Year-End Post: A Completely Random Screed, Addressing Topics Near and Dear

Last night, as Christmas '17 drew to a close, my wife and I imbibed with a (very small) glass of Pappy Van Winkle, which, if you know anything about bourbon, is totally epic shit and absolutely the right way to finish off a holiday. As I let the cordial burn the inside of my mouth (and I do mean burn), I thought about a year that was completely random in so many ways. I'll leave aside the declining discourse of our civic life and translate this to the content of this blog, which is non-compete and trade secret litigation.

I thought of the great successes my clients and I have had this year. I began the year arguing in the Third District Appellate Court, site of the Lincoln-Douglas debates, on a non-compete judgment entered in favor of my client, a former staffing industry sales employee, after a bench trial. Work then pivoted to a monster appeal in the Second District, which recently affirmed a bench trial judgment in our favor and affirmed a nearly $1.5 million fee award under corporate indemnification procedures. We now have pending, again in the Third District, a discretionary, interlocutory appeal on an issue of contract interpretation concerning non-competes. We are hopeful that this case, too, will establish precedent and continue to move the ball down the field of rationality.

In the trial courts, my work was no less significant. And again, our results--for awesome clients--continued to be great. We successfully dismissed an inevitable disclosure action in Illinois state court, with a factual and procedural context so utterly inane and bereft of competence that I cannot do it justice. But I tried, in my blog post "38 Minutes of Hell," which garnered a lot of classic feedback.

June and July were consumed with one of the truly weirdest cases I'll ever see, a replevin claim in Cook County Circuit Court, where we prevailed in a bench trial. Next, we headed to the East Coast and defeated a preliminary injunction in the Delaware Court of Chancery, following a failed business acquisition. This time, too, the merits were a real head-scratcher, with the plaintiff pursuing a claim based on a no-hiring clause that limited our ability to hire employees of the potential target company. Problem: we hired an independent contractor. Once again, we see litigation as an ex post attempt to strike a business deal that the parties never adopted. That lawsuit's in the ditch now.

Then we stepped into a federal non-compete and trade secrets case that had been pending for several months. After getting subbed in for defense counsel, I read the file and concluded rather quickly that this case, too, was purely abusive. We then immediately contacted non-party witnesses, obtained statements that undermined the plaintiff's claim of breach (and trade secrets theft) in toto, and served our initial evidence disclosures. You could almost hear the plaintiff back-pedal, as it filed a motion to dismiss the case with prejudice, conditioned of course on the "with each party to bear its own costs and fees." Ain't that easy, partner. We moving for fees. May not get 'em. But we tryin'.

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We're now in yet another one of these cases, with similarly weak facts from the plaintiff's perspective. And as I'm litigating that one, I can't help but feel we're reaching an inflection point on non-compete cases. What I continue to see is canned pleadings and complaints, invoking the same shop-worn phrases about what it is the plaintiff is trying to protect through covenants both broad and narrow. What is missing from many such cases is a deconstructed analysis of these interests and how the enforcement action is designed to protect them from an unfair competitive threat.

In the main, these business interests sound reasonable and decent. Customer relationships and confidential information, though, are interests only protectable if the facts justify market-distorting protections. I believe that, in opaque industries not intuitively familiar to the average person, the notion of "customer relationships" can be awfully difficult to deconstruct and analyze. Put another way, the term (or the asserted interest girding the restrictive covenants) quickly gets disaggregated from the actual, relevant facts.

Business-to-business relationships, which are what most non-competes are designed to protect, are complex. The question, for instance, of who a customer even is can be iterative, not obvious. Furthermore, we live in an era (call it the post-Industrial era, since no one knows what else to call it) where businesses are becoming more and more fragmented and specialized. This is what I wrote on LinkedIn last week:

...Extreme market fragmentation within industries means that companies once deemed "rivals" now operate in a manner adjacent to, not competitive with, each other. Contractual restrictions on competing in the "same or similar line of business," once thought acceptable, now fail to account for this macroeconomic shift towards hyper-specialization....

I stand by that and think that we need to keep this in mind when assessing whether to file suit and how to defend a suit.

What I see in non-compete cases is this. Plaintiff recycles a complaint with a very nice series of allegations about customer relationships. Those allegations have no fit whatsoever to the industry they happen to be litigating. A trial judge operates under a familiar framework, constrained by time and resources, all the while failing to grasp the nuances of the business that is the subject of the dispute during an emergency hearing. The allegations may be enough to get a plaintiff a few first downs. But ultimately they get three holding penalties in a row, the punter fumbles the ball, and the team is totally blown out by halftime. (As a Chicago Bears fan, the analogy seemed obvious and temporally appropriate.)

So what is my point? The protectable interest question is really, really important. It is not nearly enough to rest on the laurels of past pleadings that survived a motion to dismiss and that invoke the black-letter principles we all now know. What is demanded is a strong look at just how the defendant, who signed a restrictive covenant, can move business in a manner that deprives his ex-employer of a fair chance to compete for the business on an even playing field. After hashing out a number of different tests, standards, or formulations, I think this is the inquiry for whether enforcement of a reasonably drafted non-compete is permissible to protect customer relationships. Anything broader restrains fair competition in the market, despite what the contract says.

To be sure, some industries are more susceptible to allowing enforcement. But many come nowhere close. I guess what I'm saying is this: I'm not tired of non-compete lawsuits. I'm tired of crappy non-compete lawsuits. And I'm absolutely done with lazy lawyering.

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As I often do, I checked out Russell Beck's Fair Competition Law and learned Pennsylvania legislators have proposed a California-style ban on non-competes. The text of House Bill No. 1938 is available here. Of more interest, candidly, was Russell's hat-tip to a recent article published by Norm Bishara and Evan Starr, The Incomplete Noncompete Picture. Bishara and Starr conclude that some basic questions are left unanswered by empirical research. One area that seems to be problematic for researchers is the ability to track employees over time, in terms of their job advancement and wage rates. And if you think about it, incentives for these employees may change.

For early-stage employees, they are very likely to change jobs and face advancement constraints posed by non-competes that they are unable to litigate. They have, and should have, very coarse feelings about them. But over time, they may change their mind, particularly if they are entrepreneurial and can benefit from restrictive covenants imposed on others.

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Finally, for this year, I thought the Sixth Circuit's opinion in Hall v. Edgewood Partners Ins. Center, Inc., No. 17-3744, is well worth a read for practitioners and laypersons alike. It addresses a rather common question I face regarding assignability of employee restrictive covenants following an asset sale. I will not deconstruct or case-summarize here, but I do provide a link to Judge Thapar's eminently readable opinion on an issue that is often misunderstood and extremely important to get right.

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With that, I bow out for 2017. See you in a week or so. And thanks again for reading!

The Reading List (2017, No. 30): Ex Parte Seizure Orders, North Dakota Non-Competes, and 9 Years of Blogging

Non-Compete and Trade Secrets News for the week ended December 15, 2017

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Ex Parte Seizures of Trade Secrets

The Defend Trade Secrets Act's provision for ex parte seizures of property has generated considerable buzz and commentary, much more so than the remedy's narrow application seems to be worth. I am interested in it only in the academic sense, not the pragmatic one.

If you want nuts and bolts as to how it works, look elsewhere. I'm not covering it here. (Though if you're truly jonesing for stuff, e-mail me and I'll send you a white paper on it.) The gist is simple: if a plaintiff feels a defendant has stolen trade secrets, it can petition the court for an order to retrieve the property containing those secrets.

The case law applying the ex parte seizure order is understandably thin, given how new the DTSA is. Still, there's more on this remedy than more conventional ones, simply because it takes longer to try a case to judgment than it does to pursue an emergency interim order. So we have some helpful cases.

The most interesting one so far is Blue Star Land Services, LLC v. Coleman, No. 17-931, a case pending in the Western District of Oklahoma. Of course, it involves an employee departure that appears to have gone completely haywire. And even less surprisingly given the venue, it involves the oil and gas industry.

I am showing at the bottom of this post the district court's original ex parte seizure order. This one is pretty interesting since it involves an application for electronic storage devices and a Dropbox account (really, credentials to get into that account). Misappropriation tools tend to be digital, presenting sticky issues for law-enforcement seizure efforts. Put another way, it's easier to seize a bag of dope than it is a cloud-based folder of PDFs.

The Order below is a bit broad, but perhaps necessarily so. That is, it orders the seizure of "[a]ny computers, computer hard drives, or memory devices in Defendants' possession that may contain [trade secret information]." It further extends to seizure of usernames and passwords, information even less apt to forcible retrieval but obviously related to the instrumentalities needed to facilitate the alleged theft. All in all, I think counsel did a good job proposing this quirky remedy, and the court did a nice job entering it given the difficult aspects of seizing digital assets.

North Dakota Non-Compete Decision

We now move upwards to North Dakota, awash in fracking material but mercifully bereft of non-compete litigation. Tell that, though, to one Dawn Osborne, an office supply house sales representative who signed a two-year non-compete with Brown & Saenger.

The problem for Osborne is that even though she worked in Fargo, her employer was a South Dakota company. And the non-compete agreement contained a South Dakota choice-of-law/choice-of-forum clause. But North Dakota prohibits non-compete agreements along the same lines that California does. The Supreme Court of North Dakota held the forum-selection clause invalid, stating "one may not contract for application of another state's law or forum if the natural result is to allow enforcement of a non-compete agreement in violation of North Dakota's long-standing and strong public policy against non-compete agreements." This shows the importance in non-enforcement states of establishing venue through a declaratory judgment action to challenge a forum-selection clause. Litigants in California and Georgia know this tactic well.

A link to Osborne v. Brown & Saenger, Inc. is available here.

My 9-Year (Blogging) Anniversary

I've been blogging about non-competes longer than I've been married.

If my wife is reading this, it feels like I just got married yesterday and I'm still in the throes of wedded bliss! I can't say the same about blogging, but it has been a fun journey to share my thoughts and ideas on here. When I originally started this, my goal was simply to provide helpful, informative content.

My style has changed a great deal from those first timid days when I wasn't sure what my voice would be. I suspect that's true for most people who provide commentary in this format. I was interested, after 9 years, to see which posts (out of more than 600) were read the most, figuring that there would be some sort of logical pattern.

Nope. Some of the most widely-read posts were fairly predictable, like my attack on one of the worst, if not the worst, non-compete I've seen. Then there were my twin posts (here and here) on Tradesman Int'l v. Black, which discussed an important Seventh Circuit case I litigated on bad faith in trade secrets cases. Among the more popular posts was a discussion on pursuing declaratory judgment actions (much like Ms. Osborne did in North Dakota) and ensuring you have a sufficiently ripe controversy. I get tons of e-mails, messages, and calls on that from other attorneys and potential clients.

By far my most popular post, though, was an assessment of what exactly a "solicitation" is in the context of restrictive covenant litigation. I figured it would be a good one, but the numbers were staggering. But even some really obscure, pedantic posts generated an abnormal number of hits, such as about using contention interrogatories. Or this one involving the mootness rule on appeal. Or for God's sakes this one, with the almost intoxicating title "Some Thoughts on Pursuing Expedited Discovery." Turns out, y'all are civil procedure nerds.

The future of legal blogging is a bit uncertain. In this particular area, it's easy to get drowned out by blogs that are manufactured and designed to attract viewers. Many are unhelpful, uninteresting, and apparently undertaken solely as part of a poorly conceived executive committee marketing endeavor. Still, there are many excellent sources of information online which add context and color to the discussion.

I don't where this, my blog, ends, but I know it does end. And I will know when the time is right. So God willing, it may have started before my marriage, but it won't outlast it. For now, thanks for reading.

Blue Star Land Services v. Coleman - Ex Parte Seizure Order (WD Okl) by Ken Vanko on Scribd

38 Minutes of Hell

I've represented defendants in some pretty stupid lawsuits. But 2017 is proving a banner year.

Earlier this year, I had client get served with a claim for inevitable disclosure of trade secrets. From the outset, the case was a pure head-scratcher because there were no facts that so much as hinted at trade secret misappropriation. And, here's one for ya, my client had a non-compete agreement. In point of fact, he did leave his job to go work for a company in the same industry.

So why on earth would the plaintiff not sue on its non-compete and proceed on the inevitable disclosure claim?

Simple.

The Illinois Appellate Court previously had found this company's non-compete unenforceable as a matter of law. It turns out the company learned nothing and never altered its void non-compete in any meaningful way. So, quite obviously, a contract-based claim would have gone nowhere.

So enter inevitable disclosure - the Kim Jong Un of legal claims. The theory was that my client couldn't work for a competitor on the grounds that he inevitably would disclose his former employer's trade secrets - in effect a diabolical work-around to a non-compete that the employer knew it couldn't enforce.

We had none of it, filed a motion to dismiss, and won. It was not close.

The plaintiff's lead attorneys - probably operating under directions from their client to abuse the legal process and prevent competition - then filed a bad-faith, frivolous amended complaint trying to add facts that would suggest some plausible risk that my client might disclose trade secrets.

The facts in this new complaint were so hopelessly convoluted they took about 3 pages of allegations to explain the theory, an ersatz diatribe laden with a cloak-and-dagger reference to a "Customer 1" (as if this is some sealed indictment). The logic was tortured and made no sense, due in large part to the fact that my client had no contact with "Customer 1" and the sequence of events was totally fucked up.

Luckily for the plaintiff, they had another attorney. A really good one, kind of a local counsel, who had common sense. And I feel this attorney must have put the brakes on all the dicking around after I notified everyone that Complaint 2.0 sucked just as badly as the first version.

So the case settled. The plaintiff released us from the non-compete it had and got zero out of the case except a bunch of obvious representations from my client that he had done nothing wrong. (This, I am quite certain, the plaintiff knew. But who the fuck cares about the truth when your client pays your padded bills?) There's no doubt the plaintiff dodged a sanctions motion (which I would have taken up to the appellate court for free in the unlikely event we lost).

But what did law firm insist on in the settlement agreement? A deposition of my client. That's right - a deposition after the case settled, after the claims had been released, and after the action had been dismissed with prejudice.

Who thinks of this garbage? Is this part of orientation day, where you get schooled on how to maximize the billing opportunities in your file? Or is this client-driven, an attempt to show that, frivolous suits be damned, I'll have the last word by golly!?!?

So the purpose of the deposition? To confirm my client was telling the truth in the settlement agreement when he represented he didn't take anything and wasn't soliciting his former clients. As if he would do that. In yet another epic move, the plaintiff's lawyer calls me and tells me he does this sort of deposition all the time.

By that, I now assume he meant that he files a bunch of stupid cases, dismisses them, and then bills for more work after the case is over. We agreed because we had nothing to hide and just wanted this over.

The deposition went forward yesterday. And that's where the title of this post - "38 Minutes of Hell" - comes in.

It wasn't 38 minutes of hell for me. And it damn sure wasn't 38 minutes of hell for my client. It was 38 minutes of hell for them. Because big law firm (two lawyers) and big corporation got to sit across the table from me and my client and see how utterly fucking stupid their lawsuit was. I hope it was as humiliating as it felt. I know it was.

Why do I share this story?

For all the non-compete apologists out there, another story needs to be told. This kind of bullshit that I just told in this blog post goes on every day. Lawyers who file and maintain frivolous anti-competitive suits need to know that it will not end well. It could be a big fee judgment. Or it may be an appellate court telling them their clients' non-compete is awful.

Or it could be just as satisfying - 38 minutes of hell, pure and utter humiliation, watching a replay of your crappy work before your very eyes.

The Reading List (2017, No. 29): Frivolous Litigation in the Northern District and Uber (Allegedly) Covers Up

Non-Compete and Trade Secrets News for the week ended December 1, 2017

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Another Dumb Lawsuit in Illinois

Sorry. I call it like it is. And this lawsuit was stupid. I've been waiting to write on it for some time, after the preliminary injunction order came out this Summer. But I've been busy. Now's the right time.

In an action filed in the Northern District of Illinois, a company called Cortz, Inc. sued an erstwhile acquirer of its business, Doheny Enterprises, Inc., and a purchasing manager named Tim Murphy? Why? Beats me. Here's the gist. And it should sound a familiar refrain for lawyers like me who see this kind of silly litigation nonsense every single week.

Cortz, a pool and spa products supplier, had a business with declining income. Doheny wanted to buy but was turned away. The parties had signed a non-disclosure agreement, which (like most in the transactional sphere) said Doheny couldn't hire Cortz's management-level employees for two years. Fair enough.

Enter Murphy. He was fired from Cortz after its eventual buyer, some outfit named Leslie's Pool Supplies, demanded a two-year non-compete from him. This was an entirely rational business decision to make for both. Leslie's saw a way to use market power and tie up a dude it felt might be key to its business. Rational, yes. Smart, maybe not. Murphy, to his credit, balked. He had been with Cortz for nearly 20 years, apparently had no ownership stake and no role in the sale, and all of a sudden some acquirer demands a non-compete. Murphy probably had a few sleepless nights, but good for him drawing the red line. Cortz (now a Leslie's subsidiary post-deal) fires Murphy. As was its right. Probably stupid, but whatever.

As one might imagine (you know, since there was a lawsuit), Murphy (out of work) hooked on with Doheny on a trial basis. Cortz then decides to sue, claiming this hiring violates the NDA's non-solicitation provision. (One almost can imagine the lawyers salivating over the prospect of potential work.) Cortz made that decision even though Murphy was not then employed by Cortz and even though Cortz made the business judgment to fire him. Of course, no one thought to draft the NDA in a way that covered past employees. But Cortz tried to make that claim during the litigation.

Big fail. Hard stop.

Judge Amy St. Eve, probably one of the top three district court judges in Chicago, had none of it, stretching no further than basic principles of contract construction. If you're going to draft a deal-based NDA with a restrictive covenant, damn sure better cover what you're trying to restrict. The linguistic gymnastics that Cortz tried to pull off here were not exactly compelling.

No judge should have any patience for this sort of after-the-fact hooha, in which a commercial contract party tries to use litigation to mulct an unambiguous agreement into one which they wish they had signed. (Doubtful, mind you, Doheny would have signed a naked restraint that barred its hiring of those not employed by Cortz. Why on earth would it do that?)

Nor was Judge St. Eve moved by Cortz's other claim, that Murphy used trade secrets of Cortz in negotiating vendor prices. (His prior job was purchasing, so apparently his knowledge of vendor costs was the motivating force here.) The factual basis for this claim, to be frank, is so hopelessly unintelligible that it might not be worth even reading it. (Still, if you care to do so, the link to the opinion is available here.)

Thankfully, the case was dismissed shortly after this injunction hearing. What exactly did Cortz get out of this? A totally silly lawsuit that probably cost it $150,000? For what gain? So it could thump its chest and blow off some steam? There's not a single fact in here suggesting financial loss much less an actionable claim of wrongdoing. Not one fact even hints at a threat of trade-secret misappropriation, or even opaque, intangible harm.

This is quite similar to two separate cases I've had this year, both of which ended unceremoniously in dismissal orders. One was a deal-based NDA where the plaintiff dicked around with the unambiguous language of a non-solicitation covenant during litigation, tried to twist it into something totally at odds with the plain terms of the agreement, and then suffered a quick defeat. The other was a case involving claimed trade secrets over knowledge of vendor costs - once again with no evidence of misappropriation. That case, too, ended quickly.

Knowing that other clients and lawyers have to defend such trifling drivel is something I can take comfort in. But it does not make it any more acceptable or tolerable. Cortz, and its counsel, are lucky this thing ended with no fee-shifting.

Waymo-Uber Litigation

Speaking of lawsuits gone bad, Uber's counsel did not have a good week.

In the trade-secrets trial of the century, Judge Alsup delayed the start of Waymo v. Uber indefinitely. The reason: Uber allegedly failed to disclose to Waymo evidence that suggests a corporate culture hell-bent on misappropriating trade secrets of rivals. It is never good, of course, when the judge tells you: "on the surface, it looks like you covered this up."

But so said Judge Alsup after a pre-trial evidentiary hearing that featured an ex-Uber employee named Richard Jacobs testifying about internal business practices at Uber that were, charitably put, shady. He testified, for instance, that Uber instructed employees to use disappearing chat apps and sent employees to bootcamp in Pittsburgh (of all places) and taught them how to impede and obstruct legal investigations.

The testimony, and forthcoming discovery, is highly relevant because it calls into question Uber's position that it has not used any of the allegedly confidential files taken by Waymo's ex-engineer, Anthony Levandowski, before he joined Uber. That said, Jacobs had no knowledge of Uber using any of Waymo's stolen files. Still, many trade-secrets cases are about circumstantial, not direct, evidence. And what Jacobs said certainly strengthens Waymo's case.

The sordid tale is making the rounds in all major news outlets. But I recommend The New York Times piece here and CNBC's coverage here.

The Reading List (2017, No. 28): Non-Compete Legislation Proposed in New Jersey and More Non-Compete Nonsense in Florida

Non-Compete and Trade Secrets News for the week ended November 24, 2017

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New Jersey Proposes Non-Compete Reform

New Jersey historically has been a strong non-compete enforcement state. In his terrific article Fifty Ways to Leave Your Employer: Relative Enforcement of Covenants Not to Compete, Trends, and Implications for Employee Mobility Policy, Norm Bishara concluded that New Jersey was the 7th strongest enforcement state.

As Russell Beck breaks down, though, pending legislation would alter New Jersey's place in the overall non-compete landscape. Russell runs through the particular changes that Senate Bill 3518 would make, comparing it to the annual non-compete debate in Massachusetts. I encourage you to jump to Russell's site and review the proposed list of changes.

Florida Court of Appeal Invalidates Non-Compete Injunction

Speaking of pro-enforcement states, Florida sits firmly atop the rankings. But employees are not without hope.

Last week, the Florida Second District court of Appeal in Salazar v. Hometeam Pest Defense, Inc., No. 2D16-4123 invalidated a non-compete injunction imposed on a "pest control technician." The employee's agreement prohibited him from engaging in "pest control, exterminating, fumigating, or termite control business" in five Florida counties after his termination. Salazar, it turns out, was fired. An apparently responsible, enterprising adult, he formed his own business after being tossed out of a job.

His employer sued and obtained an injunction in Florida state court. But the Court of Appeal vacated that injunction because the order failed to comply with clear procedural requirements for awarding this type of relief. It contained no findings at all. Whatever occurred in the trial court appears to be totally inexcusable. Leave aside the merits of this. If you represent an employer and seek injunctive relief, you must understand what the injunction order needs to say. I have had cases similar to Salazar. And it is shocking that this continues to occur.

On remand, I'd be interested to see how Hometeam Pest Defense articulates its legitimate business interest in preventing Salazar from working in his industry. The source of a potential client list for those in need of home pest control seems rather obvious...

You can link to the Salazar opinion by clicking here.

Confidentiality Agreements

Every day, we're witness to the unmasking of sexual harassment and misconduct charges leveled at media figures, politicians, and industry leaders. And the sad reality is that many claims are settled on the condition that the victim is muzzled by a confidentiality clause.

Elizabeth Tippett writes in the San Francisco Chronicle about the two principal uses of confidentiality agreements: ones signed at the start of employment and those signed as part of a settlement. And she rightfully questions how non-disclosure agreements (or NDAs) should not muzzle victims of abuse. I suspect we've reached the tipping point where these NDAs may face legislative scrutiny, at least when they relate to a public figure or use of public funds.

That subject matter is outside the scope of my expertise, but it's certainly an interesting and important one to follow as events unfold in near real time. I do think, however, there may be a spillover effect on the less newsworthy type of confidentiality agreement, the kind I tend to write about.

I have been writing for years that employment-based NDAs can operate like stealth non-competes. The general problem is three-fold:

1. The clauses contain open-ended, malleable terms that do less to define "Confidential Information" and more to reserve discretion for the company to label something confidential without repercussion.
2. Employees may have no way to monitor what information remains confidential and potentially protected once they are gone from a business.
3. The breadth of these clauses (including the lack of a durational limit) may enable an employer to state a colorable claim when competition arises and may open the door to expensive discovery.

Let me be clear: I am not subverting the current debate on sexual harassment-related NDAs in favor of this one. Both are important, but the use of NDAs in settlement agreements is far more troubling and deserves far more scrutiny. All I am saying is that practitioners should not just assume blindly that employment-based NDAs are perfectly legit. In many cases, they serve just as punitive of a restraint on fair competition as more overtly stated non-competes.

The "Inevitable Disclosure" Non-Compete Clause: What is it and for God's sakes...why?

Leave it to lawyers to see an obscure, narrow, and disfavored legal theory and then try to drive a mack f**king truck through it like it's the next great revelation.

To what might I refer? Try a non-compete on steroids, one so hopelessly inane and stupid that, at first blush, it actually has some appeal. Until, of course, you analyze it and put more than three minutes of thought into what you're doing.

I refer to this unicorn (in the eyes of some) as the inevitable-disclosure non-compete, the intersection of obscurity and protectionism. Allow me to explain how this bad-ass of contractual clauses works (until it's declared invalid).

Start with the basics.

An agreement may have several different types of post-employment covenants that bind the employee. You have your standard non-disclosure clause, which limits for a period of time the use of confidential information the employee learned. Then you have your non-solicitation covenant, which may preclude work with a group of valuable clients or recruitment of co-workers.

Hard stop for a second.

Those two types of covenants have some legitimate uses. But lawyers must still draft them reasonably and with sensible scope and time limits, even if a geographical one isn't needed.

I continue.

Your agreement may even have a general, market-based non-compete that bars work in a relevant industry.

Hard stop again.

This type of covenant needs to be even more carefully tailored, given its broad economic hardship on the person agreeing to the covenant. It limits work, not a type of work or a narrow subset of work activity. Here, we need activity limits, probably a shorter duration, and in many (but not all) cases a geographic scope confined to the employee's or company's sphere of influence.

An inevitable-disclosure non-compete is profoundly different. It requires the employee to refrain from accepting employment that may require him to use, disclose, or rely on the employer's confidential information. This precise type of covenant recently was held unenforceable in the case of Sullivan v. Gupta, M.D., LLC, No. 2:17-cv-609 (E.D. La. Aug. 10, 2017), because it failed to comply with the requirements in Louisiana for enforceable restraints of trade. (Among other things, State law requires an identification of which parish the non-compete applies to, and this one didn't cut the proverbial mustard.)

This is by no means the first case to find that a stealth non-disclosure agreement constitutes a non-compete.

I have my own experience with agreements like this, and it hasn't been positive (except for the fact that we've won). I blogged a few weeks ago about our trial and appellate victory in Automated Industrial Machinery, Inc. v. Christofilis, 2017 IL App (2d) 160301-U, where the Second District affirmed a fee award for my client, the defendant, of nearly $1.5 million.

One of the issues in that case concerned a non-compete, which the trial court found invalid for lack of consideration. The Appellate Court affirmed that ruling. But it didn't discuss the terms of AIM's non-compete. Had we not prevailed on the consideration issue, we had a strong argument on invalidity (not to mention lack of breach, for which there was no evidence).

That agreement was a true inevitable-disclosure non-compete, and I reprint below the operative restriction, which is stunning in scope:

Pretty rough start when you call your non-compete clause a "doctrine of inevitable disclosure." Who the hell thought of that one? Way to be pedantic, and nice way to warm up to a judge.

Beyond that titular snafu, look at the terms. Just two low-lights to point out:

(1) It applies in perpetuity if my client "could not help but rely on or use...or would otherwise inevitably disclose Confidential Information." Who makes that call? How is that agreement one containing definite terms, a plain requirement under contract law?

(2) The employee must provide the company with, basically, a job description and then beg for permission to take it. And the company has 20 days to decide whether "such ...employment is prohibited under the doctrine of inevitable disclosure."

So a clause like this, patently unenforceable and overbroad, vests the employer with sole discretion in perpetuity to decide whether a particular position would require the employee to use its confidential information.

This violates every conceivable principle of non-compete law. No certainty at all. Vast amounts of discretion reserved to the employer to veto an employee's career choice. No time limit to speak of (beyond what the employer itself decides is appropriate). Economic protectionism, to be sure, is not a legitimate business interest.

Bottom line: You use an agreement like this, you deserve to lose. And you will.

The Reading List (2017, No. 27): Judicial Rock-Stars,Forum-Selection Clauses, Attorney General Suits, and Worthless Blog Posts

Non-Compete and Trade Secrets News for the week ended November 10, 2017

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Vicarious Liability Ruling in Waymo v. Uber

For those of you following the driverless car technology trade secrets lawsuit between Google and Uber, I urge you to take a break from the day-to-day litigation filings. They're interesting, to be sure. But they ain't as interesting as this article in The Verge about the judge presiding over the case, William Alsup. I can't do it justice. Read it. It is stunning.

On to more mundane topics in this case: vicarious liability. One of the defendants, Otto Trucking, is out of the case. Judge Alsup granted its summary judgment motion, soundly rejecting Waymo's theory of vicarious liability for the actions of its founder, Anthony Levandowski, the former star engineer whose mass download of files is the heart of Waymo's suit. The court specifically relied on Waymo's strategy to divide and conquer, an effort that kept its claims against Levandowski out of court and the other defendants out of arbitration. As Judge Alsup stated, Waymo could not treat the two as "fungible targets."

The issue of vicarious liability doesn't arise much in the case law, at least in terms of nuanced legal analysis. One line of cases holds that respondeat superior, or vicarious liability, is not available under the Uniform Trade Secrets Act on the grounds that it is a common-law remedy preempted by the statute. Other cases take a more flexible, case-by-case approach, relying on the equities. Judge Alsup's idiosyncratic opinion avoids this discussion entirely, and it's bereft of a single case citation. That doesn't make it uninteresting or even wrong.

To me, the better approach - one textually consistent with the state and federal statutes - is to assess each defendant separately and to determine whether the relevant conduct for each amounts to misappropriation. This is, I think, what Judge Alsup is saying. He eschews any reference to statutory preemption, but it's just a different way of getting to the same result.

Maryland Non-Compete Agreements

Judge Paul Grimm, another total judicial rock-star, struck down a five-year, market-based non-competition clause against a high-level engineer, a ruling summarized in Allied Fire Protection, Inc. v. Thai, 2017 WL 4354802 (D. Md. Oct. 2, 2017). The particular non-compete had the feel of being an amalgamation of form clauses, designed specifically to instruct lawyers on how not to draft non-competes.

For starters, the duration was five years - something sure to align the court with the affected employee. Those limits may be acceptable in the sale-of-business context, where there's equal bargaining power, but they almost never have any justification for at-will employees. Then the employer decided to bar the employee from working in a "similar" business with any of the plaintiff's former, current, or future clients. No parameters. No illustration of why. No common sense.

Judge Grimm's ruling that the non-compete was not tailored to protect a business interest, in the main, is not surprising. But it is significant that it arose in the context of a motion to dismiss, and not after the evaluation of evidence at the injunction or summary-judgment stage. These kinds of early, case-dispositive rulings happen all too frequently, but they embody a pragmatic approach sorely needed in litigation featuring an asymmetry in resources. Judge Grimm was careful to note the lack of allegations demonstrating the need for such broad covenants, a point that enabled the early dismissal.

Practice tip: if you're an employer, never lead with a frivolous argument. For reasons that confound, the employer decided it was a good idea to challenge the removal petition - the case originated in State court - on the grounds that removal jurisdiction violated Article I, § 10 of the United States Constitution - the so-called impairment-of-contracts clause. But as Judge Grimm noted, that clause applies to the States, not the federal government (and it was, after the federal government's jurisdiction that was challenged constitutionally). This approach to argument does nothing to endear one to the court.

Forum-Selection Clauses Following Atlantic Marine

On to a more challenging venue issue.

Venue, jurisdiction, and choice-of-law are heavily litigated procedural issues in non-compete and trade secrets litigation. Though it may seem like in-the-weeds, lawyer drivel, questions of procedure can be consequential. For instance, a few years back, Illinois courts held that Florida choice-of-law clauses are unenforceable because they contravene public policy. If that issue weren't litigated, cases may have come out differently.

Venue clauses may be equally as important. The Supreme Court, in Atlantic Marine Construction Co v. U.S. District Court, endorsed forum-selection clauses and has held courts must honor them in all but the most unusual cases. Practically, that means that only certain public interests (outside of any interests the litigants assert) will justify a transfer when a forum-selection clause is present. That means litigants cannot get out of a choice-of-venue clause if it is inconvenient to them. Predictably, district courts have followed Atlantic Marine and have cut back on the number of transfer orders in federal non-compete cases.

The Third Circuit, this Summer, addressed a difficult question under Atlantic Marine: how should courts apply the ruling when some, but not all, defendants are bound to forum-selection clauses that designate different federal districts? Get ready for some freakin' procedure, folks...

According to the court, there's a four-step inquiry (always a BAD sign). First, courts will apply Atlantic Marine to parties with forum-selection clauses, meaning their claims may be severed and transferred to the agreed-upon forum.

Second, courts then consider public and private interests related to the non-contracting parties (such as a corporate defendant with no direct contractual relationship to the former employer). Here the factors may suggest that the same forum is appropriate for both the contracting and non-contracting parties. And that may be enough for the court to kick or keep the whole action.

Third, if the court finds that the first two steps point in opposite directions, then it must consider severing the claims. That means that a court may need to transfer the action as to some defendants while retaining jurisdiction over others. For instance, a court may lack personal jurisdiction over a non-contracting defendant. It couldn't keep the case, in that instance, for efficiency reasons.

Fourth, if the issue of severance is not clear, then the court must evaluate "efficiency" interests and the non-contracting parties' private interests. Here, a court could find that public interests "overwhelmingly" outweigh the parties' interest in upholding the venue clause and thereby decline to enforce it.

The application of this four-step approach is fairly intricate, but the circuit court's analysis will resemble many of the same issues that arise in multi-defendant non-compete litigation, where individuals have forum-selection clauses and the new employer operates in a venue remote from the contractually chosen one. A link to the opinion is available here.

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I am not sure I understand the point of drafting worthless, uninteresting blog posts. But if you are a blogger (or aspiring to start one), then I would highly recommend reading the latest entry on the Employment Trial Report. It's a classic example of what not to do. This post caught my eye when it showed up in a blast e-mail through Lexology and purported to "analyze" a $6.8 million trade-secrets judgment in California. Sounds f**kin' awesome, bruh!

No. For starters, don't waste everyone's time talking about a default judgment involving a defendant who has no legal representation and who "failed to participate in the subsequent damages proceedings." What is the takeaway there? It's good to have a lawyer? It's advisable to contest damages? It's best to show up in court for a hearing?

And then don't tell us how the judgment demonstrates that companies "need to be vigilant and act quickly and decisively when it appears" there's theft by an insider. Has anyone ever counseled an employer that, in such a situation, companies should be sluggish and move slowly and equivocally?

Sorry, but you clog up the blogosphere and so you deserve some opprobrium. Take a stand. Say something interesting. Offer a viewpoint. Don't spew drivel. And I could care less if the mandate from the firm's Executive Committee was to fill up the site with more posts...

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Thad Felton over at Greensfelder in Chicago writes about the Attorney General's non-compete lawsuit against Check Into Cash of Illinois, Inc., calling the move "somewhat unusual." A better description would have been "entirely appropriate." The Freedom to Work Act, signed into law effective January 1, 2017, bars employers from using covenants not to compete against so-called "low-wage employees." This is a move that has gained traction across the United States, as State legislatures seek to pare back the use of overbroad restraints that do nothing to promote economic freedom and serve only to stifle competition.

According to the Attorney General's suit, brought under the Freedom to Work Act, the common law, and the Consumer Fraud and Deceptive Business Practices Act, the affected employees were store clerks, assistant managers, and managers, many of whom were paid on an hourly basis. The non-compete, recited in a pain-staking block quote, is oppressively overbroad and disconnected to any legitimate business interest. It's obviously unenforceable, despite the thatchy, semantic jungle in which the contractual language is buried.

A copy of the Attorney General's complaint is available here.

The Reading List (2017, No. 26): Fee Awards, New Legislation, and Inevitable Disclosure

Non-Compete and Trade Secrets News for the week ended November 3, 2017

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Illinois Appellate Court Affirms $1.5 Million Fee Award

In a Rule 23 Order, the Second District Appellate Court affirmed a substantial fee award, nearly $1.5 million, for the prevailing defendant in a fiduciary duty, trade secret, and non-compete case. I had the privilege of representing the defendant, Tom Christofilis, at trial and on appeal. It is truly a pleasure working with someone who is so candid, forthright, and credible that you don't even need to prepare him for his testimony. Good things happen to good people.

The basis of the $1.5 million fee award is rooted in corporate law and in particular the bylaw indemnification provisions that cover former employees, officers, and directors of Christofilis' former employer, Automated Industrial Machinery, Inc. I have written before that corporate indemnity procedures, whether rooted in internal documents like bylaws or through state statute, are the potential game-changer and equalizer in competition suits. It is essential that counsel fully assess the interplay of indemnity when deciding whether and how to pursue competition claims against a former insider. It is just as crucial for defense counsel to understand the legal framework and position his or her client for fee-shifting.

The Appellate Court's judgment here demonstrates the raw power of indemnification, ruling that it covered non-compete, trade secret, and fiduciary duty claims. But to be sure, this case was very fact-specific, and the availability of indemnification depended at least in part on Christofilis' complete success, the sheer breadth of the claims asserted against him, and the anchoring fiduciary-duty cause of action that brought the bylaw provisions into play.

Keep in mind the deferential standard of review applicable in this case. No two indemnification cases are the same. And the trial court retains substantial discretion in making the call as to what claims are and are not indemnifiable, given the pleadings, legal theories, and evidence.

A link to the Rule 23 Order in Automated Industrial Machinery, Inc. v. Christofilis is available here.

New Legislation on Non-Competes

For those interested in legislative updates, Russell Beck's Fair Competition Law blog is a must read. Here are a few links that discuss pending and enacted legislation on non-compete law:

October 21: Russell reports on bills in New York and Pennsylvania concerning very different aspects of non-compete reform.

October 15: Russell discusses bills in several states, including changes to Oregon and West Virginia law. Oregon now bans non-competes for home-care workers, while West Virginia outlaws certain types of physician non-competes. This continues a trend of industry-specific reform, rather than wholesale, across-the-board changes.

The DTSA and Inevitable Disclosure

The Defend Trade Secrets Act contains a crucial limitation on injunctive relief: courts cannot issue an injunction under the DTSA to "prevent a person from entering into an employment relationship." And conditions on a person's employment must be based on threatened misappropriation, not merely on information the person knows. This limitation forms part of the compromise that resulted in the DTSA's near-unanimous passage. And it departs from the law of several states that allow for inevitable-disclosure injunctions that bar employment altogether.

Courts, though, are frequently terrible at applying the doctrine of inevitable disclosure. A perfect illustration comes from the case of Express Scripts, Inc. v. Lavin, where a federal court appears to have applied the DTSA to issue an injunction, at least in substantial part on inevitable disclosure. It could be that the court was loose with its analysis, since it already had found a non-compete agreement to be enforceable. And it could be that the court was relying on Missouri law. But it sure as hell does not help to have a poorly engaged analysis like this, suggesting that the DTSA does not mean what it says.

I reviewed the briefs filed by the plaintiff's law firm (one that must remain nameless). The brief never indicates for the court that the DTSA limits inevitable-disclosure injunctions. It lumps stuff together in a way that I feel is highly misleading. That's troubling, because the court was ruling on a petition for temporary restraining order. More concerning is the court's rote copying of the law firm's brief (down to the word). This amounts to judicial abdication, not bona fide engagement.

Let's be clear: the DTSA does not permit inevitable disclosure injunctions of the kind that the court in Express Scripts may have ordered. This decision carries no weight at all. I'll chalk this one up to an emergency ruling, a busy judge, and sloppy lawyering.

A copy of the ruling can be found online (I refuse to link to it or make your job easy). The case name is Express Scripts, Inc. v. Lavin, No. 4:17-cv-1423 (E.D. Missouri). The case since has settled.

Computer Fraud and Abuse Act

The most significant CFAA case of the past several years has been United States v. Nosal, which made two trips to the Ninth Circuit. The Supreme Court has declined to grant certiorari on Nosal's latest appeal. That cert petition made headlines when Nosal enlisted Supreme Court star litigator Neal Katyal on brief. Reuters discusses the Court's decision not to review Nosal and a separate CFAA case called Facebook v. Power Ventures.

Speaking of the CFAA, it continues to generate fewer cases of interest in light of the Defend Trade Secrets Act and the federal civil remedy now available for trade secret misappropriation. But some cases still wind through the system.

The sharp divide, which stems in great part from Nosal, concerns the application of one statutory term in the CFAA: the meaning of the phrase "exceeds authorized access." In the CFAA framework, this could mean an individual's misuse of protected information in violation of a corporate policy or common-law duty. Or it could mean something far narrower, namely an employee's improper access of files in the more objective sense without regard to state of mind or intent.

In Hedgeye Risk Management, LLC v. Heldman, the United States District Court for the District of Columbia adopted the narrower reading of the CFAA. In effect, it held that the statutory language is not concerned with the purpose for which the employee accessed the computer files. In so doing, the court joins the Second, Fourth, and Ninth Circuits. On the other side of the ledger, the Fifth, Seventh, and Eleventh endorse a purpose-based analysis, with the reasoning of those courts varying to some extent. As the district court in Heldman noted, the D.C. Circuit has not weighed in.

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Last week, I had the privilege of presenting at PLI in New York for a conference titled Trade Secrets 2017: What Every Lawyer Should Know. My panel consisted of Audra Dial from Kilpatrick Townsend & Stockton in Atlanta and John Siegal of Baker Hostetler. Our moderator was the great Vicki Cundiff of Paul Hastings. In the company of such luminaries, I felt like one of those fringe candidates on stage at a debate with the audience wondering who the hell I was. But my co-presenters were just terrific, and I thoroughly enjoyed it. For lawyers seeking to learn more about trade secrets, PLI offers a similar program via webcast next week.

Years back, I butted heads with Farmers Insurance in a number of non-competition cases, all of which settled pretty amicably. Apparently, Farmers has more problems to solve in this area, as reported by Insurance Journal. This suit sounds like it fits a familiar pattern in which an employee copied a number of documents and scooted off to a competitor. Of note, it's pending in California, which does have a trade-secret "exception" to its non-compete law.

Forbes has a long article about a burgeoning dispute between Citrix and Egnyte, one that brings to the fore the difficult procedural question that often arises when employees bolt for a California company but don't live in California.

Finally, if you're interested in further reading on an array of subjects, including the Waymo v. Uber case and Defend Trade Secrets Act case updates, I suggest linking to John Marsh's Trade Secret Litigator blog and his October monthly wrap-up. Lots of excellent source material here.

Much Overdue Case Law Update, Part II

This week, I offer my second case-law update, highlighting a variety of cases from around the company on topics of interest.

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Indiana Court Affirms Nationwide Non-Compete Agreement

Last Friday, the Court of Appeals of Indiana addressed the enforceability of a nationwide non-compete agreement for an engineer in the glass container business. The facts follow a typical pattern and deal generally with a senior-level engineer's move from Ardagh Glass Containers to Owens-Illinois. (As an aside, my paternal grandfather worked at Owens-Illinois for something like 35 years, during which time he consumed approximately 364,000 unfiltered Camel cigarettes working the assembly line, kind of a poor man's Don Draper in this respect.)

The employee's non-compete barred his work anywhere in North America and covered products over which the employee contributed development knowledge. The Court of Appeals, applying Pennsylvania law, enforced the non-compete, reasoning that both Ardagh and Owens competed nationally for the same type of customers. The court also remarked on a few typical facts in enforcing the preliminary injunction: (1) the employee's lack of candor on a few important facts that pertained to consideration and his "paid-leave" status at Owens-Illinois; and (2) the employee's lack of urgency in contesting the preliminary injunction and the appeal.

Of greater concern was the court's breezy trade-secrets analysis, which seemed to excuse an improper trade secrets identification at trial. The court all but found the injunction order was too broad in finding that Ardagh Glass identified 16 categories of trade secrets that were at risk. And it found Ardagh Glass would need to do better at a permanent injunction hearing. But the court was not engaged at all in assessing whether the at-risk secrets were actually "threatened" from misappropriation.

A link to the Court of Appeals' decision in Vickery v. Ardagh Glass Inc. is available here.

Forfeiture-on-Termination Clause Found Unenforceable

This one is crazy.

Kelley Rieves took a job as an assistant manager at Buc-ee's - a convenience store chain in Texas. It was at that point that Buc-ee's and its cadre of lawyers foisted upon her a historically stupid agreement. Rieves had the ability to decide how she was going to get paid - but it had to be a split between hourly wages and a flat monthly amount.

The catch? The flat amount had to be repaid to Buc-ee's if Rieves (at at-will employee) left within 5 years and didn't give 6 months' notice. This is known (by me) as the stick-without-the-carrot approach. Rieves and Buc-ee's re-upped a year later with a similar arrangement. Rieves, of course, left before the 5-year period ended and filed suit to declare the repayment provision unenforceable. Somehow, Buc-ee's convinced a state court judge to enter an award for payment of the entire amount owed (less taxes) under the contract's repayment clause.

Rieves appealed and, mercifully, won. Common sense prevailed. The reason? A repayment clause inhibits employee mobility. And unless the contract is consistent with non-compete law, it's unenforceable. The salary disgorgement provision, here, was totally unlike a prototypical forfeiture clause that would, for instance, cancel unvested stock options if the employee leaves to compete. Instead, it had no connection to incentivizing the employee's future performance, imposing an illogical and disproportionate penalty on an at-will employee's election to find a better job.

Buc-ee's should be publicly shamed for requiring Rieves to sign such a manifestly stupid agreement. For now, at least we have a public opinion - available here - that will prevent any sort of spurious litigation like this in the future.

Federal Circuit Affirms $91 Million Trade Secrets Verdict

In an unpublished ruling, the Court of Appeals for the Federal Circuit affirmed a $91 million trade-secrets verdict arising out of a business transaction gone wrong in the mitral-valve implant market. The particular invention at issue in that case arose after Neovasc sought to collaborate with CardiAQ and provide CardiAQ with ancillary products. During the course of their relationship, Neovasc apparently designed a competing transcatheter mitral valve implant that was similar to the one CardiAQ had developed. Neovasc learned of the TMVI device after signing a non-disclosure agreement.

The Federal Circuit approved the district court's award of $70 million in compensatory damages and $21 million in enhanced damages (along with an 18-month head-start injunction). The court rejected several claims Neovasc had made concerning the trade secret instructions given to the jury. And it further found CariaAQ's royalty damages testimony was supported by the evidence. This is yet another in a series of high-damage trade secrets judgments we've seen over the past several years.

A copy of the unpublished disposition is available here.

Much Overdue Case Law Update, Part I

It has been a while since I surveyed new reported decisions. So over the next few weeks, I'm going to summarize very briefly some of the cases I've seen that piqued my interest. The topics are varied, which is kind of the point.

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Non-Recruitment Clauses in Georgia

Georgia courts have proved to be tough venues when it comes to enforcing restrictive covenants. The prevailing rule of non-severability (for older agreements) generally means that an unenforceable restrictive covenant will void other similar covenants, even if they (standing alone) might be considered reasonable.

But as the Court of Appeals in Georgia recently noted, this non-severability rule does not apply to non-recruitment/no-hire provisions that bar employees from soliciting co-workers. Simply put, those types of restraints to do not rise to the upper tier of restrictive covenants. And so a void non-compete will not invalidate a reasonable no-hire clause. Other courts in other States seen to equate no-hire clauses with more restrictive covenants.

The case is CMGRP, Inc. v. Gallant, and it's written by Twitter star Chief Judge Stephen Dillard. A link to the opinion can be found here.

Seventh Circuit Discusses Sale of Business Non-Compete Dispute

The Seventh Circuit hears about one or two non-compete cases per year. They generally involve questions of Indiana, Illinois, or Wisconsin law. And those States have non-compete laws that are interesting and nuanced.

But E.T. Products, LLC v. D.E. Miller Holdings, Inc. did not require the court to delve much into substantive State law (here, Indiana) because the case hinged on whether certain activity amounted to a breach of the non-competition clause. The case involved a business acquirer's attempt to enforce a sale-of-business non-compete against the seller, after the seller rendered post-closing assistance to the acquirer's distributor. The court found that the seller's conduct did not amount to prohibited competition, saying that "a firm whose sole conduct in the relevant market consists of distributing one manufacturer's product plainly isn't that manufacturer's competitor." The court also noted the seller terminated its relationship with the distributor and rendered no assistance at all once the distributor began competing on some product lines. The facts, as the court recited them, amply demonstrated the defendant's good faith and intent to adhere to the non-compete. The pursuit of the case appeared to be vast overreach.

The opinion, written by Judge Diane Sykes, is available here.

The Protocol for Broker Recruiting and "Good Faith"

Those of us who represent advisory firms and financial advisors have a good deal of familiarity with the Protocol for Broker Recruiting. But many don't. The Protocol's design is to foster client choice, a recognition of the intensely personal nature of the advisory relationship. More broadly, the Protocol represents an industry solution to expensive, uncertain non-compete litigation - in effect, a contractual way around flexible legal standards being applied by judges who generally lack deep knowledge of particular industries.

The Protocol's basic tenets allow an advisor to avoid liability if she takes client information to her departing firm (generally, it must be related to those clients she serviced and the information must be provided to her firm on departure). If followed in good faith, the employee will not be bound by any contractual restrictive covenant or held liable under trade secrets law pertaining to the taken (and disclosed) client information and subsequent solicitation efforts of those clients.

The term "good faith" is a bit nebulous and fact-specific. If an employee engages in bad faith, the she cannot avail herself of the Protocol and courts default back to any signed agreement the employee has. The district court decision in UBS Financial Svcs., Inc. v. Fiore, No. 17-cv-993, 2017 WL 3167321 (D. Conn. July 24, 2017), contains a lengthy discussion of good faith in the context of advisor departures. Ultimately, it found that despite some wrongful behavior, the defendants did not forfeit the Protocol's protections since their notice was proper and they took only information pertaining to their client lists. The court focused on the fact that UBS still had all the information it needed to contact the same clients.

In the past, courts have found that the Protocol did not apply when employees took information beyond what was allowed, altered information in a client database, or deleted contact information in a work e-mail account. Like most good-faith inquiries, each case turns on its facts. The Fiore decision is interesting and well worth a read because it is not particularly clear cut factually. The departing defendants complied with the Protocol in the most crucial ways but still did some things that appeared designed to hinder UBS' ability to retain its wealth-management clients.

The Farewell to Judge Posner: Ten Opinions for Non-Compete Lawyers to Read

Less than two weeks ago, Judge Richard Posner left the Seventh Circuit Court of Appeals. Immediately. No senior status. No notice. Just up and left. Presumably to hang out with his cat, Pixie.

And like that, the most widely cited appellate judge since at least Henry Friendly (and probably well before that) was gone.

His post-retirement exploits are being met with more than a little skepticism and head-scratching, as he promptly released a long book airing some of his dirty laundry with his Seventh Circuit colleagues. The early returns are, how shall we put it, not great.

I met Judge Posner once, when I was a 3L at the University of Illinois College of Law and editor of the Moot Court Board. He had come down for the annual competition, and I was sort of coordinating it. He was as you'd expect. Passively intimidating, somewhat aloof, lost in his thoughts. Not on my dream dinner guest list. I've argued three cases in the Seventh Circuit but never had him on a panel, which was probably just as well. Oral arguments with him are just torture to listen to, as the whole thing seemed to resemble a reflexive exercise in self-indulgence.

In truth, I can't say he was my favorite judge. I liked his writing style, to a point, and I appreciated the unconventional approach he took with cases. I think his overly academic view of non-compete agreements, however, was not at all pragmatic (even though he claims to have been the great pragmatist). I found many of his recent opinions to be a bit out there, such as his bizarre concurring opinion in the Hively case that brought sexual orientation within Title VII's sexual discrimination ambit. And I certainly don't think he was the best judge on his own court. I always have felt Judge Frank Easterbrook was stronger, more consistent, and more clear in his writing. And even Judges Diane Sykes and David Hamilton have approaches to deciding cases that I can grasp with much greater confidence.

But, he's Posner and everyone seems to worship him. So some tribute seems in order. Though the Seventh Circuit only decides one or two trade secrets or non-compete cases per year, his influence in this area is profound with a number of important decisions under his belt. I thought I'd offer a farewell to Posner with a top ten list of cases he wrote that influence this field of law:

10. Outsource Int'l, Inc. v. Barton, 192 F.3d 662 (7th Cir. 1999). This is the one dissent from Judge Posner I am including, and it's from an appellate decision that endorses a staffing industry non-compete. Posner thought the result was correct in principle, but not under Illinois law. So he dissented. But in doing so, he outlined the historical hostility to non-competes and concluded "[t]here is no longer any good reason for such hostility." He does a nice job wading through the policy choices behind non-compete enforcement and the courts' antagonism to these restraints. But, I think he has it all wrong. His concerns are, no doubt, academically grounded. But he largely misses the point that a disparity in bargaining power, coupled with asymmetrical resources, create a large deadweight loss to society from breezy judicial attitudes towards non-compete arrangements.

9. Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 626 F.3d 662 (7th Cir. 2010). This is a trademark case, but it's instructive for analyzing fee petitions. Trademark defendants can obtain fees only if the case is exceptional. In Nightingale Home Health Care, Judge Posner says that a defendant can meet the exceptionality standard by showing the case was an "abuse of process," designed to impose disproportionate costs on the defendant. This standard mirrors that under the Trade Secret Act's "bad faith" provision and reflects a pragmatic approach. Just as important, Posner cautions against an elaborate state-of-mind inquiry on the fee petition, preferring that fee-petition hearings be summary proceedings rather than drawn-out affairs.

8. Confold Pacific, Inc. v. Polaris Indus., Inc., 433 F.3d 952 (7th Cir. 2006). I call this a "trade-secrets light" case. It confronts the frequent fact-pattern of what happens when one party, bound by a contractual relationship, tries to subvert contract law and claim a host of related remedies from a relationship gone wrong, such as unjust enrichment and trade-secrets theft. Judge Posner deftly explains, as if lecturing the plaintiff's counsel, what trade secrets are and how they fit into a broad continuum of other intellectual property and informational rights.

7. Rockwell Graphic Systems, Inc. v. Dev Indus., Inc., 925 F.2d 174 (7th Cir. 1991). This is a terrific read for trade-secret practitioners who are litigating the issue of whether one made reasonable efforts to keep proprietary information secret. Factually, the case addresses a common issue. Can one claim trade-secret status for information that is disclosed to others - in this case, vendors who receive part drawings? Judge Posner says yes and explains in very simple, easy-to-understand language why that's the case.

6. Micro Data Base Systems, Inc. v. Dharma Systems, Inc., 148 F.3d 649 (7th Cir. 1998). The first of three damages cases, this one involving a claim of trade-secret misappropriation by a software developer against a buyer who disclosed the program to a third-party. The proof of damages was relatively simple, in effect allowing a non-expert to base a claimed damage award on projected lost future sales. Judge Posner rejected the argument that because the testimony was self-serving, it was inadmissible. The case also contains a good discussion of the point made earlier in Rockwell Graphic Systems - that some trade secrets (to be useful) must be disclosed to others. That won't destroy secrecy in the legal sense.

5. ATA Airlines, Inc. v. Federal Express Corp., 665 F.3d 882 (7th Cir. 2011). From a simple damages presentation to a downright intimidating one, Judge Posner vacated a jury verdict in excess of $65,000,000. Key to the discussion was the failure of the parties and the district court judge to understand the expert's damages testimony. Posner tears into the regression analysis that ATA's expert applied to the breach-of-contract suit. He makes a couple of crucial points. First, if a district court judge doesn't understand what the expert is saying he can either require him to speak in plain English or appoint the court's own expert. Second, he concluded the attorneys in the case did not understand the regression analysis central to the damages presentation (kind of shocking, given the size of the damages requested and granted by the jury). And as if to prove a point, Posner spends pages dissecting the damages analysis and ripping it apart, concluding ultimately that the expert's "regression had as many bloody wounds as Julius Caesar when he was stabbed 23 times by the Roman Senators led by Brutus." For the lawyers in the case, this must have been a tough one to read.

4. Schiller & Schmidt, Inc. v. Nordisco Corp., 969 F.2d 410 (7th Cir. 1992). Another case on damages, this one with a simpler and punchier analysis, is one of my favorite opinions. It is decidedly defense friendly, but the gist of it is that courts must pay close attention to expert witness damages theories and not let those witnesses get away with what Judge Posner calls "simplistic extrapolation and childish arithmetic." Posner's opinion chastises both the expert and the plaintiff for their failure to attribute lost revenue to causes unrelated to the act of trade secret misappropriation. This is a must-read for any defense counsel litigating a claim on damages where several intersecting causes may have played a part in the alleged loss.

3. Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466 (7th Cir. 1983). The hidden gem of all Judge Posner cases. I love this decision for many reasons. The gist of the action was Grip-Pak's claim that baseless anti-competitive litigation behavior violated antitrust laws under the Sherman and Clayton Acts. The essence of Posner's commentary is found in this passage: "The existence of a tort of abuse of process shows that it has long been thought that litigation could be used for improper purposes even when there is probably cause for the litigation; and if the improper purpose is to use litigation as a tool for suppressing competition in its antitrust sense...it becomes a matter of antitrust concern."

2. Roland Machinery Co. v. Dresser Indus., Inc., 749 F.2d 380 (7th Cir. 1984). If you didn't study this case in law school, you're very old or went to a shitty law school. This is the case that in effect teaches the preliminary injunction standard and how courts should evaluate the standard in light of the evidence. Not only does Judge Posner give an in-depth analysis of the "inadequate remedy at law" test, but he also gives courts a new way to think about how the traditional four injunction factors fit together. He articulates what is still called the "sliding scale" analysis, in which courts weigh the moving party's likelihood of success and the relative harms associated with grants or denials of injunctive relief. In other words, he reformulates the test so that courts may balance one against the other. A strong case for injunctive relief does not require a substantial showing of harm from a denial of that relief.

1. Curtis 1000, Inc. v. Suess, 24 F.3d 941 (7th Cir. 1994). At the time, Curtis 1000 seemed like a garden-variety non-compete case in which the employer simply failed to demonstrate a protectable interest supporting the covenant. But the case has taken on added importance in Illinois, given the ongoing and unresolved debate on just what constitutes adequate consideration for at-will employee restrictive covenants. In classic Judge Posner style, he dissects the justification for the consideration rules and then reconstructs them in a way that is readable and satisfying.

Judicial Engagement and Non-Compete Litigation

The lack of judicial engagement is a serious thing - particularly in competition disputes.

What do I mean by judicial engagement? For simplicity, I mean a bridge between judicial activism and judicial restraint. It's a method of evaluating and deciding cases, plain and simply.

The term is somewhat in vogue in libertarian circles (which I inhabit) and used when litigants challenge economic regulations on the grounds that they are irrational or impinge on personal liberties.

So when a government enacts a law that restricts economic freedom - say, an occupational licensing requirement - those who favor judicial engagement do not want courts to abdicate their roles. That is to say, courts should not simply defer to whatever the legislature says is a rational justification for the law.

Rather, courts must engage with the evidence and ensure that it supports the need for the law. And on that score, advocates for judicial engagement would argue that protectionism is never a valid governmental interest. Unfortunately, the black-letter rules that attend government economic regulation all but invite trial judges to defer entirely to whatever the legislature says. An overreading of these black-letter principles leads courts to the wrong results, in which they often time rely on theoretical assumptions or abstract hypotheticals.

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The same decisional framework, judicial engagement, applies to non-compete cases because the applicable legal rule already demand a searching analysis without granting undue deference to the party in whose favor a non-compete runs. So that seems easy enough and a perfectly reasonable analogue to the traditional playing field for the theory of judicial engagement.

I digress for a second, but only a second. As my colleague Jonathan Pollard writes in a recent post, non-competes are first and foremost restraints of trade. Unless we are discussing a negotiated agreement (such as in a sale of business) with real consideration, non-competes are not traditional contracts. They may not even be contracts at all.

When an employer involves the government, here the judiciary, the same liberty concerns arise - with just as much force as an irrational, generally applicable regulation that the legislature passes. The problem that has vexed courts, lawyers, and litigants is how to engage or grapple with the facts in a non-compete dispute. To be sure, judicial restraint is no method of deciding such cases at all.

But many courts employ a burden-shifting approach that all but requires an employee to prove the impossible: that the employer lacks a legitimate business interest in enforcing a restraint. Allowing employers, for instance, simply to mouth some variant of a "legitimate business interest" is not the proper way for a judge to sanction a restraint and impede someone's livelihood.

Let me be clear: nothing in the philosophy of judicial engagement calls upon courts usurp their roles. Just as it is crucial for courts to assess the rationale for governmental regulations of economic activity, it is a moral imperative for them to scrutinize an employer's attempt to enforce through court order a restraint of trade. This is particularly so given the dead weight that enforced and unenforced non-competes have on the economy and productivity.

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Let's take an example of judicial abdication, rather than engagement. The Kansas case of Servi-Tech, Inc. v. Olson is as bland of a non-compete case as you can get. I've handled some variation of this dispute for 20 years, and this fits within the most basic of fact-patterns, summarized (for simplicity as follows):

• Employee signs a non-compete agreement, containing a broad 2-year market-based restraint wherever the company's clients are located;
• Employee's non-compete also contains a 2-year restriction against soliciting clients with whom he had contact;
• Employee works for 2 years before the company terminates him;
• Employee receives nothing but his job for signing the agreement;
• Employee is assigned 10 clients when he starts;
• Employee's friends and family then comprise 5 additional clients after he starts;
• After being fired, employee stays in the same field and works only with his 5 "friends-and-family" contacts.

The district court enforces the non-solicitation agreement against the employee and includes within the injunction the 5 new clients that joined the company because of their relationship with the employee.

I am simplifying the case for purposes of this discussion. And there are elements of the court's ruling that are proper (if not in reasoning then certainly in result). For instance, the court found the market-based restraint unenforceable, which seems fairly obvious.

But I am concerned about the reasoning in the injunction opinion, particularly its lack of engagement with the facts. On this score, the court seems just to be accepting at theoretical value whatever the employer has said in defense of its broad restraint.

For instance, in discussing the employer's proof of a legitimate business interest, the court said this:

"Olson received some special crop consulting and agronomy training from Servi-Tech, so Servi-Tech has a legitimate business interest to enforce the non-competition clause to protect its investment in him. This, coupled with Servi-Tech's interest of not losing customers, justifies the non-solicitation provision ... that prevents Olson from contacting customers he had worked with as a Servi-Tech employee."

Let's examine this further.

First, the court never describes any aspect of this "training" that the employee, Olson, received. Training if an oft-asserted, rarely convincing "interest" in need of protection. Would companies fail to train people if they lacked non-competes? Does all training incentivize performance or build goodwill? Hardly. The interest is easy to state in the abstract but it often falls apart under even the most basic level of scrutiny. More problematically, the court in Servi-Tech never explains why the particular training received justifies a 2-year work ban (to be fair, it later found the non-compete unreasonable on other grounds). Put differently, the court abdicated its role to assess the proper fit between the asserted interest and the scope of the restriction. 

Second, the interest in "not losing customers" is hardly one to justify a restraint of trade. True, there may be something special about a particular customer relationship - exclusivity, large up-front capital investment - that could justify a customer-based restraint. But no business wants to lose customers. Classifying this as an interest, much less a proven rationale, is judicial abdication and the product of undue deference to whatever the employer says.

Third, the court uses this purported interest to justify a restraint on all customers Olson had worked with at Servi-Tech. But what about the five family members who came to Servi-Tech because of Olson. What does the court say about them: "...they still became Servi-Tech's clients - not Olson's. Once they became Servi-Tech's clients, Servi-Tech was entitled to the benefits of doing business with them." True. That only is relevant, though, for the time Olson worked there. Nothing indicates that Servi-Tech did anything to create goodwill with those small group of personal contacts Olson had. Perhaps they would have come even if Servi-Tech had a poor marketplace reputation. In all likelihood, their fealty was to Olson himself. The court simply used an overbroad rationalization - "they're the employer's clients" - to justify a restraint that limits not just Olson's rights, but those of the clients themselves.

This is not to say, of course, that enforcement of all non-solicitation covenants leads to the same analytical problem. All I am asking for is for courts to engage and not defer. Engage with the facts, as well as the logical conclusions and implications of what the employer alleges.

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So what must judges do to engage, rather than defer or abdicate? Here are some preliminary suggestions and steps:

(1) Hold the employer to a strict burden of proof. In some states, this is not an option for judges. Unless the legislature has made a qualitative judgment concerning this burden, the employer must bear it at all times.

(2) Evaluate the fit between the asserted business interests, the evidentiary facts, and the scope of the restriction. It is not enough for the employer simply to state an interest it deems worthy of protection. The court must demand hard evidence that supports an interest over and above protectionism. And the employer must demonstrate the logical relationship between the interest and the restraint's reach.

(3) Disaggregate special skills, training, or customer relationships from those that are ordinary or common. Too often, we see employers recasting easily acquired industry knowledge (even if through day-to-day work experience) as trade secrets. And training that is conventional on-the-job training, or gained via everyday work experience, is often something that employers provide regardless of having a signed non-compete. 

(4) Examine the time period of the restraint and assess its fit to the asserted interest. It is insufficient for courts to point to some case 20 years ago where a durationally similar non-compete was enforced. That is not engagement - that's punting.

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Of course, these are just starting points. I have advocated, too, other approaches such as "quick-look" hearings on adequacy of consideration or facial validity of the agreement. Those may have some utilitarian, pragmatic benefit. But if we're constrained at this point to evaluate all non-compete cases individually, then judges really need to start doing so. No more deference to the employer. No more blind acceptance of allegations that have some theoretical appeal. And no more forgiveness of evidentiary lapses.

The Reading List (2017, No. 25): Eighth Circuit Affirms Damages Award in West Plains Litigation

Non-Compete and Trade Secrets News for the week ended September 1, 2017

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Jury Verdict Affirmed in West Plains Litigation

The Nebraska case of West Plains, LLC v. Retzlaff Grain is unique in that it belongs in the limited group of trade secrets and unfair competition cases to proceed to jury verdict. The case is garden-variety lift-out, engineered by a former owner of the plaintiff who systematically recruited away key employees to replicate his former business. A Nebraska jury returned a verdict of $1,513,000 in compensatory damages (along with compensation forfeiture in varying amounts against certain ex-employees).

The case is valuable for its discussion of a very common tort that usually accompanies trade-secret or non-compete claims: interference with business relationships. In most cases, interference can be privileged or legally justified if it's for competitive purposes. But interference can be tortious (or wrongful) if done in bad faith, with improper means, or as part of a fraudulent or illegal scheme. Here, the Eighth Circuit found that enough evidence of unjust interference was present in the employees' mass exodus from their former employer. Specifically, the employees used customer lists, documents, and other internal confidential information to plan a coordinated departure. Too, the plaintiff introduced communications that suggested the defendants knew they were acting inappropriately in using their then-employer's information to establish a turn-key competitor from day one.

West Plains shows the value that ancillary tort claims can play in competition cases. With the right facts, it is not always necessary to have a restrictive covenant. To be sure, finding evidence of bad faith or willful misconduct is not easy. But employees seem to keep finding a way to leave digital fingerprints all over the place.

A link to the opinion is available here.

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Privilege in the Waymo/Uber Fight

Privilege issues in trade secrets litigation can arise in a variety of ways. But those issues extend well beyond garden-variety claims of attorney-client or work-product privilege.

The trade-secrets battle-of-the-millennium in Waymo, LLC v. Uber Technologies, Inc. has featured several intricate disputes over production of privileged materials. In July, Magistrate Judge Corley denied Waymo's efforts to compel Anthony Levandowski - the ex-Google engineer in charge of driverless car technology - to produce documentation and media that would have reflected his retention of 14,000 files belonging to Waymo and that concerned its proprietary LiDAR technology. Given that Levandowski's pre-termination conduct posed a risk that he would be prosecuted for trade-secrets theft, the court found that compelling the production of those files would implicate his Fifth Amendment privilege against self-incrimination.

But Judge Corley's order denying Waymo's motion to compel went further. She extended the Fifth Amendment privilege to a privilege log that Levandowski had to prepare. The court had required Levandowski to develop the privilege log with enough substance so that Waymo could respond to his Fifth Amendment arguments. As her ruling shows, even the outlines and parameters of a privilege log, without a corresponding production of the logged materials, can provide enough of a link to a potential crime so as to implicate constitutional concerns.

The Order is available at Waymo, LLC v. Uber Techs., Inc., No. 17-cv-939, 2017 WL 2864854 (N.D. Cal. July 5, 2017).

An Analysis of Two California Cases. Big California Cases.

Over the past week, we received two big decisions from two different California courts on two vastly different issues. One was a decision that has no precedential effect, but which garnered a lot of headlines, particularly in tech circles. That case was decided correctly. The other received almost no attention, but which is precedential. And that case was wrongly decided.

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The Computer Fraud and Abuse Act and Data Scraping

I have a been a long-time critic of the CFAA, a law put together so haphazardly and over so many years that it is difficult to resolve important questions of statutory interpretation. The key legal question that arises under the CFAA - at least in the context of employee claims - is when one exceeds her authorized access to a protected computer or accesses that computer "without authorization." Put another way, many cases have analyzed claims of insider misappropriation within the CFAA's statutory text, even though it seems clear the statute didn't really have that type of case in mind.

But applying the "without authorization" language of the CFAA goes beyond just employment claims, as reflected in the important case of hiQ Labs, Inc. v. LinkedIn Corp. The case involved another question of statutory interpretation: whether the CFAA prohibited access to public LinkedIn profiles after LinkedIn revoked permission to such access.

A little background is essential, since the idea of an open internet is crucial to the case's disposition. hiQ Labs is a data analytics company. Its business model revolves around scraping data off of LinkedIn users' public profiles. It then can offer products to its client companies: an analysis of which employees are likely to leave or be recruited (such as by employees updating their skills and other LinkedIn fields) and a separate analysis of which skills individual workers possess.

LinkedIn demanded that hiQ stop scraping public data from its website, relying on its User Agreement and the term that prohibited data collection. hiQ sought injunctive relief, arguing that LinkedIn's threats undermined its business model and violated state statutory and common law. The analysis, though, hinged on the CFAA - for a reading of that statute in LinkedIn's favor would have preempted the offensive claims hiQ brought.

The district court found that the CFAA likely did not preclude hiQ's claims, and it relied on two general concepts. First, it distinguished other cases where CFAA infractions involved access to private, as opposed to public, data. And second, it looked to the law of trespass to conclude that, despite LinkedIn's supposed revocation of hiQ's access to public profiles on its website, hiQ hadn't circumvented any sort of authentication system to view those profiles. This analysis incorporated Professor Orin Kerr's influential Columbia Law Review article that discussed the law of trespass as explaining some of the ambiguity and context of the "without authorization" language in the CFAA.

The decision seems intuitive and obvious, but in large part it was constrained by the text of the CFAA itself, which has confounded courts over the years. Thank goodness we have thought leaders like Orin Kerr to make sense of the statute and provide the appropriate analytical framework on which courts can reconcile very difficult questions. Public websites need to be open and accessible, and operators cannot erect artificial barriers under the guise of an unread, boilerplate user agreement to invoke the specter of criminal liability for viewing and using what's freely available.

Malicious Prosecution

The second decision comes from the Supreme Court of California, where the Court absolved Latham & Watkins for its pursuit of a frivolous trade-secrets claim many years ago. That case made its way up to the Court of Appeal and is somewhat well-known to lawyers (like me) who believe that a robust, common-sense interpretation of "bad faith" is essential to defense fee-shifting claims. The case of FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (2009), was the precursor to Parrish v. Latham & Watkins. In FLIR Systems, the Court of Appeal affirmed a fee award for the prevailing defendants after the plaintiff's trade-secret claim (and the expert testimony girding that claim) fell apart at trial. As the Court had held, the plaintiff's modest success in defeating summary judgment did not insulate the bad-faith fee award. That was a sound rationale: trade secrets plaintiffs often dodge, duck, and distract a trial court into believing there are factual issues in need of resolution.

Unfortunately, for the defendants in that case, the summary-judgment "loss" hurt them in a later, independent malicious prosecution claim that they brought against Latham & Watkins, the law firm that represented FLIR Systems. The Court of Appeal held that the so-called "interim adverse judgment" rule barred the malicious prosecution claim, a decision the Supreme Court of California affirmed last week.

That rule says that a malicious prosecution plaintiff cannot maintain a claim if a "trial court judgment or verdict" is rendered in favor of the plaintiff in the underlying suit - here the FLIR Systems litigation. The problem with applying this rule is that FLIR Systems' defeat of a summary judgment motion is not a judgment in and of itself. It's an interlocutory order that is not even appealable and is a reflection of the trial judge's perception that fact issues need a full airing in court. Indeed, a denial of a summary judgment motion is not a ruling on the merits in any sense.

California is ground-zero for crummy trade secrets claims, so the ruling is an important one. It is particularly important if the plaintiff cannot satisfy a fee award or if the pursuit of the claim caused collateral damage that flowed from the pursuit of the action (such as lost investors, delayed market entry, jettisoned goodwill). A fee award won't cover those damages, but a malicious prosecution suit will. The "interim adverse judgment" rule, applied to denials of summary judgment motions, is an artificial construct that insulates attorneys who pursue claims without an objective, good-faith basis. That they survive a summary judgment is by no means a reflection of the suit's merit, since the trial is where the facts are most tested. Courts need flexibility to assess whether the entirety of the prosecution was malicious, not whether the plaintiff's lawyers were skilled enough to defeat a motion.

An obvious consequence? California courts may see less summary judgment motions. Why risk it after the Latham & Watkins case?