Connecticut Noncompete Law is Not Undergoing Legislative Changes

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UPDATE/CORRECTION (7/17/2013): It turns out that I had been mistaken about this. The various reports that the governor had signed the bill were incorrect. The bill had only made its way to the governor, but he had not signed it. And, he has in fact now vetoed it. So, for the moment at least, Connecticut’s law concerning noncompetes will not be changing any time soon. My apologies for any confusion! 

Happy 4th of July! (I hope you’re not reading this today – it can wait until Monday!)

Starting October 1, 2013, Connecticut noncompete law would have changed in one very important respect: In the context of corporate mergers and acquisitions, employers will be required to jump through a procedural hoop before they will be able to enforce certain noncompetes. (The text of the new law is reproduced below and available here.; the legislative history is available here.)

The bill is a bit unclear about exactly which noncompetes come within the purview of the new law. Specifically, it seems to apply to noncompetes that are “presented . . . as a condition of continued employment . . . .” See Section 1(b)(2). However, immediately after, it talks about “such noncompete” not just “entered into,” but “renewed or extended . . . .” Id.

This raises a few serious questions, not the least of which is how can a noncompete be renewed or extended (which suggests that it already exists) when it also needs to be “presented” (which suggests a new agreement with the new company)? Similarly, is it to say that once a company is merged with – note, not “into” – another, all employees of the two merged entities are now within the scope of the law?

Does it mean that from the time of the merger or acquisition forward, the company will need to comply with this statute, regardless of how long ago the acquisition or merger was?

Does “noncompete” mean just traditional noncompetes, or does it include garden leave clauses, nonsolicitation agreements, nondisclosure agreements, and other restrictive covenants? (This was a similar issue raised by New Hampshire’s recent noncompete statute, which I discussed at the time here.)

Does it apply to an employment agreement where only one portion contains the noncompete (as is often the case)?

I’m sure that these issues would have all be the subject of litigation at some point.

On the positive side (though admittedly not ideal for employers), the ambiguities could have been largely avoided by following the procedural requirement of providing a reasonable period (what’s is “reasonable,” you ask?) for the employee to consider the agreement before signing it.

Note that at a minimum, the period must be one week. Will that always be considered reasonable? Unclear. (I, for one, would want to consider the attendant circumstances before concluding that one week is sufficient.)

And, finally, the consequence of failing to comply is important: The agreement would have been void. That’s a big deal. As with much of the bill, however, that too is unclear. Would the entire agreement be void, or just the noncompete portion?

The full text is as follows:

AN ACT CONCERNING EMPLOYER USE OF NONCOMPETE AGREEMENTS.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective October 1, 2013) (a) As used in this section:

(1) “Employee” means any person engaged in service to an employer in the business of the employer; and

(2) “Employer” means a person engaged in business who has employees, including the state and any political subdivision thereof.

(b) If (1) an employer is acquired by, or merged with, another employer, and (2) as a result of such merger or acquisition an employee of the employer is presented with a noncompete agreement as a condition of continued employment with the employer; any such noncompete agreement entered into, renewed or extended on or after October 1, 2013, between the employer and employee shall be void, unless prior to entering into the agreement, the employer provides the employee with a written copy of the agreement and a reasonable period of time, of not less than seven calendar days, to consider the merits of entering into the agreement.

(c) Nothing in this section shall be construed to limit or deny any rights an employee may have at law or in equity. An employee may waive the right provided under subsection (b) of this section if such waiver is reduced to a separate writing, sets forth the right being waived and is signed by the employee prior to entering into the agreement.

By the way, were you wondering about the image? It is nutmeg; it’s there because Connecticut is the Nutmeg State. 

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:

Fairly Competing – A New Podcast

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FairComp LogoI am thrilled to announce that I have been given the opportunity to work with two of my favorite (though far more prolific) bloggers, Ken Vanko and John Marsh, to create a brand new podcast: Fairly Competing, a Competition Law Podcast. It is among the first podcasts devoted to trade secrets, restrictive covenants (noncompetes), and related unfair competition laws.

We have recorded two episodes so far, and will be recording our third soon. We hope to record one every two weeks or so. They will generally last about 20-25 minutes, after the first episode (which was about 40 minutes). The will be available to listen to through the three speakers’ blogs, on iTunes, and on Fairly Competing.

The first episode is an examination of a few of the most significant trade secrets/noncompete/unfair competition developments in 2012 (sort of an abbreviated year in review).

For anyone interested in a more detailed review of the trade secrets developments in 2012, I have provided here my (quite lengthy) materials for the trade secrets portion of this year’s Boston Bar Association’s annual IP Law Year in Review CLE. In addition, both Ken Vanko (here) and John Marsh (starting here) have excellent posts covering similar issues.

The second episode covers the recent prosecution of internet activist and Reddit founder, Aaron Swartz, under the Computer Fraud and Abuse Act (CFAA). We discuss the forces that shaped this tragic case, consider whether changes to the CFAA are needed, and debate whether Silicon Valley Congresswoman Zoe Lofgren’s proposed amendment to the CFAA goes far enough.

The third episode will cover recent and proposed noncompete legislation around the country.

To subscribe to our podcast on iTune, click here.

We hope you will listen and enjoy them as much as we do!

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trade Secret | Noncompete – Issues and Cases in the News – 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:

Unfair Competition Basics… Boundless Noncompete Restrictions

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With some exceptions (most notably California, Oklahoma, and North Dakota) properly-drafted, properly-executed employee noncompete agreements are generally enforceable around the country, as long as, based on the attendant facts, they satisfy the applicable standards. Most often the standards require that the agreement be limited in time (duration of the restriction), space (geographic reach), and scope of restricted activities (although scope is frequently not expressly stated as a part of the test).

So, what happens when a noncompete is not self-limiting geographically?

In states that follow a red-pencil/all-or-nothing approach or blue-pencil approach, the answer is easy: The noncompete will almost certainly fail. (Few rules are absolute in the world of noncometes, however, and this is no different; for example, in some states, if the agreement is limited to specified customers, the need for a geographic restriction may be obviated.)

In states that follow the reformation approach (even when they mistakenly refer to it as “blue penciling”), the question is more difficult. In those states, in theory at least, courts have the ability to, essentially, rewrite the agreement to fit it within the particular state’s rules. And, this is just what the Kentucky Court of Appeals said in a recent case, Charles T. Creech Inc. v. Brown. (The court also has an excellent discussion of Kentucky noncompete law in general.)

In that case, the court remanded the matter back to the trial court to consider the various factors under Kentucky noncompete law. So, we don’t know what the end result will be.

The takeaway, however, is that whether enforcing or defending in a reformation state, you should not assume that absence of a stated geographic limitation – or any of the requirements of the applicable test, for that matter – will be fatal to the enforceability of the agreement. (For which states are reformation states, see our 50-State Noncompete Chart.)

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