2013: The Top 10 List (Part II)

I hate to see 2013 leave, so I stretched my annual year-end review into two parts. Yesterday, I discussed the first half of my top 10 developments in non-compete and trade secret law. And today, I conclude the year with numbers one through five.

Here we go....

5. Aleynikov's Advancement Victory Highlights Oft-Overlooked Issue in Competition Suits. Former Goldman Sachs code developer has the distinction of making the Top 10 list in back-to-back years. (He is, in essence, the Arcade Fire of trade secrets litigants.) In last year's post, I summarized his legal high-wire act and predicted that he just might win his indemnification and advancement suit against Goldman Sachs. Well, he prevailed at least in part, with a federal district court finding that Aleynikov is entitled to have Goldman advance his legal expenses to fight the ongoing state criminal case in Manhattan. This development is significant because advancement and indemnification rights are the soft underbelly of many competition cases and often can throw a wrench into a company's plans to fight unfair competition. States recognize the broad policy goals of advancement and indemnity and will apply these statutes liberally to further those goals. Aleynikov's case, and others like it, should teach plaintiff's counsel to carefully consider how to plead and pursue competition claims. For a recap of Aleynikov's win in New Jersey, read my post from last month.

4. Federal Court Convicts David Nosal of Computer Fraud. The Computer Fraud and Abuse Act continued to wreak havoc on logic and reason (and more than a few lives) in 2013, and the case of David Nosal is one such example. The former Korn/Ferry search executive was convicted for violating the CFAA and the general federal conspiracy laws in California federal court. Nosal's plight (he will again appeal) indicates that conduct often giving rise to civil claims for unfair competition can actually result in criminal charges. Nosal's conviction generated a fair amount of controversy and demonstrates the broad applicability of the CFAA. For a discussion of the Nosal conviction, listen to the Fairly Competing podcast that John Marsh, Russell Beck, and I produced and posted back on May 28.

3. Illinois Appellate Court Issues Controversial Fifield Decision. No single non-compete has generated more buzz than the Appellate Court of Illinois' opinion in Fifield v. Premier Dealer Services. The case holds that a non-compete given in exchange for employment is not sufficient consideration unless the employment continues for at least two years. (To those unfamiliar: this is a case not legislation. I know it's confusing.) The rule broadly impacts at-will employees and has caused business counsel to lose sleep and wring their hands over just how to draft employment contracts. The Supreme Court of Illinois tacitly approved of the holding, declining to take the petition for leave to appeal. They were not persuaded, apparently, by my "dissenting opinion" in Fifield as the phantom Fourth Justice. (For those of you interested in assessing blogging metrics, this post - by a factor I can't even count - generated the most hits, the most e-mails, two news magazine interviews, and three citations in opposing counsel's legal briefs.) For my follow-up take, you can read more on Fifield here. (And if you want even more, just Google "Fifield." You'll find plenty.)

2. Seventh Circuit Decides Tradesmen Int'l v. Black. My case. Navel-gazing. Can say no more. Read here and here.

1. Federal Legislation to Protect Trade Secrets on the Horizon? Number one is a runaway. Not even close. It is difficult to overstate the importance of many proposed bills that are currently working their way through committee or that could be reintroduced in some form or fashion. Of particular note in 2013 was "Aaron's Law", which Zoe Lofgren introduced to cut back on the perceived unfairness and breadth of the CFAA. John, Russell, and I discussed the CFAA prosecution of activist Aaron Swartz on our Fairly Competing podcast early this year. Rep. Lofgren also introduced the Private Right of Action Against Theft of Trade Secrets Act, which would create a private civil cause of action at the federal level. Other legislative activity at the federal level included introduction of the Deter Cyber Theft Act, which would establish a "watch list" of countries that engage in cyber theft and require border patrol to bar imports from those countries. My June 4 discussion of the Act can be found here. Finally, and most recently, Senator Flake introduced the Future of American Innovation and Research Act. This legislation would provide a federal trade secrets remedy against those acting outside the U.S. or for the benefit of a foreign actor. It also provides for an ex parte seizure order, subject to some limitations. And finally, if you're interested in listening to further discussion about the federalization of trade secrets law, listen to the podcast John, Russell, and I produced on May 17.

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That's a wrap on 2013. Again, many thanks to my readers and those who are kind and thoughtful enough to e-mail me. You have made this a truly enjoyable experience once again. A less warm farewell for the year to those spammers who have ruined the commenting portion of this blog permanently. Such is life on the internet.

I am looking forward to starting Year 6 and reaching that milestone of post number 500. See you in 2014!

2013: The Top 10 List (Part I)

And so ends Year 5, my fifth full year writing this blog. Sometime during the first quarter of next year, I will be penning my 500th post. I guess that qualifies as a milestone, but I'm not exactly sure how to celebrate. Perhaps a guest column? We'll cross that bridge later.

For now, we'll have to make do with what has become an annual tradition - a countdown to the Top 10 most significant developments for the past year. Some on this list will be familiar, some perhaps not. And as usual, I have my own reasons (which I'll try to explain) for why I think a development is signficant.

This year, I am breaking the post into two parts. Not so much to speed-up the countdown to Post No. 500, but to continue on with the suspense-building tradition of bifurcating Top 10 lists (see Pitchfork's Top Albums list, for instance).

So here goes Part I, in which I'll summarize 10 through 6. Tomorrow, we'll conclude the year with Part II, in which I outline the five most important developments of 2013.

10. State Legislatures Continue Examining Non-Compete Agreements. Every January we see legislatures consider a host of new bills - many of which are unpassable sops to constituents. It has become commonplace to see the introduction of bills regulating non-compete agreements. This year was no different, as legislatures in Minnesota, Illinois, New Jersey, Connecticut, and Oklahoma all considered regulating various aspects of non-compete law. For a take on the Oklahoma bill, read my post from June 10.

9. First Circuit Addresses Scope of "Solicitation." One of the year's more interesting circuit opinions comes from Massachusetts and the always-reliable Judge Selya. The case of Corporate Techs. v. Hartnett addressed a frequent problem posed by non-solicitation covenants: just what is a "solicitation" anyway? The case pragmatically concludes that there is no real viability to a "first contact" rule, and that business realities must play some role in assessing whether an employee has impermissibly solicited a client in violation of a contractual restriction. For a summary of Hartnett, read my October 17 post.

8. Fracking Bills Intersect Public Policy with Trade Secret Rights. For those of you interested in our country's continuing debate over energy independence, the very word "fracking" can invoke a visceral reaction. It is beyond dispute, however, that the renewed interest in fracking as a means of energy production has led to job creation, particularly in areas hard-hit by the recession (including my state of Illinois). As a result, state legislatures are considering or enacting bills to allow (and heavily regulate) this method of energy production. But in doing so, states are having to consider how to protect the trade secret rights of oil and gas producers. Understandably, many environmental groups want to know what kinds of chemicals the producers are using in their fluid compositions (which is critical to the fracking method). And this leads to an explosive intersection of public policy and private ordering of trade secret rights. For my take on the issues likely to come up time and again in fracking cases, read my May 2 post.

7. Supreme Court Validates Use of Forum Selection Clauses. It is near-sacrilege on this blog to discuss matters related to venue and jurisdiction, if only to prevent internet-induced boredom. But there is no doubt for practitioners that these issues are important to understand. For the second straight year, the Supreme Court has issued an opinion that will be critical for those attorneys who deal with the enforceability of non-compete agreements. While last year's decision dealt with arbitrability, this year, the Court reaffirmed the notion that forum selection clauses are presumptively enforceable. As it stands right now, the only real method of shifting venue when the underlying contract contains a forum selection clause is to argue third-party inconvenience. For my summary of the Atlantic Marine case, read my post from last week.

6. Courts of Appeal Affirm EEA Convictions. The Economic Espionage Act continues to generate much discussion among commentators, particular given the importance of trade secrets in our economy. This year, we saw two courts of appeal affirm EEA convictions arising out of theft of trade secrets. In one case, the Seventh Circuit affirmed Hanjuan Jin's conviction arising from her misappropriation of technology from Motorola (though the technology is now somewhat dated). In the more interesting case, the Sixth Circuit affirmed the convictions of Clark Roberts and Sean Howley for misappropriating Goodyear's tire-assembly machine technology. But it reversed the sentences the district court imposed, particularly given Goodyear's inability to describe adequately the economic loss it incurred from the theft. For my discussion of the Goodyear case, read my February 6 discussion in USA v. Roberts.

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Stay tuned for Part II (5 through 1) tomorrow afternoon, featuring proposed federal legislation, criminal convictions under the Computer Fraud and Abuse Act, and developments in Illinois.

Supreme Court Finds Forum Selection Clauses Presumptively Valid

For the second straight year, the Supreme Court has issued an opinion which impacts procedural issues surrounding many non-compete disputes.

Last year, the Court held that when an employment contract contains an arbitration clause, an arbitrator - not a court - must determine the enforceability of a restrictive covenant. This year, the Court addressed an issue which seems more and more pervasive in covenant fights: the enforceability of forum selection clauses. These procedural disputes are time-consuming, expensive, and totally ancillary to the merits.

Venue provisions seem to be part and parcel of any employment agreement nowadays, with those clauses specifying what law the parties agree to apply and where any dispute should be heard. Although it is not uncommon to see venue provisions as merely optional or permissive, it is far more frequent in my opinion to see mandatory clauses that specify the employer's home state as the exclusive place for dispute resolution.

The problem concerning enforceability of these clauses generally arises when an employee lives and works out of state. Often times, the employee - anticipating a covenant lawsuit - will file preemptively in his or her home state to establish a venue different than that specified in the contract. Just as frequently, the employee's first response in a covenant suit is to try to dismiss or transfer the case on venue grounds to his or her home district.

Is this permissible? The Court in Atlantic Marine Constr. Co. v. U.S. Dist. Ct. makes it much more difficult for the employee to raise this defense.

The Court in Atlantic Marine held that a district court should enforce the forum selection clause and transfer the case to a different federal court (the one in the pre-determined venue) unless extraordinary circumstances "unrelated to the convenience of the parties" work against a transfer. Effectively, the forum selection clause has controlling weight in the case, and a district court judge should transfer the case unless non-parties would be inconvenienced.

For an employee, the only practical way to prevail in this type of forum fight is to introduce by way of affidavit specific testimony showing that nearly all of the relevant witnesses are located out of state. This would cause a court to consider whether maintaining the suit in the chosen state would work a hardship on third-parties and lead to problems with subpoena compliance. Even that may not be enough, since presumably the employer will introduce counter-testimony showing which witnesses reside in the contractually agreed-to state. The availability of video testimony or use of depositions at trial further work against the employee. That said, the employee's showing must be compelling, detailed, and substantial if he or she is to have any shot at all.

It is important to remember that when a venue fight like this arises it usually takes place in federal court. If the employee files a preemptive suit in another state, it is a virtual certainty there will be complete diversity between the parties so the suit will end up somehow in federal court (either on its own or through the process of removing it out of the state court into the federal court). When seeking to enforce a forum selection clause, the employer is going to move to have the case transferred to a different federal court or dismissed so it can refile in the appropriate state court. However, the Court's opinion indicates the same test concerning enforceability of the forum selection clause will apply regardless of whether the motion is for transfer or dismissal.

Is the definition of a "trade secret" too complicated? Judge Posner says yes.

Courts long have recognized that a trade secret is one of the most "elusive" concepts in the law. This recognition results from a misunderstanding of what kind of protection the law will afford commercially sensitive material. It also results fr

om the fact that owners of business information tend to overvalue it and, hence, claim trade secret protection over too much material.

In the high-profile Chicago case of U.S. v. Jin, No. 12-3013 (7th Cir. Sept. 26, 2013), Judge Posner somewhat criticized the definition of a trade secret under the Economic Espionage Act. He called the definition elaborate and disconnected from a trade secret "in the ordinary sense." He specifically called out the element of the definition that a trade secret have "independent economic value from not being generally known to ... the public." It was this definition that allowed Hanjuan Jin to challenge her conviction.

Jin's defense centered on value, because the stolen trade secrets - Motorola's dated mobile telecommunications system - were losing commercial value. Not surprisingly, Judge Posner found that the United States, in proving its case, did not need to prove that Motorola lost money as a result of Jin's theft. (Incidentally, this was one of those cash-in-the-luggage, one-way-ticket-to-China-with documents-in-hand fact patterns that had all the hallmarks of cloak-and-dagger stuff. Hard to believe any jury would have much sympathy for that.)

The Court then noted that a trade secret need only have potential value, not actual, and that the "damage" may have come in the fact that Motorola had to reveal "that it couldn't keep secrets or prevent rivals from stealing its technology." Judge Posner long has endorsed trade secret rights, and this opinion reflects his effort to broadly define value - even though he found the EEA's trade secrets definition unduly "elaborate."

(This is the definition from the Restatement of the Law (Third), Unfair Competition, Section 39:

A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.)

A copy of the Opinion is below.

US v. Jin - Opinion (00181177)

Reflecting on Garden-Leave and the English Approach

Last month, the Illinois Bar Journal published a feature article I wrote called "Non-Traditional Non-Competes: Designing Non-Competition Agreements to Hold Up in Court."

The stated premise of my article was fairly straightforward and uncontroversial: non-competes are tough to enforce, and attorneys should think creatively about how to make them more reasonable and reflective of an arms-length transaction. I described three basic templates attorneys could consider using to make agreements more enforceable. These templates, which generally adopt a garden-leave approach to enforcement, would all but eliminate any line of attack concerning lack of consideration and undue hardship.

The unstated premise was more nuanced: by paying employees not to compete, employers will avoid more litigation and challenges to enforceability. Since non-compete litigation itself costs money and infrequently results in monetary judgments, the net economic benefit to a garden-leave approach isn't quite as bad as it might seem when first thinking about it.

I started the article with a discussion of the famous case from the English Court of Appeal, Evening Standard v. Henderson, in which a London-area paper successfully prohibited an employee from working for another employer during his garden-leave (or extended notice) period. The other day, I read another English decision, JM Finn & Co. Ltd. v. Holliday, which granted injunctive relief (just as in Henderson) to keep an an investment manager on the sidelines during his one-year notice period after he indicated he was leaving to join another brokerage firm. The decision can be found here.

The mechanics of garden-leave can be somewhat confusing. The general approach is that an employer, like JM Finn, has the ability to enforce what's called a "notice period" when it receives a resignation letter, like Holliday provided to it. At that point, the employer continues paying the employee to sit out and importantly (at least in the United States) the employee continues to owe duties of loyalty and fidelity to his then-employer (even though he is not actively working). As I discuss in my article, it's best that the employer not retain any discretion to conscript the employee into performing any type of work during the notice period.

Garden-leave is prevalent in the financial services sector, but as I point out in my bar journal article, it has received almost no attention in U.S. courts. Maybe this proves my point. If these clauses are in use, shouldn't they result in less litigation (meaning, fewer searchable cases) and reduced attorneys' fees?