Old Georgia Law Still Invalidates Many Restrictive Covenants

When the Georgia General Assembly passed the Restrictive Covenant Act in 2009, it substantially changed the playing field between employers and employees. Under the common law, it was exceedingly difficult for employers to enforce anything but the most perfectly worded and narrowly tailored covenant. Cases repeatedly failed on the facial ambiguity or overbreadth of the covenant, leading to judicial invalidation. And the blue-pencil rule was not available to save overbroad (even slightly overbroad) contracts.


But the new Act did not become effective until 2010 and only applies to contracts entered into after November 3, 2010. A great many employees and independent contractors signed agreements well before that, and their enforceability continues to be subject to the old common law.

A recent district court summary judgment decision illustrates how strict this old common law actually is.  The case involved a dispute in the credit-card merchant processing industry. This is a rapidly growing market where companies provide merchants - often, retailers - a wide range of credit-card processing services. Those services range from simple payment processing to mobile processing to "tokenization" (a fancy way of saying that the processing company will enable merchants to store credit card data safely and securely).

The defendant was an independent contractor who marketed the processor's services to merchants for a fee. In his Independent Contractor Agreement, he agreed to two broad covenants:

(1) An in-term non-compete restriction that prohibited him, during the term of his relationship with the plaintiff, from entering into agreements to solicit merchants for the merchant-acquiring program of any bank or third-party financial institution, or from entering "into any relationship with any organization...that would effect an indirect relationship with any" organization.

(2) A 5-year, post-termination non-solicitation restriction that prevented him from calling on the plaintiff's customers, regardless of whether he had a relationship with those customers.

The district court had little trouble under Georgia common law striking down both clauses. The ruling on the non-solicitation covenant was not much of a surprise, since Georgia law (like some other states) generally does not look favorably upon non-solicitation covenants that extend to customers the employee did not serve - particularly when there is no geographic restriction. And the 5-year term was well beyond the 2-year rule Georgia courts long have advocated.

The more surprising aspect of the ruling is the fact the court struck down the in-term non-compete arrangement. It held the general rules pertaining to non-compete agreements apply, even though it did not prohibit any post-termination activity. In-term covenants rarely are litigated because in an at-will environment, employees (or, as here, independent contractors) simply terminate the relationship before leaving to compete.

The court, though, struck the non-compete and held that its activity scope was unreasonable - mainly due to the quoted, italicized language above. The court found that the prohibition on the defendant from entering "into any relationship" with a bank was ambiguous and ill-defined. In reality, it didn't appear to be as broad as the court held. Rather, it seems the clear intent of the covenant was to prohibit the defendant from entering into a similar arrangement with another credit-card processor while he was soliciting merchants for the plaintiff. The language of the non-compete which the court deemed problematic only appeared to further restrict the plaintiff from circumventing this fairly clear covenant in a more indirect manner.

Still, the ruling indicates that courts often are troubled by restrictive covenants and their impact on competition as a whole. I've written before about how judges sometimes will gloss over a contract's intent to find an ambiguity, even though it's questionable such an ambiguity exists. That seems to be what happened here as well.

Inevitable Disclosure Doctrine Inapplicable to Contract Damage Claims

As readers of this blog may know, the "inevitable disclosure" doctrine is a theory of trade secrets misappropriation.


A plaintiff need not show either actual or threatened misappropriation if it can prove that it's inevitable a defendant either will use or disclose trade secrets. In many competition cases, a plaintiff asserts an inevitable disclosure claim in tandem with breach of contract claims. For remember that most employees who join a competitor (and who are worth the expense of a lawsuit) probably have some sort of non-disclosure agreement.

This raises the issue of whether a plaintiff can use the inevitable disclosure doctrine to prove breach of contract. There are relatively few cases that seem to address the issue, although the logical answer seems to be "no." The better way to apply the inevitable disclosure doctrine is to use it as a means to seek preliminary injunctive relief, as a recent Arkansas federal district court did.

In Nanomech, Inc. v. Suresh, the court rejected the plaintiff's effort to extend the inevitable disclosure doctrine to a breach of contract claim for damages, stating:

"The doctrine has only been applied in Trade Secrets Act cases, particularly where plaintiffs have alleged the 'threatened misappropriation of trade secrets,' a discrete violation of the Act that is inherently speculative in nature."

When asserting a claim for damages, it makes little sense to use the inevitable disclosure doctrine. Damages presume that some wrong already has occurred and caused an economic loss. If disclosure of trade secrets is merely "inevitable," then it's illogical to conclude the plaintiff incurred a loss. By definition, the wrong would not have occurred. Rather, the only use for the doctrine would appear to be securing injunctive relief.

This raises a related issue. Many times a non-disclosure covenant will be written in such a way as to bar a threatened disclosure of confidential information. In this circumstance, a plaintiff - faced with imminent disclosure - probably doesn't need to wait until actual breach and can instead sue on the contract. However, it's easy enough to just allege a violation of the contract, along the lines of anticipatory breach, for pleading purposes. Too, until such time as there is an actual disclosure, a plaintiff's request for a remedy should be limited to an injunction.

Dumb Settlement Comments Can Help Establish Bad Faith in Trade Secrets Case

There's a perception that anything written in a settlement letter is privileged.

This perception is decidedly wrong.

Offers of settlement are not admissible to prove liability because we want to encourage parties to resolve their disputes out of court. If those offers were admissible, then parties would be hesitant to mediate disputes. This is a simple, common-sense rule. But that rule doesn't give a party carte blanche to say whatever it wants in a settlement letter and then hide under the cloak of privilege.

As readers of this blog know, trade secrets disputes can go horribly wrong for plaintiffs, my case of Tradesmen International v. Black from the Seventh Circuit being a recent example. But because of the overly emotional nature of competition cases, plaintiffs frequently double down when litigation goes south. It is quite common, in fact, for trade secrets plaintiffs to make outrageous settlement demands, or ridiculous statements in a settlement letter, even in the face of a significant defeat.

Those plaintiffs better be careful what they say in settlement letters, however.

If those letters contain over-the-top missives, improper threats, or even pie-in-the-sky demands, the statements aren't privileged and can help establish bad faith. Remember: a defendant gets his attorneys' fees if he can prove a plaintiff brought or maintained a trade secrets misappropriation claim in bad faith.

So what kind of statements in a settlement letter are not privileged? Generally, I find there are two categories that get plaintiffs in trouble.

First, the plaintiff often makes comments about how much continued litigation is going to cost, or indirect references to the fact that an appeal is going to be expensive for a prevailing party to defend. These sort of threats aren't privileged because even an idiot lawyer knows that further litigation costs money, and it's completely disconnected from an offer of settlement. Threatening a defendant into spending further legal fees indicates the plaintiff simply is pursuing litigation to force its adversary to bear the burdens of litigation - not to achieve a specific result at judgment.

Second, the plaintiff may make irrational demands as part of a settlement term sheet - often times totally disconnected to the actual dispute. In past cases (both in Iowa and California), courts have looked to outrageous settlement demands that have nothing to do with trade secrets claims as evidence of subjective bad faith. For instance, demanding a broad non-compete in California (where non-competes are unenforceable) as part of a settlement would demonstrate bad faith intent. So, too, would damages demands far in excess of a trial disclosure and demands to avoid certain customers or product lines, even though this is not part of the relief sought in the complaint. Even though these are terms of the offer, they aren't privileged as settlement communications because they don't tend to establish the plaintiff's case is worth less than what it claims.

Settlement letters are potential land-mines in litigation. If a trade secrets plaintiff says anything beyond conveying the offer, those statements could help show bad faith. As with most letters, it's best to keep it short and to the point.

Do the Final Episodes of "Breaking Bad" Qualify As Trade Secrets?

For die-hard fans of the greatest TV show of all time, these next six weeks are absolute gold.

Which led me to think: Do the plot lines over these final eight episodes qualify as "trade secrets"? Put another way, if one of the show's insiders - an actor, a writer, a key grip - published the final episodes' general plot narrative (online or in an interview), would the owners of the show - AMC - have a claim for trade secret misappropriation?

As many readers probably know, the test for determining a trade secret is relatively straightforward. An owner must show both: (a) that the information is economically valuable because of its secrecy; and (b) that it instituted reasonable security measures to protect the information.

So let's apply this to the final episodes of Breaking Bad and see if we can answer this question.

Economically Valuable Information

One argument weighing against trade secret status for the final episodes is that the information - that is the scripts and plot - are valuable as much for their novelty as for their secrecy. Secondarily, one could argue that the viewers would watch Breaking Bad even if the ending were either known or easily predictable. With this, I would disagree.

As to the first possible contention, every television show has some degree of originality, and as great as Breaking Bad is, it's not necessarily novel. After The Sopranos, it's hard to call a serial drama featuring a disaffected, criminal white male as "novel." In fact, it seems that virtually every new iteration of prestige television has such a protagonist (except, perhaps, for Orange Is the New Black).

So, since the series is not "novel," the argument for granting the last eight episodes trade secret status strengthens. That leads to the second possible argument against trade secret status: would people watch regardless of the ending? From my point of view, there are two key factors that indicate the story derives great value from its ability to hold its ending secret.

First, the show's true calling card from the beginning has been the parlor game begging viewers to speculate about the end. In other words, we know Walter White breaks bad from the first episode. Walt has cancer, meaning the show's lifespan is naturally limited. Add to the mix the compressed time frame over which the plot develops - two years' story time spread over six seasons - and the show has a frenetic, building pace that singularly drives viewers to speculate as to the ending. Since the focal point of the show always has been about the end, the plot that develops in the final season naturally has a high degree of intangible value.

Second, somewhat incredibly, Breaking Bad's viewership doubled from the last episode of Season Five to the first episode of the Season Six. This is staggering, if not ridiculous, for a serial drama that makes no sense if you jump in and start watching mid-stream. And it's due almost entirely to word-of-mouth. That is to say, those who've watched the show from the beginning have told their friends to get caught up because the end is near. Viewers of the show experience the show as much the day after it airs by reading the endless recaps and listening to insider podcasts, all of which contain a heavy undercurrent of how each episode builds towards the conclusion and what might happen in the last few episodes.

In all likelihood, 3 million new viewers have decided to watch over 50 hours of television in the past calendar year simply because the end is coming. The increased ratings for Breaking Bad likely have allowed the show to generate more advertising revenue (and possibly spin-offs for AMC), and this is mainly attributable to the fact the show is ending. Therefore, it seems logical that the narrative of the final episodes constitute some of the most valuable information about the show.

Secrecy Measures

This is somewhat of an unknown, simply because I don't know exactly what the owners of Breaking Bad have done to protect the plot details. But, from what's available in the public domain, the secrecy steps appear to be somewhat legendary.

We know from recent interviews that one of the supporting characters - "Lydia" - received scripts for the final episodes that redacted all lines but hers. We also know the scripts created by the show's writers generally contain code names (they're not labeled, for instance, Breaking Bad), ostensibly to guard against the impact of some accidental disclosure. The show has contracts with vendors that are secret and that don't reference the show at all, such that many vendors apparently don't even know they are supplying goods or services to Breaking Bad. These may seem like extreme security measures, but it signifies the show believes its ending has great value.

We also know creator Vince Gilligan will not allow previews of the coming show. That is, at the end of, say, Episode 1, we don't see scenes from Episode 2. Nor does the show preview the show in commercial spots during the week. In fact, Gilligan only will do a very short (and very oblique, to put it mildly) teaser on AMC's recap show, Talking Bad, that shows a still photo from the coming episode. His commentary is so trite as to be meaningless.

So the answer to me is a clear "yes." The plot lines for the remaining episodes qualify as legal trade secrets. But like many trade secrets, their shelf life is limited. In six weeks, all of this information will be in the public domain, and the plots lose any legal protection (except for copyright law, which is sort of besides the point for this post).

Until the final episode has wrapped, any of the show's insiders who know how it will end would be well-advised to tread lightly.

(Many thanks to Eric Ostroff for inspiring this post, based on his July entry on WWE wrestling. Eric and I reach somewhat different conclusions, incidentally.)

More from Tradesmen Int'l v. Black: Analyzing Judge Hamilton's Concurring Opinion

When construction staffing industry titan Tradesmen International lost its appeal in the Seventh Circuit, it suffered more than just a defeat in a particular lawsuit that (in my opinion) it had no expectation of winning.

In the course of its analysis, the Court of Appeals made it perfectly clear that Tradesmen's non-compete was unenforceable under Ohio law. As Judge Tinder noted in his opinion, the non-compete had a nationwide reach and extended to all Tradesmen customers and prospects throughout the country even though the individual defendants worked solely in Indiana. Consequently, the agreement went far beyond what was necessary to protect Tradesmen's business interests.

To me, one of the more interesting aspects of the Seventh Circuit's ruling was Judge David Hamilton's concurring opinion and his discussion of the blue-pencil rule, which generally deals with a court's willingness to strike overbroad portions of a non-compete.

That Judge Hamilton wrote separately in this case is not surprising. During oral argument, it was clear to me he was troubled by the scope of Tradesmen's agreement and what precisely it was trying to protect. Though he is the newest member of the Seventh Circuit, Judge Hamilton quickly has become known as an active questioner during argument. And this case provided him the opportunity to live up to that reputation. Judge Hamilton has made it known in interviews that he has a great interest in the law of non-compete agreements and trade secrets.

Although he agreed with the majority opinion, Judge Hamilton wrote about the intersection of choice-of-law clauses and the blue-pencil rule. In Tradesmen, the individual non-compete agreements all contained Ohio choice-of-law provisions. The choice isn't unreasonable, since Tradesmen is an Ohio-based company with a nationwide footprint. Businesses certainly have an interest in seeing that its contracts are interpreted under a uniform set of rules. But the case potentially posed a significant choice-of-law issue because the individual defendants were Indiana citizens, and the litigation took place in Illinois.

Judge Hamilton, though, is troubled (and has been in the past) by courts' willingness to enforce choice-of-law clauses when another state has a greater interest in the case and the chosen state's law embraces an employer-friendly blue-pencil rule. As he wrote, even though most states assess non-competes under a general rule of reason framework, "even a gentle tap on that fragile surface of similarity shows important differences from state to state."

According to Judge Hamilton, courts should "not discount too quickly the force of ... public policy" that certain states have adopted when refusing to enforce overbroad non-compete agreements. In his mind, a state's unwillingness to rewrite or pare back non-compete agreements can be a strong enough public policy to invalidate a choice-of-law clause.

As an example, Indiana courts - like many others - subscribes to a strict blue-pencil rule. This means a court will not rewrite an overbroad contract, but will sever offending clauses from the rest of the agreement. States like Ohio, and to a lesser degree Illinois, have different policies (nuanced though they may be) that allow for courts to modify agreements or enforce them to the extent they are reasonable.

Is this a strong enough difference in public policy to invalidate a choice-of-law clause?

Judge Hamilton thinks it might be for a very pragmatic reason: an employer like Tradesmen can draft an obviously unenforceable contract and throw it to the courts to enforce a reasonable contract the parties could have signed instead. A state's unwillingness to adopt a liberal rule allowing for partial enforcement may signal a broader public policy that the state "protect[s] employees from overly broad coveants." The employer-friendly rule impacts employees who may not have the ability to obtain firm guidance on what type of competitive activity is prohibited legally, even with the sound advice of counsel.

Judge Hamilton addressed this same public policy issue in a lengthy opinion when he sat as a district court judge in the Southern District of Indiana. The case was Dearborn v. Everett J. Prescott, Inc., 486 F. Supp. 2d 802 (S.D. Ind. 2007), and the case had strong similarities to some of the issues in the Tradesmen suit concerning choice-of-law. Though his opinion in Dearborn was thoughtful and extremely thorough, I didn't entirely agree with everything Judge Hamilton wrote in that case. Still, his reasoning has great appeal, for it recognizes the critical role the blue-pencil rule plays in non-compete suits. Judge Hamilton's concurrence in Tradesmen rings many of the same alarm bells he struck in Dearborn concerning choice-of-law.

Divining when a state's public policy is so strong as to override a contractual choice-of-law clause is no easy task. To me, courts could look at this one of three ways:

(1) Has the legislature enacted a clear statement of public policy? This is the easy analysis, because legislatures typically bear the laboring oar of setting forth public policy choices. As a result, states that have strong legislative enactments on non-competes - California, North Dakota, and Oklahoma on the employee side; Florida on the employer side - present obvious examples of when parties will have to confront critical choice-of-law issues.

(2) Have courts expressed a consistent, widely applied rule that clearly expresses a public policy choice? This becomes more nuanced because non-compete cases are so fact-specific. But, taking the blue-pencil rule as an example, if a state's case law shows a uniform pattern where courts are unwilling to rewrite or modify overbroad covenants, this may rise to the level of a public policy sufficient to invalidate a choice-of-law clause. Illinois, for instance, has suggested in recent years that despite its black-letter principle of allowing modification of overbroad non-competes, public policy considerations may not allow a court to do the work an employer should have done when drafting contracts.

(3) Could the difference in state law change the outcome? This approach would take a broader view of public policy, and to me it's not the proper analysis. For instance, in some (but not all) states, "continued employment" is sufficient consideration to enforce a non-compete signed after the start of employment. Certain states seem to have broader pronouncements that a non-compete cannot extend to "prospective" customers. To be sure, these are significant differences depending on the facts of the case, and they well may be dispositive in litigation. But they are really at the edges of a state's public policy as to enforcement. Courts long have recognized that mere differences in a state's law don't rise to the level of a strong public policy.

Judge Hamilton seems to subscribe to the second approach, and he views a state's willingness to rewrite non-competes as a strong enough choice to implicate public policy concerns. Ultimately, this may signal the Seventh Circuit's willingness to examine choice-of-law issues more carefully and retreate from prior decisions where the court seemingly has deferred to a choice-of-law clause as long as it has some connection to the dispute.

In Tradesmen, I didn't make an issue out of choice-of-law for the simple reason that Tradesmen never could point to any evidence my clients breached any agreement. The issue was, to be frank, moot and not worth spending a nickel of legal fees over. Had my clients decided to challenge the enforceability of the contracts, then certainly choice-of-law would have been a more significant legal issue to consider.

Seventh Circuit: Test for Determining "Bad Faith" In Trade Secrets Case Is Common Sense

This is a case I know a little something about.

When Tradesmen International sued my clients in May of 2010 , the outcome was already clear. The claims were garden-variety; the facts weren't. The individual defendants moved out of state to avoid the territorial restriction of their non-compete contracts to form a new business that supplied labor to the construction industry.

Tradesmen elected to take the dreaded shotgun approach to litigation. Instead of honing in on the contract-based claims (which it was destined to lose), it made a broad allegation of trade secrets theft. In particular, it claimed that Dun and Bradstreet reports - purchased through a commercial service for a fee and which some of the defendants had access to - were "trade secrets" that independently barred my clients from competing.

There were a couple of, to put it mildly, problems with this theory:

1. Anyone can buy Dun and Bradstreet reports, which my clients did after they left Tradesmen.

2. Tradesmen took virtually no steps (I say, none) to preserve the "secrecy" over these reports (for good reason; such security measures would yield no marginal benefit given their availability).

3. Tradesmen admitted my clients never used the reports they had at Tradesmen to build their business.

(Actually, there were tons of other problems, but I'll have to simply ask you to check out the briefs I filed. I can't do justice in a blog post to this train-wreck of a case.)

So when the defendants successfully obtained summary judgment, I moved for my legal fees under the Illinois Trade Secrets Act. Like many versions of the Uniform Trade Secrets Act, the Illinois version allows for fee-shifting if a plaintiff makes a claim of misappropriation in "bad faith." To me, there was virtually no doubt Tradesmen pursued its claim in bad faith, but Illinois courts never addressed how this provision should be interpreted. And the district court judge had no guidance.

Ultimately, Magistrate Judge Bernthal addressed a novel issue of Illinois law and ruled the trade secrets claim had to have been "filed" in bad faith rather than "maintained" in bad faith. That later was the essence of my argument. In short, I argued a more flexible standard was appropriate since trade secrets claims have the capacity to serve anti-competitive goals, as exemplified I felt by Tradesmen's litigation conduct.

The Seventh Circuit agreed and reversed the district court order. A copy of the Opinion is embedded below. The court held that a defendant is liable for fees if it filed or maintained a trade secrets claim in bad faith. More particularly, the court stated "common sense" supports such an interpretation because "a plaintiff makes a claim in bad faith if she continues to pursue a lawsuit - even after it becomes clear that she has no chance to win the lawsuit - in order to cause harm to the defendant." Because the district court had used a narrow, "point-of-filing" inquiry, it didn't consider the proper range of factors bearing upon bad faith. And it didn't examine the "no chance to win" scenario that I felt should have been the focus of the bad faith motion.

For my clients, the issue is of obviously of great significance. But for the law, what's the impact? In my mind, a couple of considerations come to mind:

First, trade secrets plaintiffs have a greater incentive to investigate and develop their claims. They cannot, in other words, hide behind what they believed to be true at the time of filing the lawsuit and then sit back and tax the defendants in the form of lawyer's fees to achieve a win. This should encourage greater scrutiny over claims that pose a great risk of serving an anti-competitive purpose and will require a continuing reassessment of a case during litigation. In my appellate brief, I discussed this at length and argued for a flexible inquiry that takes into account the unique dynamics of trade secrets suits.

Second, fee hearings at the conclusion of a lawsuit will require a district court to be flexible in what factors it considers. Courts normally consider both objective and subjective factors to determine bad faith. In other words, what did the plaintiff do and what did it say? The inquiries overlap to a great extent, because often times the best evidence of intent is the lack of merit. With a broader standard to consider, courts will have to examine the record, the development of the claims, discovery answers, litigation conduct, and a failure of proof on key elements to establish the cause of action.

Third, if a defendant claims a suit has been "maintained" in bad faith, it must be prepared to make an articulable, intelligent analysis of when the bad faith began. Put another way, it will need to look at key moments of the lawsuit and identify that point when a continuum of "bad faith factors" coalesces into actual bad faith. This likely means a fee hearing will be a combination of evidence presentation (a mini-trial of the plaintiff's low moments, in other words) and legal argument.

***

In my next post, I'll discuss the Seventh Circuit's analysis of Tradesmen's overbroad non-compete agreement and how some of the key facts in my case played into the court's extended discussion as to contract enforceability.

Tradesmen Int'l v. Black - Seventh Circuit Opinion by Ken Vanko

Revisiting "Damage" and "Loss" Under the Computer Fraud and Abuse Act

The Computer Fraud and Abuse Act is organized about as logically as David Foster Wallace's sprawling masterpiece, Infinite Jest.

For literary fiction, that might be fine. For federal statutes, it's a disaster.

As a result, courts and commentators long have struggled over what parties must prove to establish an actual civil claim under the CFAA. And a great deal of the confusion and disagreement concerns the twin concepts of damage and loss.

At first blush, the terms sound like synonyms. But they're not. For purposes of the CFAA, each term has a precise definition.

The basic confusion has arisen because to state a civil claim, a party must have suffered "damage or loss" by reason of a substantive offense. To compound problems, certain substantive CFAA provisions require a party independently to show "damage," which renders the either/or structure a bit confusing. And a textual reading of the CFAA seems to show that in all cases (really, in all cases that deal with unfair competition) a plaintiff must show compensable "loss."

In other words, it's a total nightmare.

Or is it?

In my opinion, the concepts of damage and loss are complimentary pieces that fit together. They're not substitutes. But to understand this, it's critical to keep in perspective the overall purpose and set-up of the CFAA.

What the CFAA Does (and Doesn't) Protect?

Attorneys too often view the CFAA as a federal trade secret substitute. In other words, attorneys who want the muscle of a federal court try to shoehorn a trade secrets (or duty of loyalty) case into a CFAA violation if they determine a computer somehow was involved in facilitating the underlying act (usually, the downloading of documents). As a result, a large majority of CFAA claims in the employment context never quite fit the elements of the statute.

The CFAA protects a party from damage to computer systems (including files and programs), outside hacking, and theft of computer data. That's it. It is not a broad federal statute that displaces a wide range of contract- and tort-based claims typically reserved for state courts. And because computers are omnipresent in the way parties deal with each other, a broad CFAA construct could have the effect of federalizing competition claims well outside the statute's intent. This is part of the ongoing dispute over the CFAA's reach, a subject on which I and countless others have written.

The Concept of "Damage"

The definition of "damage" under the CFAA is decently plain. Damage is simply the impairment to the availability or integrity of data. For example, if an outsider hacks into a network and causes the deletion of files from a server, this would constitute damage. If an insider copies confidential information that otherwise remains available, this would not constitute damage because the data is still available. I'll return to this, but the word "integrity" is the key to unlocking the confusion that has arisen over when certain conduct causes damage.

Here's an easy way to understand "damage" for CFAA purposes: it's the type of injury the statute was designed to cover. As I'll discuss, the relatively limited statutory definition becomes confusing when applied to data theft cases.

Defining "Loss"

"Loss" is not the same as damage. Where damage defines the nature of the harm, "loss" covers what is compensable arising from that harm. Loss covers either: (1) costs in restoring a computer system, programs, or files; or (2) revenue lost due to an interruption in service.

A couple of examples may help clarify. If an outside hacker launches a denial-of-service attack on an e-commerce website, he can be liable for the revenue lost attributable to server downtime. Similarly, if an insider destroys the only copy of files on a shared server, she can be liable for the costs the company spends to hire a forensic technician to recover those files. These are the classic CFAA offenses.

Understanding the Types of CFAA Cases

The problem in fitting together the concepts of "damage" and "loss" arises from the predicate to Section 1030(g). This is the section of the CFAA that enables a private party to assert a civil claim.

The predicate starts off by stating unambiguously that a party "who suffers damage or loss" for an enumerated offense can maintain a civil cause of action. In reality, that language is either unnecessary or improperly worded. I maintain it's unnecessary.

The Destruction or Hacking Cases

Several provisions of the CFAA independently require a civil plaintiff to show "damage." I refer to these provisions, for simplicity sake, as the data destruction or hacking offenses. They are contained within Sections 1030(a)(5)(A)-(C). By and large, these sub-sections of the CFAA are easy to understand. They include the paradigms I described above: the outsider launching a denial-of-service attack and an insider destroying files.

In these fact patterns, which Section 1030(a)(5) clearly is designed to redress, a court first assesses whether the activity gives rise to "damage" - that is, data or system impairment - and then looks to whether the plaintiff can establish "loss." It makes little sense to view this as an either/or proposition because loss (response costs or lost revenue due to an interruption in service) flows naturally from damage. If a party can show damage, it will show loss (unless the amount is so trivial as to fall short of the CFAA's modest $5,000 jurisdictional minimum).

The Theft Cases

The other provisions of the CFAA that are frequently at issue in competition cases are Sections 1030(a)(2) and (a)(4). Those sub-sections have caused a great deal of dispute among federal courts because of the concept of "access" and whether "unauthorized access" includes misuse of data. Aside from that, both sub-sections generally provide a remedy if a party lacks proper access (however interpreted) and obtains information from a computer either with or without an intent to defraud.

The best way to look at these provisions of the CFAA is that they serve different ends than the destruction or hacking provisions of Section 1030(a)(5). In other words, Sections 1030(a)(2) and (4) provide a remedy for civil theft out of a computer. In the context of these claims, a party is not going to show "damage" to a computer because the very nature of the offense doesn't contemplate system downtime or lost files - unless we reinterpret "damage", which I argue below we must. Rather, the claim deals with the taking of information (trade secret or not). But, by virtue of the claim, the owner still has the same data (or else it simply would be a Section 1030(a)(5) claim).

From my perspective, a plain reading of the CFAA requires a plaintiff to show loss in virtually any CFAA case involving unfair competition. But since loss appears limited to damage assessment, recovery costs, and lost revenue due to a service interruption, assessing loss in a "theft" case is much more difficult to grasp. The computer isn't damaged; the data isn't gone; and the server hasn't crashed.

For this reason, courts seem to have stretched the meaning of "loss" to include the cost of retaining a forensic expert to track wrongdoing. And in the context of a CFAA theft case under 1030(a)(2) and (a)(4), this may be a "cost responding to an offense." But it's awfully difficult to fit that into the definition of "loss" unless we do more work to reconcile the CFAA as a whole. This issue receives little attention because there's so much noise surrounding the other elements of a theft case, in particular whether the term "unauthorized access" can apply to insiders who have credentials to use a computer system but act in ways contrary to their employers' interests.

Reconciling "Damage" and "Loss" Under the CFAA

As it stands, here's what seems clear. For a hacking or data destruction case under Section 1030(a)(5), a plaintiff must show damage and loss. This is based simply on a textual reading of the statute. Loss should flow naturally from damage. These are not difficult cases to understand, which is hardly a surprise given that they fall within the statute's prime focus.

A theft case is different. A plaintiff needs to show a loss, but it does not have to show damage. That much also seems clear from the plain language of the statute. Practically speaking, though, should it prove damage? I think so.

But to do this in a theft case arising under Section 1030(a)(2) or (4), a court would have to interpret "damage" as a compromise to the manner in which data was stored or protected. Arguably, this is consistent with the statutory definition, which references an impairment to the integrity of data.

Then, of course, the plaintiff still would need to show a loss. To me, it's difficult to argue loss without showing damage because (as I've noted) the concepts seem to be complements - not substitutes. Plaintiffs have figured this out by engaging forensic firms to track unauthorized access and stolen information out of a protected computer. I'm not totally convinced this is an expense that qualifies as a "loss," but if courts expand the definition of damage, then I guess "loss" would have to include investigation expenses. Regardless, it's not a totally unreasonable reading of the statute to include these expenses.

Ultimately, courts have little choice. They have to expand the definition of damage to give meaning to Section 1030(a)(2) and (4). Otherwise, if damage and loss are given a narrow reading, there's no claim under the CFAA for theft cases. It's easy to say now that the definitions simply don't match up, but it would be absurd to find there's no way to define damage for theft cases.

This expansive definition of damage may solve the riddle that confronts cases involving theft of data. More to the point, it demonstrates precisely why CFAA theft cases (as opposed to hacking or data destruction cases) should be limited to access by outsiders - those who truly don't have the credentials to access data in the first place. This is another way of saying the narrow view of what unauthorized access means is consistent with the purpose of the statute and in particular the concepts of damage and loss. Otherwise, the CFAA is little more than a substitute for state laws that already govern trade secrets theft and breach of the duty of loyalty. And given that the CFAA contains broad criminal sanctions, this is an interpretation courts should be very hesitant to adopt.

Trade Secrets Whistleblower SLAPPed In Effort to Dismiss Lawsuit

Several weeks ago, John Marsh, Russell Beck, and I discussed on the Fairly Competing podcast the special problems that arise when companies pursue so-called "whistleblowers" for trade secrets misappropriation.

As John wrote on his blog this Spring, such suits may have the unintended consequence of giving the whistleblower a public forum to air her grievances and enable her to draw attention to facts that are potentially embarassing or harmful to the company.

One of the issues that can arise concerns the whistleblower's claim that her activity is protected under the First Amendment. Many states, including California and Illinois, have anti-SLAPP statutes that enable parties who face frivolous strike suits to pursue an early, special motion to dismiss. (SLAPP is an acronym for "strategic lawsuit against public participation.").

This procedure generally allows for: (1) consideration of matters outside the pleadings themselves; (2) a stay of discovery; and (3) mandatory cost- and fee-shifting. Traditionally, SLAPP suits (and anti-SLAPP) motions arise from defamation claims brought against a group of citizens, or notable citizens who have spoken out on a public issue. But they can arise from claims of trade secrets theft, because disgruntled employees often feel as though the public has a right to know of certain non-public information concerning a company's business practices, services, or products.

In our episode of Fairly Competing, John, Russell, and I discussed a particularly interesting suit in California in which James Clark accused Anheuser-Busch (his ex-employer) of filing a SLAPP suit. According to Clark, A-B sued him after he participated in (really, initiated) a class action related to the A-B's supposed mislabeling of alcohol content on its beer products. A-B's claim was for trade secrets misappropriation, arising out of Clark's supposed taking of beer specification sheets and other materials before he left A-B, which arguably were instrumental in the development of the class action suit.

Last week, the California court denied Clark's special motion to dismiss, finding that the trade secrets suit was not a SLAPP under California law. The Court determined Clark's protected activity - that is, participating in the class action against A-B - was "merely incidental" to the claims of trade secrets misappropriation and therefore beyond the anti-SLAPP law. Put another way, A-B's claims stood on their own without reference to the class action suit.

The court's ruling reflects the narrow set-up of California's anti-SLAPP law. In particular, California law does not specifically cover claims brought "in response to" government petitioning activity. Had such a provision been part of the statutory scheme, the court may have considered a number of other factors bearing upon A-B's claim. Illinois' anti-SLAPP law, for instance, is much broader, in that a responsive or retaliatory claim may fall directly within the statute. Courts in Illinois consider on a case-by-case basis whether the suit is truly relatiatory and will examine "retaliatory intent."

However, the court in the A-B case stated that "evidence of [A-B]'s motivation does not establish" that its claims "arose from Defendant's protected activity." The court's decision not to consider subjective intent may be surprising given the nature and purpose of anti-SLAPP laws. As a practical matter, this objective analysis has the effect of requiring courts to assess the nexus, or fit, between the underlying claim and the allegedly retaliatory claim. If the former has an independent factual and legal basis, then it does not "arise from" petitioning activity.

The court did not consider a relatively recent amendment to California's anti-SLAPP law, Section 425.17 of the California Code of Civil Procedure. That section, enacted to prevent "a disturbing abuse" of the anti-SLAPP law, meant to exempt certain actions arising from certain commercial statements or conduct.

The provision is densely worded and may not have directly fit the A-B/Clark dispute. But, at the very least, it recognizes in the SLAPP context the principle that commercial speech generally has more limited protection under the First Amendment compared with non-commercial interests. In this sense, California seems to be shifting away from allowing anti-SLAPP motions if they do not truly concern a matter of important public interest.

My Issue With PRATSA: The Rule of Lenity

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.

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:

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.