuit, applying Louisiana law, has taken a narrow view of the preemption doctrine applicable to statutory trade-secrets claims. States that have adopted the Uniform Trade Secrets Act frequently confront the question of preemption. That is, when do other claims based on trade-secrets theft have to give way to just the statutory claim itself? The so-called narrow view is more in line with the text of the statutory preemption clause. In other words, a plaintiff cannot use another tort claim that invokes trade-secrets misappropriation. Common victims include conversion and breach of fiduciary duty. But as the Fifth Circuit held in Brand Services LLC v. Irex Corporation, claims based on misuse of confidential information that is not a trade secret do not fall within the preemption provision.

This is a textual reading of the statute, endorsing a narrow view of preemption and rejecting a more pragmatic approach favored by many courts.

The "Inevitable Disclosure" Non-Compete Clause: What is it and for God's sakes...why?

Leave it to lawyers to see an obscure, narrow, and disfavored legal theory and then try to drive a mack f**king truck through it like it's the next great revelation.

To what might I refer? Try a non-compete on steroids, one so hopelessly inane and stupid that, at first blush, it actually has some appeal. Until, of course, you analyze it and put more than three minutes of thought into what you're doing.

I refer to this unicorn (in the eyes of some) as the inevitable-disclosure non-compete, the intersection of obscurity and protectionism. Allow me to explain how this bad-ass of contractual clauses works (until it's declared invalid).

Start with the basics.

An agreement may have several different types of post-employment covenants that bind the employee. You have your standard non-disclosure clause, which limits for a period of time the use of confidential information the employee learned. Then you have your non-solicitation covenant, which may preclude work with a group of valuable clients or recruitment of co-workers.

Hard stop for a second.

Those two types of covenants have some legitimate uses. But lawyers must still draft them reasonably and with sensible scope and time limits, even if a geographical one isn't needed.

I continue.

Your agreement may even have a general, market-based non-compete that bars work in a relevant industry.

Hard stop again.

This type of covenant needs to be even more carefully tailored, given its broad economic hardship on the person agreeing to the covenant. It limits work, not a type of work or a narrow subset of work activity. Here, we need activity limits, probably a shorter duration, and in many (but not all) cases a geographic scope confined to the employee's or company's sphere of influence.

An inevitable-disclosure non-compete is profoundly different. It requires the employee to refrain from accepting employment that may require him to use, disclose, or rely on the employer's confidential information. This precise type of covenant recently was held unenforceable in the case of Sullivan v. Gupta, M.D., LLC, No. 2:17-cv-609 (E.D. La. Aug. 10, 2017), because it failed to comply with the requirements in Louisiana for enforceable restraints of trade. (Among other things, State law requires an identification of which parish the non-compete applies to, and this one didn't cut the proverbial mustard.)

This is by no means the first case to find that a stealth non-disclosure agreement constitutes a non-compete.

I have my own experience with agreements like this, and it hasn't been positive (except for the fact that we've won). I blogged a few weeks ago about our trial and appellate victory in Automated Industrial Machinery, Inc. v. Christofilis, 2017 IL App (2d) 160301-U, where the Second District affirmed a fee award for my client, the defendant, of nearly $1.5 million.

One of the issues in that case concerned a non-compete, which the trial court found invalid for lack of consideration. The Appellate Court affirmed that ruling. But it didn't discuss the terms of AIM's non-compete. Had we not prevailed on the consideration issue, we had a strong argument on invalidity (not to mention lack of breach, for which there was no evidence).

That agreement was a true inevitable-disclosure non-compete, and I reprint below the operative restriction, which is stunning in scope:

Pretty rough start when you call your non-compete clause a "doctrine of inevitable disclosure." Who the hell thought of that one? Way to be pedantic, and nice way to warm up to a judge.

Beyond that titular snafu, look at the terms. Just two low-lights to point out:

(1) It applies in perpetuity if my client "could not help but rely on or use...or would otherwise inevitably disclose Confidential Information." Who makes that call? How is that agreement one containing definite terms, a plain requirement under contract law?

(2) The employee must provide the company with, basically, a job description and then beg for permission to take it. And the company has 20 days to decide whether "such ...employment is prohibited under the doctrine of inevitable disclosure."

So a clause like this, patently unenforceable and overbroad, vests the employer with sole discretion in perpetuity to decide whether a particular position would require the employee to use its confidential information.

This violates every conceivable principle of non-compete law. No certainty at all. Vast amounts of discretion reserved to the employer to veto an employee's career choice. No time limit to speak of (beyond what the employer itself decides is appropriate). Economic protectionism, to be sure, is not a legitimate business interest.

Bottom line: You use an agreement like this, you deserve to lose. And you will.

The Reading List (2017, No. 20): Are Prince's Unreleased Songs "Trade Secrets"?

Non-Compete and Trade Secrets News for the week ended May 26, 2017

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The Trade Secret Status of Prince's Unreleased Recordings

Prince's death last year unleashed an unfortunate - and somewhat predictable - wave of litigation in his home State of Minnesota.

One lawsuit involves a claim of trade secrets misappropriation. The nature of the action? A sound engineer's possession of five previously unrecorded Prince songs. Prince's estate sued to enjoin the promotion and distribution of those recordings. The engineer signed a Confidentiality Agreement providing that any recordings were the "sole and exclusive property" of Paisley Park Enterprises, a corporation Prince owned while he was alive. The five songs were recorded and edited between 2006 and 2008, long before Prince's death. Around this time, the engineer had stopped working with Prince.

After Prince's estate learned that the engineer was planning to release one of the recordings, it sued and sought both possession of all recordings and a temporary restraining order barring their release. The court ultimately issued a temporary restraining order in favor of Prince's estate and Paisley Park. But the claim to trade-secret protection over the recordings failed.

Though the recordings themselves were kept secret, that alone was not enough to vest them with trade-secret status under Minnesota law. The court stated that "[n]o other artist or record company could take market share from Paisley Park Enterprises by discovering the contents of the disputed recordings." Though the recordings unquestionably had economic value, that value did not derive from their secrecy; rather, the value came from Paisely Park's exclusive right to sell them to the public.

Here is a link to the district court's opinion.

Stryker Wins Sixth Circuit Appeal

Back in February, I noted the significance of Stone Surgical LLC v. Striker Corp., at least in the sense that the Sixth Circuit appeal from a jury verdict raised an interesting choice-of-law question. The dispute centered on a non-compete with a Michigan choice-of-law clause. But the relevant conduct involved a Louisiana salesman who had Louisiana contacts. Given that State's pro-employee stance towards non-compete agreements, the employee (Ridgeway) had a good argument that applying Michigan law would violate Louisiana public policy.

But the Sixth Circuit - though acknowledging it was a fairly close question - found that Louisiana's interest was not materially greater than Michigan's. In other words, though Louisiana had an interest in protecting its residents from unfair and overbroad non-compete agreements, the court had to weigh the employer's interest in protecting its economic rights against a breach. And on that score, it saw no error in the district court's conclusion that Louisiana's interest was not significantly greater. The Michigan choice-of-law clause applied, and the jury's verdict against Ridgeway was upheld.

Here is a link to the Stone Surgical opinion.

Baseless Suits as a "Deceptive Trade Practice"

Defense strategies for fighting frivolous lawsuits generally are fairly limited. Counsel always have the ability to seek fees under Rule 11 or state-law equivalents if the suit is groundless. Most trade-secret statutes have "bad faith" fee-shifting clauses. Those are a tough sell in most suits. In other cases, business corporation act indemnity provisions may give rise to broad fee-shifting. And, of course, prevailing-party clauses that allow for winners to obtain fees may provide relief.

But are there other grounds for prevailing defendants to seek legal costs? The options are out there. I was interested to read an Order out of the Eastern District of Louisiana in a case called Byram Healthcare Centers, Inc. v. Rauth, No. 16-16854. In that case, the court allowed a defendant to counterclaim against her ex-employer for seeking to prevent her from working for a competitor. The legal basis? The state's Unfair Trade Practices Act, which allows a person to bring an action if she suffers "any ascertainable loss of money or movable property, corporeal or incorporeal, as a result of the use or employment by another person of an unfair or deceptive method..."

The gist of the opinion is that misuse of the judicial process itself can be a deceptive trade practice. Some state-law interpretations of the abuse of process tort would say, in essence, the same thing. But state trade practices statutes often provide for mandatory fee-shifting. This is a very creative use of state law by the employee's counsel to gain leverage in a case where the employer, even on a flimsy case, holds all the leverage simply because it is able to bear the cost of litigation.

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It's pretty hard not to read the New York Times and the Washington Post these days, a journalistic battle that illustrates the profound benefits of competition. But the NYT has gone well past all things Russia and has published a series of pieces concerning non-competition agreements. The latest comes from Paul Krugman in an opinion piece tilted "The Unfreeing of American Workers." This article discusses the shackling of employees due to the unreasonable proliferation of non-competes and the irrational linkage of health care to employment. Krugman even manages to work in a reference to Russia - noting American workers are "yoked to corporate employers the way Russian peasants were once tied to their masters' land."

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The Waymo-Uber driverless car technology fight continues to dominate the news. Jonathan Pollard takes an in-depth look at the latest developments, including Waymo's "loss" at not obtaining a broader injunction to stop Uber from pursuing its competing technology. In his usual candid style, Jonathan thinks Uber's lawyers are getting the better of their counterparts at Waymo.

For background on the man at the center of the trade-secrets case of the year, I recommend the Wall Street Journal profile on Anthony Levandowski and his rather unconventional tenure at Google.

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Russell Beck's Fair Competition Law blog discusses an amendment to the Texas Uniform Trade Secrets Act. The amendment does not allow for a trade-secrets injunction that prohibits a person from using his general skill, knowledge, and experience acquired during employment. That language helps, but it still falls short of what is needed - a clear ban on so-called inevitable disclosure injunctions.

Eric Ostroff has an excellent practical piece for lawyers who represent clients in trade-secrets suits. The gist: as an ethical matter, they probably need to encrypt e-mails that refer to the trade secrets. The American Bar Association's opinion on encryption only formalizes what a lot of us have been discussing for sometime, particularly given law firms' obvious status as targets for hackers.

Dechert has a lengthy analysis, in case summary form, of the Ninth Circuit's opinion in United States v. Liew. This matter arose of the conviction of Walter Liew under the Economic Espionage Act arising out of his theft of certain trade secrets of DuPont and his apparent agreement with the Chinese government to supply it with certain technology for titanium dioxide. Confirming the correctness of my decision never to eat Oreo cookies, titanium dioxide is the pigment that makes the center of the Oreo white. Almost as troubling as what Liew did.

Michael Starr of Holland & Knight discusses the Molon Motor case, about which I wrote last week, and its preliminary ruling that an inevitable disclosure claim withstood a defense motion to dismiss. Despite some scuttlebutt, Molon Motor does nothing to pierce the DTSA's ban on inevitable disclosure claims in the employment context. We lawyers tend to overread cases from time to time. The upshot is this: inevitable disclosure claims, even in States that recognize the theory, are incredibly hard to pursue and by no means give an employer a clear path to injunctive relief. Without some evidence of bad-faith conduct giving rise to an actual threat, they almost always fail.

The Reading List (2017, No. 9): The First Defend Trade Secrets Act Verdict Arrives

Non-Compete and Trade Secrets News for the week ended March 3, 2017

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Defend Trade Secrets Act

On February 24, 2017, a jury in the Eastern District of Pennsylvania rendered a verdict in favor of Dalmatia Import Group and against FoodMatch, Inc. under the Defend Trade Secrets Act. As of this posting date, the verdict is not available for viewing, but McDermott Will & Emery (counsel for plaintiff) reports that the judgment will exceed $5 million.

The case grew out of FoodMatch's product launch of what Dalmatia called a "copycat line of fruit spreads." FoodMatch previously had been a Dalmatia distributor in the United States but terminated that relationship and began its own competing line of products. FoodMatch also purportedly engaged Dalmatia's contract manufacturer, who apparently knew of the fruit spread recipes, to develop a competing product line.

The DTSA is largely consistent with state law in terms of the damages remedies available to aggrieved plaintiffs like Dalmatia. It is important to note, too, that this was not just a DTSA case; Dalmatia claimed counterfeiting under the Lanham Act. And though the case seemed to progress quickly to verdict given the DTSA's short history (it was signed into law on May 11, 2016), Dalmatia filed the case well before then and added the DTSA claim later.

Nevada Legislator Introduces Non-Compete Bill

Nevada made news last year for soundly rejecting the blue-pencil doctrine. This year, an Assemblyman has introduced Bill No. 149, which would limit non-competition agreements to a duration of 3 months after the end of employment. The bill further codifies the rule-of-reason analysis used by Nevada courts currently. If a company entered into an agreement with a longer, and therefore statutorily unreasonable, duration, it would be subject to a fine of up to $5,000.

The bill has been referred to the Committee and Commerce and Labor. A PDF copy of the bill is available here.

Fee Awards in Texas

Try making sense of this development. A Harris County, Texas jury awarded an employee nearly $200,000 in attorneys' fees after the jury found his ex-employer pursued a trade secrets misappropriation claim in bad faith.

But the same jury awarded the employer nearly $500,000 in attorneys' fees after finding the employee failed to comply with a confidentiality clause. It's hard for me to understand how to reconcile the two awards. A blog post further describes this rather contentious suit.

Overbroad Non-Competes in Louisiana

As I've discussed several times in the past, Louisiana has a very nuanced framework for non-compete agreements. Most importantly, non-competes must specify a parish or municipality where the restriction applies, and the employer must do business there. Courts have been strictly applying this language.

In Affordable Roofing v. Artigues, 2:16-cv-16872 (E.D. La.), a federal district court determined that a non-compete applying "in any state" where the employer conducts business was void. The employer conceded this but argued the employee in any event knew precisely where the employer did business. As is fairly obvious, such an interpretation would violate the plain language of the statute. A copy of the Order is available here.

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.

The Reading List (2017, No. 5): Plaintiffs and Courts Avoid the DTSA's Ex Parte Seizure Order

Non-Compete and Trade Secret News for the week ended February 3, 2017

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Defend Trade Secrets Act

I alluded to this case in my prior post.

But we have another federal district court case that discusses the Defend Trade Secrets Act and the ex parte seizure order. In Magnesita Refractories Co. v. Mishra, the court found that a temporary restraining order issued under Federal Rule of Civil Procedure 65, which mandated the seizure of a defendant's laptop, did not require the plaintiff to follow the process outlined in Section 1836(b)(2) of the DTSA.

This is about as in-the-weeds as you can get, but it reaffirms the much larger point: courts are going to issue TROs that have the same effect as the seizure order. And if that's the protocol, then the seizure order may - as I predicted - be more bark than bite. A copy of Judge Simon's ruling, which is truly for nerds like me, is available here.

Non-Recruitment Clauses

Tesla Motors has sued a director of its Autopilot program, Sterling Anderson, claiming misappropriation of "hundreds of gigabytes" of confidential information and improper solicitation of Tesla employees. The Complaint reads like a typical bad divorce between a key employee and a jilted employer, with some fairly serious allegations related to efforts to conceal electronic evidence and pre-termination "cloak and dagger" meetings to plan a competing venture. In California, where the suit is based, post-employment restrictions on soliciting employees are enforceable. That's the centerpiece of the contract claim.

The case is pending in Santa Clara Superior Court. A copy of the Complaint is available here. For a detailed news account, see this article in The Verge.

Sixth Circuit Appeal

The Sixth Circuit Court of Appeals this week heard oral argument in the case of Stryker Corp. v. Ridgeway, No. 16-1654. A jury in the Western District of Michigan entered a verdict in favor of Stryker in the amount of $745,000, which was based in part on Ridgeway's breach of a non-compete agreement. Among other things, the appeal raises a very important choice-of-law/choice-of-forum issue concerning Louisiana law. That state's law is very favorable to employees, but the district court did not apply it. (The district court ruling on the choice-of-law issue is at 2015 WL 5682317.)

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Russell Beck discusses in his Fair Competition blog post the renewed efforts at non-compete reform in Massachusetts. This has become an annual rite of passage. Seyfarth Shaw discusses the same proposals floating around the Massachusetts house and senate.

IPWatchdog has posted an article entitled How to Write Enforceable Non-Compete Agreements. This is a very nice, concise summary of employers' considerations in deciding whether and how to use restrictive covenants. A number of helpful quotes from some of my colleagues...

Other colleagues of mine, from Seyfarth Shaw, have posted their Top Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2016. This post is notably longer than my year-end list and gives a few more illustrative cases - particularly on non-competes and federal computer fraud claims.

Louisiana's Rather Unusual Non-Compete Exemption

My last post, and many other fine posts circulating in the blogosphere, commented on the White House's call to action concerning non-compete reform. That effort was a thoughtful initiative that should drive discussion at the state level for the foreseeable future.

Of all the areas of reform the White House suggested, the one that is relatively undefined is the idea that certain classes of workers should be exempt from non-competes altogether. The "public health and safety" language the White House used clearly is meant to include nurses and physicians, but there's very little meat on the bone beyond this very broad principle.

I can tell you one occupation that I believe the White House did not mean to include by way of a categorical exemption: car salesmen.

Yet, oddly enough, in Louisiana, car salesmen are indeed exempt - statutorily - from enforceable non-competes. Louisiana is a relatively exacting state when it comes to non-competes in the first place. But just how the legislature decided that car salesmen merited their own exemption is a true oddity. This week, the Third Circuit Court of Appeal held that a dealership could not circumvent the statutory language by claiming a former employee was performing sales management duties. In addition to relying on the plain language of the statute (and the clear legislative intent), the court noted that all sales employees perform at least some management duties.

I truly hope this is the last time I feel compelled to discuss the nuances and interpretations of this particular statute.

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

Be Careful When Drafting Geographic Restriction in Louisiana (In re Gulf Fleet Holdings, Inc.)

Louisiana is one of those special drafting states. Attorneys must proceed with great care when drafting the scope of a non-compete restriction by virtue of a strictly applied statute. Section 23:921(C) of the Louisiana Statutes provides that for a non-compete to be enforceable specific parishes or municipalities must be identified. Even if an employer conducts business throughout the state, a blanket prohibition on competing in Louisiana will be invalid.

It is settled law in Louisiana that an employer cannot enforce a non-compete in a parish where it does not conduct business. For employers that want to restrict post-employment activities, therefore, it is essential to be consistent and include in the non-compete agreement only those parishes where it can show demonstrable business activity.

If an employer chooses to be overinclusive and list, for instance, all parishes in Louisiana, this would not necessarily be fatal or render the covenant overbroad. Several courts, including a recent adversary proceeding in bankruptcy, have allowed an employer to engage in this practice and have blue-penciled the listed parishes where the employer does not engage in business.

Another twist, however: the operative agreement must contain a clause allowing for such severing of the covenant. Finally, if the covenant applies outside Louisiana, the restrictions must also list out the prohibited territories by county. So for instance, if an employer chooses to restrict business in neighboring Texas, it too must list each Texas county it considers off-limits.

Louisiana courts place a strange emphasis on over-technical drafting. It can certainly be argued that the practice of blue-penciling specific parishes or counties creates an incentive for an employer to be overinclusive and overbroad, knowing full well courts can strike specific locations without rendering the entire agreement unenforceable.

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Court: United States Bankruptcy Court for the Western District of Louisiana
Cite: In re Gulf Fleet Holdings, Inc., 2011 Bankr. LEXIS 1396 (W.D. La. Mar. 31, 2011)
Opinion Date: 3/31/11
Favors: Employer
Law: Louisiana

Debts Incurred for Violating Non-Competition Provision Usually Are Dischargeable (In re: O'Connor)

In most competition cases, a defendant's obligation to satisfy a monetary judgment entered against him or her may be impacted by the decision to file for bankruptcy.

As a general matter, contract debts are dischargeable. So, if an employee is found liable for breach of a non-compete contract and found to owe lost profits or liquidated damages to the ex-employer, he may be able to avail himself of bankruptcy law and avoid the obligation. It is likely in such a factual matrix that the debt would be discharged.

There are a few notable exceptions, however. If a damages judgment is rendered on a breach of fiduciary duty claim (which often is added to a non-compete case, depending on the pre-termination conduct), that would not be dischargeable as long as the trust relationship existed prior to the act creating the debt. Note that in some jurisdictions (e.g., New Hampshire) ordinary employees do not automatically owe a fiduciary duty to their employers. The test is usually whether the employee was in a supervisory or managerial capacity, but these are rare exceptions.

Another provision of the bankruptcy code provides for non-dischargeability in the event of a willful or malicious injury. No matter how much an employee intends to violate a non-compete, however, the question of malice in a contract claim is meaningless. There is nothing inherently wrong with breaching a contract, as long as the non-breaching party is made whole.

There is one interesting other exception to the non-dischargeability rule: a judgment of damages following a finding of contempt will not be dischargeable. Say, for instance, that a defendant breaches a non-compete agreement and is enjoined by order of the court (or, even by agreement) from further violating his or her contract. If that defendant subsequently competes in a way that violates the court order, any damages arising from the contempt proceeding are non-dischargeable under Section 523(a)(6). This rule applies to both temporary and permanent injunctions.

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Court: United States Bankruptcy Court for the Western District of Louisiana
Opinion Date: 9/30/10
Cite: In re O'Connor, 2010 Bankr. LEXIS 3475 (W.D. La. Sept. 30, 2010)
Favors: Employee
Law: Federal

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

Lack of Proximate Cause Fatal to Damages Claim in Breach of No-Hire Clause (Overland Solutions v. Christensen)

No-hire clauses, or those which prohibit ex-employees from enticing away former co-workers, are generally viewed as a less problematic restraint of trade in most states. In Louisiana, they do not even fall under the state'e non-compete statute.

The appropriateness of damages for breach of a no-hire clause, however, is a more vexing problem for employers. In Overland Solutions v. Christensen, the court found that the general manager of a premium audit services company violated a no-hire clause which prohibited him from enticing away co-workers for a year following his termination of employment. The defendant offered jobs to eight Overland employees and hired five of them within a year after he resigned from Overland.

At trial on the issue of damages, Christensen acted pro se and defeated the damage claims against him entirely. The problem for Overland was its presentation of the evidence: it simply could not show that the costs it claimed as damage components were incurred as a result of Christensen's solicitation of former employees.

Most notably, Overland claimed as damages the costs of training and replacing the solicited employees. However, it included in its damage calculation an array of fixed costs it would have incurred regardless of whether the solicitation ever occurred. On the issue of training pay, Overland's presentation of evidence was unconvincing because the costs it incurred in expending training pay was less than the salaries that would have been paid to the five employees who left as a result of Christensen's wrongful solicitation.

As a result, the court simply held the evidence was too speculative to support any kind of lost profits damage award. In cases involving breach of no-hire covenants, injunctions against further solicitation of employees seems to be the most widely available remedy. On this score, courts likely won't apply the injunctive relief to require a defendant from terminating someone who was wrongfully solicited and started work before the order of injunction is entered. So for that category of employees, a damage award would seem to be the most practical remedy.

But proving it is a different matter. Practitioners always must consider the exacting standards required by courts to satisfy an award of lost profits. The presence of multiple intervening causes and speculative evidence often reduce, or eliminate, lost profits awards in competition cases. For this reason, reasonable liquidated damages clauses should be considered to provide a remedy for breach of a no-hire clause.

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Court: United States District Court for the Middle District of Louisiana
Opinion Date: 8/21/09
Cite: Overland Solutions, Inc. v. Christensen, 2009 U.S. Dist. LEXIS 74601 (M.D. La. Aug. 21, 2009)
Favors: Employee
Law: Louisiana

Louisiana Court: No-Hire Covenants Do Not Fall Within Non-Compete Statute (CDI v. Hough)

Though frequently a target of derision, the Louisiana courts actually have churned out some interesting non-compete decisions of late. The latest construed a fairly typical no-hire clause, a covenant generally barring employees from soliciting co-workers for a period of time after termination. Courts have been all over the map with respect to these types of covenants. One example is Missouri, where an appellate court held that such covenants were invalid as a matter of law because they did not support a recognized business interest, namely that of maintaining a stable workforce. The legislature acted expeditiously to overturn that decision. Illinois, by way of example, is all over the board on these types of covenants.

In CDI v. Hough, the Court of Appeal had occasion to apply a no-hire clause to an amended statute of general applicability governing non-compete agreements. The employee contended it was an invalid restraint under the statute; the employer felt the statute was not applicable by its terms to a no-hire clause.

The employer came out ahead and was able to enforce the covenant.

Louisiana's statute generally prohibits contracts "by which anyone is restrained from exercising a lawful profession, trade or business of any kind." There are exceptions for reasonable non-competes, but those aren't relevant here. The italicized language is the key to analyzing a no-hire.

According to the court, a no-hire clause does not prevent anyone from exercising a lawful profession. It merely places a restriction on who that individual can solicit to join him. Though the dissent disagreed, the wording of the statute seemingly does not apply at all to no-hire clauses, which are generally the least troubling type of employment covenant (according to most courts, at least).

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Court: Court of Appeal of Louisiana, First Circuit
Opinion Date: 3/27/09
Cite: CDI Corp. v. Hough, 2009 La. App. LEXIS 457 (La. Ct. App. Mar. 27, 2009)
Favors: Employer
Law: Louisiana

Will Statutory Amendments Apply Retroactively to Non-Compete Agreements? It Depends. (Hixson Autoplex v. Lewis)

As of this writing, 16 states have statutes of general applicability concerning non-compete agreements. Several other states have much more limited statutory provisions which address, among other things, no-hire covenants (Missouri), non-disclosure agreements (Washington), and profession-specific non-competes (Delaware, Illinois, New York, Massachusetts, and others).

Legislation in this area is increasing, particularly as the economy flattens and employees conduct business across state lines. Idaho and Oregon have enacted major changes to non-compete law by statute in the last year or two, while Georgia is on the cusp of major reform. Though a bill was filed in the Illinois House of Representatives concerning non-compete agreements, that legislation did not make it past a first reading and the deadline has passed for it to be introduced and called for a vote during Regular Session.

Given the expectation that legislative activity will only proliferate in this field of law, a logical question is whether a statute should be applied prospectively or retroactively. Even then, the question arises as to what prospective application means to a contract that is intended to apply at a future point in time.

The Court of Appeal of Louisiana had occasion to consider this question in Hixson Autoplex of Alexandria v. Lewis. In that case, the employee, a car salesman, signed an industry non-compete with his dealership in 2005. A year later, the Louisiana legislature carved out car salesmen from the statute permitting narrowly tailored non-competes. (Parenthetically, this appears to be the only state granting a non-compete exemption to car salesmen. It is unknown why this lobby has enough influence in Louisiana to get such a law passed). In 2008, Lewis was terminated and accepted employment with another dealership in a prohibited territory under his contract.

The court held that the change to the non-compete law substantive, not procedural, and as a default rule, substantive changes in the law apply prospectively only. The dissent rightfully points out that the relevant inquiry could be considered the time of termination, not the time the contract was entered into. After all, the covenant only takes effect upon termination, and the sina qua non of a covenant is to protect the employer after the employee is gone. By the time Lewis was fired, the statute had been changed. Neither side had anything to gain by the contract prior to this date.

Generally speaking, a legislature's expressed intent will govern. A statute may very well provide that it is intended to apply to agreements entered into on or before a date certain, and that type of clause will govern. Absent such an expression, the substantive change in the law applies prospectively. But Hixson Autoplex, and in particular the dissent, notes the inquiry regarding prospective application of a statutory amendment is not as simple in non-competes as it is in other business transactions.

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Court: Court of Appeal of Louisiana, Third Circuit
Opinion Date: 4/1/09
Cite: Hixson Autoplex of Alexandria, Inc. v. Lewis, 2009 La. App. LEXIS 509 (La. Ct. App. Apr. 1, 2009)
Favors: Employer
Law: Louisiana

Ambiguous Non-Compete Agreement In Real Estate Broker’s Contract Found Unenforceable (Century 21 v. Lambert)

In some states more than others, employers have little room for drafting ambiguity, and even the smallest error can doom an otherwise enforceable contract. A dispute between a real estate agent and Century 21 in Louisiana illustrates the strict construction rule perfectly.

In Century 21 v. Lambert, the agent had a non-compete agreement which provided that she would “refrain from carrying on or engaging in the Real Estate Marketing, brokerage, sale or similar business to that performed by [Century 21] and also from soliciting customers of the broker within the parishes of Orleans, Jefferson, St. Charles, St. Tammany, St. Bernard and Plaquemines for a period of two years from the date [she] leaves the Broker’s company. This clause shall survive termination of this agreement and prohibits the engagement by [Lambert] in any business directly or indirectly which competes with that of the broker.”

Lambert left Century 21 to join Keller Williams, a competing brokerage. Though the realty office was situated outside the parishes enumerated in the non-compete clause, it appeared as though Lambert engaged in some advertising and limited sales activity within the proscribed territory.

The trial court found the last sentence of the non-compete rendered the entire clause unenforceable, and the Court of Appeal affirmed. The reasoning: presumably, that last sentence (bold-italicized above) purported to extend the non-compete term beyond two years, the maximum allowed under Louisiana’s non-compete statute. Due to a paucity of legal analysis, it is not entirely clear what the appellate court meant by this. But the only logical reading of the decision is that the phrase “this clause” refers not to the preceding and (predominant) sentence of the non-compete, but rather the last sentence concerning Lambert’s engagement in a competing business. If this is the court’s interpretation, then the second sentence would appear to stand on its own as a separate covenant and contains no temporal limit at all.

If this is not what the court meant, then the ruling makes no sense. It is customary for non-compete agreements to contain express language stating that the post-employment restriction survives termination of the agreement. That sentence does not purport to extend the term past two years for a breach. Rather, it merely clarifies that should the broker’s contract end, her non-compete obligations remain in effect.

Whether the ruling will be appealed or contested on rehearing remains to be seen.

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Court: Court of Appeal of Louisiana, Fifth Circuit
Opinion Date: 2/25/09
Cite: Century 21 Richard Berry & Assocs., Inc. v. Lambert, 2009 La. App. LEXIS 298 (La. Ct. App. Feb. 25, 2009)
Favors: Employee
Law: Louisiana

Louisiana Appellate Court Affirms Finding That No-Hire Clause Is Overbroad (Bell v. Rimkus Consulting Group)

The Louisiana case of Bell v. Rimkus Consulting Group has a long and tortured history, and generally speaking, appears to substantially favor the departing employees who sued their former firm seeking to have their rights under a customer non-solicitation clause declared invalid.

A recent ruling by the Court of Appeal of Louisiana further favors the employees and strictly applies an employee non-solicitation, or "no-hire" clause. These types of restraints of trade are receiving increased judicial scrutiny as employers attempt to prevent the poaching away of key employees. Courts have taken a number of different approaches in analyzing no-hire clauses. The general rule appears to be that, while the same are restraints of trade, they are not necessarily subject to the same rigorous analysis as customer non-solicitation or general non-compete covenants.

In the Bell case, the court upheld a trial court ruling, however, that a no-hire clause was invalid due to its overbreadth. The clause provided that Bell, following his termination, "will not, directly or indirectly, solicit, employee, or in any other fashion, hire persons who are, or were, employees, officers, or agents of the Company, until such person has terminated his employment with the Company for a period of eighteen (18) months."

The overbreadth of the no-hire clause was fairly obvious: it had no temporal limitation at all on Bell's conduct. As an illustration, if Bell waited ten years to approach a Rimkus employee for a new position, he would be barred from soliciting that person until he or she had left Rimkus' employment and was gone for at least 18 additional months. Put another way, the temporal limit was tied not to Bell, the party seeking to hire the employee, but rather to the employee being solicited.

The Louisiana court appeared to apply a conventional restrictive covenants analysis to the no-hire clause.

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Court: Court of Appeal of Louisiana, Fifth Circuit
Opinion Date: 1/13/09
Cite: Bell v. Rimkus Consulting Group, Inc., 2009 La. App. LEXIS 48 (Ct. App. La. Jan. 13, 2009)
Favors: Employee
Law: Louisiana