Stored Communications Act Playing Big Role In Competition Cases (Pure Power Boot Camp v. Warrier Fitness Boot Camp)

Back in March, I wrote an article focusing on a bizarre employment dispute between Bonnie Van Alstyne and her former employer, Electronic Scriptorium. Broadly speaking, Van Alstyne's former boss fired her and then accessed her personal AOL e-mail on numerous occasions. This conduct resulted in a federal claim brought by Van Alstyne under the Stored Communications Act, 18 U.S.C. 18 U.S.C. 2707, for which punitive damges and attorneys' fees are available.

What does all this have to do with non-compete cases? My experience shows that a substantial percentage of the relevant evidence in non-compete cases involves e-mail. Often times, this e-mail is generated, sent and stored on employees' personal accounts as they develop their departure and competitive plans. The rub lies in the fact many employees also access their e-mail from time to time at work. Depending on the particular internet settings established, the work computer may store web-based e-mail usernames and passwords. If these are not removed prior to an employee's departure from the company, he or she may be unknowingly providing the ex-employer with the tools to access private e-mail accounts.

This, in fact, is what happened to Bonnie Van Alstyne. It also happened to Alexander Fell, who planned to leaving his job at a fitness company to start his own. When Fell resigned, his boss - Lauren Brenner - was able to access a Hotmail account Fell had logged onto while at work. She was further able to obtain access to Fell's gmail account, and a separate account set up under Fell's new company's name. Brenner then found damaging evidence related to Fell's pre-departure activities.

We can expect scenarios like this to happen with increasing frequency. Brenner's conduct violated the Stored Communications Act and severely damaged her ability to pursue Fell for unfair competition. Though it is not clear whether Fell has since countersued Brenner under the SCA, he may have an independent claim to attorneys' fees and punitive damages even if he is liable to her for unfair competition. To add further insult to Brenner's (self-inflicted) injury, the damaging e-mails she obtained in violation of federal law cannot be used against Fell, unless he opens the door to them or unless they are used solely for impeachment purposes. The harsh reality is that Brenner would have been able to obtain these in the normal course of discovery from Fell or anyone who communicate with Fell - business partners, clients, vendors and the like.

Even internet or e-mail policies may not give an employer a basis to access personal e-mail accounts used during work hours. As the court in Fell's case noted, employees still have a reasonable expectation of privacy to their personal accounts. One important caveat should be noted, here, though. The court was not addressing a situation where Fell drafted and disseminated the e-mails while using his ex-employer's computer, network and server. Presumably, evidence obtained from the server itself or hard-drive would pose problems. But it seems that a court would still be very hesitant to bless any access of a personal e-mail account on this basis alone.

Employers can wade into dangerous territory by being overly aggressive in searching employee's computers. When dealing with personal e-mail accounts, it is best to obtain only what is available from the company's network and rely on the discovery process to glean relevant facts.

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Court: United States District Court for the Southern District of New York
Opinion Date: 8/22/08
Cite: Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 587 F. Supp. 2d 548 (S.D.N.Y. 2008)
Favors: Employee
Law: Federal

Don't Mess With Texas (Courtroom Sciences v. Andrews)

In a relatively short amount of time, Texas went from a state where an employer virtually never was able to enforce a non-compete agreement against a departed at-will employee, to one where there seems to be a presumption that such a non-compete will be enforced. All this despite no legislative interference.

The case of Courtroom Sciences v. Andrews breaks no new legal ground, though it may be the first reported case to follow the predictable decision from the Texas Supreme Court in Mann Frankfort, about which I wrote some time ago. The beauty of this case is its non-sensical, sub-Three Stooges analysis - something all too familiar to lawyers who follow Texas non-compete cases.

Andrews, who worked in jury consultancy and trial services out of Chicago for CSI, signed an employment agreement with an array of restrictive covenants. They weren't terribly drafted, which meant she had no chance of winning. Essentially, they prohibited her from disclosing a range of confidential business information, soliciting CSI clients with whom she had a relationship, interfering with employee relationships, and working nationwide for a trial sciences consultancy firm. Other than the confidentiality restriction, the covenants lasted two years.

The court's analysis about the level of Andrews' violation of her agreement when she left abruptly to join DecisionQuest is predictably thin. It seemed to focus on her failure to return certain corporate information - not really defined at all - to CSI within 24 hours of her departure. It also seemed to suggest CSI lost business, though it's not clear Andrews solicited any clients to leave or if they just left CSI as a result of Andrews' resignation. The court didn't bother to give us that rather helpful bit of information.

Here's the richest part of this case, though. The court itself acknowledged that Texas law requires courts to modify covenants if they are unreasonable or overbroad in any respect. The court further discussed at length CSI's nationwide practice and how it would be unfair or illogical to put a geographic parameter on the non-compete. Then, despite enforcing the other activity covenants in the agreement, the court ignored the non-compete clause and did not restrain DecisionQuest from employing Andrews. Instead, it prohibited her from performing work for CSI clients through trial (in essence, what the non-solicitation clause barred), disclosing certain information unique to CSI, and soliciting employees of CSI (despite the absence of any evidence this actually took place).

So the end result of the non-compete clause was that it was not enforced despite the court's recognition that the law compelled enforcement.

Of all the inane and stupid commentary throughout the decision, however, the real head-scratcher comes in the "analysis" regarding Andrews' breach of her fiduciary duty as an employee of CSI. In citing the evidence supporting a finding in plaintiff's favor, the court actually had the temerity (or ignorance) to cite this fact: "[Andrews] obtained a 'fail-safe' contract insuring her income regardless of the result of this anticipated litigation."

Supposedly now, in Texas, it is a breach of fiduciary duty for an employee to negotiate a favorable contract with a new employer. I would argue this seems a bit ridiculous, but we've come to expect that from Texas courts.

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Court: United States District Court for the Northern District of Texas
Opinion Date: 5/11/09
Cite: Courtoom Sciences, Inc. v. Andrews, 2009 U.S. Dist. LEXIS 39917 (N.D. Tex. May 11, 2009)
Favors: Employer
Law: Texas

Royalty Injunction Not Appropriate for Knowing Misappropriation of Trade Secrets (Progressive Products v. Swartz)

The Court of Appeals of Kansas recently rendered an opinion on a somewhat obscure issue of law under the Uniform Trade Secrets Act. The question involved application of a royalty injunction, under which a party found to have misappropriated trade secrets can still utilize them as long as a reasonable royalty is paid to the non-infringing party.

The case arose out of a fairly typical departing employee fact pattern. Progressive Products is engaged in the manufacture and sale of Ceram-Back, a ceramic coating for pipe elbows that lengthens the life of a pipe. Several employees left to form a competitor which manufactured the identical product under a different name. The evidence adduced at trial indicated the defendants took the formula for Ceram-Back, its mixing process, a pricing method related to the sale of Ceram-Back, price lists, and customer lists. The court of appeals was unwilling to overrule the trial court's factual determination that the information taken constituted trade secrets and that Progressive Products demonstrated misappropriation under the uniform act.

The tougher issue concerned the remedy. The trial court did not award Progressive Products any damages and refused to issue a prohibitory injunction against the defendants. Instead, it issued a royalty injunction, which conditioned the defendants' future use of the trade secrets on payment of a 20 percent royalty to Progressive Products for three years.

This remedy is found in the uniform act, which varies slightly from state to state. The court of appeals reversed this aspect of the judgment and remanded for the trial court to determine the extent of a prohibitory injunction. In Kansas, the trade secrets law allows for a royalty injunction to issue under "exceptional circumstances." That has been interpreted to include either: (a) an overriding public interest; or (b) acquisition of a trade secret in good faith, with prejudice resulting to the innocent misappropriator should a prohibitory injunction issue.

In this case, the court found the defendants could not qualify as innocent misappropriators. It disagreed with the trial court's rationale that a royalty injunction was appropriate given the interest in competition, Progressive Products' culpability in failing to protect its secrets, and the need for some trade secret protection. As a matter of law, the trial court's rationale failed to meet the applicable standard.

Had the defendants acquired the formulas and other product information innocently or in good faith, perhaps from a party who had misappropriated them, a royalty injunction might have been appropriate. But it was not in a situation involving knowing misappropriation.

In Illinois, the uniform act is not as broad and only permits a royalty injunction to issue when there is an "overriding public interest."

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Court: Court of Appeals of Kansas
Opinion Date: 4/17/09
Cite: Progressive Products, Inc. v. Swartz, 2009 Kan. App. LEXIS 167 (Kan. Ct. App. Apr. 17, 2009)
Favors: Employer
Law: Kansas

Wisconsin District Court Follows Citrin in Allowing Computer Fraud Claim to Proceed (Dental Health Products v. Ringo)

The increasing federalization of trade secrets claim in Illinois is a direct result of the Seventh Circuit's 2006 decision in Int'l Airport Centers, LLC v. Citrin. That case, which broadly interpreted the Computer Fraud and Abuse Act, provided a wide open pathway for employers to bootstrap trade secrets actions into federal CFAA claims as long as some act of misappropriation involved computers. These days, virtually all trade secrets claims involve the downloading of data.

The gist of Citrin is the notion that an employee loses his authorization to access protected computers once he violates his duty of loyalty and acquires an interest adverse to his then-employer. Because each CFAA claim mandates a plaintiff to show a defendant accessed a protected computer "without authorization" or in a manner that "exceeds" the employee's authorization, Citrin allows an employer to convert a trade secrets claim into one under the CFAA if the employee downloads or copies company business information before he quits and leaves to compete.

The case of Dental Health Products v. Ringo applied Citrin to an employee competition case that reads like many others. Ringo, a former salesman for a dental supply company, allegedly copied his entire work hard-drive onto an external drive while he was still employed and while he was actively competing for accounts on behalf of a different entity. Presumably, Ringo intended to use this information on behalf of a competing firm. After DHP filed suit, Ringo tried to dismiss the CFAA claim, arguing his access to the computer at the time of the relevant events was authorized.

The district court relied on Citrin to deny Ringo's motion to dismiss. DHP asserted Ringo's conduct violated the three most common provisions of the CFAA that apply to employee competition claims: (a)(2), (a)(4) and (a)(5).

The (a)(2) claim, or the "theft of data" theory, requires an employer only to show the employee improperly accessed a computer to obtain information. That information need not be a trade secret, or even lesser-protected "confidential information." Under Citrin, the court upheld the claim with ease.

The (a)(4) claim is the "intent to defraud" provision, and again the court ruled DHP stated a cause of action. Importantly, a plaintiff need not allege fraud with particularity under this section. For purposes of Federal Rule 9(b), an (a)(4) claim is not a traditional fraud claim and plaintiffs need only allege that the information was taken through dishonest means.

Finally, the court upheld the (a)(5) claim. That provision generally requires a plaintiff to demonstrate unauthorized access to a computer that results in damage. A key question that Citrin seemed to resolve, but on which other courts have been significantly divided, is whether information that is merely copied results in "damage." Clearly, deleted information would seem to meet that definition, but data that is copied stands on a different footing.

The court in Ringo struggled a bit with the allegations made by DHP, but ultimately concluded DHP stated a cause of action. Once a practitioner cuts through the maze of confusing terms utilized in the CFAA, and its haphazardly organized provisions, it is fairly clear the breadth of each section allows plaintiffs to bring a broad range of claims in competition cases involving the taking of electronically stored information. In the Seventh Circuit, this is far easier than in other jurisdictions where the issue of "authorization" is more defendant-friendly.

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Court: United States District Court for the Eastern District of Wisconsin
Opinion Date: 4/20/09
Cite: Dental Health Products, Inc. v. Ringo, 2009 U.S. Dist. LEXIS 38328 (E.D. Wis. Apr. 20, 2009)
Favors: Employer
Law: Federal

Litigation Misconduct Supports Finding of Bad Faith In Trade Secrets Action (Precision Automation v. Krevanko)

For a defendant who prevails in a trade secrets action, obtaining attorneys' fees is never going to be easy. In most states that have adopted some version of the Uniform Trade Secrets Act, the standard will be "bad faith" prosecution of a trade secrets claim. Courts have taken different approaches to applying the bad faith test.

A commonly applied standard is the objective-subjective analysis, requiring the court to de

termine whether the plaintiff's trade secrets claim was "objectively specious" and whether pursuit of the claim involved "subjective misconduct." In a recent case out of the District of Oregon, a court found that the defendant met this standard and awarded him prevailing party fees from his ex-employer.

The objectively specious part of the analysis focused on two key factors. First, the employer was unable to produce a confidentiality agreement binding the employee. The plaintiff relied on the fact another employee signed a confidentiality agreement and that it would most likely find one relating to David Krevanko, the main defendant. As the court noted, this bizarre contention was specious "at best." Second, the claimed trade secrets - to the extent they were even identified at all - were dealer and customer identities, as well as product specifications. These are the kinds of broad trade secret assertions that often land plaintiffs in hot water.

The court found that dealer identities were not secret, since they were posted on plaintiff's website. Never an advisable way to protect a trade secret...

The court further noted the plaintiff had no discernible method for identifying confidential business data, nor did it have any real security measures in place to prevent access to trade secrets by other employees. Finally, the product specifications were not trade secrets, since lists were sent out to dealers who were under no obligation to keep them secret.

The more interesting part of the opinion focused on subjective misconduct. During the deposition of Krevanko, the plaintiff's counsel misled him into thinking that a confidentiality agreement which was presented as an exhibit was generated in the ordinary course of business. The exhibit contained Krevanko's name and bore a footer that suggested it had been created in the normal course.

In fact, the exhibit was prepared for litigation purposes and had been created after the plaintiff fired Krevanko. The court was less than thrilled the attorney questioning Krevanko had used the deposition exhibit to suggest Krevanko had been presented with, or even signed, a confidentiality agreement during his employment with the plaintiff.

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Court: United States District Court for the District of Oregon
Opinion Date: 4/28/09
Cite: Precision Automation, Inc. v. Technical Services, Inc., 2009 U.S. Dist. LEXIS 36506 (D. Ore. Apr. 28, 2009)
Favors: Employee
Law: Oregon

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.

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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

Insurance Industry Non-Compete Supported By Valuable Consideration - But Still Overbroad (Hejl v. Hood, Hargett & Assoc)

The Court of Appeals of North Carolina issued another employee-friendly ruling on a non-compete claim. In this particular dispute, two issues were up for review. First, the court had to determine whether $500 given to an existing employee for his execution of a non-compete was sufficient consideration for the contract. Second, the court addressed the employee's argument that the contract was too broad to be enforced.

At trial, the court ruled in favor of the employee on the consideration argument, but the appellate court rejected that reasoning. The issue of consideration in after-thought covenants has always been a fertile ground for litigation. States differ in their approaches, with many holding that continued employment is sufficient consideration for an at-will employee's non-compete agreement.

North Carolina is different. It requires new or separate consideration. In this case, the court found that $500 was sufficient to meet this requirement. It also noted the following would suffice:

Continued employment for specified amount of time;
Raise, bonus or other change in compensation;
Promotion;
Additional training;
Uncertificated shares of ownership;
Other increase in responsibility.

The court noted there is a difference between separate consideration and adequacy of that consideration. Clearly, the $500 payment was separate consideration. Whether it was adequate was irrelevant under North Carolina law.

However, the employee still prevailed in the end, just on separate grounds as he did in the trial court. The customer non-compete clause which bound the insurance broker-employee was too broad. In particular, the court held that since it included even prospective customers to whom the employee may have only quoted insurance products (but not necessarily sold them to), the covenant exceeded the protectable interests the employer had. Therefore, it was void and unenforceable.

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Court: Court of Appeals of North Carolina
Opinion Date: 4/7/09
Cite: Hejl v. Hood, Hargett & Assocs., Inc., 2009 N.C. App. LEXIS 377 (N.C. Ct. App. Apr. 7, 2009)
Favors: Employee
Law: North Carolina

Texas Court Finally Gets a Non-Compete Issue Right (Mann Frankfort v. Fielding)

Litigating a non-compete dispute in Texas is the equivalent of wading into an intellectual abyss.

Texas has enacted a non-compete statute that provides little in the way of guidance, but contributes greatly to attorneys' level of confusion. The particular provision of the statute that has wreaked judicial havoc concerns the requirement that a non-compete covenant be "ancillary to an otherwise enforceable agreement."

Texas courts seemed to ruminate for years over what this meant. Some of the confusion disappeared a few years ago when the Supreme Court of Texas issued its decision in Alex Sheshunoff Mgmt. v. Johnson, a case that marginally made some sense but left a key issue open.

The basic issue decided in Alex Sheshunoff was that for a covenant to be ancillary to an otherwise enforceable agreement, the employer's return promise to provide confidential information to the employee need not be fulfilled at precisely the time the employee promises not to compete. Previous decisions had yielded the bizarre rule that unless there was a simultaneous disclosure of confidential information to the employee at the time the contract was signed, the covenant was void entirely.

Alex Sheshunoff basically said the employer could eventually provide confidential information to the employee, and this would satisfy the ancillarity requirement.

The issue left unresolved was whether an implied promise to provide confidential information to the employee was sufficient. In Mann Frankfort v. Fielding, the Court said yes. Prior to this decision, the appellate cases came out both ways. Some held an implied promise was enough, while others disagreed. Unless the agreement was crystal clear that an employer had an obligation to provide the employee with confidential information, the employee had more than a decent argument the non-compete was illusory.

This seems to be the final step for Texas courts to move beyond this pedantic line of cases involving ancillarity.

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Court: Supreme Court of Texas
Opinion Date: 4/17/09
Cite: Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009)
Favors: Employer
Law: Texas

Bankruptcy Court Approves Debtor's Petition to Purchase Non-Competes (In re Pilgrim's Pride)

Prior to 2005, key-employee retention plans were often endemic to a company's recovery during a Chapter 11 bankruptcy. The general thought was management needed to have a vested stake in a distressed company, and without an incentive plan, managers would resign in droves.

In October of 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which placed significant restrictions on such incentive plans offered to key managers. In that legislation, Congress authored key changes to Section 503(c) of the Act.

At issue in the Pilgrim's Pride bankruptcy was which provision of Section 503(c) governed the debtor's motion to essentially buy non-compete agreements from departing executives. By way of background, Section 503(c)(1) governs retention bonuses to insiders. The Trustee argued the company's petition to pay nearly $500,000 to a departed CEO and COO fell within the ambit of (c)(1). However, the court disagreed, finding that the company wanted the CEO and COO gone - not retained. Indeed, the restructuring officer testified the voluntary resignations were given under threat of termination.

The court next determined that the sought-after non-compete payments did not fall within (c)(2), which expressly applied to severance pay. Here, the executives had already been paid severance, so no logical reading of (c)(2) could apply to the debtor's petition.

Finally, the court concluded that the non-compete payments were subject to (c)(3). That provision is a catch-all clause in the Bankruptcy Code governing plans outside the ordinary course of a debtor's business not formally designed to retain insiders.

The key issue for the court was what standard to apply to the petition. Noting that some courts implemented a simple "business judgment rule" test, the court went further and held that a debtor's petition was subject to stricter scrutiny. In particular, the court founds as follows:

"Section 503(c)(3) is intended to give the judge a greater role: even if a good business reason can be articulated for a transaction, the court must still determine that the proposed transfer or obligation is justified in the case before it. The court reads this requirement as meaning that the court must make its own determination that the transaction will serve the interests of creditors and the debtor's estate. Put another way, when a transaction is proposed between a debtor and its insiders, the court cannot simply rely on the debtor's business judgment to ensure creditors and the debtor's estate are being properly cared for."

Despite taking a de novo look at the petition for non-compete payments, the court approved them over the trustee's objection. The court noted the payments were not insubstantial, but that the threat of competition from two departed executives outweighed any cost borne by the estate. The court specifically found each executive had extensive knowledge about the debtor's customers and could divert large accounts, potentially costing the company millions of dollars. The court did not comment why the executives were not subject to pre-existing non-compete obligations, either as part of an executive employment agreement or severance package.

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Court: United States Bankruptcy Court for the Northern District of Texas
Opinion Date: 2/26/09
Cite: In re Pilgrim's Pride, 401 B.R. 229 (N.D. Tex. 2009)
Favors: N/A
Law: Federal

Appellate Court of Illinois Overturns Final Judgment on Trade Secrets Claim (System Development Services v. Haarman)

The recent decision in System Development Services v. Haarman, arising out of a final judgment rendered in Effingham County, Illinois, reads like an all too-familiar script. Indeed, this presents a fact pattern I probably see more often than not when counseling corporate clients or individuals seeking to join a competing organization or start their own venture.

And though the fact pattern may vary slightly from case to case, it always seems to involve these elements:

(1) The employee has no non-compete or customer non-solicitation agreement.
(2) The employee has left to form or join a competitor.
(3) The employee has key customer relationships and intimate knowledge of vital business information, including contact names, pricing history, customer requirements, and anticipated future buying needs.
(4) There is little or no evidence the employee actually took documents or downloaded information such as a customer list.
(5) The ex-employer suspects the employee might have used some information in his or her new position.
(6) The customers systematically have left to follow the new employee at his or her new venture.

In the absence of a non-compete agreement, the employer generally is left with two potential avenues of relief: breach of fiduciary duty or trade secrets theft. The former is awfully difficult to prove in the absence of demonstrable, actual competition prior to the date of resignation. The latter is a much more fact-intensive, amorphous inquiry, and the very nature of trade secrets law gives a lawyer room for creative argument.

But here is the rub. That lawyer representing the company ought to be darn careful when bringing such a claim; courts have long cautioned against using trade secrets claims to impose upon an employee an ex post facto non-compete.

The Haarman case is not that unique, but its procedural posture was and the ruling will make it more difficult for companies trying to prevent competition by ex-employees under vague claims of trade secrets theft.

The industry involved is one where non-competes are fairly common: computer network consulting. System Development Services (SDS) catered to businesses around Effingham, Illinois, and the technicians employed by SDS had substantial customer contact. They were often on-site at a customer location and had intimate knowledge of customer needs.

When several of SDS' employees left to form a new company, SDS filed suit and claimed trade secrets theft. At trial, two trade secrets were at issue: a customer list and customer requirements (i.e., knowledge of customers' computer systems). The trial court founds that the defendants misappropriated both and entered a two-year injunction against the employees which barred them from marketing to any actual or potential customer in SDS' database. The court further awarded judgment against the employees in the amount of $481,892, exemplary damages of $20,000 and a fee award of $260,695.99. In short, the trial court put the defendants out of business and fined them nearly three-quarters of a million dollars.

The defendants appealed and had to overcome a daunting standard of review; in essence, they had to argue that the evidence could never support judgment against them. They prevailed.

The court held the customer list was not a trade secret. In particular, the list at issue contained only the names, addresses and phone numbers of potential clients in the general geographic area where SDS was located. The employees testified this could be gleaned from commonly used public sources, such as the internet and telephone books. The court further noted each employee was a resident of the area with a large family and network of personal contacts. The injunction prevented them from working with a number of potential clients they already knew and which clearly required no reference to any secret list. Importantly, the court stated "the evidence established that the defendants were able to lure...customers away from SDS...because of those personal relationships, not because of SDS' client list."

Though it did not say so, this is the sina qua non of a non-compete agreement. If an employee has access to, and is able to influence customer decisions, a non-compete may be appropriate. Without one, imposing an injunction on vague, conclusory allegations of trade secrets theft smacks of unfairness.

The second trade secret at issue was even less concrete, and it is questionable whether the plaintiff even bothered identifying it. The secret involved the concept of "customer requirements", that is, buying preferences and knowledge of what a customer owns and might need in the future. Citing a litany of cases, the court had little trouble discarding the trial court's conclusion that this catch-all basket of information constituted a protectable trade secret. The court never discussed the definitional problem, and instead relied on two facts clearly established by the testimony: (a) the information was the customer's, not that of SDS; and (b) such information is the product of an employee's general skill and knowledge, not any trade secret of his employer.

Haarman does not establish any groundbreaking new precedent under trade secrets law when something less tangible and concrete is at issue. There are plenty of cases just like it, including the influential Fleming Sales decision written by Judge Shadur many years ago. Cases involving misappropriated source code or an engineering drawing are far easier to grasp analytically than something like what was presented in Haarman.

The case also demonstrates a few other things that I think are critical:

(1) An attorney must remember that a trade secret is nothing more than information that derives its value from being secret. Regardless of the factors that are used to analyze a trade secret claim, this is the most important inquiry.

(2) These disputes are frequently mishandled by the trial court - as evidenced by the judgment entered in Haarman.

(3) Litigation through trial can be awfully expensive, as evidenced by the plaintiff's fee petition (now since reversed) of more than $260,000.

(4) Identifying what the claimed trade secret is continues to be a major irritant.

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Court: Appellate Court of Illinois, Fifth District
Opinion Date: 4/13/09
Cite: System Development Services, Inc. v. Haarman, 2009 Ill. App. LEXIS 218 (Ill. App. Ct. Apr. 13, 2009)
Favors: Employee
Law: Illinois