It's a given that courts consider a wide range of facts - perhaps too wide - when ruling on enforcement actions. Already burdened with figuring out the competitive inflection points between warring companies on a truncated record, courts also must balance a completely unrelated issue. Hardship. As in, how would enforcement of a non-compete through a court order harm an employee?
This inquiry, part of the widely used "rule of reason" test, mandates a look at softer facts that really have nothing to do with the merits of the case. Instead, the collateral inquiry all but invites the court to take into account evidence that is highly personal .
This begs a question that few courts tackle head-on. How relevant is age?
I started thinking about this after I read an article by Josh Zumbrun from the July 14 Wall Street Journal ("Lower Job Churn Hurts Young Workers" at p. A2). The article describes a compelling economic rationale for mobility among younger workers, and consequently could be an endorsement that younger workers should be released from non-compete enforcement. The article discusses Federal Reserve Chairwoman Janet Yellen's concern over the lack of mobility among younger workers. The following passage is particularly illuminating:
By hopping from employer to employer, especially early on, workers find jobs better-suited to their skills, build their resumes, bid up their salaries and boost lifetime earnings prospects. They eventually settle down and change jobs less frequently.
Sounds reasonable.
Is this a consideration, though, for courts? It could be, depending on the strategic direction a defendant wants to take. In the context of non-compete battles, time is of the essence and a defendant spends a lot of time reacting. It's conceivable that a defendant could obtain an opinion from a labor economist on the issue of hardship, although that is a hefty expense few can afford.
I used to think of the age factor from a different perspective. Older workers tend to be less mobile and not as attractive on the open market. That could militate against enforcement, since courts occasionally (perhaps rarely) comment on this when looking at the hardship issue. The Wall Street Journal article sort of flipped my thinking and takes a longer term view of the economic impact of not changing jobs.
The tension is interesting because courts used to confront fact patterns where the older, seasoned worker developed goodwill, sales contacts, and enough embedded knowledge that her move to a competitor seemed most likely to pose a threat. In our more technology-driven economy, though, it often is the younger worker who imparts the most value to a company or who is more likely to innovate by developing a new product or service. The economics of job mobility could be seen as militating against non-compete enforcement for these younger, valuable workers.
Tuesday, August 12, 2014
Thursday, July 17, 2014
NYT Article Adds Grist to the Mill Over Non-Compete Debate
Camp counselors. Hair stylists. Yoga instructors.
These are not the occupations lawyers usually think of when the topic of non-compete enforcement comes up. We normally envision a dispute concerning the mobility of an executive sales manager, a software engineer, or a seasoned product developer.
But many employees in retail professions have to confront non-competes as well. The June 8 New York Times article, "Noncompete Clauses Increasingly Pop Up In Array of Jobs," addresses the ever-expanding use of non-compete agreements and its impact on mid-level professionals.
In fact, the illustration of the 19 year-old camp counselor bound to a non-compete in her summer employment agreement is ridiculous. The owner's justification for such a restriction is laughable:
Um, no it's not.
This type of reasoning would, of course, justify the use of non-compete clauses for any employee in any work environment. But the summer camp proprietor's comment illustrates the problem with an employee's ability to challenge the enforceability of that agreement. She would need to show the lack of a legitimate business interest worthy of protection. And the rub is this: that's awfully expensive to prove.
Business owners always will provide some rationale for why their business is unique or how it invests significantly in human capital. And these flimsy, self-serving assertions of a legitimate business interest often carry the day with judges who simply don't have the time to take a deeper dive into what exactly it is the employer is trying to protect. An employee trying to fence with her ex-employer on this issue is hamstrung by the cost of litigation.
The ubiquity now surrounding non-competes, particularly as they are applied to mid-level retail-oriented employees, ultimately could produce a boomerang effect. If non-competes become too widespread, policymakers will search for legislative solutions. Courts will question how the pervasive use of covenants squares with the widespread rule that they should protect only against unfair, not ordinary, competition.
There can, in fact, be too much of a good thing.
These are not the occupations lawyers usually think of when the topic of non-compete enforcement comes up. We normally envision a dispute concerning the mobility of an executive sales manager, a software engineer, or a seasoned product developer.
But many employees in retail professions have to confront non-competes as well. The June 8 New York Times article, "Noncompete Clauses Increasingly Pop Up In Array of Jobs," addresses the ever-expanding use of non-compete agreements and its impact on mid-level professionals.
In fact, the illustration of the 19 year-old camp counselor bound to a non-compete in her summer employment agreement is ridiculous. The owner's justification for such a restriction is laughable:
"Our intellectual property is the training and fostering of our counselors, which makes for our unique environment. It's much like a tech firm with designers who developed chips."
Um, no it's not.
This type of reasoning would, of course, justify the use of non-compete clauses for any employee in any work environment. But the summer camp proprietor's comment illustrates the problem with an employee's ability to challenge the enforceability of that agreement. She would need to show the lack of a legitimate business interest worthy of protection. And the rub is this: that's awfully expensive to prove.
Business owners always will provide some rationale for why their business is unique or how it invests significantly in human capital. And these flimsy, self-serving assertions of a legitimate business interest often carry the day with judges who simply don't have the time to take a deeper dive into what exactly it is the employer is trying to protect. An employee trying to fence with her ex-employer on this issue is hamstrung by the cost of litigation.
The ubiquity now surrounding non-competes, particularly as they are applied to mid-level retail-oriented employees, ultimately could produce a boomerang effect. If non-competes become too widespread, policymakers will search for legislative solutions. Courts will question how the pervasive use of covenants squares with the widespread rule that they should protect only against unfair, not ordinary, competition.
There can, in fact, be too much of a good thing.
Monday, June 23, 2014
Supreme Court of Kentucky Finds Continued Employment Is Insufficient Consideration for Non-Compete
The enforcement of non-competes is most troublesome in the at-will employment context. This is a recurring topic on this blog, and countless others. Courts have taken divergent approaches to analyzing the consideration issue.
Generally, the rules concerning enforcement of covenants for at-will employees fall into one of three categories:
(1) Continued employment is sufficient to enforce a covenant not to compete against an at-will employee if she signs it after the start of employment. This may be the majority rule, although I haven't broken it down state-by-state.
(2) Continued employment is insufficient to bind an at-will employee to a newly presented covenant not to compete unless the employee receives some true, real advantage in connection with signing the contract. A substantial minority of states, including Minnesota, adopt some variant of this rule.
(3) Even if an at-will employee signs a non-compete at the start of her employment, continued employment is insufficient unless the employment continues for a substantial period of time. This is Illinois' outlier Fifield rule.
Recently, the Wisconsin Court of Appeals certified a legal question to the state supreme court for review, concluding that existing case law relating to consideration was hopelessly in conflict. And just last week, the Supreme Court of Kentucky weighed in on the "continued employment" rule - with an opinion that seems to be of little value.
The Court held that continued employment was insufficient consideration to enforce a covenant not to compete that an at-will employee signed. The case is Charles T. Creech, Inc. v. Brown. Ultimately, though, the opinion does not seem to provide any rules. Instead, the Court simply found that given the particular facts of the case, the relatively broad non-compete lacked consideration. That in and of itself seemed odd, since the parties didn't conduct must discovery.
Although the opinion has flaws, it's still useful for what the Court determined to be significant in regards to the consideration inquiry. It honed in on the following factors:
(1) The employer undertook no new obligations in the contract.
(2) The contract lacked any indicia of an employment agreement, such as provisions relating to salary, benefits, and conditions of discharge.
(3) Brown, the employee, was a 16-year employee with pre-existing experience in the industry, meaning he didn't receive specialized training in response to signing the non-compete.
(4) Brown was not promoted and did not sign the agreement in connection with any real new advantages, such as a bump in pay or some access to new training or new information. The employer seemed to demote him.
(5) Most unusually, the employer did not threaten Brown with termination if he refused to sign the agreement. (It's hard to see how a counterfactual would be more persuasive evidence of consideration.)
While the result in the employee's favor may be appropriate given the other problems with the non-compete, the opinion does nothing more than leave a murky area of the law even cloudier. The Court gave no rule - and only hinted at a standard. Therefore, employers still don't have clarification on what they would need to provide at-will employees in the way of proper consideration to support a non-compete covenant.
The best practice still is to afford an at-will employee with some real, tangible advantage that a court will be able to grasp. The concept of continued employment is somewhat nebulous and in certain circumstances illusory. It makes enforcement difficult, particularly with long-term employees. Potential benefits could include:
(1) A raise, bonus, or promotion.
(2) The ability to terminate only for cause.
(3) Severance if the employer must terminate without cause.
In many states, any one of these would vest a non-compete with consideration. In my view, it also is beneficial to include the covenants in a more robust contract of employment, as opposed to a stand-alone document.
Generally, the rules concerning enforcement of covenants for at-will employees fall into one of three categories:
(1) Continued employment is sufficient to enforce a covenant not to compete against an at-will employee if she signs it after the start of employment. This may be the majority rule, although I haven't broken it down state-by-state.
(2) Continued employment is insufficient to bind an at-will employee to a newly presented covenant not to compete unless the employee receives some true, real advantage in connection with signing the contract. A substantial minority of states, including Minnesota, adopt some variant of this rule.
(3) Even if an at-will employee signs a non-compete at the start of her employment, continued employment is insufficient unless the employment continues for a substantial period of time. This is Illinois' outlier Fifield rule.
Recently, the Wisconsin Court of Appeals certified a legal question to the state supreme court for review, concluding that existing case law relating to consideration was hopelessly in conflict. And just last week, the Supreme Court of Kentucky weighed in on the "continued employment" rule - with an opinion that seems to be of little value.
The Court held that continued employment was insufficient consideration to enforce a covenant not to compete that an at-will employee signed. The case is Charles T. Creech, Inc. v. Brown. Ultimately, though, the opinion does not seem to provide any rules. Instead, the Court simply found that given the particular facts of the case, the relatively broad non-compete lacked consideration. That in and of itself seemed odd, since the parties didn't conduct must discovery.
Although the opinion has flaws, it's still useful for what the Court determined to be significant in regards to the consideration inquiry. It honed in on the following factors:
(1) The employer undertook no new obligations in the contract.
(2) The contract lacked any indicia of an employment agreement, such as provisions relating to salary, benefits, and conditions of discharge.
(3) Brown, the employee, was a 16-year employee with pre-existing experience in the industry, meaning he didn't receive specialized training in response to signing the non-compete.
(4) Brown was not promoted and did not sign the agreement in connection with any real new advantages, such as a bump in pay or some access to new training or new information. The employer seemed to demote him.
(5) Most unusually, the employer did not threaten Brown with termination if he refused to sign the agreement. (It's hard to see how a counterfactual would be more persuasive evidence of consideration.)
While the result in the employee's favor may be appropriate given the other problems with the non-compete, the opinion does nothing more than leave a murky area of the law even cloudier. The Court gave no rule - and only hinted at a standard. Therefore, employers still don't have clarification on what they would need to provide at-will employees in the way of proper consideration to support a non-compete covenant.
The best practice still is to afford an at-will employee with some real, tangible advantage that a court will be able to grasp. The concept of continued employment is somewhat nebulous and in certain circumstances illusory. It makes enforcement difficult, particularly with long-term employees. Potential benefits could include:
(1) A raise, bonus, or promotion.
(2) The ability to terminate only for cause.
(3) Severance if the employer must terminate without cause.
In many states, any one of these would vest a non-compete with consideration. In my view, it also is beneficial to include the covenants in a more robust contract of employment, as opposed to a stand-alone document.
Monday, June 16, 2014
Anti-SLAPP Motions and Private Contract Disputes
One of the burgeoning issues in employee competition disputes is the applicability (or inapplicability) of state Anti-SLAPP statutes.
These statutes generally provide an expedited mechanism for an individual who is sued for petitioning the government or exercising her free speech rights to dismiss a retaliatory suit and obtain damages or attorneys' fees. Increasingly, individuals are using Anti-SLAPP statutes in the context of competition claims that employers bring.
I previously have discussed special problems that arise in the context of so-called "whistleblowers" and the intersection of trade secret law. Although this may provide a compelling factual scenario for the application of Anti-SLAPP motions, individual defendants generally have met with a fair amount of resistance in their efforts to use this statutory mechanism to cut off trade secrets claims.
By and large, Anti-SLAPP laws require a petitioning defendant (assumed here to be an ex-employee sued on some competition-related claim) to show that his or her activity involved a matter of public concern or public interest. For instance, the Court of Appeals of Washington recently found that an ex-employee's post to a job board that warned potential employees about his ex-employer's security practices did not involve a matter of sufficient public concern to invoke that state's Anti-SLAPP law. Alaska Structures, Inc. v. Hedlund, 2014 Wash. App. LEXIS 933 (Wash. Ct. App. Apr. 21, 2014).
Generally speaking, courts seem adverse to applying Anti-SLAPP laws to matters that involve private contract disputes, such as a claim for breach of a non-disclosure agreement. This is not to say fact patterns that overlap with a competition claim can't arise, but the employee's conduct generally must implicate some or all of the following:
These statutes generally provide an expedited mechanism for an individual who is sued for petitioning the government or exercising her free speech rights to dismiss a retaliatory suit and obtain damages or attorneys' fees. Increasingly, individuals are using Anti-SLAPP statutes in the context of competition claims that employers bring.
I previously have discussed special problems that arise in the context of so-called "whistleblowers" and the intersection of trade secret law. Although this may provide a compelling factual scenario for the application of Anti-SLAPP motions, individual defendants generally have met with a fair amount of resistance in their efforts to use this statutory mechanism to cut off trade secrets claims.
By and large, Anti-SLAPP laws require a petitioning defendant (assumed here to be an ex-employee sued on some competition-related claim) to show that his or her activity involved a matter of public concern or public interest. For instance, the Court of Appeals of Washington recently found that an ex-employee's post to a job board that warned potential employees about his ex-employer's security practices did not involve a matter of sufficient public concern to invoke that state's Anti-SLAPP law. Alaska Structures, Inc. v. Hedlund, 2014 Wash. App. LEXIS 933 (Wash. Ct. App. Apr. 21, 2014).
Generally speaking, courts seem adverse to applying Anti-SLAPP laws to matters that involve private contract disputes, such as a claim for breach of a non-disclosure agreement. This is not to say fact patterns that overlap with a competition claim can't arise, but the employee's conduct generally must implicate some or all of the following:
- The matter must be of interest of concern to a substantial number of people. An example would be a disclosure about an issue concerning consumer product safety;
- There must be a close tie between the employee's statements, disclosures, or conduct and the public interest itself. For instance, an employee's disclosure of material must be directed towards the public good and not purely for some personal gain.
- The individual's conduct should not be mere ammunition-gathering in a fight with her ex-employer. There must be some objective indication the employee is pursuing a matter of larger public concern.
Thursday, June 12, 2014
Unreasonable Settlement Demands Illustrate Bad Faith In Trade Secrets Cases
Most attorneys believe everything said in a settlement letter is privileged through the Rules of Evidence.
This is decidedly not so.
The purpose of the evidentiary privilege is to preclude a jury from concluding that an offer to resolve a case suggests liability (on the part of the defendant) or weakness (on the part of the plaintiff). In trade secrets disputes, though, settlement statements that rise to the level of specious demands are not protected because they don't pose a risk of prejudicing a jury.
Trade secrets cases can go south in a hurry unless a plaintiff has done serious homework. And even if there has been a misappropriation, many times the plaintiff will have no shot at proving damages. That, however, does not preclude a plaintiff from making an outrageous demand. There are a number of courts that have assessed unreasonable settlement positions in the context of bad faith fee petitions for prevailing defendants.
An interesting, though non-precedential, decision from the Court of Appeal of California in Aerotek, Inc. v. The Johnson Group Staffing Co., Inc., affirmed a bad faith fee award of over $700,000. The court specifically looked at unreasonable settlement demands the plaintiff made, including a demand following a loss at trial, as evidence of bad faith.
Also of interest to the court:
This is decidedly not so.
The purpose of the evidentiary privilege is to preclude a jury from concluding that an offer to resolve a case suggests liability (on the part of the defendant) or weakness (on the part of the plaintiff). In trade secrets disputes, though, settlement statements that rise to the level of specious demands are not protected because they don't pose a risk of prejudicing a jury.
Trade secrets cases can go south in a hurry unless a plaintiff has done serious homework. And even if there has been a misappropriation, many times the plaintiff will have no shot at proving damages. That, however, does not preclude a plaintiff from making an outrageous demand. There are a number of courts that have assessed unreasonable settlement positions in the context of bad faith fee petitions for prevailing defendants.
An interesting, though non-precedential, decision from the Court of Appeal of California in Aerotek, Inc. v. The Johnson Group Staffing Co., Inc., affirmed a bad faith fee award of over $700,000. The court specifically looked at unreasonable settlement demands the plaintiff made, including a demand following a loss at trial, as evidence of bad faith.
Also of interest to the court:
- An expert's apparent unawareness that one of the customers on which he based his lost profits calculation was no longer in business; and
- A third-party witness's testimony that a plaintiff representative talked about the plaintiff's deep pockets and intent to shut the defendant's business down.
The interesting part of the case was the fact that the plaintiff actually won at the first trial, and the defendant stipulated that the customer list at issue was in fact a trade secret. Under such facts, its unusual to see a court find bad faith on the part of the plaintiff in bringing the case.
However, in California, there already is a strong public policy favoring open competition. Judges tend to view these cases more skeptically to begin with, and a case that might appear somewhat close still can yield a bad faith finding in California. Ultimately, it was clear that the plaintiff in Aerotek had a foundering case and doubled down. Maintaining a bad case will not endear any plaintiff's lawyer to the judge.
Monday, June 9, 2014
What Happens In Bankruptcy...Does Not Necessarily Stay in Bankruptcy.
The unfortunate reality of many non-compete lawsuits is that the parties face a vast asymmetry in legal resources. While individuals suing companies in court is hardly a novel concept, an individual usually stands something to gain - money - if she wins. A non-compete defendant is in no such similar position.
As a result, bankruptcy looms as a potential "option" for defendants in a good percentage of non-compete cases. Most defendants don't realize that there's a significant chance that a damages award may not even be dischargeable, though this depends on a host of factors. Blanket statements or conclusions can't be made.
Another vexing issue is a company's ability to pursue injunctive relief to protect customer goodwill or confidential information, even if a non-compete defendant has filed a bankruptcy petition. The most obvious step for companies to take is to file a lift-stay motion. This refers to the fact that all litigation against a debtor is "stayed" (or halted) once he or she files a petition.
Bankruptcy laws serve to relieve an honest debtor from the weight of his financial obligations and give him a fresh start in business life. Injunctive relief, though, is not a matter that impacts the administration of a bankruptcy estate, so courts often confront a company's attempt to lift the stay so that it may seek to pursue an injunction and protect against the loss of customers or trade secrets. Because damages are difficult to prove, injunctive relief still is the preferred remedy for most non-compete plaintiffs.
Since bankruptcy laws do not give a debtor a shield to misappropriate assets or customer relationships, under what circumstances will a court grant an employer's lift-stay motion and allow it to proceed forward with its case outside of bankruptcy?
There are several factors courts have examined in the past, though there is no uniform set of rules:
(1) Likelihood of success - This seems rather obvious, but it poses serious challenges for bankruptcy judges. If a bankruptcy judge weighs in on the merits (even if it's not a decision or judgment), then there is a substantial risk that the court hearing the underlying dispute will be influenced by another judge's thoughts. This is a particularly acute concern when the non-compete case is in state court.
(2) Prejudice to debtor - The most obvious hardship is the cost of litigation. However, in the past, bankruptcy courts haven't found that this practical reality is a significant prejudice factor that would justify a denial of relief.
(3) Prejudice to the estate - In a garden-variety employee matter, the bankruptcy estate rarely has an interest in the non-competition covenant. Put another way, the contract is not an estate asset.
(4) Harm to the moving party - In the decisions addressing lift-stay motions, most courts find that the potential harm to the ex-employer (i.e., loss of customers or impairment of trade secret rights) is the most important factor to consider. Courts seem receptive to the notion that it is impermissible to use the bankruptcy laws offensively to continue violating unexpired restrictive covenants.
It also is important to keep in mind that considerations of lifting a stay are different in Chapter 11 or 13 cases when enforcement of a covenant not to compete may affect a debtor's ability to reorganize and earn income. However, in a typical Chapter 7 case, a bankruptcy court is unconcerned with a debtor's ability to generate post-petition earnings because those earnings are not estate property.
As a result, bankruptcy looms as a potential "option" for defendants in a good percentage of non-compete cases. Most defendants don't realize that there's a significant chance that a damages award may not even be dischargeable, though this depends on a host of factors. Blanket statements or conclusions can't be made.
Another vexing issue is a company's ability to pursue injunctive relief to protect customer goodwill or confidential information, even if a non-compete defendant has filed a bankruptcy petition. The most obvious step for companies to take is to file a lift-stay motion. This refers to the fact that all litigation against a debtor is "stayed" (or halted) once he or she files a petition.
Bankruptcy laws serve to relieve an honest debtor from the weight of his financial obligations and give him a fresh start in business life. Injunctive relief, though, is not a matter that impacts the administration of a bankruptcy estate, so courts often confront a company's attempt to lift the stay so that it may seek to pursue an injunction and protect against the loss of customers or trade secrets. Because damages are difficult to prove, injunctive relief still is the preferred remedy for most non-compete plaintiffs.
Since bankruptcy laws do not give a debtor a shield to misappropriate assets or customer relationships, under what circumstances will a court grant an employer's lift-stay motion and allow it to proceed forward with its case outside of bankruptcy?
There are several factors courts have examined in the past, though there is no uniform set of rules:
(1) Likelihood of success - This seems rather obvious, but it poses serious challenges for bankruptcy judges. If a bankruptcy judge weighs in on the merits (even if it's not a decision or judgment), then there is a substantial risk that the court hearing the underlying dispute will be influenced by another judge's thoughts. This is a particularly acute concern when the non-compete case is in state court.
(2) Prejudice to debtor - The most obvious hardship is the cost of litigation. However, in the past, bankruptcy courts haven't found that this practical reality is a significant prejudice factor that would justify a denial of relief.
(3) Prejudice to the estate - In a garden-variety employee matter, the bankruptcy estate rarely has an interest in the non-competition covenant. Put another way, the contract is not an estate asset.
(4) Harm to the moving party - In the decisions addressing lift-stay motions, most courts find that the potential harm to the ex-employer (i.e., loss of customers or impairment of trade secret rights) is the most important factor to consider. Courts seem receptive to the notion that it is impermissible to use the bankruptcy laws offensively to continue violating unexpired restrictive covenants.
It also is important to keep in mind that considerations of lifting a stay are different in Chapter 11 or 13 cases when enforcement of a covenant not to compete may affect a debtor's ability to reorganize and earn income. However, in a typical Chapter 7 case, a bankruptcy court is unconcerned with a debtor's ability to generate post-petition earnings because those earnings are not estate property.
Wednesday, June 4, 2014
An Illinois Federal Court Now Pivots Towards Supporting Fifield
I wrote previously about the hostile reception Fifield v. Premier Dealer Services, Inc. had received in Illinois federal courts, which is set forth in my March 6 post "Fifield, Federal Style." Since that time, I have presented at two seminars in which I predicted that a fissure between how state and federal courts perceived the Fifield consideration rule may encourage the Supreme Court of Illinois to take the issue up when it inevitably resurfaces.
Perhaps, I am wrong.
One federal judge in Chicago has disagreed with his federal court counterparts and endorsed Fifield. The case is Instant Technology, LLC v. DeFazio, No. 12-cv-491. Judge Holderman declined to follow the lead of Chief Judge Castillo in Montel Aetnastak, Inc. v. Miessen (and Judge Feinerman in another case) and found that the Supreme Court of Illinois would, indeed, follow the two-year consideration rule from Fifield.
As readers of this blog know all too well by now, Fifield holds that for at-will employees new or continued employment must last at least two years for the employment to serve as consideration supporting a non-compete agreement. It's clear from Fifield that this two-year rule applies to both non-compete and non-solicit covenants, but it almost certainly does not extend to confidentiality restrictions.
Judge Holderman relied on Judge Posner's opinion in Curtis 1000, Inc. v. Suess to justify why Fifield represents the law in Illinois. That case discussed the fact that employment in the at-will context often is illusory because the employer retains full discretion to take away the consideration without fear of liability. Also important to Judge Holderman's analysis were two recent Illinois circuit court decisions that appeared to endorse Fifield. It's rather unusual to see a federal court rely on and cite to unreported trial court cases as support for a ruling. But such is the terra (in)firma that Fifield graced us with.
As I recently wrote, the Supreme Court of Wisconsin is addressing an important question of law concerning consideration for non-competes in the at-will employee context.
Perhaps, I am wrong.
One federal judge in Chicago has disagreed with his federal court counterparts and endorsed Fifield. The case is Instant Technology, LLC v. DeFazio, No. 12-cv-491. Judge Holderman declined to follow the lead of Chief Judge Castillo in Montel Aetnastak, Inc. v. Miessen (and Judge Feinerman in another case) and found that the Supreme Court of Illinois would, indeed, follow the two-year consideration rule from Fifield.
As readers of this blog know all too well by now, Fifield holds that for at-will employees new or continued employment must last at least two years for the employment to serve as consideration supporting a non-compete agreement. It's clear from Fifield that this two-year rule applies to both non-compete and non-solicit covenants, but it almost certainly does not extend to confidentiality restrictions.
Judge Holderman relied on Judge Posner's opinion in Curtis 1000, Inc. v. Suess to justify why Fifield represents the law in Illinois. That case discussed the fact that employment in the at-will context often is illusory because the employer retains full discretion to take away the consideration without fear of liability. Also important to Judge Holderman's analysis were two recent Illinois circuit court decisions that appeared to endorse Fifield. It's rather unusual to see a federal court rely on and cite to unreported trial court cases as support for a ruling. But such is the terra (in)firma that Fifield graced us with.
As I recently wrote, the Supreme Court of Wisconsin is addressing an important question of law concerning consideration for non-competes in the at-will employee context.
Monday, May 19, 2014
Supreme Court of Wisconsin to Address Key Consideration Issue
The Court of Appeals of Wisconsin certified an important question to the state Supreme Court concerning restrictive covenant law:
Is consideration in addition to continued employment required to support a covenant not to compete entered into by an at-will employee?
The case is Runzheimer Int'l Ltd. v. Friedlin, 2014 Wisc. App. LEXIS 342 (Ct. App. Apr. 15, 2014). The question, to be sure, is a recurring one across the states. This is for a few reasons.
The policy rationales for and against a consideration rule lie in tension with one another. On the enforcement side, employers say that because they can terminate at-will employees without liability, there's no true distinction between a covenant signed at the start of employment and those signed mid-stream (or, as an afterthought). Conversely, employees legitimately can argue they face a disparity in bargaining power and feel serious economic pressure to sign a contract just to keep their job.
Wisconsin courts haven't really addressed this issue head-on, which is surprising given that state's volume of non-compete disputes and its well-known pro-employee bent. The few cases - none directly on point - push courts in opposite directions, which is reflective of the policy tension I just discussed. Decisions from other states aren't helpful, because there's no uniform rule. The pro-employee cases make just as much sense as the pro-employer cases. (Not surprisingly, the Court of Appeals did not discuss the analysis from Illinois' much-maligned Fifield decision, probably since there is no analysis in that case to rely on.)
From my perspective, it's a bit myopic to say no consideration is required simply because the at-will relationship is fluid and starts anew each day. This is a theoretical argument and ignores a couple of realities.
First, it assumes freely terminate people when they view them as valuable. There's no empirical support for this. I am not aware of employers firing employees en masse only to rehire them with a non-compete. Not only would such a practice impair goodwill, but it actually would raise the specter of liability for unemployment costs. The pro-employer theory neglects to consider marketplace realities and the intangible harm to reputation that could arise.
Second, an employee may accept a job with Company X in reliance on the fact X never asked him to sign a restrictive covenant. Presumably, that impacted his decision to forego other jobs. Those lost (irretrievably) opportunities should be accounted for at least to the same degree as the theoretical "fire-rehire" justification.
In the final analysis, I'm not a huge fan of "continued employment" as a consideration theory. It seems wishy to me, and employers ought to come up with something better - a promotion, a new commission opportunity, a bonus - to justify binding an employee to a significant work restriction.
Is consideration in addition to continued employment required to support a covenant not to compete entered into by an at-will employee?
The case is Runzheimer Int'l Ltd. v. Friedlin, 2014 Wisc. App. LEXIS 342 (Ct. App. Apr. 15, 2014). The question, to be sure, is a recurring one across the states. This is for a few reasons.
The policy rationales for and against a consideration rule lie in tension with one another. On the enforcement side, employers say that because they can terminate at-will employees without liability, there's no true distinction between a covenant signed at the start of employment and those signed mid-stream (or, as an afterthought). Conversely, employees legitimately can argue they face a disparity in bargaining power and feel serious economic pressure to sign a contract just to keep their job.
Wisconsin courts haven't really addressed this issue head-on, which is surprising given that state's volume of non-compete disputes and its well-known pro-employee bent. The few cases - none directly on point - push courts in opposite directions, which is reflective of the policy tension I just discussed. Decisions from other states aren't helpful, because there's no uniform rule. The pro-employee cases make just as much sense as the pro-employer cases. (Not surprisingly, the Court of Appeals did not discuss the analysis from Illinois' much-maligned Fifield decision, probably since there is no analysis in that case to rely on.)
From my perspective, it's a bit myopic to say no consideration is required simply because the at-will relationship is fluid and starts anew each day. This is a theoretical argument and ignores a couple of realities.
First, it assumes freely terminate people when they view them as valuable. There's no empirical support for this. I am not aware of employers firing employees en masse only to rehire them with a non-compete. Not only would such a practice impair goodwill, but it actually would raise the specter of liability for unemployment costs. The pro-employer theory neglects to consider marketplace realities and the intangible harm to reputation that could arise.
Second, an employee may accept a job with Company X in reliance on the fact X never asked him to sign a restrictive covenant. Presumably, that impacted his decision to forego other jobs. Those lost (irretrievably) opportunities should be accounted for at least to the same degree as the theoretical "fire-rehire" justification.
In the final analysis, I'm not a huge fan of "continued employment" as a consideration theory. It seems wishy to me, and employers ought to come up with something better - a promotion, a new commission opportunity, a bonus - to justify binding an employee to a significant work restriction.
Tuesday, April 22, 2014
Supreme Court of Wyoming Issues Important Trade Secrets Decision Related to Fracking
One of the hot new frontiers in trade secrets law involves an industry, not a legal question. There is no question the fracking industry is controversial. On the one hand, state legislatures view hydraulic fracturing as a potential boon to local economies. On the other, the very nature of this process causes much hand-wringing and cause for concern among environmental advocacy groups.
Hydraulic fracturing occurs when operators inject pressurized fluids into rock layers to release petroleum or natural gas. Fracking companies often believe the chemical compounds used in the fluid injection process are trade secrets. This causes a natural tension when public interest groups seek to discover what kind of chemicals are being inserted into local aquifers.
The case law applying trade secrets concepts to fracking is new and largely undeveloped. In the most significant decision to date, the Supreme Court of Wyoming addressed what trade secret definition should apply to a request for disclosure of an operator's chemical compounds. In Powder River Basin Resource Council v. Wyoming Oil and Gas Conser. Comm'n, the Court held that the most stringent trade secrets definition should apply. (The opinion is contained below.)
It considered three alternatives:
(1) The Uniform Trade Secrets Act definition, with its now ubiquitous two-part formulation;
(2) The Restatement (Third) of Unfair Competition definition, found in Section 39, which generally is viewed as less rigorous than the UTSA standard; and
(3) The federal Freedom of Information Act definition.
The Court ultimately chose the FOIA definition. It defines trade secret as "[a] secret, commercially valuable plan, formula, process, or device that is used for the making, preparing, compounding, or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort."
The italicized clause limits trade secrets to the productive process and would exclude a wide range of commercially valuable information that often times is at issue in competitive disputes. The Court's justification makes some sense. The broader UTSA and Restatement definitions are geared towards providing a remedy for unfair competition in private disputes. And a more definition would render meaningless the protection FOIA affords "commercially valuable" information.
The FOIA definition, which should lead to more disclosure, is meant to balance ownership of a true trade secret with the public's right to access documents affecting matters of public interest. In those states with fracking laws and regulations, operators normally have the chance to show administrative agencies that their chemical compounds or formulas are trade secrets. The decision in Powder River Basin will provide appropriate guidance to other courts that are called upon to evaluate a challenge to any administrative decision that favors fracking operators.
Hydraulic fracturing occurs when operators inject pressurized fluids into rock layers to release petroleum or natural gas. Fracking companies often believe the chemical compounds used in the fluid injection process are trade secrets. This causes a natural tension when public interest groups seek to discover what kind of chemicals are being inserted into local aquifers.
The case law applying trade secrets concepts to fracking is new and largely undeveloped. In the most significant decision to date, the Supreme Court of Wyoming addressed what trade secret definition should apply to a request for disclosure of an operator's chemical compounds. In Powder River Basin Resource Council v. Wyoming Oil and Gas Conser. Comm'n, the Court held that the most stringent trade secrets definition should apply. (The opinion is contained below.)
It considered three alternatives:
(1) The Uniform Trade Secrets Act definition, with its now ubiquitous two-part formulation;
(2) The Restatement (Third) of Unfair Competition definition, found in Section 39, which generally is viewed as less rigorous than the UTSA standard; and
(3) The federal Freedom of Information Act definition.
The Court ultimately chose the FOIA definition. It defines trade secret as "[a] secret, commercially valuable plan, formula, process, or device that is used for the making, preparing, compounding, or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort."
The italicized clause limits trade secrets to the productive process and would exclude a wide range of commercially valuable information that often times is at issue in competitive disputes. The Court's justification makes some sense. The broader UTSA and Restatement definitions are geared towards providing a remedy for unfair competition in private disputes. And a more definition would render meaningless the protection FOIA affords "commercially valuable" information.
The FOIA definition, which should lead to more disclosure, is meant to balance ownership of a true trade secret with the public's right to access documents affecting matters of public interest. In those states with fracking laws and regulations, operators normally have the chance to show administrative agencies that their chemical compounds or formulas are trade secrets. The decision in Powder River Basin will provide appropriate guidance to other courts that are called upon to evaluate a challenge to any administrative decision that favors fracking operators.
Friday, April 18, 2014
Contention Interrogatories In Trade Secret Cases Demand Strict Compliance
Yesterday, I gave a lengthy presentation to the American Intellectual Property Law Association's Trade Secrets Committee. The bulk of my presentation dealt with the knotty issue of properly identifying trade secrets in litigation.
Many trade secrets cases stall out due to deficient identifications. Since trade secrets are unlike other forms of intellectual property in that they are not listed in the public record, a plaintiff controls the identification of its property. In litigation between competitors, a plaintiff frequently will attempt to hide its secrets - yes, the crux of the claim itself - from the defendant. This leads to many disputes over whether the plaintiff properly is identifying its trade secrets in discovery. Sometimes the dispute occurs quite early, but other times it can take months or years before the identification issue reaches an inflection point.
As I was preparing for my presentation yesterday, I took a scan through some recent cases on the identification question. If you're looking for a fertile area of legal research, this is it. The federal district courts seem inundated with questions about whether a plaintiff is properly identifying its trade secrets during litigation. And the cases yield few hard-and-fast rules.
But, as I am sometimes prone to do, I found a case on the identification question that I hadn't seen before. The case, Safety Today, Inc. v. Roy, 2014 U.S. Dist. LEXIS 17116 (S.D. Ohio Feb. 11, 2014), addressed a plaintiff's attempt to answer a customer trade secrets identification interrogatory by referencing documents produced in the case. This sometimes is permitted under Federal Rule of Civil Procedure 33(d).
But the Safety Today court said no, a plaintiff could not use the Rule 33(d) mechanism to "identify" its trade secrets in response to a contention interrogatory. It did say that in some unusual cases a court could permit this approach. For instance, if the trade secret is entirely contained within a document - say a customer list, or an engineering drawing - then a Rule 33(d) reference may be appropriate. The secret, though, would have to be really narrow.
The case dealt with an entirely different factual matrix that did not lend itself to a bald document reference. In fact, the court called it a "typical case" involving ex-employees and stated specifically:
"Only the employer will know what portion of that myriad information known to its employees can legitimately be claimed as a trade secret, and no amount of record production can provide the appropriate answer to the question."
The court examined a largely undifferentiated set of documents the parties produced and noted that it was not at all apparent from the production what was secret and what was not. In other words, the defendant still would have to guess at what bits of information the plaintiff claimed as trade secrets. It was, indeed, the typical case where the trade secrets are not evident to anyone from the face of a particular document.
This illustrates the burden a plainitff in a trade secrets case usually will face. When answering an interrogatory, it is essential to take that obligation seriously and not reflexively punt to documents the parties otherwise produce. This approach may just raise more questions and do more harm than good.
Ultimately, a plaintiff ought to be under a strict burden to do its homework and prepare its case for trial. If it cannot grasp its own trade secrets and is not willing to put the time in to do so, that usually portends a much larger, strategic problem.
Many trade secrets cases stall out due to deficient identifications. Since trade secrets are unlike other forms of intellectual property in that they are not listed in the public record, a plaintiff controls the identification of its property. In litigation between competitors, a plaintiff frequently will attempt to hide its secrets - yes, the crux of the claim itself - from the defendant. This leads to many disputes over whether the plaintiff properly is identifying its trade secrets in discovery. Sometimes the dispute occurs quite early, but other times it can take months or years before the identification issue reaches an inflection point.
As I was preparing for my presentation yesterday, I took a scan through some recent cases on the identification question. If you're looking for a fertile area of legal research, this is it. The federal district courts seem inundated with questions about whether a plaintiff is properly identifying its trade secrets during litigation. And the cases yield few hard-and-fast rules.
But, as I am sometimes prone to do, I found a case on the identification question that I hadn't seen before. The case, Safety Today, Inc. v. Roy, 2014 U.S. Dist. LEXIS 17116 (S.D. Ohio Feb. 11, 2014), addressed a plaintiff's attempt to answer a customer trade secrets identification interrogatory by referencing documents produced in the case. This sometimes is permitted under Federal Rule of Civil Procedure 33(d).
But the Safety Today court said no, a plaintiff could not use the Rule 33(d) mechanism to "identify" its trade secrets in response to a contention interrogatory. It did say that in some unusual cases a court could permit this approach. For instance, if the trade secret is entirely contained within a document - say a customer list, or an engineering drawing - then a Rule 33(d) reference may be appropriate. The secret, though, would have to be really narrow.
The case dealt with an entirely different factual matrix that did not lend itself to a bald document reference. In fact, the court called it a "typical case" involving ex-employees and stated specifically:
"Only the employer will know what portion of that myriad information known to its employees can legitimately be claimed as a trade secret, and no amount of record production can provide the appropriate answer to the question."
The court examined a largely undifferentiated set of documents the parties produced and noted that it was not at all apparent from the production what was secret and what was not. In other words, the defendant still would have to guess at what bits of information the plaintiff claimed as trade secrets. It was, indeed, the typical case where the trade secrets are not evident to anyone from the face of a particular document.
This illustrates the burden a plainitff in a trade secrets case usually will face. When answering an interrogatory, it is essential to take that obligation seriously and not reflexively punt to documents the parties otherwise produce. This approach may just raise more questions and do more harm than good.
Ultimately, a plaintiff ought to be under a strict burden to do its homework and prepare its case for trial. If it cannot grasp its own trade secrets and is not willing to put the time in to do so, that usually portends a much larger, strategic problem.
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