2008 In Review: Top Five Developments In Non-Compete Law

We've reached the end of the year, and my first month of writing this blog. I hope to continue this for many years to come. There's no doubt 2008 was a significant year in non-compete developments. I don't have a Top 10 List for you, but rather an extended Top 5. Here are the Top 5 Developments in Non-Competition Agreements for 2008.

5. Idaho Passes New Non-Compete Legislation: Effective July 1, 2008, Idaho enacted a new non-compete law. As with many states, Idaho had operated solely under the common law. The new legislation codified much of the common-law concerning the requirements of reasonableness, but identified several “legitimate business interests” that an employer may assert in seeking to enforce a non-compete clause. The most significant change is the requirement that the non-compete agreement relate only to key employees or independent contractors. The new statute actually defines those class of persons and provides a rebuttable presumption that anyone who is among the highest 5 per cent in terms of compensation qualifies. Also significant is the change in the law that a non-compete term cannot exceed 18 months from the date of termination, unless an employer specifically gives extra consideration to an employee to sit out longer. In addition, the employer is granted some presumptions of reasonableness if the term is 18 months or less, and if the geographic area of restriction is confined to where the individual “provided services or had a significant presence or influence.” Finally, courts must modify agreements that are overbroad.

4. Massachusetts Legislator Considers Introduction of Law Banning Non-Competes for All Employees: Inspired by the growth of the high-tech economy in California (where non-competes are void), one Massachusetts legislator is considering legislation to bar non-compete agreements entirely within that state. Will Brownsberger admits to a dual motivation for seeking a substantial change in the law: (a) preventing organizations from taking advantage of average, mid-level laborers who have no bargaining power and are subject to inherently unfair restraints; and (b) keeping talented engineers in Massachusetts. Most experienced employment law attorneys agree that non-compete agreements are viewed less favorably the farther west one migrates, where economic libertarianism tends to flourish. On the East Coast, the bias tilts heavily towards the employer. Whether this movement gains traction in Massachusetts may portend a shift away from regional trends in non-compete law.

3. Louisiana Amendments Extend Permissible Uses of Non-Compete Agreements: Louisiana is one of a handful of states that regulate non-compete agreements through a combination of statutory and common law. Effective August 15, the Louisiana Legislature amended LSA-R.S. 23:921 to expand the permissible scope of non-compete agreements. Now, corporations, partnerships and limited liability companies may enter into non-compete covenants with shareholders, partners or members (as the case may be) once their ownership interest in the organization ends. Previously, these types of arrangements were not permitted under the Louisiana statute, and by operation of the default clause against restraints of trade, they were void.

2. California Supreme Court Rejects “Narrow Restraint” Rule: By now, most attorneys are aware that non-compete agreements are invalid restraints of trade under California Business and Professions Code Section 16600. A number of Ninth Circuit cases had tried to limit the application of Section 16600 and impliedly created a “narrow restraint” exception, which basically said that non-compete clauses were acceptable if they barred employees from pursuing only a small or limited part of his or her trade. However, in Edwards v. Arthur Andersen, 189 P. 3d 285 (Cal. 2008), the Supreme Court of California rejected the so-called “narrow restraint” doctrine. In fact, the narrow restraint was anything but. The 18-month non-compete at issue prevented a high-level tax manager from working with any client for whom he conducted professional services or any client of the office (Los Angeles) to which he was assigned. In most states, this is called a customer non-solicitation clause. In Illinois, it is subject to the same standard of reasonableness as any non-compete contract. For professionals and sales employees, it is tantamount to a general non-compete clause barring work in the industry. The Court expressly rejected the exception and upheld a strong public policy against employee non-compete agreements.

1. The Papermaster Case: The year’s most high-profile case is also the most significant. A discussion of IBM v. Papermaster can be found by tracking back to my earlier post.

That's it for the year. As the calendar turns, my first full year with this blog. Stop back often!

Florida Court Rejects Two Non-Compete Defenses In Granting Injunction (Charles Schwab & Co. v. McMurry)

In issuing a preliminary injunction against a former financial consultant of Charles Schwab & Co., the district court rejected two rather common defenses employees offer in the hopes of breaking their non-compete agreement.

First, the defendant, Lance McMurry, argued that Schwab failed to pay him in a timely manner, and that this delay released him from his obligations under the contract. The court rejected the defense, noting that mere delay in payment - as opposed to an outright failure to pay - will not allow an employee to escape otherwise valid restrictive covenants.

Second, McMurry argued that his mere act of sending announcements to Schwab clients regarding his new position at Bank of America did not constitute improper solicitation within the meaning of the non-compete clause. Again, the court had little trouble rejecting the contention - particularly since McMurry did more than just mail announcements. He followed them up with actual phone calls to clients.

The court noted that mere sending of announcements may constitute impermissible solicitation, and it cited a number of cases dealing with the financial brokerage industry holding as such.

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Court: United States District Court for the Middle District of Florida
Opinion Date: 12/23/08
Cite: Charles Schwab & Co., Inc. v. McMurry, 2008 U.S. Dist. LEXIS 104140 (M.D. Fla. Dec. 23, 2008)
Favors: Employer
Law: Florida

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.

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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

New York Court Upholds Validity of Unlimited Non-Disclosure Clause (Ashland Management v. Altair Investments)

Investment management firms - much like other professional service organizations - are highly dependent on the goodwill and personal contacts developed by managing directors and portfolio managers. In a recent case decided by the Appellate Division in New York, the court upheld broad application of a standard non-disclosure clause to limit two ex-employees' ability to solicit and service certain clients seeking investment advice.

In Ashland Management v. Altair Investments, a managing director and a vice-president formed a competing investment management firm just prior to their departure from Ashland. Before they had resigned, the two upper-level employees sent an unauthorized commentary on investment performance for the second quarter of 2003 to plaintiff's clients, along with a third quarter forecast. The letter was a breach of company policy. The record also listed other improper pre-termination conduct.

The defendants appealed the trial court's order denying them summary judgment on the breach of contract claims arising out of the non-disclosure covenant. They contended it was unenforceable due to its overbreadth and lack of a durational limit. The court, over a dissent, affirmed the trial court's order and held that the defendants were not entitled to summary judgment on the reasonableness of the non-disclosure covenant.

The decision is somewhat significant in that the court appeared to sanction the use of a non-disclosure covenant as a de facto client non-solicitation clause. Indeed, the underlying injunction barred the defendants from soliciting or working with a select group of plaintiff's wealth management contacts. No non-compete was at issue, and the record is unclear whether the trial court upheld injunctive relief based on a breach of fiduciary duty theory.

This case serves a somewhat cautionary note for employees who are bound only by a non-disclosure agreement and seek to use customer lists or proprietary contact management software following their departure. Frequently, employees do this, reasoning that since no non-compete exists, any restraint would be limited to turnover of their ex-employer's data. However, courts have broad discretion to fashion injunctive relief to achieve an equitable result; in certain instances, the only way to remedy a breach of a non-disclosure agreement, particularly if the breach touches directly upon client information, may be to order an employee to stay away from those clients.

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Court: Supreme Court of New York, Appellate Division, First Department
Opinion Date: 12/23/08
Cite: Ashland Mgmt. Inc. v. Altair Investments NA, LLC, 2008 N.Y. App. Div. LEXIS 9787 (N.Y. App. Div. 1st Dep't Dec. 23, 2008)
Favors: Employer
Law: New York

Ohio Appellate Court Requires Heightened Proof for "Inevitable Disclosure" Case (Hydrofarm v. Orendorff)

The "inevitable disclosure" theory of trade secrets misappropriation continues to yield new rules and concepts. One of the most hotly litigated areas of unfair competition law involves application of the theory absent an actual non-compete agreement. Courts have taken a number of different approaches in balancing the rights of an employer to protect its intellectual property with an employee's right to earn a livelihood.

Three of the earliest and most frequently cited inevitable disclosure cases - PepsiCo v. Redmond, Merck v. Lyon, and DoubleClick v. Henderson - all dealt with direct competition, but no non-compete. What emerged from those cases was that courts required something more than just a theoretical threat of trade secrets disclosure. Some element of bad faith, or a willingness to use actual, identifiable trade secrets had to be present.

A recent Ohio case follows suit.

In late 2005, Hydrofarm - a manufacturer of indoor gardening products - entered into a separation agreement with Phil Orendorff. As is now common, that agreement contained a covenant requiring Orendorff to keep confidential Hydrofarm's proprietary information. It contained no non-compete covenant.

Nearly two years later, Orendorff accepted a job with one of Hydrofarm's direct competitors, Sunlight Supply. Hydrofarm then sued, seeking preliminary injunctive relief under a number of different legal theories, including trade secrets theft. The trial court issued the injunction, barring Orendorff from working for Sunlight Supply for six months.

On appeal, the Court of Appeals of Ohio reversed under the exacting abuse of discretion standard. Notably, the court stated that "[n]either this court nor the Supreme Court of Ohio has applied the 'inevitable disclosure' doctrine in a case that did not involve an enforceable noncompetition agreement." Still, the court did not go so far as to hold that the doctrine couldn't be applied in the absence of a non-compete.

But its holding makes clear that employers must show something more than a direct competitive relationship and an overlap in job duties to enjoin a former employee under the inevitable disclosure doctrine. In particular, the court held:

"Hydrofarm must demonstrate by clear and convincing evidence not only that defendant possesses Hydrofarm's trade secrets, but, also, that defendant will inevitably disclose them to Sunlight Supply, or will utilize those trade secrets in his competitive work on behalf of Sunlight Supply, and that those trade secrets will enable Sunlight Supply to achieve a substantial competitive advantage over Hydrofarm."

Put another way, the employer seeking utilize the doctrine must demonstrate irreparable harm under a heightened standard of proof - something that appears to require bad faith or a concrete demonstrable threat to use the trade secrets at issue. In the Hydrofarm case, the court had little trouble reversing the decision, since Orendorff had not had access to proprietary information of Hydrofarm for almost two years. The court found that pricing and marketing information, along with certain trade show selection criteria and customer feedback concerning products, was stale. As such, it is doubtful this type of cyclical, operational data could be considered trade secret information - and nothing indicated Orendorff threatened to use it.

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Court: Court of Appeals of Ohio, Tenth Appellate District
Opinion Date: 12/23/08
Cite: Hydrofarm, Inc. v. Orendorff, 2008 Ohio App. LEXIS 5717 (Ohio App. Ct. Dec. 23, 2008)
Favors: Employee
Law: Ohio

New York Case Provides Paradigm for Impermissible "Indirect Solicitation" of Clients (Marsh USA v. Karasaki)

The State of New York continues to be the venue where some of the most significant non-compete and trade secret issues have been decided in 2008. A week from today (12/31), I will be posting my top 5 developments and cases of the year - and we can be sure New York will be well-represented on the list.

A recent decision on a preliminary injunction motion addresses a common issue in non-compete agreements: to what extent can a contractually bound employee facilitate solicitation of former clients through strawpersons? This type of indirect solicitation is usually quite transparent, and the case of Marsh USA v. Karasaki demonstrates this perfectly.

By all accounts, Chad Karasaki was a highly successful insurance brokerage executive at Marsh & McLennan, responsible for supervising and cultivating construction industry clients in Hawaii. In 2003, nearly 17 years after he started his career at Marsh, Karasaki signed a one-year non-compete agreement (in connection with Karasaki's participation in a discretionary bonus plan) with Marsh prohibiting him from servicing Marsh clients he contacted or supervised for a period of one year after the termination of his employment. Four years later, he signed a similar agreement.

In 2007, Aon - unquestionably Marsh's biggest competitor - had suffered from poor performance in its Hawaii office and began an effort to recruit Karasaki - and other account executives - away from Marsh. Karasaki eventually quit Marsh and joined Aon a week later. Marsh sued to prevent Karasaki from breaching his non-solicitation clauses, and after the case was transferred from Hawaii to New York, Marsh prevailed with relative ease. In fact, the court awarded Marsh its attorney's fees after the preliminary injunction and before any final judgment in the case.

The case is notable in two respects. First, New York courts continue to follow the rule that when the asserted protectable interest in a non-compete is client relationships or goodwill, the employer can only prevent an employee from capitalizing on relationships the company helped create or facilitate. In this respect, New York is similar to Illinois - but unlike a lot of other states - in reasoning that an employer cannot recruit someone with pre-existing relationships, capitalize on those relationships, and then seek to preclude the employee from working on those accounts after he or she leaves. This rule, of course, would not apply if the asserted protectable interest were protection of trade secrets.

Second, the Karasaki case is a textbook example of indirect client solicitation. In other words, Karasaki tried to circumvent his restrictions by funneling client names, key contacts and other important client information to others who would serve as a proxy or conduit for Karasaki. Once again, discovery of e-mail between Karasaki and Aon executives involved in the mass exodus effort provided all the evidence needed to link Karasaki to the ruse. (It is clear Karasaki breached his covenants directly, as well, but the bulk of the competitive activity occurred through others.)

Most well-drafted agreements now specifically provide that a non-compete clause will bar solicitation of clients - either directly or indirectly. Karasaki's did as well. Even in the absence of such explicit language, however, courts will not allow an employee to benefit from this so-called loophole. In fact, as I have always advised clients, many competition cases turn on whether the court views the defendant as dishonorable or sympathetic. Indirect solicitation certainly does not help engender sympathy. Rather, it shows conscious wrongdoing and evasive behavior.

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Court: United States District Court for the Southern District of New York
Opinion Date: 10/31/08
Cite: Marsh USA Inc. v. Karasaki, 2008 U.S. Dist. LEXIS 90986 (S.D.N.Y. Oct. 31, 2008)
Favors: Employer
Law: New York

IBM-Apple Dispute Provides Year's Most Significant Competition Dispute (IBM v. Papermaster)

The preliminary injunction issued in the year's most high profile competition dispute, IBM v. Papermaster, has received quite a bit of attention and commentary in legal circles. The intricacies of that case - now over a month old - won't be rehashed here.

But IBM's success in preventing its former Vice-President of Microprocessor Technology Development from taking an executive position with Apple, Inc. should send shockwaves through the high-tech community and serve as a stark reminder of the impact non-compete clauses can have when enforced.

By way of (brief) background, Papermaster ran a division for IBM noted for its "Power" architecture technology. Up until 2006, Apple utilized IBM's PowerPC microprocessors in its personal computers. However, in 2008, Apple purchased a microchip design company - P.A. Semi - to replace IBM and to use its processors to power game applications, PCs, and...the iPhone and the iPod. You might have heard of those.

Enter Papermaster. After one unsuccessful round at interviews with Apple, Papermaster was re-approached earlier this Fall about becoming Apple's Senior Vice-President for the iPod/iPhone Division - a substantial promotion with a big pay raise. IBM balked and filed suit to prevent Papermaster from assuming such a position under his non-compete agreement and the inevitable disclosure of trade secrets theory of misappropriation.

IBM prevailed with the Court concluding that Papermaster could not perform his job in the iPod/iPhone Division without relying or disclosing (even if inadvertent) high-level technical, proprietary and strategic information he learned at IBM. The court noted there was no evidence Papermaster engaged in underhanded or dishonorable conduct. However, it issued a sweeping injunction that prevented him from working for Apple.

The notable aspects of the case are inter-related. The court utilized the inevitable disclosure theory to support its finding of irreparable harm - a key component of any showing a plaintiff must make when seeking preliminary injunctive relief. It then issued the injunction as a necessary remedy to prohibit Papermaster from violating his one-year non-compete agreement with IBM.

The decision is somewhat remarkable in that, during his last 2 years at IBM, Papermaster ran a division which designed and developed "blade servers." Those are not consumer products. In fact, the court acknowledged that IBM does not compete with the iPhone or iPod but it does seek to provide the brains (i.e., the processors) to run those products. Still, IBM lost the business in 2006, and at least as far as I can tell, there was no evidence that IBM was working its way back in at Apple.

So the key here, apparently, was the acquisition of P.A. Semi - the company that competes with IBM because it sells a microprocessor capable of running the iPod and iPhone. The disconnect, in this observer's opinion, is that it's not clear Papermaster was even responsible for overseeing the P.A. Semi products. Just how he would be using trade secrets was not clear.

The inevitable disclosure theory continues to mature. The fact Papermaster had a non-compete agreement certainly helped backstop the court's reasoning. But often times, inevitable disclosure cases proceed when no non-compete is at issue. Whether the court would have rendered the same decision had Papermaster not signed a non-compete in 2006 is a question for academics.

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Court: United States District Court for the Southern District of New York
Opinion Date: 11/21/08
Cite: IBM Co. v. Papermaster, 2008 U.S. Dist. LEXIS 95516 (S.D.N.Y. Nov. 21, 2008)
Favors: Employer
Law: New York

Missing Non-Compete Agreement Fails to Help Employees (Aim High Academy v. Jessen)

Should this really happen in a society that is rapidly going "paperless"? Probably not.

A recent Rhode Island trial court solved - with relative ease - the case of the missing non-compete agreements. The dispute arose out of a competitive cheerleading and gymnastics business operating in East Greenwich (the geographic center of what the court called "this wonderful, if diminuitive, state"). The owners of the plaintiff, Aim High Academy, were able to recruit the Jessens (a husband/wife tandem, the wife being a 1988 Olympian for the former Czechoslovakia) to work as coaches for Aim High. Prior to this time, the Jessens ran a financially-troubled competitor in Connecticut.

The treasurer of Aim High was concerned about the Jessens and made them sign non-compete agreements. However, when the Jessens were terminated in 2008, and after they started a competing gym in Warwick, the non-compete agreements were missing from their personnel files. In addition to the usual arguments concerning enforceability, the court had to confront the question of whether the agreements were ever signed in the first place.

The court had little trouble discounting the testimony of the Jessens and another ex-Aim High employee who started the Jessens' Warwick facility despite having no coaching credentials. It concluded the Jessens had in fact signed the agreements at or around the time of their employment. Those agreements both contained covenants against any competitive business activity for one year following termination of employment within the entire State of Rhode Island. This was an important trial court finding, since the Statute of Frauds would have barred enforcement of an agreement that could not be performed within one year. In Rhode Island, as in most states, an oral non-compete for 6 months is permissible, but not one extending a year or more.

The court, concluding the Jessens signed non-compete agreements, issued a preliminary injunction against business competition for the entire year. (Since the order was preliminary injunctive relief, it could be modified and the injunction dismissed if the dispute is ripe for final decision before the one-year period lapses.) It did, however, modify the non-compete agreements based on the overbreadth of the language. The court found that the geographic restriction extending to the entire State of Rhode Island was too broad and pared the scope back to 15 radius miles from Aim High's East Greenwich facility.

The court also upheld the non-disclosure provision in the agreement and managed to interpret that clause as a restriction against customer solicitation. How the court reached this conclusion is somehow unclear, but it found that customer information and coaching/training information was proprietary to Aim High. Apparently, it dovetailed a non-solicitation restriction out of this confidentiality clause. But, it did allow the Jessens to accept business from Aim High clients as long as they did not actively solicit them. Under the court's reasoning, passive acceptance of business from customers would not implicate the use of confidential information.

The decision is significant because it demonstrates that attorneys should advise clients to store (and password-protect) digital copies of key personnel documents. This would avoid an evidentiary problem if an employee is cunning enough to raid his or her personnel file. The decision also is significant in that it is sort of a poor-man's inevitable disclosure case; the court used a confidentiality clause to impose a customer-based restriction on an employee.

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Court: Superior Court of Rhode Island
Opinion Date: 12/10/08
Cite: Aim High Academy, Inc. v. Jessen, 208 R.I. Super. LEXIS 152 (R.I. Super. Ct. Dec. 10, 2008)
Favors: Employer
Law: Rhode Island

Ohio Decision Demonstrates Vagueness Problem With Trade Secrets Injunctions (Chornyak & Assoc. v. Nadler)

A recent decision out of the Ohio appellate courts demonstrates a common, amateurish mistake many attorneys make in trade secrets litigation.

On appeal, a company in the financial services industry contended the trial court improperly refused to hold its ex-employee in contempt of court for violating a permanent injunction order entered in November 2005. That order restrained defendant from "directly or indirectly, ... disclosing, using, transferring or destroying any Chornyak & Associates, Ltd. trade secret(s) as that term is defined in [Ohio Code Section] 1333.61 in any form whatsoever including originals, copies, other reproductions, derivatives, or computerized information, in any form whatsoever."

The plaintiff filed a contempt citation when its expert determined that the defendant had uploaded and used one Word document and two Excel spreadsheets generated during the course of his employment with Chornyak and which had been in his home office stored on a floppy disk. Eventually, the appellate court affirmed the trial court's determination that none of the documents constituted trade secrets of the former employer, and it upheld the trial court's denial of the contempt citation.

The more central question, though, is why the court even addressed the status of the documents as trade secrets in the first place. The underlying injunction order was patently void.

Illinois law on this issue is particularly exacting, mandating that a party seeking an order of injunctive relief spell out with reasonable specificity the exact trade secrets that are the subject of the restraint. In state court, Tseutaki v. Novicky, 158 Ill. App. 3d 505 (1st Dist. 1983), sets forth the standard, while in federal courts the landmark decision from American Can v. Mansukhani, 742 F. 2d 314 (7th Cir. 1984), delineates the law to be followed.

At bottom, a reasonable person with no legal training must be able to ascertain what documents or categories of information are subject to an order punishable by contempt. Simply incorporating the terms "trade secrets or confidential information of the Plaintiff" is too vague and not enforceable by contempt sanctions.

Poor drafting and lack of judicial oversight of such orders does no one any good. The plaintiff will not be able to rely on the order in the event the defendant uses its information, and the defendant will have to test its conduct through contempt proceedings. Great care must be taken with the drafting of injunction orders. And if the plaintiff is concerned about disclosing its trade secrets in a court order, it can always make reference to an attached schedule kept under seal in the court file.

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Court: Court of Appeals of Ohio, Tenth Appellate District
Opinion Date: 12/18/08
Cite: Chornyak & Assoc., Ltd. v. Nadler, 2008 Ohio App. LEXIS 5569 (Ohio App. Ct. Dec. 18, 2008)
Favors: Employee
Law: Ohio

Discovery Dispute Clarifies Permissible Scope of Protective Order in Trade Secrets Case (Directory Concepts v. Fox)

A federal district court opinion and order rendered last week highlights the problem of conducting discovery in a trade secrets case. Normally, it is standard operating procedure for the parties to agree on a protective order to facilitate the orderly, efficient flow of discovery. Indeed, the Uniform Trade Secrets Act actually requires a court to enter a protective order to safeguard against even "an alleged trade secret."

In an Indiana dispute between administrators of yellow pages advertising, the parties were not quite so amenable to agreeing on the terms of a protective order. The defendants challenged the very entry of the protective order claiming that the trade secret information at issue was readily ascertainable in the industry. The court sensibly concluded that this argument went to the ultimate merits of the case, and that plaintiff's allegations demonstrated good cause for entry of a Rule 26(c) protective order.

However, the court addressed a number of other concerns litigants have over the terms of the order. The Seventh Circuit, which includes federal district courts in Indiana, has taken a more hands-on approach to scrutinzing protective orders so that trial judges simply are not allowed to rubber-stamp agreed orders parties place in front of them. The case of Citizens First Nat'l Bank v. Cincinnati Ins Co., 178 F. 3d 943 (7th Cir. 1999), instructs that parties can keep trade secrets out of a public court record if:

(a) the judge satisfies himself that the parties know what a trade secret is and are acting in good faith in deciding which parts of the record are trade secrets; and

(b) the judge makes explicit that either party and any interested member of the public can challenge the secreting of any particular information.

In the case before it, the plaintiff proposed a protective order that did not have a sufficiently demarcated category of confidential information. Specifically, the proposed order defined "trade secrets" as "defined by Indiana Code Section 24-2-3-2 and Indiana case law." The court demurred on plaintiff's attempt.

However, the court accepted the plaintiff's affidavit submitted in support of its motion in which plaintiff broke down categories of alleged trade secrets into sub-categories: Workflow Information, Order Information by Client, Billing Preferences by Region, Databases That Show Billing Preferences by Location and Region, Client Databases Detail by Location, Contact Databases, and Nat Reports by Region or Location. Each category contained examples and identifications of the types of data that plaintiff used to operate is business.

The court incorporated those terms and held that they were "sufficiently specific to satisfy the Court that the parties know what a Trade Secret is..." Finally, the court held that most of the information in the proposed protective order (except, oddly, for Non-Party Private Information) could be designated as "attorneys-eyes only."

Entering a protective order in federal court - especially in districts within the Seventh Circuit - requires much more work and diligence than it does in state court. Normally, defense attorneys can mitigate any concerns about agreeing to or acknowledging that certain information constitutes a trade secret. The easiest way to do this is by inserting a simple clause that states a party's mere designation of a document as "confidential", or the other party's decision not to challenge such a designation with the court, does not operate as an admission as to the trade secret or proprietary status of the document itself.

In fact, defense attorneys who challenge the propriety of a protective order in the first place will be hindering their own chances at discovery and will only add to the time and expense of litigation.

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Court: United States District Court for the Northern District of Indiana
Opinion Date: 12/16/08
Cite: Directory Concepts, Inc. v. Fox, 2008 U.S. Dist. LEXIS 102192 (N.D. Ind. Dec. 16, 2008)
Favors: Employer
Law: Indiana, Federal Rules of Civil Procedure