The Reading List (No. 10)

Today's Chicago Tribune Business section contains a lead article on the sentencing of Hanjuan Jin (right), the former software engineer who was caught boarding a plane to China with highly confidential documents misappropriated from Motorola. This is a very in-depth article and also discusses the recent Valspar case on which I have previously written.

The Colorado Springs Gazette discusses a jury verdict of $1.34 million against two former managers who violated non-competition covenants. The article seems to indicate the employees solicited customers, but does not elaborate on the basis for the high damages award. Though damages are difficult to prove in non-compete cases, a plaintiff can recover them with a sound, cohesive theory and well-prepared damages witnesses. Presumably, the plaintiff had that here.

Seyfarth Shaw's blog always contains helpful, in-depth posts, but I enjoyed Paul Freehling's article on the interplay between damages and permanent injunction awards. A similar issue arises in the context of royalty injunctions - the flip side of compulsory licensing in the patent law arena (an approach Judge Posner recently endorsed). This royalty injunction remedy essentially allows a court to condition future use of a misappropriated trade secret on payment of a reasonable royalty to the trade secret owner. But states vary on the circumstances in which a royalty injunction may be appropriate. In any event, it shouldn't be very often. While patents derive value from exclusivity, trade secrets derive value from...secrecy. A royalty injunction that allows a misappropriator to use stolen information seems to undercut the very foundation for trade secrets law.

Finally, John Marsh has outlined a series of "7 Deadly Sins" that departing employees should always keep in mind when trying to avoid litigation. His post contains an excellent, in-depth summary of what often causes non-compete/trade secrets suits to go south from the employee's perspective.

The Reading List (No. 9)

Today's reading list - which is long overdue - leads with a few articles geared towards in-house counsel.

The In-House Advisor has a nice post regarding non-compete considerations for in-house counsel. I am recommending the article because it has a discussion concerning the importance of posting bond if an injunction is granted. That's not a topic I see very often. My view on bonds is that the cases are everywhere. You could see a bond imposed of several hundred thousand dollars in one case, and in a similar case, only a nominal bond imposed. Remember that in federal court Rule 65 seems to require some sort of bond, meaning all of those contracts that say "bond is waived" can't literally be followed.

Great article by Jon Hyman of the Ohio Employer's Law Blog on BYOD ("Bring Your Own Device") policies for employers. This is a very new area, and lawyers are still grasping with how to draft policies and advise clients on what to consider. Jon's focus in his article is on maintaining security, and he has excellent recommendations for in-house counsel.

Drinker Biddle's blog discusses two recent bad faith fee-shifting cases under the Uniform Trade Secrets Act. I previously wrote about one of them, the California case of SASCO v. Rosendin Electric, in this post.

John Marsh of Hahn Loeser has a nice recap of some news stories involving trade secrets theft, including a brief discussion on New York's recent arrest of ex-Goldman Sachs programmer Sergei Aleynikov. I, along with countless others, previously wrote about the Second Circuit's reversal of his federal law convication.

Not technically a "Reading List" topic, but worth mentioning, too, is the Supreme Court of Missouri's opinion in Whelan Security Co. v. Kennebrew, 2012 Mo. LEXIS 167 (2012). The Court found an unlimited customer non-solicitation covenant overbroad, given that it restricted ex-employees of a national security firm from working with any of the firm's customers or prospective customers. The Court noted that while such clauses may be reasonable for a small, localized firm, a non-solicitation restriction without any geographic or definitional parameters was overbroad. However, the Court modified the restriction to give effect to the parties' intentions and to protect the employer. It rewrote the restriction to strike any limitation on soliciting prospective customers and to restrict only solictation of customers the ex-employees dealt with during their employment. The court also upheld a 50-mile general non-competition covenant against one of the two employees - begging the question of whether that validated non-compete achieves the same purpose as the partially invalidated non-solicitation covenant.

The "I'm Too Busy Edition": Non-Compete Case Law Update

I swear I try to multi-task. But it's not easy.

Running a law firm, being a husband, being a dad (!), tending to a completely out-of-control garden, and actually practicing law sometimes creates the perfect storm where I realize I'm three weeks behind on, literally, everything. For instance, I just started Season 1 of "Breaking Bad." I think the Olympics are coming up, too...I can hardly wait!

So this blog has been neglected, but I promise to make up for it. I thought I would update my readers with five interesting decisions from the past several weeks in non-compete land.

Florida: Probably the most employer friendly state, any Florida decision starts with the presumption that the employee is out of luck. So too with DePuy Orthopaedics, Inc. v. Waxman, 2012 Fla. App. LEXIS 12654 (Fla. Ct. App. Aug. 3, 2012). In that case, the Court of Appeal interpreted the Florida statute that allows for assignment of restrictive covenants from an employer to an assignee. The court reversed a trial court order holding that the assignment was ineffective, relying upon the plain language of the statute. The assignment provision was contained a separate clause in the so-called general terms and conditions of the contract. The dissenting opinion would have held that the restrictive covenant itself had to reference assignability. In its view, the general assignment language was not enough under the plain language of Florida's governing statute.

Illinois: The Fourth District Court of Appeals - where all the madness started a few years back - has reversed an employee-friendly judgment on a non-solicitation covenant. In Zabaneh Franchises, LLC v. Walker, 2012 IL App (4th) 110215, the Appellate Court reversed a judgment entered following a temporary restraining order proceeding where an H&R Block franchisee tried to enforce a covenant against a tax preparer. The court found a two-year, client-specific covenant to be reasonable under Reliable Fire Equipment v. Arredondo. It is somewhat surprising the court found it reasonable on its face, rather than remanding for the trial court to make such a determination.

South Dakota: Home of the Black Hills, Custer State Park, and Wall Drug, one of my favorite states does not produce many competition decisions. But the district court's opinion denying injunctive relief to Little Caesar Enterprises is actually very interesting. The court in Little Caesar Enterprises, Inc. v. Sioux Falls Pizza Co., Inc., 2012 U.S. Dist. LEXIS 108828 (D.S.D. Aug. 3, 2012), confronted the age-old problem of trade secrets identification. This is often a major issue for trade secrets litigants because plaintiffs frequently don't inventory or understand their trade secrets until after something bad (more accurately, something perceived to be bad) has occurred.

Unlike patents, trade secrets are not known or registered or objectively verifiable. There is no incentive, apart from litigation preparedness, to document and monitor internally how trade secrets are kept, developed, and maintained. Little Caesar could not identify a trade secret, sufficient to obtain an injunction, over its Hot-N-Ready pizza method. That method, apparently, allowed Little Caesar to sell ready-for-pickup pizzas according to a particular system - that is, what products to prepare on an hour-by-hour basis, with specific ingredients and preparation requirements. (I say "apparently" because I have not eaten a Little Caesar's pizza in at least 10 years and am in no position to understand how this is any different than your standard fare carry-out. But it must be).

The court, in denying injunctive relief, noted that the description of the Hot-N-Ready system was too generic or general to amount to a trade secret. The court also relied on evidence that many of the specifics in terms of pizza preparation were common to other proprietors. Perhaps most importantly, the end product - the actual pizza - was admittedly different and bore no similarity to Little Caesar's. If that's really the case, it's a mystery why this case is even a case.

Virginia: Hamden v. Total Car Franchising, Corp., 2012 U.S. Dist. LEXIS 111432 (W.D. Va. Aug, 7, 2012), presents one of those interesting contract interpretation questions. In this case, the court found that the expiration of a franchise agreement did not trigger post-termination obligations. Holding "expiration" and "termination" were not synonymous, the court focused on the fact that the contract listed a series of conditions under which the contract terminated automatically. Most employment contracts are at will, meaning expiration rarely comes up. But the plaintiff (the franchisee, who sued for a declaratory judgment) was able to dodge a few unfavorable cases from other jurisdictions to prevail.

Wisconsin: Section 103.465 is the Wisconsin statute that has given management lawyers fits over the years. It applies to "restrictive covenants in employment contracts." For non-employment covenants, Wisconsin's common law rule of reason analysis applies. In Key Railroad Development, LLC v. Guido, 2012 Wisc. App. LEXIS 625 (Wisc. Ct. App. Aug. 7, 2012), the Court of Appeals found that Section 103.465 applies to employees who shared equal bargaining power with the company. The court was able to distinguish a recent case involving a stock option agreement, which was not governed by Section 103.465. In Key Railroad, the employees - though they were higher level management, no doubt - still were classified under the contract as "at-will."

Supreme Court of South Carolina Addresses Validity of Invention Assignment Clause

Cases addressing invention assignment clauses are few and far between. But 2012 has produced two state supreme court decisions in this area of intellectual property law. Earlier this year, Wyoming addressed the matter, and now South Carolina has.

I have discussed this subject infrequently, but assignment clauses often intersect non-compete law. In essence, they provide that any inventions (patentable or not) that an employee develops in association with her employer are the property of the employer. The only real controversial element of these clauses is the holdover or trailer aspect of them - which are found, I'd say, in about half the contracts I've seen. Those holdover clauses bear some passing resemblance to a post-termination non-compete, as they require an employee to assign inventions if they are developed within a period of time - usually 6 months or a year - after termination.

The purpose of holdover clauses is fairly obvious. Assume an employee in product development is working on a rollout of new smart phone technology, whose planned launch is several months away. If she leaves and starts development of a product based on that same technology, an assignment clause without a trailer may not capture this invention. The holdover clause creates a disincentive for an employee to delay or hide work on a technological development, because presumably the employee knows the trailer clause won't allow her to lie in the weeds and exploit it after termination. One can also look at a holdover clause as an extension of an employee's duty of loyalty, in effect providing a remedy in contract for improperly exploiting valuable commercial information after departure.

The Supreme Court of South Carolina in Milliken & Co. v. Morin held that holdover clauses were not restraints of trade subject to the traditional three-part rule of reason. More importantly, they are not strictly construed against the employer. Still, because there is potential for overreaching and for holdover clauses to restrict some competition, courts will assess whether they're reasonable. It's difficult to distinguish between a more lax test of reasonableness (applicable to clauses like an invention assignment holdovers and even non-disclosure covenants) and a three-part rule of reason (applicable to non-competes). In fact, the test that the Court in Morin established sounds almost identical to the non-compete test.

Practically speaking, courts will simply check to see what the economic impact of the holdover clause is on the marketplace. If it looks and acts like a more expansive non-compete, such as a term that is too long (say 5 years) or a clause that is too vague so as to not put someone on notice of its scope, then a court more likely will apply a strict scrutiny test. If the clause looks commercially reasonable and designed to protect an employer's inventions, then a simple reasonableness check almost certainly will uphold the covenant.

--

Court: Supreme Court of South Carolina
Opinion Date: 8/1/12
Cite: Milliken & Co v. Morin, No. 27154
Favors: Employer
Law: South Carolina

Fourth Circuit Adopts Reasoning From U.S. v. Nosal in Limiting CFAA Application

In my opinion, the civil remedy provisions of the CFAA - outside those applicable to hackers - are totally useless.

The Act is nothing more than a jurisdictional hook to get into federal court, where a host of state law claims are the real focus of a case. In a case where there is diversity of citizenship, the Act is uber-useless.

The Fourth Circuit in WEC Carolina Energy Solutions LLC v. Miller, 2012 U.S. App. LEXIS 15441 (4th Cir. July 26, 2012), affirmed the dismissal of a CFAA complaint arising out of an allegation that an ex-employee improperly downloaded confidential business information and used that information to make a presentation on behalf of a competitor following termination of employment.

The court agreed with the Ninth Circuit's narrow view of "without authorization" in United States v. Nosal and disagreed with the Seventh Circuit's expansive application of the CFAA under common-law agency principles in Int'l Airport Centers, LLC v. Citrin. Readers may recall that Nosal was written by Judge Kozinski and Citrin, the "cessation-of-agency" theory, was the work of Judge Posner.

The Fourth Circuit did not extend liability to so-called use-policy violations. In other words, if an employee obtains or access information from a protected computer to which he or she is not entitled to retrieve in the first place, then the CFAA would provide a remedy under the plain text of the statute. Conversely, misusing information to which the employee had a right to access falls outside the Act's scope.

Because the CFAA is both a criminal and civil statute, the Fourth Circuit relied on the rule of lenity to chose an interpretation of the statute that would not result in criminal sanctions. The court indicated its holding would "disappoint employers hoping for a means to rein in rogue employees," but it also noted that other legal remedies exist. Indeed, these types of disputes are fundamentally the province of state contract and tort law. Just as much of trade secret law is in fact duplicative of common law remedies, so too is the CFAA. WEC Carolina - the plaintiff - has a state court complaint pending against the same defendants in the federal case, a case that has nine other claims for relief.

The Bad Edition: On Bad Faith and Bad Laws (Courtesy of Judge Posner)

Describing the parameters of bad faith should be no more complicated than Justice Potter's famous test for identifying pornography: you know it when you see it.

Trade secrets laws generally allow for a prevailing defendant to recover its attorneys' fees if a claim of misappropriation is made in bad faith. The uniform act contains no definition of what that means, but really it's no more complicated than the "exceptionality" standard used to determine fee-shifting for patent and trademark infringement. If a plaintiff uses the litigation process to heap litigation costs on a competitor (and not to win), then this is pure abuse of process - the normative equivalent of bad faith.

The trade secrets provision hasn't been the subject of much litigation outside California, and the interpretations of bad faith generally hinge on some showing of objective speciousness in the claim. Many courts also look for some indicators of the plaintiff's subjective intent to harass or abuse the litigation process.

A recent California case demonstrates that the concept of bad faith has to be flexible and necessarily looks at a variety of circumstances outside the initial pleadings. In SASCO v. Rosendin Electric, 2012 Cal. App. LEXIS 797 (Cal. Ct. App. 4th Dist. 2012), the Court of Appeal affirmed an award of nearly $500,000 in attorneys' fees for the defendants who prevailed on a trade secrets claim arising out of "off-the-shelf"software. (They prevailed, actually, because SASCO voluntarily got rid of the case before entry of summary judgment.)

The court discussed the objective/subjective test, noting fees are proper if a plaintiff either brings or maintains a claim in bad faith. The court rejected the defense argument that it was appropriate to look to California's Rule 11 equivalent in determining the speciousness of the claim. Rejecting this argument, the court stated: "...it simply makes no sense as a matter of statutory interpretation to insert a general pleading abuse statute applicable to attorneys or others signing pleadings and motions...into a ...section limited to the recovery of attorney fees and costs in trade secret misappropriation claims."

This malleable use of bad faith dovetails nicely with the abuse of process, or exceptionality, test used by some courts - notably the Seventh Circuit - in other intellectual property litigation. Both the Patent Act (Section 285) and the Lanham Act (Section 1117) allow for fees in "exceptional" cases. Equating exceptional cases with those containing "abuse of process" elements is pragmatic and recognizes the realities of competitive litigation, much of which is driven for retributive - not remedial - purposes. So exceptionality equals "abuse of process" equals "bad faith."

Speaking of patents...you might have heard Apple and Motorola's dust-up over smart phone technology ended with a whimper, not a bang. Judge Posner presided over that trial, sitting as a district court judge, and ruled that neither damages nor injunctive relief was appropriate. The ruling is certain to be appealed. What's interesting, though, is Judge Posner's general views on the problems with our patent laws and how they can be fixed. His op-ed article from The Atlantic describes why there are too many patents and how the current system is broken.

Firms generally make decisions whether to patent or keep valuable information secret. Those are mutually exclusive ideas. If Posner's views on reform are implemented, it is likely that many firms would be encouraged to exploit ideas or inventions through secrecy rather than a government-sanctioned monopoly. I don't necessarily think that's a good thing, since trade secrets are not objectively verifiable and are often overused to cannibalize general knowledge. But Posner's clearly right that the patent system is a wreck.

So we come full circle on fees. The best way to deter this overuse of the trade secret branch of intellectual property is to give some real teeth and meaning to fee-shifting. Given the sheer expense of trade secrets litigation (the Rosendin Electric case being an example), the deterrent effect of pursuing a weak claim would be quite high if fee-shifting were more than a pipe dream. Courts in California, where much of our technology innovation occurs, have taken steps in interpreting its trade secrets laws to create the proper incentives and to put trade secrets plaintiffs on notice that unsupported claims will result in a significant sanction.

Applying the Logic of Empro to Non-Compete Cases

One of my favorite opinions is Judge Easterbrook's decision in Empro Mfg. Co., Inc. v. Ball-Co Mfg., Inc., 870 F.2d 423 (7th Cir. 1989). It's classic Easterbrook: short, clear, rooted in public policy, and beautifully persuasive in the way it resolves an issue that divided courts. Judge Easterbrook himself has said that he is surprised Empro still has enduring impact more than 20 years after he wrote it.

The case dealt with pre-closing liability, addressing what legal obligations parties to a business transaction have to each other when they reach a preliminary agreement (that is, a letter of intent) with details to be ironed out later. Judge Easterbrook applied an objective theory of contract law, finding that the parties' "intent" is grounded in the contract terms they use, not some ephemeral, or subjective, "meeting of the minds." Written terms are the best expressions of intent; the parties tend to forget, or selectively interpret, what they said leading up to the contract signing.

Okay, so on its face, the case has nothing to do with non-competes. Or does it?

Non-compete agreements are one of main areas of litigation that deal with common-law (not UCC) contract rules. General principles of contract construction often are front-and-center in non-compete litigation. And, from my experience, non-compete cases bear a tang of similarity to the Empro problem. Let me explain three situations in which the parties' subjective expectations - expectations which often are not contained in a contract term or condition and which arise pre-closing - can become an issue in litigation.

Preliminarily, it's important to keep in mind that non-competes usually are standardized agreements that are applied (perhaps slightly modified) throughout an organization. This is a good thing, as form agreements reduce transaction costs - savings that are passed down throughout the company in the form of better bonuses, commissions, and salary increases. But because agreements are standardized, they often are not tweaked when an employee is brought on board. So pre-signing discussions or "terms" may not make their way into a final signed document, even if the new employee and his recruiter (usually a mid-level manager or human resources officer) have some preliminary understanding of what is expected. This is the Empro problem through and through. Here are three paradigms:

1. The scope of restricted customers. This problem creeps up often. A sales employee who accepts a job may have a garden-variety customer non-solicitation covenant. He or she may think that any customer brought to the new company should be exempted from the restriction. After all, the employer may do nothing to facilitate the relationship. But unless something is written in the contract to express this intent objectively, the employee will have to defend on reasonableness - a much more arduous task than defending on breach.
2. Policy on enforcement. I've had many employee clients come to me after a lawsuit has been filed and who have said something along these lines: "When I was hired, I was told as long as I avoid my top accounts, the company wouldn't come after me." This may persuade an employee to join, but it's certainly not a binding statement and shouldn't even be admitted into evidence. Still, it is an unfortunate reality of non-compete cases when an employee seeks broad, irrelevant discovery into the company's "policy" of enforcement, either in whole or in part.
3. Indemnification. What happens when an employer tells an employee that it will "cover" any litigation costs incurred as a result of hiring him or her away? The best protection for an employee is to make sure the indemnity is contained in some agreement - usually the new employment agreement or a separate indemnity contract. Often, though, employers won't write in such an obligation. If litigation ensues, the employer may feel differently about spending money on lawyers. For starters, the employee may not perform up to anticipated standards, so the marginal cost of retaining that employee through a lawsuit is prohibitive. The litigation itself could be expensive. And it could go south quickly, particularly if a restraining order is entered. An employee's expectation to receive a continued defense, or even salary indemnity, may not be binding if a contract does not contain a term confirming this expectation.

These problems may give rise to other defenses. But Empro would seem to significantly undercut alternative theories of recovery or extra-contractual defenses. The beauty of a case like Empro is its certainty and clarity. In a perfect world, parties would set forth all the material terms and conditions rather than rely on pre-contract expectations. The world of non-compete litigation is not perfect, though, and these issues creep up repeatedly. An Empro-like analysis would go a long way towards simplifying litigation. 

Post-Reliable Fire, Illinois Courts Are Really All Over the Place

When the Supreme Court of Illinois rendered its decision in Reliable Fire Equipment Co. v. Arredondo, I really didn't think much had changed. Though I suspected courts would be less susceptible to motions to dismiss, Reliable Fire really did not set forth any hard-and-fast rules - even if it did broaden the types of interest a company can protect through a non-compete agreement. In essence, I thought employers might have a slightly easier time enforcing contracts than in the past.

Less than a year later, courts continue to struggle with Reliable Fire in application. The problem continues to be that each judge views non-competes differently, and that very few generalist judges are in the position of reading the 150 or so Illinois decisions to try and reconcile cases all over the map. Further, there are very few areas of commercial litigation that call upon courts to make policy judgments and to resolve tensions with significant public interests at stake.

But non-compete litigation poses a number of challenges for litigants, attorneys, and judges. For instance, it's widely assumed - rightfully so - that only the most extreme non-competes will be tossed before discovery. This is what Judge Holderman held a week or so ago in Instant Technology, LLC v. DeFazio, 2012 U.S. Dist. LEXIS 90911 (N.D. Ill. June 26, 2011). That case involved a three-year non-solicitation covenant in the IT staffing business - one of my top three markets for non-compete litigation (insurance agents and medical device sales run a solid one and two). Citing Reliable Fire, Judge Holderman noted that the three-part reasonableness test requires a court to balance the totality of the circumstances to determine whether a covenant is enforceable.

But the Appellate Court of Illinois looked at the issue differently in Kairies v. All Line, Inc., 2012 IL App (2d) 111027-U, when it affirmed a circuit court's order granting judgment on the pleadings in a non-compete case. That dispute involved a declaratory judgment claim brought by an employee who was bound to a two-year non-solicitation/non-compete covenant. The court found that the non-solicitation covenant was unenforceable on its face because it extended to all of the company's customers - not just those the employee contacted or developed. The non-compete proved an easier analysis, because it was an outright prohibition on competition anywhere (though, for some reason, the court never notes the absence of a geographic term).

The really screwy part of this is that the Kairies court held Reliable Fire was of limited impact, since the "principles governing the determination" of the non-solicitation covenant's reasonableness were "well settled and predate Reliable Fire." Essentially, Kairies seems to suggest Reliable Fire only deals with determining the existence of a legitimate business interest, and that prior cases concerning reasonableness were undisturbed.

But this can't be right. If Reliable Fire requires consideration of the totality of the circumstances, and indeed says that the "identical contract and restraint may be reasonable and valid under one set of circumstances...and invalid under another set" then a court must look at the protectable interest and the covenant's language together, with the unique facts of each case.

As an example, a customer non-solicitation covenant may not have the necessary tie in to the employee, which the agreement in Kairies did not. But what if the facts show that the company was small and that all employees had access to, or worked on, all customers' accounts? Or what if the employee was a manager, such that he had indirect contact with (but extensive knowledge of) a wide range of customers?

This is not to say that some agreements are so patently overbroad that a pre-discovery motion is never a useful tool to dispose of a case. But there is no way that the Supreme Court intended for Reliable Fire to be interpreted so narrowly.

It's hard to say whether Kairies will be revisited on a motion to reconsider. It has a shaky foundation. At this point, it's non-precedential (why, I don't know...) under Rule 23. For lawyers, the case is a continuing reminder that they must be careful advising clients on enforceability. Courts just continue to miss significant legal issues.

A final word. I am not defending the contract provisions in Kairies. They weren't the greatest, and perhaps the employer deserved its fate. The policy rationale, and the potential impact, for future cases, though, is of real concern.

New Hampshire Employer Alert: Notice Required for Non-Compete Agreements

A few years ago, Oregon enacted legislation requiring that employers give employees notice they will have to sign non-compete agreements. New Hampshire has just followed suit.

In a statute passed May 15 - to take effect July 14 - employers in New Hampshire must provide a copy of any "non-compete or non-piracy agreement" to an employee or potential new hire. The terms are not defined, but it seems obvious any restriction on competitive conduct or solicitation (or employees or customers) would fall within the statute. Less certain is whether a non-disclosure agreement would, though the text of the agreement suggests it wouldn't.

The statute also applies to a "change in job classification." As Seyfarth Shaw's blog points out, this too is not defined and could include a promotion, demotion, or lateral move. I doubt it would include a change in pay, since that doesn't seem to alter how one is classified.

The law is vague enough that crafty lawyers will soon litigate over its meaning.

I don't think it's worth reading too much into this, though. Smart employers should provide a copy of a non-compete to a new hire with reasonable notice. This helps mitigate any consideration defense, to be sure. But it also is a sound business practice. Experience shows that employees are more satisfied and less likely to leave if they feel as though they have been treated fairly by their employers.

Case Update...The Trade Secrets Edition

I've come up with a better way to differentiate between trade secrets (protected nearly everywhere by statute) and confidential information (somewhere protected by the common law; more often, by contract). I may be totally off-base on this, but here goes.

A trade secret is a form of intellectual property whose value can be monetized like a patent or trademark. Confidential information is information that generally is not available to outsiders but which lacks independent value as a firm asset.

(I actually thought of this yesterday while changing a diaper.)

We're in the dead of summer, but the law continues to churn out interesting cases for us nerds to ruminate over.

Inevitable Disclosure in Massachusetts

A preliminary injunction ruling out of the District of Massachusetts rejected a rather expansive view of the inevitable disclosure doctrine. U.S. Elec. Svcs., Inc. v. Schmidt, 2012 U.S. Dist. LEXIS 84272 (D. Mass. June 19, 2012), involved the departure of a national accounts manager who did not have a non-compete agreement with the plaintiff (he actually left to work for a subsidiary two years prior). When a project coordinator followed the manager to a competing electrical distributor, the distributor sued under a variety of theories. Surveying Massachusetts' interpretation of the inevitable disclosure rule, the district court held that the rule is best applied to establish irreparable injury - basically, a protectable interest - supporting a non-competition agreement. It did not approve of using the theory as the foundation for a trade secrets claim. Factually, the claim appeared to be a stretch since the manager had not dealt with the key customer at issue - Dollar Tree Stores - for over two years.

Royalty Damages for Misappropriation

Royalty damages are the back-up plan for victims of trade secrets theft who can't prove lost profits or gains the misappropriator realized. This is a derivative of patent law, and it seeks to figure out a hypothetical licensing price that the misappropriator would pay for the privilege of using the information taken from the owner.

An Arizona court has held that a trade secret owners license fees for other patents and investment costs in developing the trade secret can provide a basis for a royalty award. It also rejected the argument that because a product may never be brought to market - the product involved an intestinal sleeve to treat morbid obesity - damages were inherently speculative. Using corporate finance theory, the court stated that a risky future cash flow is simply discounted with a risk-adjusted rate. The case is W.L. Gore & Assocs., Inc. v. GI Dynamics, Inc., 2012 U.S. Dist. LEXIS 75055 (D. Ariz. May 30, 2012).

Attorneys' Fees In Non-Compete Agreements

What happens when an employee wins a non-compete case and tries to recover attorneys' fees he never was obligated to pay? In my experience, new employers pay the freight on non-compete suits about 1/4 of the time, depending on the employee's value and position within the company. (An executive, for instance, likely will be able to negotiate this as part of his employment agreement.)

In Rogers v. Vulcan Mfg. Co., 2012 Fla. App. LEXIS 8793 (Fla. Ct. App. June 1, 2012), the Court of Appeal of Florida reversed a $0 attorneys' fee award to the employee after he prevailed on the employer's non-compete claim. The fee-shifting clause provided the employee could recover fees "incurred to enforce any term, condition, or provision" of the contract. The court found the clear intent of the clause was that "the loser pays, and the winner does not." It did not matter who the source of the funds was, because the language in the fee provision was passive.

And who said never to use the passive voice??