The Reading List (No. 3)

Several good articles this week, ranging on topics from customer relationships, to the Computer Fraud and Abuse Act, to bad faith trade secrets claims. I did not include any editorials on the mud-slinging affair in the Florida primary.

So here is this week's reading list.

Justin Beyer of Seyfarth Shaw writes on Hill v. Best Medical, a total disaster of a case in Pennsylvania. The district court shifted attorneys fees to the prevailing counterdefendant, after Best Medical lodged specious claims of trade secrets misappropriation. Justin summarizes the key facts relied upon by the court in finding evidence of bad faith.

Brent Cossrow of Fisher & Phillips discusses a new CFAA case and the ongoing divergence of circuit court opinions on whether the federal statute is intended to federalize acts against so-called faithless employees.

Epstein Becker Green published a paper discussing New York's reluctance to enforce non-compete provisions designed to protect customer relationships. A pdf version of the article is available in EBG's blog post here.

Finally, John Shonkwiler of Novak & Macey in Chicago was recently interviewed by Smart Business and discusses how managing e-mail properly can save time and litigation expense. This may not relate directly to non-competes, but the issues John discusses in this article are part of most non-compete disputes. If his advice is not taken, a client could find its discovery expense much higher than is necessary.

The Weekly Posner (No. 1)

I met Judge Richard Posner when I was in law school. I was chairing a moot court competition at the University of Illinois, and we somehow convinced RP to serve on a distinguished panel for our 2L contestants. What struck about him then is that he is a lot more normal in person than you would expect.

Judge Posner writes faster than I can read. His books touch on diverse subjects such as economics, plagiarism, and sex. His legal opinions are among the most influential of any jurist living today. He hasn't written a whole lot about non-competes or trade secrets, but he doesn't have to in order to earn a bi-weekly slot here. Something can be gleaned from each of his opinions which may be relevant to a non-compete attorney. That is what I am attempting to deliver here.

The first installment of The Weekly Posner comes from a recent Seventh Circuit opinion called ATA Airlines, Inc. v. Federal Express Corporation. The court overturned a jury verdict of over $65,000,000 in favor of ATA in a contract dispute with Fed-Ex. The particulars of the dispute are interesting strictly from a contract formation perspective. The more enduring part of the opinion however is Judge Posner's castigation of ATA's damages analysis.

The court blistered ATA's counsel for not understanding linear regression analysis, which was used by an expert witness to come up with a statistical model of damages. Regression analysis is a modeling technique which explores a causal relationship between dependent and independent variables. It is really complicated stuff, and even my one semester of Statistics at Ohio State would not be nearly enough for me to understand it without an intensive refresher course.

Judge Posner understands it, though. And when he went up against ATA's lawyer, bad things happened. In the Seventh Circuit opinion, Judge Posner noted the failure of the ATA attorney to explain in plain English just what the expert's evidence actually meant. The last paragraph of the opinion says it all: "If a party's lawyer cannot understand the testimony of the party's own expert, the testimony should be withheld from the jury." The Seventh Circuit reversed a $65 million judgment and directed the district court to dismiss the case with prejudice.

For years, the Seventh Circuit - Judge Posner in particular - has been crucifying parties who show up with junk science theories of damages. I have such a case which is in the Seventh Circuit right now, where my opponent had not one clue what its alleged "damages" were. The lesson here is clear: if you are a plaintiff in a business case, you better think through your damages theory from every conceivable angle. If you don't, you're liable to end up with one of Judge Posner's opinions breathing down your neck.

Recent Decisions of Interest (No. 2)

Today, a decision out of Georgia (always a good source of entertainment), a New York court opinion on non-recruitment clauses, and an Ohio case on trade secrets.

Paragon Techs., Inc. v. Infosmart Techs., Inc., 312 Ga. App. 465 (2011). In a technology staffing contract, a covenant that prohibited the staffing provider from working directly with the contractor's client for a period of one year was unreasonable under Georgia law. The reason? This arms' length contract was still judged under the strict scrutiny standard, which invalidates covenants prohibiting unsolicited work with a client.

Renaissance Nutrition, Inc. v. Jarrett, 2012 U.S. Dist. LEXIS 2490 (W.D.N.Y. Jan. 9, 2012). A federal court in New York held that under New York law, a non-recruitment provision barring solicitation of employees must be judged under the traditional three-part restrictive covenant analysis. However, the court also stated that because a non-recruitment covenant does not impinge on an individual's livelihood, it is "inherently more reasonable" than non-compete covenants. This follows the trend in most states. It is surprising that so few cases in New York, which generally produces the most non-compete opinions, have weighed in on the issue.

Finally, we have Columbus Bookkeeping & Bus. Svcs., Inc. v. Ohio State Bookkeeping, LLC, 2011 Ohio App. LEXIS 5655 (Ct. App. Dec. 30, 2011), where the Court of Appeals of Ohio reversed a preliminary injunction in a trade secrets case. The plaintiff had claimed that its list of clients was a trade secret, and that by competing for those clients, the defendants misappropriated trade secrets. The trial court agreed and imposed, in effect, a non-compete as to those clients.

The Court of Appeals found this to be an abuse of discretion, noting that "plaintiff seeks...to enforce a non-existing noncompetition agreement against defendants by invoking the statutory provisions governing trade secrets." The trial court's order was amplified by the expiration date it placed on the defendants' ability to service customers, as the Court of Appeals found that this was more in line with what courts would do for non-compete agreements (which have expiration dates).

A true trade secret should be protected for as long as it is secret and valuable. Finally, the court correctly found that client lists are usually trade secret when accompanied by a host of other non-public data, such as contact information and other particulars known as a result of the client relationship.

The Reading List (No. 2)

A couple of weeks ago, I read "Making Your Case" by Justice Antonin Scalia and Bryan Garner, the latter being sort of the Steve Jobs of the legal writing industry.

On page 62, the authors discuss brief writing and quote Judge Frank Easterbrook (right) of the Seventh Circuit, who says:

"The best way to become a good legal writer is to spend more time reading good prose. And legal writing ain't that! So read good prose. And then when you come back and start writing legal documents, see if you can write your document like a good article in The Atlantic, addressing a generalist audience. That's how you do it: get your nose out of the lawbooks and go read some more." (Incidentally, Judge Easterbrook's brother, Gregg, is a well-known writer on a variety of subjects (including football) who was published in the February edition of The Atlantic.)

Awesome advice. With some exceptions, the legal writing I see is poorly framed, drab, and mind-numbing.

So I start today's reading list suggesting a great non-legal article. In the February edition of Harper's, Barry C. Lynn writes about the impact of "new monopolies" on free competition. In "Killing the Competition", Lynn discusses the much-ballyhooed pact among the Silicon Valley tech companies not to hire each other's employees.

Interesting news item here in Velo News describing a trade secret/employment contract dispute between Specialized and Volagi. Employees of well-known road bike manufacturer Specialized left to start their own firm, and Specialized claimed that they not only stole trade secret information but also used their former employer's time and resources to start a competing enterprise. Though Specialized prevailed on one claim (and received $1 in damages), Volagi claimed victory and noted the more than $1m in legal fees spent by Specialized. The article highlights the difficulty of proving damages in competition disputes and further illustrates the high legal fees associated with contested litigation in this area.

Finally, Michael Elkon from Fisher & Phillips discusses the use of non-compete agreements in college football contracts. The article points out some very astute policy implications. I wrote on this topic in December 2010 when Bobby Petrino inked his new deal at the University of Arkansas.

The Practical Lawyer (No. 1): A Client Gives Me a Drafting Tip

One of the most important pieces of advice I can give any lawyer is very simple (and maybe very obvious): listen to your client.

Many of my clients are small business owners. As corporate counsel, it is critical for me to understand the dynamics that affect my clients' business operations. This week, when working on a draft non-compete agreement, a client caught something that was missing from the form document off of which I start the drafting process.

A provision that deals with cloud computing.

It is standard procedure in my non-compete agreements to have some provision calling for the return of business materials upon termination of employment. Those clauses also call for an inspection opportunity, such that an employer can verify company data isn't maintained on personal thumb-drives, tablets, or smart phones after termination.

However, my form agreement did not mention cloud computing or cloud storage. By now, most attorneys are aware that documents and data can be stored in the cloud. Cloud storage basically means that information is stored online in a pool hosted by a third-party. It provides employees the opportunity, for instance, to access information following departure even if their personal laptop or tablet device appears "clean." It is similar (and far more advanced) than the situation involving employees who have old company e-mails maintained in a web-based e-mail system, which provides ease of access.

Employers should consider restricting the ability of employees to store documents in the cloud. In my opinion, the availability of easy-to-use cloud storage platforms (such as iCloud) creates a potential problem that employment agreements may not address.

Recent Decisions of Interest (No. 1)

My regular Thursday column will survey recent decisions across the United States which touch upon non-compete or trade secret issues. The four cases I chose this week touch on a wide variety of issues, including those relevant to the corporate counsel drafting non-compete clauses.

AMG Nat'l Trust Bank v. Ries, 2011 U.S. Dist. LEXIS 149130 (E.D. Pa. Dec. 29, 2011). The court, applying Colorado law, found that a liquidated damages provision in a two-year non-compete, which called for payment of ten times the annual gross fees for each wrongfully solicited client, was voidable as a matter of law. I drafted two liquidated damages clauses this week for clients, and my advice is always the same: be able to justify the methodology you select under oath. The more random and arbitrary a clause looks, the more likely a court simply will strike it.

ISCO Indus., LLLC v. Erdle, 2011 U.S. Dist. LEXIS 148907 (E.D.N.C. Dec. 28, 2011). A North Carolina court denied entry of a preliminary injunction motion against a sales employee in the piping distribution business. The employee's covenant was not narrowly tailored to restrict him from selling only products or services competitive with those offered by the ex-employer. This further illustrates why attorneys must be careful in considering the scope of the non-compete restriction. Using hypothetical scenarios during the drafting process can help identify problems of overbreadth.

WIT Walchi Innovation Techs., GmbH v. Westrick, 2012 U.S. Dist. LEXIS 1847 (S.D. Fla. Jan. 6, 2012). A court issued an ex parte temporary restraining order against an employee who allegedly stole a laptop containing proprietary source code and programming for a software product. The court issued a broad evidence preservation order and ordered immediate return of the stolen laptop computer. No commentary necessary here. Firsthand evidence of outright theft of property warrants mandatory injunctive relief, even on an ex parte basis.

Pellerin v. Honeywell Int'l Inc., 2012 U.S. Dist. LEXIS 3781 (S.D. Cal. Jan. 12, 2012). A district court in California sustained a defense objection to the retention of a trade secrets expert on the basis that the expert was a former employee of the defendant. Such objections, usually made under the terms of protective order, are common when the expert may have had prior access to an adversary's confidential information. It may be impossible in such circumstances for the expert to provide legitimate, untainted opinion testimony.

The Reading List (No. 1)

As I wrote last week, every Tuesday I will be posting links to other articles of interest. This is the first installment of The Reading List, and I encourage my readers to visit these informative articles from other authors.

Ted Olsen of Sherman & Howard writes on an interesting social media case, involving an employer's posting of entries on its employee's Twitter and Facebook sites. As this article aptly describes, the law and theories under which parties can sue is still evolving and it is not entirely clear what personal and property rights are protected.

Seyfarth Shaw discusses New Jersey's adoption of the Trade Secrets Act in a post here. The actual legislation can be found here.

Rob Radcliffe writes on the proliferation of non-compete agreements in the medical device industry, citing his past experience with a particular party and the trends in overall health care spending. As Rob notes, some companies have developed reputations for being very aggressive in filing or pursuing non-compete actions against ex-employees. Rob notes that one such employer is Synthes Medical.

Chicago Tribune business law writer Ameet Sachdev discusses the Illinois Supreme Court's decision in Reliable Fire Equipment v. Arredondo. Surprisingly, he concludes by saying that labor attorneys representing both management and employees have favorable reviews of the decision. My experience is the opposite.

MIT News contains an article on the impact of non-compete agreements on engineers. The article also cites a detailed academic study recently published in the American Sociological Review, which notes that roughly one-third of technical employees bound by non-compete agreements leave their industry altogether.

New Jersey Adopts Uniform Trade Secrets Act

On January 9, Governor Chris Christie signed the New Jersey Trade Secrets Act into law. This Act is modeled after the Uniform Trade Secrets Act. With this legislation now in effect, only three states - Texas, Massachusetts, and New York - have yet to adopt the UTSA.

The New Jersey version of the Act is very similar to other statutory schemes adopting the UTSA. While the definition of "trade secret" is different, and a little broader, than other states, the basic foundation of trade secret law is still on par with the vast majority of states.

The passage of the UTSA does work a couple of changes. First, preemption now will apply and common law tort claims based on trade secret misappropriation likely will be barred. Second, the UTSA will allow an aggrieved party the opportunity to recover so-called "royalty" damages, a theory previously unavailable under the common law. Previously, a trade secrets plaintiff only could recovery money upon a showing of lost profits or under an unjust enrichment theory. Similarly, a royalty injunction is available, which allows a misappropriating party to use a trade secret into the future provided it pays a reasonable royalty to the trade secret owner.

Finally, the fee shifting provisions common to trade secrets claims - to the plaintiff upon a showing of willfulness, and to the defendant upon a showing of bad faith - will apply.

The New Jersey statute takes effect immediately, though it does not apply to claims of misappropriation arising before January 9, 2012.

Bring on 2012 - A Time for Change

I'm not sure whether Ron Paul is going to get elected President or not (though I have a strong hunch), but 2012 is sure to bring in a great deal of change.

I, for one, like change. I think it's healthy, good, and invigorating. There is nothing more annoying to me than someone who continues doing the same thing over and over again and justifies it simply by saying "that's how I've always done it." I see this all the time with lawyers, who justify bad work product based on prior practice. This hasn't worked for the Chicago Cubs, and it's not a defense. If something sucked ten years ago, it almost certainly still sucks.

So how does the idea of change affect my blog for 2012?

Here's how. Starting next week, I will publish three regular columns per week which will follow a similar theme.

On Tuesdays, I will publish "The Reading List", a quick reference guide to articles I have read from other attorneys and commentators. A lot of my colleagues publish great websites and I want my readers to see other perspectives and points of view.

On Thursdays, I will publish "Recent Decisions of Interest", which is a more condensed version of the case summaries I frequently post. My goal is to provide more content and more cases in a slightly less jargony format. If there is a truly significant decision that merits further discussion, I may write separately on that. I also intend to include issues that relate to employee transition disputes, but not necessarily decisions touching specifically on non-competition agreements. Summaries and posts may include references to social media and commission disputes.

On Fridays, I will alternate between "The Practical Lawyer" and "The Weekly Posner." The former is intended to follow the theme and style of many former columns, because I have received a tremendous amount of positive feedback from clients and fellow lawyers for my prior posts. I won't necessarily to discuss some groundbreaking decision or interesting new non-compete case. Rather, I will impart to my readers what issues I typically see when representing clients and how to begin thinking about them.

The latter will be somewhat of a novel twist for this site, since it won't directly touch on non-compete law. But, (just as it sounds) "The Weekly Posner" will discuss a case or article from the leading jurist in America, Seventh Circuit Judge Richard A. Posner. Judge Posner has had a tremendous influence on my legal career and the way I think about cases and issues. Any attorney who litigates a business case ought to know how Judge Posner has ruled or approached issues in the past. This column will be sort of a tip-of-the-hat to him.

As the year goes, I expect I may revert to my old ways and break from this format on occasion. However, I want to keep this site fresh and interesting and hope that you will enjoy what I provide in 2012.