The Reading List (2017, No. 25): Eighth Circuit Affirms Damages Award in West Plains Litigation

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

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Jury Verdict Affirmed in West Plains Litigation

The Nebraska case of West Plains, LLC v. Retzlaff Grain is unique in that it belongs in the limited group of trade secrets and unfair competition cases to proceed to jury verdict. The case is garden-variety lift-out, engineered by a former owner of the plaintiff who systematically recruited away key employees to replicate his former business. A Nebraska jury returned a verdict of $1,513,000 in compensatory damages (along with compensation forfeiture in varying amounts against certain ex-employees).

The case is valuable for its discussion of a very common tort that usually accompanies trade-secret or non-compete claims: interference with business relationships. In most cases, interference can be privileged or legally justified if it's for competitive purposes. But interference can be tortious (or wrongful) if done in bad faith, with improper means, or as part of a fraudulent or illegal scheme. Here, the Eighth Circuit found that enough evidence of unjust interference was present in the employees' mass exodus from their former employer. Specifically, the employees used customer lists, documents, and other internal confidential information to plan a coordinated departure. Too, the plaintiff introduced communications that suggested the defendants knew they were acting inappropriately in using their then-employer's information to establish a turn-key competitor from day one.

West Plains shows the value that ancillary tort claims can play in competition cases. With the right facts, it is not always necessary to have a restrictive covenant. To be sure, finding evidence of bad faith or willful misconduct is not easy. But employees seem to keep finding a way to leave digital fingerprints all over the place.

A link to the opinion is available here.

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Privilege in the Waymo/Uber Fight

Privilege issues in trade secrets litigation can arise in a variety of ways. But those issues extend well beyond garden-variety claims of attorney-client or work-product privilege.

The trade-secrets battle-of-the-millennium in Waymo, LLC v. Uber Technologies, Inc. has featured several intricate disputes over production of privileged materials. In July, Magistrate Judge Corley denied Waymo's efforts to compel Anthony Levandowski - the ex-Google engineer in charge of driverless car technology - to produce documentation and media that would have reflected his retention of 14,000 files belonging to Waymo and that concerned its proprietary LiDAR technology. Given that Levandowski's pre-termination conduct posed a risk that he would be prosecuted for trade-secrets theft, the court found that compelling the production of those files would implicate his Fifth Amendment privilege against self-incrimination.

But Judge Corley's order denying Waymo's motion to compel went further. She extended the Fifth Amendment privilege to a privilege log that Levandowski had to prepare. The court had required Levandowski to develop the privilege log with enough substance so that Waymo could respond to his Fifth Amendment arguments. As her ruling shows, even the outlines and parameters of a privilege log, without a corresponding production of the logged materials, can provide enough of a link to a potential crime so as to implicate constitutional concerns.

The Order is available at Waymo, LLC v. Uber Techs., Inc., No. 17-cv-939, 2017 WL 2864854 (N.D. Cal. July 5, 2017).

Minnesota's Justification Rule Shield Employer Liability on Non-Compete Claims

The economics of non-competes often don't work.

Injunctive relief is expensive and sometimes yields a hollow remedy if customers start to bolt regardless. As for damages, many employees aren't collectible.

This is where the new employer comes in. If there is real customer attrition linked to a non-compete violation, the new employer becomes the target simply because the old employer perceives it as able to satisfy a damages judgment.

The theory of liability hinges on the tort of "interference" with contract rights - encouraging the non-compete breach, in other words. For companies trying to enforce the non-compete and collect damages, it's essential to consider how to prove interference.

Most states apply the tort the same way, but crucial differences can arise.

The principal difference involves "justification" - that is, a party's ability to interfere with a contract to further its own business enterprise. In that respect, one question that frequently comes up is whether counsel's advice that a non-compete is unenforceable can rise to the level of legal justification absolving the tort. If so, the new employer may not face liability even if the employee breaches the contract and must pay damages.

This was the question before the Supreme Court of Minnesota in Sysdyne Corp. v. Rousslang, decided this past Thursday.

The Court found that the justification defenses encompasses the honest reliance on advice of counsel. In Rousslang, the Court applied the defense to the fact-pattern described above: the advice that an employee's non-competition covenant was unenforceable.

The Court's opinion provides what appears to be a safe harbor for new employers. The ruling is demonstrably unsound because it extends the concept of justification beyond the honest furtherance of one's own contractual right. A new company does not have a "right" to employ a particular individual. It may want to and may feel that person would be a valuable asset. However, this interest should not provide a third-party a pathway to interference, because it then would eviscerate the tort claim entirely (even outside the non-compete context). A party always will be able to claim a business interest in something.

The advice-of-counsel defense effectively undercuts any viable damages remedy, leaving the enforcing party with potentially a hollow judgment. The Court in Rousslang did not articulate what kind of inquiry a new employer must make, defaulting only in the broadest sense to a "reasonable inquiry" standard to be applied under the facts of each case.

So what kind of facts would the new employer establish as part of the advice-of-counsel/justification defense? Here are some:

1. Testimony concerning how the company retained counsel and the experience of counsel.
2. Evidence that it sent counsel the agreement for review.
3. A description of the facts the company gave counsel (such as the employee's experience, exposure to customers, training, access to confidential information).
4. The opinion itself, whether verbally or in writing.
5. Billing records and e-mail correspondence.

All of this puts counsel in an awkward spot, of course, as her advice may be on trial (at least to show it was reasonable, not necessarily that it was correct). Getting past that awkwardness, an attorney really has no malpractice exposure as long as she follows some basic protocols like understanding the facts, reviewing the agreement, and communicating the basis for advice to the employer.

And on the flip side, it will be awfully difficult for the old employer to prove that counsel administered advice flippantly. One key fact could undermine the advice-of-counsel defense: is the new employer asking the employee to sign a similar non-compete? Relatedly, does the company use non-competes for similarly situated employees? If so, then it's going to be awfully difficult to claim the justification defense because there's no objective honesty in the advice.

To me, this collateral inquiry into what an attorney did in terms of advising a client is no way to run a non-compete case. It adds a layer of transaction costs into what otherwise should be a fairly straightforward case about breach and the protectible interest supporting the covenant. It brings into play the specter of expert witnesses opining on whether the new employer's attorney did what a reasonable lawyer should have.

Other courts disagree with the Minnesota approach and do not allow the advice-of-counsel defense to a tort claim. The Rousslang decision is below.

Sysdyne Corp. v Rousslang (Minnesota)

Hurricane Lane's Lawsuit and the Relevance of Being "Malicious"

Football is huge in Tennessee.

When Lane Kiffin bolted UT for Southern California after a rather pedestrian 7-6 season in 2009, Volunteers fans were irate. Not because of Kiffin's remarkable pedigree - at best, he has an unimpressive record of mediocrity - but rather because he jumped ship from one blue-chip program to another.

So you would think Kiffin might be careful when wading into Tennessee. Not so.

Last week, the Tennessee Titans (really Tennessee Football, Inc.) filed suit against Kiffin claiming that he wrongfully induced their running backs coach, Kennedy Pola, to quit and assume a position with the USC football program.

Pola had a one-year contract with the Titans, and it contains an exclusivity or in-term non-compete clause. Simply put, Pola could not accept employment anywhere else during the term of his employment contract. A copy of the Complaint can be found here.

Much has been made in the news media of Kiffin's alleged "malicious" conduct. The only real relevance is that under Tennessee law, the Complaint must allege malice in order for a plaintiff - like the Titans - to recover treble (or, triple) compensatory damages. Tennessee law is somewhat unique in this regard. While contractual interference is a well-recognized tort, the availability of treble damages is a statutory remedy in Tennessee that is not particularly common.

All that said, it is clear that the lawsuit is trying to capitalize on Kiffin's infamy in the Volunteer State. It makes allegations about Kiffin's abrupt departure from UT and recruitment of other UT assistants (including his father) to join him at USC. It would be surprising if USC and Kiffin allowed the case to progress very far, particularly given that he is set to embark on his first season at USC in just a month or so.

Interestingly, the Titans did not sue Pola, the coach who left to join Kiffin. It is possible the Titans did not want to send a message to other potential coaches around the league that they are willing to sue ex-employees and who might be deterred from joining the Titans in the future.

Had the Titans elected to sue Pola and prevent him from assuming his position with USC, it almost certainly could have done so. There are many cases involving athletes where injunctive relief has been granted to prevent a player from terminating his services while the contract is in force and jumping ship to a rival. The most famous of these cases involved Rick Barry, who tried to get out of his NBA contract with the then-San Francisco Warriors in favor of playing in the now-defunct ABA with the Oakland Oaks. Barry, the first player to switch from the NBA to the ABA (in the same geographic market, no less), was ordered to sit out a year before joining the Oaks.

Employee's Tortious Interference Claim Depends on Validity of Non-Compete Agreement (Hidy Motors v. Sheaffer)

Yesterday, I wrote about the practical difficulty of pursuing employee-side non-compete claims. These almost always arise in the context of a declaratory judgment claim, where an employee seeks a court ruling (or declaration) that a non-compete is void and unenforceable. However, if an ex-employer has taken affirmative steps to interfere with competitive employment - often through a cease and desist letter to the new company - an employee may have a claim in tort for interference with employment expectancy.

A recent case in Ohio confirms that the validity of a tortious interference claim often is tied to the enforceability of the non-compete itself. In Hidy Motors v. Sheaffer, the ex-employee (Sheaffer) accepted a general manager position at an auto dealer in alleged violation of his non-compete clause. His former employer then phoned the new car dealership and informed Sheaffer's boss that his hiring violated a non-compete clause. In response, Sheaffer was fired.

Hidy Motors sued seeking a declaration that the non-compete agreement was enforceable, and Sheaffer countersued. One of his claims was based on tortious interference with employment, given that Hidy Motors' threatening phone call about the non-compete clearly was the proximate cause of his termination. Hidy Motors obtained summary judgment on the tortious interference claim, as the court held that its actions were privileged.

The appellate court reversed, holding that the trial court failed to conduct the requisite analysis into whether the non-compete was valid. According to the appellate court, "the trial court erred in assuming that the covenant not to compete could be relied on as the basis for Hidy's privilege defense to Sheaffer's tortious interference claim." In Ohio, therefore, the defense of privilege depends on the validity or enforceability of the non-compete.

The law in other states is substantially the same. When an employer raises privilege (or justification) as an affirmative defense, courts generally apply a test found in the Restatement of Torts which requires an employer to prove that the interference does not creat or continue an invalid restraint of trade. If a non-compete is unenforceable and overbroad under the law, the employer won't be able to prove the elements of the justification defense. Based on my review of other cases with similar facts, an ex-employer may be liable for punitive damages in certain circumstances, although I doubt a garden-variety case would support such an award. There must be some gratuitous interference, such as when there is no substantial competitive relationship between the two companies.

Avoiding interference claims, though, is rather easy. An employer simply should avoid contacting any prospective employers about an ex-employee's non-compete. It should direct any cease-and-desist letters to the employee only, in which case an interference claim won't stand at all. My good friend, former boss, and mentor, Bill Schaller of Baker & McKenzie, aptly wrote about this issue in his 2001 law review article "Jumping Ship: Legal Issues Relating to Employee Mobility in High Technology Industries." He writes that "[c]ommon sense does not necessarily track common law, and thus caution is important in investigating and litigating these complex, high-speed cases. Complexity and speed present an explosive mix, making it imperative that inside and outside counsel map their strategy as thoroughly and as soon as possible."

Indeed, outside counsel ought to be the voice of restraint and advise corporate clients not to act too rashly in making threats and demands when issues of potential unfair competition arise. Legal counsel can and must serve as a check to ensure that pre-litigation and litigation strategy strikes the appropriate balance between protecting a client's business interests and minimizing unnecessary risk.

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Court: Court of Appeals of Ohio, Second Appellate District
Opinion Date: 7/31/09
Cite: Hidy Motors, Inc. v. Sheaffer, 916 N.E.2d 1122 (Ohio Ct. App. 2009)
Favors: Employee
Law: Ohio