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:

Social Media Privacy Bills Around the Country

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

Other states (Massachusetts, California, Illinois, and New Jersey) are not far behind. See Social Media Password Privacy Bills.

In Massachusetts, for example, a similar bill was sponsored by Representative Cheryl A. Coakley-Rivera, with the support of over 18 other State Representatives, including Representative Lori Ehrlich (who is also a co-sponsor of the Massachusetts noncompete bill still pending before the Joint Committee on Labor and Workforce Development).

The operative language of the Massachusetts social media bill (“An Act relative to social networking and employment”) is as follows:

It shall be unlawful for any employer to ask any employee or prospective employee to provide any password or other related account information in order to gain access to the employee’s or prospective employee’s account or profile on a social networking website or electronic mail. No employee or prospective employee shall be required to provide access to an employer for a social networking site.

The bill also makes clear that it does “not apply to any employer who obtains information about a prospective employee or an employee that is in the public domain or obtained in compliance with this section” and does “not limit an employer’s right to promulgate and maintain lawful workplace policies governing the use of the employer’s electronic equipment, including policies regarding internet use, social networking site use, and electronic mail use.”

Whether these bills are passed by the respective legislators and governors remains to be seen. Interestingly, the US Congress has rejected a similar effort. See Congress Decides to Allow Employers to Demand Your Facebook Password. If they do pass, however, they will certainly raise some interesting issues (beyond the obvious) given the trade secrets concerns that have been in the news lately. See Employers May Own Employee’s Social Media Accounts: Twitter, Facebook, LinkedIn, and YouTube.

Social Media is Not Social “Security”

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A lot has been written on how insecure social media can be and the need to assess the risks. I won’t bother to add more.  I am, however, passing along a very-well written (and lengthy) discussion of many of these issues – including the ethical implications for lawyers.

Part One: The Basics and Framing the Issues

Part Two: Privacy and the Cloud

Part Three: Relationships in the Cloud

Part Four: E-Discovery and Digital Evidence

Part Four and a Half: Extending the Discussion of E-Discovery in the Cloud

Part Five: Ethics or Why All Lawyers-Not Just Technogeek Lawyers Like Me-Should Care About Data Security

Enjoy the reading!

So, Can Your Employees Sext At Work?

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The perennial issue of the extent of privacy rights in the workplace — in particular, what right the employer has to review private messages (including sexually-explict text messages, see “sexting“) sent using company-owned equipment — was finally supposed to be answered by the much-anticipated Supreme Court decision in City of Ontario v. Quon. Without getting into the details of the case (suffice it to say that it includes sexting between an employee and his mistress, discovered by his boss; oh, and the employee is a police officer on the SWAT Team – need I say more?), the case asserted claims under the Stored Communications Act, 18 U. S. C. § 2701, et seq., California privacy law, and the Fourth Amendment (freedom from unreasonable search and seizure). Accordingly, it afforded the Court ample opportunity to set a standard for workplace privacy in the Information Age.

Unfortunately, the Court chose to explicitly duck the issue: “Though the case touches issues of far-reaching significance, the Court concludes it can be resolved by settled principles determining when a search is reasonable.” As a result, the Court decided only whether the City violated the Fourth Amendment, which it said was not violated.

For what it’s worth, some feel that the Court passed on the more important issue out of a lack of understanding of the facts, specifically, the technology. See, e.g., WSJ’s Our Tech-Savvy Supreme Court. The Court’s decision, however, indicates to the contrary; instead, concerned about the lack of fully-developed societal attitudes toward this relatively-new technology, the Court cautioned as follows: “A broad holding concerning employees’’ privacy expectations vis-à-vis employer-provided technological equipment might have implications for future cases that cannot be predicted. It is preferable to dispose of this case on narrower grounds.”

So, where does that leave us? Can you read your employee’s sexts (or even texts) made using company-issued equipment or not? Like all good legal questions, the answer is:  It depends. The Court did provide some limited the guidance. Here are the take-aways: Check your policies. Do you have an electronic use policy? If not, write one. If so, make sure it’s updated and specifically anticipates that new technologies will be governed by the policy. Equally important, make sure that your employees are aware of it, have received a copy of it, and have acknowledged reading and understanding it. Repeat next year!

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