2011: Year-End Review, Part II

I decided to augment my year-end review this year with a different tone and message. In the past, I have confined my end of the year analysis to a true summary of what legal developments we saw in the area of non-compete law during the prior twelve months.

But upon reflection of the year that is now behind us, I wanted to share some personal thoughts about what I have seen representing clients in lawsuits and non-compete disputes.

In 15 years of practice, I have never been more bothered and disturbed by the role attorneys play in facilitating their clients' grievances, rather than resolving them. Competition disputes are a little bit different - actually, a lot different - than other ordinary suits. More than frequently, they are not about righting a wrong or recovering some liquidated debt. Rather, they are intensely personal, strategic, and improperly pursued. I have written before on the range of legal fees often generated in these cases and what factors go into those ranges. Clients and potential new clients are sometimes shocked to hear this, but it is much better for them to know at the outset.

In 2011, I tried three non-compete cases to final judgment - two victories and one defeat. And on each occasion, the court ultimately got it correct. The attorney I lost to was one of the finest and most honorable attorneys I have met, represented his client well, and worked well with me to get a non-compete case tried to final judgment in a remarkable 35 days. This is what lawyers should aspire to. I left the case sad for my client, but emboldened in my belief in the system and that some attorneys just "get it."

Along the way, however, I witnessed lawyering that was the complete opposite. To sum it up eloquently, the representation I saw this year from a wide range of lawyers was fucking horrendous.

Lawyers seem to forget that they have obligations not only to the clients they represent, but also to the court and opposing counsel. In competition cases, these considerations seem to get swept under the rug all too often. Competition suits have the potential to be strategic - that is, not meant to redress a true grievance, but to gain foothold in the marketplace and to impose litigation costs on a competitor. This in and of itself is wrong. Many lawyers, however, could care less.

The law provides some redress for parties who are the victims of frivolous or strategic lawsuits (and, that term means both suits that were not well-grounded from the start, but also - and especially - those that were filed and maintained for some ulterior purpose), but the avenues to gain just compensation are exceedingly narrow, difficult to prove, and cost inefficient. My experience is that courts are impermissibly hostile to fee-shifting petitions, wary of counterclaims, and unwilling to view the motive behind lawsuits with a jaundiced eye.

Just three illustrations from this year to show what I have experienced firsthand.

I litigated a trade secrets injunction case in state court where the plaintiff, my opponent, had no idea what its trade secret was and ultimately concluded it was his "overall business model." (It was about halfway through a preliminary injunction hearing when the plaintiff finally decided this.) Aside from the fact my client was not even in the same line of business and never took anything from the plaintiff, the plaintiff and its lawyer pursued us anyway and forced a young man to spend $20,000 in personal savings to clear his good name. The court denied our motion for sanctions, which the plaintiff did not even defend.

I also prevailed in a federal court non-compete/trade secrets case where my opponent could not identify how it was ever harmed or injured as a result of what turned out to be business activity in a completely separate market outside the geographic scope of my clients' non-compete agreements. My fee petition for $100,000 is now pending, and my adversary has bitched, whined and lied that I failed to disclose information about my opponent's damages (not sure how this is even possible) and that I confused a deposition witness (is this a compliment or a complaint?).

In another trade secrets case, my opponent filed a claim in a complex industry, claiming that certain technology know-how components (each of which were clearly in the public domain) gave rise to an inevitable disclosure case. The suit, in essence, was a forced hostile takeover of a corporate competitor by virtue of a dubious trade secret claim, and resulted in a large settlement just so the defendant could move on with its business and close its debt financing. At no point did the plaintiff show any interest in what its trade secrets were (its theory changed three times before the first witness was deposed), but the lawyers managed to rack up millions in legal fees.

Victims of lawsuit abuse can always pursue claims for attorneys fees, abuse of process, malicious prosecution, and antitrust violations. But they are hard to prove, perhaps intentionally so. More problematically, lawyers these days seem more interested in charging their clients, building their books of business, and collecting fees, rather than doling out sound advice and pursuing cases to recover compensation.

There are simply too many attorneys chasing too little work, encouraging clients to take on stupid lawsuits for the sole purpose of litigating. Too infrequently, lawyers give little thought to how they will win a case. Litigating is enough until they get their ass handed to them or force their client to settle (usually after most of the fees have been charged and collected) right before trial.

I don't want to give the impression that I won't pursue a case for a client who has been truly wronged. In the past two years, I have been lead counsel for a plaintiff on only five cases - a mere fraction of how many times I defend clients in competition suits. But in those five suits, I know what I am doing and my clients damn well know I investigated the case before I filed it. I don't pretend to know everything, and I have had my share of disappointments. However, I have never used a competition suit for some ulterior purpose. Unlike many of my opponents, I can look myself in the mirror and say that I understand what the profession means.

Faces of Lawsuit Abuse

2011: Year-End Review, Part I

I put a fair amount of effort into this blog, but I try to go the extra mile in my year-end review. I went back and read my material from prior years, and I am proud of the content I have provided my readers as we have turned the page on another year.

So this year, I am going a step further and dividing my column in two parts. This installment features some notable developments in competition law and some links to suggested reading. The second installment will be a lot different, and I hope you find it valuable too.

As I look back on 2011, there were five significant developments (four of which I wrote about) in non-compete and trade secret law.

1. Supreme Court of Illinois "Reaffirms" Reasonableness Test. Courts in Illinois have struggled for 3 or 4 years to determine what test to apply to non-compete agreements. Due to a district split, the Supreme Court had little choice but to take Reliable Fire Equipment v. Arredondo to clarify the law applicable to covenants. As it turns out, the opinion in Reliable Fire was not all that illuminating, but it reaffirmed the tripartite reasonableness test that is common to many states and further held that an employer must demonstrate a protectable interest. The biggest change is that the protectable interest is to be assessed under a "totality of the circumstances" approach - a notable departure from a rigid test that lawyers and courts frequently struggled with. I wrote about this decision earlier this month. The defendants in that case have petitioned the Court for a finding that the ruling applies prospectively only. I will update the blog when the Court rules on (denies) that motion.

2. Texas Supreme Court Expands Permissible Scope of Non-Competes. In July, I wrote about Marsh USA v. Cook, an important Texas Supreme Court case which completed a long revamp of Texas law. Essentially, Texas has now migrated away from an analysis based on whether a covenant was "ancillary" to an employment contract and focused more on whether it is reasonable to protect a legitimate business interest. In Marsh USA, the Court determined that the provision of stock options (as opposed to confidential information) was the type of consideration that could support a non-compete. The best part of the case, though, is Justice Willett's scholarly and beautifully written concurring opinion. It should be required reading for any judge before he or she examines a non-compete case.

3. Georgia's New State Law Takes Effect. After some fits and starts, Georgia's new non-compete statute took effect earlier this year. Though the law only applies to contracts entered into after a certain date, Georgia now goes from being a notoriously employee-friendly state to one more neutral in how it assesses non-competes.

4. Colorado Allows for Continued Employment to Serve as Valid Consideration. The issue of whether continued employment can serve as sufficient consideration for a non-compete is one of my top wedge issues - those that clients often don't grasp and which are the subject of disagreement among states. Earlier this year, Colorado joined a majority of states in concluding that continued employment can constitute sufficient consideration.

5. Massachusetts Courts Expand Trade Secret Proteciton. This is not an issue I wrote about, but it is worth reading Russell Beck's discussion on the Fair Competition Law blog of Specialized Technology Resources v. JPS Elastomerics. Massachusetts has not enacted the Uniform Trade Secrets Act, and Section 93A is its general unfair competition statute. This case appears to give employers some more ammunition for obtaining damages and attorneys' fees against employees who misappropriate trade secret material and use the same after the employment relationship ends. Prior case law had been unclear as to how (or whether) employers could invoke this statute against departing employees.

So that's it for the traditional year-end wrap. Next up, a different and more personal take on 2011.

Iowa Appellate Court Addresses First Sale of Business Non-Compete Case In Over 70 Years (Sutton v. Iowa Trenchless)

Sale of business non-compete cases do not often end up in the appellate courts because they are so frequently enforced. While the contract still technically amount to restraints of trade, the level of scrutiny applied by courts is far more lenient than in employment cases.

The Court of Appeals of Iowa took its first sale of business case in more than 70 years and reaffirmed the long-held principle that courts grant a greater "scope of restraint" in sale of business non-competes than in other adhesive contracts. Interestingly, the court stated the "reasonableness" test is the same, "it is only the application of the test that is different." The court even noted that as long as the area covered by the non-compete was coextensive with the company's line of business, an unlimited duration still could be acceptable.

The Iowa court's formulation of the reasonableness test is similar to that in other states. Some courts will, for instance, presume that a protectable interest exists. Many states shift the burden of proof to the party challenging the covenant, in essence requiring him or her to demonstrate unreasonableness. In a normal employer-employee context, the burden often is on the employer to show why the protections are needed.

Interestingly, in the trial court, the employee - Sutton - sought a declaratory judgment that the non-compete was unenforceable. The employer counterclaimed for breach of contract. Both the trial court and appellate court found that the employer failed to establish an actual breach because it could not prove damages.

In reversing the trial court's grant of declaratory relief, however, the court found that Sutton actually had to reimburse the employer's attorneys' fees under a prevailing party provision of the contract, even though the employer never established breach. Sutton, therefore, may have been better off waiting to see if his ex-employer sued him, rather than filing a preemptive suit for declaratory judgment.

--

Court: Court of Appeals of Iowa

Opinion Date: 11/23/11

Cite: Sutton v. Iowa Trenchless, LLC, 2011 Iowa App. LEXIS 1359 (Iowa Ct. App. Nov. 23, 2011)

Favors: Employer

Law: Iowa

Missouri Among States Which Disapproves of Equitable Tolling (Whelan Security Co. v. Kennebrew)

One of the most important procedural issues in non-compete disputes is the idea of equitable tolling. This doctrine essentially allows a court to toll, or stay, the time remaining on a non-compete agreement during the period in which the employee is in breach.

There is a problem, however, with this doctrine. It's not always available, and the remedy is highly dependent on what state's law governs the agreement.

Lawyers need to look at two primary issues. First, does the agreement expressly provide for equitable tolling? If so, then basic principles of contract law should allow a court the power to toll the time remaining on a non-compete if an employee is found in breach. Second, if the agreement is silent on this issue, does the state common law allow for tolling as a default rule?

Ohio, for instance, is a state which allows equitable tolling. In Illinois, it seems as if the courts will not approve of it absent a clear contract provision, but at least one older case suggests the remedy might be available in certain circumstances. Many states simply hold the doctrine is not available.

Missouri is one of the states falling into this last category. The Court of Appeals of Missouri recently reaffirmed this principle in Whelan Security Co. v. Kennebrew, and cited several prior cases as support for its holding. The case, incidentally, also involved the reversal of a summary judgment in favor of the employee on the grounds that the non-compete was facially overbroad. Since the court had to consider the merits of the case, including the protectable interest at stake and the reasonableness of the agreement, the issue of injunctive relief came up in the court's opinion.

The court found that the employer still had a claim for damages, but that injunctive relief was not available given the lapse of the non-compete period. The court noted the equities of its reasoning: "This would avoid the injustice of penalizing Kennebrew by effectively terminating the security guard business that he has established and built since 2009."

For employers, it is essential to seek injunctive relief, if at all, right away. Waiting until a defendant has established its business raises numerous equitable issues, not the least of which is the potential harm to third-parties and the specter of a double recovery.

--

Court: Court of Appeals of Missouri, Eastern District, Division One

Opinion Date: 11/29/11

Cite: Whelan Security Co. v. Kennebrew, 2011 Mo. App. LEXIS 1590 (Mo. Ct. App. Nov. 29, 2011)

Favors: Employee

Law: Missouri

Are Signatures Required on a Non-Compete Agreement? (U.S. Risk Mgmt. v. Day)

Readers might be surprised how often employers fail to tie up the loose ends on basic personnel matters. I have seen on more than one occasion a non-compete agreement which fails to contain one or even both signatures. Of course, when a dispute arises, it is difficult for lawyers to turn back the clock and figure out why this was the case.

A case from earlier this year in Louisiana addressed an employee's argument that his non-compete was not binding because the employer never signed it. The agreement even said that it was only effective upon "execution." The court held, however, that a genuine issue of fact concerning contract formation existed, and the suit could not be dismissed at the pleading stage.

A couple of thoughts on this, and similar issues:

First, as the Louisiana court held, "execution" of a contract can mean signing or performance by both parties. Therefore, just as a I wrote yesterday, I would not get too hung up on formalities.

Second, contract formation may be a bigger issue if the employee (rather than the employer) fails to sign. An employee after all is the party to be bound under a non-compete, and the employer's obligations are usually not extensive.

Third, it is important to look at extrinsic facts. If there truly were a dispute over whether the employee consented to the non-compete terms, then the failure to tie up formalities may express the intent that no agreement was ever reached.

On this last point, it would be important to examine pre-hiring communications, an employee's voiced objections to certain terms, and other similar facts. In many cases, the employee may balk at the proposed non-compete and begin work anyway. If the issue is left hanging without any resolution, the court could conclude no meeting of the minds occurred even if the employer subjectively believes the employee had to sign the non-compete to remain employed.

--

Court: Court of Appeal of Louisiana, Fourth Circuit

Opinion Date: 9/28/11

Cite: United States Risk Mgmt., LLC v. Day, 73 So. 3d 1100 (La. Ct. App. 2011)

Favors: Employer

Law: Louisiana

Stealing a Non-Compete Agreement May Not Do You Any Good and It Could Land You In Jail

A man in Wisconsin who wanted to open up his own karate studio has been charged with a felony after trying to break into his former employer's work and steal a non-compete contract. The story can be found here.

Obviously, this was pretty stupid. But it likely would not have done much good even had this novice criminal pulled off his caper.

For starters, a missing non-compete hardly means a court cannot find one existed. I wrote about a similar case in Rhode Island exactly three years ago. A trial court certainly can consider evidence from knowledgeable people that an employee did in fact sign a non-compete. Helpful testimony would include the following:

(1) Facts indicating that a new employee must sign the contract as part of an established process at the time of hire;

(2) Evidence an agreement was sent to an employee;

(3) Evidence that personnel files were regularly audited to make sure agreements were on file; and

(4) Some admission by the employee that he signed the agreement.

My impression is that clients, particularly those who are new to litigation, are too enamored with formalities and technicalities. Courts (and rules of evidence) aren't that myopic.

I have had at least one case where my client (the employer) felt an ex-employee stole his non-compete agreement, and we have every reason to think he did. Of course, we did not have the direct evidence which landed our Wisconsin friend with a felony charge. But the judge in our case was willing to consider extrinsic evidence that an agreement was in fact reached.

The case of the missing non-compete, however, should not be an issue. Important documents should be saved (and backed up) electronically.

Supreme Court of Oklahoma Describes Limited Circumstances for Non-Solicitation Enforcement (Howard v. Nitro-Left Techs.)

Oklahoma is one of three states which bans non-competition agreements, the other being California and North Dakota. However, Oklahoma law allows for the limited enforcement of non-solicitation covenants.

The Supreme Court of Oklahoma in Howard v. Nitro-Lift Technologies recently clarified this standard, holding that a non-solicitation covenant may only restrict an employee's solicitation of "established" customers. This means that a covenant which bars solicitation of past customers, for instance, is overbroad. Interestingly, the Court also disapproved of a covenant which left undefined the term "customer," stating that it "might stretch to encompass temporary or single-event relationships." A market-based non-compete will never be enforced against an employee.

Employers in Oklahoma are on clear notice of what their covenants should look like. The state legislature and courts have clearly confined the restrictions to a narrow class of activity restraints. Based on the recent Howard decision, employers also should clarify their definition of "customers" so that it does not reach beyond "established customers" as required by Oklahoma law. While this may be unsatisfying for some employers, at least everyone knows the extent of what courts will enforce. The same cannot be said in virtually every other state.

--

Court: Supreme Court of Oklahoma

Opinion Date: 11/22/11

Cite: Howard v. Nitro Left Techs., LLC, 2011 Okla. LEXIS 107 (Okla. Nov. 22, 2011)

Favors: Employee

Law: Oklahoma

Court Holds Pictures of Dead Bodies Are Not a Trade Secret (Kenyon Int'l Emergency v. Malcolm)

I have nothing more to add to this post than the title itself.

--

Court: United States District Court for the Southern District of Texas

Opinion Date: 12/13/11

Cite: Kenyon Int'l Emergency Svcs., Inc. v. Malcolm, 2011 U.S. Dist. LEXIS 143437 (S.D. Tex. Dec. 13, 2011)

Favors: Employee

Law: Texas

California Court Summarizes Policy Behind Early Trade Secret Identification (North Am. Lubricants. v. Terry)

One of the big fights in trade secrets concerns proper identification of that which the plaintiff claims has been improperly taken, used, or disclosed.

Unlike the subject-matter of other intellectual property claims or contract claims, the trade secrets subject to protection are often unknown - even to the alleged misappropriator. For this reason, courts have noted that trade secrets cases are qualitatively different and impose on the plaintiff some obligations not seen in other areas of the law.

Many states have a common-law pre-discovery disclosure rule, and California has one by statute. Even those states which do not have hard-and-fast rules seem to suggest that a sequencing of early discovery is appropriate to allow a defendant to understand the claim in greater detail.

The policy justifications for early trade secrets identification were summarized succinctly in a discovery order in North American Lubricants Co. v. Terry. Identification serves four primary purposes:

(1) It promotes "well-investigated" claims and dissuades the filing of meritless trade secrets complaints;

(2) It prevents plaintiffs from using the discovery process as a means to obtain the defendant's trade secrets;

(3) It assists the court in framing the appropriate scope of discovery and in determining whether plaintiff's discovery requests fall within that scope; and

(4) It enables defendants to form complete and well-reasoned defenses, ensuring that they need not wait until the eve of trial to effectively defend against charges of trade secrets misappropriation.

In the North American Lubricants case, the court gave some examples of improperly identified trade secrets. They were: the plaintiff's "business model," its "business plan," and "marketing materials."

Defendants in trade secrets cases should take one of two approaches to identification. First, it could move for some sort of sequencing of early discovery to require that the plaintiff paint a clearer picture of its claimed trade secrets. Second, it should serve an early interrogatory on the plaintiff that at least requires the plaintiff to respond first and embark on the task of identification.

--

Court: United States District Court for the Eastern District of California

Opinion Date: 11/18/11

Cite: North American Lubricants Co. v. Terry, 2011 U.S. Dist. LEXIS 133672 (E.D. Cal. Nov. 18, 2011)

Favors: Employee

Law: Arizona

Michigan Appellate Court Upholds 3-Year Injunction In Absence of Non-Compete (Actuator Specialties v. Chinavare)

My employer clients often ask whether competitive activity can be stopped in the absence of a non-competition agreement. My answer is always the same: unless you can show some truly "unfair" competitive activity, your chances of obtaining an injunction are about zero.

What does "unfair" mean in my standard response? Two things: (1) true competitive activity (such as diverting business) during the term of employment; and (2) improper taking of truly sensitive business information. This "headstart" injunction is hard to achieve and is usually reserved for cases which are highly one-sided in terms of the facts.

Under the Uniform Trade Secrets Act, a court has the power to enjoin business activity for a reasonable period of time to eliminate the competitive advantage caused by the misappropriation. This time period necessarily will vary based on the facts of each case. A recent case from Michigan illustrates that this headstart period can be quite lengthy.

In Actuator Specialties, Inc. v. Chinavare, the Court of Appeals of Michigan affirmed a three-year injunction which prohibited the defendant from working for a competitor after the evidence showed he had accessed computer files of his ex-employer close to the time of his termination. After the lawsuit was filed, and a TRO was entered, it appeared the defendant continued to upload these files to his new employer's server and copied allegedly the content of sensitive documents to fulfill customer orders. The court also noted that one of the USB drives onto which the defendant copied information could not be located.

In light of these facts, the court affirmed what effectively amounted to a three-year industry non-compete. These types of rulings are somewhat unusual (though not unprecedented). In my opinion, a trial court which enjoins competitive activity to this extent has to make a finding that a defendant has been less than forthright or demonstrated a willingness to ignore or circumvent court orders.

Courts in equity will often look to which party is wearing the "white hat", and in cases involving the systematic taking or use of truly confidential information, it is hard for the defendant to achieve this "white hat" status. In cases where a defendant has improperly accessed or taken data, it is best that counsel for the defendant put the issues to rest right away. This would involve returning information, scouring potential sources where such information may have been copied, and ensuring that no such information has been used in the business. Otherwise, a defendant will be hard-pressed to convince a trial court that his or her former employer needs no ongoing protection.

--

Court: Court of Appeals of Michigan

Opinion Date: 12/1/11

Cite: Actuator Specialties, Inc. v. Chinavare, 2011 Mich. App. LEXIS 2133 (Mich. Ct. App. Dec. 1, 2011)

Favors: Employer

Law: Michigan

Assessing Reliable Fire and Non-Competes In Illinois

The Supreme Court's opinion in Reliable Fire Equipment was not much of a surprise. It seemed fairly clear the Court would establish that Sunbelt Rentals v. Ehlers was wrongly decided and that an employer needed to establish a legitimate business interest to support a reasonably drafted non-compete agreement.

The Court did just that, holding that the traditional three-part reasonableness framework holds and that courts must consider the totality of the circumstances in assessing whether the restraint is no greater than necessary for the employer's protection.

Though the decision left much to be decided and provided no real direction for future cases, a couple of principles were clarified.

First, the Court reaffirmed the long-held principle that total and general restraints of trade are void as against public policy. Therefore, an employer still must ensure that its non-compete agreements contain sensible limits in terms of activity, time, and territory. A complete ban on working in an industry will undoubtedly fall within Reliable Fire's purview of illegal "general" restraints.

Second, prior precedent in Illinois discussing legitimate business interests remain good law. Accordingly, employers may still rely on cases discussing the protectable interests of confidential information or customer relationships to demonstrate that a covenant is reasonable. They won't, however, be constrained by a rigid, formulaic test. Many cases, though, finding no protectable interest in ordinary customer relationships probably are of limited value.

Third, the Court stated that the three-part reasonableness test is "unstructured." In reality, this means trial courts will end up considering the following: (a) the language of the covenant; (b) its impact on the employee's livelihood; (c) whether non-parties or the public are harmed (this usually will involve a highly specialized service); and (d) whether the stated interest bears a nexus to the restrictions.

Employers will have some room to be creative in establishing a legitimate business interest. Such interests could include: (a) special training; (b) extraordinary or unique services (as in the case of a well-known CEO); (c) ability to influence critical vendor or supply chain relationships; or (d) disintermediation. In truth, employers have always asserted these interests, usually trying to bootstrap them into the categorical test, which is now just a guidepost rather than a dispositive inquiry. An article on the decision in Crain's can be found here.

Interestingly, last week the Supreme Court of Montana, in Wrigg v. Junkermier, Clark, Campanella, Stevens, P.C., addressed a very similar issue as that presented in Reliable Fire Equipment and held that an employer must "establish a legitimate business interest as a threshold step to [a court's] analysis of the reasonableness of the covenant." In that case, the Court held that an employer could not establish a protectable interest when the employee was involuntarily terminated. Prior decisions (of which there are few in Montana) did not come right out and discuss the protectable interest requirement, an issue similar to that in Illinois which led to the appellate district split.

I am not aware of any states which do not require courts to look at the protectable interest asserted.

Supreme Court of Illinois Reverses in Reliable Fire, Establishes Traditional Framework for Covenants Analysis

Today, the Supreme Court of Illinois reversed the lower court's decision in Reliable Fire Equipment v. Arredondo, the first non-compete case the Court has taken in five years.

The Court established the three-part reasonableness analysis as described in my previous blog post and held that courts in Illinois are not constrained to consider the two traditional protectable interests. Instead, Courts should examine the employer's legitimate business interest in light of each case's facts.

More on this case as the opinion of the Court becomes available.

Supreme Court of Illinois To Rule in Reliable Fire Equipment on Thursday

The Supreme Court of Illinois will issue its ruling Thursday morning in the important case of Reliable Fire Equipment v. Arredondo.

Last year, I wrote extensively on the Second District's opinion in this case, which effectively caused a three-way split among the Appellate District courts in how employment non-competes are analyzed. Though I have not noticed any great controversies or debates in the non-compete cases I currently have, the fractured opinion in Reliable Fire Equipment highlighted a lingering issue over the scope of the legitimate business interests that can support non-compete agreements in Illinois.

My prediction is the Court will adopt (or reaffirm) a three-part test for assessing whether employment non-compete agreements are enforceable. That is, the covenant must: (1) be no greater than necessary to protect a legitimate business interest of the employer; (2) not impose an undue hardship on the employee; and (3) not harm the public interest.

The Court, in my judgment, will not adopt the categorical rule the appellate courts have long advocated for what types of protectable interests can support a non-compete. In other words, I expect the Court to vest trial courts with flexibility to assess whether an employer has articulated a protectable interest under the unique facts and circumstances of each case. I would be surprised if the Court holds that the only two protectable interests are near-permanent customer relationships and trade secret or confidential information.

This will be the Court's first ruling on a non-compete case since 2006. In that case, the Court offered little guidance on the issues in Reliable Fire Equipment and did not discuss the types of interests that can support a non-compete.

Non-Compete Clauses in Franchise Agreements

Generally, non-competition clauses are governed by one of two standards: the strict scrutiny test applied most commonly to employment agreements, and the reasonableness test applied in the context of a sale of business.

The tests are different in degree, not kind. Both tests require a showing of reasonableness, but in the employment context, the employer must articulate a legitimate interest worthy of protection. Courts often scrutinize the asserted interest carefully and find that the covenant does not support something the law protects. In the sale of business context, the courts employ are more straightforward time, territory and scope analysis, and generally presume a protectable interest exists - usually goodwill.

In many states, the tests are colloquially known as the employment test and the sale of business test. But many covenants do not fall neatly within these two buckets. A common example is the covenant incidental to a franchise agreement.

I have had many clients come to me with these issues, and there is not a ton of case law assessing whether a franchisor/franchisee non-compete should be judged according to the strict scrutiny standard or the more traditional reasonableness standard. Courts in Pennsylvania, Kansas, and Washington have looked at franchise agreements as akin to employment agreements and applied strict scrutiny to the reasonableness analysis. Courts in New Jersey, Wisconsin, Virginia, and Montana have taken the opposite approach. There appears to be no majority rule.

What are the main differences between a franchisee and employee which might lead one to conclude that the sale of business standard should apply? Here are four:

(1) The franchisee usually has a close association with the franchised system's goodwill;

(2) Tradesmarks and trade secrets are more likely to be closely aligned with, and entrusted to, the franchisee;

(3) Franchisees lose their capital investment upon termination, where an employee's job simply ends;

(4) Competition by ex-franchisees impacts the economic interests of other franchisees.

Additionally, some courts have concluded that failing to enforce covenants in franchise agreements undermines the franchise systems entirely, where that is not at all the case in the employment arena.

There also are, however, some differences between franchisees and sellers of a business. Here are two big ones:

(1) The franchisor retains a significant amount of control over a franchisee;

(2) Franchisees typically are not compensated for the value of the business upon termination.

In my mind, this is a close call. From my review of cases, it seems as though franchise covenants are drafted better than those found in employment agreements and have more reasonable time and territory restrictions. I don't know why this is, but I think there is less adhesion up front. Potential franchisees always have more choices than potential employees.

I also disagree with the idea that covenants automatically should be characterized as employment or sale of business. I think courts should recast them as either arms-length transactions or contracts of adhesion. For instance, executive employees may be in a far superior bargaining position to change or narrow up their non-competes than even a seller of a business or a franchisee.

The Cost of Litigating Competition Cases

One of the inescapable facts about non-compete and trade secrets cases is that the cost of legal services often far outweighs the monetary value of the case itself.

Courts note, rightly so, that a business may justifiably spend a great deal of money to protect trade secret information (of course, that information better be a capital asset of the firm). So a large expenditure of fees even without a significant monetary recovery may still be worth the effort.

Still, clients need to be aware of how much a lawsuit can cost. Three examples from the past year stick out. In Johnson v. Simonton Building Products, Inc., 2011 U.S. Dist. LEXIS 36056 (D. Kan. Mar. 31, 2011), the defendants spent $1.8 million on a trade secrets case and were unable to recover their fees. Conversely, in ICE Corp. v. Hamilton Sundstrand Corp., 2010 U.S. Dist. LEXIS 120500 (D. Kan. Nov. 12, 2010), the plaintiff spent $1.138 million - recovering most of this on a post-judgment fee petition. I point out these two cases because the prevailing market rates in Kansas are not terribly high - $300 or so an hour is market for experienced partners. The third case, from Chicago, is SKF USA, Inc. v. Bjerkness, 2011 U.S. Dist. LEXIS 110275 (N.D. Ill. Sept. 27, 2011), where Locke Lord's fees totaled $1.3 million.

As can be seen, fees on either the plaintiff or defense side easily can reach seven figures. From my own personal experience, I just finished litigating a case to a favorable defense judgment where our fees were about $115,000. However, the plaintiff put little effort into the case and could not to seek injunctive relief. Further, there were few discovery disputes and very little in the way of motion practice. It seems unlikely that I could ever litigate a competition case to final judgment for less than $100,000. In past cases, my defense fees have exceeded $400,000 for similar cases - an amount clients consider high, but courts likely would not bat an eyelash at.

Clients need to be aware that litigating competition cases can be extremely costly. Numerous variables arise, from unreasonable (or, frequently, uninformed) attorneys on the other side to unforeseen developments with a client's business during the litigation. The "X" factors normally involve discovery disputes, e-discovery, and involvement of third-parties (by way of subpoena or depositions). It is extremely difficult to budget for competition cases, and often times the best an attorney can do is budget for discrete events along the way.

Uniform Trade Secrets Act Not Uniform When It Comes to Fee-Shifting

Trade secrets cases raise the specter of fee-shifting. Like many prevailing party statutes, fee-shifting is not automatic in trade secrets cases. Rather, a party must meet a prescribed standard and count on a court to exercise discretion to award fees.

The Uniform Trade Secrets Act has been adopted in all but a handful of states (New York, New Jersey, Massachusetts and Texas). The Act's fee-shifting provision generally has three components. A party can recover attorneys fees in the following situation:

(1) If a claim of misappropriation is made in bad faith;

(2) If willful and malicious misappropriation exists; and

(3) A motion to terminate an injunction is made or resisted in bad faith.

I have no experience at all with the third prong of this statutory provision. My hunch is that the drafters of the UTSA intended it to apply when a defendant moves to terminate an injunction on the grounds that secret material has entered the public domain, and the plaintiff continues to assert protection over the information. I could be wrong, though.

The first two prongs are mirror images of each other. A claim made in bad faith is essentially the flip side of a defendant's intentional stealing of secrets. The analysis is basically the same - was there some intent to harm, either through misappropriating legitimate secrets or advancing a meritless claim?

Some of the states that adopted the UTSA do not have fee provisions. Those states are Alaska, Idaho, Missouri, and Vermont. (Interestingly, Alaska also has no provision for recovery of royalty damages in the event of misappropriation.) Virginia has a fee provision but excludes the clause concerning termination of an injunction.

Keep in mind too that to recover fees, a party must be "prevailing." There are not a lot of cases out there which apply the prevailing party standard to UTSA fee-shifting claims. Many times it is obvious. One question which is likely to arise concerns the interplay of injunctive relief and damages. For instance, if a plaintiff obtains a preliminary injunction, but later fails to obtain any permanent relief or damages at trial, is it "prevailing"?

I don't think there are hard-and-fast rules on this. Nor should there be. Courts should adopt a flexible approach to see whether the plaintiff has practically succeeded. The preliminary relief in trade secrets cases is often the most valuable, and a quick stop to any misappropriation may prevent a plaintiff from showing damages.

California Court Holds Trade Secrets Preemption Issue Premature for Ruling (Amron Int'l Diving Supply v. Hydrolinx Diving)

The preemption provision of the Uniform Trade Secrets Act is a topic on which I write quite frequently. The idea is that the UTSA is supposed to displace conflicting tort claims based on trade secrets misappropriation.

States which have adopted the UTSA are varied in how they approach key principles of preemption. One of those concerns whether a court can determine if preemption applies when no definitive ruling has been made on whether something alleged to be a trade secret actually qualifies as such.

A California court has joined the reasoning of states holding that a court cannot adjudicate preemption on the basis of an allegation alone. It joins Virginia, Wisconsin and other courts holding that motions on the pleadings, claiming preemption under the UTSA, are premature.

Ohio is among a group of states (the majority) reaching the opposite conclusion. In such states, it is routine to see ancillary tort claims (such as conspiracy, conversion, and tortious interference) dismissed because the underlying conduct is alleged to be based on misappropriation of a trade secret.

UPDATE X1: A commenter has astutely pointed out that this ruling likely is inconsistent with California state court precedent (which would be binding, as opposed to this memorandum opinion). It appears California adopts a broad view of preemption under K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939 (6th Dist. 2009). From reading that case, it appears that courts are empowered to dismiss ancillary tort claims prior to a finding of trade secrets misappropriation. This is the far more sensible rule and is more consistent with California's policy towards non-compete and trade secrets claims.

--

Court: United States District Court for the Southern District of California

Opinion Date: 10/21/11

Cite: Amron Int'l Diving Supply, Inc. v. Hydrolinx Diving Comm., Inc., 2011 U.S. Dist. LEXIS 122420 (S.D. Cal. Oct. 21, 2011)

Opinion Date: 10/21/11

Favors: Employer

Defining "Damages" and "Loss" Under the CFAA

The Computer Fraud and Abuse Act is my least favorite statute. This is partly a result of the way it has been set up - a series of amendments that allow for civil actions, within a criminal statute.

The other fundamental problem with the CFAA is that key terms are either confusing, vague or undefined.

Regardless of which statutory provision is invoked in a CFAA claim, a plaintiff must prove either "loss" or "damages" to obtain compensatory damages (if it sounds redundant, it kind of is). Though the terms sound synonymous, they're not. Here's a brief summary of the difference.

To prove "damages," a plaintiff must show "impairment to the integrity or availability of data." Courts generally hold that this means destruction or deletion of files or hard drives. It does not mean the copying of electronic information from a computer system.

"Loss" is the subject of conflicting court rulings, but generally means costs of responding to an offense, damages from an interruption in service, or costs of conducting a damage assessment.

Disputes often arise whether retention of a forensic expert to examine an ex-employee's computer fit within the idea of "conducting a damage assessment." The general rule is they do not, because such costs are more akin to assisting in the overall litigation.

Also, the loss of business resulting from misuse of confidential information is not properly a "loss" under the CFAA, but is better addressed within the construct of contract damages or trade secret law.

In Alabama, No Implied Covenant Not to Compete In Business Sale (Pinzone v. Papa's Wings, Inc.)

A few months ago I discussed New York's common law rule that in a sale of business, when goodwill is part of transferred assets, the law implies a covenant on the part of the seller not to solicit the patronage of his or her former clients. Under New York law, this is inextricably bound up with goodwill itself, such that even in the absence of an express non-compete in the business sale documents, courts will grant the purchaser one to protect the integrity of the deal.

In Alabama, the opposite is true. The Court of Civil Appeals held that the existence of a covenant not to compete cannot be implied even when the sale agreement includes the transfer of intangible goodwill.

As I have previously noted, even in more protectionist states like New York, it is far preferable to draft clear covenants and include them in the transaction documents. What these cases discuss are gap-filler rules at common law, which should be invoked sparingly. Parties always are free to contract for a wide array of covenants in connection with an arms' length transaction, and courts generally enforce them as long as they are not patently unreasonable.

--

Court: Court of Civil Appeals of Alabama

Opinion Date: 7/9/10

Cite: Pinzone v. Papa's Wings, Inc., 2010 Ala. Civ. App. LEXIS 189 (Ala. Ct. Civ. App. July 9, 2010)

Favors: N/A

Law: Alabama

Establishing Value From Being Secret Is the Most Difficult Part of any Trade Secrets Case

I was reading an article by the firm Drinker Biddle today which discussed trade secret protection over customer lists.

One particular comment caught me by surprise. The article suggests that establishing economic value over a trade secret is relatively easy to establish. I respectfully disagree. As my readers know, trade secret laws place a two-part burden on a plaintiff to establish the existence of a trade secret. A plaintiff must show that the information is economically valuable from being secret, and that the information is the subject of reasonable secrecy measures.

If you analyze the case law, it is actually far easier to establish the second prong of the test - secrecy measures. Most employers now are aware that protection of knowledge assets is important and deploy enough secrecy measures to establish that they acted reasonably. (Though of course there are plenty of cases out there where a plaintiff, after the fact, attempts to establish secrecy when information never was intended to be kept out of the public domain.)

The first part of the test, though, can be incredibly difficult to establish. In the case of a customer list (which the Drinker Biddle article discusses), an employer may be able to claim that a list is economically valuable in the sense that it spent money advertising and marketing to the customers on that list.

But is it really that easy to show that the list is economically valuable "from being secret"? I don't think so. A plaintiff may not be able to account for the fact that the details of its list frequently change or evolve, that key parts of the list (say contact information) may be gleaned from public sources, or that major parts of the list can be obtained from commercially available databases. This is particularly the case with a prospect or target list.

At a minimum, a trade secrets plaintiff must identify the witnesses who can establish that information is valuable because of its secrecy. That is to say, those witnesses (likely, experts) must be prepared to testify that comparable information is not known by competitors or being used in the industry, and that such information provides true competitive value in very specific ways.

The bottom line is that a trade secrets plaintiff carries a necessarily heavy burden. Courts rightly favor the free exchange of ideas and vigorous competition. Allowing a plaintiff to establish trade secret status over information that is merely valuable - as opposed to being valuable because of secrecy - would undermine this critical policy goal.

Attorneys Fees In Competition Disputes Often Disproportionate to Harm (SKF USA v. Bjerkness)

One of the inescapable truths about non-compete and trade secrets cases is the expense associated with litigating them. In many, if not most, cases, the actual legal fees necessary to pursue a claim and mount a defense are disproportionate to actual quantifiable loss.

This is particularly true where injunctive relief has successfully been obtained, and a defendant may have started competing but where he or she has not been able to pirate away key accounts.

On the one hand, the most practical remedy has been obtained, but going the extra mile and obtaining damages would be exceedingly difficult. This is why many disputes settle at or around the time of an injunction hearing.

For cases where injunctive relief is not pursued or obtained, trying to obtain an actual remedy is quite difficult and may be an exercise in futility. This is particularly true when a plaintiff cannot point to actual accounts it lost.

A recent federal district court case in Illinois demonstated just how out of hand attorneys fees can get in competition cases. In SKF USA v. Bjerkness, the plaintiff prevailed on a trade secret misappropriation claim and obtained a judgment of only $81,068. Prior opinions in the case suggested the plaintiff's damages presentation was not very convincing.

But the plaintiff obtained a key finding - that misappropriation was "willful." That finding allowed them to obtain attorneys' fees under the Illinois Trade Secrets Act. The fee petition sought $1.3 million, representing 2,700 billable hours of time (or about a year and a half worth of work for a normal Chicago attorney to bill). The bulk of that fee petition was granted.

Such a result is not that uncommon. Fees generally are high in unfair competition cases for several reasons.

First, there normally a number of legal issues to address, from enforceability arguments to proper trade secrets identification.

Second, these cases ordinarily are document intensive, both from parties and non-parties (such as customers).

Third, they are hotly contested, and sometimes provoke irrational litigation behavior among attorneys. It is a truism that non-compete and trade secrets cases often are fought just to be fought, and to obtain a greater competitive advantage outside the actual scope of litigation.

Any case assessment must begin with planning for these contingencies and advising clients on what other similar disputes actually can cost.

--

Court: United States District Court for the Northern District of Illinois

Opinion Date: 9/27/11

Cite: SKF USA Inc. v. Bjerkness, 2011 U.S. Dist. LEXIS 110275 (N.D. Ill. Sept. 27, 2011)

Favors: Employer

Law: Illinois

Ohio Among States Adhering to Dominant View of Trade Secrets Preemption (Office Depot, Inc. v. Impact Office Products, LLC)

The preemptive effect of the trade secrets can be relatively narrow or very broad depending on which state's law applies. As explained in prior posts, preemption is the concept that a state's trade secrets act displaces conflicting state law tort claims based on misappropriation.

There are a number of preemption-related questions that courts must resolve. One of the more significant ones involves whether the trade secrets preemption clause displaces state law tort claims for misappropriation of confidential information not rising to the level of a trade secret.

The dominant view among states is that it does. Preemption would displace any tort claim based not only on trade secret misappropriation (such as conversion or unjust enrichment), but also any similar claim to the extent it is predicated on misuse of confidential, proprietary or other commercially valuable information.

Last week, an Ohio federal district court reaffirmed this principle under the Ohio Uniform Trade Secrets Act. Several Ohio cases previously addressed this issue, and it is a state squarely within the majority class adhering to a broad view of preemption.

There are two general policy rationales supporting this view. First, a narrow view of preemption would enable a party simply to default to other tort claims to avoid having to prove the statutory elements of trade secret misappropriation. If a party can sue for misappropriation of confidential information, why would it ever undertake the burden of pleading and proving the elements of a trade secret case? This would undermine the statute's goal of uniformity among jurisdictions to protect commercially sensitive information.

Second, allowing a party to bring tort claims for misappropriation of confidential information would discourage it from employing the secrecy measures of information that the trade secrets laws require. A party simply could bypass enacting secrecy measures and sue in tort for misusing confidential information that is not widely disseminated or publicly available, but still known by others in the industry. This would lead to less certainty, discourage fair competition, and impede the development of commercial ideas.

States adopting a minority view, which would allow for tort claims based on misappropriation of confidential information, include: Wisconsin, Virginia, Missouri, and South Carolina.

States which adhere to the majority view include: New Hampshire, Ohio, Hawaii, Kentucky, Michigan, and California.

--

Court: United States District Court for the Northern District of Ohio

Opinion Date: 9/26/11

Cite: Office Depot, Inc. v. Impact Office Prods., LLC, 2011 U.S. Dist. LEXIS 109420 (N.D. Ohio Sept. 26, 2011)

Favors: Employee

Law: Ohio

Make Sure Your Employees Are Really Employees (Figueroa v. Precision Surgical, Inc.)

Trying to distinguish between who is properly classified as an independent contractor is way beyond the scope of this blog.

However, it apparently has some relevance in non-compete cases. I have not seen a case like this before, but the Third Circuit has affirmed a denial of a preliminary injunction motion in a non-compete case because the "independent contractor" really was treated as an employee.

Joseph Figueroa challenged the validity of his restrictive covenants with Precision Surgical, Inc. As part of his contention, Figueroa claimed that his status as an independent sales representative was not honored while he was engaged by Precision Surgical. Figueroa reasoned that Precision Surgical breached the underlying agreement (which contained a non-competition covenant) by treating him as an employee. The district court and Third Circuit agreed and found Precision Surgical was unlikely to succeed on the merits of its counterclaim for a non-compete violation.

Among the relevant factors in the court's determination:

(1) Figueroa was given the title "account executive"

(2) He was required to regularly report, attend sales meetings, and received instructions on how to dress.

(3) Precision Surgical made deductions on his commission payments.

(4) Precision Surgical terminated the relationship when Figueroa refused to convert to W-2 status.

As I have told clients before, a non-compete (or more likely, a non-solicit) covenant for an independent contractor can be enforceable. Problems generally arise, though, when a disgruntled former contractor applies for unemployment compensation, and questions arise as to whether he or she was misclassified.

For those employers who do use non-competes in connection with independent contractor agreements, make sure those agreements are followed and that you're not exercising undue control over your people.

--

Court: United States Court of Appeals for the Third Circuit
Opinion Date: 4/12/11
Cite: Figueroa v. Precision Surgical, Inc., 423 Fed. Appx. 205 (3d Cir. 2011)
Law: Pennsylvania
Favors: Employee

Step-Down Clauses May Be Important In Blue-Pencil States (Team IA, Inc. v. Lucas)

Step-down clauses are not something I often see in non-compete agreements.

The basic premise is fairly easy to grasp. A step-down clause provides alternative restrictions if a court finds that one (that is, the more restrictive one) is too broad to be enforced. When would such a clause be appropriate to use? If your jurisdictions is a true blue-pencil state.

The blue-pencil rule provides that, though certain overbroad clauses can be stricken without invalidating an entire contract, a non-compete clause cannot be rewritten by a court to make it reasonable. That means that a restriction - usually a territorial one - runs the risk of being held overbroad, unenforceable and not salvageable.

A step-down clause is a creative way to avoid the sometimes strict impact of the blue-pencil rule. A recent South Carolina case, which upheld a step-down clause, illustrates how it can work in the context of a non-compete lawsuit. The employee's territorial restriction was nationwide, but also provided that in the event it was held overbroad, could be limited to four southeastern states.

The court struck down the nationwide restriction as overbroad but concluded the step-down clause, with a much narrower geographic territory, was valid and enforceable.

In equitable modification states (which allow for reasonable alterations to a non-compete to make them reasonable), using a step-down clause is not as critical. Still, it may provide the court an easy alternative. Many judges are hesitant to modify parties' contracts and may view a reasonable step-down clause as upholding the parties' bargain.

--

Court: Court of Appeals of South Carolina

Opinion Date: 9/14/11

Cite: Team IA, Inc. v. Lucas, 2011 S.C. App. LEXIS 267 (S.C. Ct. App. Sept. 14, 2011)

Favors: Employer

Law: South Carolina

The Value of Business Information In a Nutshell

Having litigated and advised clients on issues related to non-competes for almost 15 years, I hear the terms "trade secret", "confidential information" and "proprietary information" every day. It can be a little numbing, and unfortunately, I think more about these terms of art than I should.

So I thought I would try to summarize, briefly, what they mean in practice. The terms are different and they are not at all interchangeable.

1. Trade Secret. A trade secret is the type of non-public business information afforded the highest legal protection. Essentially, a trade secret is a narrow subset of valuable commercial information. There are two keys to establishing the existence of a trade secret: (a) value; and (b) secrecy. But here is the catch for lawyers and clients alike. Something does not qualify for trade secret protection simply because it is valuable, or because it is secret. It must be valuable because it is kept secret. Put differently, if something publicly available provides you the same or similar value, it's not a trade secret. Also, courts scrutinize secrecy measures very carefully. You need to demonstrate affirmative steps were taken to protect the information.

2. Confidential Information. I hate this term. And I hate it because by itself it is meaningless and overused. The law treats confidential information differently than a trade secret. In Illinois, it means "particularized information which is unknown to others in the industry and gives an employer advantage over his competitors." Trying to differentiate this from the trade secret definition is not easy, but here is the best I can come up with. First, courts will be more lenient on the degree of specificity required in claiming something is confidential. Second, courts won't impose that high of a burden on employers to show what secrecy measures are employed. And third, it is not clear that an employer needs to show the information is valuable because of its confidentiality. Keep in mind that while breach of confidentiality likely has legal implications, the remedies available are not as sweeping as in a trade secrets case.

3. Proprietary Information. As much as I hate the term "confidential information", I hate this term more. It is a mistake to equate confidential information with proprietary information. If something is "proprietary", it simply means it is owned. A patent, or documents submitted in a patent application, can be and likely are proprietary, but when published they are neither secret nor confidential. Even the content of this blog is proprietary to me, because I have copyright in it. But again, it's not confidential (as evidenced by the fact you are reading this...). A form contract may be proprietary in the sense that a company developed it, but if customers have access to it without restriction, it probably is not confidential. Absent some breach of confidentiality, disclosure of "proprietary" information may not be problematic.

Does the Illinois Computer Crime Prevention Law Benefit Employers?

The Illinois Computer Crime Prevention Law (ICCPL) is a scaled back version of the federal Computer Fraud and Abuse Act. Effectively, it is a penal statute (contained entirely within the Criminal Code) that criminalizes improper computer conduct, such as hacking or improper access of a computer system.

It does contain one civil remedy, however, and that potentially gives employers another weapon to combat unfair competition. An increasing number of employment competition cases at least raise the specter of whether the employee transferred confidential data or information prior to his departure. Often, this can color a trade secrets or non-compete claim. It is more frequent that an employee's communications will tip off the employer what he or she is planning to do, and it may even reveal sensitive details of a future business opportunity.

Some departing employees, to be frank, are not that clever. They try to cover their tracks by wiping a hard-drive clean with off-the-shelf software like "Window Washer" or "Evidence Eliminator." (Yes, the program names are as sinister as they sound.) The ICCPL potentially gives employers a statutory claim if a departing employee installs and runs one of these programs which has the effect of deleting data from a work computer. This information could consist of stored e-mails or even a detailed competing business plan.

What does this ICCPL claim get an employer? Perhaps not much. I am not a huge fan of piling on claims just so I can see my own work product on paper. In my mind, the claim ought to give the client some other type of relief - injunction, attorneys fees, punitive damages - or an alternative path to victory.

The ICCPL allows for damages and discretionary fee-shifting, but an employer likely has those claims anyway. However, there may be an issue on the type of damages the ICCPL allows and which may not otherwise be recoverable. From a plain reading of the statute, the damages seemingly would have to relate to the lost data. Potential damages, therefore, could include time spent on a forensic examiner to assess and recover lost data. It theoretically could include indirect damages, such as the value of employee time spent recreating the substance of what was lost. This is not clear, but if so, this may be a potentially valuable add-on claim. I am not so sure the typical business tort or contract-based claims would allow for those types of damages.

As one might expect, there are virtually no cases under the ICCPL (certainly none of note). The ICCPL also contains several other provisions, none of which provide for a civil remedy.

Illinois Court Describes What Facts State Claim for "Inevitable Disclosure" (Mobile Mark, Inc. v. Pakosz)

Illinois is one of the many states which recognize the "inevitable disclosure" doctrine. As I have written before, the doctrine is a species of the Uniform Trade Secrets Act provision which allows "threatened" misappropriation to be enjoined. A few courts have noted the fine line between a threat of disclosure and the inevitability of such disclosure. Only lawyers would devote such time to parsing this distinction.

With the new heightened federal pleading standard, a trade secrets plaintiff must show facts that demonstrate inevitable disclosure is a plausible theory of misappropriation. In Mobile Mark, Inc. v. Pakosz, a federal district court in Chicago rejected a motion to dismiss on the grounds the plaintiff had not pled the inevitable disclosure claim with enough facts.

Here are some factors the court outlined that are critical to the inevitable disclosure theory:

(1) Evidence of copying the employer's confidential information (usually, this is alleged by way of suspicious downloading activity, e-mails to web-based accounts, unusual printing activity, or off-hours appearances on the employer's premises prior to departure);

(2) The level of competition between the new employer and the old employer;

(3) Whether the employee's position is comparable to the position s/he previously held;

(4) The employer's steps in protecting against the employee's use or disclosure of the prior employers' confidential information (as an example, courts look to warnings, covenants not to use such information in a new agreement, "firewalls" from sensitive projects or clients).

Prior inevitable disclosure cases seem to examine other factors, such as an employee's lack of candor about the new work assignment or shifting explanations about what job duties s/he will be assuming.

--

Court: United States District Court for the Northern District of Illinois

Opinion Date: 9/6/11

Cite: Mobile Mark, Inc. v. Pakosz, 2011 U.S. Dist. LEXIS 99865 (N.D. Ill. Sept. 6, 2011)

Favors: Employer

Law: Illinois

Orthodontics Sales Representative Prevails in Non-Compete Bench Trial (Thiesing v. Dentsply Int'l)

A former dental products sales representative of GAC International, who left to join American Orthodontics, has prevailed in a non-compete bench trial in the Eastern District of Wisconsin.

The case involving Tim Thiesing started out as a declaratory judgment action filed by him and his new employer, AO. GAC International countersued under a variety of theories. Eventually, the claims which proceeded to trial were based on Thiesing's 2-year non-compete agreement and a tortious interference claim against AO.

The non-compete was, in a word, strange.

For some reason, it did not simply bar Thiesing from selling orthodontics products in his former territory or to his former accounts. Rather, it inexplicably tied his sales activity to the incorporation of confidential information belonging to his former employer, GAC, into products sold by his new employer.

Effectively, this meant that the employer not only had to prove a non-compete case, but it also had to demonstrate a breach of confidentiality as well. This is exactly what an employer should not have to do. The non-compete can protect well-established business interests such as client goodwill and relationships.

But by flipping the case around and tying everything (including solicitation of customers) to confidential information, the employer basically lost the benefit of a more easily established business interest. Stated another way, the court inevitably had to focus on whether certain information Thiesing had access to or used in his employment with GAC was truly confidential, and if it was, whether it was incorporated into his AO sales functions.

It wasn't.

As with many sales-oriented cases, the employer had a hard time establishing how the information alleged to be confidential - prices, contact names, product designs - was actually kept confidential. None of the claimed categories of information appeared to be anything more than ordinary commercial information that a customer would expect to receive in a sales solicitation and, of course, free to use in bargaining with another potential supplier.

(As an illustration, my wife and I are putting in a fence. We had four companies come out and provide us quotes and plans. Those documents were left with us after the sales pitch. Were we able to use them to negotiate and get a better price? Of course. Are those confidential documents? Nope.)

The court appeared to have little trouble rendering a decision in favor of Thiesing and AO. Because the court did not find that Thiesing incorporated his old employer's confidential information into his new company's product offerings, there was no non-compete violation. In my mind, this is a classic case of an overlawyered contract. It makes no sense why an employer would complicate what should be a clear agreement with confusing definitions that make it harder to enforce its own document.

But that is why there are disputes, and ultimately trials. Incidentally, I followed this case and have to commend the work that the Godfrey & Kahn firm in Milwaukee did for both Thiesing and AO. The attorneys, William Duffin and Mark Schmidt, represented their clients very well, which is obvious from reading the filings. Their briefs and pre-trial submissions were first rate and go straight into my bank of sample documents.

I am not ashamed to admit that I will be block copying some of their analyses and arguments into my own cases.

--

Court: United States District Court for the Eastern District of Wisconsin

Opinion Date: 9/7/11

Cite: Thiesing v. Dentsply International, Inc., 2011 U.S. Dist. LEXIS 101437 (E.D. Wis. Sept. 7, 2011)

Favors: Employee

Law: Minnesota

Justice Souter Discusses Equitable Tolling Policy in EMC Case (EMC Corp. v. Arturi)

I have written frequently about the equitable tolling rule, which is one the more significant procedural issues in non-compete law. In a nutshell, the rule provides that a party who contracts for a non-compete clause should gain the full benefit of it, and the time period should be tolled during the period of breach. States have different views on it.

Readers here know my view on this by now: if employers want to use the equitable tolling rule, put it in the contract. It's not that difficult. About one sentence will suffice. I represent plenty of employers and I am no apologist for employees who willingly violate their non-compete contracts. But on the other side, I have little sympathy for employers (particularly sophisticated ones) who draft lousy contracts.

Massachusetts is one of those states where courts have indicated that, to use the equitable tolling doctrine, the contract must be clear. Last December, EMC Corporation was not able to deploy the doctrine when it sought to enforce a non-compete after the contracted-for covenant expired. I wrote about the district court opinion here. On appeal to the First Circuit, retired Associate Justice David H. Souter authored an opinion that spoke to why EMC was out of luck on its effort to impose injunctive relief:

"Like any contracting party, EMC makes its agreements subject to the rules of equity governing specific enforcement; rules, moreover, that were clearly in place in the governing federal and state cases well before the company required [the employee] to sign. Being forewarned, EMC could have contracted, as the district judge noted, for tolling the term of the restriction during litigation, or for a period of restriction to commence upon preliminary finding of breach. But it did not."

When there is contractual uncertainty in non-compete cases, the employer bears responsibility. Because an equitable tolling clause is easy to draft and a common remedy, it is not too much to ask of an employer to include it specifically so that the parties are fully aware of what rights and remedies are on the table at the start of a dispute. This is particularly so because equitable tolling can have the effect of allowing an employer a double recovery for damages (during the period of breach) and injunctive relief (extending the non-compete for more time).

--

Court: United States Court of Appeals for the First Circuit

Opinion Date: 8/26/11

Cite: EMC Corp. v. Arturi, 655 F.3d 75 (1st Cir. 2011)

Favors: Employee

Law: Massachusetts

Top Employment Law Blog? You Decide...

This blog has been nominated by LexisNexis as a Top 25 Labor and Employment Law Blog. Of the nearly 60 nominees, LexisNexis will be picking the Top 25 through reader comments (which apparently count as votes). The Labor and Employment Community at LexisNexis will then choose the top blog.

If you're interested in participating and supporting this blog, all you need to do is click here and follow the easy steps. In the interests of full disclosure, to comment and vote you will need to register as a Labor and Employment Community member. But unlike most free trials online, there is no catch and you're not subject to a monthly fee after 30 days. And to vote it will only take you a fraction of the time it takes me to keep this site regularly updated with interesting content. Small price to pay, right?

If you don't want to go through the hassle of voting, I appreciate you stopping by to visit. And if you prefer to send along kind remarks for my blogging work over the past three years, feel free to e-mail me directly. I always appreciate hearing from you!

Finally, by clicking on the link above, you will find a list of the other nominees. There are a ton of great, interesting blogs out there on a wide range of employment law topics. Be sure to visit them and add them to your blogroll.

Bank Executive's Non-Compete Dispute Promises To Be Year's Most Interesting Case

John Kanas is a legendary figure within the New York banking community. Five years ago, he sold his highly successful North Fork to Capital One Financial. In the course of doing so, Kanas received a $200 million payout. Kanas stayed on with Capital One, but clearly the match was not working out. Capital One agreed to let Kanas resign earlier than his original contract called for.

Once he resigned, Kanas decided not to hit the country club circuit. Instead, he orchestrated an acquisition of BankUnited, a failed Florida bank that had been seized by the FDIC. Kanas did so with a private equity group featuring such prominent names as Wilbur Ross, who is known for restructuring failed companies in the steel and coal industries. In recent interviews, Kanas has made it clear he wants back into the New York market.

Problem: his Capital One non-compete has not yet expired. Under Kanas' reworked non-compete arrangement, he is prohibited from competing in consumer or commercial banking within New York, New Jersey, and Connecticut. The restrictions are set to expire August 7, 2012.

Capital One claims certain activity by Kanas through BankUnited rises to the level of unfair competition and has enlisted heavy-hitter Orin Snyder of Gibson Dunn & Crutcher to litigate the the non-compete case. Kanas, and co-defendant John Bohlsen, responded with perhaps the nation's best attorney, David Boies.

The suit is interesting on several levels. Capital One's claim really centers on four key facts which it claims constitutes a non-compete violation:

(1) BankUnited already had a banking portfolio which contained mortgages on New York and New Jersey properties at the time Kanas and Bohlsen acquired BankUnited.

(2) BankUnited has planned to construct and open branches in New York and has advertised for open positions at these locations.

(3) Kanas placed a bid for the Bank of Ireland's New York commercial banking portfolio on behalf of BankUnited. (Bank of Ireland has been forced by that country's financial regulators to sell off a significant percentage of its foreign loan portfolio, and many of the real estate properties are located in New York).

(4) BankUnited has entered into an agreement to acquire Herald National Bank, a commercial bank located in Manhattan specializing in small to mid-size commercial lending.

The defendants have answered the complaint and from their statements, it is clear they do not believe that alleged activity constitutes a non-compete violation. They are contesting the reasonableness of the agreements they signed and believe that they constitute unenforceable restraints of trade if they were interpreted as Capital One proposes.

Interestingly, there is no motion for preliminary injunction on file. The complaint does seek an extension of the non-compete period commensurate with the period of breach, which could be ongoing until next August - depending on what the Court views as a breach. Capital One also is seeking a disgorgement of consideration paid to Kanas and Bohlsen for signing the non-competes, but it's not clear if this would need to be some sort of prorated amount based on the time period each sat out. However, given the dollars paid to both Kanas and Bohlsen (who pocketed $100 million), the claim for disgorgement at least would be well into the 7 figures.

This is one of those cases where you can anticipate a discovery fight. The interpretation of the defendants' conduct, and how it fits into the non-compete contracts, will be front and center. That should mean high-stakes depositions and costly document production. It is unlikely that the court would view the non-competes signed in exchange for millions of dollars to be unenforceable restraints. More likely, if the defendants prevail, the court will have to find that Capital One's interpretation is incorrect. Other high-profile executive disputes, such as that involving involving Mark Hurd, have settled quickly, so perhaps all sides will determine that a confidential settlement is the best option.

Virginia law governs the non-compete contracts, so that state's blue-pencil rule could pose a problem for Capital One if the court finds that the contracts contain some overbroad terms. Virginia's Supreme Court has not approved of a blue-pencil rule, though the case law there is employee-friendly in many respects and courts "discourage" modification of overbroad covenants.