2013: The Top 10 List (Part II)

I hate to see 2013 leave, so I stretched my annual year-end review into two parts. Yesterday, I discussed the first half of my top 10 developments in non-compete and trade secret law. And today, I conclude the year with numbers one through five.

Here we go....

5. Aleynikov's Advancement Victory Highlights Oft-Overlooked Issue in Competition Suits. Former Goldman Sachs code developer has the distinction of making the Top 10 list in back-to-back years. (He is, in essence, the Arcade Fire of trade secrets litigants.) In last year's post, I summarized his legal high-wire act and predicted that he just might win his indemnification and advancement suit against Goldman Sachs. Well, he prevailed at least in part, with a federal district court finding that Aleynikov is entitled to have Goldman advance his legal expenses to fight the ongoing state criminal case in Manhattan. This development is significant because advancement and indemnification rights are the soft underbelly of many competition cases and often can throw a wrench into a company's plans to fight unfair competition. States recognize the broad policy goals of advancement and indemnity and will apply these statutes liberally to further those goals. Aleynikov's case, and others like it, should teach plaintiff's counsel to carefully consider how to plead and pursue competition claims. For a recap of Aleynikov's win in New Jersey, read my post from last month.

4. Federal Court Convicts David Nosal of Computer Fraud. The Computer Fraud and Abuse Act continued to wreak havoc on logic and reason (and more than a few lives) in 2013, and the case of David Nosal is one such example. The former Korn/Ferry search executive was convicted for violating the CFAA and the general federal conspiracy laws in California federal court. Nosal's plight (he will again appeal) indicates that conduct often giving rise to civil claims for unfair competition can actually result in criminal charges. Nosal's conviction generated a fair amount of controversy and demonstrates the broad applicability of the CFAA. For a discussion of the Nosal conviction, listen to the Fairly Competing podcast that John Marsh, Russell Beck, and I produced and posted back on May 28.

3. Illinois Appellate Court Issues Controversial Fifield Decision. No single non-compete has generated more buzz than the Appellate Court of Illinois' opinion in Fifield v. Premier Dealer Services. The case holds that a non-compete given in exchange for employment is not sufficient consideration unless the employment continues for at least two years. (To those unfamiliar: this is a case not legislation. I know it's confusing.) The rule broadly impacts at-will employees and has caused business counsel to lose sleep and wring their hands over just how to draft employment contracts. The Supreme Court of Illinois tacitly approved of the holding, declining to take the petition for leave to appeal. They were not persuaded, apparently, by my "dissenting opinion" in Fifield as the phantom Fourth Justice. (For those of you interested in assessing blogging metrics, this post - by a factor I can't even count - generated the most hits, the most e-mails, two news magazine interviews, and three citations in opposing counsel's legal briefs.) For my follow-up take, you can read more on Fifield here. (And if you want even more, just Google "Fifield." You'll find plenty.)

2. Seventh Circuit Decides Tradesmen Int'l v. Black. My case. Navel-gazing. Can say no more. Read here and here.

1. Federal Legislation to Protect Trade Secrets on the Horizon? Number one is a runaway. Not even close. It is difficult to overstate the importance of many proposed bills that are currently working their way through committee or that could be reintroduced in some form or fashion. Of particular note in 2013 was "Aaron's Law", which Zoe Lofgren introduced to cut back on the perceived unfairness and breadth of the CFAA. John, Russell, and I discussed the CFAA prosecution of activist Aaron Swartz on our Fairly Competing podcast early this year. Rep. Lofgren also introduced the Private Right of Action Against Theft of Trade Secrets Act, which would create a private civil cause of action at the federal level. Other legislative activity at the federal level included introduction of the Deter Cyber Theft Act, which would establish a "watch list" of countries that engage in cyber theft and require border patrol to bar imports from those countries. My June 4 discussion of the Act can be found here. Finally, and most recently, Senator Flake introduced the Future of American Innovation and Research Act. This legislation would provide a federal trade secrets remedy against those acting outside the U.S. or for the benefit of a foreign actor. It also provides for an ex parte seizure order, subject to some limitations. And finally, if you're interested in listening to further discussion about the federalization of trade secrets law, listen to the podcast John, Russell, and I produced on May 17.

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That's a wrap on 2013. Again, many thanks to my readers and those who are kind and thoughtful enough to e-mail me. You have made this a truly enjoyable experience once again. A less warm farewell for the year to those spammers who have ruined the commenting portion of this blog permanently. Such is life on the internet.

I am looking forward to starting Year 6 and reaching that milestone of post number 500. See you in 2014!

2013: The Top 10 List (Part I)

And so ends Year 5, my fifth full year writing this blog. Sometime during the first quarter of next year, I will be penning my 500th post. I guess that qualifies as a milestone, but I'm not exactly sure how to celebrate. Perhaps a guest column? We'll cross that bridge later.

For now, we'll have to make do with what has become an annual tradition - a countdown to the Top 10 most significant developments for the past year. Some on this list will be familiar, some perhaps not. And as usual, I have my own reasons (which I'll try to explain) for why I think a development is signficant.

This year, I am breaking the post into two parts. Not so much to speed-up the countdown to Post No. 500, but to continue on with the suspense-building tradition of bifurcating Top 10 lists (see Pitchfork's Top Albums list, for instance).

So here goes Part I, in which I'll summarize 10 through 6. Tomorrow, we'll conclude the year with Part II, in which I outline the five most important developments of 2013.

10. State Legislatures Continue Examining Non-Compete Agreements. Every January we see legislatures consider a host of new bills - many of which are unpassable sops to constituents. It has become commonplace to see the introduction of bills regulating non-compete agreements. This year was no different, as legislatures in Minnesota, Illinois, New Jersey, Connecticut, and Oklahoma all considered regulating various aspects of non-compete law. For a take on the Oklahoma bill, read my post from June 10.

9. First Circuit Addresses Scope of "Solicitation." One of the year's more interesting circuit opinions comes from Massachusetts and the always-reliable Judge Selya. The case of Corporate Techs. v. Hartnett addressed a frequent problem posed by non-solicitation covenants: just what is a "solicitation" anyway? The case pragmatically concludes that there is no real viability to a "first contact" rule, and that business realities must play some role in assessing whether an employee has impermissibly solicited a client in violation of a contractual restriction. For a summary of Hartnett, read my October 17 post.

8. Fracking Bills Intersect Public Policy with Trade Secret Rights. For those of you interested in our country's continuing debate over energy independence, the very word "fracking" can invoke a visceral reaction. It is beyond dispute, however, that the renewed interest in fracking as a means of energy production has led to job creation, particularly in areas hard-hit by the recession (including my state of Illinois). As a result, state legislatures are considering or enacting bills to allow (and heavily regulate) this method of energy production. But in doing so, states are having to consider how to protect the trade secret rights of oil and gas producers. Understandably, many environmental groups want to know what kinds of chemicals the producers are using in their fluid compositions (which is critical to the fracking method). And this leads to an explosive intersection of public policy and private ordering of trade secret rights. For my take on the issues likely to come up time and again in fracking cases, read my May 2 post.

7. Supreme Court Validates Use of Forum Selection Clauses. It is near-sacrilege on this blog to discuss matters related to venue and jurisdiction, if only to prevent internet-induced boredom. But there is no doubt for practitioners that these issues are important to understand. For the second straight year, the Supreme Court has issued an opinion that will be critical for those attorneys who deal with the enforceability of non-compete agreements. While last year's decision dealt with arbitrability, this year, the Court reaffirmed the notion that forum selection clauses are presumptively enforceable. As it stands right now, the only real method of shifting venue when the underlying contract contains a forum selection clause is to argue third-party inconvenience. For my summary of the Atlantic Marine case, read my post from last week.

6. Courts of Appeal Affirm EEA Convictions. The Economic Espionage Act continues to generate much discussion among commentators, particular given the importance of trade secrets in our economy. This year, we saw two courts of appeal affirm EEA convictions arising out of theft of trade secrets. In one case, the Seventh Circuit affirmed Hanjuan Jin's conviction arising from her misappropriation of technology from Motorola (though the technology is now somewhat dated). In the more interesting case, the Sixth Circuit affirmed the convictions of Clark Roberts and Sean Howley for misappropriating Goodyear's tire-assembly machine technology. But it reversed the sentences the district court imposed, particularly given Goodyear's inability to describe adequately the economic loss it incurred from the theft. For my discussion of the Goodyear case, read my February 6 discussion in USA v. Roberts.

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Stay tuned for Part II (5 through 1) tomorrow afternoon, featuring proposed federal legislation, criminal convictions under the Computer Fraud and Abuse Act, and developments in Illinois.

Supreme Court Finds Forum Selection Clauses Presumptively Valid

For the second straight year, the Supreme Court has issued an opinion which impacts procedural issues surrounding many non-compete disputes.

Last year, the Court held that when an employment contract contains an arbitration clause, an arbitrator - not a court - must determine the enforceability of a restrictive covenant. This year, the Court addressed an issue which seems more and more pervasive in covenant fights: the enforceability of forum selection clauses. These procedural disputes are time-consuming, expensive, and totally ancillary to the merits.

Venue provisions seem to be part and parcel of any employment agreement nowadays, with those clauses specifying what law the parties agree to apply and where any dispute should be heard. Although it is not uncommon to see venue provisions as merely optional or permissive, it is far more frequent in my opinion to see mandatory clauses that specify the employer's home state as the exclusive place for dispute resolution.

The problem concerning enforceability of these clauses generally arises when an employee lives and works out of state. Often times, the employee - anticipating a covenant lawsuit - will file preemptively in his or her home state to establish a venue different than that specified in the contract. Just as frequently, the employee's first response in a covenant suit is to try to dismiss or transfer the case on venue grounds to his or her home district.

Is this permissible? The Court in Atlantic Marine Constr. Co. v. U.S. Dist. Ct. makes it much more difficult for the employee to raise this defense.

The Court in Atlantic Marine held that a district court should enforce the forum selection clause and transfer the case to a different federal court (the one in the pre-determined venue) unless extraordinary circumstances "unrelated to the convenience of the parties" work against a transfer. Effectively, the forum selection clause has controlling weight in the case, and a district court judge should transfer the case unless non-parties would be inconvenienced.

For an employee, the only practical way to prevail in this type of forum fight is to introduce by way of affidavit specific testimony showing that nearly all of the relevant witnesses are located out of state. This would cause a court to consider whether maintaining the suit in the chosen state would work a hardship on third-parties and lead to problems with subpoena compliance. Even that may not be enough, since presumably the employer will introduce counter-testimony showing which witnesses reside in the contractually agreed-to state. The availability of video testimony or use of depositions at trial further work against the employee. That said, the employee's showing must be compelling, detailed, and substantial if he or she is to have any shot at all.

It is important to remember that when a venue fight like this arises it usually takes place in federal court. If the employee files a preemptive suit in another state, it is a virtual certainty there will be complete diversity between the parties so the suit will end up somehow in federal court (either on its own or through the process of removing it out of the state court into the federal court). When seeking to enforce a forum selection clause, the employer is going to move to have the case transferred to a different federal court or dismissed so it can refile in the appropriate state court. However, the Court's opinion indicates the same test concerning enforceability of the forum selection clause will apply regardless of whether the motion is for transfer or dismissal.

Is the definition of a "trade secret" too complicated? Judge Posner says yes.

Courts long have recognized that a trade secret is one of the most "elusive" concepts in the law. This recognition results from a misunderstanding of what kind of protection the law will afford commercially sensitive material. It also results fr

om the fact that owners of business information tend to overvalue it and, hence, claim trade secret protection over too much material.

In the high-profile Chicago case of U.S. v. Jin, No. 12-3013 (7th Cir. Sept. 26, 2013), Judge Posner somewhat criticized the definition of a trade secret under the Economic Espionage Act. He called the definition elaborate and disconnected from a trade secret "in the ordinary sense." He specifically called out the element of the definition that a trade secret have "independent economic value from not being generally known to ... the public." It was this definition that allowed Hanjuan Jin to challenge her conviction.

Jin's defense centered on value, because the stolen trade secrets - Motorola's dated mobile telecommunications system - were losing commercial value. Not surprisingly, Judge Posner found that the United States, in proving its case, did not need to prove that Motorola lost money as a result of Jin's theft. (Incidentally, this was one of those cash-in-the-luggage, one-way-ticket-to-China-with documents-in-hand fact patterns that had all the hallmarks of cloak-and-dagger stuff. Hard to believe any jury would have much sympathy for that.)

The Court then noted that a trade secret need only have potential value, not actual, and that the "damage" may have come in the fact that Motorola had to reveal "that it couldn't keep secrets or prevent rivals from stealing its technology." Judge Posner long has endorsed trade secret rights, and this opinion reflects his effort to broadly define value - even though he found the EEA's trade secrets definition unduly "elaborate."

(This is the definition from the Restatement of the Law (Third), Unfair Competition, Section 39:

A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.)

A copy of the Opinion is below.

US v. Jin - Opinion (00181177)

Reflecting on Garden-Leave and the English Approach

Last month, the Illinois Bar Journal published a feature article I wrote called "Non-Traditional Non-Competes: Designing Non-Competition Agreements to Hold Up in Court."

The stated premise of my article was fairly straightforward and uncontroversial: non-competes are tough to enforce, and attorneys should think creatively about how to make them more reasonable and reflective of an arms-length transaction. I described three basic templates attorneys could consider using to make agreements more enforceable. These templates, which generally adopt a garden-leave approach to enforcement, would all but eliminate any line of attack concerning lack of consideration and undue hardship.

The unstated premise was more nuanced: by paying employees not to compete, employers will avoid more litigation and challenges to enforceability. Since non-compete litigation itself costs money and infrequently results in monetary judgments, the net economic benefit to a garden-leave approach isn't quite as bad as it might seem when first thinking about it.

I started the article with a discussion of the famous case from the English Court of Appeal, Evening Standard v. Henderson, in which a London-area paper successfully prohibited an employee from working for another employer during his garden-leave (or extended notice) period. The other day, I read another English decision, JM Finn & Co. Ltd. v. Holliday, which granted injunctive relief (just as in Henderson) to keep an an investment manager on the sidelines during his one-year notice period after he indicated he was leaving to join another brokerage firm. The decision can be found here.

The mechanics of garden-leave can be somewhat confusing. The general approach is that an employer, like JM Finn, has the ability to enforce what's called a "notice period" when it receives a resignation letter, like Holliday provided to it. At that point, the employer continues paying the employee to sit out and importantly (at least in the United States) the employee continues to owe duties of loyalty and fidelity to his then-employer (even though he is not actively working). As I discuss in my article, it's best that the employer not retain any discretion to conscript the employee into performing any type of work during the notice period.

Garden-leave is prevalent in the financial services sector, but as I point out in my bar journal article, it has received almost no attention in U.S. courts. Maybe this proves my point. If these clauses are in use, shouldn't they result in less litigation (meaning, fewer searchable cases) and reduced attorneys' fees?

Georgia Court of Appeals Discusses Anti-Severability Rules

One of the defining characteristics of a state's non-compete law is its application of the blue-pencil rule. Although several variations of the rule exist, states generally fall into one of two camps: those that readily modify overbroad covenants to make them reasonable, and those that generally frown on modification or blue-penciling.

Georgia historically has been one of the states that enforces only those agreements that are reasonable as written. That is to say, courts cannot modify overbroad agreements to make them enforceable. In essence, Georgia judges will decline to force the parties to accept a contract they could have, but didn't, make.

Georgia law continues to evolve, and a new statute governs contracts entered into after May of 2011. However, it doesn't impact contracts signed before the effective date, and courts will continue to apply the old common law for many years to come.

The Court of Appeals discussed at length the state's anti-severability rule in Lapolla Industries, Inc. v. Hess. As the Court described, the anti-severability rule applies to the following types of restrictive covenants:

• covenants restricting employment or competition generally in a relevant market;
• covenants restricting the solicitation of business from actual or potential customers; and
• covenants restricting the acceptance of business from actual or potential customers.

(There was another type of restrictive covenant at issue in Hess, which I still don't understand after reading it several times and which the Court of Appeals intelligently glided over. Lapolla (the ex-employer) had a non-solicitation covenant that prohibited the employee from soliciting or accepting business from a business competitive with or similar to Lapolla. In other words, the employee could not vend any kind of product or service to a Lapolla competitor. Silly.)  

However, the anti-severability rule does not apply to covenants that either:

• restrict solicitation or hiring of certain employees or independent contractors; and
• restrict disclosure of trade secrets or confidential information.

Like many states, Georgia historically has frowned upon so-called market-based restraints, which contain broad prohibitions on working for a competitor in any capacity. Georgia's case law, however, also has applied strict scrutiny to lesser restrictive customer-based restraints, such that a number of appellate decisions strike down clauses that many other states would deem enforceable. For instance, Georgia courts have frowned upon customer-based restraints that prevent an employee from accepting, instead of soliciting, a customer's business. This distinction never has made much sense to me, since it's virtually impossible without the aid of legal process to determine who solicited whom.

The Court also discusses at length in Hess Georgia's reluctance to enforce choice of forum and choice of law clauses in contracts when application of a foreign state's law would lead to a result contrary to Georgia's public policy. In keeping with one of my sacrosanct rules to limit discussion of venue and jurisdiction disputes to an absolute minimum, I will say no more regarding this subject.

Even Reprehensible Terms of Service Violations Do Not Yield CFAA Claim

Although the Computer Fraud and Abuse Act frequently has been described as extremely broad in reach, it's also important to recognize its limitations.

One of the most substantive, sweeping limitations involves potential violations of website "Terms of Use" or "Terms of Service." Largely as a result of the case law that has developed out of the Ninth Circuit Court of Appeals, courts have recognized that pursuing a CFAA claim (or prosecuting a CFAA crime) on the basis of TOS violations poses significant problems.

The CFAA, somewhat famously, prohibits access to a protected computer without authorization or (critically) in a manner that "exceeds authorized access." Shoehorning a TOS violation into the "exceeds authorized access" framework has caused a great deal of handwringing among academics, prosecutors, defense attorneys, and judges.

The most well-known case involved Lori Drew, the MySpace Mom who created a fake account to contact a 13-year-old girl with whom her daughter was friends. The girl later committed suicide after corresponding with a person she thought to be a 16-year-old boy, the identity Drew assumed online with the fake account. After the U.S. Attorney's Office prosecuted Drew under the CFAA for a TOS violation, the district court judge threw out the conviction and held that the CFAA - as applied in the case - was void for vagueness. (Professor Orin Kerr represented Drew in this case.)

A similar dust-up ensued in an Oregon middle school recently, when a number of students created fake Facebook and Twitter accounts under the name of their assistant principal, Adam Matot. The students would then invite children to be friends with "Matot", and upon receiving an acceptance of the invitation, they would send the children obsene material (including pornographic images).

Matot's grievance, however sympathetic, simply did not state a CFAA claim for many of the same reasons the government couldn't maintain a conviction against Drew. The TOS violation, under Ninth Circuit law (Matot filed suit in Oregon), was not enough to demonstrate that the children exceeded their authorized access to a computer, since that statutory term restricts only access to a protected computer - not the misuse of information contained within the protected computer.

It is important to remember what function website terms of service play in commerce. As Professor Kerr mentioned in testimony before the U.S. House of Representatives, "[c]ompanies write those [TOS] conditions broadly in part to avoid civil liability if a user of the computer engages in wrongdoing....Those terms are not designed to carry the weight of criminal liability."

The same analysis generally will apply to civil claims involving the CFAA. In a majority of federal jurisdictions, courts will look at whether an individual had permission to use a protected computer in the first place and will not focus on whether the individual's use of information was wrongful.

Aleynikov Turns the Tables on Goldman Sachs Group

Score one for the underdog.

In Sergey Aleynikov's latest legal battle against Goldman Sachs, he emerged victorious. Earlier this month, Aleynikov prevailed on summary judgment and obtained an advancement (that is, prepayment) of legal fees related to his legal defense of state criminal charges brought by the Manhattan District Attorney.

As many readers know, Aleynikov was convicted by a federal district court of violating the Economic Espionage Act related to his alleged theft of Goldman's trade secret high-frequency trading source code. The Second Circuit reversed that conviction - after Aleynikov spent many months in federal prison before the reversal - leading to a quick modification of the federal statute.

Soon thereafter, a grand jury in New York indicted Aleynikov on similar state charges. It's unclear what the DA hopes to accomplish since even if Aleynikov is convicted, he will receive credit for extensive time he served in the federal case. But, now at least, Aleynikov will be able to have Goldman advance his legal fees and forge a defense to the latest round of criminal charges.

Although Judge McNulty called the advancement question a close one, there are several lessons to be learned.

First, the advancement and indemnification rights afforded corporate officers and directors are broad in scope. To that end, any ambiguities are resolved in the indemnitee's favor. Here, although Aleynikov was not an "officer" in the traditional sense (as would be the case for Lloyd Blankfein), the court found Goldman reserved for itself broad discretion to determine who was eligible for fee advancement. In fact, Goldman had advanced fees to 51 of 53 people who applied for it (apparently, one other unlucky soul found himself viewed as equivalent in stature to Aleynikov) over a six-year period.

Second, rights to advancement require an analysis of state corporation law, corporate bylaws, and any governing agreements (such as employment contracts). Advancement rights are treated differently by the states, and often times states make distinctions between officers, directors, and employees. In some states, for instance, a corporate charter must opt-out of advancement for directors, or else it's mandatory. Goldman's corporate bylaws, mandated advancement to officers as long as certain conditions were met.

Third, the key analysis usually turns on whether an individual is a defendant "by reason of the fact" that he was an employee, officer, or director. This is usually where advancement cases turn, although in Aleynikov it wasn't the flash point at all. In Delaware (which most states will turn to for interpretive questions), this requires a court to consider the nexus or causal connection between the alleged wrongdoing (whether civilly or criminally based) and the individual's status. In Aleynikov's case, his theft of trade secrets occurred solely because of his access to them while he was a Goldman employee. To be sure, the act of misappropriation occurred before he quit. Therefore, Aleynikov wouldn't have been able to misappropriate the code (or understood his value) but for the exercise of his official duties as a Goldman employee. Several other courts have found improper pre-termination competitive activity (usually for trade secrets theft or violation of a fiduciary duty) as sufficient to establish the "by reason of the fact" test. Individual obligations arising after service ends, such as a non-compete violation, won't fall within the causal nexus and won't trigger advancement rights. (For this reason, it's exceedingly important for a plaintiff to consider the implications of its allegations and sought-after remedies.)

Simply because Aleynikov is entitled to fee advancement does not mean he is off the hook. If he loses and is found guilty by a Manhattan jury, he'll have to repay his fees - hence, the title "advancement." But he doesn't have to post security as a condition. Advancement is an unsecured undertaking (unless the corporate charter says otherwise), and it's hard to see where Aleynikov would ever have the practical ability to repay if things head further south.

A copy of Judge McNulty's lengthy advancement opinion is contained below.

Aleynikov - SJ Opinion on Advancement (00180447).pdf

Inevitable Disclosure Theory Not Available as a "Stand-Alone" Claim

Ever since the Seventh Circuit decided PepsiCo v. Redmond in 1995, there has been an almost insatiable desire for plaintiff's attorneys to apply the "inevitable disclosure" doctrine to claims of trade secret theft.

As I've written before, the doctrine serves as a proxy for actual misappropriation and is based on the idea that despite one's best intentions he cannot serve in a particular employment position without relying on specific trade secret knowledge gleaned elsewhere.

The concept is similar to a party's request for a broad manufacturing or production injunction, akin to what the court ordered in the now-famous case of E.I. duPont v. Kolon Industries. So the theory goes, if a party has incorporated a stolen secret process into its manufacturing line and cannot help but rely on that process, then a mere "use or disclose" injunction plainly is insufficient. A broader, prophylactic order prohibiting conduct related to the trade secret is necessary to protect it.

It is important to understand the limits and parameters of the inevitable disclosure doctrine. It is not a stand-alone claim for relief, as a federal district emphasized in Janus et Cie v. Kahnke, 2013 U.S. Dist. LEXIS 139686 (S.D.N.Y. Aug. 29, 2013). It is a means to obtain a preliminary injunction under state trade secret law or to demonstrate a protectable interest for purposes of enforcing a non-compete agreement.

This means, for all intents and purposes, two things. First, if a plaintiff asserts a claim based on the inevitable disclosure theory without moving for a preliminary injunction, then the claim isn't plausible. Second, a plaintiff almost certainly won't be able to obtain damages (or fees) under state trade secrets law absent some actual misappropriation.

The inevitable disclosure doctrine is a very narrow path to secure injunctive relief, and the court's stringent four-factor test to award such relief typically guards against unduly speculative, factually empty cases. On top of that, the states treat the inevitable disclosure doctrine in different ways, with some adopting what many believe to be a "pure" form of relief and others limiting the doctrine substantially or declining to adopt it altogether.

So, What Is a "Solicitation"?

One of the most frequently asked questions I get when advising clients is deceptively complex:

What does it mean to solicit a client?

On its face, this probably sounds like it should be an easy question to answer. However, it's really not. Since courts are hesitant to enforce broad non-compete agreements (particularly as to sales persons), many disputes hinge on the applicability of a customer non-solicitation covenant. The scope of those covenants can range from the very broad to the much narrower, both in terms of the type of activity prohibited and the customers covered by the prohibition.

A broad non-solicitation covenant reads something like this:

Employee agrees for a period of one year not to solicit, contact, or provide services to a Restricted Customer for the purpose of providing Competitive Products.

A narrow non-solicitation covenant usually reads this way:

Employee agrees for a period of one year not to solicit or entice away a Restricted Customer for the purpose of providing Competitive Products.

The difference between the two is that the narrow covenant does not prohibit so-called "passive" solicitation, where a client reaches out to the employee. As a practical matter, these more narrow covenants lead to just as much litigaton because most times an employer won't know who contacted who. But it will justifiably be concerned about the fact the employee is continuing to work with the client. It only will be able to discover what actually happened through the litigation process.

In these cases involving narrower covenants, the issue of breach often hinges on whether the employee actually solicited the customer, or whether the customer sought out the employee. The First Circuit's recent opinion in Corporate Techs., Inc. v. Harnett illustrates a common fact-pattern and rejected a bright-line "initial contact" test. In that case, the ex-employee's new company sent out a blast announcement that piqued the curiosity of a targeted group of customers that happened to fall within the terms of the employee's non-solicitation covenant. Upon receiving that announcement, customers started contacting the ex-employee.

The court specifically noted that "initial contact" is somewhat amorphous and "can easily be manipulated" depending on the facts of a particular case. This is particularly so with businesses where the selling cycle is long, such that the initial contact would be "unlikely to bear fruit in the absence of subsequent solicitation." It had little trouble affirming a preliminary injunction that enforced the non-solicitation covenant.

The takeaway from cases like Harnett is that employees must understand that the issue of "solicitation" is intensely fact-laden and that it's awfully hard to play cute and end-run the contract. Courts will need to consider how employees typically communicate with customers, and whether the employee set in motion a chain of events designed to lead to contact by the customers themselves. Targeted announcements are an obvious invitation to cause a customer to contact the employee and present a fairly easy case for determining that a solicitation has occurred. Even more problematic are personal e-mails, LinkedIn invitations to connect, and other one-on-one activity that suggests an effort to continue a business relationship.

Corporate Techs v. Hartnett - Opinion by Ken Vanko