Trade Secret | Noncompete – Issues and Cases in the News – October-November 2012

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 4^th Circuit’s decision in WEC Carolina Energy Solutions LLC v. Miller, two circuits (the 4^th and 9^th) have employed a narrow interpretation of the CFAA, while four other circuits (the 1^st, 5^th, 7^th, and 11^th) 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:

• After computer game maker, Zynga, Inc., obtained an ex parte injunction against former high-level employee Alan Patmore (see “Zynga Files Suit Against Former Staffer, Claiming Theft of Trade Secrets”), Zynga amended its complaint to include Patmore’s new employer, KIXEYE, Inc., who, no surprise, has filed a counterclaim, asserting that Zynga is using the case to discover KIXEYE’s trade secrets. For more reading, see “Exclusive: Zynga’s Alan Patmore case gets more complicated with Kixeye cross-complaint.”

• In a very interesting case Wanke, Industrial, Commercial, Residential, Inc. v. The Superior Court of San Diego County, discussed by Daniel Salinas, a California appellate court reversed a trial court that refused to enforce a nonsolicitation agreement contained in a stipulated injunction. For a discussion of the case, see “California Appellate Court Holds That Non-Compete Restriction in Stipulated Injunction Is Enforceable Because There Was No Showing That It Was Not Necessary to Protect Trade Secrets.”

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.”

• For a few additional recent cases (including one that I cannot comment on, as I am the mediator), see Massachusetts Quick Links – October 2012 on Lee Gesmer’s always excellent Mass Law Blog.

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 2^nd 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 2^nd 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.)

• While the focus is so frequently on overseas theft, the DOJ does not ignore alleged domestic espionage. See, for example, “3 men accused of stealing trade secrets from local company.”

Related Items of Interest:

• For a recently-published study of the use of noncompetes in CEO contracts, see my friend Norm Bishara’s article, “When Do CEOs Have Covenants Not to Compete in Their Employment Contracts?”

• For some interesting observations about some perceived trends in restrictive covenant use by healthcare providers, see Becker’s Hospital Review, “Non-Compete Agreements Among Healthcare Providers: 6 Trends.”

• Last year, my partner, Steve Riden, wrote an article in New England In-House called “Taking your non-compete agreement from good to great.” In that article, Steve described several provisions that should always be considered for inclusion when drafting restrictive covenants. One of Steve’s suggestions was a forum selection clause. Recently, Jason James of Poyner Spruill wrote about a North Carolina case highlighting the wisdom of Steve’s advice: “Revisiting Home Field Advantage In Noncompete And Trade Secret Cases.”

• On November 14, 2012, President Obama reportedly signed a secret cyber security directive, Presidential Policy Directive 20, to give the military powers to combat cyberattacks. See “Obama signs secret directive to help thwart cyberattacks,” in the Washington Post. For more background, see the National Security Council’s “Cybersecurity” post.

• Want to learn about Indian trade secrets law? See “India: Trade Secrets in Indian Courts.”

• Although it often seems that US companies are the only targets of corporate espionage, they are not. Here’s a recent high-profile example: “Tokyo lawsuit highlights risk of former employees spilling secrets.”