For the most part, I am deferring extended discussion of the proposed new trade secrets law to my (friendly) competitors, John Marsh of Hahn Loeser and Robert Milligan/Josh Salinas of Seyfarth Shaw. Their posts are excellent and insightful, as usual.
In short, the Private Right of Action Against Theft of Trade Secrets Act (PRATSA) creates a federal civil cause of action for trade secrets misappropriation, something commentators have debated for years. So, too, by the way, did the Fairly Competing hosts - John Marsh, Russell Beck, and me - several weeks back!
As John described in his post, PRATSA is a companion law to Aaron's Law - legislation that would narrow the reach of the Computer Fraud and Abuse Act and eliminate its application to garden-variety misappropriation claims in the workplace. John aptly describes PRATSA and Aaron's Law as a trade-off in that PRATSA expands the potential remedies for trade secrets theft, while Aaron's Law limits the CFAA to traditional forms of computer hacking.
In its current form, PRATSA is styled as an amendment to the Economic Espionage Act, which is in Title 18 of the United States Code dealing with crimes and criminal procedure. And - much like the CFAA (also housed in Title 18) - it would graft onto the statute a civil remedy. The problem, in my opinion, is something known as the rule of lenity.
The rule of lenity is fairly simple in concept: in construing a criminal statute, a court must interpret any ambiguity in favor of the defendant. In CFAA cases, many courts have applied the rule of lenity to narrow the reach of the statute and limit the types of activity that exceed authorized access to a protected computer under the statute. Put simply, the rule of lenity is a thorn in a CFAA plaintiff's side because a defendant simply can rely on a time-honored rule of construction to argue for a narrow interpretation. That argument has worked very well.
The same problem potentially exists with PRATSA.
As Robert and Josh identify in their discussion, the bill does not address many substantive issues - such as damage remedies and fee-shifting. Without further amendments (which seems unlikely), a defendant could argue that common remedies available under state trade secrets law (such as royalty damages) are not available under the rule of lenity. That may discourage plaintiffs from using PRATSA, since it would not displace state civil trade secrets laws.
If PRATSA were to move forward through committee, it seems inevitable that some of the deficiencies would be addressed.
Monday, July 15, 2013
Tuesday, July 9, 2013
We've Been Down This Road Before: More on Fifield
Many thanks to all the readers who've e-mailed me or posted links to my "dissenting opinion" in Fifield v. Premier Dealer Services. I'd like all of you to know I'm in the process of recovering. Your words of support and encouragement have been, well, overwhelming.
But I'm not done yet.
I have more to say. It's part of my healing.
This is not the first time the Appellate Court has gone off the tracks on non-compete law.
It's the third.
I've written so many times about the first - the Appellate Court's wholly-created, now-defunct legitimate business interest test, and the ensuing Reliable Fire opinion - that I won't repeat it here.
The second deserves more discussion.
The Ancillarity Problem
The Fifield opinion (and I use that term in the most liberal sense) reminds me of an open wound that festered in the 1990s. For a few years, the Appellate Courts disagreed over what became known as the "ancillarity" doctrine.
In essence, the problem was this:
Courts split over this question.
One case (Creative Entertainment v. Lorenz) favored a more narrow approach as to enforceability and held that the covenant not to compete must be contained within some broader form of an employment contract. That is to say, the contract had to contain additional terms like the period of employment, termination conditions, and rate of pay.
Importantly, Creative Entertainment appeared to suggest (if not outright state) that covenants for at-will employees were "naked agreements," since there was no promise of a definite term of employment exchanged for the restrictive covenant. That, in essence, is the concern underlying Fifield. What, truly, does an employee receive in exchange for giving up some right to compete in the future?
Creative Entertainment, the step-father to Fifield, had a shorter shelf life than most reality TV shows.
It took less than a year for another district of the Appellate Court of Illinois to disgree with Creative Entertainment. That district (which perhaps not coincidentally tried to eliminate the legitimate business interest test a few years ago) liberalized the ancillarity requirement. It held, in Abel v. Fox, that the restrictive covenant need only be ancillary to a valid relationship, not an employment contract. It specifically examined the Restatement of Contracts to conclude that Creative Entertainment was too rigid in its analytical framework. Put another way, an at-will relationship was "valid" for purposes of determining ancillarity. It never stated, or suggested, that an employer must continue employment for a period of time to validate the covenant.
The more liberal ancillarity approach took hold quickly. Creative Entertainment was effectively reversed just a few years later. The case is, and has been, a total afterthought. No lawyer in Illinois discusses ancillarity anymore. It's just widely assumed - rightly so - that the employment relationship itself solves the problem.
The Continued Employment Redux
All this sort of begs the question: Doesn't the rejection of the conservative ancillarity doctrine from Creative Entertainment undermine the consideration problem now identified in Fifield?
More particularly, doesn't it illustrate precisely why the continued employment rule should be confined to "afterthought" covenants - that is, those signed after the relationship started?
In these afterthought covenant cases, it is entirely proper to examine the issue of consideration and whether continued employment suffices. In my view, it is appropriate to find consideration lacking when: (a) the employer terminates the relationship without cause, and (b) the continued employment, considering the totality of the circumstances, was insubstantial. (Although I'm opposed to the arbitrary "two-year" rule Fifield endorses, in the larger scheme of things, it's not a total abomination.)
When assessing covenants signed at the start of the relationship (the Fifield problem), the ancillarity and consideration inquiries collapse into one.
The Final Question - Part 1
This leads to the penultimate problem: What happens if the employee signs the covenant at the start of the relationship but the employer terminates the relationship within a short amount of time?
This is clearly the Fifield problem simplified. I've written about this before, too. There are multiple ways to deal with this issue, which I believe in practice arises very infrequently.
First, courts can remedy this problem through the affirmative defenses of unclean hands or unconscionability. Little more need be said. They're good defenses.
Second, the court can and should consider under the Reliable Fire test the totality of the circumstances before enforcing the covenant. That test requires courts to determine the hardship to the employee that may result from enforcement. Certainly, an involuntary termination bears on the question of hardship.
Third, courts could create a rebuttal presumption against enforcement in the context of involuntary discharge, to be overcome by a showing of need under a clear and convincing evidence standard of proof. This would serve a proper balance between the typical discharge case (no enforcement needed) and one that isn't subject to categorical rules (a pretty rare case).
The Final Question - Part 2
Now, to conclude. The issue of voluntary resignation and consideration.
Right now, courts in Illinois appear not to distinguish the enforceability of covenants for employees who quit and those who get fired. In my view, this is a mistake.
For an at-will employee who signs a non-compete, and then leaves, this is not a consideration problem. The employer hasn't removed the consideration - the employment itself - in this scenario. Any mitigating circumstances from the employee's perspective are best addressed through an overall reasonableness analysis, which Reliable Fire expressly endorses.
Put simply, an employee who leaves always has the ability to argue enforceability. It is inconsistent with past precedent - both Reliable Fire itself and the ancillarity cases - to find that an at-will employee has a two-year option to revoke his or her non-compete unilaterally.
But I'm not done yet.
I have more to say. It's part of my healing.
This is not the first time the Appellate Court has gone off the tracks on non-compete law.
It's the third.
I've written so many times about the first - the Appellate Court's wholly-created, now-defunct legitimate business interest test, and the ensuing Reliable Fire opinion - that I won't repeat it here.The second deserves more discussion.
The Ancillarity Problem
The Fifield opinion (and I use that term in the most liberal sense) reminds me of an open wound that festered in the 1990s. For a few years, the Appellate Courts disagreed over what became known as the "ancillarity" doctrine.
In essence, the problem was this:
Must a non-compete covenant for at-will employees be ancillary to an actual employment contract, or just the relationship itself?
Courts split over this question.
One case (Creative Entertainment v. Lorenz) favored a more narrow approach as to enforceability and held that the covenant not to compete must be contained within some broader form of an employment contract. That is to say, the contract had to contain additional terms like the period of employment, termination conditions, and rate of pay.
Importantly, Creative Entertainment appeared to suggest (if not outright state) that covenants for at-will employees were "naked agreements," since there was no promise of a definite term of employment exchanged for the restrictive covenant. That, in essence, is the concern underlying Fifield. What, truly, does an employee receive in exchange for giving up some right to compete in the future?
Creative Entertainment, the step-father to Fifield, had a shorter shelf life than most reality TV shows.
It took less than a year for another district of the Appellate Court of Illinois to disgree with Creative Entertainment. That district (which perhaps not coincidentally tried to eliminate the legitimate business interest test a few years ago) liberalized the ancillarity requirement. It held, in Abel v. Fox, that the restrictive covenant need only be ancillary to a valid relationship, not an employment contract. It specifically examined the Restatement of Contracts to conclude that Creative Entertainment was too rigid in its analytical framework. Put another way, an at-will relationship was "valid" for purposes of determining ancillarity. It never stated, or suggested, that an employer must continue employment for a period of time to validate the covenant.
The more liberal ancillarity approach took hold quickly. Creative Entertainment was effectively reversed just a few years later. The case is, and has been, a total afterthought. No lawyer in Illinois discusses ancillarity anymore. It's just widely assumed - rightly so - that the employment relationship itself solves the problem.
The Continued Employment Redux
All this sort of begs the question: Doesn't the rejection of the conservative ancillarity doctrine from Creative Entertainment undermine the consideration problem now identified in Fifield?
More particularly, doesn't it illustrate precisely why the continued employment rule should be confined to "afterthought" covenants - that is, those signed after the relationship started?
In these afterthought covenant cases, it is entirely proper to examine the issue of consideration and whether continued employment suffices. In my view, it is appropriate to find consideration lacking when: (a) the employer terminates the relationship without cause, and (b) the continued employment, considering the totality of the circumstances, was insubstantial. (Although I'm opposed to the arbitrary "two-year" rule Fifield endorses, in the larger scheme of things, it's not a total abomination.)
When assessing covenants signed at the start of the relationship (the Fifield problem), the ancillarity and consideration inquiries collapse into one.
The Final Question - Part 1
This leads to the penultimate problem: What happens if the employee signs the covenant at the start of the relationship but the employer terminates the relationship within a short amount of time?
This is clearly the Fifield problem simplified. I've written about this before, too. There are multiple ways to deal with this issue, which I believe in practice arises very infrequently.
First, courts can remedy this problem through the affirmative defenses of unclean hands or unconscionability. Little more need be said. They're good defenses.
Second, the court can and should consider under the Reliable Fire test the totality of the circumstances before enforcing the covenant. That test requires courts to determine the hardship to the employee that may result from enforcement. Certainly, an involuntary termination bears on the question of hardship.
Third, courts could create a rebuttal presumption against enforcement in the context of involuntary discharge, to be overcome by a showing of need under a clear and convincing evidence standard of proof. This would serve a proper balance between the typical discharge case (no enforcement needed) and one that isn't subject to categorical rules (a pretty rare case).
The Final Question - Part 2
Now, to conclude. The issue of voluntary resignation and consideration.
Right now, courts in Illinois appear not to distinguish the enforceability of covenants for employees who quit and those who get fired. In my view, this is a mistake.
For an at-will employee who signs a non-compete, and then leaves, this is not a consideration problem. The employer hasn't removed the consideration - the employment itself - in this scenario. Any mitigating circumstances from the employee's perspective are best addressed through an overall reasonableness analysis, which Reliable Fire expressly endorses.
Put simply, an employee who leaves always has the ability to argue enforceability. It is inconsistent with past precedent - both Reliable Fire itself and the ancillarity cases - to find that an at-will employee has a two-year option to revoke his or her non-compete unilaterally.
Tuesday, July 2, 2013
The Fourth Justice: My Dissenting Opinion in Fifield v. Premier Dealer Services
Although many commentators are discussing the Appellate Court of Illinois' opinion in Fifield v. Premier Dealer Services, Inc., you may not realize that I sat in on that case as the fourth justice. Unfortunately, my colleagues on the Court forgot to include my dissenting opinion.
So, I figured this blog was as good a place as any to fix that mistake.
"Justice Vanko, dissenting, throwing things in chambers, drinking an Old Fashioned, and about ready to lose his mind:
I dissent. A lot.
In today's ruling, the Court decides in the blink of an eye to rewrite the law of non-compete agreements for at-will employees. Perhaps this is a job the Supreme Court of Illinois wishes, one day, to undertake. Perhaps our General Assembly - if they can put this pension nonsense behind us - will see fit to change the law. But it decidedly is not the function of an intermediate appellate court to work such a fundamental change in the law without so much as a whisper of reasoned analysis.
The Court holds (at paragraphs 13-17) that "continued employment" constitutes sufficient consideration for a restrictive covenant as long as it lasts for two years or more. Fine. But, the Court then ignores decades of case law and sheer common sense. It lumps together this continued employment rationale in two vastly different contexts: (a) a covenant signed at the start of an employment relationship, and (b) a covenant entered into after the relationship begins (commonly known as an "afterthought" covenant).
No Illinois court has merged the analysis of continued employment like the majority does today. In the case of Diederich Ins. Agency, LLC v. Smith (Fifth District), the employee signed a non-compete roughly six months after the beginning of his employment. The same holds true with Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc. (Second District), in which the employee signed an afterthought covenant not to compete 18 months after starting his job. Finally, Brown and Brown, Inc. v. Mudron (Third District) confronted a situation where "existing employees were required to sign an employment agreement" with a corporate successor.
I have just summarized all the relevant precedents the Court cites. Shorthand: N/A. To equate these cases with this one borders on lunacy. For some reason, the Court neglects to point out that the dozen or so decisions of this Court discussing and applying the continued employment doctrine all arise in the context of afterthought covenants. #NotASurprise. #Uncontroversial.
Recognizing its precedent gap, the Court pivots to a district court decision in Bires v. WalTom, LLC, which is not binding on this Court. To support its ruling, Bires relies on dicta from Curtis 1000, Inc. v. Suess. In Curtis 1000, Judge Posner was concerned with the adequacy of consideration when the employer - not the employee - obtained a restrictive covenant and then elected to terminate the employment relationship. Such a fact-pattern elicits notions of bad faith, fraud, lack of mutuality, unconscionability, and a host of other legal terms that only a lawyer could love. Nothing in that case suggests Judge Posner would have applied the continued employment doctrine to a fact-pattern in which the employee was the one who elected to end the relationship.
To recap, mathematically speaking:
The majority (which curiously never mentions or rebuts my dissent...#Waiver #Estoppel) fails to discuss why we should treat covenants signed at the start of employment differently than those afterthought covenants which pose special problems.
It has to do with the idea of reasonable expectations.
Suppose Fifield here signed on with Premier Dealer Services and had the expectation he would not be bound to any kind of a non-compete. That may have been an important factor in his decision to begin the relationship. He might have foresaken other equivalent opportunities. And over time, his status as a free-agent begins to cement. If his employer foists upon him a non-compete after years of hardened expectations, then it makes some sense for the law to step in and inquire as to the true consideration provided for that non-compete.
It's not the same case if Fifield walks into the relationship with Premier Dealer Services knowing full well he has to sign the non-compete to take the job in the first place. For starters, he isn't tricked. Both sides have put their cards on the table. He can try to negotiate the terms (which Fifield did here!). And he's in a better position to evaluate other opportunities before agreeing to be bound to the contract.
Yet, we find ourselves in a landscape where the Court finds the parties' reasonable expectations don't matter. Over the past several years, the continued employment doctrine has evolved from its historical roots. It originally was intended to eliminate an employer's chicanery into tricking an employee into signing a restrictive agreement, only to discharge him or her shortly thereafter. Our appellate courts then applied the doctrine regardless of which party - employer or employee - ended the relationship. That wasn't very smart. Now, we've extended it to all employees who are terminable at-will (that is, about 95 percent of private sector workers). That really wasn't very smart. And to put the cherry on top of this sundae, we've somehow spirited up a bright-line where the continued employment must last at least two years. That's just flat-out making stuff up. Welcome to the vortex of judicial activism and arbitrary rules!
So we've succeeded in giving employees a two-year option in which they can decide whether to breach a covenant not to compete or solicit customers. Terrific. Talk about creating uncertainty. This decision comes at great social cost. For starters, it will reduce companies' incentives to train younger workers and give them access to clients. It almost begs employers to limit their access to company secrets (particularly in that heart-stopping period right before an employee's two-year option window is about to close). This can only lead to declining productivity, and with where India and China are at in that regard, God help us.
Beyond that, we've screwed the lawyers. For years, they've operated under the assumption the continued employment doctrine applied to afterthought covenants only. Now, they'll have to start calling their clients and tell them we've subtly shifted the law on them. Why doesn't anyone care about lawyers? I don't get this.
Perhaps I'm being too naive. The lawyers will find creative ways around today's ruling. They'll write non-compete agreements so that something else provides consideration beyond the inception of employment itself. Imagine all the self-serving consideration paragraphs we now have to analyze. So I guess consideration could be a signing bonus of $2,500 (which surely will be deducted from the employee's other forms of compensation), eligibility to receive a year-end bonus, or access to company confidential information. One lawyer already has suggested sufficient consideration might come from making the covenant inoperable in the event of a termination without cause. Desperation is the mother of all invention!
In sifting through this precedential mess and trying to make sense of where we're at now, I am reminded of a quote from one of the great American movies of my lifetime - Billy Madison - which somehow seems fitting here:
I beg the lawyers for Premier Dealer Services to petition for rehearing on this issue. Or appeal to the Supreme Court of Illinois. I need a drink."
And here's the actual Opinion.
So, I figured this blog was as good a place as any to fix that mistake.
"Justice Vanko, dissenting, throwing things in chambers, drinking an Old Fashioned, and about ready to lose his mind:
I dissent. A lot.
In today's ruling, the Court decides in the blink of an eye to rewrite the law of non-compete agreements for at-will employees. Perhaps this is a job the Supreme Court of Illinois wishes, one day, to undertake. Perhaps our General Assembly - if they can put this pension nonsense behind us - will see fit to change the law. But it decidedly is not the function of an intermediate appellate court to work such a fundamental change in the law without so much as a whisper of reasoned analysis.
The Court holds (at paragraphs 13-17) that "continued employment" constitutes sufficient consideration for a restrictive covenant as long as it lasts for two years or more. Fine. But, the Court then ignores decades of case law and sheer common sense. It lumps together this continued employment rationale in two vastly different contexts: (a) a covenant signed at the start of an employment relationship, and (b) a covenant entered into after the relationship begins (commonly known as an "afterthought" covenant).
No Illinois court has merged the analysis of continued employment like the majority does today. In the case of Diederich Ins. Agency, LLC v. Smith (Fifth District), the employee signed a non-compete roughly six months after the beginning of his employment. The same holds true with Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc. (Second District), in which the employee signed an afterthought covenant not to compete 18 months after starting his job. Finally, Brown and Brown, Inc. v. Mudron (Third District) confronted a situation where "existing employees were required to sign an employment agreement" with a corporate successor.
I have just summarized all the relevant precedents the Court cites. Shorthand: N/A. To equate these cases with this one borders on lunacy. For some reason, the Court neglects to point out that the dozen or so decisions of this Court discussing and applying the continued employment doctrine all arise in the context of afterthought covenants. #NotASurprise. #Uncontroversial.
Recognizing its precedent gap, the Court pivots to a district court decision in Bires v. WalTom, LLC, which is not binding on this Court. To support its ruling, Bires relies on dicta from Curtis 1000, Inc. v. Suess. In Curtis 1000, Judge Posner was concerned with the adequacy of consideration when the employer - not the employee - obtained a restrictive covenant and then elected to terminate the employment relationship. Such a fact-pattern elicits notions of bad faith, fraud, lack of mutuality, unconscionability, and a host of other legal terms that only a lawyer could love. Nothing in that case suggests Judge Posner would have applied the continued employment doctrine to a fact-pattern in which the employee was the one who elected to end the relationship.
To recap, mathematically speaking:
(district court case X 1) + (dicta in Seventh Circuit case X 1) ≠ (consistent decisions of this court on continued employment doctrine X approximately 19) + (common sense X infinity)
The majority (which curiously never mentions or rebuts my dissent...#Waiver #Estoppel) fails to discuss why we should treat covenants signed at the start of employment differently than those afterthought covenants which pose special problems.
It has to do with the idea of reasonable expectations.
Suppose Fifield here signed on with Premier Dealer Services and had the expectation he would not be bound to any kind of a non-compete. That may have been an important factor in his decision to begin the relationship. He might have foresaken other equivalent opportunities. And over time, his status as a free-agent begins to cement. If his employer foists upon him a non-compete after years of hardened expectations, then it makes some sense for the law to step in and inquire as to the true consideration provided for that non-compete.
It's not the same case if Fifield walks into the relationship with Premier Dealer Services knowing full well he has to sign the non-compete to take the job in the first place. For starters, he isn't tricked. Both sides have put their cards on the table. He can try to negotiate the terms (which Fifield did here!). And he's in a better position to evaluate other opportunities before agreeing to be bound to the contract.
Yet, we find ourselves in a landscape where the Court finds the parties' reasonable expectations don't matter. Over the past several years, the continued employment doctrine has evolved from its historical roots. It originally was intended to eliminate an employer's chicanery into tricking an employee into signing a restrictive agreement, only to discharge him or her shortly thereafter. Our appellate courts then applied the doctrine regardless of which party - employer or employee - ended the relationship. That wasn't very smart. Now, we've extended it to all employees who are terminable at-will (that is, about 95 percent of private sector workers). That really wasn't very smart. And to put the cherry on top of this sundae, we've somehow spirited up a bright-line where the continued employment must last at least two years. That's just flat-out making stuff up. Welcome to the vortex of judicial activism and arbitrary rules!
So we've succeeded in giving employees a two-year option in which they can decide whether to breach a covenant not to compete or solicit customers. Terrific. Talk about creating uncertainty. This decision comes at great social cost. For starters, it will reduce companies' incentives to train younger workers and give them access to clients. It almost begs employers to limit their access to company secrets (particularly in that heart-stopping period right before an employee's two-year option window is about to close). This can only lead to declining productivity, and with where India and China are at in that regard, God help us.
Beyond that, we've screwed the lawyers. For years, they've operated under the assumption the continued employment doctrine applied to afterthought covenants only. Now, they'll have to start calling their clients and tell them we've subtly shifted the law on them. Why doesn't anyone care about lawyers? I don't get this.
Perhaps I'm being too naive. The lawyers will find creative ways around today's ruling. They'll write non-compete agreements so that something else provides consideration beyond the inception of employment itself. Imagine all the self-serving consideration paragraphs we now have to analyze. So I guess consideration could be a signing bonus of $2,500 (which surely will be deducted from the employee's other forms of compensation), eligibility to receive a year-end bonus, or access to company confidential information. One lawyer already has suggested sufficient consideration might come from making the covenant inoperable in the event of a termination without cause. Desperation is the mother of all invention!
In sifting through this precedential mess and trying to make sense of where we're at now, I am reminded of a quote from one of the great American movies of my lifetime - Billy Madison - which somehow seems fitting here:
Mr. Madison, what you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.
I would hold simply this: The continued employment doctrine only applies in the event of a covenant not to compete signed after the start of employment. And in all cases, the Court must consider the totality of the circumstances to determine whether continued employment provides sufficient consideration for an afterthought covenant, consistent with the general principles in Reliable Fire Equipment v. Arredondo. #CommonSense #JudicialRockStar #PragmatistI beg the lawyers for Premier Dealer Services to petition for rehearing on this issue. Or appeal to the Supreme Court of Illinois. I need a drink."
And here's the actual Opinion.
Friday, June 28, 2013
Face It: Judges Sometimes Hate Competition Cases
Believe it.
One exceedingly difficult message to convey to clients is this: A judge may not view your case as importantly as you do.
In my personal view, judges should be agnostic to subject-matter. That is, he or she should (in a perfect world) treat each case with equal importance. This may mean some disputes are simple or straightforward, in which case a decision should be fairly easy to reach. But a judge's subjective view as to a type of case should not influence his or her choice of outcomes (or more accurately, his or her relative time spent thinking about the case).
In the world of non-compete and trade secrets disputes, judges often don't like these disputes.
There are a couple of reasons.
First, they usually are teed-up on an emergency basis, clogging already full judicial calendars.
Second, they smack of the ordinary rough-and-tumble of economic life, where battles should be fought in the board rooms.
And third, theyalmost always sometimes sound like a bunch of old people fighting over canasta points.
There's a couple of recent examples where you can get a glimpse of how judges quickly tire of non-compete litigation.
The first comes from Ohio in the case of Lawyers Title Company v. Kingdom Title Solutions. The case involved apparent pre-termination competition by a couple of ex-Lawyers Title employees. Proceeding to a jury trial and after an extensive trial court record, Lawyers Title obtained a judgment for (hold your breath) $13,000 in damages. On post-trial proceedings, the district judge - barely - upheld the verdict on the proof of damages, noting:
"...it is impossible to know why [the former customers] took their business elsewhere. But Lawyers did not call its former customers to testify, probably because none of them would ever do business with Lawyers again after being dragged into this silly litigation."
In all fairness to Lawyers, it may have felt compelled to pursue its claims against former employees who (it appears) diverted clients pre-termination. Folding the tent would send a terrible signal for the next slate of employees who may contemplate a move. In that sense, the litigation surely was not "silly." But pursuing litigation with little to no damages is sure to draw the ire of a busy district judge.
The second case, Patch Rubber Co. v. Toelke, originates from North Carolina. There, District Judge Boyle denied a preliminary injunction to enforce a non-compete against a former plant manager. The problem: a ridiculously overbroad agreement that went way beyond protecting a legitimate business interest. In North Carolina, courts cannot modify overbroad agreements, so it is fairly common to see bad contracts chucked out the door early in a case.
And the judge's displeasure at the contract may have colored his view on the remainder of the case. In the face of evidence the employee downloaded "several documents containing a strategic plan...and customer cost and formula information," the court discounted the evidence entirely. It simply found the plaintiff didn't really show how the information was confidential or trade secret material.
This is not to absolve the plaintiff. It very well may have failed to convince the judge. But often times evidence of downloading at least leads to some partial relief, such as a limited injunction to protect against disclosure or use of the downloaded material.
But it's hard not to read the case and conclude that by the time the court got around to analyzing the trade secrets component, he was aggravated by the non-compete.
For employers, it's essential to consider how a generalist judge is going to view a case. The judge will want to know what relief the company will seek and whether there is a real dispute in need of an objective decision maker. It is a stark reality that many judges feel a great majority of competition cases could have been resolved easily before litigation.
One exceedingly difficult message to convey to clients is this: A judge may not view your case as importantly as you do.
In my personal view, judges should be agnostic to subject-matter. That is, he or she should (in a perfect world) treat each case with equal importance. This may mean some disputes are simple or straightforward, in which case a decision should be fairly easy to reach. But a judge's subjective view as to a type of case should not influence his or her choice of outcomes (or more accurately, his or her relative time spent thinking about the case).
In the world of non-compete and trade secrets disputes, judges often don't like these disputes.
There are a couple of reasons.
First, they usually are teed-up on an emergency basis, clogging already full judicial calendars.
Second, they smack of the ordinary rough-and-tumble of economic life, where battles should be fought in the board rooms.
And third, they
There's a couple of recent examples where you can get a glimpse of how judges quickly tire of non-compete litigation.
The first comes from Ohio in the case of Lawyers Title Company v. Kingdom Title Solutions. The case involved apparent pre-termination competition by a couple of ex-Lawyers Title employees. Proceeding to a jury trial and after an extensive trial court record, Lawyers Title obtained a judgment for (hold your breath) $13,000 in damages. On post-trial proceedings, the district judge - barely - upheld the verdict on the proof of damages, noting:
"...it is impossible to know why [the former customers] took their business elsewhere. But Lawyers did not call its former customers to testify, probably because none of them would ever do business with Lawyers again after being dragged into this silly litigation."
In all fairness to Lawyers, it may have felt compelled to pursue its claims against former employees who (it appears) diverted clients pre-termination. Folding the tent would send a terrible signal for the next slate of employees who may contemplate a move. In that sense, the litigation surely was not "silly." But pursuing litigation with little to no damages is sure to draw the ire of a busy district judge.
The second case, Patch Rubber Co. v. Toelke, originates from North Carolina. There, District Judge Boyle denied a preliminary injunction to enforce a non-compete against a former plant manager. The problem: a ridiculously overbroad agreement that went way beyond protecting a legitimate business interest. In North Carolina, courts cannot modify overbroad agreements, so it is fairly common to see bad contracts chucked out the door early in a case.
And the judge's displeasure at the contract may have colored his view on the remainder of the case. In the face of evidence the employee downloaded "several documents containing a strategic plan...and customer cost and formula information," the court discounted the evidence entirely. It simply found the plaintiff didn't really show how the information was confidential or trade secret material.
This is not to absolve the plaintiff. It very well may have failed to convince the judge. But often times evidence of downloading at least leads to some partial relief, such as a limited injunction to protect against disclosure or use of the downloaded material.
But it's hard not to read the case and conclude that by the time the court got around to analyzing the trade secrets component, he was aggravated by the non-compete.
For employers, it's essential to consider how a generalist judge is going to view a case. The judge will want to know what relief the company will seek and whether there is a real dispute in need of an objective decision maker. It is a stark reality that many judges feel a great majority of competition cases could have been resolved easily before litigation.
Monday, June 24, 2013
Episode 11 of Fairly Competing: Trade Secrets Back to Basics, Part 2
Episode 11 of the Fairly Competing podcast is now available for listeners and subscribers.
Listen to this episode
In this episode, John Marsh, Russell Beck, and I conduct the second part of our trade secrets boot camp.
In this podcast, we identify commonly used security measures businesses implement to protect trade secret information. We examine security steps companies should take at the time key employees join the organization, as well as those exit interview steps that lead to the better protection of confidential business information. Finally, John, Russell, and I discuss the perils of "bring your own device" policies that companies utilize, which may impact the ability to protect trade secrets adequately.
Listen to the podcast by clicking on the link below, visiting the official podcast website, or subscribing to Fairly Competing on iTunes.
Tuesday, June 18, 2013
Doc Rivers' Non-Compete Agreement
By the time you read this blog post, it's like to be outdated. Such is the fast-paced world of professional sports, and the insane coaching carousel we see every year (but particularly this year in the National Basketball Association).
This past week, the NBA world - which should be focusing on the Heat-Spurs final - has been distracted by the possibility of Doc Rivers leaving the Boston Celtics for the Los Angeles Clippers. The rub is that Rivers, the game's highest paid coach, has three years and $21 million remaining on his Celtics' agreement.
So how, and under what terms, can Rivers leave if he is bound by a current agreement? There are a few different angles to explore on this.
First, in the NBA, a standard coaching contract provides for a means by which teams can negotiate compensation to let coaches leave and jump ship from one team to another before the contract expires. In Rivers' case, his agreement is not standard. He has a separate clause that prohibits his employment as a head coach by another organization before the end of his contract term. The significance is that the Celtics' top brass simply could invoke the non-compete, rather than negotiate under the standard contract clause for suitable compensation to let him leave for another team. Obviously, this creates leverage for management, which is a by-product of the above-market compensation Rivers received a few years ago.
Second, the incentives in the coaching world strongly favor negotiated transactions to release coaches from their contracts. If a coach makes it publicly known that he's considering leaving, then recruiting (either via free-agency or - in the case of college coaches - from high school players) will suffer. And team chemistry may be shot. Therefore, a team - faced with a disgruntled coach and a looming PR disaster - needs to think about an appropriate business resolution, not enforcing agreements.
Third, the supply of potential competent coaches vastly exceeds the number of available openings. There's a new school of thought, based largely on statistics, which demonstrates that coaches don't influence game outcomes as previously thought. If that's the case, then owners and management can use coaches as mere assets on a balance sheet - to gain even some minimal compensation to waive a contract term and allow a coach to leave if another team genuinely wants that coach. In pro sports, this compensation usually takes the form of draft picks or actual players. In college, it's generally a buy-out of the contract by the hiring university. Economists and other experts likely will debate for years to come the intrinsic value of coaches, but everyone would agree that finding a replacement for most coaches generally is pretty easy.
Recall, too, that coaching obligations generally are in-term, not post-term, restraints. It is not, to my knowledge, illegal to sign a coach to a contract that contains a garden-variety post-termination restrictive covenant (although this may be an interesting question for any institution or franchise in California, Oklahoma, and North Dakota). But no one does it.
Why is that?
For starters, no team or university is likely to set a standard that makes it difficult to attract a top-flight coach. Even though economists may feel as though coaches' ability to influence outcomes is overstated, institutions always want to be viewed as an attractive destination. Put another way, an industry standard has developed that by and large discourages any organization from requiring a post-termination non-compete.
On a related point, coaches sign contracts that guarantee them compensation for a term of years. Most employees are at-will, meaning they can resign at any time and are perpetual free agents. An in-term non-compete for an employee like Rivers limits his ability to leave for another team, and the Boston Celtics have the exclusive right to his unique services for a period of years. Both sides get an obvious tangible benefit. This level playing field simply is not a paradigm most employees are familiar with.
The one high-profile post-termination non-compete exception I have seen in recent years involved Billy Donovan. Donovan, the current University of Florida basketball coach, agreed in principle to leave and join the Orlando Magic after winning two national titles with the Gators. He soon backed out of the deal to which he committed. As part of a settlement, the Magic released Donovan from his coaching contract and allowed him to return to UF. But Donovan agreed not to coach in the NBA for five years. Incidentally, that pact has now expired - and Donovan openly has ruminated over a potential return to the NBA.
Is anyone surprised?
This past week, the NBA world - which should be focusing on the Heat-Spurs final - has been distracted by the possibility of Doc Rivers leaving the Boston Celtics for the Los Angeles Clippers. The rub is that Rivers, the game's highest paid coach, has three years and $21 million remaining on his Celtics' agreement.
So how, and under what terms, can Rivers leave if he is bound by a current agreement? There are a few different angles to explore on this.
First, in the NBA, a standard coaching contract provides for a means by which teams can negotiate compensation to let coaches leave and jump ship from one team to another before the contract expires. In Rivers' case, his agreement is not standard. He has a separate clause that prohibits his employment as a head coach by another organization before the end of his contract term. The significance is that the Celtics' top brass simply could invoke the non-compete, rather than negotiate under the standard contract clause for suitable compensation to let him leave for another team. Obviously, this creates leverage for management, which is a by-product of the above-market compensation Rivers received a few years ago.
Second, the incentives in the coaching world strongly favor negotiated transactions to release coaches from their contracts. If a coach makes it publicly known that he's considering leaving, then recruiting (either via free-agency or - in the case of college coaches - from high school players) will suffer. And team chemistry may be shot. Therefore, a team - faced with a disgruntled coach and a looming PR disaster - needs to think about an appropriate business resolution, not enforcing agreements.
Third, the supply of potential competent coaches vastly exceeds the number of available openings. There's a new school of thought, based largely on statistics, which demonstrates that coaches don't influence game outcomes as previously thought. If that's the case, then owners and management can use coaches as mere assets on a balance sheet - to gain even some minimal compensation to waive a contract term and allow a coach to leave if another team genuinely wants that coach. In pro sports, this compensation usually takes the form of draft picks or actual players. In college, it's generally a buy-out of the contract by the hiring university. Economists and other experts likely will debate for years to come the intrinsic value of coaches, but everyone would agree that finding a replacement for most coaches generally is pretty easy.
Recall, too, that coaching obligations generally are in-term, not post-term, restraints. It is not, to my knowledge, illegal to sign a coach to a contract that contains a garden-variety post-termination restrictive covenant (although this may be an interesting question for any institution or franchise in California, Oklahoma, and North Dakota). But no one does it.
Why is that?
For starters, no team or university is likely to set a standard that makes it difficult to attract a top-flight coach. Even though economists may feel as though coaches' ability to influence outcomes is overstated, institutions always want to be viewed as an attractive destination. Put another way, an industry standard has developed that by and large discourages any organization from requiring a post-termination non-compete.
On a related point, coaches sign contracts that guarantee them compensation for a term of years. Most employees are at-will, meaning they can resign at any time and are perpetual free agents. An in-term non-compete for an employee like Rivers limits his ability to leave for another team, and the Boston Celtics have the exclusive right to his unique services for a period of years. Both sides get an obvious tangible benefit. This level playing field simply is not a paradigm most employees are familiar with.
The one high-profile post-termination non-compete exception I have seen in recent years involved Billy Donovan. Donovan, the current University of Florida basketball coach, agreed in principle to leave and join the Orlando Magic after winning two national titles with the Gators. He soon backed out of the deal to which he committed. As part of a settlement, the Magic released Donovan from his coaching contract and allowed him to return to UF. But Donovan agreed not to coach in the NBA for five years. Incidentally, that pact has now expired - and Donovan openly has ruminated over a potential return to the NBA.
Is anyone surprised?
Monday, June 10, 2013
Oklahoma Legislation Impacts Employee Non-Solicitation Covenants
Hat-tip to Josh Salinas at Seyfarth Shaw for his fine analysis of new Oklahoma legislation that chips away at some prohibitions on restrictive covenants.
Oklahoma is one of three red-flag states that generally prohibit non-competition agreements. And while true non-compete arrangements are void like they are in North Dakota and California, Oklahoma statutory law allows for agreements under which an employee agrees not to solicit the sale of goods or services "from the established customers" of the employer.
Therefore, Oklahoma courts will enforce reasonable restraints that fall short of broad non-compete restrictions.
The new legislation, Senate Bill 1031, affects another type of restraint - employee non-solicitation covenants. As readers know, those types of covenants impact an employee's ability to solicit fellow employees to leave and join a competitor. They're commonly referred to as "Pied Piper" clauses and can work significant hardships on employees who are looking to build a team of sales or information technology professionals for a new company.
SB 1031, embedded below, allows for contractual covenants that prohibit an employee's ability to entice away other employees. Josh makes the point in his blog post that this new legislation may permit only clauses restricting active recruitment or enticement away of current employees. Put another way, is a clause prohibiting an employee from hiring those employees who may seek out alternative employment on their own enforceable under Oklahoma law? Josh says likely not.
I agree and think the answer is found in Inergy Propane, LLC v. Lundy. This is an Oklahoma case from 2009 where the same issue was at play, except the case involved a customer (not employee) non-solicitation covenant. As Oklahoma law has developed, a prohibition on diverting clients "where no active solicitation has occurred" runs afoul of state statutory law and is an illegal restraint on trade. I think it's likely Oklahoma courts would find that the same rationale applies to employee non-solicitation agreements, particularly since (as Josh notes) recent Oklahoma cases have frowned upon broad "no-hire" covenants.
The best argument for making the distinction is that a restraint on soliciting customers is much more likely to impact an employee's value to potential new employers and therefore limit his or her right to earn a living. The same hardly can be said for Pied Piper clauses, which shouldn't impede one individual's ability to sell his or her services on the open market.
Unfortunately, this legislative and judicial hair-splitting and word-play does no one any good. It is exceedingly difficult for an employer to determine who solicited whom. And in the absence of a mistakenly sent e-mail or a customer who is exceedingly loyal to the company, an employer is unlikely to find out except through the discovery process which party initiated the contact.
These statutes may be intended to discourage litigation, but only invite it, as they fail to create objective rules.
Oklahoma is one of three red-flag states that generally prohibit non-competition agreements. And while true non-compete arrangements are void like they are in North Dakota and California, Oklahoma statutory law allows for agreements under which an employee agrees not to solicit the sale of goods or services "from the established customers" of the employer.
Therefore, Oklahoma courts will enforce reasonable restraints that fall short of broad non-compete restrictions.
The new legislation, Senate Bill 1031, affects another type of restraint - employee non-solicitation covenants. As readers know, those types of covenants impact an employee's ability to solicit fellow employees to leave and join a competitor. They're commonly referred to as "Pied Piper" clauses and can work significant hardships on employees who are looking to build a team of sales or information technology professionals for a new company.SB 1031, embedded below, allows for contractual covenants that prohibit an employee's ability to entice away other employees. Josh makes the point in his blog post that this new legislation may permit only clauses restricting active recruitment or enticement away of current employees. Put another way, is a clause prohibiting an employee from hiring those employees who may seek out alternative employment on their own enforceable under Oklahoma law? Josh says likely not.
I agree and think the answer is found in Inergy Propane, LLC v. Lundy. This is an Oklahoma case from 2009 where the same issue was at play, except the case involved a customer (not employee) non-solicitation covenant. As Oklahoma law has developed, a prohibition on diverting clients "where no active solicitation has occurred" runs afoul of state statutory law and is an illegal restraint on trade. I think it's likely Oklahoma courts would find that the same rationale applies to employee non-solicitation agreements, particularly since (as Josh notes) recent Oklahoma cases have frowned upon broad "no-hire" covenants.
The best argument for making the distinction is that a restraint on soliciting customers is much more likely to impact an employee's value to potential new employers and therefore limit his or her right to earn a living. The same hardly can be said for Pied Piper clauses, which shouldn't impede one individual's ability to sell his or her services on the open market.
Unfortunately, this legislative and judicial hair-splitting and word-play does no one any good. It is exceedingly difficult for an employer to determine who solicited whom. And in the absence of a mistakenly sent e-mail or a customer who is exceedingly loyal to the company, an employer is unlikely to find out except through the discovery process which party initiated the contact.
These statutes may be intended to discourage litigation, but only invite it, as they fail to create objective rules.
Thursday, June 6, 2013
Episode 10 of Fairly Competing: Trade Secrets, Back to Basics Part 1
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In this episode, John Marsh, Russell Beck, and I conduct the first part of our trade secrets boot camp.
John, Russell, and I discuss particular types of trade secrets, from those commonly recognized to those that are more difficult to define and uphold in court. We also compare and contrast trade secrets with other forms of intellectual property, discuss the benefits of conducting a trade secrets audit, and talk about the differences between trade secrets and lesser protected confidential information.
Part 2 of Trade Secrets, Back to Basics focuses on security measures and will be available soon to listeners.
Part 2 of Trade Secrets, Back to Basics focuses on security measures and will be available soon to listeners.
Listen to the podcast by clicking on the link below, visiting the official podcast website, or subscribing to Fairly Competing on iTunes.
Tuesday, June 4, 2013
Deter Cyber Theft Act Would Augment Federal Policy Against Industrial Espionage
Last month, a group of bipartisan senators introduced the Deter Cyber Theft Act (S. 884, a copy of which is embedded below).This legislation follows a long series of recent developments that makes clear one thing: our Congress can actually find common ground on a public policy issue.
Federal policy is shifting towards greater recognition of trade secret rights and their collective value to American enterprise. Last year, Congress enacted the Theft of Trade Secrets Clarification Act in almost unprecedented fashion to close a loophole created by the oft-discussed (here and elsewhere) Aleynikov case.
The Obama Administration has been more active than any administration in memory at preventing industrial espionage from foreign governments and actors. It has published a comprehensive strategy to mitigate the theft of trade secrets from U.S. companies. The Administration also invited public comment on its trade secrets legislative strategy. And in 2012, Senator Chris Coons introduced the Protecting American Trade Secrets and Innovation Act. That law would have, in effect, created a federal civil cause of action for trade secrets theft.
The latest building block in this comprehensive effort at the federal level is the Deter Cyber Theft Act, which would (if enacted) require the Director of National Intelligence to create a foreign watch list, identifying countries that engage in industrial or economic espionage.
The proposed law would require the DNI to:
- Identify the types of technologies that rogue states target.
- Disclose what was being used to steal or appropriate U.S. technologies.
- Name foreign governments, and foreign companies, that were active in industrial or economic espionage.
The centerpiece of the law is the import ban. The Act would require the President to direct U.S. Customs to exclude from entry into the United States any article that incorporates misappropriated technology or "to protect the Department of Defense supply chain." Finally, the law is broad enough to extend beyond trade secrets, and expressly includes "proprietary information." Section 2(7) of the proposed legislation gives non-exhaustive examples of proprietary information that would be protected under the Act, and it's broad enough ("commercially valuable information") to encompass just about anything U.S. business or government maintains that's not generally available in the public domain - regardless of whether it meets the statutory definition of a "trade secret."
This latest legislative effort is largely in response to a series of high-profile incidents involving China. Just about every week or so, we hear a new story about a hacking incident, whether at the New York Times to track dissidents or to infiltrate the Pentagon or American businesses to appropriate industrial and defense secrets.
Senator Carl Levin, a sponsor of the bill, targeted China in his comments following introduction of the Act. And given the momentum created last year with an otherwise divided Congress, it's hard to envision much dissent over this legislation.
Friday, May 31, 2013
The Employee's First Client Meeting
I am taking a little bit of a different approach with this post, with a focus on representing employee clients in competition litigation.
When I first talk to a new client who has a legal problem involving a non-compete (or a related issue), there is much to consider in a short amount of time. The client frequently is overwhelmed. Her mind is going in many directions. He or she may never have hired an attorney before.
When this is the case, clients often want to know what to expect and how to prepare for an initial meeting.
Obviously, every attorney is different. But I think these rules generally apply (both to non-compete cases and to other types of engagements). If individual clients understand these points, they should feel more at ease before meeting with an attorney:
When I first talk to a new client who has a legal problem involving a non-compete (or a related issue), there is much to consider in a short amount of time. The client frequently is overwhelmed. Her mind is going in many directions. He or she may never have hired an attorney before.
When this is the case, clients often want to know what to expect and how to prepare for an initial meeting.
Obviously, every attorney is different. But I think these rules generally apply (both to non-compete cases and to other types of engagements). If individual clients understand these points, they should feel more at ease before meeting with an attorney:
- Have your documents ready. At the risk of stating the obvious, clients should have relevant documents available for counsel to review. These should include, at a minimum, the following: employment contracts, handbook provisions, cease and desist letters, the complaint and related court papers if a suit is on file, and the contents of any personnel file. My personal preference is to receive these before the meeting, provided the engagement letter is signed. Which leads me to Rule #2...
- Review the engagement letter. My standard practice before a meeting with a new client is to send them the engagement letter for review. I prefer to have any questions about retainers, fees, and the scope of the engagement addressed up front before the meeting, so our first meeting is focused on legal advice.
- Develop a list of questions you want answered. Clients sometimes are surprised by the direction meetings with counsel take. And it is frequently the case that they forget to ask questions that are important to them. It is worth taking the time to type out a list of questions ahead of time. I prefer the client e-mail these questions to me beforehand so I can think about how I want to answer them. The questions themselves will alert me to other issues I may need to explore. Finally, they often help guide the meeting and enable a client to feel as though they're participating actively in the meeting, rather than just being questioned. My experience is that clients - whether new or seasoned to litigation - ask very smart questions.
- Let your attorney understand the industry. Competition disputes (unlike most civil litigation) require the attorney to understand the business. This means clients need to help educate their lawyer learn about the competitive forces at work and the details of how the business operates. I am very direct in telling clients to stop using industry jargon and reduce "inside the beltway" concepts to plain English. If I represent that client, a judge will demand the same of me in court.
- Disclose all facts - good and bad. Clients need to understand that their attorney is their personal counselor and will represent them in a non-judgmental manner. Too often, clients "hide" bad facts. Lawyers are not, and shouldn't be, cheerleaders. We need to know if there are problematic documents out there or facts that may prove damaging in a lawsuit. Only then can the client receive proper advice.
- Expect follow-up. Many individual clients want all the answers at an initial meeting. Sometimes, that's not possible. Your attorney may identify an issue that needs some legal research. (Competition disputes are notorious for this.) He or she may need to understand the industry better (particularly if it's not explained well enough at the initial meeting). And it's usually better to make important decisions on litigation strategy after thinking through them for a while.
- Understand your best, worst, and most likely outcomes. A judge once told me that the best lawyers advise their clients as to these three outcomes. I agree wholeheartedly. Clients need to understand all three. If the lawyer is not giving you all three and explaining them in a concise manner, you need a new lawyer.
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