The Reading List (No.7)

I was kicking around the idea of putting Atlas Shrugged on this week's Reading List, but that would be too self-indulgent.

This 1,100 page behemoth is almost behind me, and the themes are timeless. I totally get why the Tea Party caused this masterpiece to make a comeback. But you don't have to be super into politics to get into this book. If you have an extra couple of months to burn, read it (or read it again). For now, though, we'll stick with the exciting (and timeless) world of non-competes.

Forbes.com has an interesting article on Cloud storage and what considerations corporations must look at when housing trade secrets in the cloud. There have been some high-profile security breaches, including with the ubiquitous Dropbox (which I use). This is an emerging phenomenon, and I don't think it's a particularly smart idea to keep the highest level secrets in the cloud. The general, day-to-day stuff, sure.

Fisher & Phillips (a current rival of mine) has a post on Mediation in competition cases. I agree with one of the main points that mediation, to be successful, has to occur early. Too much money gets spent in discovery and feelings start to harden once lawyer bills have to get paid.

I always enjoy Rob Radcliff's blog, Smooth Transitions. A wealth of interesting posts awaits you, but I liked his comments on what clients should consider when approaching a trial. Rob has one post where he asks rhetorically what the "upside" of a trial is. I would add one point to this. If a client has been bullied around by a competitor, it may be necessary to take a case to trial simply to prove that the adversary can't extort a settlement. One case I am defending right now on appeal is, without a doubt, one of the most pointless, nonsensical, and abusive lawsuits I have seen in 15 years. It simply is about a big company trying to squeeze out a small competitor, and the merits of the case aren't close. If we were to settle - which I am sure we could, even for relatively low consideration - the next lawsuit would be right around the corner. We will have gotten out of one suit, only to wait for them to (try to) push us around again.

The Practical Lawyer (No. 3): Plan Your Damages Case Early and Often

Competition disputes get very heated very early. This paradigm normally means decisions are made without much time to think of the consequences.

As a result, it is quite common for cases to launch without the plaintiff ever having thought how it is going to recover for its alleged injury. Most business competition disputes are not about recovering a liquidated debt which is easily calculable. Rather, they are about stopping conduct deemed threatening and, if that conduct is not stopped, recovering some lost business damages.

By definition, those are difficult to calculate and amenable to wild speculation. For any attorney representing a plaintiff in non-compete litigation, it is essential to figure out what remedy his or her client is primarily seeking. If it is damages, then special care must be taken to figure out how those damages will be proven.

A couple of things to keep in mind.

(1) Projecting lost profits requires an assessment of the cost the firm would have to expend in order to obtain that profit. This means that a plaintiff must consider the incremental cost (commissions and direct selling expense) that it would incur to produce new business.

(2) Some amount of guesswork is permitted, as long as it has a rational basis. Rank speculation, such as wildly off-the-mark growth rates, will doom an entire damages presentation.

(3) Expert witnesses are likely necessary, particularly if a plaintiff seeks future lost profits. It is usually beyond the scope of fact witness testimony to establish a growth pattern in client revenue, derive an appropriate terminal period, and introduce evidence of an acceptable discount rate. Incompetent evidence on any lost profits variable may ruin any chance of recovery.

(4) Finding an expert who knows the industry is essential.

(5) Clients should be prepared to disclose more information than they're comfortable with. To recover for lost profits means a client will need to allow an expert unfettered access to sensitive business records, and the defense will generally be entitled to see whatever business documents the plaintiff's expert reviews.

(6) Researching the jurisdiction's lost profits case law is essential. Not every jurisdiction has the same types of rules. It also may be helpful to review trends and patterns in cases that go bad and those that turn out well for the plaintiff. An attorney who spends a little time up front sifting through damages opinions may find expert witnesses whose testimony has stood up to appellate review and whose theories have been accepted by judges and juries. There is no substitute for preparation.

Recent Decisions of Interest (No. 6)

This week's Recent Decisions highlights a jury verdict in Arkansas arising out of the sale of an accounting practice. In Creed Spann v. Lovett & Co., 2012 Ark. App. LEXIS 192 (Ct. App. Feb. 1, 2012), the Court of Appeals of Arkansas affirmed a verdict where the purchaser of an accounting firm's client list received $434,777 in lost profits after the seller worked with certain restricted clients following the sale.

The decision does not necessarily break any new ground, but it does highlight a couple of important realities clients need to consider when pursuing or defending non-compete suits.

First, the plaintiff - the acquiring firm - retained a lost profits expert to show the amount of damages which would have been realized had the defendant - the selling firm - not worked with restricted clients. The jury accepted the expert's estimation of damages down to the dollar. It did not appear that the defendants put forth a rebuttal expert, suggesting that the expert witness was highly persuasive to the jury. Because damages are so difficult to prove when they are non-liquidated - such as a projection of lost income - experts are essential to a plaintiff's case. Without one, it is highly likely that a court will be left without a basis to award recoverable damages even in the event of breach.

Second, the plaintiff's legal fees in the case totaled over $250,000, an amount it recovered under Arkansas' prevailing party statute. Compared with the verdict award, the amount of fees incurred is relatively high. However, it was far from unreasonable. Competition disputes cost a lot of money, particularly when discovery focuses on triaging the issue of breach, identifying lost clients, and examining what the defendants did with those clients. Preparing for and presenting experts is costly, as well. The opportunity to resolve a case usually is lost once counsel incurs a substantial amount of these fees. Therefore, the best time to explore a business resolution outside of court is right after the issues have been framed in the suit and before discovery begins.

The Reading List (No. 6)

I'm sick of bad lawyers.

And I'm sick of bad lawyers filing bad lawsuits. Unfortunately, in my area of the legal world - trade secrets and non-compete law - this happens all the time. Lawyers who act as mere shills for their irrational clients. Lawyers abusing the legal process to achieve some ulterior purpose - usually to force a competitor to do something it otherwise would not have to do. Lawyers talking clients into a suit because there is too little legitimate legal work out there, and, well you know, billable hours need to come from somewhere.

It's all very aggravating, and the system has to change. I'm all for civility, but if lawyers abuse the legal system, they need to pay - literally and figuratively.

The sum total of today's Reading List is all of one, a great piece by Matthew Prewitt of Schiff Hardin discussing bad faith fee-shifting liability under the Uniform Trade Secrets Act. Mr. Prewitt outlines some excellent practical, and legal, considerations for clients and lawyers to think about. This should be required reading for any competition lawyer.

The basic problem is pretty simple. Competition law is not easy to figure out, particularly if you don't practice it with some regularity. It moves quick, which leads to inept and poorly planned decisions. And it's emotional, meaning a client can try and mulct a claim out of nothing, which might actually sound convincing on paper. Finally, it's expensive, which leads to parties getting themselves into intractable positions early, with no face-saving way out.

None of this is an excuse; rather, it's an explanation. A lawyer's failure to understand a case is no excuse, and he or she has the obligation to cut and run even if the client doesn't see it the same way. It's rare that actually happens, however. Until there is some meaningful, readily ascertainable remedy for crummy lawyering in this area of the law, the system will continue to allow parties to get away with using the legal purpose not to right a wrong, but to gain a foothold in the market. Not. Cool.

The Weekly Posner (No. 2)

Because damages are often extremely difficult to prove (and because injunction issues are decided early in a case), attorneys' fees often become the driving force in non-compete or trade secret litigation. Indeed, an early litigation thrust usually means that the legal bills hit mid-five or -six figures before the parties even have an idea of what they are in for.

So for any plaintiff or defendant in an unfair competition lawsuit, the ability to shift fees becomes a driving, paramount concern. The basis for fee shifting usually is found in a contract (a prevailing party clause) or the statute under which a party is suing (or much less frequently, a statute of general applicability).

One common method of attempting to recover fees finds its home in the Trade Secrets Act, which contains a fee provision allowing a plaintiff to recover fees if the defendant's misappropriation is "willful." Conversely (and as a mirror image to the willfulness standard), a defendant can obtain its fees if the suit was filed or maintained in "bad faith." Very little in the way of case law helps us figure out a uniform test, despite the fact the Trade Secrets Act is a uniform act adopted everywhere now but New York, Massachusetts, and Texas.

It is appropriate, therefore, to look elsewhere, including Judge Posner's opinion in Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 626 F.3d 958 (7th Cir. 2010), where he surveyed the semantic jumble in determining when fees were appropriate for "exceptional" cases of trademark or trade dress infringement under the Lanham Act.

Much of Judge Posner's discussion in Nightingale Home Healthcare discusses the tort of abuse of process and the stark reality that disputes between competitors are often about litigation costs, not judgment-oriented outcomes. Put another way, parties to litigation often use the litigation as the end itself - not a means to an end. As Judge Posner notes, a new market entrant may have a clearly meritorious claim for infringement against a large opponent, but may find itself bullied into submission through a scorched earth defense strategy (and which has no hope of prevailing). On the other side of the coin, a dominant player in the market may sue a new, much smaller entrant on dubious claims just to force that competitor out of the market under the specter of six-figure legal bills.

This is what drives Judge Posner's standard for defining "exceptionality" for purposes of Lanham Act fee shifting. The same considerations likely would motivate him if, and when, he looked at fee shifting under the Trade Secrets Act. Very little separates trademark infringement from trade secret misappropriation, save for the fact the latter is much harder to define. Trade secrets can be made up on the fly, while marks are registered.

So the public policy behind allowing for fee shifting in the trade secrets context has to be the same as that in the trademark context, and Judge Posner likely would focus on whether and how parties in trade secrets suits used the litigation for improper purposes to ramp up lawyers' fees needlessly. These types of suits are too close of cousins for any other result to make much sense. One potential side issue: his opinion in Nightingale Home Healthcare seems to have more applicability to a defense-side fee petition. The exceptionality standard seems more akin to bad faith, than it does "willfulness." Stated another way, a defendant may be liable for the plaintiff's fees if he intentionally stole something he should have known was secret, even if that defendant did nothing to pile on legal fees or engage in vexatious litigation conduct.

Also of significance in Nightingale Home Healthcare is Judge Posner's feelings on fee petitions themselves. As is often the case, fee petitions are pursued at the tail end of a lawsuit, usually after all the wheat has been separated from the chaff and the merits have been disposed of. In this sense, Judge Posner believes that parties in fee petitions should not engage in an "elaborate inquiry into the state of mind of the party from whom reimbursement of attorneys' fees is sought." Therefore, he would look at objective indicia of exceptionality (or, bad faith, presumably), and determine whether the facts objectively can be shown to demonstrate the use of legal process to heap costs on adversaries.

This is an incredibly important case, for it looks at fee-shifting differently. It requires a court to assess the undercurrent of virtually all competitive litigation: the asymmetry of costs and the use of process itself to achieve something in the marketplace.

Recent Decisions of Interest (No. 5)

FINRA and the Protocol for Broker Recruiting

We have not seen many cases addressing the Protocol for Broker Recruiting, which has been adopted by many firms in the financial services industry. One of the cases actually discussing the Protocol is Ameriprise Financial Svcs., Inc. v. Koenig, 2012 U.S. Dist. LEXIS 13864 (D. N.J. Feb. 6, 2012). The court summarizes the intent of the Protocol by stating that registered representatives who are leaving one firm to join another should keep two lists.

The first should identify basic profile information: name, address, phone number, e-mail address, and account title. That is the representative's list to keep. The second should contain account numbers, plus all data on the first list. That is for the firm. When a representative takes information beyond this basic profile data, as Koenig apparently did, then he or she is potentially liable for misappropriating trade secret data or breaching contractual covenants. Finally, despite this potential breach, the Protocol still will permit a representative to service his or her old clients - as long as he or she does not use "excess information."

Attorneys' Fees and a Discharge in Bankruptcy

An increasing number of non-compete issues end up in bankruptcy court. In re Al-Suleiman, 461 B.R. 893 (M.D. Fla. 2011), dealt with one sure to arise and interest employers who prevail in litigation and obtain monetary relief. The court held that an award of attorneys' fees in underlying non-compete litigation was dischargeable in bankruptcy. In so holding, the court rejected the creditor's argument that the debt arose out of the defendant's "larceny" of a patient list. It also held that the debt did not arise out of a willful and malicious injury to the creditor's business. Though the record is not totally clear, the court in the underlying litigation did not make any findings that would support the theory of nondischargeability.

Forfeiture for Competition Clauses

Finally, a decision out of Texas. Usually, cases involving the link between equity incentive awards and competition covenants produce interesting results. This one is no different. The case is Drennen v. Exxon Mobil Corp., 2012 Tex. App. LEXIS 1161 (Ct. App. Feb. 14, 2012), and it deals with a so-called bad boy provision tied to an award of restricted shares. Essentially, the plaintiff - Drennen - received a number of incentive award units through his long employment at Exxon Mobil, but the program which administered the awards provided that the same could be canceled if Drennen (or any plan participant) engaged in "detrimental activity." This, of course, could include competition with Exxon Mobil during or after employment.

Drennen left Exxon Mobil in late 2006. He informed the Company a few months later he would be joining Hess Corporation, which engaged in the exploration, production, and sale of crude oil and natural gas. He received notice that it was likely Exxon Mobil would cancel his incentive units due to the competitive nature of his work. When it followed through, Drennen sued for declaratory relief. He lost, but the Court of Appeals reversed.

The court found that the provisions concerning forfeiture were unenforceable under Texas law. This is one of the rare cases we see in which a choice-of-law clause is outcome-determinative. Though the plan was governed by New York law, the Texas court refused to enforce that choice-of-law clause, finding it contravened a public policy expressed in Texas law. Simply put, New York honors the so-called employee choice doctrine, which generally enforces forfeiture-for-competition clauses. The idea is that an employee can refrain from competing by accepting the benefits, or preserve his right to work in the industry by forfeiting them. Texas, however, holds that such clauses are not enforceable unless they meet the reasonableness criteria.

Here, the terms of the incentive program did not contain any parameters describing what competitive activity would not result in cancellation. Instead, the cancellation provision was unbounded - it was not limited in time - which created a fundamental enforcement problem under Texas law. The choice-of-law discussion ultimately focused on the close connection between Texas and each of the parties. The court ultimately rejected Exxon Mobil's plea to have New York law apply so as to create uniformity. Though this rationale is commonly accepted, Exxon Mobil's own plan undercut the argument: the plan allowed for the application of other laws to accommodate local laws of foreign nationals.

The Reading List (No. 5)

This week's Reading List features a couple of articles on procedure, and then some on criminal prosecution for trade secrets theft. On with it.

Fisher & Phillips discusses the key factors courts look it when plaintiff's pursue ex parte temporary restraining orders and cautions that the circumstances are rare in which such relief should be sought.

Seyfarth Shaw's Trading Secrets blog discusses the new Illinois Appellate Court case which applies Reliable Fire retroactively. I get a brief mention (and a new spelling to my last name!).

From Bloomberg news comes another story on a criminal prosecution for trade secrets theft. This time, the facts involved theft of titanium dioxide technology from DuPont. Don't worry civil trade secrets defendants. These prosecutions under the Economic Espionage Act usually involve an international conspiracy (this one with a Chinese state-owned enterprise) to pirate away industrial information.

Finally, also from Bloomberg news, a federal district court in Illinois convicted a Motorola software engineer of trade secrets theft (but acquitted her of related charges). Hanjuan Lin was somewhat infamously arrested as she was boarding a plane with a one-way ticket to China with $30,000 in cash and over 1,000 Motorola documents.

And my friends think this area of the law is dull. Seriously?

Illinois Legislative Update

The Weekly Posner shall return next week. In the meantime, an important new bill has been introduced in the Illinois General Assembly.

Unlike most of the hair-brained pieces of legislation we see coming out of Springfield, this one actually makes some sense.

House Bill 5198, introduced by Rep. Daniel Biss (D-Skokie), would amend the Code of Civil Procedure to allow a circuit court to shift attorneys' fees to a prevailing defendant if a contract under which a plaintiff sues allows for the plaintiff to recover fees.

These one-way fee-shifting clauses are prevalent in many employment non-compete contracts (they are also common in leases and loan documents, which probably is what prompted the bill). If the bill passes, a prevailing employee would have a path to recover fees. Right now, unless a claim is made in bad faith or a fee clause is mutual, that path is exceedingly narrow, if it exists at all.

I wrote last year about one-way fee-shifting clauses. Rep. Biss' bill is similar to general legislation found in California, Montana, and Washington.

Recent Decisions of Interest (No. 4)

This week's installment focuses on just one decision - the first pronouncement from the Appellate Court of Illinois following the Supreme Court's decision in Reliable Fire Equipment Co. v. Arredondo last year.

Of course, the decision was unpublished - an annoying trend in the Appellate Court. The Second District reversed and remanded a defense judgment on the grounds that the circuit court did not correctly apply Reliable Fire and instead analyzed the case under an outdated framework which that case rejects.

The case involved a common fact pattern. Hair stylist signs non-compete with a defined geographic territory. Hair stylist leaves. Hair stylist breaches by joining salon in prohibited territory. Jilted employer sues. Little more in the way of factual background is needed, except that the circuit court applied the right test then existing at the time of its judgment.

On appeal, the Second District held that Reliable Fire does indeed apply to a case which was decided under the prior regime but which was appealed during the time Reliable Fire was issued. The primary rationale, from what I can tell, is that Reliable Fire - in truth- did not change anything. It clarified a standard that long existed but which appellate courts got in the habit of misapplying.

So in that regard, the Appellate Court followed the general rule that a court opinion applies retroactively, as well as prospectively. None of the exceptions to this rule fit, primarily because nothing in Reliable Fire indicated it should apply prospectively only. Indeed, that would be illogical since the Supreme Court, in its own mind, really did nothing to change the law but only rejected the appellate courts' gloss on the applicable non-compete test.

Consistent with Reliable Fire, the circuit court on remand did not need to try the case over but could, in its discretion, allow for additional submissions and briefs necessary to address the issues and develop an appropriate record for decision.

--

Court: Appellate Court of Illinois, Second District

Opinion Date: 2/3/12

Cite: Hafferkamp v. Llorca, 2011 IL App (2d) 100353U

Favors: Employer

Law: Illinois

The Reading List (No. 4)

If you don't learn something from this week's reading list, blame yourself.

A lot of good stuff today, which covers a wide swath of non-compete law.

First up is an excellent summary piece titled "Top 10 Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law" from Seyfarth Shaw. The article is a few weeks old and takes an in depth look at key legislation, a number of state supreme court cases, and high profile jury verdicts. Though some of these topics have been the subject of my blog posts, a number of them do not appear here at all.

Next comes Russell Beck of Fair Competition Law with a January round-up covering a fair amount of ground across the United States. I can't do this justice by summarizing. Just go there, read for yourself Russell's excellent survey of new cases and developments.

The subject of broadcast non-competes is an interesting topic on which I have written before. Wiley Rein's post from December summarizes the issues very well and notes which states have legislation concerning broadcast industry employees.

Finally, on the transactional side, Business Valuation Update published an article by Gary Trugman of Trugman Valuation Associates, Inc., which provides an 11-factor checklist for valuing non-competition covenants as part of a corporate divestiture or sale of a professional practice. Trugman notes an eight-step approach to obtain a correct valuation of the covenant followed by an 11-factor checklist used to determine the economic reality of the covenant. A free copy of the Trugman article can be found on Business Valuation Resources site, though you may need to provide an e-mail address to obtain a log-in and password.

The Practical Lawyer (No. 2): Confirming The Reason for Termination

December and January always result in a rush of severance work for me, both in terms of drafting contracts for my employer clients and reviewing them for employees.

This week's "Practical Lawyer" is no more than a simple drafting tip. On the employee side, it is important to try and obtain a representation in the severance contract that the employee was terminated without cause. (If he or she were terminated for cause, it is highly unlikely that a severance agreement is even in play.) What is the reason for including this provision? There really are two.

First, it means an employer won't be able to contest unemployment.

Second, it can help the employee find a new job without worrying about a non-compete clause. Many employment contracts provide that non-competes are enforceable only if an employee quits or is fired for cause. An acknowledgment by the employer that the employment was terminated without cause is an admission and would not allow for enforcement.

In some states (New York and Montana), termination without cause means an employer cannot enforce the non-compete agreement regardless of the triggering language in the contract. In most states, it is a factor a court will weigh when considering whether enforcement is reasonable.

Even reaffirmation of a non-compete within a severance contract may not allow an employer to enforce. For starters, courts recognize the difficult economic choice an employee is in when presented a severance. Further, the consideration for the payment is not necessarily the reaffirmed non-compete, but rather the release the employer obtains in the severance contract. Every employee situation is different in terms of assessing what consideration the employer truly received for the severance payment. Finally, the amount of the severance may have an impact. Reaffirming a covenant for two weeks severance pay won't impress a court if it is asked to enforce a non-compete. A year's pay may be a different story.

Employees, therefore, should always request that an employer agree in a severance document that termination was "without cause." In most circumstances, the employer should have no issue with this and should consent to it.

Recent Decisions of Interest (No. 3)

This week...a ubiquitous trade secret problem and two cases concerning non-compete drafting.

General Patent Corp. v. Wi-Lan, Inc., 2011 U.S. Dist. LEXIS 134625 (S.D.N.Y. Nov. 22, 2011). In denying a plaintiff's motion for preliminary injunction, a New York federal district court dealt with one of the most common issues in trade secrets litigation - the lack of specificity concerning what was misappropriated. The case gives a laundry list of generalized information too lack in detail to survive trade secret scrutiny at a contested evidentiary proceeding. Though New York has not adopted the Uniform Trade Secrets Act, the common law factors it uses to assess trade secrets claims are similar to those that UTSA states consider.

The decision in Murphree v. Yancey Bros. Co., 311 Ga. App. 744 (2011), has to be viewed in light of Georgia's employer-friendly common law prior to the time the legislature passed its sweeping amendments last year. For covenants decided under the common law, it is impermissible to prohibit an employee from merely accepting business from his or her former customers. A non-compete or non-solicit clause must only prohibit so-called active solicitation. In this particular case, the Court of Appeals of Georgia had no issue with the covenant's use of the term "solicit, divert or take away", ruling essentially that each of those was a synonym. Other cases seem to suggest that merely accepting unsolicited business from an account falls within the term "divert."

Ophir-Spiricon, LLC v. Mooney, 2011 U.S. Dist. LEXIS 135608 (D. Utah Nov. 23, 2011), dealt with a non-compete covenant I see more and more frequently. The covenant did not require the employee from working for a competitor. Rather, it prohibited him from entering employment competitive with his former employer if such employment would "inherently require" him to reveal or use any confidential information or trade secrets. Though these covenants may narrow the non-compete a bit, they lead to vast uncertainty. An employee (like the one in this case, apparently) may legitimately believe that he is complying to the letter if he avoids certain activity - say, taking customer lists or directly contacting his old accounts. However, the employee is at the mercy of his former employer's interpretation or subjective belief as to what the new employment "inherently requires." In such circumstances, it is critical that the employee and his new employer work to create a detailed job description and enter into an agreement concerning what acts the employee is not allowed to engage in during the restricted period.