Last week, the Seventh Circuit heard oral argument in the case of Instant Technology v. DiFazio, No. 14-2132. The DiFazio case is one of several Illinois district court cases that apply the so-called Fifield rule on consideration.
Readers of this blog know all too well the contours of this rule, but as a refresher, it holds that at-will employment itself only can serve as consideration for a non-compete agreement if the employment lasts at least two years. Effectively, the rule means that employers must consider alternative forms of consideration, such as a signing bonus or grant of severance, to bind at-will employees to a non-compete or non-solicit covenant.
(My discussion of the district court's ruling is found here.)
DiFazio was a pro-employee decision, as the district court found that several of the individual defendants had unenforceable non-competes by virtue of their short stint of employment with Instant Technology. The defense-friendly decision had a litany of other facts, particularly concerning the protectable interest underlying the covenants, so consideration was somewhat of a tangential issue in the case. It's likely that even without the rule the employees would have won.
Will the Seventh Circuit weigh in on whether Fifield is good law? That's undecided even after oral argument. Instant Technology downplayed Fifield in its appellate briefs. And then it hired as appellate counsel the same attorney, Anthony Valiulis, who argued on Fifield's behalf in the Appellate Court of Illinois. That must have been awkward, and indeed Mr. Valiulis made light of this during his presentation.
By and large, I thought the argument was a let-down. The panel consisted of Judges Frank Easterbrook, David Hamilton, and Ann Williams. In particular, Judge Hamilton has a strong interest in this area of the law, as he handled a number of trade secret and non-compete cases while in private practice. And as usual, Judge Hamilton asked the best, clearest questions. (Judge Easterbrook, surprisingly, asked none).
On Fifield, though, the court revealed very little. Judge Hamilton asked Mr. Valilulis whether the Appellate Court correctly decided Fifield. Not surprisingly, he had to admit that the court got it wrong. Instant Technology argued that consideration should be judged by a totality-of-the-circumstances approach, consistent with the underlying rule-of-reason analysis concerning a covenant's terms. That strikes me as a position that is principled, in that it relies on prior precedent in this area, but ultimately misguided since it conflates two entirely separate legal concepts. However, none of the circuit judges really took issue with Mr. Valiulis' argument on this.
Though not speaking about consideration necessarily, Judge Hamilton said when questioning Mr. Valiulis that non-compete law is an area where predictability is incredibly important, both for employees and employers. That may provide a justification for the Fifield rule, which for all its faults is at least easy to apply in practice. In fact, Mr. Valilulis conceded that was one of his arguments in the Fifield case for the bright-line rule.
One issue did not come up. The court didn't even suggest that it would certify the consideration question to the Supreme Court of Illinois, which it is able to under Seventh Circuit Rule 52 (as well as state Supreme Court Rule 20(a)). It may be that the other flaws in Instant Technology's case prevent this, because Circuit Rule 52 only allows for certification on a state-law question that "will control the outcome of a case."
My guess is that Judge Hamilton will write an opinion affirming the district court's ruling and will discuss in passing the controversy concerning Fifield's consideration rule. Ultimately, though, because it may not be case-dispositive, I do not think he'll weigh in on what the rule should be.
Friday, May 29, 2015
Friday, May 22, 2015
More Discord In Treatment of CFAA "Exceeds Authorized Access" Claims
The scholarship and divergence of opinion on the Computer Fraud and Abuse Act's reach has become so pervasive that the issues no longer seem as complex as they once did.
Most practitioners still are not familiar with the CFAA, and since it's buried in the criminal code, civil litigators shouldn't have much reason to learn the statute's intricacies. But since it's a federal statute that has criminal and civil reach, the CFAA occupies a somewhat unique place for trade secret and non-compete litigators. In essence, the CFAA can serve as the jurisdictional hook to get competition cases into federal court.
The statute is densely worded and a patchwork of amendments. But for simplicity it enables an employer to pursue a civil cause of action if an ex-employee took information out of a protected computer (essentially anything hooked to the internet) and caused damage or loss. There are permutations to the various sub-sections, but that's the CFAA's civil reach in a nutshell.
I wrote recently about another CFAA case that arose in the employment context, which I felt crystallized the deep split among courts about how to apply the statute when insiders access information to use it contrary to their employers' interests. The issue comes up often because it is easy to misappropriate information out of computers, and at least half of trade secret defendants get tripped up through electronic evidence.
But the actual language of the CFAA is not easy to apply. In the employment context, one can use it against an employee who access a computer "without authorization" or in a manner that "exceeds authorized access." This raises the question - not easily solved - of whether an employee who has the ability to access corporate information, but who intends to misuse it, really has violated the CFAA at all.
The case of American Furukawa, Inc. v. Hossain, 2015 U.S. Dist. LEXIS 59000 (E.D. Mich. May 6, 2015), provides a clear illustration of all the CFAA issues that crop up in employment cases. They include allegations of improper downloading of files to an external drive, planned competition, questionable conduct on the employee's part around the time of departure, and then the fortuitous discovery of actual competition through a misdirected e-mail. (Yes, auto-fill is a boon to the plaintiff's bar.)
With those allegations, the court allowed the CFAA claim to persist, even disagreeing with other courts within the same judicial district. In essence, the court gave deference to limitations the employer placed on computer access, use, and purpose. It held that the misuse of information in violation of policy or contractual limitations can give rise to an "exceeds authorized access" claim. Succinctly put, the court stated "such explicit policies are nothing but 'security measures' employers may implement to prevent individuals from doing things in an improper manner on the employer's computer system."
The opinion itself is notable for its harsh criticism of the decision in United States v. Nosal, a decision out of the Ninth Circuit that takes a very narrow interpretation of the CFAA and its "access" language. In fact, in several places, the district court cited the government's brief before the Ninth Circuit, in which it argued for a broad access definition. The case provides an interesting survey of the law surrounding the circuit split in the CFAA. And it further underscores the need for legislative reform or (less likely) a case to make its way to the Supreme Court.
Most practitioners still are not familiar with the CFAA, and since it's buried in the criminal code, civil litigators shouldn't have much reason to learn the statute's intricacies. But since it's a federal statute that has criminal and civil reach, the CFAA occupies a somewhat unique place for trade secret and non-compete litigators. In essence, the CFAA can serve as the jurisdictional hook to get competition cases into federal court.
The statute is densely worded and a patchwork of amendments. But for simplicity it enables an employer to pursue a civil cause of action if an ex-employee took information out of a protected computer (essentially anything hooked to the internet) and caused damage or loss. There are permutations to the various sub-sections, but that's the CFAA's civil reach in a nutshell.
I wrote recently about another CFAA case that arose in the employment context, which I felt crystallized the deep split among courts about how to apply the statute when insiders access information to use it contrary to their employers' interests. The issue comes up often because it is easy to misappropriate information out of computers, and at least half of trade secret defendants get tripped up through electronic evidence.
But the actual language of the CFAA is not easy to apply. In the employment context, one can use it against an employee who access a computer "without authorization" or in a manner that "exceeds authorized access." This raises the question - not easily solved - of whether an employee who has the ability to access corporate information, but who intends to misuse it, really has violated the CFAA at all.
The case of American Furukawa, Inc. v. Hossain, 2015 U.S. Dist. LEXIS 59000 (E.D. Mich. May 6, 2015), provides a clear illustration of all the CFAA issues that crop up in employment cases. They include allegations of improper downloading of files to an external drive, planned competition, questionable conduct on the employee's part around the time of departure, and then the fortuitous discovery of actual competition through a misdirected e-mail. (Yes, auto-fill is a boon to the plaintiff's bar.)
With those allegations, the court allowed the CFAA claim to persist, even disagreeing with other courts within the same judicial district. In essence, the court gave deference to limitations the employer placed on computer access, use, and purpose. It held that the misuse of information in violation of policy or contractual limitations can give rise to an "exceeds authorized access" claim. Succinctly put, the court stated "such explicit policies are nothing but 'security measures' employers may implement to prevent individuals from doing things in an improper manner on the employer's computer system."
The opinion itself is notable for its harsh criticism of the decision in United States v. Nosal, a decision out of the Ninth Circuit that takes a very narrow interpretation of the CFAA and its "access" language. In fact, in several places, the district court cited the government's brief before the Ninth Circuit, in which it argued for a broad access definition. The case provides an interesting survey of the law surrounding the circuit split in the CFAA. And it further underscores the need for legislative reform or (less likely) a case to make its way to the Supreme Court.
Friday, May 8, 2015
Supreme Court of Wisconsin Follows Majority Rule on Non-Compete Consideration
Wisconsin generally is known as a pro-employee state when it comes to enforcement of non-compete agreements. However, last week it gave employers a fairly significant victory in Runzheimer Int'l, Ltd. v. Friedlen, when the state supreme court held that an employer's election to refrain from firing an existing at-will employee constitutes lawful consideration for signing a non-compete agreement.
The Supreme Court of Wisconsin correctly noted that this issue has divided courts across the country, with a minority taking the opposite approach. Pennsylvania happens to be considering a similar question right now. Illinois courts are a mess when it comes to determining the adequacy of consideration for non-competes in the at-will context. In the past, Wisconsin courts had sent mixed signals and had not definitively reached the issue presented. The Court's decision - confusing in its rationale, to be sure - at least provides much-needed clarity for employers and employees moving forward.
The issue that percolates beneath the surface in cases like this is the employer's ability to fire the employee. So the reasoning goes, an employer can "trick" an employee into signing a non-compete, secure that commitment, and then fire the employee without any liability (for at-will employment is a relatively risk-free relationship). According to the Court, it's not correct to view the forbearance from firing as "illusory consideration." Rather, other contract defenses (like fraudulent inducement) provide a legitimate check against such trickery.
The other, less formal, check is that an employer which engages in these kinds of tactics will be less attractive to potential new hires. Further, when it comes time to enforcement, an employer will have a separate issue to confront wholly apart from the consideration question: whether enforcement after involuntary discharge is reasonable. Part of the reasonableness test will examine whether enforcement will present an undue hardship on the employee.
In the past, I have been an advocate for looking at this hardship factor when the employment ends at the behest of the employer, rather than the employee. It is an issue separate from the four corners of the contract, but it still relates to the reasonableness of enforcement. Courts will view attempts to enforce non-competes against terminated employees with much greater suspicion than those who leave of their own volition.
As Runzheimer suggests, we can view this issue wholly apart from the element of consideration. It may be another contract defense. It may be within the overall reasonableness inquiry. But it clearly is something, and employers always will need to factor in the equities when enforcing non-competes.
The Supreme Court of Wisconsin correctly noted that this issue has divided courts across the country, with a minority taking the opposite approach. Pennsylvania happens to be considering a similar question right now. Illinois courts are a mess when it comes to determining the adequacy of consideration for non-competes in the at-will context. In the past, Wisconsin courts had sent mixed signals and had not definitively reached the issue presented. The Court's decision - confusing in its rationale, to be sure - at least provides much-needed clarity for employers and employees moving forward.
The issue that percolates beneath the surface in cases like this is the employer's ability to fire the employee. So the reasoning goes, an employer can "trick" an employee into signing a non-compete, secure that commitment, and then fire the employee without any liability (for at-will employment is a relatively risk-free relationship). According to the Court, it's not correct to view the forbearance from firing as "illusory consideration." Rather, other contract defenses (like fraudulent inducement) provide a legitimate check against such trickery.
The other, less formal, check is that an employer which engages in these kinds of tactics will be less attractive to potential new hires. Further, when it comes time to enforcement, an employer will have a separate issue to confront wholly apart from the consideration question: whether enforcement after involuntary discharge is reasonable. Part of the reasonableness test will examine whether enforcement will present an undue hardship on the employee.
In the past, I have been an advocate for looking at this hardship factor when the employment ends at the behest of the employer, rather than the employee. It is an issue separate from the four corners of the contract, but it still relates to the reasonableness of enforcement. Courts will view attempts to enforce non-competes against terminated employees with much greater suspicion than those who leave of their own volition.
As Runzheimer suggests, we can view this issue wholly apart from the element of consideration. It may be another contract defense. It may be within the overall reasonableness inquiry. But it clearly is something, and employers always will need to factor in the equities when enforcing non-competes.
Friday, May 1, 2015
On Predatory Lawsuits and Bad Faith in Trade Secrets Claims, California Continues to Lead the Way
Trade secrets claim are inherently fraught with a startling reality: they have the potential to morph into opportunistic litigation.
What I mean by this is that a party can use a trade secrets lawsuit for a purpose unrelated to the merits. Put another way, the suit can be a means to heap costs on smaller competitors, discourage the development of a competing product or service, or deter perfectly lawful employee recruitment. Trade secrets suits are often fraught with complexity, which means that it's hard for a judge to snuff out bad faith. They also are exceedingly difficult to dismiss early, because they are fact-intensive. These factors, and more, result in a potential toxic brew that can masquerade a plaintiff's bad faith until well into the litigation process.
I have been fortunate (or, from my client's perspective, unfortunate) to have litigated for the defendants a bad-faith trade secrets claim all the way to the Seventh Circuit Court of Appeals. In Tradesman Int'l, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2003), the Court found under Illinois law that a trial court need not examine a plaintiff's bad faith at the time a lawsuit is filed. Rather, the inquiry is more flexible, and a court is empowered to award fees if it maintains a suit in bad faith. By definition, this requires an ongoing examination of a case to determine if and when a party's bad faith starts.
The Tradesman case is one of a handful of cases - indeed, one of the most important - outside California that examine the notion of bad faith in the specific context of a trade secrets suit. The Uniform Trade Secrets Act, adopted by nearly all states, allows for fee-shifting if a prevailing defendant illustrates bad faith. But relatively few cases reach that stage, and even fewer result in persuasive opinions that practitioners can use for future guidance.
Enter Cypress Semiconductor Corp. v. Maxim Integrated Products, which is surely the most important bad faith case since Tradesman. The case does not establish any new law, as California already has cemented its two-part "objective speciousness/subjective bad faith" test. But the facts of the case, and the Court of Appeal's analysis are powerful and serve to guide lawyers over the bad faith question.
The case arose out of nothing more than Maxim's apparent recruitment (through a headhunter) of Cypress employees - particularly in the area of touchscreen technology. Since California has banned employment non-compete agreements, the broad theory of trade secrets liability ("you're targeting our employees to acquire trade secrets") was dubious out of the gate. Even more problematic for Cypress was California's refusal to adopt the "inevitable disclosure" doctrine - which is broadly used as a justification to enforce non-competes and is more controversially used sometimes as a free-standing claim to bar competition even in the absence of a non-compete.
So, from the start, Cypress' case was in trouble. It veered further off the rails when Maxim demanded a trade secrets identification, which California law requires early in the case. Here's what Cypress disclosed:
(1) A compilation or list of Cypress employees who worked with Cypress's touchscreen technology and products area and their employee information, including contact information.
(2) Cypress's substantive confidential information regarding its proprietary touchscreen technology and high performance products.
Well now. That's seems compelling.
As for category (1), Cypress ran into trouble when Maxim found those same employees - whose identifies were apparently trade secrets, in the Cypress world - on LinkedIn and other social networking sites. Problem.
As for category (2), I am not sure what to say. Identifying your trade secrets as "substantive confidential information" regarding all your products seems a wee-bit circular. Adding adjectives was not all that helpful.
The opinion (embedded below) is replete with an often harsh characterization of what Cypress did with this profoundly silly lawsuit. It supported its bad-faith finding with a wide-ranging criticism of Cypress's improper identification, rank speculation that Maxim even was offering Cypress employees positions on touchscreen technology, and its use of litigation to achieve an improper purpose.
Of greater interest, though, was Cypress's novel defense: since it voluntarily dismissed the lawsuit, Maxim could not be a "prevailing party" under the bad-faith statute. Here, the theory was that Cypress could have refiled the case in the future. Demonstrating a fair amount of arrogance, Cypress contended it was the prevailing party since Maxim voluntarily stopped soliciting Cypress's employees.
The Court of Appeal reached a pragmatic result by rejecting this voluntary dismissal defense. By finding that the plaintiff acted in bad faith, a court will have ensured that the defendant did not achieve some "superficial or illusory success" by virtue of the voluntary dismissal. Put another way, the bad-faith finding is itself a determination that the plaintiff would have lost - badly, in fact. Therefore, there is no real justification for denying fees to a defendant who wins simply because the plaintiff elected to ditch its case in the face of inevitable loss. The Court asked rhetorically "why a party who has made a trade secret claim in bad faith should be permitted to inflict the costs of defense on his or her opponent."
In finding that Maxim was the prevailing party, the Court of Appeal sensibly resolved an issue that trade secrets defendants fear (particularly in state court): the plaintiff's use of expensive litigation to achieve some temporary objective - a standstill agreement to stop competing, piling on of legal fees - only to cut and run after it sends its marketplace message. In these circumstances, a defendant can be left holding the bag with fewer fee-shifting options because it will not have a judgment on the merits.
But as the Court found, the bad-faith finding is tantamount to such a judgment because it serves as a finding that not only was the defendant not liable, but also that the plaintiff knew from the start that it never could be. From a policy perspective, the bad-faith statute has far less teeth if the plaintiff can use the safe-harbor of a voluntary dismissal to avoid even the specter of a fee claim. This is the sort of loophole that should a liberal construction of the bad-faith statute can close.
The issue of bad faith and predatory litigation is one that is not going away, and the Cypress decision serves as a road map for how defendants can fight back against frivolous, anti-competitive claims.
What I mean by this is that a party can use a trade secrets lawsuit for a purpose unrelated to the merits. Put another way, the suit can be a means to heap costs on smaller competitors, discourage the development of a competing product or service, or deter perfectly lawful employee recruitment. Trade secrets suits are often fraught with complexity, which means that it's hard for a judge to snuff out bad faith. They also are exceedingly difficult to dismiss early, because they are fact-intensive. These factors, and more, result in a potential toxic brew that can masquerade a plaintiff's bad faith until well into the litigation process.
I have been fortunate (or, from my client's perspective, unfortunate) to have litigated for the defendants a bad-faith trade secrets claim all the way to the Seventh Circuit Court of Appeals. In Tradesman Int'l, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2003), the Court found under Illinois law that a trial court need not examine a plaintiff's bad faith at the time a lawsuit is filed. Rather, the inquiry is more flexible, and a court is empowered to award fees if it maintains a suit in bad faith. By definition, this requires an ongoing examination of a case to determine if and when a party's bad faith starts.
The Tradesman case is one of a handful of cases - indeed, one of the most important - outside California that examine the notion of bad faith in the specific context of a trade secrets suit. The Uniform Trade Secrets Act, adopted by nearly all states, allows for fee-shifting if a prevailing defendant illustrates bad faith. But relatively few cases reach that stage, and even fewer result in persuasive opinions that practitioners can use for future guidance.
Enter Cypress Semiconductor Corp. v. Maxim Integrated Products, which is surely the most important bad faith case since Tradesman. The case does not establish any new law, as California already has cemented its two-part "objective speciousness/subjective bad faith" test. But the facts of the case, and the Court of Appeal's analysis are powerful and serve to guide lawyers over the bad faith question.
The case arose out of nothing more than Maxim's apparent recruitment (through a headhunter) of Cypress employees - particularly in the area of touchscreen technology. Since California has banned employment non-compete agreements, the broad theory of trade secrets liability ("you're targeting our employees to acquire trade secrets") was dubious out of the gate. Even more problematic for Cypress was California's refusal to adopt the "inevitable disclosure" doctrine - which is broadly used as a justification to enforce non-competes and is more controversially used sometimes as a free-standing claim to bar competition even in the absence of a non-compete.
So, from the start, Cypress' case was in trouble. It veered further off the rails when Maxim demanded a trade secrets identification, which California law requires early in the case. Here's what Cypress disclosed:
(1) A compilation or list of Cypress employees who worked with Cypress's touchscreen technology and products area and their employee information, including contact information.
(2) Cypress's substantive confidential information regarding its proprietary touchscreen technology and high performance products.
Well now. That's seems compelling.
As for category (1), Cypress ran into trouble when Maxim found those same employees - whose identifies were apparently trade secrets, in the Cypress world - on LinkedIn and other social networking sites. Problem.
As for category (2), I am not sure what to say. Identifying your trade secrets as "substantive confidential information" regarding all your products seems a wee-bit circular. Adding adjectives was not all that helpful.
The opinion (embedded below) is replete with an often harsh characterization of what Cypress did with this profoundly silly lawsuit. It supported its bad-faith finding with a wide-ranging criticism of Cypress's improper identification, rank speculation that Maxim even was offering Cypress employees positions on touchscreen technology, and its use of litigation to achieve an improper purpose.
Of greater interest, though, was Cypress's novel defense: since it voluntarily dismissed the lawsuit, Maxim could not be a "prevailing party" under the bad-faith statute. Here, the theory was that Cypress could have refiled the case in the future. Demonstrating a fair amount of arrogance, Cypress contended it was the prevailing party since Maxim voluntarily stopped soliciting Cypress's employees.
The Court of Appeal reached a pragmatic result by rejecting this voluntary dismissal defense. By finding that the plaintiff acted in bad faith, a court will have ensured that the defendant did not achieve some "superficial or illusory success" by virtue of the voluntary dismissal. Put another way, the bad-faith finding is itself a determination that the plaintiff would have lost - badly, in fact. Therefore, there is no real justification for denying fees to a defendant who wins simply because the plaintiff elected to ditch its case in the face of inevitable loss. The Court asked rhetorically "why a party who has made a trade secret claim in bad faith should be permitted to inflict the costs of defense on his or her opponent."
In finding that Maxim was the prevailing party, the Court of Appeal sensibly resolved an issue that trade secrets defendants fear (particularly in state court): the plaintiff's use of expensive litigation to achieve some temporary objective - a standstill agreement to stop competing, piling on of legal fees - only to cut and run after it sends its marketplace message. In these circumstances, a defendant can be left holding the bag with fewer fee-shifting options because it will not have a judgment on the merits.
But as the Court found, the bad-faith finding is tantamount to such a judgment because it serves as a finding that not only was the defendant not liable, but also that the plaintiff knew from the start that it never could be. From a policy perspective, the bad-faith statute has far less teeth if the plaintiff can use the safe-harbor of a voluntary dismissal to avoid even the specter of a fee claim. This is the sort of loophole that should a liberal construction of the bad-faith statute can close.
The issue of bad faith and predatory litigation is one that is not going away, and the Cypress decision serves as a road map for how defendants can fight back against frivolous, anti-competitive claims.
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