The Reading List (2017, No. 26): Fee Awards, New Legislation, and Inevitable Disclosure

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

***

Illinois Appellate Court Affirms $1.5 Million Fee Award

In a Rule 23 Order, the Second District Appellate Court affirmed a substantial fee award, nearly $1.5 million, for the prevailing defendant in a fiduciary duty, trade secret, and non-compete case. I had the privilege of representing the defendant, Tom Christofilis, at trial and on appeal. It is truly a pleasure working with someone who is so candid, forthright, and credible that you don't even need to prepare him for his testimony. Good things happen to good people.

The basis of the $1.5 million fee award is rooted in corporate law and in particular the bylaw indemnification provisions that cover former employees, officers, and directors of Christofilis' former employer, Automated Industrial Machinery, Inc. I have written before that corporate indemnity procedures, whether rooted in internal documents like bylaws or through state statute, are the potential game-changer and equalizer in competition suits. It is essential that counsel fully assess the interplay of indemnity when deciding whether and how to pursue competition claims against a former insider. It is just as crucial for defense counsel to understand the legal framework and position his or her client for fee-shifting.

The Appellate Court's judgment here demonstrates the raw power of indemnification, ruling that it covered non-compete, trade secret, and fiduciary duty claims. But to be sure, this case was very fact-specific, and the availability of indemnification depended at least in part on Christofilis' complete success, the sheer breadth of the claims asserted against him, and the anchoring fiduciary-duty cause of action that brought the bylaw provisions into play.

Keep in mind the deferential standard of review applicable in this case. No two indemnification cases are the same. And the trial court retains substantial discretion in making the call as to what claims are and are not indemnifiable, given the pleadings, legal theories, and evidence.

A link to the Rule 23 Order in Automated Industrial Machinery, Inc. v. Christofilis is available here.

New Legislation on Non-Competes

For those interested in legislative updates, Russell Beck's Fair Competition Law blog is a must read. Here are a few links that discuss pending and enacted legislation on non-compete law:

October 21: Russell reports on bills in New York and Pennsylvania concerning very different aspects of non-compete reform.

October 15: Russell discusses bills in several states, including changes to Oregon and West Virginia law. Oregon now bans non-competes for home-care workers, while West Virginia outlaws certain types of physician non-competes. This continues a trend of industry-specific reform, rather than wholesale, across-the-board changes.

The DTSA and Inevitable Disclosure

The Defend Trade Secrets Act contains a crucial limitation on injunctive relief: courts cannot issue an injunction under the DTSA to "prevent a person from entering into an employment relationship." And conditions on a person's employment must be based on threatened misappropriation, not merely on information the person knows. This limitation forms part of the compromise that resulted in the DTSA's near-unanimous passage. And it departs from the law of several states that allow for inevitable-disclosure injunctions that bar employment altogether.

Courts, though, are frequently terrible at applying the doctrine of inevitable disclosure. A perfect illustration comes from the case of Express Scripts, Inc. v. Lavin, where a federal court appears to have applied the DTSA to issue an injunction, at least in substantial part on inevitable disclosure. It could be that the court was loose with its analysis, since it already had found a non-compete agreement to be enforceable. And it could be that the court was relying on Missouri law. But it sure as hell does not help to have a poorly engaged analysis like this, suggesting that the DTSA does not mean what it says.

I reviewed the briefs filed by the plaintiff's law firm (one that must remain nameless). The brief never indicates for the court that the DTSA limits inevitable-disclosure injunctions. It lumps stuff together in a way that I feel is highly misleading. That's troubling, because the court was ruling on a petition for temporary restraining order. More concerning is the court's rote copying of the law firm's brief (down to the word). This amounts to judicial abdication, not bona fide engagement.

Let's be clear: the DTSA does not permit inevitable disclosure injunctions of the kind that the court in Express Scripts may have ordered. This decision carries no weight at all. I'll chalk this one up to an emergency ruling, a busy judge, and sloppy lawyering.

A copy of the ruling can be found online (I refuse to link to it or make your job easy). The case name is Express Scripts, Inc. v. Lavin, No. 4:17-cv-1423 (E.D. Missouri). The case since has settled.

Computer Fraud and Abuse Act

The most significant CFAA case of the past several years has been United States v. Nosal, which made two trips to the Ninth Circuit. The Supreme Court has declined to grant certiorari on Nosal's latest appeal. That cert petition made headlines when Nosal enlisted Supreme Court star litigator Neal Katyal on brief. Reuters discusses the Court's decision not to review Nosal and a separate CFAA case called Facebook v. Power Ventures.

Speaking of the CFAA, it continues to generate fewer cases of interest in light of the Defend Trade Secrets Act and the federal civil remedy now available for trade secret misappropriation. But some cases still wind through the system.

The sharp divide, which stems in great part from Nosal, concerns the application of one statutory term in the CFAA: the meaning of the phrase "exceeds authorized access." In the CFAA framework, this could mean an individual's misuse of protected information in violation of a corporate policy or common-law duty. Or it could mean something far narrower, namely an employee's improper access of files in the more objective sense without regard to state of mind or intent.

In Hedgeye Risk Management, LLC v. Heldman, the United States District Court for the District of Columbia adopted the narrower reading of the CFAA. In effect, it held that the statutory language is not concerned with the purpose for which the employee accessed the computer files. In so doing, the court joins the Second, Fourth, and Ninth Circuits. On the other side of the ledger, the Fifth, Seventh, and Eleventh endorse a purpose-based analysis, with the reasoning of those courts varying to some extent. As the district court in Heldman noted, the D.C. Circuit has not weighed in.

***

Last week, I had the privilege of presenting at PLI in New York for a conference titled Trade Secrets 2017: What Every Lawyer Should Know. My panel consisted of Audra Dial from Kilpatrick Townsend & Stockton in Atlanta and John Siegal of Baker Hostetler. Our moderator was the great Vicki Cundiff of Paul Hastings. In the company of such luminaries, I felt like one of those fringe candidates on stage at a debate with the audience wondering who the hell I was. But my co-presenters were just terrific, and I thoroughly enjoyed it. For lawyers seeking to learn more about trade secrets, PLI offers a similar program via webcast next week.

Years back, I butted heads with Farmers Insurance in a number of non-competition cases, all of which settled pretty amicably. Apparently, Farmers has more problems to solve in this area, as reported by Insurance Journal. This suit sounds like it fits a familiar pattern in which an employee copied a number of documents and scooted off to a competitor. Of note, it's pending in California, which does have a trade-secret "exception" to its non-compete law.

Forbes has a long article about a burgeoning dispute between Citrix and Egnyte, one that brings to the fore the difficult procedural question that often arises when employees bolt for a California company but don't live in California.

Finally, if you're interested in further reading on an array of subjects, including the Waymo v. Uber case and Defend Trade Secrets Act case updates, I suggest linking to John Marsh's Trade Secret Litigator blog and his October monthly wrap-up. Lots of excellent source material here.

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

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

***

Defend Trade Secrets Act

I alluded to this case in my prior post.

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

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

Non-Recruitment Clauses

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

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

Sixth Circuit Appeal

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

***

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

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

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

Why All the Hullabaloo Over the Ex Parte Seizure Order?

We are closing in on one year of the Defend Trade Secrets Act, with not a whole lot of controversy. So far, no real controversies. No concerns of federalism. No huge legal question that has confounded courts. No apparent abuse of the statute.

I was relatively late to the party in terms of supporting the DTSA, which I originally felt was unnecessary. I warmed to the idea for a number of reasons, which I wrote about months before the law was enacted.

Approximately seven months since enactment, the issue that likely delayed the DTSA's passage for two years and the one that still generates the most commentary is a statutory provision that will yield the smallest practical impact: the ex parte seizure order.

The remedy is designed to give victims of trade secrets theft a quick, uncontested way to seize the instruments of the theft. (Click here for a good summary of what the order, and applying for it, entails, by Wilmer Hale.) The problem is that the remedy really adds nothing to a judge's arsenal of relief and is unnecessary to administer the DTSA effectively.

***

I noted this about the ex parte seizure order provision back in 2015 when I endorsed the DTSA: 

This is not the law's most outstanding feature, to be sure. But it's not an independent reason to defeat the law. For starters, I have a hard time believing that federal courts will warm to the idea of this remedy. It will be deployed sparingly...Judges are competent enough to snuff out abuses and impose damages for a wrongful seizure of property. This remedy potentially is a paper tiger, and it will work itself out in practice.

With the benefit of time, I stand by my conclusion. The text of the remedy, found in Section 1836(b)(2), is so long and detailed that one must think think it adds a very heavy substantive and procedural layer of protection that the law otherwise does not afford. That's plainly not the case. In fact, federal courts have wide discretion to implement procedural orders that (a) require the immediate turnover of devices or laptops (the real target of the seizure provision), (b) protect the confidentiality of the information found on devices, and (c) preserve evidence. This authority can be found in the Federal Rules of Civil Procedure and in the court's inherent authority to control and monitor its own docket for the efficient disposition of cases.

For instance, a victim of trade-secret theft always can apply for a temporary restraining order that accomplishes precisely the same thing as a seizure order under the DTSA. Some restraining orders actually mandate conduct. So the DTSA's seizure provision overlaps significantly with what a judge could order under Federal Rule of Civil Procedure 65. Many of the subsets of the DTSA already are part of basic TRO practice, including the provisions on mandating particular findings, a return date for a hearing, a description of the property to be seized, and a surety bond.

The DTSA confusingly says that the seizure provision is unavailable if Rule 65 is inadequate to achieve the provision's purpose. No one really knows what that means, except that it certainly gives a judge reason to hit the pause button. Given the discretion a judge has to order temporary injunctive relief (even on an ex parte basis), it seems overly cumbersome for an attorney to make this showing. About the only real difference between an ex parte restraining order and an ex parte seizure order is that the latter requires a hearing on 7 days. Rule 65 gives you 14 days, so I am unclear why a victim would want to embark on a process, and then defend an order, with a shorter duration.

The DTSA does contain a provision that allows one (probably a third-party) to file a motion for encryption. This would allow one to encrypt information on a seized laptop, for instance, that's unrelated to the theft. Imagine a new employer's product designs which are on an employee's laptop, but which have nothing to do with the case. It seems reasonable and not intrusive to allow the employer to move for prophylactic relief to protect its product designs, but the Federal Rules of Civil Procedure are flexible enough to embrace that right anyway. A non-party who seeks a protective order only needs to first intervene in the case. That can't be much more cumbersome than seeking an encryption order.

District courts seem pretty sanguine about the ex parte seizure order, which bears out what I have been saying about its limited scope and impact. Three separate district courts have issued Rule 65 temporary restraining orders in DTSA cases that seize property. See Magnesita Refractories Co. v. Mishra, No. 2:16-cv-524 (N.D. Ind.); Earthbound Corp. v. MiTek USA, No. C16-1150 (W.D. Wash.); and Panera LLC v. Nettles, No. 4:16-cv-1181 (E.D. Mo.). All Rule 65 orders accomplished precisely what the ex parte seizure order was designed to do.

Another case, OOO Brunswick Rail Mgmt. v. Sultanov, No. 5:17-cv-17 (N.D. Cal.), denied a motion for an ex parte seizure order because it was issuing both (a) a separate evidence preservation order on non-parties that maintained personal e-mail accounts for the defendants, and (b) ordering the defendant to deliver devices to the court at the time of an injunction hearing. These orders fall within the court's inherent authority to issue orders preserving evidence and under Rule 65 itself.

Before the DTSA became law, Professor Eric Goldman of Santa Clara University School of Law wrote that "[i]n light of the remedies already available to trade secret owners in ex parte temporary restraining orders...the seizure provision [of the DTSA] purports to apply to only a narrow set of additional circumstances."

I'm still waiting for someone to tell me what those narrow set of additional circumstances are.

Non-Compete Suits and TROs - Part 3

In the last installment of my series on temporary restraining orders (TROs), I will discuss some practical problems and considerations for parties who argue these motions in court.

I will address this both from the perspective of the moving party (usually the employer) and the responding party (usually the employee). One caveat first. The first, most important consideration is to understand local practice.

From my perspective, it is harder to obtain a TRO in federal court than it is in state court. But practice varies widely among jurisdictions - and even within jurisdictions among judges. Preliminarily, any attorney needs to understand what it is judges want and expect at a TRO hearing.

Practical Problems and Considerations - The Moving Party's Perspective

Start with the premise that judges aren't inclined to grant many TROs. By definition, the relief is extraordinary. It will cause problems with the court's docket. And it may require the court to do a lot of work in a short amount of time.

So any party moving for a TRO better tie up every single loose end. In my experience, TROs are often poorly put together, likely because of the haste in getting something on file. But taking shortcuts and failing to cover the necessary areas is the surest (and easiest) way for a court to deny the motion.

I have come up with five key considerations that a moving party must keep in mind, irrespective of the particular merits of any case.

(1) Describe the immediate harm. This sounds obvious. But many TROs fail to address this. In a non-compete case, for instance, a moving party should attempt to show that customer solicitation efforts are occurring as of the filing (not that they once occurred) and that valuable customer relationships are at risk. If data has been taken or compromised, the moving party must show what type of harm could occur absent a court order. Conclusions are not enough. Specificity rules.

(2) Identify compelling facts in affidavits. TROs that overemphasize conclusions and speculation are destined to fail. Sworn declarations should identify customers solicited, orders lost, data taken, or other specific acts of unfair competition. If a moving party doesn't have at least some hard evidence to point to, then the motion won't carry the day.

(3) Keep it short. A party seeking a TRO will have a judge's attention - but not for very long. A TRO brief does not have to cite every case or come in just at the word limit (it's a limit, not a goal). A concise brief highlighting sworn declaration testimony, touching upon the key TRO elements, is much better than a sprawling 200-page filing that a judge will only glance at and quickly discount.

(4) Tell a story. This is my advice for just about any motion or brief. But on a TRO, you have a narrow window to make a quick, powerful impression. A strong introduction demonstrating ongoing harm and the need for an immediate order is critical. Even more important is a story describing why the non-compete is reasonable and enforceable. Because a court likely won't be considering anything but a movant's submission, it is important not to get bogged down into unnecessary details.

(5) Be prepared with a bond. It is essential for a moving party to know that it may have to post a bond to get a restraining order. Federal Rule 65(c) discusses the requirement of posting security. Courts must consider the amount of a bond when granting any type of preliminary injunction or TRO. If the court is inclined to grant the motion, it may ask counsel for the moving party what its position is on security. It is not enough simply to ask for a waiver. Counsel must be prepared to acknowledge some amount has to be posted and give a rationale for what that amount is.

Practical Problems and Considerations - The Responding Party's Perspective

A party responding to a TRO is both in the driver's seat and somewhat stuck. On the one hand, most TRO motions are denied - so that's naturally a plus-fact. However, the responding party often is caught flat-footed and has little opportunity to tell his or her side of the story.

Practical tips? There are many. Here's five:

(1) Identify procedural problems. As TROs are almost always slapped together, it is inevitable that a moving party will make mistakes. It's incumbent upon a defendant to know the TRO rules and standards, and describe for the court why the plaintiff failed to meet its burden. For instance, in Illinois state courts, our pleading rules require a moving party to show specific facts concerning irreparable injury. Conclusions won't suffice. I have defeated TROs when plaintiffs make undeveloped or conclusory arguments concerning this critical TRO element.

(2) Focus on what is being requested. Often times, a court may agree that a TRO - in comcept - is warranted. But the plaintiff may overplay its hand and ask for too much relief. For instance, a draft order submitted may sweep too broadly or not describe with specificity the conduct to be enjoined. A responding party should always seek to narrow the TRO the plaintiff seeks, or describe why the scope of the relief is too broad or vague to be enforced. This often dooms a TRO seeking some relief concerning use of trade secrets.

(3) Point to delay, lack of an emergency. Courts will require a moving party to act quickly if it wants a TRO. But sometimes a plaintiff will wait too long; even a week's delay in acting can spell the end of a TRO motion. A defendant is well-advised to point to evidentiary holes or facts demonstrating that the plaintiff was aware of the challenged conduct and sat on its rights for an unreasonable period of time.

(4) Submit a concise response - if you can. Difficult as it may seem, a responding party should try to submit a response brief, with or without affidavits. Again, brevity is very important because a judge won't have time to review a lengthy submission. And, also, it may give the court a better idea of the defendant's story before any hearing. In federal court, it is common for courts to give the responding party a few days to submit a brief before conducting any sort of a hearing. In state court, this is less common.

(5) Consider an agreed order. It's never fun conceding. But a defendant can do well by averting a TRO hearing altogether. It can propose an agreed injunction order that gives a plaintiff some relief, but not all of what it's asking for. A plaintiff has a natural incentive to consider this, given the reluctance with which courts grant TROs. Common ways to resolve a TRO in a non-compete case include an agreement not to solicit a narrow (as opposed to broad) group of customers, to return documents or information, and not to work in a defined role at a competitor pending an injunction hearing.

Non-Compete Suits and TROs - Part 2

Last Saturday, I discussed a difficult procedural issue concerning TROs - appellate rights.

Today, I want to discuss a more practical problem clients face when deciding whether to move for a TRO in a non-compete case: what are the benefits and drawbacks of seeking an immediate restraining order?

Benefits

I think there are three potential benefits to moving for a TRO, but like anything else, they're subject to some qualification.

First, pursuing a TRO often times leads to an agreed order that may be less than what the client wants, but still gives some measure of relief before an evidentiary hearing on a preliminary injunction motion. Look at it this way: if you don't move for a TRO, you're not getting anything until the injunction hearing - which could be 2 months down the road. And if you take something less than what you're asking for to resolve the motion, you're still getting more than you would without seeking the TRO in the first place.

Second, a TRO motion gives the plaintiff the ability to frame the dispute for a judge right away. My experience is that judges - despite their heavy dockets - remember cases that are before them on TROs and preliminary injunctions. They immediately dive into the merits, which doesn't happen in the vast majority of cases. By seeking a TRO, the plaintiff is able to tell a story and get it right before a judge, who is more likely to remember the case as opposed to those that just sit around or are a regular staple of his or her docket. In a strong case, this can be very beneficial for future disputes or contested motions.

Third, the client often benefits from a TRO motion, even if it's not entirely successful. The lawyer must communicate that TROs are difficult to obtain, and that a loss is really not a huge setback. Even unsuccessful TROs can force an immediate settlement discussion or a concession, and the very pursuit of it may achieve some measure of relief. The defendant, for instance, may prevail and defend the TRO successfully, but decide that - to minimize risk - he or she is going to stop soliciting the accounts protected by the covenant.

Drawbacks

Despite these benefits, TROs suffer from some drawbacks, too. Again, I'll stick with three.

First, a loss can embolden a defendant into thinking he or she has a strong defense. The standards for determining a TRO are much different than at final judgment, but if a judge expresses skepticism at a TRO hearing about the covenant's enforceability, then a defendant may feel as if the cost of litigation is justified for achieving a favorable result.

Second, the compressed timeframe in which an attorney must file and present a TRO motion often leads to sloppy or incomplete work. Unless a client is prepared to provide the evidence and testimony required to support a TRO, an attorney could be hamstrung and ill-prepared to demonstrate for the court the immediate need for a TRO. In my experience, these poor evidentiary presentations doom most TRO motions.

Third, the compressed timeframe can be detrimental even if the motion is successful. Some clients are ill-prepared to go to an injunction hearing in 14 days. Since a TRO is temporary, the grant of a motion speeds up the case; the court must conduct a hearing to determine whether to convert the TRO into a preliminary injunction. And if the defense insists on a quick hearing date (that is, it doesn't consent to an extension), the plaintiff must be prepared with its witnesses and supporting evidence. In some cases, this won't be an issue. But for a client that hasn't prepared sufficient affidavits or conducted a strong factual investigation, this short turnaround time could be fatal to the success of an injunction motion.

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.

Recent Decisions of Interest (No. 7): Court Orders Return of Bedbug-Detecting Beagle

Non-compete disputes tend to have some strange facts in them. The case of Western Industries v. Lessard, though, takes this to a new level.

Western Industries operates in what has to be a niche industry of providing to its clients canines who are able to detect the presence of bedbugs, presumably in hotels, hospitals, and the like. Each canine has a handler. You can see right now where this is going.

Blaine Lessard was one such handler, and his trusted ally was Dixie - a beagle. (This picture is not Dixie, by the way.) Lessard appears not to have thought much of his employer, as he started doing the same type of work on his own long before he was fired, going so far as to sell himself on LinkedIn under his new company's name. To make matters worse, he used Dixie to provide competitive services and promoted Dixie on his website. Figuring out Lessard was up to something not good wasn't especially tough. (Many non-compete disputes start this way, incidentally. The employee just doesn't seem to give a damn about whether he is caught or not.)

Predictably, Western Industries fired Lessard. But after the termination, Lessard refused to return Dixie. Western Industries moved for immediate temporary restraining order, and the court had little trouble ordering Dixie's return.

The court, in its TRO opinion, cited a document or corporate property return provision as a basis for ordering immediate relief. Though my wife would disagree that dogs are "property" (they are more like people, she would suggest), it seems safe to analogize Dixie to a corporate asset.

So-called "mandatory" injunctions are not all that common. Courts do not like to order parties to affirmatively take certain steps; they would rather say "don't do X." However, in competitive disputes, judges frequently will order the immediate return of corporate property. That's not all that burdensome. Often times, this includes documents, hard drives, source code, or other intellectual property. But it doesn't have to be IP-related, as the case of Dixie proves.

An employer must be prepared to present competent evidence to show that it owns the assets it wants back immediately. Unadorned assertions of who owns what won't do. Corporate counsel should prepare affidavits of persons knowledgeable about the assets the company wants back, making sure to authenticate any documents evidencing ownership.

--

Court: United States District Court for the Eastern District of Virginia
Opinion Date: 3/13/12
Cite: Western Industries-North, LLP v. Lessard, 2012 U.S. Dist. LEXIS 33683 (E.D. Va. Mar. 13, 2012)
Favors: Employer
Law: New Jersey

Recent Decisions of Interest (No. 1)

My regular Thursday column will survey recent decisions across the United States which touch upon non-compete or trade secret issues. The four cases I chose this week touch on a wide variety of issues, including those relevant to the corporate counsel drafting non-compete clauses.

AMG Nat'l Trust Bank v. Ries, 2011 U.S. Dist. LEXIS 149130 (E.D. Pa. Dec. 29, 2011). The court, applying Colorado law, found that a liquidated damages provision in a two-year non-compete, which called for payment of ten times the annual gross fees for each wrongfully solicited client, was voidable as a matter of law. I drafted two liquidated damages clauses this week for clients, and my advice is always the same: be able to justify the methodology you select under oath. The more random and arbitrary a clause looks, the more likely a court simply will strike it.

ISCO Indus., LLLC v. Erdle, 2011 U.S. Dist. LEXIS 148907 (E.D.N.C. Dec. 28, 2011). A North Carolina court denied entry of a preliminary injunction motion against a sales employee in the piping distribution business. The employee's covenant was not narrowly tailored to restrict him from selling only products or services competitive with those offered by the ex-employer. This further illustrates why attorneys must be careful in considering the scope of the non-compete restriction. Using hypothetical scenarios during the drafting process can help identify problems of overbreadth.

WIT Walchi Innovation Techs., GmbH v. Westrick, 2012 U.S. Dist. LEXIS 1847 (S.D. Fla. Jan. 6, 2012). A court issued an ex parte temporary restraining order against an employee who allegedly stole a laptop containing proprietary source code and programming for a software product. The court issued a broad evidence preservation order and ordered immediate return of the stolen laptop computer. No commentary necessary here. Firsthand evidence of outright theft of property warrants mandatory injunctive relief, even on an ex parte basis.

Pellerin v. Honeywell Int'l Inc., 2012 U.S. Dist. LEXIS 3781 (S.D. Cal. Jan. 12, 2012). A district court in California sustained a defense objection to the retention of a trade secrets expert on the basis that the expert was a former employee of the defendant. Such objections, usually made under the terms of protective order, are common when the expert may have had prior access to an adversary's confidential information. It may be impossible in such circumstances for the expert to provide legitimate, untainted opinion testimony.

Motorola Obtains Limited (And Vague) Restraining Order Against David Hartsfield

As I wrote last week, Motorola filed another unfair competition case, this time against high-level executive David Hartsfield, based on the "inevitable disclosure" doctrine. It sought fairly sweeping relief in its verified complaint, but when pursuing an emergency temporary restraining order, Motorola appeared to back off substantially. The reason may be strategic.

The inevitable disclosure doctrine permits a party to impose what amounts to an ex post facto non-compete on an employee if the competitive position sought is substantially similar to the previous one and the risk of disclosing specific, valuable trade secrets is imminent and real. However, this looks better on paper than in practice. In most circumstances, when competition has yet to commence, the potential for harm is inherently speculative and the specific trade secret at issue is hard to pin down.

This is a problem with all trade secrets case, but especially ones where there is no proof as to what the employee has or hasn't done. In the Hartsfield case, Motorola invoked the inevitable disclosure doctrine but did not follow through at the TRO hearing for any relief beyond what amounted to a court order restricting what the law already prohibits. Put differently, Motorola did not seek to extend the use of the inevitable disclosure doctrine to prohibit Hartsfield from working at Nokia. This may result from the fact that Nokia and Hartsfield reside in California, but that issue was not briefed before Judge Norgle in federal court.

But why file the case anyway if Hartsfield already has a contractual and common law duty not to disclose certain confidential or trade secret information? Motorola most likely is trying to make a statement that it will carefully monitor Hartsfield and subject him to ongoing discovery requests, in which case its complaint or request for injunctive relief may be amended and supplemented.

The TRO entered by Judge Norgle, however, is fairly limited, and potentially problematic - for it may not meet the required specificity demanded by Rule 65 to put Hartsfield on notice of what exactly is restrained. For instance, Hartsfield is restrained from using such broad, malleable categories of Motorola information as: (a) business plans, marketing plans, financial data and projections; (b) information on customers and potential customers; (c) intellectual property; and (d) Motorola's methods of operation and processes.

It would not be surprising to see this case develop another angle in the course of discovery if Hartsfield is involved in some projects or initiatives on behalf of Nokia which are closely related to what he performed at Motorola. Hartsfield and Nokia will be called upon to produce significant competitive information, and if Motorola unearths specific information about his plans and specific responsibilities at Nokia, the relief it seeks on a preliminary injunction will certainly expand beyond what was sought at the TRO stage. For now, the TRO is limited, though perhaps not compliant with Rule 65. Motorola did have to post a $50,000 bond to secure the TRO.

A preliminary injunction hearing is set for March 5, and the parties will be engaged in expedited discovery over the next 6 weeks.

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.

Customer Contact May Be Prohibited In Absence of Non-Compete Agreement (Taxsalelists.com v. Rainer)

One issue that frequently comes up in my practice is the extent to which an employer can prevent an ex-employee from contacting customers when there is no non-compete or non-solicitation agreement. Though it's difficult to obtain this remedy, the circumstances are not quite as narrow as many attorneys believe.

Most frequently, post-employment competition without a valid non-compete can be restrained when an employee steals some proprietary data that bears a direct nexus to customer names or goodwill, or when the employee engages in pre-termination competitive activity with certain accounts.

As to the former, it is perfectly logical to prevent customer contact if proprietary customer information (such as a secret list) has been taken. Regarding the latter, courts call this a "headstart" injunction because it purges the unfair competitive advantage gained by an employee before his fiduciary duty of loyalty ended. So the reasoning goes, if an employee has moonlighted and diverted a customer account away for 6 months, then he or she should be restrained from working with that same customer for the same period of time.

A recent case from Colorado illustrates these two situations. In Taxsalelists.com, LLC v. Rainer., a business engaged in providing complete property tax sale lists to affiliates and subscribers suffered a bizarre familial fallout in November and early December. The owner of Taxsalelists.com, John Lane, hired his two stepsons and their wives in 2008 as employees. In July of 2009, one of the two stepsons, Matthew, resigned. While employed at Taxsalelists.com, Matthew had enabled his Gmail account to forward any personal e-mail to his company account. When Matthew quit, he forgot to disable this feature.

This might not have been a big deal, except that the plaintiff claimed Matthew was providing Taxsalelists.com's customer database to a direct competitor both before and after his employment at Taxsalelists.com ended. At the time of an injunction proceeding, a review of e-mail information seemed to confirm that the other step-son, who is still employed by Taxsalelists.com, was enabling Matthew to provide such proprietary information illegally to a direct competitor.

The court had little trouble issuing a temporary restraining order on a complaint charging violation of the Computer Fraud and Abuse Act, breach of fiduciary duty, and a host of other common-law claims. The TRO ruling is interesting in a few separate respects:

(1) It was issued ex parte (i.e., without notice) on the basis that the defendants may seek to destroy electronic evidence, hard drives and relevant information if given notice of the TRO hearing.

(2) The TRO prohibited all of the defendants from contacting any of plaintiff's customers contained on the appropriated e-mail/customer lists.

With compelling evidence of misappropriation of customer data, the court was able to fashion what amounts to a non-compete even though no contract prohibiting customer competition was in place. Under most state trade secrets statutes and the common law of fiduciary duty, courts have wide latitude to remedy acts of unfair competition, and in many cases a strong case on one of these theories may enable a plaintiff to restrain more competitive acts than even the most airtight agreement.

UPDATE X1: This matter settled with no admission of liability by the Defendants who strongly denied any misappropriation ever occurred.

--

Court: United States District Court for the District of Colorado
Opinion Date: 12/11/09
Cite: Taxsalelists.com, LLC v. Rainer, 2009 U.S. Dist. LEXIS 122274 (D. Colo. Dec. 11, 2009)
Favors: Employer
Law: Federal

Temporary Restraining Order In Non-Compete Case Requires Showing of Immediate Harm (Ride-Away Handicap Equip. v. Tracey)

Employer seeking immediate redress from threatened competitive harm have to move fast. The preferred remedy in most non-compete disputes is an injunction, and for extreme emergencies, an employer can seek a temporary restraining order - in effect, a paper trial before the court hears live evidence.

TROs are important because the employer will be largely in control of the documents. At a preliminary injunction, the defense has the benefit of time - time to amass evidence, prepare witnesses and find helpful third-party testimony.

But TROs require exigency. Illustrating this key point is a decision from earlier in the week in Florida federal court. In Ride-Away Handicap Equipment v. Tracey, the employer waited four months after sending a "cease and desist" letter to two ex-employees (and its new employer) to file a TRO petition. It also appears the employer gave no notice of the TRO to the defendants. Notice is not required in some circumstances, but the moving party must show why irreparable injury would result from lack of notice.

The court was unimpressed with the employer's delay and denied the TRO petition without a response. There is no bright-line rule for when an employer must move for injunctive relief. Immediacy, in fact, can arise during the pendency of a dispute, for example if an ex-employee suddenly starts poaching other co-workers or discloses confidential information to a customer in violation of a contract. But in a case where the breach is known to the employer, and the employer waits a few months to seek an injunction to stop that breach, it risks losing a valuable equitable right.

--

Court: United States District Court for the Middle District of Florida
Opinion Date: 11/10/09
Cite: Ride-Away Handicap Equipment Corp. v. Tracey, 2009 U.S. Dist. LEXIS 104984 (M.D. Fla. 2009)
Favors: Employee
Law: Federal Rules of Civil Procedure

New Jersey Case Law Demonstrates Breadth of Protectable Interests (Ajilon Professional Staffing v. Griffin)

In most every state, a non-compete agreement must not only be reasonable, it must support a legitimate (or protectable) business interest. The rationale is that agreements that restrict competition per se are unenforceable restraints, much like anti-trust law bars certain types of business combinations or contracts.

The scope of protectable interests varies from state to state, though there is a significant level of overlap. New Jersey's test, applied on a recent motion for temporary restraining order, is employer-friendly and gives a court greater discretion to find a restraint supports a protectable interest. Like many states, New Jersey recognizes an employer has an interest in protection of confidential information and client relationships. However, its third recognized interest protects "an investment in an employee."

As should be evident, this goes beyond what other states permit. Many states, New York among them, protect unique or extraordinary skills (such as an on-air personality), while others protect specialized employee training. But just about every employer makes some "investment" in an employee. It is difficult to imagine how an employer could not satisfy the protectable interest test the way New Jersey courts have framed it.

In Ajilon Professional Staffing v. Griffin, the court had little trouble concluding at the TRO stage that an executive placement agency demonstrated a protectable interest when one of its recruiters left to join a competing firm. The court noted Griffin had worked for Ajilon for 12 years and developed a reputation in the community as a solid recruiter for financial professionals. The TRO was, therefore, extended to bar Griffin from performing a host of competitive activities under his non-compete agreement, activities which extended beyond mere solicitation of Ajilon clients.

--

Court: United States District Court for the District of Arizona
Opinion Date: 4/10/09
Cite: Ajilon Professional Staffing, LLC v. Griffin, 2009 U.S. Dist. LEXIS 35895 (D. Ariz. Apr. 10, 2009)
Favors: Employer
Law: New Jersey

Ohio Court Denies More Expansive Temporary Restraining Order for Trade Secrets Misappropriation (The Right Thing v. Brown)

In trade secrets litigation, the scope of any injunctive relief is always a hotly contested issue. Courts retain wide latitude to fashion an order to achieve equity. Often times, this means a court will go beyond prohibiting a defendant from using or disclosing certain, listed types of information that were improperly used or disclosed. To that end, if a court finds that more robust restrictions on competitive activity are needed, the injunction can extend to solicitation of certain accounts about whom the employee misused or accessed confidential information, or even to prohibition on taking a job altogether.

In The Right Thing v. Brown, the court determined that a former recruiter who left an outsourcing firm to join Manpower e-mailed to her personal account a number of her ex-employer's documents containing arguably sensitive business information, such as client information, price lists, and financial data. The allegedly purloined documents were sent around the time Brown quit and just before she started with Manpower.

The court had little trouble concluding that, for purposes of the temporary restraining order motion, the ex-employer was likely to prevail on claims of trade secrets misappropriation. Accordingly, it entered an (arguably vague) order barring Brown from using certain types of documents or information of her ex-employer.

Still, the court refused to take the next step and prevent Brown from working at Manpower. Aside from the problematic e-mails, there was little to indicate Brown had intended to use the information taken to target specific accounts or market segments. In light of this lack of additional, damaging evidence, the more expansive TRO request was denied.

--

Court: United States District Fourt for the Northern District of Ohio
Opinion Date: 2/2/09
Cite: The Right Thing, LLC v. Brown, 2009 U.S. Dist. LEXIS 7464 (N.D. Ohio Feb. 2, 2009)
Favors: Employer
Law: Ohio

Illinois District Court Issues Partial TRO In Employee Competition Dispute (Hal Wagner Studios v. Elliott)

A federal district case out of Southern Illinois illustrates the difficulty employers face in attempting to enforce restrictive covenants - even those reasonably drafted.

The case of Hal Wagner Studios v. Elliott arises out of the school photography business. HWS provides yearbook and portrait services to schools in the Southern Illinois area. At the end of 2008, several of its key employees defected to a competitor, Herff Jones, and immediately began soliciting key HWS accounts. HWS also produced substantial evidence that certain of the employees misappropriated a substantial number of corporate documents. To its credit, HWS listed the specific documents missing, produced logs indicating suspicious copying and printing activity, and outlined for the court how it would be harmed by the defendant's use of those documents.

HWS also produced a non-compete agreement with the lead defendant, Kris Elliott. The non-compete was well-drafted and reasonably tailored; it only barred Elliott from soliciting school photography accounts which were in his defined territory or which he produced for HWS. (A separate aspect of the non-compete further barred Elliott from engaging in other competition with respect to those accounts, but the reasonableness of this clause was not discussed.)

HWS immediately filed suit and moved for a TRO on both the non-solicitation covenant and on several common-law claims seeking return of the information taken by the defendant group around the time of their mass exodus. The court denied HWS' effort to prevent Elliott from soliciting clients, but granted an affirmative injunction mandating return of documents.

In denying relief on Elliott's non-solicitation covenant, the court found that it was of questionable applicability under Missouri law because HWS had failed to pay Elliott commissions for a period of time. Though HWS claimed it adjusted Elliott's salary instead, the court found that a provision of the contract requiring modifications or amendments to be in writing doomed HWS' explanation. As such, and even though the court warned Elliott about the risks of further solicitation, the court could not issue a TRO in light of the likelihood HWS would not prevail on the merits.

The issue regarding return of documents proved easier for the court. Under a fiduciary duty theory, the court exercised its power of equity to demand immediate return and an accounting of documents HWS identified as missing. Key to this finding was the balance of harms analysis. Not only was HWS likely to prevail on the merits, but HWS was in a far worse position from not retrieving its documents than the defendants were from having unlawful continued access to them.

To its credit, the court issued a very specific TRO outlining by document name what should be returned and how the documents needed to be accounted for. Frequently, courts issue overbroad TROs without any degree of required specificity.

--

Court: United States District Court for the Southern District of Illinois
Opinion Date: 1/15/09
Cite: Hal Wagner Studios v. Elliott, 2009 U.S. Dist. LEXIS 2778 (S.D. Ill. Jan. 15, 2009)
Favors: Employee
Law: Missouri, Illinois

Faulty Affidavit Prevents Employer From Obtaining TRO (American Family v. Gustafson)

An effort by American Family Insurance to obtain an ex parte temporary restraining order against a former employee, Barry Gustafson, failed in large part because of an insufficient affidavit submitted by the plaintiff in its TRO application.

The case arose under the Computer Fraud and Abuse Act (CFAA), as well as other pendent state claims for unfair competition. Increasingly, employers are using the CFAA to federalize competition cases, particularly given the expansive reading some circuit courts have given to the statute. The gist of plaintiff's claim was that Gustafson downloaded information from American Family's computers and used that information to solicit away customers for his new venture. The TRO was denied, and the court chastised the plaintiff for its conclusory affidavit.

In particular, the court noted that the affiant could not set forth any facts demonstrating that Gustafson had solicited or continued to solicit customers improperly. Additionally, the affidavit indicated that Gustafson began soliciting customers in July or August of 2008, but given that the complaint and ex parte TRO were filed on December 21, the statements of the affiant undercut any argument of "immediate injury."

The case demonstrates the care which attorneys must take in securing testimony by way of affidavit. Too often, insufficient or hastily prepared affidavits contain inadmissible hearsay or improper conclusions. This can doom an employer's chances of obtaining immediate injunctive relief regardless of the merits.

--

Court: United States District Court for the District of Colorado
Opinion Date: 12/22/08
Cite: American Fam. Mut. Ins. Co. v. Gustafson, 2008 U.S. Dist. LEXIS 103068 (D. Col. Dec. 22, 2008)
Favors: Employee
Law: Federal Rules of Civil Procedure

Temporary Restraining Order Granted In Insurance Brokerage Dispute (Prudential Ins. Co. v. Hosto)

A federal district court in Illinois issued a temporary restraining order against an insurance agent who left Prudential to work for a competitor, Broker Dealer Financial. The employee, Barry Hosto, had executed a non-compete agreement with Prudential before his departure.

Hosto's undoing was largely caused by his new employer, which, after receiving information about Hosto's post-employment activities, turned over to Prudential 109 customer files Hosto allegedly pilfered before he quit. Several months later, when it was apparent Hosto was still violating his non-compete obligations and contacting his old insurance accounts from Prudential, Prudential filed suit seeking an immediate injunction.

The district court had little trouble concluding a temporary restraining order was warranted. It did not discuss or analyze the validity or reasonableness of the non-compete agreement. The opinion issued by Judge Reagan was notable in one respect - despite the clear evidence of Hosto's misappropriation of customer files, the court rejected Prudential's request for Hosto to turn over all documents then in his possession related to his former Prudential clients.

Decisions are generally split over whether this element of relief is warranted at the TRO or preliminary injunction proceeding, with the dissenters claiming such an order would be tantamount to a permanent injunction. However, in the face of clear evidence Hosto had taken Prudential's property, it seems a better result would have required Hosto to immediately turn over and account for property taken at the TRO stage.

--

Court: United States District Court for the Southern District of Illinois
Opinion Date: 10/2/08
Cite: Prudential Ins. Co. of America v. Hosto, 2008 U.S. Dist. LEXIS 77051 (S.D. Ill. Oct. 2, 2008)
Favors: Employer
Law: Illinois