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:

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