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.

Much Overdue Case Law Update, Part II

This week, I offer my second case-law update, highlighting a variety of cases from around the company on topics of interest.

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Indiana Court Affirms Nationwide Non-Compete Agreement

Last Friday, the Court of Appeals of Indiana addressed the enforceability of a nationwide non-compete agreement for an engineer in the glass container business. The facts follow a typical pattern and deal generally with a senior-level engineer's move from Ardagh Glass Containers to Owens-Illinois. (As an aside, my paternal grandfather worked at Owens-Illinois for something like 35 years, during which time he consumed approximately 364,000 unfiltered Camel cigarettes working the assembly line, kind of a poor man's Don Draper in this respect.)

The employee's non-compete barred his work anywhere in North America and covered products over which the employee contributed development knowledge. The Court of Appeals, applying Pennsylvania law, enforced the non-compete, reasoning that both Ardagh and Owens competed nationally for the same type of customers. The court also remarked on a few typical facts in enforcing the preliminary injunction: (1) the employee's lack of candor on a few important facts that pertained to consideration and his "paid-leave" status at Owens-Illinois; and (2) the employee's lack of urgency in contesting the preliminary injunction and the appeal.

Of greater concern was the court's breezy trade-secrets analysis, which seemed to excuse an improper trade secrets identification at trial. The court all but found the injunction order was too broad in finding that Ardagh Glass identified 16 categories of trade secrets that were at risk. And it found Ardagh Glass would need to do better at a permanent injunction hearing. But the court was not engaged at all in assessing whether the at-risk secrets were actually "threatened" from misappropriation.

A link to the Court of Appeals' decision in Vickery v. Ardagh Glass Inc. is available here.

Forfeiture-on-Termination Clause Found Unenforceable

This one is crazy.

Kelley Rieves took a job as an assistant manager at Buc-ee's - a convenience store chain in Texas. It was at that point that Buc-ee's and its cadre of lawyers foisted upon her a historically stupid agreement. Rieves had the ability to decide how she was going to get paid - but it had to be a split between hourly wages and a flat monthly amount.

The catch? The flat amount had to be repaid to Buc-ee's if Rieves (at at-will employee) left within 5 years and didn't give 6 months' notice. This is known (by me) as the stick-without-the-carrot approach. Rieves and Buc-ee's re-upped a year later with a similar arrangement. Rieves, of course, left before the 5-year period ended and filed suit to declare the repayment provision unenforceable. Somehow, Buc-ee's convinced a state court judge to enter an award for payment of the entire amount owed (less taxes) under the contract's repayment clause.

Rieves appealed and, mercifully, won. Common sense prevailed. The reason? A repayment clause inhibits employee mobility. And unless the contract is consistent with non-compete law, it's unenforceable. The salary disgorgement provision, here, was totally unlike a prototypical forfeiture clause that would, for instance, cancel unvested stock options if the employee leaves to compete. Instead, it had no connection to incentivizing the employee's future performance, imposing an illogical and disproportionate penalty on an at-will employee's election to find a better job.

Buc-ee's should be publicly shamed for requiring Rieves to sign such a manifestly stupid agreement. For now, at least we have a public opinion - available here - that will prevent any sort of spurious litigation like this in the future.

Federal Circuit Affirms $91 Million Trade Secrets Verdict

In an unpublished ruling, the Court of Appeals for the Federal Circuit affirmed a $91 million trade-secrets verdict arising out of a business transaction gone wrong in the mitral-valve implant market. The particular invention at issue in that case arose after Neovasc sought to collaborate with CardiAQ and provide CardiAQ with ancillary products. During the course of their relationship, Neovasc apparently designed a competing transcatheter mitral valve implant that was similar to the one CardiAQ had developed. Neovasc learned of the TMVI device after signing a non-disclosure agreement.

The Federal Circuit approved the district court's award of $70 million in compensatory damages and $21 million in enhanced damages (along with an 18-month head-start injunction). The court rejected several claims Neovasc had made concerning the trade secret instructions given to the jury. And it further found CariaAQ's royalty damages testimony was supported by the evidence. This is yet another in a series of high-damage trade secrets judgments we've seen over the past several years.

A copy of the unpublished disposition is available here.

The Reading List (2017, No. 24): Idaho Non-Competes Featured in NYT Article

Non-Compete and Trade Secrets News for the week ended August 11, 2017

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The New York Times Continues to Explore Non-Compete Agreements

Over the past few months, The New York Times has published several stories and editorial pieces concerning non-compete agreements than I ever can recall. The latest, published July 14, takes readers far away from New York to Idaho, where Conor Dougherty explores the change in the law that makes it much more difficult for employees to contest the validity of restrictive covenants. the NYT piece explores the motivations for how the law changed to favor employers and the lobbying efforts behind the legislative efforts.

Idaho's statute is focused on "key employees," which actually includes independent contractors too. The applicable definition is fairly broad and applies automatically to the top 5 percent in terms of wage earnings. But it goes beyond that to include those who "have the ability to harm or threaten an employer's legitimate business interests."

The statute does more. It creates a series of rebuttable presumptions concerning reasonableness. For time, 18 months is presumed reasonable. For territory, it's where the key employee provided services. And for activity scope, reasonableness is presumed if the covenant is limited to the type of employment that the key employee conducted. The upshot of the Idaho law is this: the employee has the unenviable burden of proving a negative, that he or she is incapable of impairing the employer's legitimate business interests.

This sort of burden-shifting approach turns non-compete law on its head. The employer, seeking to restrain trade, always should justify and establish both the legitimate business interest (beyond mere protectionism) and the imminent harm it faces to that interest. The Idaho approach is reminiscent of the way courts have analyzed 14th Amendment challenges to economic legislation through rational-basis review. That standard, which fairly can be called judicial abdication and not judicial review, requires a challenging party to disprove every conceivable basis which might support the law. And in some jurisdictions, a legitimate basis might even be economic protectionism or a pure economic interest.

The dynamism of our economy requires much more engagement by the judiciary to assess, meaningfully, the asserted interest and justification for a non-compete clause. Requiring the employee to bear the burden of proving he or she won't harm the employer will lead courts to embrace covenants that are too protectionist and safeguard against only theoretical or irrationally perceived harm.

Contractual Injunction Clauses

Non-compete agreements contain a number of important terms beyond the restrictive covenants themselves. Clauses pertaining to fee-shifting, jury trial waivers, arbitration, and venue play a big role in determining how a case gets litigated and decided.

One standard clause that receives a lot of intention is the "stipulation" that a breach necessitates an injunction. Put another way, employers try to use these clauses to convince courts that they need not prove the essential elements of an injunction. They, instead, can point to the agreement itself as the basis for equitable relief.

Most courts are not receptive to this argument, finding that contractual clauses (particularly since they're not negotiated) must give way to court rules and procedures concerning injunctions. But not all courts say that. The Court of Appeals of Minnesota in St. Jude Medical, Inc. v. Carter, found an injunction remedies provision valid, relying on a general contract principle that court must enforce unambiguous terms. The problem with this reasoning is that it equates a non-compete with a freely bargained-for, non-adhesive agreement. In reality, a non-compete is not a conventional contract but a restraint of trade. Courts should always assess whether a moving party has met its burden to obtain an injunction, regardless of any contractual stipulations.

A copy of the opinion is available here.

Wal-Mart Trade Secrets Verdict

In April, Wal-Mart was hit with a jury verdict in excess of $12 million for misappropriating technology pertaining to e-commerce software. The trade-secret owner, Cuker Interactive, thereafter moved for entry of a permanent injunction as is available under the Arkansas Trade Secret Act. The district court agreed that such an injunction was available to protect the development time Wal-Mart avoided by misappropriating Cuker's technology. The district court's opinion is an engaged discussion on the availability of injunctive relief even after entry of a damages award.

But Cuker's win was slightly tempered. The court also reduced the damages award by over $2 million based on a limitation-of-liability clause in the contract between Wal-Mart and Cuker. 

The Reading List (2017, No. 23): The "Welcome Back, Ken" Edition

Non-Compete and Trade Secrets News for the week ended August 4, 2017

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This week, I welcome myself back!

I'm happy to be here, really I am. The time away from blogging was great, a much-needed break. What did I do? I went camping (in the rain). I ran a race (the Bix7 in the lovely Quad Cities), and - oh yea - I tried a case in Chicago. Eventful. Not as eventful as Anthony Scaramucci's month, but eventful nonetheless.

Speaking of my trial, it was a doozy. A replevin trial over a stolen shipment of Mexican cheese, which the Chicago Tribune reported on. And, you know your case is good when it merits discussion in Food & Wine magazine. Just so you know, cheese heists appear to be a thing. But I'll take the set of facts I tried over any of these half-baked schemes. And it turned out great a - a replevin judgment about three weeks after we filed the case.

It did get me thinking about remedies, because you know I'm always looking to relate something to non-compete and trade-secrets law. Readers of this blog know that I've written a lot about the ex parte seizure order available under the Defend Trade Secrets Act. That procedure allows for an early court hearing, without notice, through which a federal court can empower a U.S. Marshall to seize stolen items containing protected trade secrets.

This replevin remedy is kind of similar, though there's process afforded. A replevin is simply an interim order that directs the seizure of property. In my case, cheese. But it could in theory be the replevin of a trade secret, too, depending on the facts. In Illinois, at least, replevin is only available for chattels or tangible goods. Again, cheese would be an example. Most trade secrets exist electronically, making the statute in Illinois a somewhat poor fit. Also, most items that a plaintiff would want back are legitimate in and of themselves (a computer, a thumb drive). In a replevin case, the plaintiff must show a superior possessory right to the thing itself - not what may reside on it.

Depending on the facts, a replevin order could issue on an ex parte basis. But in the main, a replevin claim really is an early trial that is akin to a mandatory injunction proceeding, which if successful results in a sheriff seizing property. All that said, don't overlook replevin as a potential remedy in a trade secrets case.

Anyway, on to news and updates.

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Consideration for Non-Competes in Illinois

Illinois courts continue to debate and discuss the so-called Fifield rule of continued employment. Generally, that case suggests two years of continued employment is required to serve as adequate consideration for a restrictive covenant. The case, however, is more a result of sloppy legal writing than it is a bold pronouncement of what amounts to lawmaking.

In reality, the facts of Fifield weren't particularly compelling and the case wasn't that close. The employee had been working only for a few months before leaving, meaning his tenure was far short of the rough two-year guidepost old Illinois cases had established. And there certainly was no indication he received anything more than the job itself.

The Appellate Court of Illinois (Second District) weighed in somewhat in Paul Joseph Salon & Spa, Inc. v. Yeske in affirming the grant of a temporary restraining order. There, the defendant resigned two days before the expiration of the two-year employment period. The court held that, at least when reviewing a TRO, the court did not abuse its discretion in finding the consideration adequate even if it fell just short of the two-year mark. The case is not particularly useful since it's an unpublished decision and given the "quick-look" review afforded TROs. And in fact, the Second District in prior cases never has embraced a bright-line rule of two years' continued employment. It appears the reason why is that the two-year rule only sort of exists and stems from an unforced error in the drafting of the Fifield decision.

A link to the case is available here.

From the Southern District of Illinois, we received another district court memorandum order that rejects any bright-line rule concerning continued employment. This follows a trend of cases from Illinois federal courts. In Apex Physical Therapy, LLC v. Ball, No. 17-cv-119, 2017 WL 3130241 (S.D. Ill. Jul. 24, 2017), the court noted the problem with bright-line rules and inequitable results which could occur. Interestingly, the court stated that "consideration can be comprised of benefits beyond continued employment." As with many of the federal decisions, it is not clear what the employee's agreement said about consideration or what else the employer might have alleged in addition to continued employment.

Injunction Bonds

One overlooked aspect of injunction practice in competition cases is the need for a bond. A bond generally provides the defendant some security in case the court was wrong in issuing a preliminary injunction. To be sure, those orders can inflict economic harm on the defendant. And to complicate the equation, courts must issue those orders on a relatively undeveloped record.

In my experience, plaintiffs who seek an injunction treat the bond requirement as an afterthought. It's one thing to ask for a low or nominal bond. It's quite another to be totally unprepared in contacting a broker, filling out a surety application, and getting the bond issued. Assuming a plaintiff does secure a bond, however, it must recognize that it has responsibilities to continue with the litigation responsibly. Or else, the bond may provided the defendant with a ready source of damages.

Against this backdrop, I was interested by the North Carolina Court of Appeals' opinion in Van-Go Transportation, Inc. v. Sampson County. This is not a non-compete case, but it's about the closest analogue and certainly relevant for the bond discussion. It involved a public contract for the transportation of Medicaid patients seeking health-care services. The incumbent, Van-Go, obtained a temporary restraining order against a competing ride company that prevailed in a request-for-proposal process with a municipality. As a condition of the TRO, the court required Van-Go to post a bond.

After the defendant filed a motion to dismiss, Van-Go voluntarily dismissed its case but also sought a release of the TRO bond. The trial court denied that effort and awarded the bond proceeds among the defendants. The Court of Appeals affirmed that decision, holding that a voluntary dismissal is equivalent to an admission that the TRO was wrongfully obtained in the first instance. The ruling is obviously defense-friendly, and it forces the plaintiff to take a long-view of litigation. In rejecting Van-Go's argument that it discontinued the litigation for "responsible financial business practices," it effectively tells plaintiffs that they must continue a case in which they have secured an injunction at pain of forfeiting a bond.

Depending on the amount of the bond (and the damages a defendant can prove), that may be an acceptable risk for the plaintiff to take. But it's crucial to understand that getting an early injunction comes at a price. The plaintiff may not be able to abandon its case free of charge.

A link to Van-Go Transportation can be found here.

Independent Contractors

The enforcement of non-competes against consultants and independent contractors raises a host of tough questions. After all, the essence of being an independent contractor is freedom and, importantly, freedom to control your own work. Non-competes, by definition, stifle freedom and seem to be at odds with an independent contractor relationship. Still, many companies use non-competes with consultants or sales representatives much as they would with ordinary W-2 employees.

A pair of cases reveals the limitations, though, of shoehorning consultants into the typical employment non-compete framework. The first comes from the Eighth Circuit, where a panel concluded that a company could not restrict an outside sales representative from engaging in competing crop management and fertilizer sales since he had developed his customer contacts through his own labor and without support from the company. The case, Ag Spectrum v. Elder, is a great read on the reasonableness inquiry through its analysis of the company's protectable interest. In particular, the opinion emphasized the resources that the sales representative invested and the absence of any specialized training or assistance that the principal provided. In those circumstances, a customer non-solicitation covenant was unreasonable as applied.

The opinion from the Eighth Circuit panel is available here.

In a similar case, an Ohio federal district court denied an injunction brought by a company that sells, among other things, office chair mats against a former consultant. The non-compete entered into between the company and the consultant broadly prohibited him from competing in the sale of chair mats and other products. The problem for the company is that the consultant's work, following the end of the relationship, involved those other products. And the consultant's services had nothing to do with them. Put another way, the company was trying to prevent competition for work related to products over which its consultant had no involvement.

The opinion, written by Judge Edmund Sargas, reflects a terrific example of judicial engagement - a perspective I often find lacking in non-compete cases. Judge Sargas credited the consultant's prior history in developing the same type of products that he was offering after the end of the relationship, concluding that the consultant in fact did not try to capitalize on anything confidential he learned through his contract arrangement.

Together, both cases demonstrate the difficulty of enforcing non-competes in a more arms-length relationship where the employer simply cannot demonstrate a protectable interest - that is, an interest that stems from a significant investment of time, resources, or information.

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Much more next week, including an update on the big Wal-Mart trade secrets case and more non-compete coverage in the New York Times.

The Reading List (2017, No. 22): The "Not Precedent Opinions Can Be Interesting" Edition

Non-Compete and Trade Secrets News for the week ended June 30, 2017

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LinkedIn "Solicitations"

From the Appellate Court of Illinois this week, we got treated to a non-precedential Rule 23 order that addresses a fertile area of non-compete litigation. What effect should courts make of LinkedIn invitations to a former employee's co-workers and do those invitations amount to improper "solicitation"?

The court in Bankers Life and Casualty Co. v. American Senior Benefits LLC, 2017 IL App (1st) 160687-U, says no. Justice Simon's order gives a nice summary of similar cases from various jurisdictions and notes that the issue of "solicitation" really turns on the content of the social media post, communication, or invitation to connect. In this particular case, the LinkedIn e-mails were "generic" and mentioned nothing about either the employee's past or current employer. Nor did the e-mails invite former co-workers to leave their job or view an employment opportunity posting.

UPDATED (Aug. 8, 2017): The Appellate Court has now published the Bankers Life opinion, apparently agreeing that it sets forth a new rule of law or helps clarify an existing one. The link to the published opinion can be found here.

The Defend Trade Secrets Act and "Inevitable Disclosure"

John Marsh of Bailey Cavalieri has a very insightful post on the Third Circuit's non-precedential order in Fres-Co Systems USA, Inc. v. Hawkins. The case was a typical one in the non-compete field. Sales executive with influence over key accounts bolts for a competitor and then gets sued.

After the district court entered a preliminary injunction in favor of the employer, the Third Circuit reversed and remanded for it to consider the injunction standard more fully. As John notes, however, some of the language in the Third Circuit's order was a little loose (at best) concerning the threat of "irreparable harm" posed by the employee's move to a competitor. In particular, some of the order's reasoning implicitly suggests "inevitable disclosure" may be grounds for enjoining conduct under the Defend Trade Secrets Act. But it never comes right out and says that.

I think there's a danger of reading too much into this non-precedential order. For starters, the court lumped together its irreparable harm analysis for all the substantive legal claims, appearing never to appreciate the limits on injunctive relief under the DTSA. (The court never cites or quotes the limitation at all.) It could have instructed the district court to reconsider the irreparable harm factor in light of the DTSA, but failed to do so. Opportunity missed. That said, the plaintiff moved as well under the Pennsylvania Uniform Trade Secrets Act, which does not contain any DTSA-like limits on injunctive relief. And to be sure, the employee's non-compete would provide a separate grounds on which to analyze irreparable harm.

The Hawkins order is available here.

Trade Secrets Damages

Quantlab Financial prevailed in the Fifth Circuit Court of Appeals, which upheld a jury verdict of $11.2 million stemming from a claim of trade-secrets misappropriation. The case arose before the financial crisis and concerned the then-nascent business of high-frequency trading. The facts sounded a familiar refrain, with the evidence demonstrating large-scale copying and appropriation of trading technology source code and improper computer access by insiders.

The Fifth Circuit's unpublished disposition is located here.

Nevada Changes Non-Compete Statute

Last year, the Nevada Supreme Court in the case of Golden Road Motor Inn v. Islam held that courts could not modify overbroad non-competes, a decision I analyzed at some length. The analysis endures; the rule doesn't. Effective June 3, 2017, Nevada has a new non-compete statute that requires courts to modify overbroad non-competition covenants - a wholesale abrogation of Golden Road Motor Inn. The new law seems to strike a more employee-friendly balance, however, in that it specifically provides that a covenant cannot restrict a former employee if a customer "voluntarily chose to leave and seek services from the former employee." That's a gaping carve-out, sure to invite fact disputes about whether the customer voluntarily left. In other words, Nevada places customer choice above any countervailing employer interest.

Russell Beck's Fair Competition Law blog has an analysis of the new law here.

The Non-Compete PR Crisis

The firm Butzel Long released a Client Alert (really, a white paper) that deconstructed a number of problematic non-compete cases involving low-wage or mid-tier employees. This terrific publication addresses the Jimmy John's, Amazon.com, and Goldfish Swim School cases and offers practical guidance about how these companies could have avoided the nightmare public-relations fallout. I highly recommend this release for any practitioner who works in the non-compete and trade secrets field.

Non-Compete Crackdown in Australia?

The Guardian reports on concerns that the use of non-competes is stifling innovation in Australia, noting the concentration of market power in select industries. The report notes the same general concerns that reform advocates in the United States have, with the most compelling concern being the declining number of start-ups. This concern is all the more acute as the large technology companies continue to expand their reach into non-traditional markets - Amazon's pending acquisition of Whole Foods simply the latest example.

Uber's "Reason to Know" of Trade-Secret Theft

Android Headlines reports that members of Uber's board saw evidence of trade-secret theft concerning Anthony Levandowski's alleged appropriation of LiDAR technology from Google/Waymo. Uber was required to file an accounting with the court disclosing the names of people who may have had access to the files at the heart of Waymo's case. Uber has resisted disclosing a critical due diligence report authored by a firm before it acquired Levandowski's start-up, which likely will color Waymo's theory that Uber had "reason to know" that Levandowski was using Waymo's materials on behalf of Uber. That "reason to know" standard is crucial if Waymo is going to hold Uber liable. This discovery dispute appears to be the make-or-break moment in the biggest trade-secret action of the past several years.

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I will be taking a few weeks off from updating this blog. See you in mid-July!

North Carolina's Odd Rule on Appealing Injunctions

Lawyers deal with rules that are substantive and procedural.

For the most part, substantive rules - those governing the merits of a claim - contain some flexibility. That is particularly true in non-compete cases, where the flexibility is a direct reflection on the fact-specific nature of each dispute. Bright-line rules don't work as well because they are subject to manipulation. That is, they run counter to the idea that judges must rule on each case according to the facts presented.

Procedural rules, however, benefit from rigidity. Take the rules concerning time limits on when a party must file a case or respond to discovery. Without bright-line standards, there are no rules for how to conduct the litigation. The whole system becomes a game.

One area of procedural law that is smartly inflexible is appellate jurisdiction.

For many years, courts have noted that clear jurisdictional rules are essential. The Supreme Court, for its part, has worked in recent years to eliminate holes in old case law suggesting that some cases are "practically" or "effectively" final for appeal purposes.

Rules of appellate jurisdiction are crucial in non-compete disputes. Why? Most cases are practically decided at the preliminary injunction stage. In federal court, a grant or denial or injunctive relief affords the litigants a right to appellate review, even if the action itself may result in a damages trial down the road. This basis for appellate jurisdiction - known to lawyers as an "interlocutory" appeal - is crystal clear and provided for by statute.

Not all State court systems follow the federal rules, of course. In Illinois, rulings on temporary restraining orders are immediately appealable. Not so in federal court. One particularly odd rule, though, comes from North Carolina.

There, appeals from interlocutory orders - which preliminary injunctions are, because they are not "final" - are allowed only if they deprive the appellant of a "substantial right that will be lost absent review before final disposition of the case."

North Carolina's rule, as applied to preliminary injunction orders, is hard to square with the common-sense proposition that, above all, jurisdictional rules must be clear to lawyers and litigants.

What, for instance, is a "substantial right"?

That issue has led to some strange decisions involving non-compete cases. For instance, the North Carolina appellate courts have found that bona fide non-competition clauses that bar work in an industry rise to the level of a "substantial right." But they also have found that restraints on working with customers (non-solicitation covenants) do not meet this standard. The idea is that these activity-based restrictions do not prevent a person from earning a living. They merely limit it.

But what if the individual's customer contacts are her stock in trade - the way she makes her living? How is an appellate court to make that decision in the context of a jurisdictional inquiry? In fact, a 2015 case called A&D Environmental Services v. Miller noted this very problem. The court dismissed an employee's appeal from a preliminary injunction order, which limited his work with certain customers. The rationale was that the order only limited his right to earn a living but did not prevent him from doing so. In a footnote, the court then stated the problem with this approach: "We do not suggest that an injunction which merely prevents a person from working with a defined group of customers could never affect a person's substantial rights."

Good luck figuring that out when deciding whether to appeal.

I have no idea why North Carolina courts would embrace such an odd jurisdictional regime, where the appellate court must examine the substance of an injunction order to evaluate the "substantial right" argument and then determine whether the appeal from that order was jurisdictionally sound. The court's work, by that point, is already done. Why not rule on the merits? The obvious danger in avoiding the merits is that by the time the case reaches true finality, the non-compete will by over and therefore moot.

Strangely, North Carolina's appellate jurisdiction analysis may actually incentivize employers to seek narrower relief. If an employer, for instance, has two different restraints to enforce, why go for the broader non-compete if you can foreclose immediate appellate review by enforcing through a preliminary injunction only a non-solicitation covenant? This decisional process, of course, depends on the strength of the evidence and what the employer is trying to protect. But the current appellate jurisdiction case law would seem to discourage enforcement of broader, market-based restraints against salespersons whose value to a third-party employer lies in her customer contacts.

To be sure, that is an odd way for appellate courts to handle non-compete cases and injunction orders. Jurisdictional rules - as opposed to substantive ones - are meant to provide firm, clear guidance. North Carolina's framework does anything but.

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

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

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Waymo v. Uber

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

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

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

Trade Secrets Injunctions

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

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

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

David Nosal Heads to Washington?

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

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

How much does a typical non-compete case cost?

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

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

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

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

The Reading List (2017, No. 12): One Reason Florida Is So Non-Compete Friendly

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

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Florida Non-Competes and Evidentiary Presumptions

The Florida District Court of Appeal's decision last week in Allied Universal Corp. v. Given illustrates why Florida is the safest haven for non-compete enforcement. It further shows how employers have benefited from a statutory directive that entitles them to a presumption of irreparable injury upon the showing of a legitimate business interest. That irreparable-injury showing is an indispensable component of injunctive relief. The case also shows the uphill burden an employee faces in trying to rebut evidence of a legitimate business interest, here the relationships that enable a salesperson to generate business. Employees who do so face a high discovery burden in amassing that type of evidence. Typically, they'll need something like high turnover or customer attrition or a narrative that shows how the new company provides a different customer value-proposition than the old one. A link to the Allied Universal case is available here.

(Eric Ostroff also discusses this decision in a blog post.)

The "Cloud" as a "Protected Computer" under the CFAA

The employment-related claims that a company may have under the Computer Fraud and Abuse Act all have a common requirement, which often is just assumed to exist in litigation: the access of a "protected computer." The way the CFAA is worded, any computer connected to the internet falls within the definition.

A fair number of cases now do not deal with claims where sensitive information was removed from a workplace computer. Instead, they concern disputes over information stored on a cloud-based platform that employees from computers access. So what happens when an employee continues to access this same platform, wrongfully, following termination of employment? Is this access of a cloud-based device equivalent to a "protected computer"? In Estes Forwarding Worldwide, LLC v. Cuellar, a federal judge in the Eastern District of Virginia said yes. But the analysis was very thin and not particularly persuasive.

Prior decisions, such as the Hawaii case of Property Rights Law Group v. Lynch, suffer the same flaw: no real attempt to reconcile a cloud-based service with the definition of a "protected computer." They seem to pivot to the fact that the computer was connected to the internet and end it right there. To the extent this issue becomes a genuine dispute among district courts, it seems Congress could head off the problem by extending the jurisdictional hook to accessing information stored on a cloud-based platform. After all, what's one more amendment to the CFAA?

The Estes Forwarding decision is available here.

The Reading List (2017, No. 11): Trade Secrets Everywhere, Including the Bedroom...

Non-Compete and Trade Secrets News for the week ended March 17, 2017

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Trade Secrets Identification

The most difficult procedural issue in trade secrets cases involves when and how the plaintiff should disclose its trade secrets. Defendants frequently object to discovery until it has a specific itemization of the secrets the plaintiffs claims have been misappropriated. Courts have wide discretion to handle these types of disputes, and will do so on a case-by-case basis. A federal district court in Oregon, in the case of Quaiz v. Rockler Retail Group, Inc., No. 3:16-cv-1879, recently denied a defendant's motion to identify and stay discovery. As that case shows, the strength of an early-identification motion often is directly related to the allegations of the complaint. Here, the plaintiff gave more specificity than is often seen, confining the trade secret to a particular product and related designs. A copy of the opinion, which provides helpful analysis, is available here.

Trade Secrets Injunctions

The Georgia case of Pinnacle Agriculture Distribution, Inc. v. Mayo Fertilizer, No. 1:17-cv-29, deals with the scope of trade secrets injunctions. It illustrates that when plaintiffs present compelling evidence of misappropriation, a broader injunction may be in order. Here, an ex-employee of Pinnacle Agriculture had provided his new employer with his entire customer list and specific details about those customers, along with other information concerning Pinnacle's branch sales (including details on every product sold and profit margin for each sale). This is true smoking-gun evidence. Despite the lack of any non-compete, the court's injunction operated just like one. Both the employee and the new employer were barred from conducting business with Pinnacle's accounts. A copy of the injunction is available here.

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The San Francisco Business Times, along with many other outlets, reports this week on Google's attempt to stop Uber's self-driving car technology. Google's effort to enjoin Uber builds on its previous complaint, which I discussed last week. The new evidence Google submitted includes a damaging witness statement from the main individual defendant's former co-worker along with an expert witness.

In more trade secrets news, the Chicago Tribune this week published an article describing Motorola Solutions' suit against Hytera Communications. The trade secrets apparently pertain to Motorola's radio technology and involve more than 7,000 allegedly stolen files. Motorola sued under both the Defend Trade Secrets Act and the Illinois Trade Secrets Act. A copy of the Complaint is available here.

Finally, not sure really how to introduce this one, but Absorption Pharmaceuticals has claimed that Reckitt Benckiser, the maker of, um, K-Y lubricants, stole its trade secrets on a sexual performance enhancer. This claimed misappropriation arose out of the second most common factual scenario for theft: a purported business deal that fell apart. Absorption Pharmaceuticals is asking for an injunction to prohibit RB from selling Duration - a premature ejaculation spray. At the very least, it's a clever product name. A copy of the Complaint is available here.

Colorado Court Interprets Key Remedies Section of Defend Trade Secrets Act

With only a life span of a few months, the new Defend Trade Secrets Act has produced very little in the way of interesting case law. That's hardly a surprise at this point.

For the most part, the DTSA does not change substantive state law concerning trade secrets and how one may "misappropriate" a trade secret. The statutory differences, by and large, concern the scope of available remedies. And of course, the muscle that federal courts provide is the principal value that the new statute offers. (For more discussion on litigating in federal versus state court, see my post immediately preceding this one.)

This past week, a federal district court in Colorado offered perhaps the most in-depth look yet into the DTSA. And not surprisingly, the core aspect of the opinion concerns statutory remedies, particularly those relating to injunctions.

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Injunctive relief is a default remedy for actual or threatened misappropriation. But injunctions that prohibit merely using or exploiting trade secrets are only so helpful. For one, monitoring that type of order is almost impossible. And just as problematically, trying to define what exactly is prohibited from "use" is an exercise sure to drive lawyers and judges nuts.

To be certain, injunction clauses under the DTSA and state statutory law are not so confining for aggrieved trade-secret owners. State laws don't set precise boundaries on how far injunctions can go. So a late addition to the DTSA drew quite a bit of attention when it appeared to do just that. Section 1836(b)(3)(A) of the DTSA contains two provisions that seem to limit broader conduct-based injunctions - that is, injunctions that extend beyond prohibitions on using trade secrets.

First Exception. The first expressly states that an injunction order may not "prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows." That provision is a clear, direct shot at states that endorse injunctions under the theory of "inevitable" disclosure - something broadly akin to a non-compete agreement.

Second Exception. The second DTSA provision says an injunction cannot "otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business." This simply means that plaintiffs cannot invoke the DTSA to secure more expansive injunctive relief than some employee-friendly states would allow when enforcing non-compete agreements.

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Engility Corp. v. Daniels (a copy of which is embedded below) brought these two exceptions into play. The case was a fairly typical employment-related trade secret dispute, which arose when two employees of Engility - a former division of L-3 Communications - left to form their own business. The relevant market is somewhat technical in that it concerned the sale of military communications equipment and a related network. The facts giving rise to claims of trade secret theft arose largely from one employee's retention of data pertaining to this market and his shifting story about what he did with that data for a few weeks after termination.

Engility sought more than a use-based injunction. Although it had no non-compete agreement with the employee, Engility wanted the court to prevent the ex-employees and their new firm from working with a particular military customer. The court's challenge was to apply the DTSA, and its limiting language concerning injunctions, to this particular request.

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The court found that the first remedial limitation did not apply, principally because the ex-employees formed a new business. In the court's words, the DTSA gives "no indication that 'employment relationship' encompasses the role of an outside contractor," which the new entity would be to the military customer that was the focal point of the injunction request. It might have been easier, however, if the court simply stated that the exception did not apply because the employer did demonstrate a likelihood of actual or threatened trade-secret misappropriation.

The court then turned to the second exception and found that Colorado state law independently did not bar the customer-based restraint. The question was significant, because Colorado state law is much more restrictive of non-compete use than many other states. Here, however, the court relied upon state statutory law that allows non-compete agreements to be enforced "for the protection of trade secrets." Applying this provision, the court was able to issue a broader conduct-based injunction under the DTSA since Colorado law allowed it to the extent necessary to protect trade secrets.

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The Engility decision is instructive for how the new remedies provision of the DTSA may apply in practice. Its applicability, however, may be somewhat narrow for difficult future cases. The facts of Engility established a firm basis for the court to conclude that the employee engaged in actual or threatened trade secret misappropriation - at least at the preliminary injunction phase. With those facts determined, the court didn't really have a tough call in applying the two DTSA injunction exceptions.

The much harder cases will come when employers are unable to present facts that look like theft or misuse of confidential information. The DTSA statutory exceptions should be sufficient to weed out these weak speculative claims, based largely on a theory that an employee inevitably will use something secret. That is why those exceptions are there. Broad conduct-based restrictions under the DTSA won't survive unless employers show facts in the mold of those described in Engility.

Engility v. Daniels by Ken Vanko on Scribd

Personal Clients/Firm Clients

In 1999, the New York Court of Appeals decided BDO Seidman v. Hirshberg and said this:

"...it would be unreasonable to extend the covenant to personal clients of defendant who came to the firm solely to avail themselves of his services and only as a result of his own independent recruitment efforts, which BDO neither subsidized nor otherwise financially supported as part of a program of client development."

Which raises the question...

...what's a "personal client" and what's a "firm client"? The particular facts and context of BDO Seidman aren't the point of this post. Rather, the larger issue is the construct of rules in non-compete law that can have unintended consequences for the very parties those rules are intended to aid - employees bound by restrictive covenants.

The difference between a personal client and a firm client is not straightforward. An employer will no doubt contend that an employee's affiliation with it is an extension of its goodwill, branding, reputation in the marketplace, and particular product or service offering. That may be true. Or, as the employee will retort, "I did everything and got no help." That also may be true. The truth may lie somewhere in between.

Rules like that in BDO Seidman are easy to state and hard to apply. Take Marsh USA, Inc. v. Schruhriemen, a New York district court case decided earlier this month. There, Judge Jed Rakoff applied this personal client/firm client rule and entered a limited injunction that basically told the employee "I have no idea, so you're on your own." Of course, Judge Rakoff would never say just that, but he did say that "the Court cannot, without further factual development, provide a definitive ruling on whether [the subject client] falls within the scope of the 'personal clients' exemption" from BDO Seidman so "Mr. Schuhriemen acts at his own peril" if he services the client.

Rules like that announced in BDO Seidman are meant to be objective and place sensible limits on the use of restrictive covenants. But too often, these very rules (expressed objectively) invite further disputes, subject parties to immense litigation risk, and (most noticeably) increase litigation expense on the parties least able to bear them.

The personal clients/firm clients rule from New York is not alone. Disputes about non-compete consideration, the scope of legitimate business interests, and blue-penciling of overbroad agreements all deal with limiting unfair agreements. But only infrequently do these rules solve anything. And in too many cases like Marsh USA, they leave everyone twisting in the wind.

A Tale of Two Non-Competes

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness...

--"A Tale of Two Cities," by Charles Dickens (1859).

Perhaps (er, certainly) this is a little dramatic, but this is what I thought of after reading two recent preliminary injunction rulings in non-compete disputes. One comes from Ohio, the other from Minnesota. And they produce results you might not expect given the facts.

The first is Independent Stave Co. v. Bethel, in which the district court partially enforced a broad non-compete agreement against a log buyer, who made less than $100,000 per year. The agreement contained a geographically unlimited non-compete restriction. The court found the employee inherently credible. There was no evidence the plaintiff lost any business, or that the employee misappropriated anything. Yet, the court issued a broad injunction, even if it was not quite what the employer sought.

The second case is Wells Fargo Ins. Svcs. v. King, where a federal court in Minnesota addresses a narrow customer non-solicitation covenant, finds that the employee solicited all his largest accounts, and determines he was in blatant breach of his contract. And in that case, the court refuses to enforce the restrictive covenant, finding money damages adequate and that an injunction would do nothing to cause the "stolen" clients to revert to the employer.

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So what to make of this? Non-compete disputes are inherently fact-specific and are not susceptible to easy classification. What may be important to one judge is not necessarily of interest to another. In the King litigation, the judge may have been convinced that the presence of the new employer in the case would provide the plaintiff a deep-pocket in which to satisfy a money judgment. Perhaps in the Bethel case, the court felt it was narrowing the agreement in such a way to craft a middle-ground option for the employee while protecting the ex-employer.

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Although this list is not complete, here are a number of A-list factors that may influence a court's decision to award an injunction in a non-compete dispute:

1. Witness credibility (and in particular the employee's good-faith conduct apart from the issue of "breach).

2. Constructing a compelling narrative during an evidentiary hearing, so that the presentation is a story rather than an accumulation of evidence.

3. Whether the degree and impact of competition within the relevant market is explained and understood.

4. The ability to describe actual, as opposed to speculative, harm.

I have written on each of these topics many times, and no doubt there are many more. And it also bears repeating that in about 60 percent of cases that go to an evidentiary hearing, the plaintiff ends up prevailing on at least one of the major issues in the case. But at a micro level, as King and Bethel show, reconciling the outcomes can be awfully difficult.

Non-Compete Disputes and the Mootness Rule on Appeal

One of the reasons non-compete cases generate a lot of appeals is that the law is tense. By that, I mean that non-compete cases present a unique tension between freedom of contract and freedom to compete. And because public policy underlies many non-compete cases, appellate courts often scrutinize trial court rulings more carefully than garden-variety contract disputes or tort judgments.

But taking a non-compete case on appeal presents a unique legal issue: mootness. Most non-compete cases concern an agreement of relatively short duration, say one year or maybe two. Even if litigation is expedited, the non-compete period may run its course if there is an appeal.

How courts treat the issue of mootness on appeal is one of the more interesting procedural questions that non-compete lawyers face. Here are the three possible treatments:

1. Expiration of the covenant renders the appeal moot. Some courts treat expiration of the covenant on appeal as mooting any issue pertaining to injunctive relief. Remember: mootness only affects the injunction request. A damage claim can subsist for years after the defendant is free to work unencumbered. Texas is an example of a jurisdiction that seems to have a fairly strong mootness rule, as reflected in the recent case of Argo Group US, Inc. v. Levinson, 2015 Tex. App. LEXIS 250 (Tex. Ct. App. Jan. 14, 2015).

2. Expiration of the covenant does not impact an appeal. Other courts take the opposite approach, finding in essence that the appeal may not be moot. The doctrine is called "equitable tolling." A line of Ohio cases suggests an appeal from a denial of injunctive relief may not be moot even if the term of the post-termination covenant has run. But as the case of Tradesman Int'l, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2013), illustrates, this doctrine relies heavily on the factual and procedural posture of the case. Generally, a plaintiff must move promptly for injunctive relief to secure the benefit of the equitable tolling doctrine. If it does so, and an appellate court finds the trial court incorrectly denied the injunction, the employer still can gain the benefit of its bargain through a new term of injunctive relief that nominally extends past the expiration date. The Tradesman case dealt with the opposite fact pattern. The employer there did nothing to pursue preliminary injunctive relief and then, after the covenants expired, sought to impose a permanent injunction - effectively restarting the non-compete period against its ex-employees. As the Seventh Circuit's opinion discusses, this type of litigation conduct will not allow a plaintiff to pursue an injunction.

3. Expiration is a function of what the non-compete says. The final approach that some courts have taken is to push the expiration or mootness issue back onto the contract itself. Courts in Illinois seem to have endorsed this approach, though the case law has enough fluidity in it to make it sound like there still are no hard-and-fast rules on mootness. The notable cases are Prairie Eye Center, Ltd. v. Butler, 329 Ill. App. 3d 293 (4th Dist. 2002), and Stenstrom Petroleum Svcs. Group, Inc. v. Mesch, 375 Ill. App. 3d 1077 (2d Dist. 2007). Both look at mootness in the context of whether the parties agreed upon an extender clause within the non-compete itself. As a result, it is fairly common to see sophisticated Illinois-based agreements with robust remedies sections incorporating the holdings in Prairie Eye Center and Stenstrom Petroleum.

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I generally don't have much of a problem with options 2 or 3. Option 1 brings squarely into play the law of unintended consequences. In those jurisdictions that endorse a rigid mootness rule, the law encourages employers to adopt longer covenants so as to give them a fair chance of litigating the case, while at the same time preserving appeal rights.

In this respect, a rule that appears employee-friendly at first actually may not be. Employers will tend to compensate for the common law and "bargain" for longer post-termination covenants, knowing the mootness rule reduces the value of litigating a short non-compete in the first place.

At a Preliminary Injunction Hearing, How Likely Is an Employer to Win?

There are problems with statistical analyses. One of them is that the data sampling size may not be reliable or that the parameters established tend to skew results.

I am no statistician, but I have enough of a background to be dangerous. I decided to conduct a fairly rudimentary analysis of reported non-compete decisions so that I conclude how likely companies were to obtain a preliminary injunction in non-compete disputes at a contested hearing. This is a very narrow inquiry.

Because I only have so much time (and a trial in 10 days), I tried to obtain the best data I could, realizing full well that it was simply a subset of the actual number of decisions floating somewhere in the public domain. But I believe my data is more reliable than those used to predict a presidential election...so, here goes.

Conclusion: At a contested hearing, employers successfully obtain a preliminary injunction to enforce a non-compete agreement about 60% of the time.

Data Summary: I reviewed a sample of federal district court cases from July 2013 through August 14, 2014. I specifically limited my search to exclude appellate decisions (which would review the grant or denial of an injunction) and to exclude state trial court reports, because only a handful of states publish them online. Since federal courts issue opinions that follow the same general format, I found this to be the most reliable source of information. Finally, I only looked at preliminary injunction decisions after contested hearings, where the matter was fully briefed and the court had to decide issues of fact and law.

During this one-year window, I excluded the following from my analysis:

(1) Controversies between franchisors and franchisees (of which there were a significant number);
(2) TRO rulings, because those often times contain a sparse record for the court to consider and may not really be "contested" in the evidentiary sense;
(3) Non-compete issues arising out of a purchase or sale of a business; and
(4) Decisions that dealt only with trade secret enforcement.

I also took a subjective look at the case if the court was split (or granted the injunction only in part). That is, I made a qualitative assessment as to what kind of relief the moving party obtained and what it actually got after a hearing. If the party successfully enforced a key part of a restrictive covenant, I counted this as a favorable outcome for the employer. If it lost and only was able to enforce a non-disclosure covenant, I determined this to be a favorable outcome for the employee.

Other Observations: The data set was limited to 23 comprehensive decisions. This seems like a small number, but again, the parameters that I chose were very narrow and focused only on contested injunction hearings over a narrow span of time. I assessed what I believed were the court cases that met all the criteria in which I was interested in assessing. Though I expected to see 50 cases, the 23 I selected came from all across the country with both employer-friendly jurisdictions (Florida) and employee-friendly states (California) represented.

The conclusion of a 60% victory rate for employers after an injunction trial is, frankly, a little higher than I expected. This is so for a few reasons: (1) the difficult injunction standard employers must meet; (2) the hesitancy of courts to enforce restraints of trade; and (3) the perception that employees quickly settle obvious cases where the facts are bad. If all these are true, then I would think that contested hearings would skew in favor of employees. Apparently, not so.

Interestingly, I found no real clear pattern from the results. I found cases where courts refused to enforce agreements despite seemingly clear evidence of data theft, and cases where an employer enforced an agreement that appeared overly broad. There was no unifying theme among the decisions. This fits with the highly fact-intensive nature of these disputes.

All this underscores the fact that results are not predictable. I believe it is difficult to benchmark success when parties let a judge decide, and that it would be irresponsible to conclude that a party's chances of success ever are much greater than 50-60% even on the strongest facts.

So, What Is a "Solicitation"?

One of the most frequently asked questions I get when advising clients is deceptively complex:

What does it mean to solicit a client?

On its face, this probably sounds like it should be an easy question to answer. However, it's really not. Since courts are hesitant to enforce broad non-compete agreements (particularly as to sales persons), many disputes hinge on the applicability of a customer non-solicitation covenant. The scope of those covenants can range from the very broad to the much narrower, both in terms of the type of activity prohibited and the customers covered by the prohibition.

A broad non-solicitation covenant reads something like this:

Employee agrees for a period of one year not to solicit, contact, or provide services to a Restricted Customer for the purpose of providing Competitive Products.

A narrow non-solicitation covenant usually reads this way:

Employee agrees for a period of one year not to solicit or entice away a Restricted Customer for the purpose of providing Competitive Products.

The difference between the two is that the narrow covenant does not prohibit so-called "passive" solicitation, where a client reaches out to the employee. As a practical matter, these more narrow covenants lead to just as much litigaton because most times an employer won't know who contacted who. But it will justifiably be concerned about the fact the employee is continuing to work with the client. It only will be able to discover what actually happened through the litigation process.

In these cases involving narrower covenants, the issue of breach often hinges on whether the employee actually solicited the customer, or whether the customer sought out the employee. The First Circuit's recent opinion in Corporate Techs., Inc. v. Harnett illustrates a common fact-pattern and rejected a bright-line "initial contact" test. In that case, the ex-employee's new company sent out a blast announcement that piqued the curiosity of a targeted group of customers that happened to fall within the terms of the employee's non-solicitation covenant. Upon receiving that announcement, customers started contacting the ex-employee.

The court specifically noted that "initial contact" is somewhat amorphous and "can easily be manipulated" depending on the facts of a particular case. This is particularly so with businesses where the selling cycle is long, such that the initial contact would be "unlikely to bear fruit in the absence of subsequent solicitation." It had little trouble affirming a preliminary injunction that enforced the non-solicitation covenant.

The takeaway from cases like Harnett is that employees must understand that the issue of "solicitation" is intensely fact-laden and that it's awfully hard to play cute and end-run the contract. Courts will need to consider how employees typically communicate with customers, and whether the employee set in motion a chain of events designed to lead to contact by the customers themselves. Targeted announcements are an obvious invitation to cause a customer to contact the employee and present a fairly easy case for determining that a solicitation has occurred. Even more problematic are personal e-mails, LinkedIn invitations to connect, and other one-on-one activity that suggests an effort to continue a business relationship.

Corporate Techs v. Hartnett - Opinion by Ken Vanko

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.

Trade Secrets Injunction Order Demonstrates Difficulty of Balancing Competing Interests

One of the more difficult aspects of trade secrets law is determining how long to enjoin competitive conduct that infringes trade secret rights of the owner.

Consider one of the landmark trade secrets cases of the last 20 years, PepsiCo v. Redmond. In that case, PepsiCo was able to enjoin the work of a high-level executive who had no non-compete agreement, but whose subsequent employment with a competitor threatened to result in the disclosure of a wide range of strategic business information. Despite the broad protection afforded PepsiCo in the case, the injunction was limited in duration; it lasted a mere 5 1/2 months. That is the most overlooked part of the PepsiCo decision.

This arguably illustrates the importance non-compete agreements play as a procedural device to pre-determine the length that trade secrets will be protected from disclosure. Some rightly note that this could result in the overprotection of trade secrets, but the common law rule of reasonableness serves as a deterrent to non-competes of excessive duration. And when companies overprotect, they often lose enforcement actions.

A district court order from Nebraska, well-reasoned and thorough, is another good example of a PepsiCo-like injunction issued in the absence of a non-compete. The case follows a familiar factual matrix, as a number of employees of a freight brokerage organization called West Plains, LLC left to form a competing organization. The departure effectively gutted West Plains and left it with little manpower to service clients. The aggravating circumstance for West Plains was pretty clear from the order. The competitor was formed by the owner of a freight brokerage West Plains had bought just months earlier. The employees left to join him and took with them a wide range of customer-oriented documents, such as contact information and a spreadsheet of freight hauling rates. The evidence of improper pre-termination conduct was compelling.

Having concluded the information likely constituted trade secrets of West Plains (it could be redeveloped, but only through significant, time-intensive efforts), the court struggled with the length of injunctive relief. It ultimately concluded that a preliminary injunction of two months was sufficient to enable West Plains to hire a replacement staff and "meet its customers' needs on an even playing field." It also felt this two-month standstill period was appropriate to enable the defendants to develop information necessary to service customers from public sources.

The order was designed to protect trade secrets, and so it went beyond a garden-variety "use" prohibition and some obligation to return company data. It barred the defendants from contacting West Plains' customers with whom they dealt as West Plains employees. The trade secrets that were misappropriated were intimately tied to those customers. So any order, to be effective, had to limit customer contact and solicitation in some meaningful way.

The injunction order is included below.

West Plains v. Retzlaff Grain Co. - Injunction Order by Ken Vanko

Let's Start Year 5: Amazon.Com Loses Preliminary Fight Over Non-Compete Agreement

So 2013 starts, and what better way to kick off Year 5 of this blog than discussing Amazon.com's effort to enforce a non-compete against an executive who left for Google.

In mid-2012, Daniel Powers was terminated from his position with Amazon.com as a vice-president in Amazon Web Services. This is not the Amazon.com we all know and love. It was a segment that the retail consumer does not see and dealt with Amazon's effort to sell cloud computing services to businesses.

Powers, like most Amazon.com employees, signed a broad non-competition agreement that contained a number of restrictions. When Google hired him several months after his departure, it limited his job role to avoid any potential problems with Amazon.com. Nonetheless, it seems clear he was providing cloud computing services to Google, even if the parties disputed whether Google's products actually competed with those offered by Amazon.com.

After Amazon.com filed a preliminary injunction motion, a federal judge in Washington granted it very limited relief to enforce only that part of the contract that forbade Powers from working with Amazon.com's business customers. It did not enforce a broader non-compete restriction and found that Amazon.com had not submitted evidence to support an "inevitable disclosure" of trade secrets theory.

From my perspective, there are two interesting elements to this opinion.

First, the court specifically found that there was no evidence that Powers had intended to violate the customer non-solicitation covenant. Yet, it enforced it anyway by way of injunctive relief. This was a mistake. It is unclear to me how Amazon.com could establish a likelihood of success on this claim if there is no evidence of breach. The court's rationale was that Powers resisted the preliminary injunction motion, which suggests he might want to solicit his former business customers. But this proves too much, because any party could then go into court and base its request for an injunction solely on the fact that its opponent contests the motion.

Second, the court seemed to suggest that this non-solicitation covenant gave Amazon.com the protection it needed, and that a further ban on employment (the non-compete covenant) was not necessary. This is best summed up in the following passage:

"[Amazon's] ban on working with former customers serves to protect the goodwill it has built up with specific businesses. A general ban on Mr. Powers' competing against Amazon for other cloud computing customers is not a ban on unfair competition, it is a ban on competition generally."

When a business aims to protect customer goodwill, often times a general non-compete stretches too far. As the Powers court recognized, a customer non-solicitation is often the right fit to protect this interest.

The case is Amazon.com, Inc. v. Powers, C12-1911 (W.D. Wash.). A copy of the Order and Opinion on Amazon.com's preliminary injunction motion is contained below.

Amazon.com v. Powers - Order

Non-Compete Suits and TROs - Part 1

Companies that face competition from ex-employees often want a temporary restraining order. As readers of this blog know, there is a significant difference between a temporary restraining order and its big brother - the preliminary injunction. This past week, I had a lengthy TRO hearing on behalf of a client in federal district court in Minnesota. TRO practice and procedure differs widely from federal to state court, and even within certain courts - depending on what judge one draws.

This is the first in a three-part series about TROs in the context of non-compete disputes. Today's post reflects on a confusing issue of timing under Federal Rule 65: what does it mean, under the law, for an order to be "temporary" and for how long can courts issue TROs? Part II will focus on the benefits and drawbacks of seeking a TRO, as opposed to a preliminary injunction. And Part III will discuss some practical considerations when presenting and arguing TROs.

(Because it is the end of the year - a notoriously frenetic time for law firms - and because I have an infant who I'd rather spend time with right now, it is unknown when Parts II and III will appear. But let's just say within the next seven days...)

So onto timing. A "temporary" restraining order can only be...temporary.

The confusion for many parties in terms of a TRO's duration stems from the two types of TROs that courts see: those with notice and those without notice (called ex parte TROs). A TRO sought without notice clearly can extend no longer than 14 days under the terms of Federal Rule 65, and courts are highly skeptical of parties who seek such relief without letting the defendant know of the proceeding. In essence, courts will require parties to make an additional showing of why giving the defendant notice is either impractical or itself poses a threat of irreparable harm.

But the issue of TRO duration is less obvious when a party seeks a TRO with notice. Federal Rule 65 (and most state court rules of procedure) do not specifically address this. The 14-day duration limit is expressed in terms of a TRO sought without notice. There is simply no corollary in Rule 65 addressing duration limits for a TRO sought with notice.

So how long can a noticed TRO last? 14 days? Longer, at the court's discretion? The answer has to do with appeal rights. Under the federal rules, a grant or denial of a TRO is not appealable. This differs from the practice of some state courts - Illinois, for instance - which have specific rules of appellate procedure that allow for an appeal of a TRO ruling.

But just looking at Federal Rule 65, if a TRO is not appealable, then it has to be time-limited - whether the petition is filed with or without notice. Interpreting the rule otherwise, a court could simply foreclose an appeal right by calling a preliminary injunction a TRO. Remember: TROs issued with notice resemble preliminary injunctions. Notice concerns are gone. A party may respond with affidavits, exhibits, and even an answer denying material allegations. At that point, a court - depending on what exactly is presented - will have at worst a broad sketch of what an actual preliminary injunction hearing will look like.

So the answer is 14 days in either case. This issue is not the subject of much reported case law for two reasons. First, TROs aren't appealable in federal court so there is almost no circuit law on the subject. Second, parties often agree on how long a TRO should last - even if it's past 14 days. There is a natural incentive for parties to agree so they can adequately prepare for a preliminary injunction hearing.