The Illinois Supreme Court has rejected the controversial notion initially expressed in a 2009 decision from an Illinois appellate court (Sunbelt Rentals, Inc. v. Ehlers, 394 Ill.App.3d 421, 333 Ill.Dec. 791, 915 N.E.2d 862 (2009)) that a court need not consider whether a former employer has a legitimate business interest being protected by the noncompete agreement.  The Supreme Court’s decision, Reliable Fire Equipment Co. v. Arredondo, 2011 WL 6000743 (Dec. 1, 2011), although rejecting Sunbelt’s abandonment of the legitimate business interest test, did expand the scope of recognized legitimate business interests in Illinois, basing the test on the totality of the circumstances, rather than defined interests.

The Montana Supreme Court, in Wrigg v. Junkermier, 362 Mont. 496 (2011), held that there is no legitimate business interest (a necessary element to enforcement of noncompetes in most states) in enforcing a noncompete against a former employee who was terminated by the company without cause.

In Texas, as noted in connection with the Texas Supreme Court’s prior (now withdrawn and replaced) June 2011 decision (see Texas Overhauls Noncompete Law), until recently, noncompete law differed markedly from other states insofar as the consideration given for a noncompete in Texas had to relate to the legitimate business interest sought to be protected by the noncompete.  In December 2011, the Texas Supreme Court issued its replacement decision (Marsh v. Cook, 354 S.W.3d 764 (2011)) requiring that the consideration be “reasonably related” to the legitimate business interest to be served.

Finally, the chart was also revised to correct (thanks to a note we received from a very helpful user of the chart) a typographical error in the reference to Wisconsin’s statute and that Wisconsin law remains undecided on whether a noncompete will be enforceable against a discharged employee.

CFAA:  The much-awaited decision from the 9th Circuit (en banc) in US v. Nosal has finally issued. In short, the 9th Circuit overturned its 3-judge appellate panel and held that the District Court was correct: the Computer Fraud and Abuse Act does not apply to mere violations of terms of use restrictions. See Court narrows the reach of computer fraud law.

EEA: The other much-awaited decision – this one from the 2nd Circuit – has finally issued. In U.S. v. Aleynikov, the 2nd Circuit refused to extend the Economic Espionage Act to reach software stolen by the former Goldman Sachs programmer. For more on this, see John Marsh’s post, “U.S. v. Aleynikov: Did the Second Circuit Get it Wrong and What are the Repercussions for the Kohl/Coons Amendment to the Economic Espionage Act?” and Peter Toren’s “Second Circuit Issues Opinion in Aleynikov: Limits Scope of the EEA, Urges Congress to Take Action.” (I will be writing more on this shortly as well.)

Other states (Massachusetts, California, Illinois, and New Jersey) are not far behind. See Social Media Password Privacy Bills.

In Massachusetts, for example, a similar bill was sponsored by Representative Cheryl A. Coakley-Rivera, with the support of over 18 other State Representatives, including Representative Lori Ehrlich (who is also a co-sponsor of the Massachusetts noncompete bill still pending before the Joint Committee on Labor and Workforce Development).

The operative language of the Massachusetts social media bill (“An Act relative to social networking and employment”) is as follows:

It shall be unlawful for any employer to ask any employee or prospective employee to provide any password or other related account information in order to gain access to the employee’s or prospective employee’s account or profile on a social networking website or electronic mail. No employee or prospective employee shall be required to provide access to an employer for a social networking site.

The bill also makes clear that it does “not apply to any employer who obtains information about a prospective employee or an employee that is in the public domain or obtained in compliance with this section” and does “not limit an employer’s right to promulgate and maintain lawful workplace policies governing the use of the employer’s electronic equipment, including policies regarding internet use, social networking site use, and electronic mail use.”

Whether these bills are passed by the respective legislators and governors remains to be seen. Interestingly, the US Congress has rejected a similar effort. See Congress Decides to Allow Employers to Demand Your Facebook Password. If they do pass, however, they will certainly raise some interesting issues (beyond the obvious) given the trade secrets concerns that have been in the news lately. See Employers May Own Employee’s Social Media Accounts: Twitter, Facebook, LinkedIn, and YouTube.

Trade Secrets on the Internet: In the most recent case to address the issue of the effect of trade secrets being available on the Internet, the United States District Court for the Western District of Ohio reasoned as follows:

Absent from the Complaint is any allegation that Plaintiff made efforts to guard the secrecy of the information about its products. Instead, it appears from the limited record before the Court that Plaintiff has published this information on the Internet. Under these circumstances, the Court finds that Plaintiff has little likelihood of success on the merits of its Ohio Trade Secrets Act claim.

Given the limitation inherent in the facts alleged in the complaint, the case, Allure Jewelers, Inc. v. Ulu, does not add much to the growing body of law on the issue. For others, see Trade Secrets on the Internet.

Connecticut: The Connecticut Supreme Court has determined that public entities can shield their confidential information from the reach of public records acts requests. See Conn. high court rules university can withhold trade secrets.

Idaho: A bill to amend the Idaho trade secrets act has been introduced before the Idaho state Senate. If adopted, the bill will clarify that physical retention of a trade secret can be misappropriation, while mere memorization cannot be. (Whether trade secrets can be misappropriated by memory is a thorny issue, about which there is much disagreement nationally – see It’s All in Your Head.) The bill also creates an entitlement to legal fees for the prevailing party, and makes persons acting in concert with a misappropriator  jointly and severally liable if they turn a blind eye to the misappropriation.

Massachusetts: Massachusetts Superior Court Judge Lauriat was the latest to find that a material change in the terms of employment (even changes that are beneficial for the employee) when “coupled with an employee’s refusal to sign a new covenant at employer’s request” will vitiate a preexisting noncompete agreement. The teaching of these cases? Noncompetes should be drafted to anticipate the possibility of change and expressly apply to any new position; and care should be taken when asking for a new agreement to make clear what is to happen with the old agreement if the new one is not accepted.

New Hampshire: The New Hampshire legislature is considering a bill (HB 1270) that would require employers to disclose the requirement of a noncompete or non-piracy agreement before hiring an employee or changing the employee’s job classification. See Seacoast Online’s, Bills ‘crossover’ in coming weeks. If passed, the bill would amend the law to provide as follows:

Prior to or concurrent with making an offer of change in job classification or an offer of employment, every employer shall provide a copy of any non-compete or non-piracy agreement that is part of the employment agreement to the employee or potential employee. Any contract that is not in compliance with this section shall be void and unenforceable.

Texas: A Texas Court of Appeals, in Drennen v. Exxon Mobil Corporation, invalidated a forfeiture for competition agreement.

Utah: The Utah Court of Appeals issued a lengthy decision (CDC Restoration & Construction LC v. Tradesmen Contractors, LLC) covering two issues that occasionally arise in trade secret cases: (1) the circumstances under which a compilation of publicly available information will be deemed a trade secret; and (2) whether and which common law causes of action are preempted by the Uniform Trade Secrets Act.

With regard to when a compilation may qualify as a trade secret, the Court (quoting the Utah Supreme Court) held, “A compilation may qualify as a trade secret ‘if extensive effort is required to pierce its veil by assembling the literature concerning it and thereby uncover its parts’; on the other hand, ‘[i]f this can be readily done by one who is normally skilled in the field and has a reasonable familiarity with its trade literature, the secret may no longer be entitled to protection.’” It’s analysis of the particular facts in the case is worth a read.

Of particular note about the preemption issue is the Court’s observation in its conclusion, as follows:

With respect to its claim for misappropriation of pricing information, CDC finds itself boxed in by the UTSA. CDC lacks evidence hat the pricing information it claims [defendants] misappropriated qualifies as a trade secret under the UTSA. Yet that information is enough like a trade secret that CDC’s non-UTSA claims are preempted by the UTSA. The UTSA does not displace civil remedies not based upon misappropriation of trade secrets, nor does it displace contractual remedies, whether or not based upon misappropriation of trade secrets. However, CDC’s non-UTSA causes of action fit nether category. The are, accordingly, preempted.

The Court’s preemption analysis leading to this conclusion and observation about the effect of preemption, is far more involved and definitely worth a read.

Criminal Cases:

• There has been a lot going on with recent focus on the Economic Espionage Act. But, the big news recently was the Second Circuit’s decision to overturn the conviction of Sergey Aleynikov, the computer programer convicted of stealing Goldman Sachs’s high-frequency trading code. See He Took the Code, but Was it a Federal Crime?
• The ongoing saga over former DuPont employees and others accused of stealing DuPont’s trade secrets continues: Ex-DuPont Employee Pleads Not Guilty in Trade Secrets Case; Former DuPont Worker Pleads Guilty in Economic Espionage Case; DuPont dismisses trade secrets suit against former chemist (this case involved (Wenjing Zhou). For additional recent thoughts on the DuPont debacle, see John Marsh‘s post, From China with Love: Front Page Article in The Wall Street Journal Highlights Lieu and Pangang Group Spying.
• Hanjuan Jin was convicted of stealing Motorola’s trade secrets but not of corporate espionage (spying). See Ex-Motorola worker guilty of trade secret theft, not espionage.

Related Items of Interest:

• A new survey conducted by the National Science Foundation and the U.S. Census Bureau concluded that trademarks and trade secrets are the most important forms of intellectual property protection to most businesses. See New Pilot Survey Reveals Importance of Intellectual Property. For the details, see here.
• Mattel has filed its opening brief in the appeal of the $310,000,000 award in Mattel, Inc. v. MGA Entertainment, Inc. (sometimes called the “Bratz case” because the dispute concerns the Bratz dolls).
• Game developer Zynga, Inc. convinced the U.S. District Court for the Northern District of California to dismiss the trade secret misappropriation claim brought against it, but other claims are not preempted will go forward. Decision here; story here.
• Peter Toren, with whom I have recently been collaborating through the Trade Secrets Committee of the American Intellectual Property Association about certain proposed federal legislation, wrote a thoughtful summary of how to think about the risk of putting trade secrets in the cloud: How to Avoid Losing Your Trade Secrets When Moving To the Cloud.
• Scott Hold, who runs the Delaware Non-Compete Law Blog, prepared a nice summary of Delaware trade secret law. See Protecting Trade Secrets in Delaware.
• Boston College Law School student, Lauren Campbell, wrote a nice post for Citizen Media Law Project entitled, How Much is a Twitter Account Worth? (And Is It Enough to Keep You in Federal Court?), highlighting the questionable value ascribed to Twitter followers in the PhoneDog case.
• For the Canadian Supreme Court’s take on the intersection between trade secrets and the public’s right of access, see Supreme Court Balances Access to Information and Third-Party Confidentiality.

FINRA: SWBC Investment Services was awarded damages, attorneys’ fees, an injunction requiring destruction and nonuse of SWBC’s information, and an order requiring that respondents retain an outside company to ensure destruction of certain files allegedly taken by a former employee broker. See In the Matter of the FINRA Arbitration Between SWBC Investment Services, LLC, Claimant/Counter-Respondent, vs. Titleist Asset Management, Ltd, Respondent and Greg Thompson, Respondent/Counter-Claimant(FINRA Arbitration 11-02350, January 10, 2012), reported by Forbes in FINRA Arbitrators Enjoin Brokerage Raid And Enforce Non-Compete.

Apple: So much has been written already about Apple’s failed efforts to seal documents in its case against Psystar (maker of unauthorized-Apple clones) that I will simply point you to a recent article, in case you missed all the press. Apple fails to keep “trade secrets” from public in Psystar case.

California: An issue that often arises in litigation is finding the right expert witness. The Southern District of California addressed this issue in Pellerin v. Honeywell International Inc., 2012 WL 112539 (S.D. Ca. Jan. 12, 2012), rejecting a former employee as an expert. It’s worth a read to understand the analysis that the court went through.

California/Pennsylvania: Another recent California decision (Aerotek v. The Johnson Group Staffing Co.) is noteworthy for its award of attorneys’ fees to a defendant in a trade secrets case. (The Trade Secrets & Employee Raiding Blog provides a very good and detailed discussion of the case.) And, the Western District of Pennsylvania – following a California decision – reached a similar decision in Hill v. Best Medical International (consolidated with other cases).

Michigan: The Michigan Court of Appeals, in an unreported decision (Actuator Specialities, Inc. v. Chinavare), relying on Michigan’s version of the Uniform Trade Secrets Act (there was no noncompete) affirmed a three year injunction preventing a former employee from competing based on the threat of misappropriation. For a nice summary, see New Weapon for Michigan Employers Protecting Against Unfair Competition and Trade Secret Theft. And, note below the different result reached in Ohio (partially because of the threshold issue that the information was not a trade secret, but it is still worth a comparison).

Missouri: Noncompetes find their ways to all industries, some more so than others. But, you don’t usually see them used by farmers’ markets. Now, the Greater Springfield Farmers’ Market (of Missouri) implemented a 5 mile noncompete. And, in an interesting twist, it seems that the restriction was implemented through a policy of the market that was to be voted on voted on by the market’s members, but, according to an email we received, was apparently voted on only by the board. See ‘No-compete’ clause rare among farmers markets; Farmers’ Market Non-Compete Angers Some Local Growers. Oddly, that is not the only unusual noncompete news in Missouri this month. Apparently the Missouri School of Journalism imposed a noncompete on student journalists (and, it seems, the factuality supervisors) prohibiting them from working for other publications. Story here.

New York: A question that often arises is the standard applicable to no-raid agreements (sometimes called “nonsolicitation agreements,” though if that term is used, it should be clear that it’s nonsolicitation of employees, rather than a typical nonsolicitation agreement, which prohibits solicitation of customers or clients). That issue was most recently addressed by the Western District of New York (a federal district court) in Renaissance Nutrition, Inc. v. Jarrett,  2012 WL 42171 (January 9, 2012). [Thank you Ken Vanko for pointing out that case; as readers of this blog know, Ken administers an excellent blog on noncompetes called Legal Developments in Non-Competition Agreements.]

Ohio: I give Ken Vanko (see just above) credit for finding this one too: He came across a case in Ohio, Columbus Bookkeeping & Bus. Svcs., Inc. v. Ohio State Bookkeeping, LLC, 2011 WL 6938340 (Ohio Ct. App. December 30, 2011), in which the Ohio Court of Appeals overturned an injunction that was based, essentially, on the lower court’s misapplication of trade secret law. The case is interesting for its analysis of client lists protections in the absence of a noncompete or nondisclosure agreement. The lower court had issued an injunction prohibiting former employees from serving the plaintiff’s customers for about a year. The Court of Appeals overturned the injunction based on its conclusion that the customer list did not qualify as a trade secret. In further analyzing the lower court’s decision, however, the Court of Appeals also observed that limiting the duration of the injunction indicated that the lower court treated the case like a noncompete case with a noncompete remedy, rather than a trade secret case with a trade secret misappropriation remedy (which should last as long as the trade secret remains secret). And, note above the different reached in Michigan (where such an injunction was affirmed on appeal).

Oklahoma: [UPDATE] On February 6, I came across a Q&A on Oklahoma noncompete law, which provides a nice summary for anyone interested. Here is the link.

Virginia: Many states have, in the past few years, been reexamining their noncompete laws (some making it harder to enforce noncompetes, and some making it easier). Virginia is the latest to enter the fray. The legislature has proposed what amounts to a ban on employee noncompetes, which, if passed, would put Virginia in the company of California, Oklahoma (see above), and North Dakota. A draft of the legislation is available here. As summarized in the bill tracking website: “[The bill] [m]akes unlawful any contract that serves to restrict an employee or former employee from engaging in a lawful profession, trade, or business of any kind. Exceptions are created for persons selling a business, former partners in a partnership, and former members in a limited liability company, who agree to refrain from carrying on a similar business within a specified geographic area in which the original entity carries on business.”

Virginia: In what would seem contrary to the legislative initiative, the Supreme Court of Virginia held in Colello v. Graphic Services, Inc. (January 13, 2012) that a plaintiff need not prove competition in order to protect its trade secrets.

Arbitration and Damages: Last November, Seagate obtained a $630 million arbitration award of sanctions (one of the largest such awards ever) against Western Digital. Western Digital is now challenging that award. See here. Stay tuned. And, for other large recent trade secret damage awards read ALM reporter, Jan Wolfe’s post, Rounding Up the 10 Biggest IP Litigation Wins of 2011, and Bloomberg’s article, DuPont Trade-Secret Award Helps Drive 2011 Record Verdict Growth.

Trade Secrets at the Intersection with Public Records: An issue that occasionally comes up is the public’s right of access (under FOIA and state public records acts) to filings that might contain confidential information that businesses were required to file with the government. These issues are not limited to filings in the United States. Case in point: Canada’s Supreme Court has just provided additional clarity around the relationship between right of access to government records and trade secrets filed with the Canadian government. See Top court rules against Merk in trade secrets case.

Trade Secrets on the Internet: As I am behind in writing about the Eagle v. Morgan, Case No. 11-4303 (E.D. Pa., Dec. 22, 2011) case (the latest case to address trade secrets on the Internet), I am referring you to John Marsh’s excellent coverage of the case (in context with the other cases that preceded it): LinkedIn and Twitter: Who Owns the Account, the Employer or Employee?

For a nice summary of the new law, see Scutari’s ‘New Jersey Trade Secrets Act’ Now Law.

The first was at the end of September 2011, when Hooters – yes, Hooters – sued a competitor (though not the departing employee, curiously enough) for, among other things, misappropriation of trade secrets, violation of the Computer Fraud and Abuse Act, and tortious interference. The complaint is here, and a nice summary by Michael Greco is here.

The second was in December, when an espresso bar, Foxy Lady (in Washington state), sued a former barista and her new employer, Knotty Bodies, for misappropriation  of trade secrets, breach of a noncompete agreement, and tortious interference. The amended complaint is here, and a summary is here.

Eighth Ciruit (Indiana and Missouri):  The 8^th Circuit, applying Indiana and Missouri trade secret law, issued a recent decision (AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corporation) addressing a common question: When can publicly-available information be a trade secret? The court focused on the effort to compile the information:

Compilations are specifically contemplated in the UTSA definition of a trade secret, and the fact that some or even most of the information was publicly available is not dispositive of the first factor in the UTSA definition. Compilations of non-secret and secret information can be valuable so long as the combination affords a competitive advantage and is not readily ascertainable. . . . Compilations are valuable, not because of the quantum of secret information, but because the expenditure of time, effort, and expense involved in its compilation gives a business a competitive advantage. . . . This value is not dependent on how much of the information is otherwise unavailable because “the effort of compiling useful information is, of itself, entitled to protection even if the information is otherwise generally known.”

Ninth Circuit (California): On December 15, the 9^th Circuit took oral argument  in its en banc (full court) review of the controversial United States v. Nosal decision holding that the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030 applies to “an employee . . . when he or she obtains information from the [employer’s] computer and uses it for a purpose that violates the employer’s restrictions on the use of the information.”

California (as interpreted by an Idaho court): The Idaho Supreme Court issued a decision on November 30, 2011 (T.J.T., Inc. v. Mori) that, under California law, a seller of a business who, upon the sale, becomes an employee of the acquiring company can be bound by a noncompete agreement that he entered into as part of the sale of a business.

Colorado: In an October 12, 2011, the District of Colorado issued a decision (L-3 Communications Corporation v. Jaxon Engineering & Maintenance, Inc.) discussing the level of specificity necessary to satisfy the requirement that trade secrets be identified “with reasonable particularity.” The decision also addresses the use of filing trade secrets under seal as “[i]n order to preserve the secrecy required for such material.”

Delaware: The District of Delaware issued a recent decision (actually, a report and recommendation subject to review by the district court judge) analyzing the standards (under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937 (2009)) required to plead a trade secrets claim under the Delaware Uniform Trade Secrets Act, 6 Del. C. §§ 2001-2009.

Georgia:  Coca-Cola put its secret formula “on display.” Don’t get too excited, the formula held up as one of the most famous trade secrets in the world (whether the legendary security measures are true or not) is not really on view. See here.

Massachusetts: Faithless employee? The Massachusetts Appeals Court, in Specialized Technology Resources, Inc. v. JPS Elastomerics Corp, barred a former employee and his new employer not only from using the stolen trade secrets until such time as they are no longer trade secrets (if that should ever happen), but – for five years – from producing a similar product by any means.

Michigan: No noncompete? No problem. If your employee steals trade secrets, you may still have a remedy. The Michigan Court of Appeals, in Actuator Specialties, Inc. v. Chinavare, is the latest to grant a “head start” injunction against a faithless former employee who stole trade secrets. In Actuator Specialties, the court barred the employee from working for a competitor for three years, seemingly recognizing that that small companies may not take all the steps one would expect of more sophisticated companies (such as requiring employees to agree to relevant restrictive covenants). Another interesting aspect of the case is that the defendant employee took steps that would be barred by the requested injunction in the period between the time that the injunction was sought and when it was issued. This is an issue that comes up often, and the Michigan Court of Appeals was clearly displeased with the employee’s conduct during that window.

Montana: The Montana Supreme Court, in Wrigg v. Junkermier, held that there is no legitimate business interest (a necessary element to enforcement of noncompetes in most states) in enforcing a noncompete against a former employee who was terminated by the company without cause.

Oklahoma: Despite what these recent cases suggest, noncompete decisions from appellate courts are few and far between. In Oklahoma, where true employee noncompetes are not enforceable, they are even fewer and farther between. But, in a recent Oklahoma Supreme Court decision, Howard v. Nitro-Lift Technologies, the court considered whether it should modify a broad noncompete to, essentially, convert it into a permissible nonsoliciation agreement (which has its own limitations in Oklahoma – which must be considered when writing such agreements). The court declined to do so, “because judicial modification cannot be accomplished without rewriting the agreement to cure multiple defects, leaving only a shell of the original agreement, and would require the addition of at least one material term . . . .”

Virginia: Virginia’s genera cap on punitive damages ($350,000) applies to the entire trade secret case – not to each trade secret. E.I. DuPont De Numours & Co. v. Kolon Indus., Inc., 2011 WL 5872895 (Nov. 22, 2011).

International: Theft by foreign nationals continues. See Scientist gets 7-plus years for trade secret theft. But as I recently observed to reporter Jan Wolfe (reported in Don’t Blame China for Trade Secrets Left (on Law.com)), international trade secret theft is a much smaller problem than domestic misappropriation.

Related Items of Interest: A few obscure issues are worth a look. In particular, (1) whether a signature is required for a noncompete to be enforceable (remember the analogous case out of New York a few years ago (IBM v. Johnson), where the employee escaped the agreement because he signed in the wrong place); and (2) what happens when there is a dispute about a “missing” noncompete (I represented an employee in one of these relatively-rare cases this past year, and the validity of the purported noncompete was never resolved). Ken Vanko wrote a nice summary of the key considerations for both of these issues: Are Signatures Required on a Non-Compete Agreement? (U.S. Risk Mgmt. v. Day); and Stealing a Non-Compete Agreement May Not Do You Any Good and It Could Land You In Jail.

The problem started in 1983 with a case from our highest court (the Supreme Judicial Court, or “SJC”) called Manning v. Zuckerman. In that case – which was not a trade secrets case – the SJC made it clear that 93A does not apply to disputes arising out of an employment relationship. That seemed clear enough.

But, the very next year, the Appeals Court decided Peggy Lawton Kitchens, Inc. v. Hogan. Hogan, an employee of the plaintiff, had taken the plaintiff’s secret recipe for cookies and left to start a competing business using the plaintiff’s recipe. From the moment you start reading the decision, you know exactly how the case is going to come out; the decision starts, “Nothing is sacred.” Of course, the court holds that the plaintiff’s 93A claims against its former employee (and his new company) are proper.

The court’s decision is important in two respects: First, as to the defendant company (which the former employee had started with the intent of competing with the plaintiff), the court concluded that, because the company was never an employee of the plaintiff, Manning v. Zuckerman did not apply and the claim under 93A could therefore proceed. Second, as to Hogan, the court says, “Hogan’s use of Kitchens’ trade secret was made when he was no longer an employee of Kitchens. Hogan’s argument crumbles.”

The distinction (that 93A could be applied to conduct that took place after employment ended) lasted about 12 years.

In 1996, the Appeals Court decided Informix, Inc. v. Rennell. There, the court held that it did not matter whether the conduct occurred during or after employment. In this regard, the court stated, “Manning held simply that any claim arising from the employment relationship was not actionable under c. 93A; it imposed no limitation that the employment relationship be ongoing.” Further, the Informix court distinguished Peggy Lawton Kitchens on the basis that the claim in Informix was based on a nondisclosure agreement, whereas there was no such agreement in Peggy Lawton Kitchens, and therefore the claim in Peggy Lawton Kitchens was independent of the employer/employee relationship.

One might wonder at this point why the Appeals Court in Informix did not simply deny the 93A claim based on the nondisclosure agreement, but then allow a claim based on the common law and statutory obligations of all persons (not just employees) not to misappropriate trade secrets – but it did not. Presumably, the court’s rationale was based on the procedural posture of the case and the fact that the claim was based “solely” on the parties’ contract.

Since then, trial courts have been wrestling with these two decisions and trying to square them.

For example, in Professional Staffing Group, Inc. v. Champigny (in 2004), the Superior Court reasoned as follows:

Informix conflicts with the decision of Peggy Lawton Kitchen’s, Inc. v. Hogan. The panel reasoned that no express confidentiality or noncompetition agreement existed between Peggy Lawton Kitchen’s, Inc. and Hogan. However no doubt arises from the Peggy Lawton Kitchens decision that the wrongful misappropriation of trade secret information arose from the employment relationship. . . . Moreover the absence of an explicit employment contract is not essential to impose duties of loyalty upon a former trusted employee. The Massachusetts common law implies a covenant or promise of the trusted employee not to divulge trade secret or proprietary information. See Jet Spray Cooler v. Crampton, 361 Mass. 835, 839 (1972), and cases cited.

Having disposed of the notion that the existence or absence of a contract is controlling, the court then came back to the temporal distinction:

The other ground of distinction [from Peggy Lawton Kitchens] asserted by the Informix panel is that the theft of trade secrets constitutes a wrong independently of an employment relationship and will be separately actionable under 93A. Nothing in the Peggy Lawton decision suggests such a special rule. Rather the Peggy Lawton panel concluded that the exemption from 93A for wrongdoing arising from an employment relationship was inapplicable for temporal reasons. “Moreover, Hogan’s use of Kitchens’ trade secret was made when he was no longer an employee of Kitchen’s.” Id. at 940 (emphasis added).

It is on that temporal basis that the Superior Court in Professional Staffing Group found that 93A can apply to an employee’s misappropriation of trade secrets: “[H]ere, we are addressing conduct occurring long after the termination of the employment relationship between the contesting parties.” The court then went on to conclude that “Informix is a mechanical overextension of Manning” and “appears to drift away from the anchoring principle of c. 93A . . . .” In the end, however, after offering a few public policy reasons for applying 93A to this type of claim, the court observed that, following trial, there will be a complete record so that the issue can be reviewed on appeal. However, no appellate decision followed.

Another oft-cited case addressing this issue is TalentBurst, Inc. v. Collabera, Inc. That case relies on yet another case (Intertek Testing Servs. NA, Inc. v Curtis-Strauss LLC from Judge Gants while in the Superior Court, now on the SJC) and concludes that the Professional Staffing Group decision was distinguishable on the ground that it involved a counterclaim by the employee (rather than a claim by the former employer).

Such was the state of affairs until recently.

Enter Specialized Technology Resources, Inc. v. JPS Elastomerics Corp. (November 23, 2011), an Appeals Court decision, perhaps shedding some additional light on its two prior rulings (Informix and Peggy Lawton Kitchens). The sum total of the court’s discussion of those cases and 93A is as follows:

Applicability of c. 93A. The defendants separately assert that c. 93A is inapplicable to [plaintiff's] claim in the present case, as it arises out of an employer-employee relationship between [plaintiff] and [defendant] Galica. See Manning v. Zuckerman, 388 Mass. 8, 12-15 (1983); Informix, Inc. v. Rennell, 41 Mass. App. Ct. 161, 163 (1996). However, [defendant company] was never an employee of [plaintiff]. See Augat, Inc. v. Aegis, Inc. 409 Mass. 165, 172 (1991); S.C., 417 Mass. 484 (1994); Peggy Lawton Kitchens, Inc. v. Hogan, 18 Mass. App. Ct. 937, 940 (1984). More to the point, though Galica obtained the trade secret during his employment with [plaintiff] and was bound by a confidentiality agreement as part of his employment contract, his misappropriation of the trade secret was actionable independent of his contractual obligations and accordingly may support a claim under c. 93A. See Peggy Lawton Kitchens, Inc. v. Hogan, supra; Informix, Inc. v. Rennell, supra at 163 n.2. The former employer-employee relationship between [plaintiff] and Galica does not stand as a bar to [plaintiff's] c. 93A claim against either Galica or [his new employer].

In short, it appears that the court’s rationale is that, while the misappropriation of trade secrets may constitute a breach of an employee nondisclosure agreement, which cannot serve as a predicate to a 93A claim, the same conduct can also constitute a separate and independent wrong (presumably because it violates trade secret laws – as opposed to the fiduciary duty of loyalty referenced in Professional Staffing Group) that is actionable under 93A.

It bears mention that the decision is also very interesting insofar as it holds that a judge may ignore a jury’s findings when deciding a 93A claim and allows two different injunctive remedies for the defendants’ misappropriation of trade secrets.

This is a quick update on a significant decision issued yesterday

The Illinois Supreme Court has rejected the controversial notion expressed in a 2009 decision from an Illinois appellate court (Sunbelt Rentals, Inc. v. Ehlers) that a court need not consider whether a former employer has a legitimate business interest being protected by the noncompete agreement.

The Supreme Court’s decision is Reliable Fire Equipment Co. v. Arredondo and was decided on December 1, 2011. Most significantly, the Illinois Supreme Court stated, ”Sunbelt overlooked or misapprehended this court’s above-discussed case law that established the three-prong inquiry into the reasonableness of restrictive covenants.”

Our 50 state noncompete survey chart will be updated shortly to reflect this decision.