Indiana's Blacklisting Statute Reinterpreted on Certified Question

I have a handful of favorite moments from my legal career.

One is when I had a state court judge tell me during closing that my legal arguments were about as "helpful as a goose turd on a sidewalk", only to have that judge later get reversed on appeal - on those same goose-turdish legal points.

Another, and perhaps still my absolute favorite, is when I invoked Indiana's Blacklisting Statute to recover attorneys' fees for a prevailing defendant in a trade secrets/non-compete dispute. That statute, enacted around the turn of the century -- the 20th century, mind you -- was meant to provide some means of recovery during a period of hostile, violent activity between companies and burgeoning labor unions. Blacklisting a union or striking employee was a common tactic, and legislatures started enacting reforms to allow for aggrieved employees to recover damages.

Fast-forward 100 years or so, and courts in Indiana started fielding Blacklisting Statute petitions when an employer tried to prevent an employee from competing - usually through an overbroad non-compete agreement or a meritless trade secrets claim. To be sure, the Blacklisting Statute does not look like a particularly good fit, but the language of the statute itself -- viewed narrowly and quite literally -- seems to provide a narrow path to recovery.

Like many other attorneys before me, I saw a path to get my client its fees back under this Statute. And I did, though, I wanted the matter settled rather than decided so no appeal was taken. Turns out, this probably was a good decision.

The Blacklisting Statute, as held by the Supreme Court of Indiana, no longer applies to claims where an employer seeks to preclude an employee from competing.

The Indiana case is Loparex, LLC v. MPI Release Techs., LLC, and the Court seemed to have little trouble concluding that other remedies besides the Blacklisting Statute provided sufficient protection for baseless competition claims. The Court offered a few rationales:

First, the ordinary definition of "blacklisting" -- without question, the purpose of the statute was to prohibit this then-prevalent practice -- contemplated a very specific range of activity, such as circulating a list of people to avoid hiring.

Second, the more general language of the Blacklisting Statute, which clearly contemplates that a trade secrets defendant may have a claim, has to give way to the more specific references of "blacklisting." This is a canon of statutory construction which interests only lawyers, and for that reason, I will say no more on the matter.

Third, the Court found that applying the Blacklisting Statute in an unsuccessful competition suit would create bad policy and a "standoff between the former employer, potential employer, and the employee, and the threat of their own mutually assured destruction would deter everyone from seeking any redress whatsoever."

From my perspective, the real evil in competition litigation is the leveraging of legal fees, often when competitors field an asymmetry of resources. A better approach than applying statutes or torts which do not fit these types of disputes is to either (a) allow for one-way fee shifting clauses in non-compete agreements to be blue-penciled, or (b) encourage the use of a more flexible, realistic inquiry on bad faith fee petitions to determine what the true motives of the plaintiff were in bringing suit.

Is the decision clarifying the Blacklisting Statute correct? Probably. But at least I had my fun while it lasted.

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Court: Supreme Court of Indiana
Opinion Date: 3/21/12
Cite: Loparex, LLC v. MPI Release Techs., LLC, 2012 Ind. LEXIS 46 (Ind. Mar. 21, 2012)
Favors: Employer
Law: Indiana

Recent Decisions of Interest (No. 7): Court Orders Return of Bedbug-Detecting Beagle

Non-compete disputes tend to have some strange facts in them. The case of Western Industries v. Lessard, though, takes this to a new level.

Western Industries operates in what has to be a niche industry of providing to its clients canines who are able to detect the presence of bedbugs, presumably in hotels, hospitals, and the like. Each canine has a handler. You can see right now where this is going.

Blaine Lessard was one such handler, and his trusted ally was Dixie - a beagle. (This picture is not Dixie, by the way.) Lessard appears not to have thought much of his employer, as he started doing the same type of work on his own long before he was fired, going so far as to sell himself on LinkedIn under his new company's name. To make matters worse, he used Dixie to provide competitive services and promoted Dixie on his website. Figuring out Lessard was up to something not good wasn't especially tough. (Many non-compete disputes start this way, incidentally. The employee just doesn't seem to give a damn about whether he is caught or not.)

Predictably, Western Industries fired Lessard. But after the termination, Lessard refused to return Dixie. Western Industries moved for immediate temporary restraining order, and the court had little trouble ordering Dixie's return.

The court, in its TRO opinion, cited a document or corporate property return provision as a basis for ordering immediate relief. Though my wife would disagree that dogs are "property" (they are more like people, she would suggest), it seems safe to analogize Dixie to a corporate asset.

So-called "mandatory" injunctions are not all that common. Courts do not like to order parties to affirmatively take certain steps; they would rather say "don't do X." However, in competitive disputes, judges frequently will order the immediate return of corporate property. That's not all that burdensome. Often times, this includes documents, hard drives, source code, or other intellectual property. But it doesn't have to be IP-related, as the case of Dixie proves.

An employer must be prepared to present competent evidence to show that it owns the assets it wants back immediately. Unadorned assertions of who owns what won't do. Corporate counsel should prepare affidavits of persons knowledgeable about the assets the company wants back, making sure to authenticate any documents evidencing ownership.

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Court: United States District Court for the Eastern District of Virginia
Opinion Date: 3/13/12
Cite: Western Industries-North, LLP v. Lessard, 2012 U.S. Dist. LEXIS 33683 (E.D. Va. Mar. 13, 2012)
Favors: Employer
Law: New Jersey

The Reading List (No. 8): New Baby Arrives, But I Still Had Time to Read an Excellent Article

Changing diapers is way more difficult than litigating non-compete disputes. But now I am doing both. My wife and I welcomed our daughter, Langdon, into the world - 10 days early - on Friday night. We're obviously very excited and still trying to figure out exactly what we're doing.

So I won't be posting regularly for a week or two, and will need a bit more time to get my next podcast up. For now, I wanted to share a link to an excellent article on the Computer Fraud and Abuse Act, with a focus on the recent activity in the Ninth Circuit courts.

The link to the article by Bruce Samuels and Cindy Villanueva can be found here.

Declaratory Judgment Actions: Ensuring the Dispute Is Ripe for Decision

Clients and colleagues of mine will tell you that I am a big fan of resolving non-compete disputes in the quickest, most efficient manner possible. By definition, these disputes are time-sensitive because eventually the covenant will lapse - and usually the lapse period is a matter of months. Plus, from experience, the discovery process is completely overdone in non-compete disputes, with document production becoming more of a lawyer, than truth-finding, exercise.

For the employee who may be left twisting in the wind, the best way to resolve a non-compete dispute is through a declaratory judgment action. For those unfamiliar with the concept, both federal and state law allow a court to decide a case or controversy and declare the rights of the parties under a contract.

Non-compete disputes are generally ripe for resolution this way, because an employee and an ex-employer often have divergent views about what an employee is permitted to do following termination. From an employee's perspective, here are the benefits of going on offense and pursuing a declaratory judgment claim.

1. Cost. Non-compete litigation is incredibly and unavoidably expensive. An employee can reduce expense by suing in advance of competing, or "breaching." If the employee sues to have an agreement declared unenforceable, or inapplicable perhaps, then she has eliminated one of the biggest costs in litigation: discovery about what she has done in her new job. She won't have to produce client records, invoices, and e-mails. Handled correctly, an employee can get a final resolution of the covenant's enforceability for a fraction of the cost incurred in a defending a breach of contract case.

2. Perception. Don't underestimate how some judges view a party defending a breach of the non-compete agreement. The judge may decide early on the employee acted recklessly, flaunted her contractual obligations, or competed in a manner that just doesn't seem fair. By suing to have a court declare the agreement unenforceable, a judge is likely to look more skeptically at the employer, particularly if the pre-litigation letter writing campaign demonstrates the employer has taken an unreasonable position. One judge has told me that he viewed a declaratory action by the employee as the "honorable" way to get the case decided. That's powerful stuff to hear.

3. Certainty. If an employee decides to make a frontal assault on the covenant and "breach" it, she may be distracted and worried about what to do in the new position. She may not know what to say to potential clients. She may not even be contacting some blue-chip clients, and may try to decide for herself what clients are immaterial. None of this is good. Her supervisors or co-workers also may be trying to carefully avoid stepping on potential land mines. A judicial resolution before the employee breaches the contract can remove this uncertainty and get people refocused on growing sales and cultivating clients.

4. Risk Mitigation. If the employee loses (which does happen quite a bit), then a declaratory judgment before breach occurs will have avoided potentially significant liability.

So what does an employee need to do to ensure that a declaratory judgment claim will be heard and adjudicated?

Well, first, there needs to be a controversy. If an employee has no future job prospect in the industry (and therefore no present intent or ability to compete), a declaratory judgment claim does no one any good. Second, the employer must demonstrate some intent to enforce.

An employee has to set up the case or controversy correctly, so she can plead the required elements of a declaratory claim. She can accomplish this by requesting a release from the non-compete obligation and pointing out a concrete opportunity that awaits her upon the grant of such a release.

Ordinarily, the employer will write back a threatening letter, indicating its clear intent not to honor the request and stating that it intends to sue upon breach. This, alone, should be enough to establish a case ripe for decision by a court. (On the flip side, such a request may be granted! This has happened to me more than once, to my client's sheer delight.)

If an employee announces no plans to compete, then it becomes more likely that a court will decline jurisdiction. Without something concrete to decide, a court won't get involved.

Here is a list of non-compete cases that discuss this issue, with the recent New Jersey decision from last week being of particular interest.

Stryker v. Hi-Temp Specialty Metals, Inc., 11-cv-6384 (D.N.J. Mar. 2, 2012).

Arakelian v. Omnicare, Inc., 2010 U.S. Dist. LEXIS 84828 (S.D.N.Y. Aug. 18, 2010).

McKenna v. PSS World Medical, Inc., 2009 U.S. Dist. LEXIS 58292 (W.D. Pa. July 9, 2009).

Bruehn v. STP Corp., 312 F. Supp. 903 (D. Colo. 1970).

Non-Compete Radio Now Available Through iTunes

You can now subscribe (for free!) to my podcast, Non-Compete Radio, through iTunes. There, you will find me right alongside other pop culture icons such as Lada Gaga, Adele and The Black Keys. It's not a matter of if I will take home a Grammy, just when really...

The second episode should be available next week. You can also save in your favorites this link, where you will be able to see all podcast episodes. I will be embedding episodes into this blog as well so you can play them here. The previous post contains Episode 1.

Attention Listeners: Non-Compete Radio Is On the Air

Seriously, there hasn't been this much hype since "The Voice" premiered after the Super Bowl...

The first edition of Non-Compete Radio has arrived! My podcast should be available in iTunes within a few days.

For now, you can listen here to Episode 1, Non-Compete Agreements: Background for the Non-Lawyer.

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The Reading List (No.7)

I was kicking around the idea of putting Atlas Shrugged on this week's Reading List, but that would be too self-indulgent.

This 1,100 page behemoth is almost behind me, and the themes are timeless. I totally get why the Tea Party caused this masterpiece to make a comeback. But you don't have to be super into politics to get into this book. If you have an extra couple of months to burn, read it (or read it again). For now, though, we'll stick with the exciting (and timeless) world of non-competes.

Forbes.com has an interesting article on Cloud storage and what considerations corporations must look at when housing trade secrets in the cloud. There have been some high-profile security breaches, including with the ubiquitous Dropbox (which I use). This is an emerging phenomenon, and I don't think it's a particularly smart idea to keep the highest level secrets in the cloud. The general, day-to-day stuff, sure.

Fisher & Phillips (a current rival of mine) has a post on Mediation in competition cases. I agree with one of the main points that mediation, to be successful, has to occur early. Too much money gets spent in discovery and feelings start to harden once lawyer bills have to get paid.

I always enjoy Rob Radcliff's blog, Smooth Transitions. A wealth of interesting posts awaits you, but I liked his comments on what clients should consider when approaching a trial. Rob has one post where he asks rhetorically what the "upside" of a trial is. I would add one point to this. If a client has been bullied around by a competitor, it may be necessary to take a case to trial simply to prove that the adversary can't extort a settlement. One case I am defending right now on appeal is, without a doubt, one of the most pointless, nonsensical, and abusive lawsuits I have seen in 15 years. It simply is about a big company trying to squeeze out a small competitor, and the merits of the case aren't close. If we were to settle - which I am sure we could, even for relatively low consideration - the next lawsuit would be right around the corner. We will have gotten out of one suit, only to wait for them to (try to) push us around again.

The Practical Lawyer (No. 3): Plan Your Damages Case Early and Often

Competition disputes get very heated very early. This paradigm normally means decisions are made without much time to think of the consequences.

As a result, it is quite common for cases to launch without the plaintiff ever having thought how it is going to recover for its alleged injury. Most business competition disputes are not about recovering a liquidated debt which is easily calculable. Rather, they are about stopping conduct deemed threatening and, if that conduct is not stopped, recovering some lost business damages.

By definition, those are difficult to calculate and amenable to wild speculation. For any attorney representing a plaintiff in non-compete litigation, it is essential to figure out what remedy his or her client is primarily seeking. If it is damages, then special care must be taken to figure out how those damages will be proven.

A couple of things to keep in mind.

(1) Projecting lost profits requires an assessment of the cost the firm would have to expend in order to obtain that profit. This means that a plaintiff must consider the incremental cost (commissions and direct selling expense) that it would incur to produce new business.

(2) Some amount of guesswork is permitted, as long as it has a rational basis. Rank speculation, such as wildly off-the-mark growth rates, will doom an entire damages presentation.

(3) Expert witnesses are likely necessary, particularly if a plaintiff seeks future lost profits. It is usually beyond the scope of fact witness testimony to establish a growth pattern in client revenue, derive an appropriate terminal period, and introduce evidence of an acceptable discount rate. Incompetent evidence on any lost profits variable may ruin any chance of recovery.

(4) Finding an expert who knows the industry is essential.

(5) Clients should be prepared to disclose more information than they're comfortable with. To recover for lost profits means a client will need to allow an expert unfettered access to sensitive business records, and the defense will generally be entitled to see whatever business documents the plaintiff's expert reviews.

(6) Researching the jurisdiction's lost profits case law is essential. Not every jurisdiction has the same types of rules. It also may be helpful to review trends and patterns in cases that go bad and those that turn out well for the plaintiff. An attorney who spends a little time up front sifting through damages opinions may find expert witnesses whose testimony has stood up to appellate review and whose theories have been accepted by judges and juries. There is no substitute for preparation.

Recent Decisions of Interest (No. 6)

This week's Recent Decisions highlights a jury verdict in Arkansas arising out of the sale of an accounting practice. In Creed Spann v. Lovett & Co., 2012 Ark. App. LEXIS 192 (Ct. App. Feb. 1, 2012), the Court of Appeals of Arkansas affirmed a verdict where the purchaser of an accounting firm's client list received $434,777 in lost profits after the seller worked with certain restricted clients following the sale.

The decision does not necessarily break any new ground, but it does highlight a couple of important realities clients need to consider when pursuing or defending non-compete suits.

First, the plaintiff - the acquiring firm - retained a lost profits expert to show the amount of damages which would have been realized had the defendant - the selling firm - not worked with restricted clients. The jury accepted the expert's estimation of damages down to the dollar. It did not appear that the defendants put forth a rebuttal expert, suggesting that the expert witness was highly persuasive to the jury. Because damages are so difficult to prove when they are non-liquidated - such as a projection of lost income - experts are essential to a plaintiff's case. Without one, it is highly likely that a court will be left without a basis to award recoverable damages even in the event of breach.

Second, the plaintiff's legal fees in the case totaled over $250,000, an amount it recovered under Arkansas' prevailing party statute. Compared with the verdict award, the amount of fees incurred is relatively high. However, it was far from unreasonable. Competition disputes cost a lot of money, particularly when discovery focuses on triaging the issue of breach, identifying lost clients, and examining what the defendants did with those clients. Preparing for and presenting experts is costly, as well. The opportunity to resolve a case usually is lost once counsel incurs a substantial amount of these fees. Therefore, the best time to explore a business resolution outside of court is right after the issues have been framed in the suit and before discovery begins.

The Reading List (No. 6)

I'm sick of bad lawyers.

And I'm sick of bad lawyers filing bad lawsuits. Unfortunately, in my area of the legal world - trade secrets and non-compete law - this happens all the time. Lawyers who act as mere shills for their irrational clients. Lawyers abusing the legal process to achieve some ulterior purpose - usually to force a competitor to do something it otherwise would not have to do. Lawyers talking clients into a suit because there is too little legitimate legal work out there, and, well you know, billable hours need to come from somewhere.

It's all very aggravating, and the system has to change. I'm all for civility, but if lawyers abuse the legal system, they need to pay - literally and figuratively.

The sum total of today's Reading List is all of one, a great piece by Matthew Prewitt of Schiff Hardin discussing bad faith fee-shifting liability under the Uniform Trade Secrets Act. Mr. Prewitt outlines some excellent practical, and legal, considerations for clients and lawyers to think about. This should be required reading for any competition lawyer.

The basic problem is pretty simple. Competition law is not easy to figure out, particularly if you don't practice it with some regularity. It moves quick, which leads to inept and poorly planned decisions. And it's emotional, meaning a client can try and mulct a claim out of nothing, which might actually sound convincing on paper. Finally, it's expensive, which leads to parties getting themselves into intractable positions early, with no face-saving way out.

None of this is an excuse; rather, it's an explanation. A lawyer's failure to understand a case is no excuse, and he or she has the obligation to cut and run even if the client doesn't see it the same way. It's rare that actually happens, however. Until there is some meaningful, readily ascertainable remedy for crummy lawyering in this area of the law, the system will continue to allow parties to get away with using the legal purpose not to right a wrong, but to gain a foothold in the market. Not. Cool.