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Preview: Legal Developments In Non-Competition Agreements

Legal Developments In Non-Competition Agreements



cases, commentary and news related to restrictive covenants



Updated: 2018-04-20T15:48:06.402-05:00

 



Sinclair Broadcast and Its (Alleged) Non-Compete Agreement

2018-04-09T09:00:08.219-05:00

Until about a week ago, few of us had ever heard of Sinclair Broadcast Group. That is, until this video went viral.

The video shows local news anchors in a bizarre montage reading precisely the same script about news outlets pushing "irresponsible" stories to push fake news without appropriate fact-checking. Predictably, this generated a response among more prominent news outlets, some of whom took their local broadcast colleagues to task for not standing up to a corporate mandate.

Earlier this week, Bloomberg News reported that there may be a reason why those local anchors did not stand up and quit their jobs. The cost of doing so appears to be fairly steep. Bloomberg News reported that Sinclair employees sign contracts with 6-month non-compete clauses and liquidated damages clauses that call for repayment of up to 40 percent of annual compensation for quitting outside of a notice period.

The Bloomberg News article cites one example where Sinclair attempted to enforce a liquidated damages clause against a Florida news anchor who quit in disgust over some Sinclair tactics. The amount sought was quite low, however. Still, for some seasoned on-air talent, a repayment clause could be enough to deter an employee from quitting on principle.

The non-compete issue is an interesting one as well, though. Many states, including Illinois, prohibit non-compete arrangements in the broadcast industry. Sinclair is trying to buy the Tribune Media group, which means it would own Chicago's revered WGN.

Its apparent use of non-competes would run into a problem with WGN's on-air talent under the Broadcast Industry Free Market Act. That statute prohibits the use of non-compete agreements for television, radio, and cable station talent. It does not apply to sales or management employees. And if Sinclair were to violate the Act, it would be liable for both damages and attorneys' fees.

A number of other states, including New York and Massachusetts, also bar broadcast industry non-competes. California does so too by virtue of its general law banning restrictive covenants in employment.



Trump and the Terrible, Horrible, No Good, Very Bad NDA

2018-04-03T08:20:35.863-05:00

Leaks from the Oval Office are nothing new.But the media attention on leaks from this Oval Office has generated considerable buzz for a couple of reasons. First, President Donald Trump is, to put it mildly, unconventional and just plain odd. So anything leaked is grist for the media mill and sure to generate giggles. Second, both Trump himself and his minions flip out at any perceived slight that ends up in the media, no matter how peripheral it is to a substantive policy issue. This is kind of like the Streisand Effect. If they just  would move on to something that matters, few people would talk about the leak.Normally, the remedy to dispense with a leaker in the executive branch is to dismiss the leaker. No surprise there. It happens. A lot. And let's be clear, leaking isn't a good thing. You don't have to like Trump to bash leaks. We can, and should agree, that they're bad regardless of political affiliation.That, though, doesn't mean that we can just sanction whatever consequence comes of the leaks. And it certainly doesn't mean we can endorse punishment of people who've left and dished on the doings in the Oval Office.On that score, Trump is doing something unprecedented. We know he is the first non-politician/non-military officer to run the Executive Branch. And we know that he loves confidentiality agreements from his time working in the private sector and just plain "working" in private.So we really shouldn't be all that surprised that Trump has deployed a truly private-sector tool, the nondisclosure agreement (NDA), within the White House to stem leaks, no matter how trivial or silly they are in the grand scheme of things.***I commented a week ago or so on LinkedIn that Trump's NDA for staffers was obviously unenforceable. I stand by that wholeheartedly. The Trump trolls were out, flooding my comments and email with nonsensical, grammatically challenged screed on topics that have no relationship whatsoever to the point I was trying to make. I guess that, too, was predictable.A few other would-be apologists, probably too lazy to do their own work, demanded that I provide points and authorities for my conclusions. Apparently, common sense and that thing called the First Amendment were insufficient pillars for my post. Though I hate to indulge laziness or plain ignorance, I think the point is worth discussing in more depth.***Let's revisit the basics of what apparently has occurred with the White House staff, much of which comes from an article in The Washington Post, a famous Trump target.The Post obtained a preliminary draft of the NDA, which in all likelihood differs somewhat from the final version the White House demanded staffers to sign. What do we know about it? A few things:The scope of the NDA is not limited to "classified" information (more on this below). Instead, it captures "confidential information" defined as "nonpublic information I learn of or gain access to in the course of my official duties in the service of the United States Government on White House staff,” including “communications...with members of the press" and "with employees of federal, state, and local governments."The preliminary liquidated damages figure for a breach of the NDA was $10,000,000 per violation.An enforcement clause, which appears designed to create standing, states: “I understand that the United States Government or, upon completion of the term(s) of Mr. Donald J. Trump, an authorized representative of Mr. Trump, may seek any remedy available to enforce this Agreement including, but not limited to, application for a court order prohibiting disclosure of information in breach of this Agreement.”The non-disclosure restriction appears to last in perpetuity.***I want to leave aside the problems with each of the four numbered points above just for a second. We need to step back and understand an overriding principle at work. People who work for the government serve the public. The information they obtain, with some limited exceptions, belongs to the public. And of course, the[...]



The Supreme Court of Illinois Is Not Interested in the Non-Compete Consideration Rule

2018-04-02T08:00:11.976-05:00

For the third time, the Supreme Court of Illinois has declined to hear a petition for leave to appeal that confronts the question of continued employment as consideration for a non-compete agreement.

For at least the past few years, practitioners have operated under the assumption, perhaps wrongly, that Illinois courts established a bright-line two-year rule under which continued employment may serve as consideration for an employee restrictive covenant agreement. This is the so-called Fifield rule, stemming from a 2013 First District Appellate Court case that appeared to set forth a bright line. The Supreme Court declined to hear an appeal in Fifield, so the lack of interest in follow-on cases is not surprising.

This past week, the Court declined a petition for leave to appeal in the case of Automated Industrial Machinery, Inc. v. Christofilis, 2017 IL App (2d) 160301-U. This was my case, and I represented Tom Christofilis at trial and on appeal. Early on in the litigation, the circuit court had granted our motion to dismiss a breach of contract claim given that Christofilis' former employer, AIM, had required him to sign an afterthought non-compete that lasted only for 5 months before he resigned. The court noted that it was not relying at all on Fifield, rightly stating that not a single case in Illinois endorsed consideration of just 5 months' continued employment.

Illinois' consideration rule has come under criticism from some, who apparently are dissatisfied that courts have tread a middle ground between the absolutist positions. Those positions state either that continued employment is not valid contract consideration for a non-compete, or that it is. Very few states require some sort of meaningful period of employment, and Illinois' "substantial period of time" rule is perhaps the most well-developed line of cases that forges a pragmatic path.

Though I say the cases are well-developed, they could certainly be clearer. I think Fifield is misunderstood because sometimes easy cases make for bad law. In retrospect, the two-year pronouncement was both unnecessary to the case's disposition and simply a product of loose opinion writing. I hate to say that and don't mean to indict the appellate court, but it's simply true.

In the bigger picture, the notion of continued employment as adequate consideration at all for a restraint of trade is just weird. It is ephemeral and in many cases illusory. It fails to account for the adhesive nature of the arrangement and the fact that the employee receives nothing at all comparable to what he or she is giving up. As lawyers, we're stuck with this silly, non-sensical paradigm of analyzing contract consideration that makes very little sense to clients and seems directly at odds with the disfavored nature of non-competes in the first instance.

Legislating this issue will prove difficult. But there's another way. If a court ever took a fresh look (and based on Fifield and Christofilis, I don't see that as imminent), it may want to ask just why continued employment is a permissible form of consideration in the first instance. Or how it comports with the adequacy rule that requires some decent fit between the restraint and the benefit conferred on the party restrained. Inertia is not often a good reason for justifying a legal rule, even if lawyers and judges assume that it is.



"Solicit," in a Non-Solicit, May Not Mean First to Solicit

2018-03-06T07:30:20.166-06:00

Clear?

Didn't think so.

Much ink has been spilled over the term "solicit," since it's obviously a flash-point in non-compete litigation. That is, not all non-competes are true non-competes. Some restrict customer, or employee, solicitation. This is especially true for salespersons, who often have more limited restrictive covenant agreements concerned only with client contact.

For 20 years, I've dealt with clients who come to me with some variation of this question: What if the customer calls me first?

In other words, is that a "solicitation" that violates a restrictive covenant?

(Short digression.

The first layer of analysis is to look at the contract itself. Many non-solicitation covenants actually are broader, despite their customer-centric focus. They may prohibit an ex-employee from working with or accepting business from a group of clients. If that's the case, then an employee who wants to work with former customers needs to shift her focus away from the breach question to either contract formation or reasonableness.

Now back to the main point of this post.)

The meaning of "solicit" is pretty fact-specific. If a client contacts the employee about a project or ongoing work, then the employee likely hasn't solicited anything and may be free to work with the client on competitive business. But what if the client's initial contact is preliminary, vague, and just a precursor to eventual work? What if the discussions, in other words, contemplate that something else will happen?

There are a fair number of cases that give some color to the type of conduct that qualifies as "solicitation." But I haven't seen one quite like Quality Transportation Services, Inc. v. Mark Thompson Trucking, Inc., 2017 IL App (3d) 160761, which effectively answers my rhetorical questions.

The court there found that the client's initial contact was not dispositive of the solicitation question, and that the court needed to evaluate other circumstances. In particular, the factual question concerned the "large gaps of time that followed [the client's] initial phone call." Since the restrained party--it was a corporation, not an employee--appears to have made "multiple and arguably separate contacts" with the client, the "solicitation" question was not clear-cut. The case is definitely worth a read for anyone who wants to deconstruct the meaning of solicitation and get a sense of how courts look at customer contact.

A copy of the opinion is available here.

So what to draw from this. Employees bound by a true non-solicitation covenant, and who claim they didn't initiate client contact, need to keep detailed records of text messages, e-mails, and phone calls received. Those also should describe the nature of the conversation and whether the contact was preliminary or concrete enough to protect further communications as incidental follow-ups, and not renewed efforts to win business.

Remember: when an employer has a non-solicitation covenant, it has no real means of assessing who called whom. These clauses are ripe for litigation because the movement of business itself will trigger a reasonable assumption that the employee made first contact, not the client. But that isn't always the case. Proving that, however, is often really, really hard.



No One Owns Anyone: Orly Lobel's New Book and Thoughts on Knowledge as a Transferable Property Right

2018-02-19T12:00:24.917-06:00

Few scholars or commentators have advanced the study of non-compete agreements more than Professor Orly Lobel.I've referenced her 2013 book, Talent Wants to Be Free, numerous times on this blog and even managed to cite it in a legal brief or two. Professor Lobel is a strong advocate of what she calls "knowledge flows." This is the idea that the migration of people from one firm to another, or to their own firm, can lead to a net societal gain in terms of innovation and technological development.Her latest book, You Don't Own Me: How Mattel v. MGA Entertainment Exposed Barbie's Dark Side, is a much different read. But it is utterly fantastic, and you don't need to be an IP nerd like me to enjoy it.The setting for the book is the biggest intellectual property dispute over the past 20 years (sorry, Waymo, you settled): Mattel's war on MGA Entertainment for its development of Bratz dolls to compete with long-time market leader, Barbie. The impetus for the legal battle centered on product developer Carter Bryant, who conceived the idea of the competing Bratz toys while on hiatus from his job at Mattel.I will leave to the side the copyright and trademark issues that permeate the book, though by no means do I wish to discount them. The legal issues are fascinating. Mattel's claim over Bryant's creative work stemmed largely from the interplay of contract and intellectual property law, a narrow branch that doesn't receive nearly as much attention in the reported decisions: an invention assignment clause. Strictly as a matter of intellectual property law, there's no doubt Bryant would own his own ideas or conceptions related to Bratz. But to what effect did a contractual assignment of those inventions allow Mattel to claim them as its own?We know how this story turns out. Mattel won the first trial, but lost in the Ninth Circuit. One of the tenets of the Ninth Circuit's opinion was decently simple: Mattel's invention assignment clause never mentioned "ideas," and the concept of Bratz was an idea Bryant had. The jury got bad instructions on his contract. On re-trial, MGA won. Eventually it recovered attorneys' fees. And a line in Judge David Carter's fee opinion (the Copyright Act permits a court to award fees to the winner) nicely sums up the case and its lasting impact:"Mattel's claim posed a serious threat to the public's access to free and competitive expression; the possibility that Mattel ignored decades-old principles about the unprotectability of ideas in good faith is not an excuse and does not diminish the benefits society will reap as a result of MGA's successful defense."***Much can be written about this book, but it's a great page-turner and a courtroom drama of the highest order, not to mention a wonderful application of some difficult principles to some easily digestible facts. We all know Barbie dolls. And who among us hasn't had a great idea--whether explored or not--while off the clock?But I want to focus on three points I took from the book.First, lawyers.Professor Lobel describes how MGA switched horses mid-stream in the case. Shortly before the second trial, MGA hired Jennifer Keller, who was not an intellectual property law expert and appears not to have commanded a whole lot of respect from Mattel. But it's clear she knew her stuff and knew how to command a courtroom. The book gives great examples of how she was able to connect with the jury in a way Mattel couldn't. It's not a stretch to say she was one of the deciding factors in swinging the resolution in MGA's favor.This is a huge point for clients to consider. If a client is reading this, don't blindly hire a non-compete lawyer to represent you in a non-compete case. Hire a lawyer who is smart, relatable, and who has courtroom chops. She can learn non-compete law (it's not hard). But some pencil-neck who can recite cases poses a grave risk of losing a judge or jury. In fact, one of the worst courtroom attorneys I have seen is a self-described nati[...]



Diversity Hiring as a...."Protectable Business Interest"

2018-02-14T15:30:03.473-06:00

Just when I think there are few unexplored topics on here, I check my Google news alerts to see what new interesting non-compete stories pop up. And sure enough, we get a real doozy.IBM has sued its former Chief Diversity Officer, Lindsay Rae McIntyre, who left to join Microsoft. The fulcrum of IBM's suit is plainly stated in its brief seeking a temporary restraining order:"By taking the identical job at Microsoft, and bringing the highly confidential and competitively sensitive information she knows about IBM's diversity data, strategies, and innovations, McIntyre threatens to disclose and use IBM's valuable business secrets for the benefit of one of IBM's most significant competitors."The TRO brief goes on--for fifty pages--to say basically the same thing. Workplace diversity is important. IBM is a leader. Microsoft is behind. Customers want diversity in employment. And that diversity leads to greater innovation.Fair enough.But is this really a business interest that a company can protect through a broad non-compete?The concept of workplace diversity is no doubt important (and IBM is apparently very good at it), but wouldn't firms who are successful at recruiting and retaining diverse workforces want to publicize that fact? And wouldn't tech titans want to promote not only top talent that it brought into the fold, but how it was able to get them to the company in the first place?The IBM filing also reveals a problem in non-compete suits that festers incessantly. It's one thing to identify a broad strategy (here, hiring and retention of diverse candidates) as "confidential." But it's then quite another to introduce evidence that disaggregates something specific from that which is in the public domain already.This seems especially difficult when the claimed protectable interest concerns broadly stated hiring goals or achievements, at least some of which certainly get into the public domain. The position IBM asserts necessarily assumes a corporate culture that is on par with Microsoft (which its filing suggests is not the case at all) and assumes that the workforces are susceptible to having one crossover employee implement or replicate the same hiring tactics on diversity. And it further assumes that Microsoft will want to copy IBM altogether.It is relatively unusual to see (sustainable) non-compete cases that involve a protectable interest you cannot directly monetize. Most involve sales executives or managers, or those who create and develop intellectual property or other consumable products. The interest in those actions has a direct nexus to sales and customer goodwill. In IBM's current suit against McIntyre, however, the reference to goodwill is starkly indirect--that is, good hiring practices create a good culture which ultimately strengthens the corporation's overall position in the market.The interest IBM asserts also invokes the notion of "embedded knowledge"--the collective experience an employee brings to the new job simply by being an employee. That is, knowledge at a very high level is a transferable, natural right that a non-compete shouldn't be able to protect. Many corporations do, to be sure, and a great many attorneys feel right at home arguing that knowledge barriers are just fine and dandy. When those suits arise, and the case becomes one about embedded knowledge, it becomes awfully difficult for a court to deconstruct that abstract or collective knowledge gained from concrete secrets deployable somewhere else.When that happens, sometimes it is easiest for courts just to pivot back to the most obvious, natural theme--one plainly obvious from the first five pages of IBM's own case. Do we really want to restrict an employee from leaving to help other organizations diversify their workforces? This one is a real head-scratcher.[...]



Trade Secret Litigation Statistics Revisited

2018-01-26T10:00:01.629-06:00

Thank God for firms like Skadden Arps.

Unlike some terrible "national" law firms that attempt to blog and end up shoveling out worthless drivel, Skadden regularly publishes great content (not to mention high-quality lawyering).

This January 23 post is no different and provides very helpful, practical information for trade secrets attorneys and litigants. Though the article is titled "The Rise of Trade Secret Litigation in the Digital Age," some of its most interesting tidbits focus on statistical measures.

For instance, Skadden notes the following:


  • Trade secrets cases increased 14 percent per year from 2001 to 2012. This runs against the grain, as civil litigation statistics confirm a steady downward trend of filings.
  • Trade secrets holders have a recent success rate of 69 percent at trial.
  • Trade secrets cases are dismissed at a lower rate (22 percent) than other types of complex civil litigation actions.
  • In recent trade secrets cases, only 2 percent resulted in preliminary injunctions -  a surprising trend, given that historically the rate is 10 percent.
Data on litigation outcomes is not easy to come by. Federal court statistics generally can present a skewed picture, given the high percentage of prisoner 1983 actions. So data aggregated on a macro basis is not reflective of all litigation. A high percentage of cases settle very early, so we don't know how meritorious all filings are.

But generally, the public literature shows a few general points to keep in mind, which dovetail nicely with what Skadden summarized:

  • Contract claims usually fare better than tort claims. Trade secrets actions are more akin to tort suits.
  • Federal court jury verdicts tend to be a bit higher.
  • Tort actions involving products liability and medical malpractice fare worse than other civil actions, somewhat skewing the tort number downward. This is even more pronounced in federal court.
  • In trade secrets cases where the employee was the alleged misappropriating party, the plaintiff was nearly twice as likely to obtain a preliminary injunction as when the claimed wrongdoer was a former business partner.
The bible, if you will, on statistical analysis of trade secret litigation comes from David Almeling, and his article is available here.

Generally, my rules of thumb are as follows. And bear in mind that these are grounded less in statistics and more in anecdotal experience and general kibitzing with other nerds:

  • A court will dismiss a trade secrets case on the pleadings less than 10 percent of the time (assuming no abject incompetence on the plaintiff's part).
  • Preliminary injunctions are successful at a rate of 20 and 30 percent.
  • Of those, at least 75 percent are partially successful and deny the plaintiff part of what it seeks.
  • Summary judgments motions are 50/50 propositions at best, but in trade secrets cases the legal standards push that down closer to 40 percent. Non-compete claims are more amenable to summary judgments.
  • At trial, plaintiffs in commercial actions win some material claim at a 60 to 65 percent clip.
  • In 85 percent of jury cases, a trade secrets lawyer will put at least two jurors asleep.
  • In 100 percent of cases, judges beg the parties to try and settle.




Wisconsin Supreme Court: No-Hire Provision is a Covenant Not to Compete

2018-01-24T16:30:40.808-06:00

When they're not suing each other, the Wisconsin Supreme Court justices actually have some interesting stuff to say and some interesting cases to decide.

This past week, the Court held in Manitowoc Company v. Lanning that an employee non-solicitation clause is a covenant not to compete for purposes of the State's relatively strict non-compete statute, Wis. Stat. § 103.465.

To recap, an employee non-solicitation covenant (or no-hire clause) bars employees from inducing former co-workers to quit or join another company, usually a competitor. They are not litigated all that much, except when pied pipers try to build out sales teams beneath them.

The Court held that it has taken a flexible view of the term "restraint on trade" and that no-hire clauses fit within that term, given that they restrict an employee's "ability to engage in the ordinary competition attendant to a free market," specifically with respect to recruiting the "best talent in the labor pool."

What's the significance? The applicable Wisconsin statute requires an employer to clear a number of different hurdles to establish the validity of a restraint of trade. And just as importantly, the statute provides that any covenant that is unreasonable is void and illegal, even if some remaining portion of the restraint would be valid.

It is an all or nothing proposition.

Which is why Manitowoc Company lost on the merits of its claim, after the Court found that the governing statute applied.

What was wrong? Basically, the no-hire clause said the employee could not, for two years, solicit or encourage any company employee to leave. It's actually broader than that, but I'm trying to be brief.

The Court concluded that Manitowoc Company had no protectable interest in maintaining its entire workforce. The employee it sued had no knowledge of the 13,000+ employees the company had worldwide. The covenant, to be sure, was so broad that no protectable interest could support it. Under the statute, it was void. Plain and simple.

This is yet another opportunity to offer a lesson in contract drafting. Many non-competes get tossed out because counsel salivate at the mouth and want to appease their client. Drafting is not an exercise in chest-thumping, in which counsel gets to boast about how tough he was in writing a restrictive covenant. It's actually much more nuanced than that. Part of being a lawyer is being objective, knowing what makes sense, and then communicating that to the client.

Maybe I'm a dying breed.



The Trade Secret Status of Football Game Plans

2018-01-09T16:00:54.290-06:00

For the second day in a row, The Wall Street Journal identified interesting questions concerning the law of trade secrets. Today's article comes in the wake of the Alabama-Georgia national title game, which Alabama won in dramatic fashion.The question the article raises is pretty simple and quaintly summarized: are football game plans trade secrets?The article explores this question rather indirectly, given WSJ's apparent effort to use Freedom of Information laws to seek these game plans from public universities. My readers will be stunned to learn that the recipients of these FOI letters were less than forthcoming.One of the traditional exceptions to disclosure of public documents is that information's trade secret status. For their part, FOI laws contain slightly different definitions of trade secrets than do federal and statutes designed to guard against misappropriation. For example, the so-called Exemption 4 under federal law allows for the protection of trade secrets and "commercial or financial information obtained from a person [that is] privileged and confidential." The Supreme Court never has interpreted Exemption 4.So let's look at Alabama, whose flagship school's football game plans were the subject of the WSJ article today. Alabama's Open Records Act contains no exemption for trade secret material, which is odd but no more odd than sending Roy Moore twice to the state Supreme Court. Though I haven't researched any other statutory basis the University of Alabama may have to withhold game plans under a records request, the Open Records Act does not appear to do so.Aside from this, the larger question is quite intriguing. Are game plans actually trade secrets?The best analogy I can come up with is the scripts for popular television serials, a subject I wrote on several years ago in the lead-up to the final Breaking Bad episodes. I've since changed my conclusion and do not believe those scripts are trade secrets, though they can be protected contractually. Why do I say that?The answer comes straight from the statutory definition of a trade secret. We'll use the 1979 Uniform Trade Secrets Act, whose definition is most in use. The term "trade secret" means that the information must:(1) derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and(2) be the subject of efforts that are reasonable under the circumstances to maintain its secrecy.While much of the text would suggest popular television scripts are protectable, the highlighted part illustrates why they're not. How, for instance, would any other production company, studio, or network gain from knowing what the plot lines of a series finale are? They wouldn't. In all likelihood, the only remedy that the script owner has is contractual. That is to say, the owner could claim that improper disclosure by an insider bound to a confidentiality clause reduced the economic impact of a television run, such as through lost advertising fees.My rationale, though, supports giving game plans trade secret status.Let's start with the basics. Those game plans are valuable, in that they reveal compilations of plays, schemes, coverages, and strategies for a variety of in-game scenarios. So too, there are economic interests at stake, as college football is a business. Universities stand to gain in myriad ways from successful football programs.And game plans, unlike television scripts, are useful to competitors - even if only to the competitor whose being schemed against in the game plan. So assume that the University of Georgia has a copy of Alabama's game plan. It should know the preferred set of plays for 3rd-and-short. It would know how Alabama's blitz patterns. And it may know wh[...]



Sinovel Wind Turbine Case Heads to Trial

2018-01-08T17:00:11.480-06:00

The Wall Street Journal reported today that the Wisconsin trade secrets case of United States v. Sinovel Wind Group Co. is scheduled to begin trial this week. The criminal case highlights the growing problem of intellectual property theft by state-sponsored organizations in China. And it further illustrates that multi-national organizations often target vulnerable inside employees to aid and abet in brazen acts of theft.

The Department of Justice back in 2013 issued a Press Release detailing the charges against Sinovel Wind and several individuals, including a former employee of American Superconductor, the victim of alleged trade secret theft. According to the indictment, American Superconductor developed software that controlled the flow of electricity from wind turbines to electrical grids. This software source code is at the heart of the indictment for trade secret theft. The allegation of misappropriation centers on Sinovel's apparent acquisition, through an ex-employee, of the software to produce wind turbines that it previously agreed to buy from American Superconductor.

The charging documents outline a familiar, if not sloppy, pattern of insider theft. The FBI, for instance, was able to discover that the rogue American Superconductor employee used Skype to communicate with Sinovel regarding the stolen source code. He also e-mailed Sinovel to discuss the source code and to send repairs to the source code. Of note, the ex-insider frequently traveled to China to work on Sinovel, which at one time constituted 80 percent of American Superconductor's business. The alleged theft resulted in a drop in American Superconductor's market value from roughly $1.6 billion to approximately $200 million.

For those interested to see what a real trade-secrets theft investigation looks like, and the level of detail undertaken with respect to a forensic analysis, I highly recommend a read through the key charging affidavit, embedded below.

Finally, a topic that frequently comes up in trade secrets cases is closure of the courtroom. On December 28, the court stated that "the trial of this case will be conducted in open court, unless a strong showing is made that some evidence must be kept from public disclosure." The court allowed for limited courtroom protections for trade secrets that were the subject of the government's indictment, but denied any corresponding protection to Sinovel on the basis that it had not made the appropriate showings to gain such protection.


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It's Just Business as Usual for the Year 10 Kick-Off

2018-01-04T12:01:10.632-06:00

The more things change, the more they stay the same.If I had to make three predictions for 2018, they would have been as follows:(1) Legislators across the U.S. will introduce non-compete bills, which will advance at a glacial pace with incredibly unimpressive results.(2) Frivolous non-compete and trade secrets suits will continue unabated, and I will break three keyboards writing about them.(3) Waymo and Uber will end up going to trial, and the court will render a mixed verdict. At some point, Paul Clement will sign an appellate brief for one of the parties.***It is January 5, and we seem to have checked the box on numbers 1 and 2.Representatives in the Vermont General Assembly have introduced a bill that would establish a categorical ban on non-compete agreements, much in the mold of the North Dakota and California statutes. The proposed legislation contains the usual carve-outs for negotiated sale-of-business and partnership-style non-competes. A copy of the bill is available here. This may be the last we hear of it.Move a stone's throw to the East, and a gaggle of New Hampshire senators have introduced Senate Bill 423, which would ban non-competes for low-wage workers. Similar to the Illinois Freedom to Work Act, the term "low-wage worker" includes those earning the greater of the federal minimum wage or $15 per hour. This is a common-sense reform that probably stands a decent chance of passage. The Senate Bill is available here.***The State of Ohio, and people with some connection to the Buckeye State, have produced some pretty terrible trade secrets and non-compete litigation. Which saddens me, because I went to Ohio State.Well, the trend seems to continue with a company in the business of producing something called "precision braided textiles" filing what appears to be a really crappy suit against a former employee. A&P Technology sued a terminated Phil Lariviere on the theory of inevitable disclosure of trade secrets. Lariviere, a former engineer, sat out his broad, two-year non-compete before obtaining subsequent employment through a recruiter with one of A&P's competitors.A&P then filed suit claiming that Lariviere's intimate knowledge of everything A&P placed its trade secrets at risk, as if time stood still during the two-plus years Lariviere was gone. The Southern District of Ohio mercifully denied this injunction against Lariviere, despite his relatively hostile attitude to his former employer. The injunction briefing contained some rather amusing exhibits about Lariviere's social media posts, texts, and e-mails. Why? A&P felt that anger and hostility suggested an intent to steal trade secrets.No reason for this theory appears to be offered, and the court saw through it. According to Judge Black, "Lariviere's mockery of the former employer who terminated him and then sued him is not demonstrative of any actual effort or inclination to violate his contractual obligation to protect the confidentiality of A&P's trade secrets." Maybe this was an unfortunate choice, but I sympathize here with Lariviere. He should be pissed about getting sued on a specious claim after abiding by his non-compete.An equally interesting aspect of the opinion concerns Lariviere's smart move to force A&P to identify its trade secrets with specificity. The shotgun nature of A&P's claim all but forced Lariviere's hand to proceed this way. And the court was persuaded, ordering A&P to list out its "suspected misappropriated trade secrets" before demanding the same of Lariviere and his new employer. The main impetus for the discovery ruling appears to have been the substantive weakness of A&P's case.You can review the order and opinion at the end of this post. A further link is available here. It is well worth a read for lawye[...]



Year-End Post: A Completely Random Screed, Addressing Topics Near and Dear

2017-12-27T10:43:23.319-06:00

Last night, as Christmas '17 drew to a close, my wife and I imbibed with a (very small) glass of Pappy Van Winkle, which, if you know anything about bourbon, is totally epic shit and absolutely the right way to finish off a holiday. As I let the cordial burn the inside of my mouth (and I do mean burn), I thought about a year that was completely random in so many ways. I'll leave aside the declining discourse of our civic life and translate this to the content of this blog, which is non-compete and trade secret litigation.I thought of the great successes my clients and I have had this year. I began the year arguing in the Third District Appellate Court, site of the Lincoln-Douglas debates, on a non-compete judgment entered in favor of my client, a former staffing industry sales employee, after a bench trial. Work then pivoted to a monster appeal in the Second District, which recently affirmed a bench trial judgment in our favor and affirmed a nearly $1.5 million fee award under corporate indemnification procedures. We now have pending, again in the Third District, a discretionary, interlocutory appeal on an issue of contract interpretation concerning non-competes. We are hopeful that this case, too, will establish precedent and continue to move the ball down the field of rationality.In the trial courts, my work was no less significant. And again, our results--for awesome clients--continued to be great. We successfully dismissed an inevitable disclosure action in Illinois state court, with a factual and procedural context so utterly inane and bereft of competence that I cannot do it justice. But I tried, in my blog post "38 Minutes of Hell," which garnered a lot of classic feedback.June and July were consumed with one of the truly weirdest cases I'll ever see, a replevin claim in Cook County Circuit Court, where we prevailed in a bench trial. Next, we headed to the East Coast and defeated a preliminary injunction in the Delaware Court of Chancery, following a failed business acquisition. This time, too, the merits were a real head-scratcher, with the plaintiff pursuing a claim based on a no-hiring clause that limited our ability to hire employees of the potential target company. Problem: we hired an independent contractor. Once again, we see litigation as an ex post attempt to strike a business deal that the parties never adopted. That lawsuit's in the ditch now.Then we stepped into a federal non-compete and trade secrets case that had been pending for several months. After getting subbed in for defense counsel, I read the file and concluded rather quickly that this case, too, was purely abusive. We then immediately contacted non-party witnesses, obtained statements that undermined the plaintiff's claim of breach (and trade secrets theft) in toto, and served our initial evidence disclosures. You could almost hear the plaintiff back-pedal, as it filed a motion to dismiss the case with prejudice, conditioned of course on the "with each party to bear its own costs and fees." Ain't that easy, partner. We moving for fees. May not get 'em. But we tryin'.***We're now in yet another one of these cases, with similarly weak facts from the plaintiff's perspective. And as I'm litigating that one, I can't help but feel we're reaching an inflection point on non-compete cases. What I continue to see is canned pleadings and complaints, invoking the same shop-worn phrases about what it is the plaintiff is trying to protect through covenants both broad and narrow. What is missing from many such cases is a deconstructed analysis of these interests and how the enforcement action is designed to protect them from an unfair competitive threat.In the main, these business interests sound reasonable and decent. Customer relationships and confidenti[...]



The Reading List (2017, No. 30): Ex Parte Seizure Orders, North Dakota Non-Competes, and 9 Years of Blogging

2017-12-15T08:00:07.328-06:00

Non-Compete and Trade Secrets News for the week ended December 15, 2017***Ex Parte Seizures of Trade SecretsThe Defend Trade Secrets Act's provision for ex parte seizures of property has generated considerable buzz and commentary, much more so than the remedy's narrow application seems to be worth. I am interested in it only in the academic sense, not the pragmatic one.If you want nuts and bolts as to how it works, look elsewhere. I'm not covering it here. (Though if you're truly jonesing for stuff, e-mail me and I'll send you a white paper on it.) The gist is simple: if a plaintiff feels a defendant has stolen trade secrets, it can petition the court for an order to retrieve the property containing those secrets.The case law applying the ex parte seizure order is understandably thin, given how new the DTSA is. Still, there's more on this remedy than more conventional ones, simply because it takes longer to try a case to judgment than it does to pursue an emergency interim order. So we have some helpful cases.The most interesting one so far is Blue Star Land Services, LLC v. Coleman, No. 17-931, a case pending in the Western District of Oklahoma. Of course, it involves an employee departure that appears to have gone completely haywire. And even less surprisingly given the venue, it involves the oil and gas industry.I am showing at the bottom of this post the district court's original ex parte seizure order. This one is pretty interesting since it involves an application for electronic storage devices and a Dropbox account (really, credentials to get into that account). Misappropriation tools tend to be digital, presenting sticky issues for law-enforcement seizure efforts. Put another way, it's easier to seize a bag of dope than it is a cloud-based folder of PDFs.The Order below is a bit broad, but perhaps necessarily so. That is, it orders the seizure of "[a]ny computers, computer hard drives, or memory devices in Defendants' possession that may contain [trade secret information]." It further extends to seizure of usernames and passwords, information even less apt to forcible retrieval but obviously related to the instrumentalities needed to facilitate the alleged theft. All in all, I think counsel did a good job proposing this quirky remedy, and the court did a nice job entering it given the difficult aspects of seizing digital assets.North Dakota Non-Compete DecisionWe now move upwards to North Dakota, awash in fracking material but mercifully bereft of non-compete litigation. Tell that, though, to one Dawn Osborne, an office supply house sales representative who signed a two-year non-compete with Brown & Saenger.The problem for Osborne is that even though she worked in Fargo, her employer was a South Dakota company. And the non-compete agreement contained a South Dakota choice-of-law/choice-of-forum clause. But North Dakota prohibits non-compete agreements along the same lines that California does. The Supreme Court of North Dakota held the forum-selection clause invalid, stating "one may not contract for application of another state's law or forum if the natural result is to allow enforcement of a non-compete agreement in violation of North Dakota's long-standing and strong public policy against non-compete agreements." This shows the importance in non-enforcement states of establishing venue through a declaratory judgment action to challenge a forum-selection clause. Litigants in California and Georgia know this tactic well.A link to Osborne v. Brown & Saenger, Inc. is available here.My 9-Year (Blogging) AnniversaryI've been blogging about non-competes longer than I've been married.If my wife is reading this, it feels like I just got married yesterday and I'm still in the[...]



38 Minutes of Hell

2017-12-08T16:23:57.195-06:00

I've represented defendants in some pretty stupid lawsuits. But 2017 is proving a banner year.Earlier this year, I had client get served with a claim for inevitable disclosure of trade secrets. From the outset, the case was a pure head-scratcher because there were no facts that so much as hinted at trade secret misappropriation. And, here's one for ya, my client had a non-compete agreement. In point of fact, he did leave his job to go work for a company in the same industry.So why on earth would the plaintiff not sue on its non-compete and proceed on the inevitable disclosure claim?Simple.The Illinois Appellate Court previously had found this company's non-compete unenforceable as a matter of law. It turns out the company learned nothing and never altered its void non-compete in any meaningful way. So, quite obviously, a contract-based claim would have gone nowhere.So enter inevitable disclosure - the Kim Jong Un of legal claims. The theory was that my client couldn't work for a competitor on the grounds that he inevitably would disclose his former employer's trade secrets - in effect a diabolical work-around to a non-compete that the employer knew it couldn't enforce.We had none of it, filed a motion to dismiss, and won. It was not close.The plaintiff's lead attorneys - probably operating under directions from their client to abuse the legal process and prevent competition - then filed a bad-faith, frivolous amended complaint trying to add facts that would suggest some plausible risk that my client might disclose trade secrets.The facts in this new complaint were so hopelessly convoluted they took about 3 pages of allegations to explain the theory, an ersatz diatribe laden with a cloak-and-dagger reference to a "Customer 1" (as if this is some sealed indictment). The logic was tortured and made no sense, due in large part to the fact that my client had no contact with "Customer 1" and the sequence of events was totally fucked up.Luckily for the plaintiff, they had another attorney. A really good one, kind of a local counsel, who had common sense. And I feel this attorney must have put the brakes on all the dicking around after I notified everyone that Complaint 2.0 sucked just as badly as the first version.So the case settled. The plaintiff released us from the non-compete it had and got zero out of the case except a bunch of obvious representations from my client that he had done nothing wrong. (This, I am quite certain, the plaintiff knew. But who the fuck cares about the truth when your client pays your padded bills?) There's no doubt the plaintiff dodged a sanctions motion (which I would have taken up to the appellate court for free in the unlikely event we lost).But what did law firm insist on in the settlement agreement? A deposition of my client. That's right - a deposition after the case settled, after the claims had been released, and after the action had been dismissed with prejudice.Who thinks of this garbage? Is this part of orientation day, where you get schooled on how to maximize the billing opportunities in your file? Or is this client-driven, an attempt to show that, frivolous suits be damned, I'll have the last word by golly!?!?So the purpose of the deposition? To confirm my client was telling the truth in the settlement agreement when he represented he didn't take anything and wasn't soliciting his former clients. As if he would do that. In yet another epic move, the plaintiff's lawyer calls me and tells me he does this sort of deposition all the time.By that, I now assume he meant that he files a bunch of stupid cases, dismisses them, and then bills for more work after the case is over. We agreed because we had nothing to hide and just wanted[...]



The Reading List (2017, No. 29): Frivolous Litigation in the Northern District and Uber (Allegedly) Covers Up

2017-12-01T09:05:04.116-06:00

Non-Compete and Trade Secrets News for the week ended December 1, 2017***Another Dumb Lawsuit in IllinoisSorry. I call it like it is. And this lawsuit was stupid. I've been waiting to write on it for some time, after the preliminary injunction order came out this Summer. But I've been busy. Now's the right time.In an action filed in the Northern District of Illinois, a company called Cortz, Inc. sued an erstwhile acquirer of its business, Doheny Enterprises, Inc., and a purchasing manager named Tim Murphy? Why? Beats me. Here's the gist. And it should sound a familiar refrain for lawyers like me who see this kind of silly litigation nonsense every single week.Cortz, a pool and spa products supplier, had a business with declining income. Doheny wanted to buy but was turned away. The parties had signed a non-disclosure agreement, which (like most in the transactional sphere) said Doheny couldn't hire Cortz's management-level employees for two years. Fair enough.Enter Murphy. He was fired from Cortz after its eventual buyer, some outfit named Leslie's Pool Supplies, demanded a two-year non-compete from him. This was an entirely rational business decision to make for both. Leslie's saw a way to use market power and tie up a dude it felt might be key to its business. Rational, yes. Smart, maybe not. Murphy, to his credit, balked. He had been with Cortz for nearly 20 years, apparently had no ownership stake and no role in the sale, and all of a sudden some acquirer demands a non-compete. Murphy probably had a few sleepless nights, but good for him drawing the red line. Cortz (now a Leslie's subsidiary post-deal) fires Murphy. As was its right. Probably stupid, but whatever.As one might imagine (you know, since there was a lawsuit), Murphy (out of work) hooked on with Doheny on a trial basis. Cortz then decides to sue, claiming this hiring violates the NDA's non-solicitation provision. (One almost can imagine the lawyers salivating over the prospect of potential work.) Cortz made that decision even though Doheny was not then employed by Cortz and even though Cortz made the business judgment to fire him. Of course, no one thought to draft the NDA in a way that covered past employees. But Cortz tried to make that claim during the litigation.Big fail. Hard stop.Judge Amy St. Eve, probably one of the top three district court judges in Chicago, had none of it, stretching no further than basic principles of contract construction. If you're going to draft a deal-based NDA with a restrictive covenant, damn sure better cover what you're trying to restrict. The linguistic gymnastics that Cortz tried to pull off here were not exactly compelling.No judge should have any patience for this sort of after-the-fact hooha, in which a commercial contract party tries to use litigation to mulct an unambiguous agreement into one which they wish they had signed. (Doubtful, mind you, Doheny would have signed a naked restraint that barred its hiring of those not employed by Cortz. Why on earth would it do that?)Nor was Judge St. Eve moved by Cortz's other claim, that Murphy used trade secrets of Cortz in negotiating vendor prices. (His prior job was purchasing, so apparently his knowledge of vendor costs was the motivating force here.) The factual basis for this claim, to be frank, is so hopelessly unintelligible that it might not be worth even reading it. (Still, if you care to do so, the link to the opinion is available here.)Thankfully, the case was dismissed shortly after this injunction hearing. What exactly did Cortz get out of this? A totally silly lawsuit that probably cost it $150,000? For what gain? So it could thump its chest and blow off some steam? There's no[...]



The Reading List (2017, No. 28): Non-Compete Legislation Proposed in New Jersey and More Non-Compete Nonsense in Florida

2017-11-22T12:00:11.011-06:00

Non-Compete and Trade Secrets News for the week ended November 24, 2017***New Jersey Proposes Non-Compete ReformNew Jersey historically has been a strong non-compete enforcement state. In his terrific article Fifty Ways to Leave Your Employer: Relative Enforcement of Covenants Not to Compete, Trends, and Implications for Employee Mobility Policy, Norm Bishara concluded that New Jersey was the 7th strongest enforcement state.As Russell Beck breaks down, though, pending legislation would alter New Jersey's place in the overall non-compete landscape. Russell runs through the particular changes that Senate Bill 3518 would make, comparing it to the annual non-compete debate in Massachusetts. I encourage you to jump to Russell's site and review the proposed list of changes.Florida Court of Appeal Invalidates Non-Compete InjunctionSpeaking of pro-enforcement states, Florida sits firmly atop the rankings. But employees are not without hope.Last week, the Florida Second District court of Appeal in Salazar v. Hometeam Pest Defense, Inc., No. 2D16-4123 invalidated a non-compete injunction imposed on a "pest control technician." The employee's agreement prohibited him from engaging in "pest control, exterminating, fumigating, or termite control business" in five Florida counties after his termination. Salazar, it turns out, was fired. An apparently responsible, enterprising adult, he formed his own business after being tossed out of a job.His employer sued and obtained an injunction in Florida state court. But the Court of Appeal vacated that injunction because the order failed to comply with clear procedural requirements for awarding this type of relief. It contained no findings at all. Whatever occurred in the trial court appears to be totally inexcusable. Leave aside the merits of this. If you represent an employer and seek injunctive relief, you must understand what the injunction order needs to say. I have had cases similar to Salazar. And it is shocking that this continues to occur.On remand, I'd be interested to see how Hometeam Pest Defense articulates its legitimate business interest in preventing Salazar from working in his industry. The source of a potential client list for those in need of home pest control seems rather obvious...You can link to the Salazar opinion by clicking here.Confidentiality AgreementsEvery day, we're witness to the unmasking of sexual harassment and misconduct charges leveled at media figures, politicians, and industry leaders. And the sad reality is that many claims are settled on the condition that the victim is muzzled by a confidentiality clause.Elizabeth Tippett writes in the San Francisco Chronicle about the two principal uses of confidentiality agreements: ones signed at the start of employment and those signed as part of a settlement. And she rightfully questions how non-disclosure agreements (or NDAs) should not muzzle victims of abuse. I suspect we've reached the tipping point where these NDAs may face legislative scrutiny, at least when they relate to a public figure or use of public funds.That subject matter is outside the scope of my expertise, but it's certainly an interesting and important one to follow as events unfold in near real time. I do think, however, there may be a spillover effect on the less newsworthy type of confidentiality agreement, the kind I tend to write about.I have been writing for years that employment-based NDAs can operate like stealth non-competes. The general problem is three-fold:The clauses contain open-ended, malleable terms that do less to define "Confidential Information" and more to reserve discretion for the company to label something conf[...]



The "Inevitable Disclosure" Non-Compete Clause: What is it and for God's sakes...why?

2017-11-17T15:46:21.742-06:00

Leave it to lawyers to see an obscure, narrow, and disfavored legal theory and then try to drive a mack f**king truck through it like it's the next great revelation.To what might I refer? Try a non-compete on steroids, one so hopelessly inane and stupid that, at first blush, it actually has some appeal. Until, of course, you analyze it and put more than three minutes of thought into what you're doing.I refer to this unicorn (in the eyes of some) as the inevitable-disclosure non-compete, the intersection of obscurity and protectionism. Allow me to explain how this bad-ass of contractual clauses works (until it's declared invalid).Start with the basics.An agreement may have several different types of post-employment covenants that bind the employee. You have your standard non-disclosure clause, which limits for a period of time the use of confidential information the employee learned. Then you have your non-solicitation covenant, which may preclude work with a group of valuable clients or recruitment of co-workers.Hard stop for a second.Those two types of covenants have some legitimate uses. But lawyers must still draft them reasonably and with sensible scope and time limits, even if a geographical one isn't needed.I continue.Your agreement may even have a general, market-based non-compete that bars work in a relevant industry.Hard stop again.This type of covenant needs to be even more carefully tailored, given its broad economic hardship on the person agreeing to the covenant. It limits work, not a type of work or a narrow subset of work activity. Here, we need activity limits, probably a shorter duration, and in many (but not all) cases a geographic scope confined to the employee's or company's sphere of influence.An inevitable-disclosure non-compete is profoundly different. It requires the employee to refrain from accepting employment that may require him to use, disclose, or rely on the employer's confidential information. This precise type of covenant recently was held unenforceable in the case of Sullivan v. Gupta, M.D., LLC, No. 2:17-cv-609 (E.D. La. Aug. 10, 2017), because it failed to comply with the requirements in Louisiana for enforceable restraints of trade. (Among other things, State law requires an identification of which parish the non-compete applies to, and this one didn't cut the proverbial mustard.)This is by no means the first case to find that a stealth non-disclosure agreement constitutes a non-compete.I have my own experience with agreements like this, and it hasn't been positive (except for the fact that we've won). I blogged a few weeks ago about our trial and appellate victory in Automated Industrial Machinery, Inc. v. Christofilis, 2017 IL App (2d) 160301-U, where the Second District affirmed a fee award for my client, the defendant, of nearly $1.5 million.One of the issues in that case concerned a non-compete, which the trial court found invalid for lack of consideration. The Appellate Court affirmed that ruling. But it didn't discuss the terms of AIM's non-compete. Had we not prevailed on the consideration issue, we had a strong argument on invalidity (not to mention lack of breach, for which there was no evidence).That agreement was a true inevitable-disclosure non-compete, and I reprint below the operative restriction, which is stunning in scope:Pretty rough start when you call your non-compete clause a "doctrine of inevitable disclosure." Who the hell thought of that one? Way to be pedantic, and nice way to warm up to a judge.Beyond that titular snafu, look at the terms. Just two low-lights to point out:(1) It applies in perpetuity if my client "could not help b[...]



The Reading List (2017, No. 27): Judicial Rock-Stars,Forum-Selection Clauses, Attorney General Suits, and Worthless Blog Posts

2017-11-10T12:00:01.882-06:00

Non-Compete and Trade Secrets News for the week ended November 10, 2017***Vicarious Liability Ruling in Waymo v. UberFor those of you following the driverless car technology trade secrets lawsuit between Google and Uber, I urge you to take a break from the day-to-day litigation filings. They're interesting, to be sure. But they ain't as interesting as this article in The Verge about the judge presiding over the case, William Alsup. I can't do it justice. Read it. It is stunning.On to more mundane topics in this case: vicarious liability. One of the defendants, Otto Trucking, is out of the case. Judge Alsup granted its summary judgment motion, soundly rejecting Waymo's theory of vicarious liability for the actions of its founder, Anthony Levandowski, the former star engineer whose mass download of files is the heart of Waymo's suit. The court specifically relied on Waymo's strategy to divide and conquer, an effort that kept its claims against Levandowski out of court and the other defendants out of arbitration. As Judge Alsup stated, Waymo could not treat the two as "fungible targets."The issue of vicarious liability doesn't arise much in the case law, at least in terms of nuanced legal analysis. One line of cases holds that respondeat superior, or vicarious liability, is not available under the Uniform Trade Secrets Act on the grounds that it is a common-law remedy preempted by the statute. Other cases take a more flexible, case-by-case approach, relying on the equities. Judge Alsup's idiosyncratic opinion avoids this discussion entirely, and it's bereft of a single case citation. That doesn't make it uninteresting or even wrong.To me, the better approach - one textually consistent with the state and federal statutes - is to assess each defendant separately and to determine whether the relevant conduct for each amounts to misappropriation. This is, I think, what Judge Alsup is saying. He eschews any reference to statutory preemption, but it's just a different way of getting to the same result.Maryland Non-Compete AgreementsJudge Paul Grimm, another total judicial rock-star, struck down a five-year, market-based non-competition clause against a high-level engineer, a ruling summarized in Allied Fire Protection, Inc. v. Thai, 2017 WL 4354802 (D. Md. Oct. 2, 2017). The particular non-compete had the feel of being an amalgamation of form clauses, designed specifically to instruct lawyers on how not to draft non-competes.For starters, the duration was five years - something sure to align the court with the affected employee. Those limits may be acceptable in the sale-of-business context, where there's equal bargaining power, but they almost never have any justification for at-will employees. Then the employer decided to bar the employee from working in a "similar" business with any of the plaintiff's former, current, or future clients. No parameters. No illustration of why. No common sense.Judge Grimm's ruling that the non-compete was not tailored to protect a business interest, in the main, is not surprising. But it is significant that it arose in the context of a motion to dismiss, and not after the evaluation of evidence at the injunction or summary-judgment stage. These kinds of early, case-dispositive rulings happen all too frequently, but they embody a pragmatic approach sorely needed in litigation featuring an asymmetry in resources. Judge Grimm was careful to note the lack of allegations demonstrating the need for such broad covenants, a point that enabled the early dismissal.Practice tip: if you're an employer, never lead with a frivolous argumen[...]



The Reading List (2017, No. 26): Fee Awards, New Legislation, and Inevitable Disclosure

2017-11-03T12:00:00.172-05:00

Non-Compete and Trade Secrets News for the week ended November 3, 2017***Illinois Appellate Court Affirms $1.5 Million Fee AwardIn a Rule 23 Order, the Second District Appellate Court affirmed a substantial fee award, nearly $1.5 million, for the prevailing defendant in a fiduciary duty, trade secret, and non-compete case. I had the privilege of representing the defendant, Tom Christofilis, at trial and on appeal. It is truly a pleasure working with someone who is so candid, forthright, and credible that you don't even need to prepare him for his testimony. Good things happen to good people.The basis of the $1.5 million fee award is rooted in corporate law and in particular the bylaw indemnification provisions that cover former employees, officers, and directors of Christofilis' former employer, Automated Industrial Machinery, Inc. I have written before that corporate indemnity procedures, whether rooted in internal documents like bylaws or through state statute, are the potential game-changer and equalizer in competition suits. It is essential that counsel fully assess the interplay of indemnity when deciding whether and how to pursue competition claims against a former insider. It is just as crucial for defense counsel to understand the legal framework and position his or her client for fee-shifting.The Appellate Court's judgment here demonstrates the raw power of indemnification, ruling that it covered non-compete, trade secret, and fiduciary duty claims. But to be sure, this case was very fact-specific, and the availability of indemnification depended at least in part on Christofilis' complete success, the sheer breadth of the claims asserted against him, and the anchoring fiduciary-duty cause of action that brought the bylaw provisions into play.Keep in mind the deferential standard of review applicable in this case. No two indemnification cases are the same. And the trial court retains substantial discretion in making the call as to what claims are and are not indemnifiable, given the pleadings, legal theories, and evidence.A link to the Rule 23 Order in Automated Industrial Machinery, Inc. v. Christofilis is available here.New Legislation on Non-CompetesFor those interested in legislative updates, Russell Beck's Fair Competition Law blog is a must read. Here are a few links that discuss pending and enacted legislation on non-compete law:October 21: Russell reports on bills in New York and Pennsylvania concerning very different aspects of non-compete reform.October 15: Russell discusses bills in several states, including changes to Oregon and West Virginia law. Oregon now bans non-competes for home-care workers, while West Virginia outlaws certain types of physician non-competes. This continues a trend of industry-specific reform, rather than wholesale, across-the-board changes.The DTSA and Inevitable DisclosureThe Defend Trade Secrets Act contains a crucial limitation on injunctive relief: courts cannot issue an injunction under the DTSA to "prevent a person from entering into an employment relationship." And conditions on a person's employment must be based on threatened misappropriation, not merely on information the person knows. This limitation forms part of the compromise that resulted in the DTSA's near-unanimous passage. And it departs from the law of several states that allow for inevitable-disclosure injunctions that bar employment altogether.Courts, though, are frequently terrible at applying the doctrine of inevitable disclosure. A perfect illustration comes from the case of Express Scripts, Inc. v. Lavin, wher[...]



Much Overdue Case Law Update, Part II

2017-10-20T12:00:12.777-05:00

This week, I offer my second case-law update, highlighting a variety of cases from around the company on topics of interest.***Indiana Court Affirms Nationwide Non-Compete AgreementLast Friday, the Court of Appeals of Indiana addressed the enforceability of a nationwide non-compete agreement for an engineer in the glass container business. The facts follow a typical pattern and deal generally with a senior-level engineer's move from Ardagh Glass Containers to Owens-Illinois. (As an aside, my paternal grandfather worked at Owens-Illinois for something like 35 years, during which time he consumed approximately 364,000 unfiltered Camel cigarettes working the assembly line, kind of a poor man's Don Draper in this respect.)The employee's non-compete barred his work anywhere in North America and covered products over which the employee contributed development knowledge. The Court of Appeals, applying Pennsylvania law, enforced the non-compete, reasoning that both Ardagh and Owens competed nationally for the same type of customers. The court also remarked on a few typical facts in enforcing the preliminary injunction: (1) the employee's lack of candor on a few important facts that pertained to consideration and his "paid-leave" status at Owens-Illinois; and (2) the employee's lack of urgency in contesting the preliminary injunction and the appeal.Of greater concern was the court's breezy trade-secrets analysis, which seemed to excuse an improper trade secrets identification at trial. The court all but found the injunction order was too broad in finding that Ardagh Glass identified 16 categories of trade secrets that were at risk. And it found Ardagh Glass would need to do better at a permanent injunction hearing. But the court was not engaged at all in assessing whether the at-risk secrets were actually "threatened" from misappropriation.A link to the Court of Appeals' decision in Vickery v. Ardagh Glass Inc. is available here.Forfeiture-on-Termination Clause Found UnenforceableThis one is crazy.Kelley Rieves took a job as an assistant manager at Buc-ee's - a convenience store chain in Texas. It was at that point that Buc-ee's and its cadre of lawyers foisted upon her a historically stupid agreement. Rieves had the ability to decide how she was going to get paid - but it had to be a split between hourly wages and a flat monthly amount.The catch? The flat amount had to be repaid to Buc-ee's if Rieves (at at-will employee) left within 5 years and didn't give 6 months' notice. This is known (by me) as the stick-without-the-carrot approach. Rieves and Buc-ee's re-upped a year later with a similar arrangement. Rieves, of course, left before the 5-year period ended and filed suit to declare the repayment provision unenforceable. Somehow, Buc-ee's convinced a state court judge to enter an award for payment of the entire amount owed (less taxes) under the contract's repayment clause.Rieves appealed and, mercifully, won. Common sense prevailed. The reason? A repayment clause inhibits employee mobility. And unless the contract is consistent with non-compete law, it's unenforceable. The salary disgorgement provision, here, was totally unlike a prototypical forfeiture clause that would, for instance, cancel unvested stock options if the employee leaves to compete. Instead, it had no connection to incentivizing the employee's future performance, imposing an illogical and disproportionate penalty on an at-will employee's election to find a better job.Buc-ee's should be publicly shamed for requiring Rieves to sign such a manifes[...]



Much Overdue Case Law Update, Part I

2017-10-09T09:46:59.549-05:00

It has been a while since I surveyed new reported decisions. So over the next few weeks, I'm going to summarize very briefly some of the cases I've seen that piqued my interest. The topics are varied, which is kind of the point.***Non-Recruitment Clauses in GeorgiaGeorgia courts have proved to be tough venues when it comes to enforcing restrictive covenants. The prevailing rule of non-severability (for older agreements) generally means that an unenforceable restrictive covenant will void other similar covenants, even if they (standing alone) might be considered reasonable.But as the Court of Appeals in Georgia recently noted, this non-severability rule does not apply to non-recruitment/no-hire provisions that bar employees from soliciting co-workers. Simply put, those types of restraints to do not rise to the upper tier of restrictive covenants. And so a void non-compete will not invalidate a reasonable no-hire clause. Other courts in other States seen to equate no-hire clauses with more restrictive covenants.The case is CMGRP, Inc. v. Gallant, and it's written by Twitter star Chief Judge Stephen Dillard. A link to the opinion can be found here.Seventh Circuit Discusses Sale of Business Non-Compete DisputeThe Seventh Circuit hears about one or two non-compete cases per year. They generally involve questions of Indiana, Illinois, or Wisconsin law. And those States have non-compete laws that are interesting and nuanced.But E.T. Products, LLC v. D.E. Miller Holdings, Inc. did not require the court to delve much into substantive State law (here, Indiana) because the case hinged on whether certain activity amounted to a breach of the non-competition clause. The case involved a business acquirer's attempt to enforce a sale-of-business non-compete against the seller, after the seller rendered post-closing assistance to the acquirer's distributor. The court found that the seller's conduct did not amount to prohibited competition, saying that "a firm whose sole conduct in the relevant market consists of distributing one manufacturer's product plainly isn't that manufacturer's competitor." The court also noted the seller terminated its relationship with the distributor and rendered no assistance at all once the distributor began competing on some product lines. The facts, as the court recited them, amply demonstrated the defendant's good faith and intent to adhere to the non-compete. The pursuit of the case appeared to be vast overreach.The opinion, written by Judge Diane Sykes, is available here.The Protocol for Broker Recruiting and "Good Faith"Those of us who represent advisory firms and financial advisors have a good deal of familiarity with the Protocol for Broker Recruiting. But many don't. The Protocol's design is to foster client choice, a recognition of the intensely personal nature of the advisory relationship. More broadly, the Protocol represents an industry solution to expensive, uncertain non-compete litigation - in effect, a contractual way around flexible legal standards being applied by judges who generally lack deep knowledge of particular industries.The Protocol's basic tenets allow an advisor to avoid liability if she takes client information to her departing firm (generally, it must be related to those clients she serviced and the information must be provided to her firm on departure). If followed in good faith, the employee will not be bound by any contractual restrictive covenant or held liable under trade secrets law pertaining to the taken (and disclosed) client in[...]



The Farewell to Judge Posner: Ten Opinions for Non-Compete Lawyers to Read

2017-09-19T16:16:44.185-05:00

Less than two weeks ago, Judge Richard Posner left the Seventh Circuit Court of Appeals. Immediately. No senior status. No notice. Just up and left. Presumably to hang out with his cat, Pixie.And like that, the most widely cited appellate judge since at least Henry Friendly (and probably well before that) was gone.His post-retirement exploits are being met with more than a little skepticism and head-scratching, as he promptly released a long book airing some of his dirty laundry with his Seventh Circuit colleagues. The early returns are, how shall we put it, not great.I met Judge Posner once, when I was a 3L at the University of Illinois College of Law and editor of the Moot Court Board. He had come down for the annual competition, and I was sort of coordinating it. He was as you'd expect. Passively intimidating, somewhat aloof, lost in his thoughts. Not on my dream dinner guest list. I've argued three cases in the Seventh Circuit but never had him on a panel, which was probably just as well. Oral arguments with him are just torture to listen to, as the whole thing seemed to resemble a reflexive exercise in self-indulgence.In truth, I can't say he was my favorite judge. I liked his writing style, to a point, and I appreciated the unconventional approach he took with cases. I think his overly academic view of non-compete agreements, however, was not at all pragmatic (even though he claims to have been the great pragmatist). I found many of his recent opinions to be a bit out there, such as his bizarre concurring opinion in the Hively case that brought sexual orientation within Title VII's sexual discrimination ambit. And I certainly don't think he was the best judge on his own court. I always have felt Judge Frank Easterbrook was stronger, more consistent, and more clear in his writing. And even Judges Diane Sykes and David Hamilton have approaches to deciding cases that I can grasp with much greater confidence.But, he's Posner and everyone seems to worship him. So some tribute seems in order. Though the Seventh Circuit only decides one or two trade secrets or non-compete cases per year, his influence in this area is profound with a number of important decisions under his belt. I thought I'd offer a farewell to Posner with a top ten list of cases he wrote that influence this field of law:10. Outsource Int'l, Inc. v. Barton, 192 F.3d 662 (7th Cir. 1999). This is the one dissent from Judge Posner I am including, and it's from an appellate decision that endorses a staffing industry non-compete. Posner thought the result was correct in principle, but not under Illinois law. So he dissented. But in doing so, he outlined the historical hostility to non-competes and concluded "[t]here is no longer any good reason for such hostility." He does a nice job wading through the policy choices behind non-compete enforcement and the courts' antagonism to these restraints. But, I think he has it all wrong. His concerns are, no doubt, academically grounded. But he largely misses the point that a disparity in bargaining power, coupled with asymmetrical resources, create a large deadweight loss to society from breezy judicial attitudes towards non-compete arrangements.9. Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 626 F.3d 662 (7th Cir. 2010). This is a trademark case, but it's instructive for analyzing fee petitions. Trademark defendants can obtain fees only if the case is exceptional. In Nightingale Home Health Care, Judge Posner says that a defendant can m[...]



Judicial Engagement and Non-Compete Litigation

2017-09-07T11:20:16.739-05:00

The lack of judicial engagement is a serious thing - particularly in competition disputes.What do I mean by judicial engagement? For simplicity, I mean a bridge between judicial activism and judicial restraint. It's a method of evaluating and deciding cases, plain and simply.The term is somewhat in vogue in libertarian circles (which I inhabit) and used when litigants challenge economic regulations on the grounds that they are irrational or impinge on personal liberties.So when a government enacts a law that restricts economic freedom - say, an occupational licensing requirement - those who favor judicial engagement do not want courts to abdicate their roles. That is to say, courts should not simply defer to whatever the legislature says is a rational justification for the law.Rather, courts must engage with the evidence and ensure that it supports the need for the law. And on that score, advocates for judicial engagement would argue that protectionism is never a valid governmental interest. Unfortunately, the black-letter rules that attend government economic regulation all but invite trial judges to defer entirely to whatever the legislature says. An overreading of these black-letter principles leads courts to the wrong results, in which they often time rely on theoretical assumptions or abstract hypotheticals.***The same decisional framework, judicial engagement, applies to non-compete cases because the applicable legal rule already demand a searching analysis without granting undue deference to the party in whose favor a non-compete runs. So that seems easy enough and a perfectly reasonable analogue to the traditional playing field for the theory of judicial engagement.I digress for a second, but only a second. As my colleague Jonathan Pollard writes in a recent post, non-competes are first and foremost restraints of trade. Unless we are discussing a negotiated agreement (such as in a sale of business) with real consideration, non-competes are not traditional contracts. They may not even be contracts at all.When an employer involves the government, here the judiciary, the same liberty concerns arise - with just as much force as an irrational, generally applicable regulation that the legislature passes. The problem that has vexed courts, lawyers, and litigants is how to engage or grapple with the facts in a non-compete dispute. To be sure, judicial restraint is no method of deciding such cases at all.But many courts employ a burden-shifting approach that all but requires an employee to prove the impossible: that the employer lacks a legitimate business interest in enforcing a restraint. Allowing employers, for instance, simply to mouth some variant of a "legitimate business interest" is not the proper way for a judge to sanction a restraint and impede someone's livelihood.Let me be clear: nothing in the philosophy of judicial engagement calls upon courts usurp their roles. Just as it is crucial for courts to assess the rationale for governmental regulations of economic activity, it is a moral imperative for them to scrutinize an employer's attempt to enforce through court order a restraint of trade. This is particularly so given the dead weight that enforced and unenforced non-competes have on the economy and productivity.***Let's take an example of judicial abdication, rather than engagement. The Kansas case of Servi-Tech, Inc. v. Olson is as bland of a non-compete case as you can get. I've handled some variation of this d[...]



The Reading List (2017, No. 25): Eighth Circuit Affirms Damages Award in West Plains Litigation

2017-09-01T07:30:32.625-05:00

Non-Compete and Trade Secrets News for the week ended September 1, 2017***Jury Verdict Affirmed in West Plains LitigationThe Nebraska case of West Plains, LLC v. Retzlaff Grain is unique in that it belongs in the limited group of trade secrets and unfair competition cases to proceed to jury verdict. The case is garden-variety lift-out, engineered by a former owner of the plaintiff who systematically recruited away key employees to replicate his former business. A Nebraska jury returned a verdict of $1,513,000 in compensatory damages (along with compensation forfeiture in varying amounts against certain ex-employees).The case is valuable for its discussion of a very common tort that usually accompanies trade-secret or non-compete claims: interference with business relationships. In most cases, interference can be privileged or legally justified if it's for competitive purposes. But interference can be tortious (or wrongful) if done in bad faith, with improper means, or as part of a fraudulent or illegal scheme. Here, the Eighth Circuit found that enough evidence of unjust interference was present in the employees' mass exodus from their former employer. Specifically, the employees used customer lists, documents, and other internal confidential information to plan a coordinated departure. Too, the plaintiff introduced communications that suggested the defendants knew they were acting inappropriately in using their then-employer's information to establish a turn-key competitor from day one.West Plains shows the value that ancillary tort claims can play in competition cases. With the right facts, it is not always necessary to have a restrictive covenant. To be sure, finding evidence of bad faith or willful misconduct is not easy. But employees seem to keep finding a way to leave digital fingerprints all over the place.A link to the opinion is available here.***Privilege in the Waymo/Uber FightPrivilege issues in trade secrets litigation can arise in a variety of ways. But those issues extend well beyond garden-variety claims of attorney-client or work-product privilege.The trade-secrets battle-of-the-millennium in Waymo, LLC v. Uber Technologies, Inc. has featured several intricate disputes over production of privileged materials. In July, Magistrate Judge Corley denied Waymo's efforts to compel Anthony Levandowski - the ex-Google engineer in charge of driverless car technology - to produce documentation and media that would have reflected his retention of 14,000 files belonging to Waymo and that concerned its proprietary LiDAR technology. Given that Levandowski's pre-termination conduct posed a risk that he would be prosecuted for trade-secrets theft, the court found that compelling the production of those files would implicate his Fifth Amendment privilege against self-incrimination.But Judge Corley's order denying Waymo's motion to compel went further. She extended the Fifth Amendment privilege to a privilege log that Levandowski had to prepare. The court had required Levandowski to develop the privilege log with enough substance so that Waymo could respond to his Fifth Amendment arguments. As her ruling shows, even the outlines and parameters of a privilege log, without a corresponding production of the logged materials, can provide enough of a link to a potential crime so as to implicate constitutional concerns.The Order is available at&nb[...]



An Analysis of Two California Cases. Big California Cases.

2017-08-18T10:43:19.559-05:00

Over the past week, we received two big decisions from two different California courts on two vastly different issues. One was a decision that has no precedential effect, but which garnered a lot of headlines, particularly in tech circles. That case was decided correctly. The other received almost no attention, but which is precedential. And that case was wrongly decided.***The Computer Fraud and Abuse Act and Data ScrapingI have a been a long-time critic of the CFAA, a law put together so haphazardly and over so many years that it is difficult to resolve important questions of statutory interpretation. The key legal question that arises under the CFAA - at least in the context of employee claims - is when one exceeds her authorized access to a protected computer or accesses that computer "without authorization." Put another way, many cases have analyzed claims of insider misappropriation within the CFAA's statutory text, even though it seems clear the statute didn't really have that type of case in mind.But applying the "without authorization" language of the CFAA goes beyond just employment claims, as reflected in the important case of hiQ Labs, Inc. v. LinkedIn Corp. The case involved another question of statutory interpretation: whether the CFAA prohibited access to public LinkedIn profiles after LinkedIn revoked permission to such access.A little background is essential, since the idea of an open internet is crucial to the case's disposition. hiQ Labs is a data analytics company. Its business model revolves around scraping data off of LinkedIn users' public profiles. It then can offer products to its client companies: an analysis of which employees are likely to leave or be recruited (such as by employees updating their skills and other LinkedIn fields) and a separate analysis of which skills individual workers possess.LinkedIn demanded that hiQ stop scraping public data from its website, relying on its User Agreement and the term that prohibited data collection. hiQ sought injunctive relief, arguing that LinkedIn's threats undermined its business model and violated state statutory and common law. The analysis, though, hinged on the CFAA - for a reading of that statute in LinkedIn's favor would have preempted the offensive claims hiQ brought.The district court found that the CFAA likely did not preclude hiQ's claims, and it relied on two general concepts. First, it distinguished other cases where CFAA infractions involved access to private, as opposed to public, data. And second, it looked to the law of trespass to conclude that, despite LinkedIn's supposed revocation of hiQ's access to public profiles on its website, hiQ hadn't circumvented any sort of authentication system to view those profiles. This analysis incorporated Professor Orin Kerr's influential Columbia Law Review article that discussed the law of trespass as explaining some of the ambiguity and context of the "without authorization" language in the CFAA.The decision seems intuitive and obvious, but in large part it was constrained by the text of the CFAA itself, which has confounded courts over the years. Thank goodness we have thought leaders like Orin Kerr to make sense of the statute and provide the appropriate analytical framework on which courts can reconcile very difficult questions. Public websites need to be open and accessible, and operators cannot erect artificial barriers under the guise of a[...]