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. 3): Another Non-Compete Case in the Medical Device Business

Non-Compete and Trade Secrets News for the week ended January 20, 2017

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New Jersey Non-Competes

Non-compete disputes in the medical device and implant field are a dime a dozen these days. In that realm comes Synthes, Inc. v. Gregoris, No. 2:16-cv-6255, out of the District of New Jersey. There, Synthes successfully obtained a preliminary injunction against a former area sales vice-president who had sought to join Globus, Inc. to head up its new trauma sales division. The injunction opinion is quite long, but it hits nearly every significant legal question under New Jersey law and is a very readable primer for lawyers and non-lawyers alike.

Of particular interest is the passage concerning the employee's negotiation of a $475,000 payment from Globus if the court enforced Synthes' restrictive covenant. Crediting the employee and his counsel for obtaining this protection, the court felt that this obligation seriously mitigated the undue hardship that otherwise might result from judicial enforcement. This is the double-edged sword of indemnity obligations: they provide much-needed insurance for employees for jumping ship, but undoubtedly hurt the employee when it comes time to litigate. A copy of the Opinion is available here.

Weird Lawsuits

Perhaps because they are wrought with emotion, dust-ups over non-competes can yield some very strange lawsuits. I once had a client sued in divorce court over a non-compete because the business owner's divorce lawyer felt my client's actions somehow impacted marital property. (I won't explain here, but will say it was even more convoluted than it sounds.)

One of these bizarre non-compete related suits comes from Washington, where the Court of Appeals recently affirmed the dismissal of an action against the spouse of a former employee. The employee had breached a non-compete, and the employer sued his spouse for a constructive trust on the earnings that her husband contributed to the family's shared expenses. The employee had filed for bankruptcy, but the judgment concerning the non-compete agreement was deemed non-dischargeable. Suing the spouse didn't help the employer collect. A copy of the Opinion is available here.

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A few weeks back, I commented on the pending cert petition that asked the Supreme Court to address the International Trade Commission's authority to investigate trade secrets theft when the acts occurred outside the United States. As Jones Day writes, the Supreme Court denied Sino Legend's petition, essentially leaving intact the Tian Rui decision from several years ago that allowed the ITC to exclude the importation of goods when the misappropriation occurs outside the U.S.

Milwaukee Mayor Tom Barrett authored an op-ed in the Journal Sentinel in which he advocated for reducing employers' reliance on non-compete agreements. Wisconsin is a rather difficult enforcement state, and despite legislative efforts to liberalize non-compete law there is no indication that this will gain any real foothold. The op-ed provides an interesting viewpoint of those who believe that non-competes stifle, rather than promote, innovation.

Fisher Phillips comments on the Sultanov case, in which a federal judge denied an emergency application under the Defend Trade Secrets Act for entry of an ex parte seizure order. I wrote on this last week. The post nicely summarizes the considerations counsel must consider when seeking this type of extraordinary remedy.

From the Las Vegas strip comes a non-compete dispute between two casinos, Aria and The Cosmopolitan. The lawsuit centers on a claim that a former Aria executive wooed the casino's top customers to gamble at The Cosmopolitan. The dispute has factual shades similar to Golden Road Motor Inn v. Islam, in which the Supreme Court of Nevada held that judicial modification of non-competes was not permitted. The Las Vegas Review-Journal reports on the emergency proceedings now pending in federal court.

And in my favorite story over the past seven days, the New York Post has an article about a competition dispute between two barber shops. Three former stylists left Paul Mole's Barber Shop to start their own business, and none had a non-compete agreement. They are striking back, accusing their former employer of slandering them on Facebook and lodging allegations of "stealing" customers. Though such talk may sound like bluster, it indeed can be defamatory and non-privileged speech, potentially giving rise to presumed legal damages. Rob Radcliff has more on this story, and some practical tips, in his recent blog post.

Legislative Update: Washington Lawmaker Seeks to Ban Non-Competes

I missed my Friday post, meaning I only made it four weeks into the year before I abandoned my New Year's resolution to write and publish every Friday.

However, I took my daughter to Disney's "Frozen on Ice" on Thursday and needed a day to recover mentally. Although Frozen has officially taken over my life, it was worth it. The joy on that kid's face for two hours straight is something I won't forget. Nor will I forget the $12 icee in the Anna/Elsa tribute mug that she coaxed into me buying her. (See picture to the right. Dad drank most of it, thankfully.)

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I wrote a few weeks back that we're seeing new legislation in Washington state on medical practice non-competes, a frequent and controversial subset of restrictive covenant disputes. We got new activity out of Washington this past week on the non-compete front, and this time the legislation is more sweeping.

Five legislators have introduced House Bill 1926, which would prohibit all non-compete agreements except those incidental to the sale of a business or dissociation from a partnership or limited liability company. The proposed law would apply only to covenants enacted after the passage date.

The language of HB 1926 is identical in all respects to Section 16600 of the California Business and Professions Code, which is the well-known bar to employee non-compete and non-solicitation agreements. Courts have interpreted Section 16600 to apply to non-solicitation covenants, which are in effect just as sweeping for salespersons whose contacts are their stock in trade.

This is what both HB 1926 and Section 16600 provide:

"...every contract by which a person is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

Incidentally, Montana also has a statute in place with the same language as the California code. However, the few Montana courts which have looked at and interpreted the statutory bar have concluded it does not extend to non-solicitation covenants, creating a clear conflict with the way California interprets the statute. The proposed Washington bill does not carve out any type of activity restraint, so if passed, it would be up to the courts to decide whether to follow the California interpretation or go the Montana route.

My personal opinion is that the language could be much clearer, and it certainly should be given the proliferation of lesser restrictive activity covenants. In that regard, Montana courts probably have the better interpretation of this statutory text, but the arguments are compelling for both sides.

New Legislation and a Sentencing for Trade Secrets Theft

The new year always means a spate of legislative activity. Proposed new laws related to trade secrets misappropriation and non-compete agreements do not generate many headlines, but they are fairly common. Two states in particular are considering revising their laws concerning enforcement of non-compete agreements.

Washington

First up is Washington. Earlier this month, several legislators in Washington state introduced a bill to restrict the use of non-compete agreements that bar physicians from practicing medicine. The twin bills (one for osteopathic medicine and surgery; the other for physicians) would make non-competes void and unenforceable. The lone carve-out is that the law would allow an action to enforce a contractual provision for damages due to termination of a contract, as long as the enforcing party establishes the reasonableness of damages by clear and convincing evidence. It's not clear from the draft bill whether "termination" means a termination before the end of a set contract term, or whether it's termination of the relationship altogether. It must mean the former if non-competes would be void under the proposed law.

Physician non-competes raise, perhaps more than any other profession, issues of public policy impact, particularly if a rural area would experience a shortage of available care as a result of non-compete enforcement. The Washington bill cites the American Medical Association Code of Medical Ethics as a policy rationale for the proposed change in the law. The pertinent code provision discourages use of non-competes.

Many state courts, such as Illinois, have not found the AMA Code to raise sufficient public policy concerns to invalidate physician non-competes across the board. It is, therefore, more of a legislative judgment, rather than one for courts to balance. Other states, like Texas, attempt to strike a balance by enabling a physician to buy his or her way out of a restrictive covenant at a fair price. Texas' statute also cites to the AMA Code.

The text of the Washington house bill is available here.

Massachusetts

Next up - shocker - is Massachusetts. I, for one, hope that this state just does something so I can stop following what is going on.

Massachusetts has considered enacting the Uniform Trade Secrets Act for something like a decade, which is remarkable considering it's a uniform statute. Decide, already! The details of that debate are not that interesting.

Of more importance is whether the state will reform its laws concerning enforcement of non-compete agreements. A number of legislators have introduced bills to ban non-compete agreements, and Russell Beck's fine summary is available here. For those interested in why reform of non-competes in Massachusetts is of interest, Orly Lobel's terrific book Talent Wants to Be Free discusses this at some length.

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On the trade secrets front, criminal prosecutions continue to garner headlines.

Another one comes from Chicago where Judge Norgle handed down a tough sentence on two former employees of Citadel LLC, a high-frequency trading (HFT) outfit. As illustrated in Michael Lewis' book Flash Boys, HFT firms engage in algorithmic equities trading, a sort of shadowy corner of the markets that increasingly garners attention in the Wall Street Journal for a variety of reasons.

Citadel's victim impact statement to Judge Norgle indicated that it had spent over $2 million in costs investigating the employees' theft of trade secrets and assisting the U.S. Attorneys' office. Interestingly, Citadel had non-compete agreements with both employees and apparently paid (or contracted to pay) them during the non-compete terms. The defendants, prosecuted in part under the Economic Espionage Act, received three-year prison terms and an order to pay over $750,000 in restitution.

The allegations of trade secrets theft generally centered on the employees' repeated downloading of trading strategies and source code from Citadel's servers onto personal storage devices. Given the value of this data to Citadel's HFT platform, and the security measures it used (detailed at length in the indictment), it is not difficult to see how this conduct rose of the level of trade secrets misappropriation.

Anti-SLAPP Motions and Private Contract Disputes

One of the burgeoning issues in employee competition disputes is the applicability (or inapplicability) of state Anti-SLAPP statutes.

These statutes generally provide an expedited mechanism for an individual who is sued for petitioning the government or exercising her free speech rights to dismiss a retaliatory suit and obtain damages or attorneys' fees. Increasingly, individuals are using Anti-SLAPP statutes in the context of competition claims that employers bring.

I previously have discussed special problems that arise in the context of so-called "whistleblowers" and the intersection of trade secret law. Although this may provide a compelling factual scenario for the application of Anti-SLAPP motions, individual defendants generally have met with a fair amount of resistance in their efforts to use this statutory mechanism to cut off trade secrets claims.

By and large, Anti-SLAPP laws require a petitioning defendant (assumed here to be an ex-employee sued on some competition-related claim) to show that his or her activity involved a matter of public concern or public interest. For instance, the Court of Appeals of Washington recently found that an ex-employee's post to a job board that warned potential employees about his ex-employer's security practices did not involve a matter of sufficient public concern to invoke that state's Anti-SLAPP law. Alaska Structures, Inc. v. Hedlund, 2014 Wash. App. LEXIS 933 (Wash. Ct. App. Apr. 21, 2014).

Generally speaking, courts seem adverse to applying Anti-SLAPP laws to matters that involve private contract disputes, such as a claim for breach of a non-disclosure agreement. This is not to say fact patterns that overlap with a competition claim can't arise, but the employee's conduct generally must implicate some or all of the following:

• The matter must be of interest of concern to a substantial number of people. An example would be a disclosure about an issue concerning consumer product safety;
• There must be a close tie between the employee's statements, disclosures, or conduct and the public interest itself. For instance, an employee's disclosure of material must be directed towards the public good and not purely for some personal gain.
• The individual's conduct should not be mere ammunition-gathering in a fight with her ex-employer. There must be some objective indication the employee is pursuing a matter of larger public concern.

I am not totally unsympathetic towards individuals' efforts to use Anti-SLAPP laws, but there is a disturbing overuse of these laws in private competition disputes. While an aggressive counterattack can shift the narrative of the case, it also has the potential to backfire and force parties to double-down in litigation. I do believe there is a greater role courts should play in scrutinizing competition cases that appear to be motivated out of pure spite or for no justifiable effort to recover something of value (that is, something that clearly outweighs the costs of litigation itself). But the Anti-SLAPP laws should be a rarely invoked tool in the judicial toolkit.

Alabama and Washington Experiences Show Difficulty With Contract Formation Questions

One of the more difficult problems for employers to address is one of simple practicality:

How and when do I notify someone that she has to sign a non-compete agreement?

This sounds simple, but it's not an easy question to answer. Particularly with closely-held companies, a business may not have robust or sophisticated human resources help. They may hire infrequently. And they may not want to deal with their outside counsel to keep costs down. They may think of a non-compete at the 11th hour, before an employee has started but after she has committed to the relationship.

Or, just as frequently, the employer may decide to have her sign a non-compete after the employer has begun work. Because of the perceived "need to please," an employee may feel compelled to sign the agreement without a second thought.

These scenarios raise complicated issues of contract formation: when exactly do you have a contract and is there consideration for it?

The recent experiences of two states - Alabama and Washington - illustrate the challenges posed.


Alabama has a strange contract formation rule. It has a statute that courts have interpreted to validate non-compete arrangements only if they are "signed by an employee." That requirement is somewhat anamolous because a prospective employee who has been offered employment but who has yet to start is not "an employee" able to sign an enforceable contract. This very paradigm rendered a non-compete unenforceable in Dawson v. Ameritox, Ltd., 2014 U.S. Dist. LEXIS 801 (S.D. Ala. Jan. 6, 2014). This somewhat runs counter to advice that attorneys often dispense, which is to tell an employee beforehand of the non-compete to give that person adequate time to consider it.


Contrast this with a jurisdiction like Washington which has a fairly strong consideration rule. Like many states, Washington states that an employee may sign a noncompete when hired (such that the employment itself is consideration). But if she signs it at some time after hire, then the employer must provide fresh, independent consideration. The Court of Appeals of Washington reaffirmed this rule in McKasson v. Johnson, 2013 Wash. App. LEXIS 2848 (Wash. Ct. App. Dec. 17, 2013). The key point here is preparedness; the employer must ensure the agreement is signed at the start of the relationship.

So, what to do? The most important task for any corporate counsel or in-house attorney to do is to determine what kind of consideration rules a particular state has concerning non-competes. The Alabama rule, to be sure, is odd. The rule in Washington is far more common. And then there are plenty of states where continued employment will suffice, in which case the concerns about contract formation are not quite as paramount.

These rules are important because they override any issues pertaining to a contract's scope or whether an employee even committed a breach. They determine whether there is a contract to begin with.

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

One-Way Fee Shifting Clauses and Public Policy

Fee-shifting clauses are fairly common in non-compete agreements.

While most fee-shifting provisions in negotiated commercial contracts are mutual, employment non-compete agreements frequently contain one-way clauses. Under this scheme, employers often retain the right to obtain fees if they prevail in a dispute against an ex-employee. (Not suprisingly, I have yet to see a clause that allows only the employee to obtain his or her fees in a successful defense.)

One question I often hear from my employee clients is whether such a one-way provision is even enforceable.

At least a couple of theories are available.

First, some states may have statutes of general applicability that automatically construe one-way fee shifting provisions into mutual ones. California, Montana, and Washington are examples.

Second, a judge may be receptive to an unconscionability defense. For prevailing employees, this argument doesn't appear to give them a right to recover their fees. However, it may be a viable route to avoid fee-shifting in the event of a loss. An appellate court judge in Ohio in 1992 was open to this unconscionability defense, but since the parties did not raise it before the court, the issue was never decided.

Third, the rule of equitable modification may give a prevailing employee grounds to seek fees under a one-way fee-shifting clause. In those states that adopt equitable modification, rather than a strict blue-pencil rule, courts retain the ability to modify overbroad covenants to make them reasonable.

Can this rule be extended to allow a court to modify a fee-shifting clause? I don't know if there is any case that has ever ruled on this issue, but I think the argument has some intuitive appeal. In my mind, a lot would depend on the breadth of the restrictions, the parties' bargaining power, and the governing state's policy on reformation of covenants.

Because non-compete agreements implicate public policy unlike other commercial contracts, a higher degree of scrutiny of one-way fee provisions logically should apply. Whether a court actually will be open to this argument is something I have not yet seen.

Specific Allegations Required to State Claim for "Threatened" Misappropriation of Trade Secrets (Edifecs Inc. v. TIBCO Software)

The Uniform Trade Secrets Act allows for sweeping injunctive relief if a plaintiff can demonstrate an actual, concrete business secret and either actual or threatened misappropriation.

It is important to remember that the theory of threatened misappropriation is relevant only to claims for an injunction, not damages. The same goes with the concept of "inevitable disclosure." If a plaintiff has a cognizable damages claim, then actual misappropriation must have already occurred.

What does "threatened" disclosure mean? In California, where a substantial number of technology trade secrets cases are fought each year, courts have held that "threatened misappropriation means a threat by a defendant to misuse trade secrets, manifested by words or conduct, where the evidence indicates imminent misuse."

A recent Washington case, Edifecs Inc. v. TIBCO Software Inc., applying California law, held that a plaintiff's claim of threatened misappropriation did not survive a motion to dismiss when the only factual allegations related to the defendant's purported failure to segregate employees who knew of the plaintiff's trade secrets and who joined the defendant following a lawful acquisition of the plaintiff's competitor. The court specifically noted these allegations suggested no "affirmative conduct that would indicate a threat" of misappropriation.

It is difficult to discuss the concept of inevitable disclosure without discussing threatened misappropriation. The two theories are so closely linked as to be virtually indistinguishable in many cases. For instance, does an employee threaten to misappropriate trade secrets simply by joining a competitor in a similar position, or is this merely inevitable disclosure. Similarly, if an employee engages in suspicious conduct in addition to joining a competitor, such as downloading documents on the eve of departure, can this be considered a "threat" of misappropriation? Each case, of course, depends on many unique facts.

For practitioners, it is essential to determine whether your jurisdiction recognizes the theory of inevitable disclosure. If it does not, then the theory of threatened misappropriation certainly is available to pursue injunctive relief. But as Edifecs demonstrates, the Complaint should contain affirmative, clear allegations of imminent use of an actual trade secret.

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Court: United States District Court for the Western District of Washington

Opinion Date: 12/17/10

Cite: Edifecs Inc. v. TIBCO Software Inc., 2010 U.S. Dist. LEXIS 138654 (W.D. Wash. Dec. 17, 2010)
Favors: Employee

Law: California

Strict Construction Rule Prevents Enforcement of Non-Compete Agreement in Washington Case (Fluke Corp. v. Milwaukee Electric Tool)

Employers should always be aware that non-compete agreements will be strictly construed against it as the party in charge of drafting the contract; presumptions regarding ambiguities almost always devolve in favor of an employee. It is here where lawyers need to be particularly scrupulous in drafting agreements that reflect the intentions of the employer and guard against potential loopholes.

A recent Washington appellate case illustrates what happens when the precise contract language renders a non-compete totally ineffectual, such that traditional notions of reasonableness and protectable interests never even get addressed.

Fluke Corp. v. Milwaukee Electric Tool involves a dispute over the termination of Jonathan Morrow, who left Fluke to begin work for Milwaukee Electric in its Test and Measurement Field. But Morrow was initially hired by Jacobs Chuck Manufacturing, a subsidiary of Danaher Corporation. Fluke was a separate subsidiary of Danaher.

Morrow's two-year, broad non-compete restriction was contained in a contract with Jacbos Chuck; Fluke was not a party to it and the definition of "Company" in the preamble to the agreement referenced only Jacobs Chuck as a division of Danaher.

The non-compete clause broadened the definition of Company to include any affiliate of Danaher, but the expanded definition of Company was limited just to the non-compete term. Morrow was transferred to Fluke after he signed the non-compete contract, and he never signed a new agreement with Fluke.

Fluke balked when Morrow quit to join a competitor. Reversing the trial court's order of injunctive relief, the appellate court held that the unambiguous contract language rendered the non-compete unenforceable by Fluke against Morrow.

The reasoning: Morrow's transfer to another subsidiary - Fluke - constituted a termination of the employment agreement. It was critical that other contract provisions not at issue stated that a transfer of Morrow to another affiliate of Danaher would not constitute a termination of the agreement. However, by limiting the effect of transfer to just a few paragraphs, the fact the non-compete section was silent on this issue meant Morrow's transfer to Fluke was a termination for purposes of the non-compete covenant.

Finally, the agreement did not provide for automatic assignment to a subsidiary in the case of a transfer. Had it, the outcome may have been different - or at least the court would have been forced to address the substance of the non-compete.

The decision is an example of how employers must be careful in analyzing when the non-compete purports to operate, either in terms of an inter-company transfer, a termination or an assignment following an acquisition. It is critical that terms in one paragraph match up with another so that employees cannot argue that the strict construction rule releases them from any post-employment obligations.

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Court: Court of Appeals of Washington, Division One
Opinion Date: 2/17/09
Cite: Fluke Corp. v. Milwaukee Electric Tool Corp., 2009 Wash. App. LEXIS 364 (Wash. Ct. App. Feb. 17, 2009)
Favors: Employee
Law: South Carolina

Employer Hit For Sanctions in Washington Non-Compete Dispute (Anderson Paper & Packaging v. Johnson)

Sanctions, destruction of evidence, nefarious computer activity. All continue to be part and parcel of non-compete/trade secrets litigation these days.

In a recent Washington case, alteration of evidence was front and center after an employer sued a former sales representative for violating his covenant not to compete. Rick Johnson was a former employee of Anderson Paper & Packaging from 1994 through 1998. He was then re-hired in January of 2002.

At that time, Johnson was presented with a non-compete agreement - which he contended he did not sign. His employer claimed he signed it after being offered a signing bonus. Several years later, Johnson left and went to work for a competitor. Anderson Paper then sued to enforce the non-compete against him.

During the preliminary injunction phase of the proceedings, Rick Anderson, the plaintiff's President, submitted a declaration which attached a letter dated January 5 containing the covenant Johnson says he refused to sign. (Though the facts are not clear, it appears the document submitted to the court bore Johnson's signature.)

The parties later discovered that the January 5 letter Anderson submitted contained a letterhead the company was not using in 2002. In fact, Anderson manipulated the evidence to make it appear Johnson signed the January 5 covenant when he in fact did not. The trial court imposed evidentiary and monetary sanctions, effectively ending Anderson Paper's claim to enforce the non-compete clause.

On appeal, Anderson Paper did not challenge the appropriateness of sanctions ordered under the state court's equivalent of Rule 11. It did challenge the amount of the fees, since the court awarded Johnson all fees spent defending the non-compete claim. The court affirmed, though, reasoning that Anderson Paper's argument concerning consideration was so wrapped up in the January 5 letter that fees could not be parsed out.

As to the remaining issue on appeal, the court reversed the dismissal of the other common-law claims, reasoning that the dismissal sanction was not the "least severe sanction adequate to serve the purpose of" the sanctions rule. Those dismissed claims had included causes of action to which Johnson was not a party.

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Court: Court of Appeals of Washington, Division One
Opinion Date: 11/3/08
Cite: Anderson Paper & Packaging, Inc. v. Johnson, 2008 Wash. App. LEXIS 2569 (Wash. Ct. App. Nov. 3, 2008)
Favors: Employee
Law: Washington