Trade Secret | Noncompete Issues and Cases in the News (June/July)

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extras_03Below are the latest issues and cases making trade secrets | noncompete news since our last update …

(My apologies to those who received an email update with a draft of this post.)

Also, note that the Changing Trade Secrets | Noncompete Laws has been updated, and is regularly updated.

Federal (9th Circuit):  One of the most-watched decisions involving the Computer Fraud and Abuse Act may have finally come to an end with a recent 9th Circuit decision issued on July 5. See Ninth Circuit Affirms Nosal Computer Crime Conviction in Key CFAA Ruling. 

Federal (8th Circuit):  On July 6, the 8th Circuit overturned the Western District of Missouri’s decision in Symphony Diagnostic Services No. 1 Inc. v. Greenbaum and held that a noncompete – despite arguments that it is a personal services contract and therefore cannot be assigned without the employee’s approval – could be assigned. The rationale for the ruling was essentially that the noncompete prohibits the employee from acting, as opposed to requiring the employee to act (which is the basis for not allowing the automatic assignment of personal services contracts). See Noncompete Agreements Can Pass From One Company to Next. 

Federal (California):  The first case to issue an injunction under the Economic Espionage Act’s new private right of action was on June 10 in the Northern District of California in Henry Schein, Inc. v. Cook.

Federal (New York, Criminal):  On June 14, Xu Jiaqiang, a Chinese national, had been arrested last year in a sting operation, was indicted for espionage on by stealing source code (presumably from IBM) on behalf of the People’s Republic of China. See Former IBM software developer accused of espionage. 

California: A particularly interesting (perhaps only to me) area of trade secrets law involves the intersection of trade secrets law with lawyer ethical obligations. That issue will likely be playing out in a case in Adelson, Testan, Brundo, Novell & Jimenez v. Misa Stefen Koller Ward LLP, No. 30201600850385CUBTCJC, Superior Court of California, County of Orange. See Lawyers Who Departed Call Trade Secret Lawsuit by Former Firm “Vindictive” and “Baseless” and Ask Court to Throw Out All Claims; Firm Accuses Ex-Partners of Stealing Clients, Trade Secrets. 

California:  Alphabet has been sued in Federal Court in San Jose for allegedly stealing the idea to use weather balloons to provide wireless service to rural areas. Google accused of stealing idea for Project Loon. 

California:  California’s drought problems are no secret, but how much water is used by any individual is. There is now a bill that would change that (for businesses). Bill targets secrecy in California water data. 

Illinois:  Not to be outdone by New York Attorney General Eric Schneiderman‘s investigation of Jimmy John’s (see below), Illinois Attorney General Lisa Madigan filed a lawsuit against Jimmy John’s on June 8. See The Illinois AG’s Suit Against Jimmy John’s On Non-Competes – What It Means For Employers; Attorney General Madigan Sues Jimmy John’s over Non-Compete Agreements.

Illinois:  On June 29, a bill (the Illinois Freedom to Work Act) to ban the use of noncompete agreements for low wage workers (i.e., those earning less than $13.50/hour) was sent to Governor Rauner on June 29.

Illinois:  On April 7, in Allied Waste Services of North America, LLC v. Tibble (Ill. N.D. April 7, 2016), another judge joined the majority of federal case law in Illinois rejecting the requirement established in Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013), that absent other consideration, an employee noncompete must be supported by at least two years of employment. (Thanks to Thadford A. Felton of Greensfelder Hemker & Gale for identifying the case.) 

Massachusetts:  On June 30, the Massachusetts House of Representatives passed a revised version of the noncompete bill reported out of the the Joint Committee on Labor and Workforce Development. The current bill still contains the version of the Uniform Trade Secrets Act submitted by Steve Chow on behalf of the Uniform Law Commission and reflecting my input revising certain aspects of the earlier draft that I thought would make trade secrets harder to protect in Massachusetts, but includes significant additions to the version of the bill recently reported out by the Joint Committee on Labor and Workforce Development.

An interesting commentary by Michael Gilleran, author of the bible on 93A, argues that the UTSA (assuming it is ultimately signed into law in its present form) will preempt G.L. c. 93A (the Massachusetts unfair competition statute), insofar as 93A applies to the misappropriation of trade secrets. See Will 93A continue to apply to trade secrets — and should it? (paid subscription). (Mike focuses on Peggy Lawton Kitchens v. Hogan, 18 Mass. App. Ct. 937 (1984) and its progeny, though its application is not without question when it comes to misappropriation by former employees (which, as a group, are the greatest risk factor for misappropriation). See Massachusetts Trade Secret Protections Are Given Big Boost.) In making his argument that 93A is preempted, Mike relies, in part, on the extensive comments that accompanied the version of the Uniform Trade Secrets Act submitted by Steve Chow on behalf of the Uniform Law Commissioners.

However, although the text of the Steve’s version of the UTSA (with my handful of changes) was passed by the House, the comments (while very helpful generally – and definitely worth a read) were not included. Accordingly, their impact is of questionable significance.

Regardless, as Mike also notes, the practical impact when it comes to the availability of treble damages is likely quite limited. Noting the requirements of “willful and malicious” in the UTSA (as opposed to only “willful” or “knowing” in 93A), Mike states:

[T]he term “malicious” in the Massachusetts UTSA is to be interpreted as it would be under Massachusetts law, which has a longstanding history of equating the term malicious with the term willful: “Whatever is done wilfully and purposely, if it be at the same time wrong and unlawful, and that known to the party, is in legal contemplation malicious.” Wills v. Noyes, 29 Mass. 324, 327-328 (1832), cited in Chervin v. The Travelers Ins. Co., 448 Mass. 95, 109 (2006).

Therefore, because the term malicious under Massachusetts law is legally equivalent to the term willful, the “willful and malicious” test for triple damages under the UTSA should be the same as the “willful and knowing” test for triple damages under 93A.

Mike also notes that the same “willful and malicious” standard applies to an award of attorneys’ fees under the UTSA and that it will “make an award of attorneys’ fees under the UTSA only somewhat harder to obtain than under 93A.”

In a separate post discussing the bill, Mark Muro of the Brookings Institution takes the position that Massachusetts should limit noncompete pacts to spur growth. In a similar vein, see the June 28 article by Steven Lohr of the New York Times, To Compete Better, States Are Trying to Curb Noncompete Pacts. 

New York:  On June 22, New York Attorney General Eric Schneiderman concluded his year and a half  investigation of Jimmy John’s sandwich shops’ use of noncompetes with an announcement of a settlement. As a result, Jimmy John’s will no longer include sample noncompetes in the hiring packets it sends to its franchisees.

New York:  On June 15, New York Attorney General announced a settlement with Law360 (a subsidiary of LexisNexis), as a result of which, Law360 will no longer use noncompetes for its editorial employees, with the exception of top executives.  See New York Blows Up Company’s Non-Compete Policy in Warning to Employers.

Ohio:  On June 28, Abercrombie & Fitch sued a former marketing executive, Craig Brommers, who took a marketing job at the Gap. Claiming that part of Brommer’s job at Abercrombie was to differentiate its products from those of the Gap and that Brommers received confidential information to do so, Abercrombie seeks to enforce his 12-month noncompete. See Abercrombie Says Gap Poached Its Executive.

Wisconsin:  Wisconsin, one of the handful of red pencil states, is know for being generally hostile to noncompetes. Yet, maybe the tide is turning. Proposed legislation to replace the red pencil rule with the reformation rule (and other changes) aside (see Changing Trade Secrets | Noncompete Laws), a recent judicial decision took a surprisingly permissive approach in Schetter v. Newcomer Funeral Service Group, Inc. In addition to not invalidating a the arguably-overbroad noncompete (that was the surprising part), the court also found that a $1,000 payment for the noncompete was good consideration for a noncompete. For a good discussion of the case, see Fisher Phillips‘ Joseph Shelton‘s discussion, Wisconsin Court Throws Out Choice-of-Law Provision, Then Enforces a Non-Compete Anyway. 

Other Noteworthy News…

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