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

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.

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