Amazon.com v. Powers’s Lessons for Us All

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GoogleScreen Shot 2013-01-05 at 10.19.17 AMI have at least had a chance to read the December 27, 2012 decision of the United States District Court for the Western District of Washington in Amazon.com v. Powers, granting in part and denying in part Amazon’s request for a preliminary injunction against one of its former executives, Daniel Powers.

The case involves a high level former Amazon employee, Mr. Powers, subject to the typical restrictive covenants (nondisclosure, no-raid, nonsolicitation, noncompete, and invention assignment). Mr. Powers was responsible for sales of Amazon cloud computing services. Mr. Powers was terminated from Amazon and, importantly, took nothing. (This is always best practice for a departing employee.) Nor did he have plans to work elsewhere at the time that he was terminated.

Three months later, Mr. Powers joined Google. Google and Mr. Powers agreed that Mr. Powers would not: refer to cloud computing in his title until the end of 2012 (i.e., about 6 months after his termination); be involved with cloud computing for 6 months (i.e., for 9 months after his termination); use or disclose Amazon’s confidential information; work with Amazon’s customers for 6 months (i.e., for 9 months after his termination); and be involved with the hiring of Amazon’s employees for 12 months from his termination.

Google’s and Powers’ voluntary restrictions were insufficient for Amazon. Amazon sued in Washington state court. Mr. Powers removed the case to the Western District.

The case is interesting for many reasons, including those identified by Ken Vanko in his post on Legal Developments in Non-Competition Agreements. Here are five of the reasons:

First, the Court, somewhat surprisingly, denied Amazon’s request for a preliminary injunction to protect its confidential information.

The Court’s decision in this regard was based on the following factors: (1) Amazon was unable to definitively identify what specific knowledge is “still” in Mr. Power’s memory without discovery, which Amazon declined to do before the preliminary injunction hearing, and (2) Mr. Powers and his new employer (Google) agreed to “virtually every restriction Amazon seeks in its injunction . . . .” The defendants’ voluntary commitment to protect the information was seen by the Court as establishing that Amazon was unlikely to prove that Mr. Powers would use confidential information (even if Amazon had been able to prove that Mr. Powers still remembered confidential information). Factual scenarios like this are quite common and frequently come out the other way, with the Court granting an injunction protecting confidential information.

Second, the Court’s analysis of the lack of proof of trade secrets provides a cautionary tale. Specifically, with regard to the issue of the existence of protectable trade secrets, the Court stated as follows:

Amazon did not ask to file any evidence under seal, suggesting that it believes the court will divine what information is a trade secret from [a] public declaration [of one of its employees]. Having scoured that declaration, the court is unable to do so. The court acknowledges that it is likely that Mr. Powers learned information that would qualify as a trade secret while he was at Amazon. See RCW § 19.108.010(4) (defining trade secret as a information that derives “independent economic value” from being neither known nor readily ascertainable and that is subject to reasonable efforts to maintain its secrecy). But if there is trade secret information that Mr. Powers could still be expected to know, Amazon has not identified it.

The takeaway from that paragraph is to take heed of the seemingly increasing trend of courts (not just in the 9th Circuit) to require early particularization of trade secrets (and, of course, a corresponding willingness to accept the alleged secrets under seal).

Third, the Court deftly avoided deciding whether Washington has or has not recognized the inevitable disclosure doctrine – an area of the law receiving significant attention in many recent decisions. Despite the Court’s avoidance of the issue, it nevertheless made the following cautionary observation (for others to take note of in the future):

Were inevitable disclosure as easy to establish as Amazon suggests in its motion, then a nondisclosure agreement would become a noncompetition agreement of infinite duration. . . . Washington law does not permit that result.

Fourth, the Court’s analysis of the nonsolicitation (of customers) restriction was quite thorough and informative. Specifically, the Court first observed that Washington courts are more apt to enforce a nonsolicitation agreement than a noncompete agreement, because the nature of the restriction on the employee is less severe. However, in shorting to nine months the 18-month stated duration of the restriction, the Court’s analysis was as follows:

This is not a case where Mr. Powers seeks to leap from Amazon immediately to Google with his former customers in tow. He stopped working with Amazon customers more than six months ago. There is no evidence he has had contact with any of them since then. There is no direct evidence that he intends to pursue business with any of them. The only indirect evidence that he has interest in contacting his former customers is that he has chosen to fight Amazon’s efforts to enforce the Agreement. Although the personal aspects of his relationships with his former customers might be expected to endure for more than six months, they might just as well extend even beyond the 18-months that the Agreement provides. Amazon has not explained why it selected an 18-month period, nor has it disputed Mr. Powers’ suggestion that the Agreement he signed is a “form” agreement that Amazon requires virtually every employee to sign. Because Amazon makes no effort to tailor the duration of its competitive restrictions to individual employees, the court is not inclined to defer to its one-size-fits-all contractual choices. Amazon has not convinced the court that the aspects of Mr. Powers’ relationships with customers that depend on confidential Amazon information are still viable today.

The influence that each of those facts (the six month period before Mr. Powers joined Google; his lack of communication; the “evidence” of his interest in contacting the clients; the potential longevity of the client relationships; the “form” nature of the agreement; and the absence of confidential information) had on the Court’s decision should be instructive to those of us facing these issues in Washington (and elsewhere). Each raises all sorts of questions.

Focusing, for example, on the longevity of the relationship as compared with the duration of the restriction. That issue exists not just with customer relationships, but with confidential information and trade secrets protectable through noncompetes. In fact, one of the criticisms of noncompetes is that they are not coterminous with the life of the trade secrets. Good luck to Coca-Cola enforcing a noncompete until the secret formula to Coke is revealed. It won’t happen. Nor, I suspect, would a court refuse to enforce Coca-Cola’s secret formula based noncompete simply because the secret formula would outlive the restriction.

Well, then, why should a nonsolicitation agreement be circumscribed because the goodwill may extend longer than the restriction? While it’s easy to understand modifying (i.e., shortening) the duration when the restriction would outlive its utility, it’s hard to understand shortening it because the restriction isn’t long enough. Does this suggest that the Court would be receptive to a defense in the context of a noncompete on the ground that the trade secrets protected by the noncompete will outlast the restriction, so the restriction is unnecessary? Unclear.

And, fifth, similar to Ken’s point, the Court’s analysis of the noncompete is instructive. The Court reasoned as follows:

Its ban on working with former customers serves to protect the goodwill it has built up with specific businesses. A general ban on Mr. Powers’ competing against Amazon for other cloud computing customers is not a ban on unfair competition, it is a ban on competition generally. Amazon cannot eliminate skilled employees from future competition by the simple expedient of hiring them. To rule otherwise would give Amazon far greater power than necessary to protect its legitimate business interest. No Washington court has enforced a restriction that would effectively eliminate a former employee from a particular business sector. This court will not be the first, particularly where Amazon has not provided enough detail about the nature of AWS’s cloud computing business to convince it that an employee like Mr. Powers can only compete with AWS by competing unfairly.

The two aspects of the decision that seem atypical are that: (1) the Court used the nonsolicitation covenant to undermine the noncompete; and (2) the Court refused – under the particular facts presented – to bar Mr. Powers from a particular business sector. While both can be seen as a mere failing of the sufficiency of Amazon’s evidence, they seem to be more; they seem to suggest an overall reluctance by the Court to enforce noncompete agreements – especially where Washington is a reformation state (meaning that the courts can essentially rewrite a restriction to make it reasonable).

Stay tuned to see how the law develops in Washington (and elsewhere). It should be interesting!

Trade Secret | Noncompete – Issues and Cases in the News – September 2012

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It seems that, lately, each installment of Trade Secret | Noncompete Issues and Cases in the News could be called, “What I read over my vacation.” As was inevitably the case, given the time between posts, there is again a lot here! Enjoy…

Please note that there are some things that require action, in particular, in New Hampshire, so, if you read nothing else, please check the jurisdictions in which you do business.

Federal/EEA: Some of the big news on the federal side: There is a renewed effort to bolster the Economic Espionage Act. For the latest, see: US House Passes Tougher IP Theft Bill (discussing the Foreign and Economic Espionage Penalty Enhancement Act of 2012, which would increase penalties for trade secret theft) and Senators Kohl and Coons Announce the Protecting American Trade Secrets and Innovation Act of 2012: Can they Get It Done This Time? (discussing the creation of a federal trade secret private right of action).

4th Circuit/CFAA: The split in the circuits on the issue of the scope of the Computer Fraud and Abuse Act continues to grow as the 4th Circuit adopts the 9th Circuit’s narrow reading of the Act in WEC Carolina Energy Solutions LLC v. Miller. For an excellent discussion, see the Circuit | Splits blog’s post, “4th Circuit Deepens Division Over Scope of Computer Fraud & Abuse Act.” Keep your eyes on this issue for a petition to the Supreme Court (even though, as Brian Bialas notes here, the US Solicitor General did not petition for review of the Nosal case).

Arizona: The 9th Circuit, in Management and Engineering Technologies International, Inc. v. Information Systems Support, Inc., interpreting Arizona’s version of the Uniform Trade Secrets Act, held (based on the facts of the case) that a plaintiff’s roster of employees is not a trade secret. For a discussion of the case, see UnIntellectual Property.

California: As most experienced trade secret / noncompete lawyers know, California has a strong public policy against noncompetes (and nonsolicitation agreements, etc.), with few exceptions. In a recent case, Fillpoint, LLC v. Maas (August 24, 2012), the California Court of Appeals (Fourth Appellate District) provided some recent clarification on the exceptions. For an excellent summary, see California Court Strikes Down Post-Employment Non-Compete Agreement, Raising Questions about the Validity of Employee Non-Solicits.

Georgia: On June 24, the 11th Circuit issued an unpublished decision (Becham v. Crosslink Orthopaedics, LLC) in which the Court made clear that the Georgia Legislature’s initial efforts to change Georgia’s noncompete law effective November 3, 2010 were unconstitutional; the law applies only prospectively, starting May 11, 2011. Accordingly, agreements entered into prior to May 11, 2011, are subject to Georgia’s prior (much more noncompete-unfriendly) law. For an excellent discussion of the case, read Benjamin Fink and Neal Weinrich’s post, An Important Development Regarding Georgia’s New Restrictive Covenants Law, on Georgia Non-Compete and Trade Secret News.

Iowa: In a recent, very fact-driven case involving the intersection of open records laws and trade secrets laws (see “Trade Secrets at the Intersection with Public Records” in a prior “Noncompete – Issues and Cases in the News” post), the Iowa Supreme Court held that trade secret protection was not available to a filmmaker’s budget summaries where the filmmaker was receiving tax credits. See Film Budget Summaries Are Not Trade Secrets.

Massachusetts: A recent decision, U.S. Electrical Services, Inc. v. Schmidt, from Judge Casper of the United States District Court provides a great summary of the distinction between the inevitable disclosure doctrine as a trade secret concept (used to get an injunction in the absence of a noncompete) on the one hand and using the likelihood of “inevitable disclosure” as the standard determining whether the breach of a noncompete is likely to cause irreparable harm to a former employer.  This distinction is often overlooked, and the concepts easily confused, so the case is definitely worth a read. In addition, it’s also interesting in that Judge Casper observes that Massachusetts has not adopted the inevitable disclosure doctrine, and then, nevertheless, analyzes the facts under the doctrine. For more discussion, see “Ex-employees’ work for competitor OK, Inevitable disclosure doctrine inapplicable,” in New England In-House.

Missouri: The latest statement by the Missouri Supreme Court (in Whelan Security Co. v. Kennebrew) on Missouri noncompete law. To hear the oral arguments or read the briefs, click here.

Nevada: The United States District Court for the District of Nevada held in Switch Communications Group v. Ballard that the plaintiff must first identify trade secrets with reasonable particularity before the defendant would be required to respond to discovery.

New Hampshire: There is both a very important statutory noncompete development and an interesting Computer Fraud and Abuse Act decision in New Hampshire recently.

Statutory Development: Those of you who are regular readers of this blog know that I have been assisting Representative Lori Ehrlich and Senator Will Brownsberger on the Massachusetts noncompete bill for the past several years. Well, while Massachusetts has been working on a comprehensive review, clarification, and overhaul of its noncompete laws, New Hampshire took a more streamlined approach and, as of July 14, 2012, will require advance notice of noncompetes and “non-piracy” agreements.

Companies need to comply now; comport your practices to the statute immediately. This affects new hires and existing employees.

The operative text of the law is as follows (and a link to the law in its entirety is available here):

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.

Now for the questions… While the statute was obviously intended to prevent the circumstance where an employee does not learn that he will be bound by restrictive covenants until he commences work (or some time after), by not defining key terms, the statute seems to have created quite a few uncertainties.  For example, does “non-compete” mean just a traditional noncompete or does it include garden leave clauses? Given that people often use the term “noncompete” to mean nonsolicitation agreements as well, as are those included?  What about nondisclosure agreements (which are also sometimes grouped in as “noncompetes”)? What is a non-piracy agreement? (Typically, that is a restriction on raiding employees, although it may be more likely that in New Hampshire it will be interpreted as an agreement not to solicit customers.) What about the meaning of a “change in job classification”? Is it a promotion? Is a change in title sufficient? Is it classification for wage laws? Will a significant raise be enough? If it is only some limited circumstance, what happens if a company legitimately needs to require a noncompete after an employee is working, but there is no “change in job classification,” does that mean no noncompete? What will happen to other (less restrictive) types of restrictive covenants, such as forfeiture agreements, forfeiture for competition agreements, nondisclosure agreements, etc.?

CFAA Decision: The United States District Court for the District of New Hampshire in Wentworth-Douglass Hospital v. Young & Novis Professional Association has, despite First Circuit precedent (in EF Cultural Travel BV v. Explorica, Inc.) seemingly to the contrary, applied a narrow interpretation to the Computer Fraud and Abuse Act.

Ohio: Two recent cases from Ohio are very interesting:

  • As discussed previously here (see Ohio section), the Ohio Supreme Ohio Supreme Court, on May 24, 2012, issued a decision (Acordia of Ohio, L.L.C. v. Fishel) on a significnt issue that is unsettled in many states: The assignability (typically in a corporate merger or acquisition) of an employee noncompete. In short, the Ohio Supreme Court held that to be assignable, noncompetes must say so. However, on July 25, the Ohio Supreme Court issued a decision agreeing to reconsider its decision. Stay tuned!

Invention Assignment Agreements: Invention assignment agreements are agreements where, typically, an employee will assign to his employer all rights to virtually anything he “invents” (or even thinks of in the shower) during the time of his employment, and frequently for a period after. There are very few cases addressing these agreements. However, recently, there were three: one in Wyoming, one in South Carolina, and one in Massachusetts.

I previously covered (with relevant links) the Wyoming case here. For an excellent analysis of the South Carolina case, see Ken Vanko’s post, Supreme Court of South Carolina Address Validity of Invention Assignment Clause.

In the Massachusetts case (Grocela v. The General Hospital Corporation), the Superior Court (Lauriat, J.), considered a physician’s claim that an invention assignment agreement – requiring Grocela to assign to Massachusetts General Hospital any inventions “that arise out of or relate to [his] clinical, research, educational or other activities . . . at [MGH]” – was unenforceable. The Court started from the premise that, “In general, the ‘law looks upon an invention as the property of the one who conceived, developed and perfected it, and establishes, protects and enforces the inventor’s rights in his invention unless he has contracted away those rights.’” The Court did, however, then consider issues of reasonableness, though not going so far as applying (expressly, at least) the standard reasonableness test (time, place, scope, narrowly tailored to protect legitimate business interests) typically applicable to restrictive covenants (which include invention assignment agreements). In the end, the Court found the assignment enforceable.

Criminal:

Related Items of Interest:

Massachusetts Noncompete Bill Status Update

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As those of you following the Massachusetts noncompete bill will recall, a modified version of the bill was refiled in January. (See Massachusetts Noncompete Bill Refiled.)

Although the refiled bill reflects significant changes based on input received previously, Representative Lori EhrlichRepresentative Will Brownsberger, and Representative Alice Peisch continue to solicit input on the bill. If you have any suggestions (or questions), you can reach out to any of them or to me (Russell Beck), or add your comments directly at a website set up to facilitate discussion about the bill: OpenMassHouse.com.

Please note that the bill has been assigned to the Joint Committee on Labor and Workforce Development, which will hold a hearing on the bill on September 15, 2011.

“Google this!,” says PayPal

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While everyone else gets their information by googling it, how does Google get its information? Well, according to Pay Pal, it steals it.

Just two days ago (Friday, May 27, 2011 – for those reading this some other time), Google (in conjunction with MasterCard, Citigroup, Sprint, and First Data) announced a new service by which people can use their mobile phones as credit cards.  See Reuters here.

Later that same day, PayPal reportedly sued Google (and two former PayPal employees, Osama Bedier and Stephanie Tilenius) in Califorina, alleging (among other things – as is customary) that Google acquired PayPal’s trade secrets relating to its mobile phone payment service, and that Google did this by hiring these two individuals. See LA Times here. The case (complaint here) also accuses one of the employees of breaching an anti-piracy agreement.

The case – if it goes anywhere – raises some interesting issues at the intersection of employee mobility and right to work on the one hand and the right to protect trade secrets on the other hand. In particular, while in many states, this would be a relatively straight-forward case for PayPal, in California, which has a strong public policy favoring employee mobility and the right to work, it will be a rare test of how the California courts balance these two important policies – especially following the California Supreme Court’s 2008 seminal case on restrictive covenants such as the anti-piracy agreement involved here (Edwards v. Arthur Andersen).

Stay tuned!

Massachusetts Noncompete Bill Now Available

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For those of you interested in seeing a copy of the Massachusetts noncompete bill as it was filed, click here or on the image to the right.

Remember that the goal of the Representatives sponsoring the bill is to get as much input as possible, so that people’s concerns can be considered as part of the legislative process. Accordingly, please reach out to Representative Lori EhrlichRepresentative Will Brownsberger, or me (Russell Beck) to get your questions answered or to provide us with your input.

Also, as indicated in my prior post last week (Massachusetts Noncompete Bill Refiled), we will continue to provide close and timely coverage of the bill, so please feel free to do any or all of the following:

If you have any questions, please feel free to share them with us via email.  Also, you may wish to contact your local state senator or representative if you would like them to take a position.

 

Massachusetts Noncompete Bill Refiled

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The bill in Massachusetts to codify, clarify, and modernize Massachusetts law relative to employee noncompetition agreements was re-filed today, with several significant changes from the prior version.  A copy will be available shortly (check back or see below).

Here is a summary:

(1) The bill, if enacted, will not apply retroactively (i.e., it would apply only to noncompete agreements that are entered into after the law becomes effective). Of course, lawyers being lawyers, will not let the inquiry end there. Lawyers seeking to help their clients avoid existing noncompete agreements will likely argue that the bill provides guidance that should be followed in interpreting existing agreements.

(2) The bill does not affect nondisclosure agreements, nonsolicitation agreements, anti-piracy agreements, other similar restrictive covenants, or noncompetition agreements outside of the employment context (for example, in the context of the sale of a business). Such agreements are specifically exempted from the scope of the bill.

(3) The bill codifies current law insofar as noncompetition agreements may be enforced if, among other things, they are reasonable in duration, geographic reach, and scope of proscribed activities and necessary to protect the employer’s trade secrets, other confidential information, or goodwill. Similarly, courts may continue to reform noncompetition agreements to make them enforceable and refuse to enforce such agreements in certain circumstances.

(4) The bill requires that noncompetes be in writing, signed by both parties, and, in most circumstances (i.e., if reasonably feasible), provided to the employee seven business days in advance of employment. If the agreement is required after employment starts, the employee must be provided with notice and “fair and reasonable” consideration (beyond just continued employment).

(5) The bill restricts noncompete agreements to one year, except in the case of garden leave clauses, which may be up to two years.

(6) The bill identifies certain restrictions that will be presumptively reasonable and therefore enforceable (if all other requirements are met).

(7) The bill requires payment of the employee’s legal fees under certain circumstances, primarily where the agreement is not enforced in most respects by the court or where the employer acted in bad faith. The bill does, however, provide safe harbors for employers to avoid the prospect of having to pay the employee’s legal fees, specifically, if the noncompete is no more restrictive than the presumptively reasonable restrictions (the safe harbors) set forth in the bill – or if the employer objectively reasonably tried to fit within the safe harbors. Similarly, an employer may receive its legal fees, but only if otherwise permitted by statute or contract, the agreement falls within the safe harbor, the noncompete was enforced, and the employee acted in bad faith.

(8) The bill rejects the inevitable disclosure doctrine (a doctrine by which a court can stop an employee from working for a competitor of the former employer even in the absence of a noncompetition agreement).

(9) The bill places limitations on forfeiture agreements (agreements that can otherwise be used as de facto noncompetition agreements).

The principal changes from the last bill are as follows:

(1) The requirement that a noncompete be housed in a separate document has been eliminated.

(2) The salary threshold has been eliminated. Instead, courts shall simply factor in the economic circumstances of, and economic impact on, the employee.

(3) Garden leave clauses have been added back in. Accordingly, if an employer needs a noncompete for more than one year, up to two years, it may – at its option – use a garden leave clause.

(4) The consideration for a mid-employment noncompete has been changed to simply that which is “fair and reasonable.” The presumption that 10 percent of the employee’s compensation is “reasonably adequate” (the old standard) has been eliminated.

(5) The circumstances in which an employer can avoid paying mandatory attorneys’ fees have been expanded to include when the lawyer objectively reasonably attempted (even if unsuccessfully) to fit within the applicable safe harbors.

(6) The rejection of the inevitable disclosure doctrine has been further clarified to ensure that employers can still protect themselves if an employee has disclosed, threatens to disclose, or is likely intentionally disclose the employer’s confidential information.

(7) The scope of restrictions place on forfeiture agreements has been limited. Incentive stock option plans and similar plans will have fewer requirements placed on them.

Other information:

Some people have expressed an interest in having other issues to be addressed by the bill, which have not been incorporated. Three facts are important in this regard: (1) additional changes may be made in the future; (2) the bill is the product of input reflecting many different points of view and strives to balance those needs in order to improve the state of the law as to all of those affected; and (3) the bill is not, nor is it intended to be, a substitute for proper drafting of a noncompete (or any other restrictive covenant, for that matter).

We will continue to provide close and timely coverage of the bill, so please feel free to do any or all of the following:

If you have any questions, please feel free to share them with us via email.  Also, you may wish to contact your local state senator or representative if you would like them to take a position.

No Oracle Necessary

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Well, I guess it’s not such a bad thing that my last post was about the HP/Oracle/Hurd dispute, as there’s more to report. It’s settled. No surprise there; most of these cases do settle – and settle quickly. You didn’t need an Oracle to predict this outcome. (Sorry!) 

The settlement occurred this week, and its terms are confidential.  But, Hurd has reportedly waived a significant portion of his very sizeable severance package.  (See NY Times story.)

So, what’s the news here? Only that we will have to wait a bit longer for California to clarify the scope of its trade secret exception to its ban on noncompetes. So sad.

Is Oracle Going To Be “Hurding”?

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Bad pun aside, Hewlett-Packard has sued its former CEO, Mark Hurd, who left HP last month and reportedly just joined Oracle as its new co-president.  (A copy of the complaint if available here.)  Not surprisingly, HP is claiming that Hurd knows so much of HP’s confidential information that allowing him to work for Oracle – a direct competitor – would cause irreparable harm to HP.

This would be a textbook case for a court to consider enforcing a noncompete and/or nondisclosure agreement and even applying the inevitable disclosure doctrine (more on that here) were it not for the fact that the parties are located in California, which is notoriously hostile to noncompetition agreements, related restrictive covenants, and the inevitable disclosure doctrine.  Indeed, in 2008, the Supreme Court of California issued its seminal decision of Edwards v. Arthur Andersen LLP, closing a loophole that had been opened and expanded by the United States District Courts in California, which had allowed the enforcement of noncompetes in certain circumstances.

That case, however, left open one narrow issue:  whether noncompetes can be enforced to protect trade secrets.  While other California cases have since addressed that issue, the California Supreme Court has not.  This could be the case to do it.

Stay tuned!

The Muffin Man Returns – And So Does Inevitable Disclosure

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You may recall that in February, a senior executive from Bimbo Bakeries USA, Inc. (“Bimbo”) – maker of, among other things, Thomas’ English Muffins – went to work for a competitor. The executive, Chris Botticella, was one of only a few people in the world with knowledge of how the secret behind the famous “nooks and crannies.” That and other knowledge was information that Bimbo claimed would be inevitably used or disclosed if Botticella were permitted to work for Bimbo’s competitor.

The trial court enjoined Botticella based on a legal doctrine known as the “inevitable disclosure doctrine.” On appeal, one of the central issues was the legal showing necessary for the doctrine to apply (and thereby prevent a former employee from working for a competitor, even when the employee is not subject to a noncompetition agreement). The question came down to this: did Bimbo need to show that Botticella would “inevitably” use or disclose the information, or was it sufficient for Bimbo to show that Botticella would “likely” use or disclose the information.

On July 27, the United States Court of Appeals answered that question (under Pennsylvania law). The Court held that the standard is not “inevitability,” but rather “whether there is sufficient likelihood, or substantial threat’ of a defendant disclosing trade secrets.” Affirming the lower court’s finding that disclosure was likely, the Court of Appeals upheld the injunction. (The decision is here.)

So, what’s the takeaway? At least in Pennsylvania, where “inevitable” seems to mean “likely,” application of the inevitable disclosure is something to be seriously considered by employers in the absence of a noncompetition agreement and something that should not be taken lightly by employees considering leaving for a competitor.

For the rest of us, stay tuned. The 3rd Circuit seems to represent the most liberal construction and application of the doctrine. It remains to be seen whether others follow and fill in the nooks and crannies.

Fair Competition News: Do You Know the Muffin Man? (redux)

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Back in January, I wrote about Bimbo Bakeries USA Inc. having sued a former executive who left for competitor Hostess Brands Inc. (The story appears on the Trade Secret / Noncompete Blog, which I had created for my prior law firm.)

Bimbo claims that the former employee is one of only seven people in the world who know the secret recipe for Thomas’ English Muffins, including, according to the Huffington Post’s detailed account (here), “how much dough to use, the right amount of moisture and the proper way to bake them.” Apparently relying on the inevitable disclosure doctrine (a doctrine by which a court can stop an employee from working for a competitor of the former employer even in the absence of a noncompetition agreement, but more on that in a later post), Bimbo argued that if the former employee were permitted to work for Hostess, he would inevitably use or disclose that recipe to Hostess. The United States District Court in Philadelphia was persuaded and enjoined the employee from working for Hostess.

The employee – who is now not able to work for Hostess until his case is resolved – has appealed the ruling, raising the question of what quantum of likelihood of disclosure is required by the inevitable disclosure doctrine. This is a significant issue, as there is a dearth of cases – especially at the appellate level – accepting, much less applying and analyzing, the inevitable disclosure doctrine. Accordingly, this will be an important case to watch. Stay tuned!

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