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.

Trump and the Terrible, Horrible, No Good, Very Bad NDA

Leaks from the Oval Office are nothing new.

But the media attention on leaks from this Oval Office has generated considerable buzz for a couple of reasons. First, President Donald Trump is, to put it mildly, unconventional and just plain odd. So anything leaked is grist for the media mill and sure to generate giggles. Second, both Trump himself and his minions flip out at any perceived slight that ends up in the media, no matter how peripheral it is to a substantive policy issue. This is kind of like the Streisand Effect. If they just  would move on to something that matters, few people would talk about the leak.

Normally, the remedy to dispense with a leaker in the executive branch is to dismiss the leaker. No surprise there. It happens. A lot. And let's be clear, leaking isn't a good thing. You don't have to like Trump to bash leaks. We can, and should agree, that they're bad regardless of political affiliation.

That, though, doesn't mean that we can just sanction whatever consequence comes of the leaks. And it certainly doesn't mean we can endorse punishment of people who've left and dished on the doings in the Oval Office.

On that score, Trump is doing something unprecedented. We know he is the first non-politician/non-military officer to run the Executive Branch. And we know that he loves confidentiality agreements from his time working in the private sector and just plain "working" in private.

So we really shouldn't be all that surprised that Trump has deployed a truly private-sector tool, the nondisclosure agreement (NDA), within the White House to stem leaks, no matter how trivial or silly they are in the grand scheme of things.

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I commented a week ago or so on LinkedIn that Trump's NDA for staffers was obviously unenforceable. I stand by that wholeheartedly. The Trump trolls were out, flooding my comments and email with nonsensical, grammatically challenged screed on topics that have no relationship whatsoever to the point I was trying to make. I guess that, too, was predictable.

A few other would-be apologists, probably too lazy to do their own work, demanded that I provide points and authorities for my conclusions. Apparently, common sense and that thing called the First Amendment were insufficient pillars for my post. Though I hate to indulge laziness or plain ignorance, I think the point is worth discussing in more depth.

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Let's revisit the basics of what apparently has occurred with the White House staff, much of which comes from an article in The Washington Post, a famous Trump target.

The Post obtained a preliminary draft of the NDA, which in all likelihood differs somewhat from the final version the White House demanded staffers to sign. What do we know about it? A few things:

1. The scope of the NDA is not limited to "classified" information (more on this below). Instead, it captures "confidential information" defined as "nonpublic information I learn of or gain access to in the course of my official duties in the service of the United States Government on White House staff,” including “communications...with members of the press" and "with employees of federal, state, and local governments."
2. The preliminary liquidated damages figure for a breach of the NDA was $10,000,000 per violation.
3. An enforcement clause, which appears designed to create standing, states: “I understand that the United States Government or, upon completion of the term(s) of Mr. Donald J. Trump, an authorized representative of Mr. Trump, may seek any remedy available to enforce this Agreement including, but not limited to, application for a court order prohibiting disclosure of information in breach of this Agreement.”
4. The non-disclosure restriction appears to last in perpetuity.

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I want to leave aside the problems with each of the four numbered points above just for a second. We need to step back and understand an overriding principle at work. People who work for the government serve the public. The information they obtain, with some limited exceptions, belongs to the public. And of course, they have First Amendment rights that those employees in the private sector do not enjoy.

Courts haven't really confronted public-sector employee NDAs before, but they have developed some principles that apply to the White House's agreement. Two are crucial to understand the legal question Trump's newest NDA raises. First, restrictions on the speech of governmental employees must protect a substantial government interest unrelated to the suppression of free speech. And second, the restriction must be narrowly drawn to restrict no more speech than is necessary to protect the asserted substantial government interest.

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I want to return to a preliminary point I made before.

Leaks are bad.

With Trump, I kind of like them in the way I like a beer when I get home. But speaking objectively for a second, we can assume the government can dismiss an employee who discloses information, either to confidential sources or brazenly with his or her name attached to the disclosure.

This is part of a balance that courts must strike in evaluating speech and restrictions on public-sector employees. We know from case law that not all regulation of speech is the same. The government can regulate what its employees say far beyond what it could regulate of the general public. No debate there.

This solves the question of whether Trump could fire, say, Kellyanne Conway, for spilling to a source at the Post. (Hypothetically, of course...). She would have no Section 1983 claim for violation of her First Amendment rights.

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The problem with Trump's NDA, though, is well beyond that non-controversial point about existing leakers. Trump is trying to coerce perpetual silence from current and former staffers through agreements that do run afoul of the First Amendment.

In some states, non-disclosure agreements must contain a reasonable time limit and also be reasonable in scope. A perpetual NDA in these jurisdictions is likely void on its face.

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Now let's look at the scope of information protected by the NDA. It captures nonpublic governmental information. There is no set of limiting factors that illustrate what this may be. But it goes well beyond classified or even confidential information.

Some case authority illustrates why this scope is patently unreasonable and an infringement on the First Amendment.

The most apt line of cases involves CIA pre-publication clearance contracts. Put simply, these are agreements that CIA agents sign and that allow the CIA to censor or screen classified material before an agent seeks to publish material about CIA activities in articles or books. Regulations define "classified" material  as information about military plans, foreign governments, or the (now familiar) intelligence "sources and methods."

Pre-publication agreements, and the government's efforts to censor classified material, have been upheld as a reasonable means to protect a substantial governmental interest. But the key to upholding these agreements is the presence of a particular, ascertainable standard that limits governmental discretion to censor in the first instance.

If the standards were too flimsy, then the censorship scheme would fall apart and violate the First Amendment. 

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When viewing the pre-publication clearance agreement line of cases against the current NDA, it's pretty obvious Trump's White House has gone way too far. The NDA, it appears, prohibits the disclosure of confidential information, not classified materials, along the lines of what a business may try to enforce in the private sector. No reasonable lawyer could claim that "nonpublic information" learned in a governmental job is akin to classified materials like foreign intelligence sources.

The NDA fails to satisfy the "narrowly drawn" test, for it captures random chatter in the White House among staffers. It would prohibit the disclosure of an ex-staffer's impressions of Trump's response to a phone call with a foreign dignitary. And it would also bar a former employee from telling the media that Trump ignored a warning not to say something on a phone call with Vladimir Putin. Even if all of this is "nonpublic" information, it is the ultimately information the public has a right to and should be able to see.

No substantial governmental interest would support such a sweeping NDA.

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The NDA of course suffers other problems, too. The liquidated damages clause is an unenforceable penalty designed to coerce compliance with the terms rather than predict likely loss. Indeed, it's not clear what financial harm could inure to the federal government if one ex-staffer published a book outlining the dysfunction within the Cabinet.

Any party enforcing a liquidated damages clause must show that the selected amount was reasonable at the time of contracting and contains some relation to damages likely to result. The enforcing party then also must show actual damages would be uncertain and difficult to prove. In some cases, NDA liquidated damages clauses have been upheld as reasonable. From what I've seen, the amount selected still has some evidentiary basis that enables a court to find it was a sound predictor of harm.

Of course, I have not found any case that upholds a liquidated damages amount approaching what Trump seeks in the NDA. But aside from the fact that it's unprecedented, there's a much bigger question at play. Who exactly is damaged? Trump is not a private citizen anymore. He holds an office as part of the public trust. If a staffer revealed damaging information about Trump's conduct in the White House, then this damages Trump only in one sense: the way the public perceives him. And it's not in a sense that is remediable the way Trump thinks.

Put another way, if the public learns accurate information that affects their perception of the President, then the disclosure actually confers a benefit on the federal government. It damages nothing about the institution itself.

Note again the distinction with the CIA pre-publication clearance agreement cases. Disclosure of nuclear strategies or intelligence sources can objectively damage the country regardless of who is in power. But disclosure of the President's behavior in the White House does not suggest the same kind of damage. 

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This gets to a final problem. Who exactly would enforce this NDA? The draft seems to give either the government or Trump the option. But again, this makes little sense. Trump personally does not have standing to sue an ex-employee for disclosing "nonpublic" information about his tenure in the White House. If a staffer leaks classified material, then that is a crime. But the idea of an enforcement action by Trump against someone he perceives as a disloyal leaker is not only unprecedented, but it completely ignores his status as a public servant.

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My advice to ex-Administration employees remains the same. Speak freely as long as you don't dish classified information. And by all means, do not worry about what you signed. 

The Reading List (2017, No. 29): Frivolous Litigation in the Northern District and Uber (Allegedly) Covers Up

Non-Compete and Trade Secrets News for the week ended December 1, 2017

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Another Dumb Lawsuit in Illinois

Sorry. I call it like it is. And this lawsuit was stupid. I've been waiting to write on it for some time, after the preliminary injunction order came out this Summer. But I've been busy. Now's the right time.

In an action filed in the Northern District of Illinois, a company called Cortz, Inc. sued an erstwhile acquirer of its business, Doheny Enterprises, Inc., and a purchasing manager named Tim Murphy? Why? Beats me. Here's the gist. And it should sound a familiar refrain for lawyers like me who see this kind of silly litigation nonsense every single week.

Cortz, a pool and spa products supplier, had a business with declining income. Doheny wanted to buy but was turned away. The parties had signed a non-disclosure agreement, which (like most in the transactional sphere) said Doheny couldn't hire Cortz's management-level employees for two years. Fair enough.

Enter Murphy. He was fired from Cortz after its eventual buyer, some outfit named Leslie's Pool Supplies, demanded a two-year non-compete from him. This was an entirely rational business decision to make for both. Leslie's saw a way to use market power and tie up a dude it felt might be key to its business. Rational, yes. Smart, maybe not. Murphy, to his credit, balked. He had been with Cortz for nearly 20 years, apparently had no ownership stake and no role in the sale, and all of a sudden some acquirer demands a non-compete. Murphy probably had a few sleepless nights, but good for him drawing the red line. Cortz (now a Leslie's subsidiary post-deal) fires Murphy. As was its right. Probably stupid, but whatever.

As one might imagine (you know, since there was a lawsuit), Murphy (out of work) hooked on with Doheny on a trial basis. Cortz then decides to sue, claiming this hiring violates the NDA's non-solicitation provision. (One almost can imagine the lawyers salivating over the prospect of potential work.) Cortz made that decision even though Murphy was not then employed by Cortz and even though Cortz made the business judgment to fire him. Of course, no one thought to draft the NDA in a way that covered past employees. But Cortz tried to make that claim during the litigation.

Big fail. Hard stop.

Judge Amy St. Eve, probably one of the top three district court judges in Chicago, had none of it, stretching no further than basic principles of contract construction. If you're going to draft a deal-based NDA with a restrictive covenant, damn sure better cover what you're trying to restrict. The linguistic gymnastics that Cortz tried to pull off here were not exactly compelling.

No judge should have any patience for this sort of after-the-fact hooha, in which a commercial contract party tries to use litigation to mulct an unambiguous agreement into one which they wish they had signed. (Doubtful, mind you, Doheny would have signed a naked restraint that barred its hiring of those not employed by Cortz. Why on earth would it do that?)

Nor was Judge St. Eve moved by Cortz's other claim, that Murphy used trade secrets of Cortz in negotiating vendor prices. (His prior job was purchasing, so apparently his knowledge of vendor costs was the motivating force here.) The factual basis for this claim, to be frank, is so hopelessly unintelligible that it might not be worth even reading it. (Still, if you care to do so, the link to the opinion is available here.)

Thankfully, the case was dismissed shortly after this injunction hearing. What exactly did Cortz get out of this? A totally silly lawsuit that probably cost it $150,000? For what gain? So it could thump its chest and blow off some steam? There's not a single fact in here suggesting financial loss much less an actionable claim of wrongdoing. Not one fact even hints at a threat of trade-secret misappropriation, or even opaque, intangible harm.

This is quite similar to two separate cases I've had this year, both of which ended unceremoniously in dismissal orders. One was a deal-based NDA where the plaintiff dicked around with the unambiguous language of a non-solicitation covenant during litigation, tried to twist it into something totally at odds with the plain terms of the agreement, and then suffered a quick defeat. The other was a case involving claimed trade secrets over knowledge of vendor costs - once again with no evidence of misappropriation. That case, too, ended quickly.

Knowing that other clients and lawyers have to defend such trifling drivel is something I can take comfort in. But it does not make it any more acceptable or tolerable. Cortz, and its counsel, are lucky this thing ended with no fee-shifting.

Waymo-Uber Litigation

Speaking of lawsuits gone bad, Uber's counsel did not have a good week.

In the trade-secrets trial of the century, Judge Alsup delayed the start of Waymo v. Uber indefinitely. The reason: Uber allegedly failed to disclose to Waymo evidence that suggests a corporate culture hell-bent on misappropriating trade secrets of rivals. It is never good, of course, when the judge tells you: "on the surface, it looks like you covered this up."

But so said Judge Alsup after a pre-trial evidentiary hearing that featured an ex-Uber employee named Richard Jacobs testifying about internal business practices at Uber that were, charitably put, shady. He testified, for instance, that Uber instructed employees to use disappearing chat apps and sent employees to bootcamp in Pittsburgh (of all places) and taught them how to impede and obstruct legal investigations.

The testimony, and forthcoming discovery, is highly relevant because it calls into question Uber's position that it has not used any of the allegedly confidential files taken by Waymo's ex-engineer, Anthony Levandowski, before he joined Uber. That said, Jacobs had no knowledge of Uber using any of Waymo's stolen files. Still, many trade-secrets cases are about circumstantial, not direct, evidence. And what Jacobs said certainly strengthens Waymo's case.

The sordid tale is making the rounds in all major news outlets. But I recommend The New York Times piece here and CNBC's coverage here.

The Reading List (2017, No. 28): Non-Compete Legislation Proposed in New Jersey and More Non-Compete Nonsense in Florida

Non-Compete and Trade Secrets News for the week ended November 24, 2017

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New Jersey Proposes Non-Compete Reform

New Jersey historically has been a strong non-compete enforcement state. In his terrific article Fifty Ways to Leave Your Employer: Relative Enforcement of Covenants Not to Compete, Trends, and Implications for Employee Mobility Policy, Norm Bishara concluded that New Jersey was the 7th strongest enforcement state.

As Russell Beck breaks down, though, pending legislation would alter New Jersey's place in the overall non-compete landscape. Russell runs through the particular changes that Senate Bill 3518 would make, comparing it to the annual non-compete debate in Massachusetts. I encourage you to jump to Russell's site and review the proposed list of changes.

Florida Court of Appeal Invalidates Non-Compete Injunction

Speaking of pro-enforcement states, Florida sits firmly atop the rankings. But employees are not without hope.

Last week, the Florida Second District court of Appeal in Salazar v. Hometeam Pest Defense, Inc., No. 2D16-4123 invalidated a non-compete injunction imposed on a "pest control technician." The employee's agreement prohibited him from engaging in "pest control, exterminating, fumigating, or termite control business" in five Florida counties after his termination. Salazar, it turns out, was fired. An apparently responsible, enterprising adult, he formed his own business after being tossed out of a job.

His employer sued and obtained an injunction in Florida state court. But the Court of Appeal vacated that injunction because the order failed to comply with clear procedural requirements for awarding this type of relief. It contained no findings at all. Whatever occurred in the trial court appears to be totally inexcusable. Leave aside the merits of this. If you represent an employer and seek injunctive relief, you must understand what the injunction order needs to say. I have had cases similar to Salazar. And it is shocking that this continues to occur.

On remand, I'd be interested to see how Hometeam Pest Defense articulates its legitimate business interest in preventing Salazar from working in his industry. The source of a potential client list for those in need of home pest control seems rather obvious...

You can link to the Salazar opinion by clicking here.

Confidentiality Agreements

Every day, we're witness to the unmasking of sexual harassment and misconduct charges leveled at media figures, politicians, and industry leaders. And the sad reality is that many claims are settled on the condition that the victim is muzzled by a confidentiality clause.

Elizabeth Tippett writes in the San Francisco Chronicle about the two principal uses of confidentiality agreements: ones signed at the start of employment and those signed as part of a settlement. And she rightfully questions how non-disclosure agreements (or NDAs) should not muzzle victims of abuse. I suspect we've reached the tipping point where these NDAs may face legislative scrutiny, at least when they relate to a public figure or use of public funds.

That subject matter is outside the scope of my expertise, but it's certainly an interesting and important one to follow as events unfold in near real time. I do think, however, there may be a spillover effect on the less newsworthy type of confidentiality agreement, the kind I tend to write about.

I have been writing for years that employment-based NDAs can operate like stealth non-competes. The general problem is three-fold:

1. The clauses contain open-ended, malleable terms that do less to define "Confidential Information" and more to reserve discretion for the company to label something confidential without repercussion.
2. Employees may have no way to monitor what information remains confidential and potentially protected once they are gone from a business.
3. The breadth of these clauses (including the lack of a durational limit) may enable an employer to state a colorable claim when competition arises and may open the door to expensive discovery.

Let me be clear: I am not subverting the current debate on sexual harassment-related NDAs in favor of this one. Both are important, but the use of NDAs in settlement agreements is far more troubling and deserves far more scrutiny. All I am saying is that practitioners should not just assume blindly that employment-based NDAs are perfectly legit. In many cases, they serve just as punitive of a restraint on fair competition as more overtly stated non-competes.

The Reading List (2017, No. 10): South Carolina Interprets Stealth Confidentiality Agreement

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

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South Carolina Non-Competes

The Court of Appeals of South Carolina issued a very interesting and important ruling on the oft-overlooked interplay between non-disclosure and non-competition covenants. The case is Fay v. Total Quality Logistics, LLC, No. 2014-1828.

In Fay, the Court of Appeals determined that an indefinite non-disclosure agreement operated as a stealth non-competition restriction, because it provided that if the ex-employee entered into a similar business as his employer and worked in a similar type of position, he would "necessarily and inevitably" use the employer's confidential information to perform his job. In other words, the agreement attempted to graft the devilish "inevitable disclosure" doctrine into a non-disclosure/non-competition covenant. Bad move. This contractual language in effect prohibited the employee ever from competing with his former employer. Under South Carolina's strict "blue-pencil" rule, the court couldn't modify the contract to add in a reasonable time limit. As such, it was unenforceable.

The concurring opinion offered the same conclusion, but first looked to Ohio law because that's what the parties agreed to apply to the contract. But even under Ohio law (which is more friendly), the indefinite non-disclosure agreement would be unenforceable. Fay represents yet another case in an emerging area: an employee's challenge of a broad non-disclosure agreement and arguing it operates as a stealth non-compete. You can read the opinion of the Court of Appeals by clicking here.

Proposed Amendments to CFAA

The Computer Fraud and Abuse Act has been amended many times since it first appeared on the scene in 1986. In reality, it needs to be rewritten or broken up into several different laws. But it's back on the legislative docket, at least if one Congressman has his way.

Rep. Tom Graves (R. GA) has proposed the Active Cyber Defense Certainty Act. The bill would allow victims of cyber-attacks to engage in limited defensive measures to identify and stop attackers. In essence, it's a bill that enables "hacking back" and formalizes that concept as a defense to prosecution for unlawful computer access. The text of the bill is available here.

The theory of hack-backs have generated a lot of debate among scholars in recent years, with some arguing that, even if legal, it could have dramatic unintended consequences in ensnaring innocent third-parties. It is often difficult to trace the source of a hack.

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In other news, a great deal of news is floating around about Waymo, LLC v. Uber Techs., Inc., the trade secrets case involving Google's self-driving technology. News reports first surfaced a few weeks ago about the claim that featured, at its core, the departure of Waymo manager Anthony Levandowski and the supposed downloading of nearly 14,000 confidential Waymo files. Waymo appears to have suspected misappropriation based on the erroneous e-mail transmission of a circuit board drawing, intended for Uber but delivered instead to Waymo. A copy of the Complaint, which features a claim under the Defend Trade Secrets Act, is available here. The "Introduction" sets forth the big-picture story and is a great example of persuasive legal writing.

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For those interested in the ex parte seizure order procedure available under the DTSA, this link contains the first ever federal court seizure order carried out. The case is Mission Capital Advisors LLC v. Romaka, No. 1:16-cv-5878 (S.D.N.Y.). The collateral costs of obtaining such an order are fairly high. Of note, the defendant in this case never was represented by counsel during the litigation.

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Finally, the U.S. Attorney's Office in the Middle District of Louisiana released a statement on February 16 that confirms the sentence of Brian Johnson for violating Section (a)(5)(A) of the CFAA. Johnson's guilty plea stemmed from his installation of malicious code on Georgia-Pacific's information technology system after G-P terminated his employment. The code resulted in significant damage to G-P's operations. Johnson will serve a 3-year prison term and must pay more than $1 million in restitution.

Deconstructing the Trump Campaign's Non-Compete Agreement

The inspiration for this post comes from Donna Ballman's terrific blog and her latest post today, titled "Trump Campaign Noncompete Agreements May Break Multiple Laws."

It probably comes as no surprise that Trump's noncompete agreement sucks and is woefully inadequate. Once you wade past the grammatical errors, the contract contains the typical, rote litany of promises not to disclose any "confidential information," not to disparage Trump, not to solicit anyone associated with Trump, and not to provide "competitive services. Absolutely no one is shocked that he has campaign workers sign these.

But given that this is not really a business agreement, and really a political one, let's try to apply some of the utterly inane provisions in this contract to the general legal principles we've come to understand.

1. The non-disclosure covenant. The longest provision of Trump's contract is a non-disclosure clause, which surprises absolutely no one. It has no time limitation, which is a red flag in many states and would render it unenforceable, for instance, against a campaign worker/volunteer in Illinois. (Incidentally, not sure who in the Trump campaign exactly signs this piece of paper, but given what we know, presume everyone.) The definition of "Confidential Information" is truly rich since it is circular in that it applies to all information of a "private, proprietary or confidential nature." Then it goes further and applies to information "that Mr. Trump insists remain private or confidential." With that qualifier, the mind truly reels. As you might expect, it gets better. If Mr. Trump so elects, confidential information can extend to "any information with respect to the personal life, political affairs, and/or business affairs of Mr. Trump." There are no carve-outs for information that is within the public domain so it may be hollow, but it is worth noting that Mr. Trump includes as non-exclusive examples of "Confidential Information" such idiotic categories like his relationships (a voter interviewed on Comedy Central?), alliances (Sarah Palin?), decisions (to build a wall?), strategies ("....."), and meetings ("Sept. 26 Debate against H. Clinton"). Unenforceable.
2. Non-disparagement. Predictably, this too is a real beauty. Trump requires that anyone working on his campaign never "disparage publicly" Mr. Trump. Hypothetically, if he is elected President and it's a disaster, a former campaign worker could not criticize his term in office. It also applies to any Family Member of Trump, including his children. So if you work on Trump's campaign, and Tiffany Trump's singing career does not go great, you cannot criticize her on Twitter. Unenforceable and non-sensical.
3. Non-solicitation. This one, actually, is hard to read. The Trump campaign has no customers, unless you consider a voter a customer. So it smartly leaves that term out. But a campaign worker may not solicit another worker "for hiring" until the campaign is over. So if you're a Trump campaign worker and meet another campaign worker, you cannot hire him/her for any type of work until the campaign is over, even if that work has nothing to do with politics. Unenforceable and almost incoherent.
4. Non-compete. The best for last. A Trump campaign worker cannot assist anyone for federal or state office besides Trump, whether for compensation or as a volunteer. Therefore, a campaign worker cannot contribute to a candidate for state representative. He or she cannot host an event for that person. He or she cannot put out a yard sign for that person. And he or she cannot seek to encourage another voter to vote for that person. Unenforceable and just plain idiotic.

On the upside, you get an arbitration clause, a favorable New York choice-of-law clause, and the possibility of fee-shifting if you prevail. Plus, and this is truly priceless, you get a piece of paper with the signature of the one and only "Donald J. Trump, President." Presumably, of his campaign and not the entire United States.

A copy of the Trump non-compete is available on my Scribd site here.

Contract Overreaching and the DC Circuit's Quicken Loans Decision

A great deal has been written about the D.C. Circuit Court's decision in Quicken Loans, Inc. v. NLRB. That case enforced the National Labor Relations Board's order striking down portions of an employment non-disclosure clause and related non-disparagement provision.

The court's strongly worded ruling, which can be found here, provides a template for how employer can get into trouble by trying to coerce certain behavior in the workplace - even if that workplace is not unionized. Indeed, the NLRB's foray into non-union activity is one of the more notable employment law developments over the past few years. Quicken Loans just brings together many of these policies in a judicial opinion from the nation's most important appeals court.

To take a step back, Section 7 of the National Labor Relations Act enables employees to engage in concerted activities for the purpose of collective bargaining. These guaranteed rights, so the reasoning goes, allow employees to communicate about forming a union and about improving the terms and conditions of their employment.

So how do non-disclosure and non-disparagement clauses fit into this equation? As for the former, many restrictions contain overly broad definitions of "confidential information." The Quicken Loans policy was no different; it prohibited use of non-public employee information and all personnel lists (including e-mail addresses, cell phone numbers, and the like). The court of appeals easily found that this type of information "has long been recognized as information that employees must be permitted to gather and share among themselves and with union organizers in exercising their Section 7 rights."

As to the latter - non-disparagement clauses - Quicken Loans stumbled when it barred employees from criticizing the company in any oral or written statement, including any internet postings. Calling this clause a "sweeping gag order," the court had little trouble concluding it too violated the NLRA. Its internal procedure designed to enable employees to redress complaints did not provide any kind of a safe harbor since it, by definition, forbade a public airing of grievances.

The Quicken Loans decision certainly underscores the need for employers to stop with the overreaching. Indeed, many of these paternalistic clauses find their way into employment contracts with almost no forethought. Lawyers who encourage corporate clients like Quicken Loans to load up on prophylactic policies often ought to consider what message is being sent and what precisely there is to gain.

As a general rule, then, employers should not be enacting policies, handbook statements, rules, or form agreements that do any of the following:

• Broadly define "confidential information" to include employee data of the kind typically needed for employees to communicate with each other about the terms and conditions of their employment;
• Bar employees from criticizing the employer;
• Prohibit employees from disclosing the terms of their employment, such as salary and benefits; and
• Prohibit employees from disclosing the terms of their restrictive covenants.

This last point is something I see quite often. Frequently, I see contracts that prevent an employee from revealing that she has a non-compete and what it says. I don't get this. Why? What's the point? Is it included because some lawyer read somewhere that it might be a good idea? Is that a sufficient reason?

Much of the law is, quite frankly, common sense. If it sounds off, it probably is. No doubt many management and employment attorneys are up in arms about Quicken Loans, but read it. The court speaks in somewhat caustic terms. You get the sense they're saying this wasn't a close case. Attorneys shouldn't run into the problems noted in Quicken Loans if they simply apply real-world experience and understand that not every remote unrealized fear needs to be embodied in a contract term. 

In Wake of Defend Trade Secrets Act Passage, a New Whistleblower Ruling Protects Employees

I cannot begin to wade into the commentary surrounding the passage of the Defend Trade Secrets Act, which officially became the law this week. The summaries of this new federal legislation are so numerous and sweeping that I am already too late to the game.

I would like to discuss, though, one provision of the DTSA which protects whistleblowers - those who may need to use or reveal company confidential information to expose fraud, illegality, or some wrongdoing. Section 7 of the DTSA now immunizes employees from civil and criminal liability if they disclose confidential or trade secret information to the government for reporting suspected violations of the law. I wrote recently about the DTSA's new whistleblower provision and how this obscure provision of the new law may result in employers avoiding federal court (at least for a while) during the law's honeymoon period). Mike Greco of Fisher & Phillips takes a deeper dive into the subject, which is worth a read.

Before the DTSA's enactment, the rub of any whistleblowing activity concerning trade secrets, no matter how legitimate, is the potential for a counterclaim. When whistleblowing activity results in litigation against the company, the company may fire back and claim that the disclosure of confidential documents to counsel or the government violates an existing employment non-disclosure agreement.

Two days before President Obama signed the DTSA into law, a federal district court in the Northern District of Illinois addressed the precise type of whistleblowing activity the DTSA is meant to partially immunize. In United States ex rel. Cieszyski v. LifeWatch Services, Magistrate Judge Schenkier dismissed LifeWatch's counterclaim against an ex-employee, Matt Cieszyski, for breach of a non-disclosure agreement.

Cieszyski took corporate documents as part of his pursuit of what is known as a qui tam suit under the False Claims Act. This type of action enables a private person to bring an action in the name of the government if that person has evidence that another has submitted a false claim to the government.

Judge Schenkier found that LifeWatch did not state a plausible claim for breach of the non-disclosure covenant after balancing the countervailing interests Cieszyski had in pursuing his action (which necessarily depended on the information in the claimed confidential documents). Critically, Cieszyski took what he believed was necessary and did not disclose the corporate information to any LifeWatch competitor. The key passage from Judge Schenkier's ruling reads:

"It is unrealistic to impose on a relator the burden or knowing precisely how much information to provide the government when reporting a claim of fraud, with the penalty for providing what in hindsight the defendant views as more than was needed to be exposure to a claim for damages. Given the strong public policy encouraging persons to report claims of fraud on the government, more is required before subjecting relators to damages claims that could chill their willingness to report suspected fraud."

(A "relator" is someone like Cieszyski who brings a qui tam action.)

Keep in mind that the DTSA's whistleblower provisions do not give employees a free pass to do what Cieszyski did. What Cieszyski did in limiting what he took was obviously smart. But an employer still can maintain a counterclaim against a whistleblower if the scope of his or her taking exceeded what was necessary to maintain the qui tam suit (keeping in mind the ex ante perspective used by Judge Schenkier) or if there was some separate disclosure of the documents outside the suit, such as to a competitor.

The Three Categories of Business Information

The Sixth Circuit Court of Appeals recently had the opportunity to assess the three categories of business information that are at the center of nearly all non-compete and trade secrets cases:

(1) Trade secrets;

(2) Confidential information; and

(3) General skills and knowledge.

The question that often appears in lawsuits is to what extent the law protects these three categories of information. As discussed in Orthofix, Inc. v. Hunter (and countless other articles and cases), the law generally answers the question in the following way:

(1) Trade secrets are protected in most states by statutes (and in a few by the common law), irrespective of any contractual agreement. They are protected under the law of property and of confidence.

(2) Confidential information is protected if there is a specific contractual arrangement in place to do so, and information that does not rise to the level of a trade secret still can vest the owner with legal rights based on contract law.

(3) General skills and knowledge are protectable only through a non-competition agreement, which must be limited in time, scope, and duration. Importantly, the skills and knowledge must derive from the employment relationship - not the individual's free-standing experiences.

***

Professor Orly Lobel has written that "[e]mployers have been going after employees for using what many courts have defined as general problem-solving abilities. In response, courts repeatedly struggle with separating trade secrets from employees' aptitude, mental and physical abilities, and skills." Talent Wants to Be Free (Yale Univ. Press), at p. 107. She notes several flash-points in the law, where courts have struggled and taken different views as to the three types of business information:

(1) Training (which some courts use as a justification for enforcing restrictive covenants);

(2) Negative know-how (or, the knowledge of what does not work); and

(3) Memorized or internalized information (the so-called "embedded knowledge" problem).

Coming up with a way to differentiate trade secrets and confidential information is not an easy task, but as a shorthand approach, trade secrets typically are used continuously in the operation of a business while confidential information tends to be more ephemeral and have a shorter shelf life.Though this question is difficult in its own right, the harder question may be coming up with an intelligible standard to divide confidential information from general skills and knowledge.

And it becomes more difficult when the subject "skills and knowledge" were developed on the job (as opposed to some pre-existing job experience). The Restatement (Third) of Unfair Competition provides only the following general guidance:

(1) Separating out general skills and knowledge from protectable business information is intensely fact-specific.

(2) Trade secret rights are recognized only in specialized information.

(3) Courts will assess whether the employee took some "physical embodiment of the information" with her.

Ultimately, the Restatement (and common sense) seems to suggest that if what the employer is trying to protect is central to the employee's marketability in general, then the information likely falls within general skills and knowledge. If, however, the employer is trying to protect something unique that others have been unsuccessful in developing, then legitimate trade secrets and confidential concerns arise.

In the Sixth Circuit's Orthofix case, the court addressed a common plus-factor that allowed the employer to retain rights to certain confidential information (without concluding the same was a trade secret). The employee who left took that information with him and apparently conceded that it would take months to recreate it. The value of this specific information to the employer, coupled with a physical taking, therefore removed it from the general-skills-and-knowledge category.

Illinois Revitalizes "Old" Rule Concerning Limits on Confidentiality Agreements

Attorneys in Illinois have assumed for many years that non-disclosure agreements do not need a time limit on them.

That assumption is now conclusively incorrect.

The genesis of the problem comes from the Illinois Trade Secrets Act, which provides as follows:

...a contractual or other duty to maintain secrecy or limit use of a trade secret shall not be deemed to be void or unenforceable solely for lack of durational or geographical limitation on the duty.

The ITSA passed the General Assembly in 1985, and after that point in time, a smattering of cases dealt with the reasonableness of non-disclosure covenants and seemed to endorse them without much analysis as to scope.

But in 1985, around the time the ITSA went into effect, a case called Cincinnati Tool Steel Co. v. Breed held that durational and geographic limitations are required for a confidentiality agreement. A few subsequent cases followed Cincinnati Tool Steel, but not many and the issue was rarely litigated.

(As a potentially interesting aside, "Cincinnati Tool Steel" was not some company based in Cincinnati, Ohio but simply took its name of the president, Ronald Cincinnati. Pardon me for being somewhat of an onomastic snob, but whenever I think of this case, I cannot help but be reminded of James Spader's portrayal of Robert California in The Office, a fantastically geographic-oriented surname.)

Two recent cases, though, have revitalized Cincinnati Tool Steel. In the Appellate Court of Illinois, the case of AssuredPartners, Inc. v. Schmitt (from October 26) held that an unlimited non-disclosure covenant, both in terms of its duration and in terms of the information that fell within the terms of the covenant, was unenforceable. In particular, the court warned that such a broad covenant drastically limited the employee's ability to work in the relevant industry because it prevented him from using any knowledge he gained while employed with AssuredPartners, despite his prior work experience in the industry and regardless of whether he gained that knowledge because of his employment.

The second case, Fleetwood Packaging v. Hein, comes from the Northern District of Illinois, where Judge Tharp invoked the rationale of Cincinnati Tool Steel to conclude a non-disclosure agreement that lacked a temporal and geographic scope was unenforceable. Responding to the argument concerning the ITSA clause cited above, Judge Tharp found that it only applied to contractual restrictions that limited the use of trade secrets - not confidential information.

The reasons for demanding limitations on non-disclosure covenants are sound and generally hinge on two policy rationales.

First, as AssuredPartners recognizes, the presence of a non-disclosure covenant that is unlimited in scope can have a drastic chilling effect and can raise the possibility that an employer will attempt to bootstrap what should be a narrow restriction into a much broader non-compete that the parties never signed. Just as problematically, the relatively undefined nature of confidential information (which by definition is at least partly subjective) can leave an employee twisting in the wind if she stays in the same industry as her prior employer (which most employees do).

Second, it is awfully difficult (if not impossible) for an employee to know what remains confidential after she has left. Much ephemeral business information can lose value quickly. If corporate strategies shift, then a strategic plan that is a few years old may be of no use to anyone. Only insiders should know what remains confidential. Those who no longer are providing services to a company have no reason to know whether certain information retains some confidentiality. Therefore, it makes sense to require some reasonable limit on scope so that an employee is not left uncertain as to what she can disclose about her past work.

Allowing unlimited agreements to protect trade secrets, while certainly a fine distinction, is consistent with public policy. The challenge, of course, is to parse viable trade secrets (which should be more specific and more obvious) from general confidential information  (which likely is categorical and less obvious).

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.

Inevitable Disclosure Doctrine Inapplicable to Contract Damage Claims

As readers of this blog may know, the "inevitable disclosure" doctrine is a theory of trade secrets misappropriation.


A plaintiff need not show either actual or threatened misappropriation if it can prove that it's inevitable a defendant either will use or disclose trade secrets. In many competition cases, a plaintiff asserts an inevitable disclosure claim in tandem with breach of contract claims. For remember that most employees who join a competitor (and who are worth the expense of a lawsuit) probably have some sort of non-disclosure agreement.

This raises the issue of whether a plaintiff can use the inevitable disclosure doctrine to prove breach of contract. There are relatively few cases that seem to address the issue, although the logical answer seems to be "no." The better way to apply the inevitable disclosure doctrine is to use it as a means to seek preliminary injunctive relief, as a recent Arkansas federal district court did.

In Nanomech, Inc. v. Suresh, the court rejected the plaintiff's effort to extend the inevitable disclosure doctrine to a breach of contract claim for damages, stating:

"The doctrine has only been applied in Trade Secrets Act cases, particularly where plaintiffs have alleged the 'threatened misappropriation of trade secrets,' a discrete violation of the Act that is inherently speculative in nature."

When asserting a claim for damages, it makes little sense to use the inevitable disclosure doctrine. Damages presume that some wrong already has occurred and caused an economic loss. If disclosure of trade secrets is merely "inevitable," then it's illogical to conclude the plaintiff incurred a loss. By definition, the wrong would not have occurred. Rather, the only use for the doctrine would appear to be securing injunctive relief.

This raises a related issue. Many times a non-disclosure covenant will be written in such a way as to bar a threatened disclosure of confidential information. In this circumstance, a plaintiff - faced with imminent disclosure - probably doesn't need to wait until actual breach and can instead sue on the contract. However, it's easy enough to just allege a violation of the contract, along the lines of anticipatory breach, for pleading purposes. Too, until such time as there is an actual disclosure, a plaintiff's request for a remedy should be limited to an injunction.

New Jersey Non-Compete Bill Follows Maryland Lead - And Then Takes It a Step Further

In January, I discussed Maryland's proposed Senate Bill 51, which (if passed) would ban certain non-compete agreements if an employee was deemed eligible to receive unemployment benefits.

I offered my take on why this bill was fatally flawed. This is nothing more than another example of intrusive legislative meddling with absolutely no concern for the unintended consequences likely to result in day-to-day practice.

At least three Assemblymen from New Jersey have taken an even further step, proposing A3970, a bill that would ban a broader range of business protection covenants when an individual is deemed eligible for benefits under the state's unemployment compensation law. Incredibly, the proposed bill is not limited to general market-based non-competes, but also extends to any kind of non-solicitation covenant and even non-disclosure agreements.

New Jersey's unemployment compensation law is very similar to those in other states, in that an employee is generally not eligible to receive UC benefits if she voluntarily quits her job or is terminated for misconduct. Some states - like Maryland - have broader definitions concerning eligibility. "Misconduct" is very fact-specific and could, in many cases, cover the type of pre-termination conduct (e.g., theft of data, solicitation of accounts) that gives rise to competition suits.

For more on A3970, read the fine post from Seyfarth Shaw here and an interesting online article from NJBIZ.com here. The latter post discusses the exact point that I made in January when discussing the proposed Maryland legislation: the bill encourages companies to fight unemployment claims when they otherwise wouldn't. This is the law of unintended consequences at work.

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

Supreme Court of South Carolina Addresses Validity of Invention Assignment Clause

Cases addressing invention assignment clauses are few and far between. But 2012 has produced two state supreme court decisions in this area of intellectual property law. Earlier this year, Wyoming addressed the matter, and now South Carolina has.

I have discussed this subject infrequently, but assignment clauses often intersect non-compete law. In essence, they provide that any inventions (patentable or not) that an employee develops in association with her employer are the property of the employer. The only real controversial element of these clauses is the holdover or trailer aspect of them - which are found, I'd say, in about half the contracts I've seen. Those holdover clauses bear some passing resemblance to a post-termination non-compete, as they require an employee to assign inventions if they are developed within a period of time - usually 6 months or a year - after termination.

The purpose of holdover clauses is fairly obvious. Assume an employee in product development is working on a rollout of new smart phone technology, whose planned launch is several months away. If she leaves and starts development of a product based on that same technology, an assignment clause without a trailer may not capture this invention. The holdover clause creates a disincentive for an employee to delay or hide work on a technological development, because presumably the employee knows the trailer clause won't allow her to lie in the weeds and exploit it after termination. One can also look at a holdover clause as an extension of an employee's duty of loyalty, in effect providing a remedy in contract for improperly exploiting valuable commercial information after departure.

The Supreme Court of South Carolina in Milliken & Co. v. Morin held that holdover clauses were not restraints of trade subject to the traditional three-part rule of reason. More importantly, they are not strictly construed against the employer. Still, because there is potential for overreaching and for holdover clauses to restrict some competition, courts will assess whether they're reasonable. It's difficult to distinguish between a more lax test of reasonableness (applicable to clauses like an invention assignment holdovers and even non-disclosure covenants) and a three-part rule of reason (applicable to non-competes). In fact, the test that the Court in Morin established sounds almost identical to the non-compete test.

Practically speaking, courts will simply check to see what the economic impact of the holdover clause is on the marketplace. If it looks and acts like a more expansive non-compete, such as a term that is too long (say 5 years) or a clause that is too vague so as to not put someone on notice of its scope, then a court more likely will apply a strict scrutiny test. If the clause looks commercially reasonable and designed to protect an employer's inventions, then a simple reasonableness check almost certainly will uphold the covenant.

--

Court: Supreme Court of South Carolina
Opinion Date: 8/1/12
Cite: Milliken & Co v. Morin, No. 27154
Favors: Employer
Law: South Carolina

Hewlett-Packard Suit Against Hurd Raises Issues Concerning Inevitable Disclosure, Trade Secrets Identification

Within a day of learning that ousted Chief Executive Officer Mark Hurd accepted employment with Oracle, Hewlett-Packard was in court claiming that Hurd's employment with Oracle will necessarily result in disclosure of H-P's trade secret information.

The suit is pending in California state court, meaning H-P will have an uphill battle to prevent Hurd from working for Oracle. California has a long-standing public policy that invalidates virtually all non-compete agreements. Hurd's several contracts with H-P do not contain any non-competition obligations, but rather purport to prevent disclosure of H-P's trade secret and confidential information.

California also has rejected the "inevitable disclosure" doctrine of trade secrets misappropriation, meaning H-P must allege that Hurd has actually misappropriated, or threatened to misappropriate, H-P's secrets in working for Oracle. The Complaint carefully avoids using the term "inevitable disclosure", but does allege that Hurd accepted "a position which will make it impossible to avoid disclosing or utilizing H-P's trade secrets or confidential information." H-P makes this allegation in the context of a "threatened misappropriation" claim, but identifies no specific threat by Hurd or anyone at Oracle apart from his acceptance of employment in an executive capacity. The defense certainly could attack the Complaint on the basis that it is a thinly veiled inevitable disclosure case, a theory not recognized under California law.

California also has a statutory provision requiring the plaintiff in a trade secrets action to identify with reasonable particularity the trade secrets it claims a defendant has misappropriated prior to taking discovery of the defendant. That, too, will be an issue in this case.

The Complaint alludes to categories of information that may be at issue in the suit. In particular, H-P seized upon public comments attributable to Hurd regarding Oracle's servers, which compete directly with server products from H-P's Enterprise Business group. In addition, H-P alleged that Hurd had access to "pricing, margins, customer initiatives, allocation of resources, product development, multi-year product, business, and talent planning, and strategies being used by H-P."

As is typical of trade secrets complaints, the categories of information at issue are broad and for obvious reasons do not reveal much. I would expect Oracle to fight over the identification of those trade secrets truly at issue in the case.

Regardless of whether the case settles quickly (as often happens in these types of departing executive cases), the one-time partnership between Oracle and H-P appears to be irretrievably broken as the two companies now compete directly for business hardware services.

Over Half of Departing Employees Compromise Proprietary Data, Study Finds

Does that statistic surprise you? Research conducted by the Ponemon Institute, which was compiled in June of 2009, indicates that, in fact, over half of all employees compromise their employers' confidential information when leaving. The most surprising part of this study was that the data was compiled by interviewing the employees themselves.

Over two-thirds of survey respondents admitted to transferring confidential business information on to a USB memory stick. Almost 90% of those respondents admit that their company forbids such a practice. Over half of respondents admit to accessing web-based e-mail from workplace computers, but most employees don't believe that company policy prohibits that conduct.

My experience is that in larger, more sophisticated organizations, corporate policies concerning transfer of data to portable media, and access to web-based mail, are much more clear and widely disseminated among the employee ranks. In smaller organizations, security measures still have not caught up. It is routine for companies to allow, either implicity or explicity, documents to be shuffled around via USB drives or to be sent via web-based e-mail.

The advent of new technology, and evolving means by which it is moved, means employers need to start revising non-disclosure agreements and trade secrets policies. If certain security measures are not explicitly outlined, employees often will claim ignorance (sometimes rightfully so) about migration of data.

From an employee's perspective, little more needs to be said than what has not already been written about 100 times here. If you transfer documents to a USB stick or e-mail lists to your Gmail account, it will be traced and discovered.

Restrictive Covenants Tied to Stock Option Grant Subject to Lower Scrutiny (The Selmer Co. v. Rinn)

Traditionally, courts will analyze restrictive covenants under two tiers of scrutiny. Those covenants incidental to the sale of a business are subject to a common law rule of reason, while those tied to employment are governed by a stricter standard of scrutiny requiring the courts to examine certain other factors (which vary state-by-state).

But not all employment-related covenants merit strict scrutiny. For instance, an employment contract given to the seller of a business who stays on to assist the buyer likely will be judged under the rule of reason since it was given in connection with the underlying transaction. And even some higher level executives will have their covenants examined with a less exacting standard of review in some states given their pervasive exposure to confidential information.

Another example is one I have written about before: covenants extended in the context of a stock option grant. The law is not uniform on this, but the prevailing sentiment is that covenants which are part of a stock option award agreement will be adjudicated under the less stringent rule of reason rather than the traditional employment standard.

The Wisconsin Court of Appeals held as such in a recent case and articulated the reason behind why courts traditionally are not as likely to invalidate such covenants:

"...[U]nlike typical restrictive covenants, upon which a prospective employee's position may depend, there were no consequences attached to [the employee]'s refusal to accept the agreement. The circuit court found [the employee] was not pressured to sign the stock option agreement, nor was his employment conditioned upon his doing so. Indeed, the circuit court found [the employee]'s refusal would not have affected his employment in any way." In fact, the evidence in the Wisconsin court's case revealed the employee quadrupled his investment in company stock by accepting the agreement's benefits.

The Wisconsin court obviously reached the right result, as covenants executed in exchange for participation in an incentive program are not compulsory and are intended to align the employee's goals with the long-term best interest of the company. In fact, that case did not even deal with a traditional non-compete agreement, but rather applied only if the employee solicited firm clients or disclosed confidential information of the employer.

It is somewhat of a mistake to call the two tests used by courts as the "employment test" and the "sale of business" test. They are not limited to such confining topics. It is more appropriate to say generally that covenants that are part of an adhesive agreement are subject to strict scrutiny, while those which are the product of a bargained-for-exchange are governed by a rule of reason.

Covenants in the latter group almost certainly include those in a franchise agreement, operating or shareholder agreement, settlement agreement, or incentive plan award agreement. It might even include covenants tied to long-term employment contracts for high-level executives, though the law on this is not particularly well-developed. The former group normally will be found in most employment or independent contractor agreements.

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Court: Court of Appeals of Wisconsin, District Three
Opinion Date: 7/13/10
Cite: The Selmer Co. v. Rinn, 789 N.W.2d 621 (Wisc. Ct. App. 2010)
Favors: Employer
Law: Wisconsin

Revised Federal Pleading Standard Heightens Plaintiff's Duty to State Claim (US Bank v. Parker)

Lawyers are accustomed to lax pleading standards available to them in federal court. While discovery and pre-trial obligations are far more exacting, getting a claim to survive the initial pleading stage has never been perceived as that difficult.

However, after the recent Supreme Court decisions in Twombly and Iqbal, that perception is changing.

Those decisions held that simply reciting bare elements of a cause of action and surrounding them with mere labels and conclusions would not allow a plaintiff to survive a motion to dismiss a complaint. Instead, the complaint had to plead enough facts to make a claim factually plausible.

This standard can impact non-compete cases, particularly when the plaintiff may have a reasonable suspicion that a departed employee is violating a post-employment obligation but little in the way of actual evidence.

In a recent case out of Missouri, a federal district court held that Twombly and Iqbal require allegations beyond those qualified as "upon information and belief." The court in US Bank v. Parker found that the plaintiff's sole allegations of breach were all made upon information and belief and contained no facts that would render them plausible.

The case highlights the problem employers often face when deciding whether to pursue a claim for unfair competition: the information gap. For employees who have left no paper (or digital) trail of their post-competitive plans, an employer must have some means to discover wrongdoing. Particularly when there is only a non-disclosure or non-solicit covenant at issue, the employer will need evidence, not just belief, that documents have been taken or are missing, or that protected accounts have been solicited.

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Court: United States District Court for the Eastern District of Missouri
Opinion Date: 7/9/10
Cite: US Bank Nat'l Ass'n v. Parker, 2010 U.S. Dist. LEXIS 68324 (E.D. Mo. July 9, 2010)
Favors: Employee
Law: Federal Rules of Civil Procedure

Motorola At It Again In Trade Secrets Dispute Against Ex-Vice President

Motorola has not been shy about litigating unfair competition cases. The latest installment involves David Hartsfield, an ex-Vice President of Product Management for the Leadership Category for Mobile Devices. Motorola filed suit in Illinois state court after Hartsfield left to assume a new position at Nokia, presumably occupying the same space in the global CDMA market as his ex-employer.

The action has now been removed to federal court. Motorola is seeking to have a court issue a temporary restraining order that prevents Hartsfield's employment at Nokia altogether. There are a few interesting elements to this case. First, Motorola's claims are not based on the non-compete provisions contained Hartsfield's restricted stock agreement with Motorola. Instead, the claims revolve around his non-disclosure obligation contained in an Employment Agreement. Second, Motorola has invoked the inevitable disclosure doctrine, claiming Hartsfield cannot help but disclose certain proprietary secrets of Motorola in his new position at Nokia.

On this score, Motorola may have a few problems. First, its briefing on the TRO petition does not specify the secrets at issue. Instead, it lists broad categories of information that Hartsfield had access to while working at Motorola. This is always problematic when pursuing a trade secrets-based TRO, as courts demand that the actual secrets be particularized at some point. It is possible Motorola intends to disclose them in camera at a TRO hearing, but the pleadings at this point are fairly limited in scope.

Second, it appears Hartsfield moved to California, which has a strong public policy against non-compete restraints and which has not adopted the inevitable disclosure doctrine. The removal petition filed by Hartsfield goes to great lengths to note that Hartsfield is permanently relocated to California and is domiciled there. It remains to be seen whether Hartsfield invokes some public policy argument in defense of the suit, or seeks to have a new suit for declaratory relief filed in California. In the pleadings filed to date, he hasn't made an issue of this.

This case bears some hallmarks of one of last year's most high-profile non-compete cases, EMC Corp. v. Donatelli. In that case, Donatelli - a Vice President of EMC's Storage Division - took a job with Hewlett Packard in California and filed an action on his own in California court seeking to enjoin enforcement of his non-compete. When EMC fired back with its own suit in Massachusetts, the court there was decidedly unimpressed with Donatelli's effort to "escape" his contractual obligations by fleeing to California and imposed a broad injunction barring him from commencing work with HP.

The case involving David Hartsfield could involve the same issue - if Hartsfield decides to raise it. The suit now rests in federal court before Judge Norgle, who will decide on whether Hartsfield can continue work for Nokia.