Trade Secrets and Noncompetes – Year in Review 2013

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Document8This past week, the Boston Bar Association held its 14th annual Intellectual Property Year in Review. I covered trade secrets (including related restrictive covenants). Below is a summary of those developments. (If you would like a complete copy of my materials, click here.)

Obama Administration Focuses on Trade Secrets

In February 2013, the Obama Administration issued “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets.” Part of its strategy included the Administration’s solicitation of public comment.  Thirteen entities and individuals (including John Marsh (submission), Dean Pelletier (submission), Peter Toren (submission), and me (submission)) submitted comments.

At the rollout of the strategy, Attorney General Eric Holder warned,

[T]here are only ‘two categories’ of companies affected by trade secret theft –“[T]hose that know they’ve been compromised and those that don’t know yet.”

. . .  A hacker in China can acquire source code from a software company in Virginia without leaving his or her desk.  With a few keystrokes, a terminated or simply unhappy employee of a defense contractor can misappropriate designs, processes, and formulas worth billions of dollars.

Approximately four months later, on June 20, 2013, the Obama Administration issued its “2013 Strategic Plan for Intellectual Property Enforcement.” As explained by U.S. Intellectual Property Enforcement Coordinator Victoria Espinel, the Strategic Plan “builds on our efforts to protect intellectual property to date, and provides a roadmap for our work over the next three years.”

The focus seems to be on pushing trading partners to increase their trade secrets enforcement efforts, working with the private sector for them to take the lead, and beefing up trade secrets-related legislation.

Economic Espionage Act Getting Beefed Up

The Economic Espionage Act of 1996 (the “EEA”), 18 U.S.C. §§ 1831-1839, was enacted in 1996 to criminalize the misappropriation of trade secrets. It has two operative parts:  Section 1831(a) covering “economic espionage” (i.e., theft of trade to benefit a foreign power) and section 1832(a), covering “theft of trade secrets” (i.e., the theft of trade secrets to benefit someone other than the owner of the secrets). 2013 saw a focus on the EEA.

On December 28, 2012 (so, technically 2012, not 2013), the Theft of Trade Secrets Clarification Act of 2012 amended the EEA in response to US v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). Specifically, it expanded the reach of the EEA by deleting the old language that cover only trade secrets “related to or included in a product that is produced for or placed in interstate or foreign commerce” and replacing it with language covering trade secrets “related to a product or serviced used in or intended for use in interstate or foreign commerce.” (Of course, by deleting “included in,” the act may have created its own ambiguity as to its scope.)

On January 14, 2013, President Obama signed the Foreign and Economic Espionage Penalty Enhancement Act of 2012. In addition to requiring a review of sentencing guidelines, the Act increased fines for foreign espionage under section 1831. 

Later in 2013, Representative Zoe Lufgren (D-CA) introduced an abbreviated bill known as the “Private Right of Action Against Theft of Trade Secrets Act of 2013.” That bill provides for the addition of the following language to be added to section 1832 of the EEA:

(c)  Any person who suffers injury by reason of a violation of this section may maintain a civil action against the violator to obtain appropriate compensatory damages and injunctive relief or other equitable relief. No action may be brought under this subsection unless such action is begun within 2 years of the date of the act complained of or the date of the discovery of the damage.

(d) For purposes of this section, the term without authorization shall not mean independent derivation or working backwards from a lawfully obtained known product or service to divine the process which aided its development or manufacture.

Computer Fraud and Abuse Act: The Saga Continues

The spotlight on the appropriate scope of the Computer Fraud and Abuse Act (the “CFAA”) continued this year. For example, in Facebook, Inc. v. Power Ventures, Inc., 2013 WL 5372341 (C.D. Calif., Sept. 25, 2013) (denying a motion to reconsider), a website that aggregated data from social media sites like Facebook was found to have violated the CFAA. Of particular note, in the summary judgment decision that was being reconsidered, the court had observed that while using a website such a Facebook.com in violation of its terms of use is not a violation of the CFAA, “access[ing] the network in a manner that circumvents technical or code-based barriers in place to restrict or bar a user’s access” can be a violation. 844 F.Supp.2d 1025, 1036, 1040 (N.D. Calif. Feb. 16, 2012) (noting that California’s penal code’s requirement of “permission” (which is what the court first interpreted) is the equivalent of the CFAA’s requirement of “authorization”). In a similar vein, the Northern District of California denied a motion to dismiss the CFFA claim where the defendant (a competitor of Craigslist) “scraped” the plaintiff’s website after its authorization to do so had been revoked. Craigslist, Inc. v. 3Taps, Inc., 2013 WL 1819999, *3 (N.D. Cal. April 30, 2013).

Closer to home (for me, at least), Massachusetts saw several cases struggle to discern the proper interpretation. In Advanced Micro Devices, Inc. v. Feldstein, 2013 WL 2666746, *3 (D. Mass. June 10, 2013), Judge Hillman, adopted the narrow interpretation, noting that the “narrow interpretation reflects a technological model of authorization, whereby the scope of authorized access is defined by the technologically implemented barriers that circumscribe that access,” and the “broader interpretation defines access in terms of agency or use.” In so doing, Judge Hillman disagreed with Judge Gorton’s interpretation of EF Cultural Travel BV v. Explorica, Inc., 274 F. 3d 577 (1st Cir. 2001), as favoring a broad interpretation. Most recently, in Enargy Power Co. Ltd v. Xiaolong Wang, 2013 WL 6234625 (D. Mass. Dec. 3, 2013), Judge Casper took a more nuanced approach, finding that Wang was not specifically provided access, and therefore defendants’ access exceeded what was authorized. (See also Moca Systems, Inc. v. Bernier, 2013 WL 6017295, *3 (D. Mass. Nov. 12, 2013), in which Chief Magistrate Judge Sorokin described the different interpretations, but noted that he did not need to reach a decision as to which was the proper interpretation). )

On the criminal side, not only was David Nosal (the subject of the 9th Circuit’s high-profile decision (U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012 (en banc)) narrowly interpreting the CFAA) convicted by a jury, but a firestorm was set off when activist Aaron Swartz, who was being prosecuted under the CFAA for accessing and downloading millions of documents from the online archive (JSTOR), committed suicide. Swartz’s suicide resulted in a bill (“Aaron’s Law Act of 2013”) introduced by Representatives Zoe Lofgren (D-CA), James Sensenbrenner (R-WI), Mike Doyle (D-PA), Yvette Clarke (D-NY), and Jared Polis (D-CO) to narrow the reach of the CFAA.

Aaron’s Law has received significant attention and if passed in one form or another, could have profound implications for the scope of the CFAA. 

State Legislative Developments Are Mixed

Effective September 1, 2013, Texas became the 48th state to adopt some version of the Uniform Trade Secrets Act, leaving Massachusetts and New York as the only two hold-outs. 

Massachusetts continued to pursue adoption of its own version of the Uniform Trade Secrets Act (H.27 and H. 1225) and continued considering changes to its noncompete laws. The two most significant were H.1225, which appended a California model (i.e., a ban on most employee noncompetes) endorsed by Governor Deval Patrick, and the Noncompete Agreement Duration Act” (H. 1715/S. 846), which was the culmination of earlier efforts of Representative Lori Ehrlich and Senator William Brownsberger to overhaul Massachusetts noncompete law and leaves most existing Massachusetts noncompete law in tact, and, as its name suggests, focuses on the duration of noncompetes (creating a presumption that noncompetes longer than 6 months are unreasonable and 6 months or less are reasonable).

Other states have similarly considered laws to modify their own noncompete laws. For example, Connecticut considered (but the Governor vetoed) a bill (Substitute H.B. No. 6658) that would have imposed certain requirements on the assignability of noncompete agreements in the context of mergers and acquisitions; Minnesota considered a bill (H.F. No. 506) to ban employee noncompetes; Illinois considered a bill (HB 2782) that, while stating it permits noncompetes, would permit only nonsnolicitation and no raid agreements (subject to various requirements) and imposing legal fees in favor of the prevailing party in any litigation; Maryland considered a bill (S.B. 51, which received an unfavorable report from the Finance Committee) to render noncompetes unenforceable against terminated employees who were eligible for unemployment benefits; and the New Jersey Assembly introduced a bill (A3970) that would render not just noncompetes unenforceable against terminated employees who were eligible for unemployment benefits, but agreements not to solicit and nondisclosure agreements.

Bad Faith Claims: A Matter of “Common Sense”

Section 4 of the Uniform Trade Secret Act provides that “[i]f . . . a claim of misappropriation is made in bad faith, . . . the court may award reasonable attorney’s fees to the prevailing party.” Each year, more and more are cases doing precisely that.

But what about whether Section 4 applies to a trade secret misappropriation claim maintained in bad faith? According to the Seventh Circuit, it is a matter of “common sense” – it does apply.

The case is Tradesman International, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2013). There, following a favorable summary judgment decision, the defendants sought attorneys’ fees under Section 4 of Illinois’ version of the UTSA. Id. at 1016.  Recognizing that the absence of Illinois precedent on the issue of whether Section 4 applies to actions maintained in bad fait (as opposed to actions filed in bad faith), the Court of Appeals turned to California precedent. Id. Adopting California’s interpretation, the court held,

[W]e we conclude that “made in bad faith” is correctly interpreted as either bringing or maintaining a suit in bad faith.  In addition to the California case law, common sense supports such an interpretation. Regardless of her intentions at the time of filing, surely a plaintiff makes a claim in bad faith if she continues to pursue a lawsuit—even after it becomes clear that she has no chance to win the lawsuit—in order to cause harm to the defendant.

Consequently, we find that the district court erred in determining that a claim “made in bad faith” must be “initiated in bad faith.” A claim is made in bad faith when it is initiated in bad faith, maintained in bad faith, or both.

Id.

While neither Massachusetts nor New York has adopted the Uniform Trade Secrets Act, the Seventh Circuit’s decision will likely have broad persuasive authority in the rest of the country.

Personal Jurisdiction Expanded

Trade secrets litigation often involves interstate disputes. Sometimes there is an applicable contract that includes a forum selection clause and sometimes there is not. And, oftentimes, even when there is a contract with such a provision, there is a question about its enforceability. This year, there were two cases of particular note: An eye-opening decision from the United States District Court for the Southern District of California where there was no contract and a decision from the United States Supreme Court where there was a contract. Both, at least as a preliminary matter, found jurisdiction. 

In Integrated Practice Solutions, Inc. v. Wilson, 2013 WL 3946061 (S.D. Cal. July 31, 2013), the plaintiff, Integrated Practice Solutions, Inc. (“IPS”) provides practice management computer software for healthcare professionals. Id. at * 1. Defendant Wilson worked for IPS until August 20, 2012, as a sales representative and Vice President of Sales. Id. Later, he went to work for IPS competitor, Future Health Acquisition, Inc. (“Future Health”). IPS claimed that Wilson misappropriated its customer list and provided the information to Future Health. Id. 

The only contacts that Future Health, a South Dakota corporation, had with California were “a lone salesman . . . and the occasional trade show,” which the court held were insufficient to establish personal jurisdiction. Id. at *2. However, the court allowed discovery to proceed on the issue of specific jurisdiction, noting that, “that hinges on Future Health’s involvement, or lack thereof, with the alleged actions of Defendant Wilson in misappropriating IPS’s customer list.” Id

As the court explained, “Misappropriation of trade secrets is an intentional tort,” and, as such, “the defendant must be alleged to have (1) committed an intentional act, (2) expressly aimed at the forum state, (3) causing harm that the defendant knows is likely to be suffered in the forum state. Id. (citing Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984)). Thus, the court reasoned, “if Defendant Wilson did misappropriate the customer list and Future Health did somehow take advantage of that, then Future Health would have purposely availed itself of doing activities in or directed towards California.” Id. at *3. Accordingly, the court retained jurisdiction over Future Health and permitted IPS to take discovery concerning facts relevant to jurisdiction – including, therefore, facts concerning Future Health’s involvement in the alleged misappropriation (which effectively opens the door to extensive discovery). 

Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas, 134 S.Ct. 568 (2013), although a case involving a contractor’s alleged failure to pay its subcontractor may appear at first blush to be irrelevant to trade secrets litigation, it is in fact quite significant insofar as it makes forum selection clauses (which are or should be included in most restrictive covenants) much more enforceable. In particular, the Court stated the following:

 First, the plaintiff’s choice of forum merits no weight. . . .

* * *

Second, a court evaluating a defendant’s § 1404(a) motion to transfer based on a forum-selection clause should not consider arguments about the parties’ private interests. . . .

* * * 

Third, when a party bound by a forum-selection clause flouts its contractual obligation and files suit in a different forum, a § 1404(a) transfer of venue will not carry with it the original venue’s choice-of-law rules—a factor that in some circumstances may affect public-interest considerations. 

The impact of the decision on cases involving the attempted enforcement of forum selection clauses in noncompetition agreements arising from an employer-employee relationship will likely be seen in the not-to-distant future.

Consideration for Employee Noncompetes: Not In Illinois

Noncompetition agreements, like all contracts, require consideration. It is generally accepted that when an employment agreement is signed in connection with the commencement of employment, the new job provides the consideration necessary to support the noncompete.

The Appellate Court of Illinois for the First District, First Division, has, however, challenged that view in a decision that the Illinois Supreme Court refused to accept on appeal:  Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013). Specifically, the court held that, if a new job (i.e., employment) is the purported consideration for a restrictive covenant, then the employment must last at least two years to suffice – even if the employee terminates the employment.

Accordingly, companies hiring in Illinois will, in light of this decision, be well-advised to consider providing additional consideration to employees upon their hiring. What additional consideration will suffice remains to be seen.

Nonsolicitation Does Not Always Require “Solicitation”

It is rare for restrictive covenant cases – especially nonsoliciation cases – to proceed beyond the preliminary injunction stage. And, it’s even more rare for them to make it to an appellate court – especially a federal court of appeals. But, that is precisely what happened in Corporate Technologies, Inc. v. Harnett, 731 F.3d 6 (1st Cir. 2013).

The case involved the question of what constitutes solicitation, an issue that has resulted in many varying decisions over the years.

The First Circuit began its opinion with the following paragraph:

 Businesses commonly try to protect their good will by asking key employees to sign agreements that prohibit them from soliciting existing customers for a reasonable period of time after joining a rival firm. When a valid non-solicitation covenant is in place and an employee departs for greener pastures, the employer ordinarily has the right to enforce the covenant according to its tenor. That right cannot be thwarted by easy evasions, such as piquing customers’ curiosity and inciting them to make the initial contact with the employee’s new firm.  As we shall explain, this is such a case.

Id. at 8.

As the court explained, “[t]he dispute . . . turns on the distinction between actively soliciting and merely accepting business—a distinction that the Massachusetts Appeals Court aptly termed ‘metaphysical.’ Alexander & Alexander, Inc. v. Danahy, 21 Mass.App.Ct. 488, 488 N.E.2d 22, 30 (1986).” Id. at 10. Rejecting the defendant’s argument that the solicitation can only happen if the restricted party initiates the initial contact with the customer, the court stated, “This argument is simply a linguistic trick: creative relabeling, without more, is insufficient to transform what is manifestly a question of fact into a question of law. See Fed. Refin. Co. v. Klock, 352 F.3d 16, 27 (1st Cir.2003).”

The First Circuit’s decision is a significant addition to the body of case law interpreting what constitutes solicitation in the context of nonsolicitation agreements.

What to Watch For in 2014

  • LightLab Imaging, Inc. v. Axsun Technologies, Inc., SJC-11374, is awaiting decision by the SJC. The key issue (disputed by the parties) is whether a court can permanently enjoin the use of trade secrets where the defendant has not used them (and is not likely to use them in future).
  • Hydraulic fracking has been unavoidable in the news.  From a trade secrets standpoint, the tension is the oil companies’ desire to keep their processes secret and conservation and environmental groups’ (among others’) desire to know what is being put into the water supply.  Litigation has recently started over whether the fracking fluids are trade secrets.
  • Continued evolution of the material change doctrine.  It has long been established that a change in position within a company may constitute “a new relationship” necessitating the renewal or replacement of any restrictive covenants entered into in connection with a prior position. The watershed case on this issue is F.A. Bartlett Tree Expert v. Barrington, 353 Mass. 585, 587 (1968).  However, there has been a recent spate of cases involving the doctrine reaching results that are sometimes hard to reconcile. See, e.g., A.R.S. Servs. v. Morse, 2013 WL 2152181 (Mass. Super. Ct. April 5, 2013) (Leibensperger, J.); AthenaHealth, Inc. v. Cady, 2013 WL 4008198 (Mass. Super. Ct. May 2, 2013); Intepros Inc. v. Athy, 2013 WL 2181650 (Mass. Super. Ct. May 5, 2013) (Curran, J.); Akibia, Inc. v. Hood, 2012 WL 10094508 (Mass. Super. Ct. Oct. 9, 2012) (Locke, J.). Perhaps most interesting among them is Interpros, which held that terminating an employee voided the noncompetition agreement (based on the material change doctrine).

BRR’s 50 State Noncompete Chart UPDATED

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BRR 50 State Noncompete Chart 20130814The BRR 50 State Noncompete Chart has been updated to reflect various changes in statutory or case law, as well as clarifications of existing laws. Click here to get the latest version.

Massachusetts Noncompete Bill – Hearing Date

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cropped-cimg27721.jpgLast night, we had our 5th Annual Symposium on Employee Non-Compete Agreements, Trade Secrets and Job Creation. Following that discussion, I spoke with Representative Lori Ehrlich about the status of the current version of her and Senator Will Brownsberger’s noncompete bill (described below). Representative Ehrlich told me that the Joint Committee on Labor & Workforce Development (of which Rep. Ehrlich is the co-chair) will be conducting the hearing on the noncomepte bill on September 10, 2013. (Given my involvement with the bill, I will be testifying at the hearing and will report the details afterward.)

In the meantime, to the extent that you would like a refresher on the details, the current version of the bill – called the “Noncompete Agreement Duration Act” – leaves most noncompete law in tact, and, as its name suggests, focuses on the duration of noncompetes (in the employer/employee context). As before, the bill does not affect the law of trade secrets, nondisclosure agreements, nonsolicitation agreements, no raid/no hire agreements, noncompetes in connection with the sale of business (if the restricted person owns at least a 10 percent interest and received substantial consideration) or outside the employment context, forfeiture agreements, or agreements not to reapply for a job.

The bill starts with, and is premised on, the following two findings:

  • “[T]he Commonwealth of Massachusetts has a significant interest in its economic competitiveness and the protection of its employers, and a strong public policy favoring the mobility of its workforce” and
  • “[T]he Commonwealth of Massachusetts has determined that an employee noncompetition agreement restricting an employee’s mobility for longer than six months is a restraint on trade and harms the economy.”

The bill then creates a presumption that a noncompete that lasts up to six months is presumed reasonable in duration. The bill also creates the opposite presumption: a noncompete that lasts more than six months is presumed unreasonable in duration. The presumptions are not absolute; they can be overcome. If a court determines that the duration is unreasonable, however, the noncompete will be unenforceable in its entirety (i.e., the court will apply a “red pencil” approach).

There are three instances in which a noncompete that is unreasonable in duration can still be enforced (though the court will shorten the duration to the length of time determined to be appropriate). Those three instances are as follows:

  1. “the employee has breached his or her fiduciary duty to the employer”;
  2. “the employee unlawfully taken, physically or electronically, property belonging to the employer”; or
  3. “the employee has, at any time, received annualized taxable compensation from the employer of $250,000 or more.”
We are continuing to seek input and comment, and would be extremely interested in hearing from you.

Trade Secret | Noncompete – Issues and Cases in the News – April 2013 Update

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extras_03True to the unfortunate limit of 24 hours in a day, my posts continue to written during my vacations. This time, given the extended delay between vacations, and therefore posts on issues and cases making trade secrets | noncompete news, I am posting just some highlights of the past few months. Here we go…

Obama Administration: In February 2013, the Obama Administration issued Administration Strategy on Mitigating the Theft of U.S. Trade Secrets. In furtherance of that strategy, on March 19, 2013, the Administration solicited public comment on possible trade secrets “for an Administration legislative review related to economic espionage and trade secret theft.” The notice is available here. Comments are due by April 22, 2013. Peter Toren has commented already; his comments are here: Read My Federal Register Comments on Existing Laws Related to the Enforcement of Trade Secrets.

Second Circuit (personal jurisdiction): The Second Circuit, in a trade secrets misappropriation case, found personal jurisdiction over a former employee of a Connecticut company, who was a citizen of Canada, residing and working in Canada. The former employee was accused of misappropriating the company’s confidential information by emailing it to herself between the time she found out that she had been terminated and her last day of work. The employee’s contacts with Connecticut (and the United States) were extremely limited. However, the Court found significant that the employee’s employment agreement contained notice to the employee that the company’s email servers were located in Connecticut and that the employee could not transfer the company’s information to her personal email. The Court concluded that this language in the employment agreement put the employee on notice that any misconduct using the company’s email would be directed into Connecticut (a factor in the analysis of whether to exercise personal jurisdiction). See MacDermid, Inc. v. Deiter.

Sixth Circuit (BYOD risks): Eric Osteroff wrote a nice post on the Sixth Circuit’s decision in Kendall Holdings, Ltd. v. Eden Cryogenics, LLC concerning the perils of BYOD (bring your own device) policies. BYOD practices can have significant ramifications for trade secrets risks and need to be carefully considered in light of an overall trade secrets policy and approach. See Ken Vanko‘s post, The BYOD Thicket: Some Basic Steps to Take for BusinessesSee also My phone or yours? EEOC official provides best practices for “bring your own device” policies.

Ninth Circuit: The Mattel v. MGA saga continues, with the reversal of MGA’s $170,000,000 trade secret verdict. See Ninth Circuit Takes Away MGA’s $170 Million Trade Secret Award Against Mattel

District of Columbia: Most noncompete and trade secrets litigation starts with the sending of a “cease and desist” letter. One concern is that the sending of such a letter might, if the facts turn out to be wrong, give rise to a defamation counterclaim. However, on March 18, 2013, the United States District Court for the District of Washington rejected just such a claim. Specifically, the court held that the letter was protected by the litigation privilege, and therefore could not give rise to a defamation claim. For a discussion of the case, see Kara Maciel‘s (from my former firm, Epstein Becker & Green) post, Cease and Desist Letters Enjoy An Absolute Privilege From Libel ClaimsAs John Marsh of Hahn Loeser points out, however, the fact that a defamation claim doesn’t lie, does not equate to no risk of a tortious interference claim. Cease and Desist Letters: Defamation May Not Be An Issue But Watch Out for Tortious Interference.

Federal Circuit: The Federal Circuit in Phillip M. Adams & Assoc., LLC v. Dell Computer Corp applied the discovery rule to toll the statute of limitation in a trade secrets case. For more discussion, see Federal Circuit Addresses Uniform Trade Secrets Act Discovery Rule by Eric Ostroff.

Florida: Notwithstanding a confidentiality agreement and nonsolicitation agreement, the United States District Court for the Middle District of Florida (Tampa) permitted a former employee to use her former employer’s customer list to mass email an announcement (sometimes called a “wedding-style announcement”) to her former employer’s customers. See The Variable Annuity Life Insurance Company (VALIC) v. Laeng. For additional reading, see Mass-Mailing To Public Employees Did Not Violate Non-Solicitation Agreement by John Nefflen at Burr Forman.

In another interesting case, Florida’s Fifth District Court of Appeals affirmed an injunction where the employer offered testimony establishing that it secured the noncompete to protect its goodwill, that the defendant had been offering similar services for less money, and that the employer lost business. For more, see Fox Rothchild‘s Jason Cornell‘s post, United States: Enforcing a Non-Compete Agreement in Florida: What Evidence is Relevant?

New York (CFAA): The United State District Court for the Southern District of New York has opted for the more narrow interpretation of the Computer Fraud and Abuse Act in Advanced Aerofoil Technologies, AG v. Todaro. For more, see The Computer Fraud and Abuse Act, and Protecting Employer’s Electronic Data by Kristin Parsons of Burr & Forman and Another Court Construes the CFAA Narrowly and More of My Thoughts on the Statute by Ken Vanko.

New York (jurisdiction/venue): On January 10, 2013, the New York Appellate Division, First Department, in Aon Risk Services v. Cusack, rejected efforts to dismiss a noncompete case in favor of a prior filed action in California. For an in-depth discussion, see Battle Rages On In Epic Restrictive Covenant Dispute by David Clark of Epstein Becker & Green.

North Carolina: The North Carolina Court of Appeals held a noncompete in a staffing case – involving the sale of business – to be unenforceable. The agreement covers a number of legal points, any one of which would be sufficient to invalidate the agreement based on its language.  The court noted the plaintiff’s admission that there were no trade secrets or proprietary information at issue and that the employees were “general laborer[s].” The court then determined that the agreement was overly broad and really directed toward preventing ordinary competition, rather than the protection of goodwill. See Phelps Staffing, LLC v. C. T. Phelps, Inc. Most interesting about the case, however, is that the plaintiff purchased the staffing company from its then-owned, defendant Sheila Phelps. But, Ms. Phelps’s husband, who had been working with her, had started a competing venture shortly before the sale. He was present at the sale, presumably understood the terms, and received substantial benefit from it (the sale was $1.4 million). Oddly, he was not required to sign any documents – although one of the agreements required him not to interfere. Accordingly, even though he was a clear threat, neither the trial court nor the Court of Appeals was willing to restrain him even though he benefited substantially from the sale. Compare that with Zions First National Bank v. Macke, discussed by Amy Dehnel at Berman Fink Van Horn in Can an Employee Use a Spouse to Circumvent Restrictive Covenants? Georgia Court of Appeals Says “No.”

Wyoming: According to RT, “A district judge in Wyoming has shot down a group of environmentalists who tried to gather information about the long-term effects of fracking . . . .” See Fracking chemicals to stay ‘trade secrets.’

Legislation and Bills: A handful of states have recently proposed legislation relating to noncompetes and/or trade secrets. Ken VankoJohn Marsh, and I recorded a FairlyCompeting podcast discussing some of that proposed legislation.Here is some additional information:

Illinois: The Illinois House of Representatives has introduced a bill that, although saying it would allow “noncompetes,” would actually ban noncompetes, though allow  nonsolicitation agreements if they meet certain defined criteria. Although the bill is too long to post its contents, the full text can be found here. Ken Vanko has a nice discussion of the bill in A Brief Commentary on Illinois’ Proposed Noncompete Agreement Act.

Maryland: The Maryland Senate introduced a bill that would render noncompetes enforceable if the employee were terminated and therefore eligible for unemployment benefits. The operative text is as follows:

IF AN INDIVIDUAL WHO IS UNEMPLOYED HAS APPLIED FOR AND IS FOUND ELIGIBLE TO RECEIVE UNEMPLOYMENT INSURANCE BENEFITS AS PROVIDED IN TITLE 8 OF THIS ARTICLE, THE INDIVIDUAL MAY NOT BE BOUND BY A NONCOMPETITION COVENANT ENTERED INTO WITH THE INDIVIDUALS PRIOR EMPLOYER.

The bill would apply only prospectively to noncompetes entered into after October 1, 2013 (the putative effective date of the statute). The bill has, however, been reported unfavorably out of the Finance Committee.

Massachusetts: I previously discussed the proposed, scaled-down noncompete legislation in Massachusetts, limiting the duration of noncompetes, unless one of three exceptions exists. See New Massachusetts Noncompete Bill. The bill has been referred to the Committee on Labor and Workforce Development.

In addition, Massachusetts is again considering adopting the Uniform Trade Secrets Act (HB 27). This time, however, there is a competing UTSA bill (HB 1225) that combines the UTSA with an outright ban of employee noncompetes. The text relating to noncompetes provides:

Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

For the purposes of this section, chapter 149, section 148B shall control the definition of employment.

This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements, including those executed before the effective date of this act.

Both UTSA bills were referred to the Judiciary Committee, and remain there.

Michigan: The Michigan Senate introduced SB 786, which, if passed would, like New Hampshire (see here), require advance notice of noncompetes. The text of the bill is as follows:

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 4a. (1) An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.
THIS SUBSECTION APPLIES to covenants and agreements entered into after March 29, 1985.
(2) AN EMPLOYER SHALL NOT REQUIRE AND A COURT SHALL NOT ENFORCE AN AGREEMENT OR COVENANT UNDER THIS SECTION AS A CONDITION OF EMPLOYMENT IF THE EMPLOYER DID NOT INFORM THE EMPLOYEE OF THE REQUIREMENT AT OR BEFORE THE TIME OF THE INITIAL OFFER OF EMPLOYMENT. THIS SUBSECTION APPLIES TO AN AGREEMENT OR COVENANT ENTERED INTO AFTER THE EFFECTIVE DATE OF THE AMENDATORY ACT THAT ADDED THIS SUBSECTION.
Ken Vanko has an interesting discussion of the bill here.

Minnesota: The Minnesota House of Representatives introduced H. F. No. 506, which contains the following text:

 A bill for an act relating to commerce; regulating employment agreements; voiding certain noncompete agreements; proposing coding for new law in Minnesota Statutes, chapter 325D.

 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

 Section 1. [325D.72] NONCOMPETE AGREEMENTS VOID.

 A contract that prohibits a party to that contract from exercising a lawful profession, trade, or business is void with the following exceptions:

(1) a seller of a business’ goodwill can agree to refrain from carrying on a similar business in a specified county, city, or part of one of them if the buyer carries on a like business in that area;

(2) partners dissolving a partnership can agree that one or more of them will not carry on a similar business in a specified county, city, or part of one of them where the partnership transacted business; and

(3) a member, when dissolving or terminating their interest in a limited liability company, can agree that the member will not carry on a similar business in a specified county, city, or part of one of them where the business has been transacted if another member or someone taking title to the business carries on a like business in that area.

 EFFECTIVE DATE. This section is effective the day following final enactment.

For additional reading, see Minnesota House Bill Threatens to Void Non-Compete Agreements by Faegre Baker Daniels.

New Jersey: The New Jersey Assembly introduced a bill A3970 much like the bill introduced by Maryland (see above). The text is as follows:

BE IT ENACTED by the Senate and General Assembly of the State of New Jersey:

      1.    An unemployed individual found to be eligible to receive benefits pursuant to the “unemployment compensation law,” R.S.43:21-1 et seq., shall not be bound by any covenant, contract, or agreement, entered into with the individual’s most recent employer, not to compete, not to disclose, or not to solicit. This section shall not be construed to apply to any covenant, contract, or agreement in effect on or before the date of enactment of P.L.   , c.  (C.   )(pending before the Legislature as this bill).

      2.    This act shall take effect immediately.

Thank you to both Douglas Neu and Janette Levey Frisch for bringing this to my attention. For some additional reading, see Heated discussion as attorneys debate merits of noncompete bill and New Jersey Joins Wave Of States Considering Limitations on Noncompete Agreements. Thanks to Sue Reisinger for her article, Looking at the Future of Cybersecurity.

Texas: The Texas legislature is considering SB 953, which would effectively adopt the Uniform Trade Secrets Act, making Texas the 48th state to adopt some version, leaving just Massachusetts and New York as the last-remaining holdouts.

Related Items of Interest:

New Massachusetts Noncompete Bill

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cropped-cimg27721.jpgThere is a new noncompete bill in Massachusetts. (Jump to the end for the details.) It is not yet docketed, however, so I do not have an official version to post at this time.

Those following the Massachusetts legislature’s efforts to improve Massachusetts noncompete law will recall that in 2008, then-Representative, now Senator, Will Brownsberger and Representative Lori Erhlich each separately introduced their own noncompete bills. Brownsberger’s bill took the approach in California, Oklahoma, and North Dakota, banning noncompetes in the employee context. Ehrlich’s bill took a moderated approach, focusing on procedural and other limits.

In the spring of 2009, Rep. Brownsberger and Rep. Ehrlich decided to work together toward modifications acceptable to both. After extensive input from many different interests, they arrived at a “compromise bill” designed to codify, clarify, and modernize Massachusetts noncompete law. The compromise bill was revised over time and developed quite a bit of steam during the 2008–2009 legislative session, but ultimately died. Then, a revised version of the bill was introduced in 2010, though it too ultimately died.

This session, Senator Brownsberger and Representative Erhlich have tried an entirely new, streamlined approach. (As readers of this blog will know, I was involved with the bills from the very beginning, including this new bill, and have been the principal draftsperson; I view my role, however, as purely advisory and that of scrivener. I give my opinions on the pros and cons of the various possible approaches and language, but take no position on the policy.)

The new bill – called the “Noncompete Agreement Duration Act” – leaves most noncompete law in tact, and, as its name suggests, focuses on the duration of noncompetes (in the employer/employee context). As before, the bill does not affect the law of trade secrets, nondisclosure agreements, nonsolicitation agreements, no raid/no hire agreements, noncompetes in connection with the sale of business (if the restricted person owns at least a 10 percent interest and received substantial consideration) or outside the employment context, forfeiture agreements, or agreements not to reapply for a job.

The bill starts with, and is premised on, the following two findings:

  • “[T]he Commonwealth of Massachusetts has a significant interest in its economic competitiveness and the protection of its employers, and a strong public policy favoring the mobility of its workforce” and
  • “[T]he Commonwealth of Massachusetts has determined that an employee noncompetition agreement restricting an employee’s mobility for longer than six months is a restraint on trade and harms the economy.”

The bill then creates a presumption that a noncompete that lasts up to six months is presumed reasonable in duration. The bill also creates the opposite presumption: a noncompete that lasts more than six months is presumed unreasonable in duration. The presumptions are not absolute; they can be overcome. If a court determines that the duration is unreasonable, however, the noncompete will be unenforceable in its entirety.

There are three instances in which a noncompete that is unreasonable in duration can still be enforced (though the court will shorten the duration to the length of time determined to be appropriate). Those three instances are as follows:

  1. “the employee has breached his or her fiduciary duty to the employer”; 
  2. “the employee unlawfully taken, physically or electronically, property belonging to the employer”; or
  3. “the employee has, at any time, received annualized taxable compensation from the employer of $250,000 or more.”
I expect that the bill – as well as another bill taking the California approach – will continue to be the subject of much discussion. If you have input, we would be extremely interested in hearing from you.

Trade Secret | Noncompete – Issues and Cases in the News – October-November 2012

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Once again, this installment of “Trade Secret | Noncompete Issues and Cases in the News” is my vacation readings update. There is again a lot here! Enjoy…

Federal/Antitrust: In October 2009, Computerworld published an article of mine entitled, “No-poach agreements: A new generation of restriction.” The article discussed a no-poach agreement used by several large high tech companies (Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar) to refrain from soliciting the other’s employees. As I (here) and many others discussed at the time, this agreement led to an antitrust settlement with the DOJ in 2010. Now, as reported by CBS, the DOJ is at it again: “Justice Department sues eBay over non-compete agreement.” A copy of the DOJ complaint is here.

Federal/CFAA: As expected, there is finally a petition to the United States Supreme Court about the scope of the Computer Fraud and Abuse Act. Following the 4th Circuit’s decision in WEC Carolina Energy Solutions LLC v. Miller, two circuits (the 4th and 9th) have employed a narrow interpretation of the CFAA, while four other circuits (the 1st, 5th, 7th, and 11th) have taken a more broad approach.

Federal/ERISA: Occasionally, ERISA issues pop up in noncompete cases. That is exactly what happened in Pactiv Corp v. Rupert, in which the United States District Court for the Northern District of Illinois held that a noncompete agreement sought to be imposed to receive severance benefits was not required by the ERISA severance plan and therefore the former employee was entitled to the benefits. For more reading, see “ERISA Severance Plans and Non-Compete Agreements Must Work Together,” by Peter Land.

California:

Georgia: The Georgia Court of Appeals granted summary judgment in Contract Furniture Refinishing & Maintenance Corp. v. Remanufacturing & Design Group, LLC, reminding practitioners how difficult it can be to show actual proof of trade secret misappropriation. For more reading, see Burr & Forman’s post, “The Difficulty of Proving Trade Secret Violations.”

Illinois: How far can you go when investigating the conduct of a former employee suspected of breaching his noncompete? That answer just got a bit more complicated in Illinois, which, in Lawlor v. North American Corporation of Illinois (October 18, 2012), has now recognized a claim for intrusion upon seclusion (basically an invasion of privacy claim). Long-time noncompete blogger, Ken Vanko, discusses the case here: “Supreme Court of Illinois Recognizes Intrusion Upon Seclusion Tort in Non-Compete Investigation.”

Massachusetts:

  • About a year and a half ago, I posted about a hairstylist who was enjoined from competing with his former employer-hair salon, Zona Corp. (See “Hairdresser Takes a Haircut”.) Last month, however, a different Massachusetts judge went the other way in Invidia, LLC v. DiFonzo, raising the very question that I (and many others) were asking about the Zona Salon case: Who owns the goodwill in the context of a hairstylist? The Invidia Court determined that the employer failed to show that it was its goodwill. For more, see “Engaging Facebook Friends Doesn’t Violate Non-Solicitation Clause.”

Michigan: What happens when you have the following facts: A nondisclosure agreement; no noncompete; an employee who acts properly upon departure (returning all information, etc.); and a decrease in your business? Nothing.  Well, at least according to a recent decision by the Court of Appeals of Michigan in Michigan One Funding, LLC v. MacLean (September 20, 2012). For more reading, see “Preventing an Employee From Working for a Competitor Unravels without an Enforceable Noncompete Agreement.”

Minnesota: When enforcing restrictive covenants, the difficulty is often obtaining evidence of a true risk of harm before discovery has taken place. In Sempris, LLC. V. Watson (D. Minn. Oct. 22, 2012), the federal District Court denied a temporary restraining order based on the plaintiff’s failure to provide evidence of an imminent threat, as opposed to speculative or remote future harm. For more reading, see Paul Freehling’s post, “Speculative Fears Insufficient for Non-Compete Temporary Restraining Order Against Former Employee.”

Missouri: Choice of law provision selecting Missouri (where plaintiff was located) over Oklahoma (which like California and North Dakota, bars employee noncompetes and where defendants were located and where most of the conduct occurred) was enforced by the United States District Court for the Eastern District of Missouri in TLC Vision (USA) Corp. v. Freeman (E.D. Missouri Nov. 2, 2012). For more reading, see “Non-Compete Cases and Choice of Law: A Recent Case From Missouri,” by Jonathan Pollard.

New York: In perhaps the first 2nd Circuit decision to directly “address[] when enforcement of a covenant restricting competition may irreparably injure a former employee,” the Court held that “[d]ifficulty in obtaining a job is undoubtedly an injury, but it is not an irreparable one” when “monetary damages will compensate [the plaintiff] adequately . . . .”  Hyde v. KLS Professional Advisors Group, LLC (October 12, 2012). Given the 2nd Circuit’s pronouncement that “irreparable harm [is] the ‘single most important prerequisite for the issuance of a preliminary injunction,’” this decision should have significant implications for noncompete cases in the federal courts in New York, Connecticut, and Vermont.

Oklahoma: Rarely do restrictive covenant cases or trade secret cases proceed much beyond the injunction stage. When they do, the fight can be over permanent injunctive relief, damages, or both. Even then, damages are typically lost profits or disgorgement of profits. Sometimes, however, damages can be a reasonable royalty. That was the case in Skycam, LLC v. Bennett. There, the United States District Court for the Northern District of Oklahoma found injunctive relief to be against public policy, given limited competition, and instead ordered royalty payments – an initial payment of $1,000,000 plus $5,000 per use for the 3.5 years it would have taken the defendants to independently create the misappropriated information.

Ohio: As you may recall, in the September 2012 issue of “Trade Secret | Noncompete – Issues and Cases in the News,” I noted that, on July 25, the Ohio Supreme Court issued a decision agreeing to reconsider its May 24 Acordia of Ohio, L.L.C. v. Fishel decision, which took a dim view of assignment of noncompete clauses. Well, the Court did review its decision. And it reversed it! Here is the new (presumably final) view of the Ohio Supreme Court: Acordia II (October 11, 2012), courtesy of my friend and prolific blogger, John Marsh.

South Carolina: In another trade secret trial, judgment entered for over $4.6 million against a former employee who was found to have misappropriated trade secrets and breached his fiduciary duties. See, “Greenville Businessman Ordered to Pay $4.6 Million for Taking Trade Secrets, Breaching Fiduciary Duty.”

Virginia: As the United States District Court for the Eastern District of Virginia recently made clear in JTH Tax, Inc. v. Noor (September 26, 2012), failure to comply with an injunction requiring the return of trade secrets can have significant consequences, including an extension of the injunction. (Thank you to Jim Irving, who posted a link to the case in the LinkedIn Noncompete Lawyers group.)

Wisconsin: What happens to a plaintiff’s claim for misappropriation of trade secrets when the secret becomes publicly known? Nothing – at least according to a decision by the Eastern District of Wisconsin denying a motion to dismiss in Encap v. The Scotts Company. Well, to be clear, “nothing” in the sense that the claim survives a motion to dismiss when the information constituted a trade secret at the time of the misappropriation.  There’s no real surprise here; the cause of action is assessed as of the time the cause accrues; the fact that the circumstances later change does not affect the existence of the cause of action. (Damages may be another issue – assuming, of course, that the misappropriator was not the party that publicly disclosed the information.)

Criminal:

  • It’s always big news when employees of large companies are indicted for trade secret theft, especially when China is somehow involved. But, rarely do people report when those cases fail. So, kudos to The Trade Secrets Vault, Bloomberg, HudsonHubTimes, Alison Grant (writing for Cleveland.com here) and several others, all of whom reported that the former Bridgestone employee (Xiaorong Wang) accused of misappropriating Bridgestone’s secrets for the benefit of a Chinese company has been cleared.
  • John Marsh has an in-depth post on the latest in the Kolon/DuPont trade secrets dispute, the title of which begins, “The Kolonoscopy Continues . . . .” (The title is perfect, as is John’s discussion of the status.)

Related Items of Interest:

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:

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

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Once again, I am a bit behind on the next installment of Trade Secret | Noncompete Issues and Cases in the News. As a result, there is a lot here! Enjoy…

7th Circuit: The 7th Circuit Court of Appeals issued a decision (Fail-Safe, LLC v. A.O. Smith Corporation) on March 28, 2012 discussing the need to take reasonable measures to protect information that you wish to protect as a trade secret. For a nice discussion of the case, see “Trade Secrets May Be Lost.”

California: On May 14, 2012, the United States District Court for the Eastern District of California issued a lengthy decision (Vance’s Foods, Inc. v. Special Diets Europe Limited) analyzing and finding personal jurisdiction over an Irish company that allegedly misappropriated trade secrets from a company located in California with which it had a contractual relationship. Best practice: Include jurisdiction/forum selection provisions in restrictive covenants (and other contracts). For more on that, see my partner Steve Riden‘s article, “Taking your non-compete from good to great.”

Connecticut: A Connecticut trial court refused to enforce a noncompete against a real estate salesperson on the ground that it was punitive: “Century 21 Access America v. Garcia: Noncompete Clause Unenforceable against Salesperson.”

Delaware: Scott Holt, on the Delaware Non-Compete Blog (Settlement Discussions Not An Excuse for Delayed TRO Application To Enforce Noncompete), discusses a recent Delaware Chancery Court case highlighting the need to move quickly to seek a temporary restraining order or preliminary injunction. In that case, the court concluded that the plaintiff had spent too much time trying to settle, when it should have instead been moving for injunctive relief. It bears mention that while results like this can and do happen, quite frequently courts do come out the other way.

Massachusetts: Several recent cases in Massachusetts are worth noting:

  • Ace Precision, Inc. v. FHP Associates Inc., decided by the Hampden County Superior Court. It’s significant for several reasons. First, it is one of the rare instances in which a noncompete case went to trial. Second, it involved noncompetes arising from the sale of business, which are not frequently litigated. (And it also, of course, involved many of the other claims that typically arise in the context of a suit to enforce a noncompete (e.g., breach of contract, tortious interference, conversion, violation of G.L. c. 93A (the Massachusetts unfair competition statute).) Third, the noncompete expressly precluded enforcement if the buyer (Ace Precision) was in default of its obligations in connection with the acquisition. Fourth, following the trial, the Court found that Ace was in default, and therefore refused to enforce the noncompete without the need to assess the noncompete at all. But more importantly, in a word of caution for others, it issued judgment not only against the plaintiff on all claims, but it found in favor of the defendant on some of its counterclaims.
  • Sentient Jet LLC v. Mackenzie, also decided by the Superior Court (Judge Garsh). David Frank of Massachusetts Lawyers Weekly describes that case (no reported decision) as follows:

The defendant salesmen argued that the clause was unenforceable, relying on the CEO’s departure and the company’s possible purchase by another business as a “material change” in employment.

* * *

[But,] “[t]he prospect of a material change at some indefinite time in the future does not a material change make,” [Judge Garsh] said. “Similarly, the fact that [the plaintiff employer] has changed leadership is not evidence here of the kind of material change from which one would infer that the covenant not to compete was rescinded.”

  • Cesar v. Sundelin, decided by the Massachusetts Appeals Court, holds that a Probate Court judge can, in connection with the division of assets including a family business, impose a noncompete on the spouse that does not receive the business in the divorce. Brian Bialas, who discusses the case on the Massachusetts Noncompete Law blog, provides a copy of the case here.

Missouri: The Missouri Supreme Court, on April 17, 2012, affirmed a verdict of toritious interference when an employee – while still employed – encouraged co-workers to leave the company with no notice at staggered times, all in an effort to wrest control of a significant customer. The case is Western Blue Print Company, LLC v. Roberts. For more details, read my former partner, Peter Steinmeyer‘s post, Missouri Supreme Court Affirms Tortious Interference Verdict Against Manager Who Went To A Competitor.

New Hampshire: Ken Vanko has a nice summary of an unreported case in New Hampshire holding that New Hampshire’s version of the Uniform Trade Secrets Act broadly preempts pre-existing common law claims. Ken’s summary is available here: “New Hampshire Takes Broad View of Trade Secrets Preemption.”

New York: The New York Supreme Court (trial level court) issued a decision (MSCI Inc. v. Jacob) on April 20, 2012 that a trade secret holder has the burden – early in the case – to identify its trade secrets with specificity.

Ohio: The Ohio Supreme Court, on May 24, 2012) issued a decision (Acordia of Ohio, L.L.C. v. Fishel) on an 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. As usual, John Marsh has written a very thoughtful analysis of the case, and provided excellent advice in his post, Acordia of Ohio v. Fishel: Ohio Supreme Court Finds Non-Compete Does Not Survive Merger If It Lacks “Successor or Assigns” Language. For the latest from the First Circuit on this, see the summary (and text) of a recent decision discussed on my firm’s website, under “1st Circuit Decisions on Noncompete Agreements.”

In an interesting, unrelated decision in Ohio, a trial court refused to enforce a noncompete to enjoin a radio personality from hosting an Internet “radio” show (on www.theradiosucks.com). See “Radio station fails in effort to silence ex-hosts.”

Tennessee: Tennessee has, by statutory amendment, changed temporal restrictions on physician noncompetes. For more information, see “Removal of the Six-Year Limitation for Healthcare Non-Compete Agreements in Tennessee.”

Virginia: The United States Court of Appeals for the 4th Circuit, on February 14, 2012, reversed the Eastern District of Virginia in a noncompete case (BP Products North America Incorporated v. Stanley LLC) in which the noncompete arose from a purchase and sale of land. The 4th Circuit concluded that the tougher standards applicable to noncompetes (typically arising in an employment context) were not applicable; the more lenient standards applicable to arms-length transactions should instead apply. For a nice discussion of this, see James Irving‘s newsletter story, Old Law Wins New Case.

Wyoming:  As described by Ken Vanko in “Supreme Court of Wyoming: Continued Employment Is Sufficient Consideration for Invention Assignment Agreement” the Wyoming Supreme Court (in Preston v. Marathon Oil Company) has weighed in on the continuing question of whether continued employment is sufficient consideration to support a restrictive covenant. Interestingly, while finding that continued employment is sufficient consideration for an invention assignment agreement, the rule for noncompete agreements has been (and continues to be) to the contrary in Wyoming (more than continued employment is required for a noncompete).

Criminal:

Related Items of Interest:

  • Also in a similar vein, the FBI has been stepping up its enforcement of trade secret theft – as well as a planned public awareness campaign. See here.
  • Similarly as well, Senator Coons, one of the United States Senators pushing to enhance the relief available under the Economic Espionage Act (discussed here), attended a hearing last month at which he “warned that trade secret theft is a growing problem and, in many cases, is done at the direction of foreign governments. ‘I can tell you,’ Coordinator Espinel responded, ‘trade secret theft is an enormous priority for us, and I think it’s clear that . . . the negative implications for our ability to compete globally when we lose trade secrets . . . are very significant.’” See Senator Coons’s description here.

Social Media Privacy Bills Around the Country

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The Maryland legislature has become the first state legislature to pass a bill forbidding employers from demanding – or even asking for – social media (e.g., Facebook, Twitter, LinkedIn) usernames and passwords from employees or prospective employees. See Maryland To Ban Employers From Asking For Facebook, Twitter PasswordsMaryland Bill Bans Employers From Facebook.

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.

Massachusetts Trade Secret Protections Are Given Big Boost

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There has been much uncertainty in Massachusetts about whether and under what circumstances a claim under G.L. c. 93A (for those not from Massachusetts, that’s our unfair competition statute, which provides for the recovery of multiple damages and attorneys’ fees) exists against an employee who takes his former employer’s trade secrets to a new venture and uses them there. A recent decision from the Massachusetts Appeals Court seems to open the door to such claims. (Unless you are a lawyer, you will probably want to stop here.)

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.

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