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.)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ohio: Two recent cases from Ohio are very interesting:

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

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

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

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

Criminal:

Related Items of Interest:

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

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

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

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

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

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

Massachusetts: Several recent cases in Massachusetts are worth noting:

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

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

* * *

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

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

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

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

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

Ohio: The Ohio Supreme Court, on May 24, 2012) issued a decision (Acordia of Ohio, L.L.C. v. Fishel) on an issue that is unsettled in many states: The assignability (typically in a corporate merger or acquisition) of an employee noncompete. In short, the Ohio Supreme Court held that to be assignable, noncompetes must say so. As usual, John Marsh has written a very thoughtful analysis of the case, and provided excellent advice in his post, Acordia of Ohio v. Fishel: Ohio Supreme Court Finds Non-Compete Does Not Survive Merger If It Lacks “Successor or Assigns” Language. For the latest from the First Circuit on this, see the summary (and text) of a recent decision discussed on my firm’s website, under “1st Circuit Decisions on Noncompete Agreements.”

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

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

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

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

Criminal:

Related Items of Interest:

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

BRR’s 50 State Noncompete Survey Updated – Illinois, Montana, Texas, and Wisconsin

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The BRR 50 State Noncompete Chart has been updated (as of April 29, 2012) to reflect an update to Illinois, Montana, Texas, and Wisconsin laws.

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

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

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

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

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

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It’s time for this month’s Trade Secret | Noncompete Issues and Cases in the News.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Criminal Cases:

Related Items of Interest:

Trade Secret | Noncompete – Issues and Cases in the News – December 2011

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Like a similar post last month, 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 again, enjoy.)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mass Lawyers Weekly Advisory Board Supports Noncompete Bill

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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:

Trade Secret | Noncompete – Issues and Cases in the News

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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.
  • 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:

  • 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.
  • 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.
  • 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.

Report on Massachusetts Legislature’s Hearing on Noncompete Bill

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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.

Hearing on MA Noncompete Bill

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The Joint Committee on Labor & Workforce Development has officially announced that it will be conducting a hearing on, among other things, the Massachusetts noncompete bill on September 15. The hearing starts at 10:30 in Room A-1.

The bill (i.e., the bill that Representatives Lori Ehrlich, Will Brownsberger, and Alice Peisch have sponsored, and of which I am the lead drafter) is currently scheduled 5th on the agenda. Details about the bill can be found here.

The hearing will also cover the bill filed by Representative Sheila Harrington to ban noncompetes, which is currently scheduled 7th on the agenda. (That bill is similar to California’s approach and differs from the other bill, which takes a more balanced approach.)

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