This Move Takes...Guts

The travails of one Sergey Aleynikov are well-known to trade secrets and competition lawyers like myself.

This is the ex-Goldman Sachs programmer who spurred litigation from Chicago to New York, eventually resulting in a criminal conviction that was later overturned by the Second Circuit Court of Appeals in February.

Aleynikov's legal saga began when he misappropriated Goldman's proprietary software trading code and started work with a competitor in the high-frequency trading business, Teza Technologies.

Aleynikov is now suing Goldman to recoup his legal expenses through the concept of indemnification and advancement. Because Goldman's corporate bylaws require the firm to cover legal expenses for officers and directors, Aleynikov claims Goldman must pay the legal freight to defend charges - pursued by Goldman.

Indemnification and advancement are concepts that require attorneys to examine both state corporation law and corporate bylaws. There are many exceptions and ways for companies to avoid advancing fees and costs. Aleynikov believes that Goldman is required to, however, under the clear terms of Goldman's bylaws.

A copy of Aleynikov's federal complaint, filed in the District of New Jersey, can be found here and is embedded below:

Aleynikov v. Goldman Sachs Complaint (Indemnification and Advancement) (00136749)

Ohio's Standard for Malicious Litigation Sounds Familiar

I rely entirely on John Marsh of Hahn Loeser to provide details on one of the year's most important competition cases, American Chemical Society v. Leadscope. For this post, the holding is relevant in that it establishes - at least in Ohio - a two-part test for determining when malicious litigation can serve as the basis for an unfair competition claim. That test requires a plaintiff to show:

(1) that the legal action is objectively baseless; and
(2) that the opposing party had the subjective intent to injure the party's ability to compete.

Leadscope involved a claim of trade secrets misappropration over software code. And the standard the Supreme Court of Ohio adopts is strikingly similar to the tests courts use over related claims. Those claims are:

(1) bad faith fee-shifting petition by a defendant under the Uniform Trade Secrets Act; and
(2) sham litigation under antitrust law.

It makes sense all three claims would have similar tests. The UTSA fee-shifting test does vary from state to state, but in the main the Leadscope test constitutes the majority rule. For defendants who feel as if litigation has served no purpose than to deter competition and impose litigation costs, the main theories of recovery are the following:

(1) An independent tort claim like that advanced in Leadscope. The claim may depend state to state, but generally the theories are abuse of process, malicious prosecution, violation of antitrust law, and unfair competition.

(2) Fee-shifting statutes or contract provisions. The UTSA bad-faith fee-shifting clause is one that is commonly invoked, and is not a "claim" in the sense that a full-blown trial would be required to resolve it.

(3) A court's power to sanction, under its inherent authority, as part of the discovery process, or even against an attorney directly for unnecessarily increasing litigation costs.

The upside of option (1) is that, in theory, the recovery is not limited to attorneys' fees. In Leadscope, for instance, the defendants received $26.5 million in compensatory and punitive damages.

Kentucky Court Summarizes Non-Compete Reasonableness Factors

I found a recent decision from the Court of Appeals of Kentucky to be somewhat interesting in its discussion of what factors bear on the issue of a non-compete's reasonableness.

The case's disposition is not worth much discussion - it essentially found that the circuit court's early disposition was premature - but in the context of reversing a judgment it outlined the types of considerations a Kentucky court should consider when assessing whether an employment-based covenant is enforceable.

In Charles T. Creech, Inc. v. Brown, 2012 Ky. App. LEXIS 142 (Ky. Ct. App. Aug. 17, 2012), the court of appeals outlined the following general reasonableness factors:

(1) Nature of the industry
(2) Characteristics of the employer
(3) The history of the employer/employee relationship
(4) The interests the employer seeks to protect
(5) Hardship on the employee
(6) Impact on the public

This is similar to, but a little more specific than, other courts' three-part reasonableness test. What was most interesting, though, about the decision was that under each factor the court outlined in question format underlying considerations a trial court should delve into. The only problem I see with this approach is that the court did not indicate how the answers to some of those questions (at least the ones that are less obvious) should favor one side of the other.

For instance, under the first factor, the court instructed trial courts to ask:

"How many players are there in the market, and are their respective market shares relatively large or small?" It never answers how the answer to this question should help frame the disposition.

This is the type of evidence that inevitably comes out during a non-compete trial, but some courts view this differently. For instance, many courts look at a highly diffuse, fragmented market as supporting non-compete arrangements because there often are either low barriers to entry or an industry custom and practice of utilizing non-competes to prevent customer switching. A minority of courts, however, view this as a factor that weighs against enforcement, presumably because customers have more fleeting relationships and identities of customers aren't as obvious.

All in all, the case provides a nice roadmap to get attorneys thinking about what generalist judges view as important in these types of cases.

Illinois' Rule 23 Problem

Some years back, our Supreme Court amended Rule 23 to allow for the appellate courts to publish non-precedential orders in an expanded class of cases. Rule 23 had long been part of the appellate equation, but the latest amendment gave courts greater authority to cut back on issuing formal opinions. This change was a direct response to the perceived deluge of appeals in the five appellate districts. Publishing opinions when the courts were under a crushing workload (apparently) was seen as unfair to the appellate justices and parties who would rely on opinions that were not (apparently) subject to intellectual rigor.

How does this impact non-compete law? So far this year, our appellate courts have issued four Rule 23 orders that should have been published opinions.

The first case, Hafferkamp v. Llorca, 2011 IL App (2d) 100353-U (actually filed in 2012) was handed down in February, and it handed down an important rule of law: the standards articulated in Reliable Fire Equipment Co. v. Arredondo are to be applied retroactively - meaning cases decided under the old law could be reversed for the circuit court to apply the correct test.

The second one was just as significant. Kairies v. All Line, Inc., 2012 IL App (2d) 111027-U, held that the Reliable Fire case did nothing to change the old case law on whether specific restraints were unreasonable. According to the court, Reliable Fire only dealt with determining the viability of a protectable interest. This holding was simply incorrect, as I have written before.

The third case, InvestRX Corp. v. DiGiovanni, 2012 IL App (1st) 120758-U, came from the First District in Chicago last month and held that the circuit court properly issued a preliminary injunction against former officers who breached non-competition restrictions entered into in connection with a sale of the business. Admittedly, the opinion does not break any new ground, but it does discuss the type of protectable interest an enforcing party can assert to obtain injunctive relief. For no other reason, it should have been published to serve as a useful guide for other courts to assess the grant or denial of injunctive relief post-Reliable Fire.

Finally, just this past week, the Second District again published a Rule 23 order holding that five months continued employment was not sufficient consideration for a non-compete agreement. The court's opinion in Gallagher Bassett Svcs., Inc. v. Vacala, 2012 IL App (2d) 111175-U, was lengthy and dealt with a consideration issue that has divided Illinois state and federal courts. If for no other reason, the Vacala case ought to serve as some kind of precedent on the consideration issue since the Second District had not previously adopted the test that other districts had. Additionally, the court discussed that a trade secrets misappropriation claim requires specific, non-conclusory factual allegations concerning how the alleged secrets were misappropriated. This may not be novel, but the case law on pleading standards in trade secrets actions is so sparse, courts could use more guidance.

In my mind, Rule 23 was not designed for this, and it has become overused. Lawyers who practice in this area need more precedent to go on. Not many cases in this field make it to the appellate courts, and the issues our courts are deciding are significant enough that they should be released in opinion form.