Case Law Update: The Remedies and Civil Procedure Edition

This is a much overdue case law update, so it's a little lengthy. But on the upside, it touches on a number of different subjects from around the country.

Lost Profits

A federal district court in Indiana excluded significant parts of an expert's lost profits testimony in the hotly contested case of CDW, LLC v. NETech Corp. The case arose out of an allegation that NETech lifted out CDW's Indianapolis branch office and suffered millions in losses in "advanced technology" revenue. On a Daubert motion, the district court excluded a financial expert's "yardstick" methodology for predicting what CDW's Indianapolis branch would have earned but for the alleged wrongful conduct by the ex-employees. The ruling effectively excluded opinions that would have established lost profits of over $17,000,000. The district court allowed an alternative formulation of lost profits in a much lower amount to go to the jury.

Equitable Extension

The extension of non-competes past their expiration date (as measured from the date of termination of employment) is one of the most controversial, hotly contested remedies in litigation. As a federal district court in Idaho noted a few weeks ago, judges normally impose this remedy - when it's available - after a jury finding of breach or after a favorable ruling on summary judgment for the enforcing party. But in unusual cases, like that in MWI Veterinary Supply Co. v. Wotton, 2012 U.S. Dist. LEXIS 131784 (D. Idaho Sept. 14, 2012), the court can issue an extension remedy at a TRO or preliminary injunction phase. That finding was important in the Wotton case since the court had to find extension was appropriate to determine likelihood of success on the merits of the case. The non-compete, which arose out of the sale of a business, expired by the time the court addressed the preliminary injunction motion.

Temporary Restraining Orders

An Ohio court refused to grant a temporary restraining order against a departed sales executive in Chart Industries, Inc. v. Spagnoletti, 2012 U.S. Dist. LEXIS 140102 (N.D. Ohio Sept. 28, 2012), because the non-competition covenant contained no geographic or job-scope limitations. Though careful to note that such covenants were not per se unenforceable, the court stated it was important that the employer did not ask the court to impose any sort of limitation on the covenant at the TRO stage that would make it reasonable. The case demonstrates the continued difficulty courts have enforcing non-competes that contain no limiting language whatsoever. Delaware law applied.

Necessary and Indispensable Parties

In non-compete cases, the plaintiff sometimes will elect to forego suing the new employer and will proceed simply against the employee. There are a number of strategic and substantive reasons why this may be the case. The ruling in OneCommand, Inc. v. Beroth, 2012 U.S. Dist. LEXIS 122587 (S.D. Ohio Aug. 29, 2012), shows that a new employer is not a necessary party who must be part of the litigation under Federal Rule of Civil Procedure 19. Even if the plaintiff has potential claims against a new employer (for interference, trade secrets theft and the like), it is not necessary to make that company a party to a breach of contract suit with the employee.

Jury Trial Waivers

The right to a jury trial can be waived by contract if the waiver is knowing and voluntary. Generally, such waivers are strictly construed, however. One question that frequently arises is how far the contractual waiver extends to non-contract claims, like trade secrets misappropriation. A Delaware court concluded that a jury waiver provision in an asset purchase agreement encompassed related tort claims of trade secrets theft, conversion, and common-law unfair competition - reasoning that the "arising out of" language in the agreement was sufficiently broad to include torts intrinsically related to the contract action. The case is Coface Collections North Am., Inc. v. Newton, 2012 U.S. Dist. LEXIS 124342 (D. Del. Aug. 31, 2012).

Attorneys' Fees

Non-compete litigation can sometimes perpetuate itself solely because of fees that are incurred. An illustration of this problem comes from the case of Cumulus Broadcasting v. Okesson, 2012 U.S. Dist. LEXIS 124836 (D. Conn. Sept. 4, 2012). After the parties settled, they left it to the district judge to award attorneys' fees under a provision of the employment agreement that enabled the plaintiff to recover fees enforcing the non-compete.

The court, seemingly none-too-pleased (particularly since it was not allowed to see the terms of the parties' settlement agreement (?)), significantly pared back what the plaintiff thought it was owed. It essentially limited its fees to those incurred to obtain a preliminary injunction. And even that apparently gave the plaintiff only a small slice of what it wanted. The court ripped about $10,000 in fees off what it cost to take the matter to hearing.

The fee award was $80,317 (inclusive of some $21,000 in costs) - about 1/4 of what the plaintiff incurred and claimed it was entitled to. If nothing else, the case highlights for clients what a preliminary injunction can cost. And it further shows that weak non-compete cases can cost a lot more than the value of the benefit received.

The Reading List (No. 11)

I have not done a formal "Reading List" for a while, so I included a number of different subjects into the mix. Tomorrow or early next week, I'll have a case law update.

From the Volokh Conspiracy, Orin Kerr writes on the circuit split over the Computer Fraud and Abuse Act, as well as current legislative activity that may resolve issues inevitably destined for the Supreme Court.

John Marsh discusses the indemnification and advancement suit filed by Sergei Aleynikov in his ongoing $2.5 million legal fee adventure with Goldman Sachs. I wrote about this late last week and just happen to be dealing with this same issue in two suits of my own.

Today's Crain's Chicago Businesses discusses two non-compete disputes over doctors (urologists and obstetricians) pending in Cook County.

Epstein Becker & Green's blog discusses an unusual Texas case in which an employer lost a non-compete case due, at least in part, to its failure to sign the document. Another take on the same case from Seyfarth Shaw's blog...

Judge Richard Posner suggests on the Becker-Posner Blog reforms to both patent and copyright law. He previously wrote for The Atlantic on similar issues following dismissal of the Apple/Motorola Mobility suit, in which he sat as a trial judge by designation.

Also from the Seventh Circuit, Judge Diane Sykes' address to Marquette Law School featured comments on the late Judge Terence Evans, who died unexpectedly not long ago. Her remarks were very interesting and describe Judge Evans' clear, pragmatic style. The article can be downloaded from this site for free.

Cook County Order on Attorneys' Fees Illustrates Factors Used to Assess Bad Faith

Earlier this year, Judge Mary Anne Mason in the Circuit Court of Cook County awarded attorneys' fees to a prevailing defendant under Section 5(i) of the Illinois Trade Secrets Act. That provision allows for a defendant to recover legal fees if a claim of misappropriation is made in bad faith.

A copy of Judge Mason's Memorandum Opinion and Order in Portola Packaging, Inc. v. Logoplaste USA, Inc. is embedded below. This was not an employee defection case, but rather one which arose out of the ashes of a failed business transaction. I have a similar bad faith fees issue currently pending in the United States Court of Appeals for the Seventh Circuit in the case of Tradesmen Int'l, Inc. v. Black (Nos. 11-3715 and 12-2032). In that case, my clients petitioned the district court for an award of fees following entry of summary judgment.

By and large, the standard by which to examine "bad faith" under the ITSA (or any of its uniform act counterparts) is somewhat ad hoc. Many courts adhere to a two-part objective/subjective test very similar to that discussed in last week's post concerning the Leadscope case out of Ohio.

Judge Mason's opinion is very interesting in that it shows how a trial court judge, following the conclusion of a trade secrets case, will go back over the evidence and compare it to what the allegations revealed. For instance, one of the factors Judge Mason examines is the plaintiff's failure to retrieve copies of confidential information from the proposed acquiring company after negotiations broke down. During the course of the lawsuit, Portola had continued to insist that it did not demand retrieval of confidential documents because it held out hope of rekindling a business relationship with Logoplaste. As no documents revealed Portola's interest in this "rekindling", Judge Mason was not buying the argument.

This demonstrates that factors other than what is pled in the complaint are highly relevant to the bad-faith inquiry. Further illustrative of this is Judge Mason's reliance on evidence of pre-litigation communications where Portola had examined a litigation strategy because "new suppliers that are caught up in litigation can scare potential customers." This type of evidence, arguably irrelevant to what the allegations say, illustrates motive to pursue a competitor not for the hopes of winning a suit, but simply to deter competition altogether.

Portola Packaging v. Logoplaste - Order on Fees

This Move Takes...Guts

The travails of one Sergey Aleynikov are well-known to trade secrets and competition lawyers like myself.

This is the ex-Goldman Sachs programmer who spurred litigation from Chicago to New York, eventually resulting in a criminal conviction that was later overturned by the Second Circuit Court of Appeals in February.

Aleynikov's legal saga began when he misappropriated Goldman's proprietary software trading code and started work with a competitor in the high-frequency trading business, Teza Technologies.

Aleynikov is now suing Goldman to recoup his legal expenses through the concept of indemnification and advancement. Because Goldman's corporate bylaws require the firm to cover legal expenses for officers and directors, Aleynikov claims Goldman must pay the legal freight to defend charges - pursued by Goldman.

Indemnification and advancement are concepts that require attorneys to examine both state corporation law and corporate bylaws. There are many exceptions and ways for companies to avoid advancing fees and costs. Aleynikov believes that Goldman is required to, however, under the clear terms of Goldman's bylaws.

A copy of Aleynikov's federal complaint, filed in the District of New Jersey, can be found here and is embedded below:

Aleynikov v. Goldman Sachs Complaint (Indemnification and Advancement) (00136749)

Ohio's Standard for Malicious Litigation Sounds Familiar

I rely entirely on John Marsh of Hahn Loeser to provide details on one of the year's most important competition cases, American Chemical Society v. Leadscope. For this post, the holding is relevant in that it establishes - at least in Ohio - a two-part test for determining when malicious litigation can serve as the basis for an unfair competition claim. That test requires a plaintiff to show:

(1) that the legal action is objectively baseless; and
(2) that the opposing party had the subjective intent to injure the party's ability to compete.

Leadscope involved a claim of trade secrets misappropration over software code. And the standard the Supreme Court of Ohio adopts is strikingly similar to the tests courts use over related claims. Those claims are:

(1) bad faith fee-shifting petition by a defendant under the Uniform Trade Secrets Act; and
(2) sham litigation under antitrust law.

It makes sense all three claims would have similar tests. The UTSA fee-shifting test does vary from state to state, but in the main the Leadscope test constitutes the majority rule. For defendants who feel as if litigation has served no purpose than to deter competition and impose litigation costs, the main theories of recovery are the following:

(1) An independent tort claim like that advanced in Leadscope. The claim may depend state to state, but generally the theories are abuse of process, malicious prosecution, violation of antitrust law, and unfair competition.

(2) Fee-shifting statutes or contract provisions. The UTSA bad-faith fee-shifting clause is one that is commonly invoked, and is not a "claim" in the sense that a full-blown trial would be required to resolve it.

(3) A court's power to sanction, under its inherent authority, as part of the discovery process, or even against an attorney directly for unnecessarily increasing litigation costs.

The upside of option (1) is that, in theory, the recovery is not limited to attorneys' fees. In Leadscope, for instance, the defendants received $26.5 million in compensatory and punitive damages.

Kentucky Court Summarizes Non-Compete Reasonableness Factors

I found a recent decision from the Court of Appeals of Kentucky to be somewhat interesting in its discussion of what factors bear on the issue of a non-compete's reasonableness.

The case's disposition is not worth much discussion - it essentially found that the circuit court's early disposition was premature - but in the context of reversing a judgment it outlined the types of considerations a Kentucky court should consider when assessing whether an employment-based covenant is enforceable.

In Charles T. Creech, Inc. v. Brown, 2012 Ky. App. LEXIS 142 (Ky. Ct. App. Aug. 17, 2012), the court of appeals outlined the following general reasonableness factors:

(1) Nature of the industry
(2) Characteristics of the employer
(3) The history of the employer/employee relationship
(4) The interests the employer seeks to protect
(5) Hardship on the employee
(6) Impact on the public

This is similar to, but a little more specific than, other courts' three-part reasonableness test. What was most interesting, though, about the decision was that under each factor the court outlined in question format underlying considerations a trial court should delve into. The only problem I see with this approach is that the court did not indicate how the answers to some of those questions (at least the ones that are less obvious) should favor one side of the other.

For instance, under the first factor, the court instructed trial courts to ask:

"How many players are there in the market, and are their respective market shares relatively large or small?" It never answers how the answer to this question should help frame the disposition.

This is the type of evidence that inevitably comes out during a non-compete trial, but some courts view this differently. For instance, many courts look at a highly diffuse, fragmented market as supporting non-compete arrangements because there often are either low barriers to entry or an industry custom and practice of utilizing non-competes to prevent customer switching. A minority of courts, however, view this as a factor that weighs against enforcement, presumably because customers have more fleeting relationships and identities of customers aren't as obvious.

All in all, the case provides a nice roadmap to get attorneys thinking about what generalist judges view as important in these types of cases.

Illinois' Rule 23 Problem

Some years back, our Supreme Court amended Rule 23 to allow for the appellate courts to publish non-precedential orders in an expanded class of cases. Rule 23 had long been part of the appellate equation, but the latest amendment gave courts greater authority to cut back on issuing formal opinions. This change was a direct response to the perceived deluge of appeals in the five appellate districts. Publishing opinions when the courts were under a crushing workload (apparently) was seen as unfair to the appellate justices and parties who would rely on opinions that were not (apparently) subject to intellectual rigor.

How does this impact non-compete law? So far this year, our appellate courts have issued four Rule 23 orders that should have been published opinions.

The first case, Hafferkamp v. Llorca, 2011 IL App (2d) 100353-U (actually filed in 2012) was handed down in February, and it handed down an important rule of law: the standards articulated in Reliable Fire Equipment Co. v. Arredondo are to be applied retroactively - meaning cases decided under the old law could be reversed for the circuit court to apply the correct test.

The second one was just as significant. Kairies v. All Line, Inc., 2012 IL App (2d) 111027-U, held that the Reliable Fire case did nothing to change the old case law on whether specific restraints were unreasonable. According to the court, Reliable Fire only dealt with determining the viability of a protectable interest. This holding was simply incorrect, as I have written before.

The third case, InvestRX Corp. v. DiGiovanni, 2012 IL App (1st) 120758-U, came from the First District in Chicago last month and held that the circuit court properly issued a preliminary injunction against former officers who breached non-competition restrictions entered into in connection with a sale of the business. Admittedly, the opinion does not break any new ground, but it does discuss the type of protectable interest an enforcing party can assert to obtain injunctive relief. For no other reason, it should have been published to serve as a useful guide for other courts to assess the grant or denial of injunctive relief post-Reliable Fire.

Finally, just this past week, the Second District again published a Rule 23 order holding that five months continued employment was not sufficient consideration for a non-compete agreement. The court's opinion in Gallagher Bassett Svcs., Inc. v. Vacala, 2012 IL App (2d) 111175-U, was lengthy and dealt with a consideration issue that has divided Illinois state and federal courts. If for no other reason, the Vacala case ought to serve as some kind of precedent on the consideration issue since the Second District had not previously adopted the test that other districts had. Additionally, the court discussed that a trade secrets misappropriation claim requires specific, non-conclusory factual allegations concerning how the alleged secrets were misappropriated. This may not be novel, but the case law on pleading standards in trade secrets actions is so sparse, courts could use more guidance.

In my mind, Rule 23 was not designed for this, and it has become overused. Lawyers who practice in this area need more precedent to go on. Not many cases in this field make it to the appellate courts, and the issues our courts are deciding are significant enough that they should be released in opinion form.

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."