The reach of the federal Computer Fraud and Abuse Act continues to divide courts and commentators. The friction spills over into statutory language that seemingly is pretty clear: one cannot access a protected computer to obtain information in a manner that exceeds the user's authorized access.
The phrase "exceeds authorized access" has yielded a split among many federal courts. On one side sits the pro-employer theory: that an employee cannot access information for reasons inconsistent with the employer's interest. On the other side, employees argue that the CFAA's definition does not turn on subjective intent as to use and that the statute only bars the accessing of information that the employer did not allow.
The Fifth and Seventh Circuits have pretty well-established rules that fall on the pro-employer side, though the rationales are not identical. The Fourth and Ninth are decidedly pro-employee and construe the CFAA much more narrowly.
The Eleventh Circuit's history on this is not straightforward.
Courts within the Eleventh Circuit (that is, district courts in Florida, Georgia, and Alabama) are divided on how to interpret and apply the CFAA. Some follow the pro-employee construction. Others disagree and side with the Fourth and Ninth Circuit line of authority. The problem seems to be a criminal case from the Eleventh Circuit itself, United States v. Rodriguez, which arguably requires a pro-employer construction of the CFAA.
Illustrating this divide is Enhanced Recovery Co., LLC v. Frady (opinion embedded below), which canvasses the law and decides not to follow Rodriguez - arguably binding precedent in the Eleventh Circuit. Frady involves perhaps the most common, ubiquitous CFAA fact pattern in employee mobility cases. The allegations hinged on an employee's act in preparing to compete by sending corporate documents from a company e-mail account to a personal web-based e-mail. Under the employer's theory, this transmission of e-mails is antagonistic to its business interests and constitutes the use of company information in an unauthorized manner.
As with many close CFAA cases, the fact pattern in Frady adds a twist because the employer had fairly clear policies against non-disclosure of information and a requirement to return company materials at the termination of employment. One reasonably could make the argument that these policies at least put the employee on notice that accessing corporate information for a prohibited use exceeded any authorization to use that information.
The district court in Frady was not persuaded and held this wasn't enough. In doing so, it seemed to tread a very narrow path through the Rodriguez case, which seems on first read to warrant a broader application of the CFAA.
My personal opinion is that something else must be going on here. I have seen judges walk this tightrope before, and I believe that regardless of any formal legal analysis, many remain troubled by the extension of the CFAA well beyond its intended purpose to punish hackers criminally. Courts, of course, acknowledge this but judges must default back to the statutory text to see whether conduct falls within the statutory proscription. And they are certainly bound by circuit law. In the CFAA arena, the distinctions that judges are drawing appear to be so fine and nuanced as to be meaningless.
This is not to say that the court in Frady got the result wrong as a normative matter, because the CFAA is overused. It is, to be sure, not a trade secrets law substitute - though many attorneys perceive that it is. And if the Obama Administration has its way, this divide over the meaning of authorized access will get cleaned up in a way that (surprisingly) favors the employer. Ultimately, I think this too is wrong. The existing legal framework under state law works just fine, and a federal trade secrets act may be okay too (though I am more lukewarm on that than others in my profession).
However, extending the CFAA and criminalizing conduct that doesn't even violate state trade secret law is not the right way to go about protecting intellectual property. In the employment realm, it remains a terrible fit. How judges get there is concerning, but if they agree, then I'm okay with a formal legal analysis that leaves me scratching my head.
Friday, April 10, 2015
Thursday, April 9, 2015
Streisand Effect Bedamned: Jimmy John's "Prevails" In Class Action Non-Compete Dispute
Quite possibly because my 3-year old loves Jimmy John's sandwiches, I have a profound affinity for the place. It's a minimum once-per-week destination. Plus, I went to law school in Champaign, Illinois, where Jimmy John's is somewhat of a revered institution.
Even I have to admit that I was a bit discouraged by reading the negative publicity surrounding Jimmy John's standard "Confidentiality and Non-Competition Agreement." It appears to apply to your average sandwich-maker and prevent him from jumping ship to Subway (but not Chipotle!). The mind reels at the thought of a stoned 19-year old testifying on the stand about the proprietary nature of applying roast beef between lettuce and mayo.
But the lawsuit - which sought a declaratory judgment that the non-compete was invalid - seemed doomed from the start. And yesterday, Judge Charles Kocoras dismissed the putative class action in Brunner v. Jimmy John's LLC, 2015 U.S. Dist. LEXIS 46018 (N.D. Ill. Apr. 8, 2015). The rationale was lack of standing, a somewhat formal legalist concept that the plaintiffs did not present enough of a concrete case to have a court decide.
In other words, the mere existence of the agreement was not enough to create a controversy that a court is capable of deciding. The putative class plaintiffs alleged - and I believe them - that they didn't really know what the non-compete meant or how Jimmy John's might apply or enforce it. This, by itself, did not create enough of an apprehension that a lawsuit was imminent. Put another way, the dispute was too hypothetical.
Jimmy John's also offered, sensibly in my view, affidavit testimony that revealed an intent not to enforce the non-compete against the putative class plaintiffs in the future. This, alone, may not be enough to demonstrate the lack of a case or controversy, but it sure helped Jimmy John's here.
(As an aside, the standing rules in federal court are a bit more stringent than in many state courts. Having had first-hand experience dealing with this, it's pretty clear that any type of a non-compete declaratory judgment case in federal court runs the possibility of being dismissed for lack of standing.)
Despite the win, this all feels like somewhat of a loss. The publicity on The Huffington Post and elsewhere surrounding the corporate mandate certainly damaged Jimmy John's and created a storm of negative publicity. Amazon.com just removed its non-compete for hourly workers, a tactic which resembles Jimmy John's representation that it won't enforce the agreement.
This whole affair reminds me of the Streisand Effect, although the analogy is imperfect. The thinking is that the attempt to remove information can have the effect of promoting it. This unintended consequence often appears in defamation cases, where a plaintiff attacks a disparaging comment only to put his reputation on trial.
The lawsuits and publicity surrounding the Jimmy John's and Amazon.com non-compete work a bit in reverse, but the concept is the same. Even a win may be a defeat.
Even I have to admit that I was a bit discouraged by reading the negative publicity surrounding Jimmy John's standard "Confidentiality and Non-Competition Agreement." It appears to apply to your average sandwich-maker and prevent him from jumping ship to Subway (but not Chipotle!). The mind reels at the thought of a stoned 19-year old testifying on the stand about the proprietary nature of applying roast beef between lettuce and mayo.
But the lawsuit - which sought a declaratory judgment that the non-compete was invalid - seemed doomed from the start. And yesterday, Judge Charles Kocoras dismissed the putative class action in Brunner v. Jimmy John's LLC, 2015 U.S. Dist. LEXIS 46018 (N.D. Ill. Apr. 8, 2015). The rationale was lack of standing, a somewhat formal legalist concept that the plaintiffs did not present enough of a concrete case to have a court decide.
In other words, the mere existence of the agreement was not enough to create a controversy that a court is capable of deciding. The putative class plaintiffs alleged - and I believe them - that they didn't really know what the non-compete meant or how Jimmy John's might apply or enforce it. This, by itself, did not create enough of an apprehension that a lawsuit was imminent. Put another way, the dispute was too hypothetical.
Jimmy John's also offered, sensibly in my view, affidavit testimony that revealed an intent not to enforce the non-compete against the putative class plaintiffs in the future. This, alone, may not be enough to demonstrate the lack of a case or controversy, but it sure helped Jimmy John's here.
(As an aside, the standing rules in federal court are a bit more stringent than in many state courts. Having had first-hand experience dealing with this, it's pretty clear that any type of a non-compete declaratory judgment case in federal court runs the possibility of being dismissed for lack of standing.)
Despite the win, this all feels like somewhat of a loss. The publicity on The Huffington Post and elsewhere surrounding the corporate mandate certainly damaged Jimmy John's and created a storm of negative publicity. Amazon.com just removed its non-compete for hourly workers, a tactic which resembles Jimmy John's representation that it won't enforce the agreement.
This whole affair reminds me of the Streisand Effect, although the analogy is imperfect. The thinking is that the attempt to remove information can have the effect of promoting it. This unintended consequence often appears in defamation cases, where a plaintiff attacks a disparaging comment only to put his reputation on trial.
The lawsuits and publicity surrounding the Jimmy John's and Amazon.com non-compete work a bit in reverse, but the concept is the same. Even a win may be a defeat.
Friday, April 3, 2015
Michigan Legislator Introduces Bill to Ban Non-Compete Agreements
As reported recently by Crain's Detroit Business, State Rep. Peter Lucido introduced House Bill 4198, which would ban employee non-compete agreements in the State of Michigan. The bill, which has no co-sponsors (and which has little chance of passage), proposes to amend MCL 445.774a, the state code section pertaining to covenants not to compete.
As amended, the proposal would allow for enforcement of covenants incidental to the purchase of goodwill. However, it specifically would void any restrictive covenant entered into between employer and employee.
Michigan has a somewhat circuitous history with regard to non-competes. Thirty years ago, employment non-competes largely were void, subject to some narrow exceptions. In 1985, however, the legislature reformed non-compete law to bring the state largely within the majority of other states, effectively allowing them as long as the terms are reasonable and are designed to protect a valid competitive business interest. Lucido would take the law back to its pre-1985 status.
Matt Marx, Deborah Strumsky, and Lee Fleming published a well-known Management Sciences article in 2009, which tested the effect of the law's evolution on the mobility of Michigan employees. The study concluded that the change in Michigan law positively correlated to a brain drain, as star inventors left Michigan for states with more lax non-compete enforcement policy. In many respects, the Marx-Fleming study is the intellectual forbear to Orly Lobel's book Talent Wants to Be Free (Yale Univ. Press 2013).
In the Crain's article, attorney Bernard Fuhs takes issue with Rep. Lucido's rationale for getting rid of non-competes. Confidentiality Agreements, Lucido says, are sufficient to protect intellectual property. Fuhs offers the best retort: it's virtually impossible to police compliance with a non-disclosure agreement absent evidence from a whistleblower or through sheer dumb luck.
Non-competes provide a more objective means to ensure protection of intellectual property, even if they are somewhat overinclusive. By "overinclusive," I mean that non-competes impede a flow of knowledge or value that can be restricted only incidentally and that may not provide any competitive advantage at all.
The entire rationale for enforcing non-competes is that the economic benefit from preventing disclosure of proprietary information exceeds the social cost in preventing use of non-proprietary spillover knowledge .
As amended, the proposal would allow for enforcement of covenants incidental to the purchase of goodwill. However, it specifically would void any restrictive covenant entered into between employer and employee.
Michigan has a somewhat circuitous history with regard to non-competes. Thirty years ago, employment non-competes largely were void, subject to some narrow exceptions. In 1985, however, the legislature reformed non-compete law to bring the state largely within the majority of other states, effectively allowing them as long as the terms are reasonable and are designed to protect a valid competitive business interest. Lucido would take the law back to its pre-1985 status.
Matt Marx, Deborah Strumsky, and Lee Fleming published a well-known Management Sciences article in 2009, which tested the effect of the law's evolution on the mobility of Michigan employees. The study concluded that the change in Michigan law positively correlated to a brain drain, as star inventors left Michigan for states with more lax non-compete enforcement policy. In many respects, the Marx-Fleming study is the intellectual forbear to Orly Lobel's book Talent Wants to Be Free (Yale Univ. Press 2013).
In the Crain's article, attorney Bernard Fuhs takes issue with Rep. Lucido's rationale for getting rid of non-competes. Confidentiality Agreements, Lucido says, are sufficient to protect intellectual property. Fuhs offers the best retort: it's virtually impossible to police compliance with a non-disclosure agreement absent evidence from a whistleblower or through sheer dumb luck.
Non-competes provide a more objective means to ensure protection of intellectual property, even if they are somewhat overinclusive. By "overinclusive," I mean that non-competes impede a flow of knowledge or value that can be restricted only incidentally and that may not provide any competitive advantage at all.
The entire rationale for enforcing non-competes is that the economic benefit from preventing disclosure of proprietary information exceeds the social cost in preventing use of non-proprietary spillover knowledge .
Monday, March 30, 2015
What's Driving Wisconsin Senate Bill 69?
Wisconsin long has been a red-flag state for employers. For many years, attorneys have struggled with how to enforce non-compete agreements against Wisconsin employees. This past year, the Supreme Court of Wisconsin has considered whether continued employment constitutes sufficient consideration for an at-will employee's non-compete, joining a growing number of states that are reevaluating this important issue.
Wisconsin Senate Bill 69 is somewhat out of left field and comes at a time when the state's highest court is reviewing the consideration question. A summary and text of the proposed law is linked here.
The proposed law appears to draw from a number different legislative enactments and proposals to make Wisconsin far more friendly to enforcement. The law is not as long as Florida's over-lawyered statute, but it's still pretty wordy.
A couple of key, notable provisions of the law include:
Wisconsin Senate Bill 69 is somewhat out of left field and comes at a time when the state's highest court is reviewing the consideration question. A summary and text of the proposed law is linked here.
The proposed law appears to draw from a number different legislative enactments and proposals to make Wisconsin far more friendly to enforcement. The law is not as long as Florida's over-lawyered statute, but it's still pretty wordy.
A couple of key, notable provisions of the law include:
- Continued employment would constitute sufficient consideration for a non-compete, which would resolve (at least going forward) the Runzheimer case currently pending before the Supreme Court. If this is the sole basis for consideration, the employee must receive a "rate of pay and benefits that is equal to or greater" than that which pre-dated the non-compete. Generous.
- A court must modify an overbroad restraint and "grant only such relief as is reasonably necessary to protect" an asserted legitimate business interest. This would shift Wisconsin from a state that will not modify covenants to one that must modify them. Major shift in policy.
- When assessing reasonableness, a court must consider "evidence of common practice with respect to the duration, scope, and nature of restraints in the specific industry of the person seeking enforcement" of the non-compete. Alternatively known as the "Expert Witness Full Employment Act of 2015," this should add another layer of complexity and cost to what should be a fast-paced, efficient procedure. The mandatory nature of the rule is particularly striking and without precedent.
- A court must presume that a non-compete of 6 months or less is reasonable, while one 2 years or longer is unreasonable. This is a sensible rule that seems to follow a popular trend.
- In considering whether to enforce a restrictive covenant, a court cannot consider individualized economic or other hardship that may result from enforcement "unless that person shows that exceptional personal circumstances exist." In other words, the section is meaningless.
- A court cannot narrowly construe a non-compete against the party who drafts it, and "shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests" established by the party seeking enforcement. The narrow construction rule is a perfectly sensible device that requires an employer to provide clear guidance and avoid the uncertainty associated with dense, vague language - hallmarks of non-compete disputes.
- Courts must enforce attorneys' fees clauses, and "may award costs and attorneys' fees to the prevailing party" in the absence of a contractual restriction. The statute does not provide any guidance here, so a court has unvarnished discretion to rule. This could help deter truly meritless suits.
The statute contains other nits, but these seven changes stood out as stark and marked departures from existing law. Senator Paul Farrow, a Republican leader in the State Senate and a small business owner, introduced the bill.
Friday, March 6, 2015
Minnesota's Justification Rule Shield Employer Liability on Non-Compete Claims
The economics of non-competes often don't work.
Injunctive relief is expensive and sometimes yields a hollow remedy if customers start to bolt regardless. As for damages, many employees aren't collectible.
This is where the new employer comes in. If there is real customer attrition linked to a non-compete violation, the new employer becomes the target simply because the old employer perceives it as able to satisfy a damages judgment.
The theory of liability hinges on the tort of "interference" with contract rights - encouraging the non-compete breach, in other words. For companies trying to enforce the non-compete and collect damages, it's essential to consider how to prove interference.
Most states apply the tort the same way, but crucial differences can arise.
The principal difference involves "justification" - that is, a party's ability to interfere with a contract to further its own business enterprise. In that respect, one question that frequently comes up is whether counsel's advice that a non-compete is unenforceable can rise to the level of legal justification absolving the tort. If so, the new employer may not face liability even if the employee breaches the contract and must pay damages.
This was the question before the Supreme Court of Minnesota in Sysdyne Corp. v. Rousslang, decided this past Thursday.
The Court found that the justification defenses encompasses the honest reliance on advice of counsel. In Rousslang, the Court applied the defense to the fact-pattern described above: the advice that an employee's non-competition covenant was unenforceable.
The Court's opinion provides what appears to be a safe harbor for new employers. The ruling is demonstrably unsound because it extends the concept of justification beyond the honest furtherance of one's own contractual right. A new company does not have a "right" to employ a particular individual. It may want to and may feel that person would be a valuable asset. However, this interest should not provide a third-party a pathway to interference, because it then would eviscerate the tort claim entirely (even outside the non-compete context). A party always will be able to claim a business interest in something.
The advice-of-counsel defense effectively undercuts any viable damages remedy, leaving the enforcing party with potentially a hollow judgment. The Court in Rousslang did not articulate what kind of inquiry a new employer must make, defaulting only in the broadest sense to a "reasonable inquiry" standard to be applied under the facts of each case.
So what kind of facts would the new employer establish as part of the advice-of-counsel/justification defense? Here are some:
Injunctive relief is expensive and sometimes yields a hollow remedy if customers start to bolt regardless. As for damages, many employees aren't collectible.
This is where the new employer comes in. If there is real customer attrition linked to a non-compete violation, the new employer becomes the target simply because the old employer perceives it as able to satisfy a damages judgment.
The theory of liability hinges on the tort of "interference" with contract rights - encouraging the non-compete breach, in other words. For companies trying to enforce the non-compete and collect damages, it's essential to consider how to prove interference.
Most states apply the tort the same way, but crucial differences can arise.
The principal difference involves "justification" - that is, a party's ability to interfere with a contract to further its own business enterprise. In that respect, one question that frequently comes up is whether counsel's advice that a non-compete is unenforceable can rise to the level of legal justification absolving the tort. If so, the new employer may not face liability even if the employee breaches the contract and must pay damages.
This was the question before the Supreme Court of Minnesota in Sysdyne Corp. v. Rousslang, decided this past Thursday.
The Court found that the justification defenses encompasses the honest reliance on advice of counsel. In Rousslang, the Court applied the defense to the fact-pattern described above: the advice that an employee's non-competition covenant was unenforceable.
The Court's opinion provides what appears to be a safe harbor for new employers. The ruling is demonstrably unsound because it extends the concept of justification beyond the honest furtherance of one's own contractual right. A new company does not have a "right" to employ a particular individual. It may want to and may feel that person would be a valuable asset. However, this interest should not provide a third-party a pathway to interference, because it then would eviscerate the tort claim entirely (even outside the non-compete context). A party always will be able to claim a business interest in something.
The advice-of-counsel defense effectively undercuts any viable damages remedy, leaving the enforcing party with potentially a hollow judgment. The Court in Rousslang did not articulate what kind of inquiry a new employer must make, defaulting only in the broadest sense to a "reasonable inquiry" standard to be applied under the facts of each case.
So what kind of facts would the new employer establish as part of the advice-of-counsel/justification defense? Here are some:
- Testimony concerning how the company retained counsel and the experience of counsel.
- Evidence that it sent counsel the agreement for review.
- A description of the facts the company gave counsel (such as the employee's experience, exposure to customers, training, access to confidential information).
- The opinion itself, whether verbally or in writing.
- Billing records and e-mail correspondence.
All of this puts counsel in an awkward spot, of course, as her advice may be on trial (at least to show it was reasonable, not necessarily that it was correct). Getting past that awkwardness, an attorney really has no malpractice exposure as long as she follows some basic protocols like understanding the facts, reviewing the agreement, and communicating the basis for advice to the employer.
And on the flip side, it will be awfully difficult for the old employer to prove that counsel administered advice flippantly. One key fact could undermine the advice-of-counsel defense: is the new employer asking the employee to sign a similar non-compete? Relatedly, does the company use non-competes for similarly situated employees? If so, then it's going to be awfully difficult to claim the justification defense because there's no objective honesty in the advice.
To me, this collateral inquiry into what an attorney did in terms of advising a client is no way to run a non-compete case. It adds a layer of transaction costs into what otherwise should be a fairly straightforward case about breach and the protectible interest supporting the covenant. It brings into play the specter of expert witnesses opining on whether the new employer's attorney did what a reasonable lawyer should have.
Other courts disagree with the Minnesota approach and do not allow the advice-of-counsel defense to a tort claim. The Rousslang decision is below.
Other courts disagree with the Minnesota approach and do not allow the advice-of-counsel defense to a tort claim. The Rousslang decision is below.
Wednesday, March 4, 2015
Central District of Illinois Explains Its Disagreement With Fifield Consideration Rule
At this rate, I should have about 20 blog posts this year concerning Illinois' controversial Fifield rule.
As I have explained in numerous posts, Illinois appears to have a unique rule concerning the type of consideration needed to enforce an employee non-compete agreement. And, once again, it's critical to point out that this unique rule applies only when: (a) the employee is at-will, and (b) the sole consideration provided in exchange for the non-compete restriction is the job itself.
The Appellate Court of Illinois in two separate cases (called Fifield v. Premier Dealer Services and Prairie Rheumatology Assocs., S.C. v. Francis) appeared to establish a bright-line test for determining the adequacy of this consideration. Those cases hold that two years of continued employment is necessary. And if the employee never gets to this two-year threshold, then the contract fails for inadequate consideration. (Recall, that courts almost never examine the adequacy of consideration in traditional contract disputes, but they do when restraints of trade are involved.)
Much of the controversy concerning the rule first announced Fifield stems from three truisms:
As I have explained in numerous posts, Illinois appears to have a unique rule concerning the type of consideration needed to enforce an employee non-compete agreement. And, once again, it's critical to point out that this unique rule applies only when: (a) the employee is at-will, and (b) the sole consideration provided in exchange for the non-compete restriction is the job itself.
The Appellate Court of Illinois in two separate cases (called Fifield v. Premier Dealer Services and Prairie Rheumatology Assocs., S.C. v. Francis) appeared to establish a bright-line test for determining the adequacy of this consideration. Those cases hold that two years of continued employment is necessary. And if the employee never gets to this two-year threshold, then the contract fails for inadequate consideration. (Recall, that courts almost never examine the adequacy of consideration in traditional contract disputes, but they do when restraints of trade are involved.)
Much of the controversy concerning the rule first announced Fifield stems from three truisms:
- The prior case law seemed to suggest that the "continued employment" rule was limited to a fact pattern where the employee signed the agreement after starting the job, not in connection with taking the job.
- The two-year rule is arbitrary and sounds like something more suited to a legislative enactment.
- The rule does not differentiate between voluntary and involuntary terminations, in effect giving an employee a two-year option in which to void his own contract.
I wrote last year that Francis seemed to provide momentum for this consideration rule and that attorneys better not discount Fifield as an aberration. And I have written on several occasions (including a few weeks ago) that federal courts have split in their understanding of how the Supreme Court of Illinois would interpret the Fifield rule.
Those decisions all come from the Northern District of Illinois, which hears a fairly high volume of competition disputes under diversity jurisdiction. (I also have been involved in one unreported case where a court in the Northern District declined to apply Fifield, finding that the Supreme Court of Illinois would not apply the rule.)
Those decisions all come from the Northern District of Illinois, which hears a fairly high volume of competition disputes under diversity jurisdiction. (I also have been involved in one unreported case where a court in the Northern District declined to apply Fifield, finding that the Supreme Court of Illinois would not apply the rule.)
To my knowledge, the case of Cumulus Radio Corp. v. Olson is the first reported federal case outside the Northern District of Illinois where a judge has had the opportunity to weigh in on, and apply, the Fifield consideration rule. In that case, Judge McDade from the Central District of Illinois decided not to follow Fifield and Francis and found persuasive the reasoning of some of his colleagues in the Northern District of Illinois.
Judge McDade's conclusion embraces much of my prior criticism of the rule (though, I am slightly offended he didn't cite my blog):
"...the Court does not believe that the Illinois Supreme Court would adopt the bright-line test announced in Fifield. Such a rule is overprotective of employees, and risks making post-employment restrictive covenants illusory for employers subject completely to the whimsy of the employee as to the length of his employment. A case-by-case, fact-specific determination, on the other hand, can ensure that employees and employers alike are protected from the risks inherent in basing consideration on something as potentially fleeting as at-will employment."
In this very brief italicized passage, there is a lot of grist for the mill. Judge McDade notes and criticizes the option nature of the Fifield rule, the lack of a distinction in who ends the relationship, and the problems with basing consideration on employment itself. To that end, employers still should consider using something far more tangible and substantial than employment as non-compete consideration.
Judge McDade also analyzed the first truism that I outlined above - the weak case law support that seems to have motivated Fifield. His discussion notes that the impetus for the rule was Judge Posner's oft-cited opinion in Curtis 1000, Inc. v. Suess, where he noted employers could trick employees into signing onerous covenants only to terminate them and gain the benefit of a serious restraint. The illusory nature of "employment as consideration" justifies, therefore, a serious look when the employer is the one ending the relationship. Again, this is part of the original problem I had with the intellectual foundation of Fifield - in that there wasn't one.
Although the Supreme Court of Illinois originally declined to take up Fifield, we now are at serious risk of forum shopping and (worse) the piling on of flimsy Computer Fraud and Abuse Act claims just so an employer can get into federal court. The next time a party petitions for leave to appeal on a Fifield issue, the Court must take the case.
A copy of the Cumulus Radio decision is embedded below.
Friday, February 20, 2015
Obama Administration's Cybersecurity Proposal Would Broaden CFAA
The Obama Administration has been active in addressing concerns related to cybersecurity and trade secrets theft. In 2013, the Administration rolled its strategy to mitigate trade secrets theft - the first of its kind executive-level white paper that specifically identified trade secrets protection as part of a national economic security strategy.
In January of this year, the Administration went further than I anticipated by endorsing amendments to the somewhat controversial Computer Fraud and Abuse Act. As readers of the blog know, the CFAA can be a jurisdictional hook to bring trade secrets claims into federal court. It is broader than trade secrets law in some respects (it protects unauthorized access of any information contained in a protected computer, not just trade secret information) and much narrower in others (it contains a $5,000 damage or loss requirement).
Part of the controversy surrounding the CFAA has involved statutory language that bars someone from accessing a computer in a manner that "exceeds authorized access." That language has given courts fits, with circuit courts applying different interpretations to the statutory language. The controversy crystallized in United States v. Nosal, a federal prosecution of a Korn-Ferry executive recruiter that brought to the fore the various CFAA interpretations of "exceeds authorized access." My take on Nosal and a summary of circuit court treatment of the issue is found in this post.
The Administration's proposed set of amendments to the CFAA cuts against the Nosal approach and resolves a question where there's a split of authority: whether "exceeds authorized access" includes the misuse of information even if access to it was technically permitted. Example: copying data from a work computer to a personal thumb-drive for use at a new job.
The amendment would define "exceeds authorized access" to mean "to access a computer with authorization and to use such access to obtain or alter information: (a) that the accesser is not entitled to obtain or alter; or (b) for a purpose that the accuser knows is not authorized by the computer owner." Part (b) is the Nosal amendment and would resolve the circuit split in favor of what the employer-friendly jurisdictions, like the Seventh and Eleventh Circuits, endorse.
The impact of this proposed amendment is uncertain. On the one hand, if adopted, it almost surely would mandate corporate counsel to draft a computer usage policy so that a court would have some objective indication of what the computer owner authorizes.
On the other, it criminalizes a range of activity well below trade secrets theft, since there is no requirement that the information accessed be a trade secret or even lesser-protected "confidential" information. As long as the company can establish a value in excess of $5,000, the CFAA would apply. And on that score, the CFAA contains nothing to limit how a computer owner can establish that particular information is worth $5,000.
For a comprehensive take on the Administration's proposal, see Professor Orin Kerr's January 14 article in the Washington Post.
In January of this year, the Administration went further than I anticipated by endorsing amendments to the somewhat controversial Computer Fraud and Abuse Act. As readers of the blog know, the CFAA can be a jurisdictional hook to bring trade secrets claims into federal court. It is broader than trade secrets law in some respects (it protects unauthorized access of any information contained in a protected computer, not just trade secret information) and much narrower in others (it contains a $5,000 damage or loss requirement).
Part of the controversy surrounding the CFAA has involved statutory language that bars someone from accessing a computer in a manner that "exceeds authorized access." That language has given courts fits, with circuit courts applying different interpretations to the statutory language. The controversy crystallized in United States v. Nosal, a federal prosecution of a Korn-Ferry executive recruiter that brought to the fore the various CFAA interpretations of "exceeds authorized access." My take on Nosal and a summary of circuit court treatment of the issue is found in this post.
The Administration's proposed set of amendments to the CFAA cuts against the Nosal approach and resolves a question where there's a split of authority: whether "exceeds authorized access" includes the misuse of information even if access to it was technically permitted. Example: copying data from a work computer to a personal thumb-drive for use at a new job.
The amendment would define "exceeds authorized access" to mean "to access a computer with authorization and to use such access to obtain or alter information: (a) that the accesser is not entitled to obtain or alter; or (b) for a purpose that the accuser knows is not authorized by the computer owner." Part (b) is the Nosal amendment and would resolve the circuit split in favor of what the employer-friendly jurisdictions, like the Seventh and Eleventh Circuits, endorse.
The impact of this proposed amendment is uncertain. On the one hand, if adopted, it almost surely would mandate corporate counsel to draft a computer usage policy so that a court would have some objective indication of what the computer owner authorizes.
On the other, it criminalizes a range of activity well below trade secrets theft, since there is no requirement that the information accessed be a trade secret or even lesser-protected "confidential" information. As long as the company can establish a value in excess of $5,000, the CFAA would apply. And on that score, the CFAA contains nothing to limit how a computer owner can establish that particular information is worth $5,000.
For a comprehensive take on the Administration's proposal, see Professor Orin Kerr's January 14 article in the Washington Post.
Friday, February 13, 2015
Fifield and the Northern District: A Stormy Marriage
The much-maligned Illinois decision of Fifield v. Premier Dealer Services, Inc. got a big jolt of life when another appellate district reaffirmed its essential holding: when an at-will employee signs a non-compete, continued employment can serve as adequate consideration for the agreement only if that employment continues for at least two years.
Before the Third District appellate court spoke in Prairie Rheumatology Assocs., S.C. v. Francis, there was a pretty legitimate debate brewing about whether Fifield was a one-off outlier that attorneys could take the chance of discounting. Francis gave Fifield credibility, as it is an awfully tall order for attorneys to criticize two separate appellate court rulings from different districts and argue Fifield did not represent the law of the state.
The Northern District of Illinois, though, apparently does not feel Francis did much to establish Illinois law on the adequacy of consideration for restrictive covenants.
Another federal court has declined to follow the Fifield-Francis two-year rule. Judge Shah's opinion in Bankers Life & Cas. Co. v. Miller, 2015 U.S. Dist. LEXIS 14337 (N.D. Ill. Feb. 6, 2015), found that the "the Illinois Supreme Court would ...reject a rigid approach to determining whether a restrictive covenant was supported by adequate consideration; it would not adopt a bright-line rule requiring continued employment for at least two years in all cases."
The reasoning for the court's analysis, in which it barely even cited Fifield, does not really mention that the Fifield-Francis rule applies in a limited factual circumstance: when the only consideration for an at-will employee's non-compete is continued employment itself. If the employee received a signing bonus, a contractual severance right, or stock options, then Fifield-Francis does not apply.
But in a great many cases - probably a majority - the rule will apply, because employers don't want to pay employees more than they have to, either in bonus, incentives, or equity. I am a little dubious of the proposition that "access to confidential information" or "training" qualifies as consideration, because employers probably will have a hard time showing they wouldn't have provided the employee these aspects of employment even without the non-compete. Further, it's somewhat illusory and intangible, hard to articulate really.
Judge Shah's opinion doesn't really address what else the employer may have offered the employees in Bankers Life, and perhaps the company threw in enough allegations to move beyond Fifield-Francis. But his opinion is the first to rely on the overall "totality of the circumstances" test that Illinois courts use to analyze a restrictive covenant's reasonableness. That rule does not, by its plain terms, implicate consideration at all.
Judge Shah appears to have looked at the logic underlying that test to conclude that courts would take a more holistic approach at assessing what consideration is adequate to support a restrictive covenant, depending on the employee and probably the terms of the covenant itself.
Or he may have read my dissenting opinion in Fifield and been persuaded.
Before the Third District appellate court spoke in Prairie Rheumatology Assocs., S.C. v. Francis, there was a pretty legitimate debate brewing about whether Fifield was a one-off outlier that attorneys could take the chance of discounting. Francis gave Fifield credibility, as it is an awfully tall order for attorneys to criticize two separate appellate court rulings from different districts and argue Fifield did not represent the law of the state.
The Northern District of Illinois, though, apparently does not feel Francis did much to establish Illinois law on the adequacy of consideration for restrictive covenants.
Another federal court has declined to follow the Fifield-Francis two-year rule. Judge Shah's opinion in Bankers Life & Cas. Co. v. Miller, 2015 U.S. Dist. LEXIS 14337 (N.D. Ill. Feb. 6, 2015), found that the "the Illinois Supreme Court would ...reject a rigid approach to determining whether a restrictive covenant was supported by adequate consideration; it would not adopt a bright-line rule requiring continued employment for at least two years in all cases."
The reasoning for the court's analysis, in which it barely even cited Fifield, does not really mention that the Fifield-Francis rule applies in a limited factual circumstance: when the only consideration for an at-will employee's non-compete is continued employment itself. If the employee received a signing bonus, a contractual severance right, or stock options, then Fifield-Francis does not apply.
But in a great many cases - probably a majority - the rule will apply, because employers don't want to pay employees more than they have to, either in bonus, incentives, or equity. I am a little dubious of the proposition that "access to confidential information" or "training" qualifies as consideration, because employers probably will have a hard time showing they wouldn't have provided the employee these aspects of employment even without the non-compete. Further, it's somewhat illusory and intangible, hard to articulate really.
Judge Shah's opinion doesn't really address what else the employer may have offered the employees in Bankers Life, and perhaps the company threw in enough allegations to move beyond Fifield-Francis. But his opinion is the first to rely on the overall "totality of the circumstances" test that Illinois courts use to analyze a restrictive covenant's reasonableness. That rule does not, by its plain terms, implicate consideration at all.
Judge Shah appears to have looked at the logic underlying that test to conclude that courts would take a more holistic approach at assessing what consideration is adequate to support a restrictive covenant, depending on the employee and probably the terms of the covenant itself.
Or he may have read my dissenting opinion in Fifield and been persuaded.
Monday, February 9, 2015
Legislative Update: Washington Lawmaker Seeks to Ban Non-Competes
I missed my Friday post, meaning I only made it four weeks into the year before I abandoned my New Year's resolution to write and publish every Friday.
However, I took my daughter to Disney's "Frozen on Ice" on Thursday and needed a day to recover mentally. Although Frozen has officially taken over my life, it was worth it. The joy on that kid's face for two hours straight is something I won't forget. Nor will I forget the $12 icee in the Anna/Elsa tribute mug that she coaxed into me buying her. (See picture to the right. Dad drank most of it, thankfully.)
***
I wrote a few weeks back that we're seeing new legislation in Washington state on medical practice non-competes, a frequent and controversial subset of restrictive covenant disputes. We got new activity out of Washington this past week on the non-compete front, and this time the legislation is more sweeping.
Five legislators have introduced House Bill 1926, which would prohibit all non-compete agreements except those incidental to the sale of a business or dissociation from a partnership or limited liability company. The proposed law would apply only to covenants enacted after the passage date.
The language of HB 1926 is identical in all respects to Section 16600 of the California Business and Professions Code, which is the well-known bar to employee non-compete and non-solicitation agreements. Courts have interpreted Section 16600 to apply to non-solicitation covenants, which are in effect just as sweeping for salespersons whose contacts are their stock in trade.
This is what both HB 1926 and Section 16600 provide:
"...every contract by which a person is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."
Incidentally, Montana also has a statute in place with the same language as the California code. However, the few Montana courts which have looked at and interpreted the statutory bar have concluded it does not extend to non-solicitation covenants, creating a clear conflict with the way California interprets the statute. The proposed Washington bill does not carve out any type of activity restraint, so if passed, it would be up to the courts to decide whether to follow the California interpretation or go the Montana route.
My personal opinion is that the language could be much clearer, and it certainly should be given the proliferation of lesser restrictive activity covenants. In that regard, Montana courts probably have the better interpretation of this statutory text, but the arguments are compelling for both sides.
However, I took my daughter to Disney's "Frozen on Ice" on Thursday and needed a day to recover mentally. Although Frozen has officially taken over my life, it was worth it. The joy on that kid's face for two hours straight is something I won't forget. Nor will I forget the $12 icee in the Anna/Elsa tribute mug that she coaxed into me buying her. (See picture to the right. Dad drank most of it, thankfully.)***
I wrote a few weeks back that we're seeing new legislation in Washington state on medical practice non-competes, a frequent and controversial subset of restrictive covenant disputes. We got new activity out of Washington this past week on the non-compete front, and this time the legislation is more sweeping.
Five legislators have introduced House Bill 1926, which would prohibit all non-compete agreements except those incidental to the sale of a business or dissociation from a partnership or limited liability company. The proposed law would apply only to covenants enacted after the passage date.
The language of HB 1926 is identical in all respects to Section 16600 of the California Business and Professions Code, which is the well-known bar to employee non-compete and non-solicitation agreements. Courts have interpreted Section 16600 to apply to non-solicitation covenants, which are in effect just as sweeping for salespersons whose contacts are their stock in trade.
This is what both HB 1926 and Section 16600 provide:
"...every contract by which a person is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."
Incidentally, Montana also has a statute in place with the same language as the California code. However, the few Montana courts which have looked at and interpreted the statutory bar have concluded it does not extend to non-solicitation covenants, creating a clear conflict with the way California interprets the statute. The proposed Washington bill does not carve out any type of activity restraint, so if passed, it would be up to the courts to decide whether to follow the California interpretation or go the Montana route.
My personal opinion is that the language could be much clearer, and it certainly should be given the proliferation of lesser restrictive activity covenants. In that regard, Montana courts probably have the better interpretation of this statutory text, but the arguments are compelling for both sides.
Friday, January 30, 2015
No-Hire Provisions Are, For Some Reason, Drafting Nightmares
In the course of reviewing, say 5,000 restrictive covenants (the job can be a wee bit tedious at times), one drafting problem continually amazes me.
Restrictions imposed on employees from hiring away fellow employees appear to vex and confound those who draft contracts.
I've never quite understood this, but it's true. While it seems easy enough to draft non-compete restraints, for some reasons the same doesn't hold true for no-hire covenants.
Here's how I draft no-hire covenants in my model employment contract:
The Employee agrees that during the Restricted Period he will not solicit, hire, or induce a Restricted Employee to leave his or her employment with the Company to join a person or entity that provides similar products or services as the Company offers to others at the time of the Employee's departure.
I then define the terms "Restricted Period" as the duration of employment plus a reasonable post-termination period (say, a year). I define "Restricted Employee" as someone with management, sales, or product development responsibility (or as the client otherwise may choose in the proper case).
The bold-faced clause above is really important, or the covenant protects activity that is innocuous or could not lead to competitive harm. This is the piece I often see missing.
Below is a real beauty from a dispute I am negotiating right now for an employee (I am taking editorial liberties by deleting or revising the unnecessary legal jargon and the misspellings of commonly used words):
During Employee's employment and for two years after the end of employment, Employee shall not accept employment of any employee of Employer.
Worded terribly, this restriction only could apply in a very narrow fact-pattern. But it is not tethered to any competing work, so it's both underinclusive and overinclusive - a real achievement, if you ask me.
Reading, as I sometimes am apt to do, through recent non-compete decisions, I stumbled upon Base One Techs., Inc. v. Ali, 2015 U.S. Dist. LEXIS 5821 (D.D.C. Jan. 20, 2015). The district court dismissed a no-hire claim against two employees who the employer accused of soliciting each other to quit. (Pause to consider how to prove damages or even liability on that one.) The court confronted a covenant similar to the example I just gave, and it read (again, modified for my readers' ease):
Employee agrees not to solicit, contact, represent or offer to represent the Company's Full-Time Employees or Independent Contractors, whether or not such solicitation, contact, or offer was initiated, prompted, or in any other way developed by the Employee...
(?)
People draft agreements like this. They really do. The court was unimpressed and found that a vague and ambiguous restrictive covenant was, on its face, unenforceable. The court's particular concern was that the contract never said what conduct the employee could not solicit: "Is the employee prohibited from contacting another employee about health insurance? From soliciting another employee to attend a political fundraiser." When a court asks rhetorical questions in an opinion, that usually is a bad sign.
I believe that when attorneys start drafting contracts, every good and normal human instinct they have disappears. They are flummoxed by how to convey a relatively simple thought. They cram 75 words into one sentence. They liberally use subordinate clauses. They feel the need to use a series of three verbs for the exact same thing ("...solicit, entice, or take away..." or my favorite "...give, devise, and bequeath."
A judge once told me that a restrictive covenant should be understandable to a mildly intelligent 7th grader. I cannot say it any better than that.
Restrictions imposed on employees from hiring away fellow employees appear to vex and confound those who draft contracts.
I've never quite understood this, but it's true. While it seems easy enough to draft non-compete restraints, for some reasons the same doesn't hold true for no-hire covenants.
Here's how I draft no-hire covenants in my model employment contract:
The Employee agrees that during the Restricted Period he will not solicit, hire, or induce a Restricted Employee to leave his or her employment with the Company to join a person or entity that provides similar products or services as the Company offers to others at the time of the Employee's departure.
I then define the terms "Restricted Period" as the duration of employment plus a reasonable post-termination period (say, a year). I define "Restricted Employee" as someone with management, sales, or product development responsibility (or as the client otherwise may choose in the proper case).
The bold-faced clause above is really important, or the covenant protects activity that is innocuous or could not lead to competitive harm. This is the piece I often see missing.
Below is a real beauty from a dispute I am negotiating right now for an employee (I am taking editorial liberties by deleting or revising the unnecessary legal jargon and the misspellings of commonly used words):
During Employee's employment and for two years after the end of employment, Employee shall not accept employment of any employee of Employer.
Worded terribly, this restriction only could apply in a very narrow fact-pattern. But it is not tethered to any competing work, so it's both underinclusive and overinclusive - a real achievement, if you ask me.
Reading, as I sometimes am apt to do, through recent non-compete decisions, I stumbled upon Base One Techs., Inc. v. Ali, 2015 U.S. Dist. LEXIS 5821 (D.D.C. Jan. 20, 2015). The district court dismissed a no-hire claim against two employees who the employer accused of soliciting each other to quit. (Pause to consider how to prove damages or even liability on that one.) The court confronted a covenant similar to the example I just gave, and it read (again, modified for my readers' ease):
Employee agrees not to solicit, contact, represent or offer to represent the Company's Full-Time Employees or Independent Contractors, whether or not such solicitation, contact, or offer was initiated, prompted, or in any other way developed by the Employee...
(?)
People draft agreements like this. They really do. The court was unimpressed and found that a vague and ambiguous restrictive covenant was, on its face, unenforceable. The court's particular concern was that the contract never said what conduct the employee could not solicit: "Is the employee prohibited from contacting another employee about health insurance? From soliciting another employee to attend a political fundraiser." When a court asks rhetorical questions in an opinion, that usually is a bad sign.
I believe that when attorneys start drafting contracts, every good and normal human instinct they have disappears. They are flummoxed by how to convey a relatively simple thought. They cram 75 words into one sentence. They liberally use subordinate clauses. They feel the need to use a series of three verbs for the exact same thing ("...solicit, entice, or take away..." or my favorite "...give, devise, and bequeath."
A judge once told me that a restrictive covenant should be understandable to a mildly intelligent 7th grader. I cannot say it any better than that.
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