Massachusetts | Fair Competition Law

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

April 22, 2013

Russell Beck Fair Competition News, Massachusetts Noncompete Bill, Noncompetes, Privacy, Privacy Law, Restrictive Covenants, Trade Secrets CFAA, Massachusetts, noncompete, noncompete bill, restrictive covenants, trade secret, UTSA Leave a comment

True 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 Businesses. See 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 Claims. As 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 Vanko, John 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 INDIVIDUAL’S 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:

Ken Vanko, John Marsh, and I have recorded six episodes (so far) of our Fairly Competing podcast. They are available here and through iTunes.
As always, the starting point for a quick summary of recent cases is John Marsh‘s Trade Secret Litigator Blog‘s weekly updates.
Similarly, Michael Greco always has insightful observations and provides a great summary on recent issues. See for example, Non-Compete and Trade Secret Review for February 2013.
Gibson Dunn released a lengthy report outlining the rise in risks of hacker attacks and other data privacy concerns, as well as recent developments in applicable laws. A copy of the report is available here.
MicroSoft’s CFO will be receiving $2,000,000 for a noncompete and nondisparagement agreement. The $2 million is subject to forfeiture in case of a breach. See Departing Microsoft CFO to pick up $2 million in 2014 if he doesn’t work for a competitor, mock the company.
As an advocate of mediation in most circumstances, I was pleased to read Michael Greco‘s (of Fisher & Phillips) article, Mediating Non-Compete Disputes In The Medical Device Industry.
In a similar vein, Ken Vanko does a nice job discussing, in his 3-part post, the reasons that noncompete cases typically settle. See part 1, part 2, part 3 (which includes good points about bankruptcy considerations).
Eric Fishman and Amanda Freyre provide very good some suggestions about Drafting a Better Choice-of-Law Clause. I tend to agree with their advice, although I would give consideration on a case-by-case basis as to whether the reference to extra-contractual claims is appropriate. (You want the tort law of the other jurisdiction in certain instances.)
As reported in BusinessManagement, the NLRB does not seem to have a problem with noncompetes preventing moonlighting.
Antitrust does occasionally rear its head in connection with restrictive covenant matters. See FTC Voids Confidentiality and Non-Compete Provisions in Non-Reportable Transaction and Requires Notification of All Future Transactions.
A former GM engineer, Shanshan Du, and her husband, Yu Quin, were reportedly found guilty of trade secrets misappropriation in In re: U.S. v. Qin, U.S. District Court, Eastern District of Michigan, No. 10-cr-20454, according to Reuters, as reported in Ex-GM Engineer, husband guilty of trade-secret theft.
Brian Bialas, who runs the Massachusetts Noncompete Law blog with Michael Rosen, has a good post on the 10 Important Pieces of Noncompete, Trade Secret, and Computer Fraud News as of February 24, 2012.
Kristin Taylor of Cassels Brock in Canada discusses the use of noncompete agreements in connection with M&A deals in a video here.
China Briefing reports here on a December 28, 2012 “Decision on Revising the Labor Contract Law of the People’s Republic of China,” including its impact on noncompete enforceability.

New Massachusetts Noncompete Bill

January 28, 2013

Russell Beck Fair Competition News, Massachusetts Noncompete Bill, Noncompetes, Restrictive Covenants Brownsberger, Ehrlich, Massachusetts, noncompete, noncompete bill, restrictive covenants 1 Comment

There 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:

“the employee has breached his or her fiduciary duty to the employer”;
“the employee unlawfully taken, physically or electronically, property belonging to the employer”; or
“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

November 26, 2012

Russell Beck Computer Fraud and Abuse Act, Fair Competition News, Noncompetes, Privacy, Restrictive Covenants, Social Media, Trade Secrets California noncompete, CFAA, confidential information, damages, Economic Espionage Act, Georgia noncompete law, LinkedIn, Massachusetts, no-hire agreement, noncompete, nonsolicitation, restrictive covenants, social media, trade secret, workplace privacy Leave a comment

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 4^th Circuit’s decision in WEC Carolina Energy Solutions LLC v. Miller, two circuits (the 4^th and 9^th) have employed a narrow interpretation of the CFAA, while four other circuits (the 1^st, 5^th, 7^th, and 11^th) 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:

After computer game maker, Zynga, Inc., obtained an ex parte injunction against former high-level employee Alan Patmore (see “Zynga Files Suit Against Former Staffer, Claiming Theft of Trade Secrets”), Zynga amended its complaint to include Patmore’s new employer, KIXEYE, Inc., who, no surprise, has filed a counterclaim, asserting that Zynga is using the case to discover KIXEYE’s trade secrets. For more reading, see “Exclusive: Zynga’s Alan Patmore case gets more complicated with Kixeye cross-complaint.”

In a very interesting case Wanke, Industrial, Commercial, Residential, Inc. v. The Superior Court of San Diego County, discussed by Daniel Salinas, a California appellate court reversed a trial court that refused to enforce a nonsolicitation agreement contained in a stipulated injunction. For a discussion of the case, see “California Appellate Court Holds That Non-Compete Restriction in Stipulated Injunction Is Enforceable Because There Was No Showing That It Was Not Necessary to Protect Trade Secrets.”

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.”

For a few additional recent cases (including one that I cannot comment on, as I am the mediator), see Massachusetts Quick Links – October 2012 on Lee Gesmer’s always excellent Mass Law Blog.

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 2^nd 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 2^nd 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.)

While the focus is so frequently on overseas theft, the DOJ does not ignore alleged domestic espionage. See, for example, “3 men accused of stealing trade secrets from local company.”

Related Items of Interest:

For a recently-published study of the use of noncompetes in CEO contracts, see my friend Norm Bishara’s article, “When Do CEOs Have Covenants Not to Compete in Their Employment Contracts?”

For some interesting observations about some perceived trends in restrictive covenant use by healthcare providers, see Becker’s Hospital Review, “Non-Compete Agreements Among Healthcare Providers: 6 Trends.”

Last year, my partner, Steve Riden, wrote an article in New England In-House called “Taking your non-compete agreement from good to great.” In that article, Steve described several provisions that should always be considered for inclusion when drafting restrictive covenants. One of Steve’s suggestions was a forum selection clause. Recently, Jason James of Poyner Spruill wrote about a North Carolina case highlighting the wisdom of Steve’s advice: “Revisiting Home Field Advantage In Noncompete And Trade Secret Cases.”

On November 14, 2012, President Obama reportedly signed a secret cyber security directive, Presidential Policy Directive 20, to give the military powers to combat cyberattacks. See “Obama signs secret directive to help thwart cyberattacks,” in the Washington Post. For more background, see the National Security Council’s “Cybersecurity” post.

Want to learn about Indian trade secrets law? See “India: Trade Secrets in Indian Courts.”

Although it often seems that US companies are the only targets of corporate espionage, they are not. Here’s a recent high-profile example: “Tokyo lawsuit highlights risk of former employees spilling secrets.”

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

September 1, 2012

Russell Beck Computer Fraud and Abuse Act, Fair Competition News, Inevitable Disclosure Doctrine, Noncompetes, Restrictive Covenants, Social Media, Trade Secrets California, CFAA, confidential information, Georgia noncompete bill, inevitable disclosure, Massachusetts, noncompete, physician, restrictive covenants, social media, trade secret Leave a comment

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 9^th 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, “4^th 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 9^th 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 11^th 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:

In what is likely to be a more common issue, an Ohio court has ruled that webcasting or streaming a program similar to one that was broadcast over the radio is not competitive. See Limiting “radio” to AM/FM misses out on growth boom, says Edison’s Rosin and Former Q92 hosts settle lawsuit. If you want to hear it, listen at TheRadioSucks. While I am at it, however, I would be remiss if I did not put in a plug for my very good friend, Julie Kramer, who, with most of her former team at WFNX (until recently, a local alternative radio station in Boston, Massachusetts), now streams for Boston.com, RadioBDC.

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:

The Motorola engineer, Hanjuan Jin, arrested at O’Hare in 2007 with Motorola’s confidential information and trade secrets was sentenced to four years in prison. See Ex-Motorola Worker Gets 4 Years For Trade Secret ‘Raid’ (Bloomberg); Former Motorola engineer jailed for stealing secrets (itnews). For a little extra reading, the Chicago Tribune lists a few other trade secret prosecutions in the Chicago area. See Other cases of trade-secret theft.
According to NBC affiliate, WKYC-TV, the former Bridgestone Center for Research and Technology scientist, Xiaorong Wang charged with stealing trade secrets from BCRT (see the criminal section in an earlier “Noncompete – Issues and Cases in the News” post), has been indicted on 15 counts by a federal grand jury in Cleveland. See Hudson man accused of stealing Bridgestone trade secrets.
A civil case turns criminal in Texas: Yes, jail time is possible in a noncompete lawsuit.

Related Items of Interest:

For a typically-excellent discussion by John Marsh of the Apple v. Samsung case and implications for protecting trade secrets in litigation, see Apple v. Samsung Update: Judge Koh Issues Her Opinion Protecting Intel, Qualcomm, IBM, Nokia and Microsoft Trade Secrets and his earlier post, Apple v. Samsung: The Challenge of Protecting Trade Secrets at Trial and Other Lessons for Trade Secret Owners and Lawyers.
Interesting reading on the expanded scope of the ITC to cover trade secrets: Ruling on Common Law in Trade Secret Disputes May Expand Trade Secret Commission Caseload, by Alexander Koff and David Nickel.
Not that you need it, but, for a good reminder that legal fees can be awarded against a plaintiff for a case brought in bad faith (for example, because based on nothing more than abject speculation) under the Uniform Trade Secrets Act, see a Wilson Sonsini “Alert,” California Court Awards Attorneys’ Fees and Costs in Bad Faith Trade Secret Lawsuit,” written in part by two excellent trade secret lawyers, Marina Tsatalis and Charles Tait Graves, with whom I have had the great pleasure to work; and Recent fee shifting cases caution against diving into non-compete/trade secret litigation where the facts supporting a violation are unknown or questionable.
The issue of the tax implications of noncompetes seems to arise every now and again. According to Integrated Healthcare Strategies, the issue seems to have surfaced as a result of new IRS regulations: “IRS Proposes Regulations Under Section 83 Challenging the Use of Noncompete Agreements.”
Similarly, while everyone thought that antitrust was dead after Regan, the issue does arise here and there. For example, see, “The ‘New No-Poach Agreement’ is No More… Sort Of.” And now, according to American Medical News, the FTC has issued a recent order that exempting phsyicians from their noncompetes where there were antitrust implications. See “FTC order could give physicians a way out of noncompete deals with hospitals.”
The ABA Journal, based on a survey of 1,957 general counsel and 11,340 corporate directors, reported that, for the first time, the number one concern of GCs and boards of directors is cybersecurity. See “Cybersecurity Is Top of Mind for General Counsel and Co. Directors.”
In a related story by Sara Yin at PC Magazine about recent cybercrimes, Ms. Yin discusses a study by the Poneman Institute (funded by HP) that determined that the median annualized cost of cybercrime is $5.9 million – with some costing as much as $36.5 million.
For some reading on trade secret protections in Taiwan, see the International Technology Blog, and in Qatar, see Trade secret protection under Qatari Law.
To see what is happening in Europe, see European Commission addresses growing problem of trade secrets misuse.
Speaking of Europe, it seems a former GE executive has taken a page out of Europe’s garden leave requirements (becoming more common in the US): GE Exec to Be Paid $89K a Month… to Not Work; GE Executive To Be Paid $89,000 A Month To Do Nothing Through 2022; GE Pays $12.9 Million as Energy Chief Is Kept From Rivals.
For noncompetes in Australia, Mark McKillop, wrote an interesting piece on negotiated noncompetes: Tips for drafting longer, wider and more effective restraint of trade clauses – Pearson v HRX Holdings Pty Ltd (Full Court, FCA).
For some good general advice on international trade secret protections, see Protecting the crown jewels: How to deal with international trade secrets theft by Kent Gardiner and William Sauers.
For a good reminder that every company has trade secrets, see Jess Collen’s article in Forbes, Obama Campaign Trade Secret Snafu and the 5 Trade Secrets Owned By Every Business. Consistent with that, as reported by Wired, Toyota sued a former disgruntled employee in Kentucky, who allegedly sabotaged its computer network and misappropriated trade secrets.
For a nice summary of how we got to where we are in the world of social media, see Key Moments in Social Media Law by John Delaney.
Finally never forget to check out Ken Vanko’s “The Reading List,” the most recent of which is here and John Marsh’s “Wrap Ups” here.

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

June 9, 2012

Russell Beck Fair Competition News, Noncompetes, Restrictive Covenants, Trade Secrets litigation, Massachusetts, noncompete, restrictive covenants, trade secret, trade secret audit, unfair competition Leave a comment

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:

Suibin Zhang, a former engineer at Netgear, was convicted on May 9, 2012 of stealing trade secrets that he downloaded onto his computer from his former employer’s vendor, Marvell Technology Group Ltd. He faces ten years in prison. See “Silicon Valley Engineer Convicted In Marvell Trade Secrets Case.”
A former Citadel LLC programmer, Yihao “Ben” Pu, was indicted on May 11, 2012 for stealing trade secrets. See “Ex-Citadel programmer indicted in trade secret theft.”
The former Sanofi-Aventis chemist, Yuan Li, who pled guilty in January to passing trade secrets to a Chinese company was sentenced on May 8, 2012 to 18 months in prison and ordered to pay $131,000 in restitution. See “Ex-N.J. chemist sentenced for trade secret theft.”
Dr. Xiaorong Wang, a former research scientist at the Bridgestone Americas Center for Research and Technology, was charged in April with stealing trade secrets after he was terminated. See “Former Bridgestone research scientist, Dr. Wang, charged with stealing valuable trade information.”
According to Reuters, former Intel Corporation employee Biswamohan Pani pled guilty in April to stealing design and manufacturing documents and went to work for Advanced Micro Devices (though there is no suggestion that AMD participated in, or was even aware of, her conduct).

Related Items of Interest:

CREATE.org (the Center for Responsible Enterprise And Trade), a think tank formed only about 8 months ago by Microsoft former Deputy General Counsel Pamela Passman, has released an excellent white paper entitled,”Trade Secret Theft, Managing the Growing Threat in Supply Chains,” which, among other things, counsels (as I and many other practitioners have repeatedly urged) to conduct a proper trade secret audit. (See for example, “The Who, What, Where, When, How, and Why of Trade Secret Audits.” Thank you John Marsh for finding this.

In related reading, Pamela Passman wrote an interesting post on Forbes entitled, “Trade Secret Theft: Businesses Need to Be Ware and Prepare.” Thank you to Eric Savitz’s post on his Trade Secrets Vault blog.

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.

Enjoy the debate among John Marsh, David Almeling, and Darin Snyder about the expanded commercial use defense under the America Invents Act.

The items above can all be viewed as background for Peter Toren‘s discussion of the risks and what should be done about trade secret misappropriation for the benefit of a foreign company or sovereign, “Chinese Espionage: The Risks Within U.S. Companies.”

IBM turned off Apple’s digital assistant, Siri, and prohibited its employees from using Siri. This story has received a lot of attention insofar as IBM’s underlying concern is what Apple does (or doesn’t do) with the search information. See “IBM’s Siri ban highlights companies’ privacy, trade secret challenges.”

John Kanas, What’s In Your Wallet ($24M in Restricted Stock…), by Ken Vanko.

It is, of course, always worth taking a look at John Marsh’s Thursday Wrap-Ups.

Social Media Privacy Bills Around the Country

April 17, 2012

Russell Beck Fair Competition News, Privacy, Privacy Law, Social Media Massachusetts, Privacy, social media, trade secret, workplace privacy Leave a comment

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 Passwords; Maryland 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

December 3, 2011

Russell Beck Fair Competition News, Trade Secrets 93A, confidential information, damages, Massachusetts, trade secret Leave a comment

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.

Mass Lawyers Weekly Advisory Board Supports Noncompete Bill

November 28, 2011

Russell Beck Fair Competition News, Massachusetts Noncompete Bill, Restrictive Covenants Brownsberger, Ehrlich, Massachusetts, noncompete, noncompete bill, restrictive covenants Leave a comment

Massachusetts Lawyers Weekly‘s Editorial Advisory Board calls the noncompete bill pending in the MA legislature “a step in the right direction.” (As the lead drafter and advisor on the bill, I have covered it extensively throughout this blog and elsewhere; for a summary of the bill, see Massachusetts Noncompete Bill Refiled; for the latest update, see Report on Massachusetts Legislature’s Hearing on Noncompete Bill.)

The editorial noted that “[i]t is notoriously hard to advise both businesses and employees as to the likely enforceability of a non-compete agreement. The same non-compete may be viewed very differently by different judges.” Accordingly, in noting their support for the bill, the Editorial Advisory Board observed that “[a] bill that provides greater specificity on what elements a non-compete should include in order to be enforced helps everyone and could reduce the amount of litigation resulting from the agreements.”

The Editorial Advisory Board did identify “[o]ne aspect of the bill [that they find] troubling . . . .” Specifically, the Board is concerned about mandatory attorneys’ fees for a victorious employee; the editors would prefer to see discretion left to the judge. That very issue is still being considered by Representative Ehrlich and Representative Brownsberger.

To stay up on the latest or to provide your thoughts, please feel free to do any or all of the following:

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comment on Will Brownsberger’s reform noncompete post
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Trade Secret | Noncompete – Issues and Cases in the News

November 19, 2011

Russell Beck Fair Competition News, Noncompetes, Restrictive Covenants, Social Media, Trade Secrets California, confidential information, litigation, Massachusetts, noncompete, restrictive covenants, social media, trade secret Leave a comment

This post provides a summary of noncompete and trade secret issues and cases that have arisen in the past month or so, but that I have not already addressed in recent posts. In addition to my summary, you will find links for more in-depth reading on each issue. (There’s a lot here, enjoy.)

UPDATED November 24; updates in bold.

UPDATED November 27; updates in bold/italic.

Trade Secret Cases and Issues in the News:

In an extremely significant decision, the United States Court of Appeals for the Federal Circuit affirmed a decision by the International Trade Commission blocking importation of products from China that were developed using trade secrets that were misappropriated overseas: Tianrui Group Co. v. International Trade Commission. (For a primer on China’s trade secret law, see here; for a brief summary of the focus on misappropriation of trade secrets to China, see here.)

The United States Court of Appeals for the Federal Circuit issued a decision relating to the intersection between trade secret law and patent law: Atlantic Research Marketing Systems, Inc. v. Troy. A similar issue arose in Texas, with the court reducing from $68 million to $18 million the exemplary damages portion (separate from the $26 million compensatory damages portion) of a trade secret verdict in favor of Wellogix against Accenture. Story here. (For a brief summary of the intersection of patents and trade secrets, see here.)

The Leahy-Smith America Invents Act became was passed on September 16, 2011, and, as part of a sweeping overhaul to US patent law, will expand trade secret defenses to patent infringement actions.

Seagate won a $525,000 trade secret award in an arbitration against Western Digital, which Seagate accused of misappropriating trade secrets through a former Seagate employee. Story here.

Motorola Mobility was sued by Lemko for alleged misappropriation of trade secrets relating to the location of emergency callers on a cellular network. Story here and here. The case is related to the federal criminal charges brought against the employee, who was headed to China. Story here. (Note the China connection, and see below.)

A blogger accused of trade secret misappropriation can keep his or her identity secret. Story here.

Groupon sued employees who left for Google and who allegedly took Groupon’s trade secrets with them. Story here.

For an excellent summary on the implications of backing up your trade secrets in the cloud, see Protecting Trade Secrets in the “Cloud” and Cloud Computing – New Buzz Word, Old Legal Issues. (For more, see Social Media is Not Social “Security”.)

The Uniform Trade Secrets Act has been adopted in some form or another in all states but Massachusetts, New Jersey, New York, and Texas. Of these states, New Jersey is closest to adopting the UTSA. See New Jersey Poised to Adopt the Uniform Trade Secrets Act. The UTSA does leave open questions about the scope of other common law claims that are still permitted. For some discussion on that issue, see here.

Noncompete Cases and Issues in the News:

Further confirmation of my research (and personal experience) revealing an uptick in noncompete and trade secret litigation. See Brighter economy means noncompete, nonsolicitation litigation increasing.

Two recent noncompete decisions from the 1st Circuit suggest the need for revisions to certain provisions in existing Massachusetts noncompete agreements and similar restrictive covenants.

Virginia noncompete law is “incrementally clarified.” Noncompetes may need to be updated. The case is Home Paramount Pest Control Cos. v. Shaffer.

Georgia’s first reported decision to apply Georgia’s new blue pencil rule: PointeNorth Insurance Group v. Zander. Nice discussion of the case here.

The Eastern District of Pennsylvania finds that the automatic stay in bankruptcy does not apply to injunctive enforcement of a noncompete: In re Stone Resources.

A Texas appeals court says that the court cannot reform a noncompete to eliminate the damages remedy otherwise available through arbitration: Gray Wireline Service, Inc. v. Cavanna.

Arizona federal court refuses to give effect to choice of law provision in a noncompete: Pathway Medical Technologies, Inc. v. Nelson. In contrast, a recent North Carolina case (Akzo Nobel Coatings Inc. v. Rogers) did precisely the opposite. For a nice summary of the issues (under Delaware law) in the case – which are common issues in these types of cases – see A Covenant Not To Compete Cornucopia From The Business Court.

H-P loses race to courthouse (Texas vs. California) and Cisco’s GC speaks out (loudly) about H-P’s efforts to enforce its noncompetes. Story here.

Illinois federal court analyzes how much consideration is sufficient for a noncompete: LKQ Corp. v. Thrasher.

Big things are brewing: Boston Beer (Sam Adams beer maker) sued Anchor Brewing (Anchor Steam beer maker). Story here and Boston.com editors’ reaction here.

No implied noncompete in the sale of a business in Alabama: Pinzone v. Papa’s Wings, Inc. For a nice summary see Legal Developments in Non-Competition Agreements.

For some interesting reading on the policy of noncompetes, see The Law and Policy of Non-Compete Clauses in the United States and Their Implications by Jay Kesan and Carol Hayes; and Noncompetes and Intentor Mobility: Specialists, Starts, and the Michigan Experiment by Matt Marx, Deborah Strumsky, and Lee Fleming.

Report on Massachusetts Legislature’s Hearing on Noncompete Bill

September 15, 2011

Russell Beck Fair Competition News, Massachusetts Noncompete Bill, Noncompetes, Restrictive Covenants, Trade Secrets Brownsberger, Massachusetts, noncompete, noncompete bill, nonsolicitation, restrictive covenants, trade secret Leave a comment

Earlier today (September 15), the Massachusetts legislature’s Joint Committee on Labor and Workforce Development took testimony on the pending bills to reform Massachusetts noncompete law: two to ban employee noncompete agreements (House Bill 2296 and Senate Bill 932) and the other (House Bill 2293) to codify, clarify, and improve the existing complicated and unpredictable common law in this area. (In the interest of full disclosure, I am the principal drafter of the latter bill and am working closely with the bill’s principal sponsors, Representative Lori Ehrlich and Representative Will Brownsberger.)

In total, about 13 people (including me) provided testimony to the Committee. People spoke on both sides, for and against, with the majority in favor of the H.B. 2293.

While some opposition to reform has used scare tactics – such as incorrectly suggesting that noncompete reform will somehow prevent companies from protecting their trade secrets or that companies will suddenly be exposed to all sorts of corporate espionage – the testimony today did not take approach. Rather, of the people voicing opposition, most seemed to acknowledge that reform would be positive, but took issue with only (a) specific aspects of the bill (H.B. 2293) or (b) its timing, suggesting that making changes in the current economic climate would not be desirable.

In contrast, Secretary of Housing and Economic Development Greg Bialecki made it clear both that reform is necessary and that the Patrick Administration believes that now is the time. Accordingly, Secretary Bialecki urged people to get around a table and resolve the outstanding issues (lest the result may be the elimination of noncompetes altogether).

Throughout the process, the sponsors of the bill, in particular, Representative Lori Ehrlich (who co-chairs the committee) and Representative Will Brownsberger, have been endeavoring to do just that. In furtherance of those efforts, countless hours have been spent working with myriad individuals, companies, and associations toward a bill that strikes an appropriate balance between the legitimate business interests of employers and fairness to employees. It is for that very reason that the outstanding issues are relatively few.

At the moment, the main outstanding issues appear to be: (1) the provisions regarding attorneys’ fees; (2) the ability of the courts to consider equitable factors in deciding whether to enforce a noncompete agreement; and (3) certain requirements concerning paying employees for noncompete agreements when the agreement is imposed after the employee has already been working for the employer. (For more details on the bill, see here.) While the attorneys’ fees provisions are not currently part of Massachusetts law, the courts’ ability to take equitable factors into account most certainly is, and the concept of payment for the agreement is the subject of much debate among lawyers who regularly practice in this area.

I expect that these issues will continue to be the subject of much discussion. If you have input, we would be extremely interested in hearing from you.

Fair Competition Law

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

New Massachusetts Noncompete Bill

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

Massachusetts Trade Secret Protections Are Given Big Boost

Mass Lawyers Weekly Advisory Board Supports Noncompete Bill

Report on Massachusetts Legislature’s Hearing on Noncompete Bill

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