Non-Compete and Trade Secrets News for the week ended June 30, 2017
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LinkedIn "Solicitations"
From the Appellate Court of Illinois this week, we got treated to a non-precedential Rule 23 order that addresses a fertile area of non-compete litigation. What effect should courts make of LinkedIn invitations to a former employee's co-workers and do those invitations amount to improper "solicitation"?
The court in Bankers Life and Casualty Co. v. American Senior Benefits LLC, 2017 IL App (1st) 160687-U, says no. Justice Simon's order gives a nice summary of similar cases from various jurisdictions and notes that the issue of "solicitation" really turns on the content of the social media post, communication, or invitation to connect. In this particular case, the LinkedIn e-mails were "generic" and mentioned nothing about either the employee's past or current employer. Nor did the e-mails invite former co-workers to leave their job or view an employment opportunity posting.
UPDATED (Aug. 8, 2017): The Appellate Court has now published the Bankers Life opinion, apparently agreeing that it sets forth a new rule of law or helps clarify an existing one. The link to the published opinion can be found here.
The Defend Trade Secrets Act and "Inevitable Disclosure"
John Marsh of Bailey Cavalieri has a very insightful post on the Third Circuit's non-precedential order in Fres-Co Systems USA, Inc. v. Hawkins. The case was a typical one in the non-compete field. Sales executive with influence over key accounts bolts for a competitor and then gets sued.
After the district court entered a preliminary injunction in favor of the employer, the Third Circuit reversed and remanded for it to consider the injunction standard more fully. As John notes, however, some of the language in the Third Circuit's order was a little loose (at best) concerning the threat of "irreparable harm" posed by the employee's move to a competitor. In particular, some of the order's reasoning implicitly suggests "inevitable disclosure" may be grounds for enjoining conduct under the Defend Trade Secrets Act. But it never comes right out and says that.
I think there's a danger of reading too much into this non-precedential order. For starters, the court lumped together its irreparable harm analysis for all the substantive legal claims, appearing never to appreciate the limits on injunctive relief under the DTSA. (The court never cites or quotes the limitation at all.) It could have instructed the district court to reconsider the irreparable harm factor in light of the DTSA, but failed to do so. Opportunity missed. That said, the plaintiff moved as well under the Pennsylvania Uniform Trade Secrets Act, which does not contain any DTSA-like limits on injunctive relief. And to be sure, the employee's non-compete would provide a separate grounds on which to analyze irreparable harm.
The Hawkins order is available here.
Trade Secrets Damages
Quantlab Financial prevailed in the Fifth Circuit Court of Appeals, which upheld a jury verdict of $11.2 million stemming from a claim of trade-secrets misappropriation. The case arose before the financial crisis and concerned the then-nascent business of high-frequency trading. The facts sounded a familiar refrain, with the evidence demonstrating large-scale copying and appropriation of trading technology source code and improper computer access by insiders.
The Fifth Circuit's unpublished disposition is located here.
Nevada Changes Non-Compete Statute
Last year, the Nevada Supreme Court in the case of Golden Road Motor Inn v. Islam held that courts could not modify overbroad non-competes, a decision I analyzed at some length. The analysis endures; the rule doesn't. Effective June 3, 2017, Nevada has a new non-compete statute that requires courts to modify overbroad non-competition covenants - a wholesale abrogation of Golden Road Motor Inn. The new law seems to strike a more employee-friendly balance, however, in that it specifically provides that a covenant cannot restrict a former employee if a customer "voluntarily chose to leave and seek services from the former employee." That's a gaping carve-out, sure to invite fact disputes about whether the customer voluntarily left. In other words, Nevada places customer choice above any countervailing employer interest.
Russell Beck's Fair Competition Law blog has an analysis of the new law here.
The Non-Compete PR Crisis
The firm Butzel Long released a Client Alert (really, a white paper) that deconstructed a number of problematic non-compete cases involving low-wage or mid-tier employees. This terrific publication addresses the Jimmy John's, Amazon.com, and Goldfish Swim School cases and offers practical guidance about how these companies could have avoided the nightmare public-relations fallout. I highly recommend this release for any practitioner who works in the non-compete and trade secrets field.
Non-Compete Crackdown in Australia?
The Guardian reports on concerns that the use of non-competes is stifling innovation in Australia, noting the concentration of market power in select industries. The report notes the same general concerns that reform advocates in the United States have, with the most compelling concern being the declining number of start-ups. This concern is all the more acute as the large technology companies continue to expand their reach into non-traditional markets - Amazon's pending acquisition of Whole Foods simply the latest example.
Uber's "Reason to Know" of Trade-Secret Theft
Android Headlines reports that members of Uber's board saw evidence of trade-secret theft concerning Anthony Levandowski's alleged appropriation of LiDAR technology from Google/Waymo. Uber was required to file an accounting with the court disclosing the names of people who may have had access to the files at the heart of Waymo's case. Uber has resisted disclosing a critical due diligence report authored by a firm before it acquired Levandowski's start-up, which likely will color Waymo's theory that Uber had "reason to know" that Levandowski was using Waymo's materials on behalf of Uber. That "reason to know" standard is crucial if Waymo is going to hold Uber liable. This discovery dispute appears to be the make-or-break moment in the biggest trade-secret action of the past several years.
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I will be taking a few weeks off from updating this blog. See you in mid-July!
Friday, June 30, 2017
Wednesday, June 21, 2017
North Carolina's Odd Rule on Appealing Injunctions
Lawyers deal with rules that are substantive and procedural.
For the most part, substantive rules - those governing the merits of a claim - contain some flexibility. That is particularly true in non-compete cases, where the flexibility is a direct reflection on the fact-specific nature of each dispute. Bright-line rules don't work as well because they are subject to manipulation. That is, they run counter to the idea that judges must rule on each case according to the facts presented.
Procedural rules, however, benefit from rigidity. Take the rules concerning time limits on when a party must file a case or respond to discovery. Without bright-line standards, there are no rules for how to conduct the litigation. The whole system becomes a game.
One area of procedural law that is smartly inflexible is appellate jurisdiction.
For many years, courts have noted that clear jurisdictional rules are essential. The Supreme Court, for its part, has worked in recent years to eliminate holes in old case law suggesting that some cases are "practically" or "effectively" final for appeal purposes.
Rules of appellate jurisdiction are crucial in non-compete disputes. Why? Most cases are practically decided at the preliminary injunction stage. In federal court, a grant or denial or injunctive relief affords the litigants a right to appellate review, even if the action itself may result in a damages trial down the road. This basis for appellate jurisdiction - known to lawyers as an "interlocutory" appeal - is crystal clear and provided for by statute.
Not all State court systems follow the federal rules, of course. In Illinois, rulings on temporary restraining orders are immediately appealable. Not so in federal court. One particularly odd rule, though, comes from North Carolina.
There, appeals from interlocutory orders - which preliminary injunctions are, because they are not "final" - are allowed only if they deprive the appellant of a "substantial right that will be lost absent review before final disposition of the case."
North Carolina's rule, as applied to preliminary injunction orders, is hard to square with the common-sense proposition that, above all, jurisdictional rules must be clear to lawyers and litigants.
What, for instance, is a "substantial right"?
That issue has led to some strange decisions involving non-compete cases. For instance, the North Carolina appellate courts have found that bona fide non-competition clauses that bar work in an industry rise to the level of a "substantial right." But they also have found that restraints on working with customers (non-solicitation covenants) do not meet this standard. The idea is that these activity-based restrictions do not prevent a person from earning a living. They merely limit it.
But what if the individual's customer contacts are her stock in trade - the way she makes her living? How is an appellate court to make that decision in the context of a jurisdictional inquiry? In fact, a 2015 case called A&D Environmental Services v. Miller noted this very problem. The court dismissed an employee's appeal from a preliminary injunction order, which limited his work with certain customers. The rationale was that the order only limited his right to earn a living but did not prevent him from doing so. In a footnote, the court then stated the problem with this approach: "We do not suggest that an injunction which merely prevents a person from working with a defined group of customers could never affect a person's substantial rights."
Good luck figuring that out when deciding whether to appeal.
I have no idea why North Carolina courts would embrace such an odd jurisdictional regime, where the appellate court must examine the substance of an injunction order to evaluate the "substantial right" argument and then determine whether the appeal from that order was jurisdictionally sound. The court's work, by that point, is already done. Why not rule on the merits? The obvious danger in avoiding the merits is that by the time the case reaches true finality, the non-compete will by over and therefore moot.
Strangely, North Carolina's appellate jurisdiction analysis may actually incentivize employers to seek narrower relief. If an employer, for instance, has two different restraints to enforce, why go for the broader non-compete if you can foreclose immediate appellate review by enforcing through a preliminary injunction only a non-solicitation covenant? This decisional process, of course, depends on the strength of the evidence and what the employer is trying to protect. But the current appellate jurisdiction case law would seem to discourage enforcement of broader, market-based restraints against salespersons whose value to a third-party employer lies in her customer contacts.
To be sure, that is an odd way for appellate courts to handle non-compete cases and injunction orders. Jurisdictional rules - as opposed to substantive ones - are meant to provide firm, clear guidance. North Carolina's framework does anything but.
For the most part, substantive rules - those governing the merits of a claim - contain some flexibility. That is particularly true in non-compete cases, where the flexibility is a direct reflection on the fact-specific nature of each dispute. Bright-line rules don't work as well because they are subject to manipulation. That is, they run counter to the idea that judges must rule on each case according to the facts presented.
Procedural rules, however, benefit from rigidity. Take the rules concerning time limits on when a party must file a case or respond to discovery. Without bright-line standards, there are no rules for how to conduct the litigation. The whole system becomes a game.
One area of procedural law that is smartly inflexible is appellate jurisdiction.
For many years, courts have noted that clear jurisdictional rules are essential. The Supreme Court, for its part, has worked in recent years to eliminate holes in old case law suggesting that some cases are "practically" or "effectively" final for appeal purposes.
Rules of appellate jurisdiction are crucial in non-compete disputes. Why? Most cases are practically decided at the preliminary injunction stage. In federal court, a grant or denial or injunctive relief affords the litigants a right to appellate review, even if the action itself may result in a damages trial down the road. This basis for appellate jurisdiction - known to lawyers as an "interlocutory" appeal - is crystal clear and provided for by statute.
Not all State court systems follow the federal rules, of course. In Illinois, rulings on temporary restraining orders are immediately appealable. Not so in federal court. One particularly odd rule, though, comes from North Carolina.
There, appeals from interlocutory orders - which preliminary injunctions are, because they are not "final" - are allowed only if they deprive the appellant of a "substantial right that will be lost absent review before final disposition of the case."
North Carolina's rule, as applied to preliminary injunction orders, is hard to square with the common-sense proposition that, above all, jurisdictional rules must be clear to lawyers and litigants.
What, for instance, is a "substantial right"?
That issue has led to some strange decisions involving non-compete cases. For instance, the North Carolina appellate courts have found that bona fide non-competition clauses that bar work in an industry rise to the level of a "substantial right." But they also have found that restraints on working with customers (non-solicitation covenants) do not meet this standard. The idea is that these activity-based restrictions do not prevent a person from earning a living. They merely limit it.
But what if the individual's customer contacts are her stock in trade - the way she makes her living? How is an appellate court to make that decision in the context of a jurisdictional inquiry? In fact, a 2015 case called A&D Environmental Services v. Miller noted this very problem. The court dismissed an employee's appeal from a preliminary injunction order, which limited his work with certain customers. The rationale was that the order only limited his right to earn a living but did not prevent him from doing so. In a footnote, the court then stated the problem with this approach: "We do not suggest that an injunction which merely prevents a person from working with a defined group of customers could never affect a person's substantial rights."
Good luck figuring that out when deciding whether to appeal.
I have no idea why North Carolina courts would embrace such an odd jurisdictional regime, where the appellate court must examine the substance of an injunction order to evaluate the "substantial right" argument and then determine whether the appeal from that order was jurisdictionally sound. The court's work, by that point, is already done. Why not rule on the merits? The obvious danger in avoiding the merits is that by the time the case reaches true finality, the non-compete will by over and therefore moot.
Strangely, North Carolina's appellate jurisdiction analysis may actually incentivize employers to seek narrower relief. If an employer, for instance, has two different restraints to enforce, why go for the broader non-compete if you can foreclose immediate appellate review by enforcing through a preliminary injunction only a non-solicitation covenant? This decisional process, of course, depends on the strength of the evidence and what the employer is trying to protect. But the current appellate jurisdiction case law would seem to discourage enforcement of broader, market-based restraints against salespersons whose value to a third-party employer lies in her customer contacts.
To be sure, that is an odd way for appellate courts to handle non-compete cases and injunction orders. Jurisdictional rules - as opposed to substantive ones - are meant to provide firm, clear guidance. North Carolina's framework does anything but.
Friday, June 16, 2017
The Return of the Fourth Justice: My Concurring Opinion in BHB Investment Holdings v. Ogg
My dear readers may not realize that, despite not being a Michigan attorney, I recently sat as the Fourth Justice on the Court of Appeals of Michigan for the case of BHB Investment Holdings, LLC v. Ogg, or as it should be known for eternity the "Goldfish Swim School Case."
For reasons I haven't quite figured out, my concurring opinion is not available online. Nor does the official reporter appear to recognize my contribution to the Court. So I thought I'd repost my concurrence here.
For reasons I haven't quite figured out, my concurring opinion is not available online. Nor does the official reporter appear to recognize my contribution to the Court. So I thought I'd repost my concurrence here.
BHG Investment Holdings, LLC
d/b/a Goldfish Swim School of Farmington Hills
v.
Steven Ogg and Aqua Tots Canton, LLC
No. 330045
Court of Appeals of Michigan
February 21, 2017
Vanko, J., concurring in the judgment and ruminating about other stuff.
"You know, we're living in a society !"
-- George Costanza (Seinfeld, multiple episodes)
I have an Uncle Frank (doesn't everybody?), who is as salt-of-the-earth as you can get. He built his own house, tinkers with small engines, and drinks beer at the Moose Lodge on Sundays. Uncle Frank understands things viscerally and intuitively, in a way that speaks to a man's soul. In other words, you can't bullshit the old curmudgeon. When I see him at family gatherings, he always wants to hear what "the bastard lawyers" are up to. But he says it somewhat in jest.
The analysis of this case is no more difficult than asking a simple question: What would Uncle Frank do?
***
I know of two people named Steven Ogg. One is a character actor in TV serial dramas like The Walking Dead and Better Call Saul. The other - the defendant in this case - is a kid who works a job that pays him just enough that one day, if he's frugal, he might be able to buy a used scooter or rent a cheap apartment.
Ogg, a former competitive swimmer, teaches little urchins how to swim at a quaint little place called Aqua-Tots. I mean, seriously, how cute is that name? Unfortunately for Ogg, he used to work at Goldfish Swim School doing basically the same thing. For his work as an instructor, Ogg netted $10.50 per hour. At some point, Goldfish promoted him to a position called "deck supervisor," which sounds more walking around than swimming. For this step up the corporate food-chain, Goldfish upped Ogg's pay by $1.50 per hour. He must have celebrated with a small Slurpee.
Aside from paying Ogg what amounts to minimum-wage work, Goldfish had him sign a one-year non-compete agreement that said he couldn't teach tots to swim within a 20-mile radius. Goldfish later terminated Ogg - apparently deciding he wasn't valued enough. Ogg did what most enterprising young adults do. He found another job.
It was at that point that Goldfish lost its proverbial shit. Ogg did not - it turns out - earn his next meager paycheck by flipping burgers at McDonald's, folding shirts at the Gap, or futzing around with neighborhood landscape projects. He took the job at Aqua-Tots, which technically put him in "breach" of the 20-mile restriction Goldfish had him sign. The record does not reveal any dickering over terms or conventional contract negotiation.
For reasons that confound and amaze, Goldfish decided it was worth the money to sue and keep Ogg from working at Aqua-Tots. It was at this point that the clerk's office should have read the complaint and sent it to my Uncle Frank. He would have called up the courthouse and demanded someone toss the whole file in the shredder. No one would have been worse off had this occurred.
True, this sounds a bit third-world, but these are the times in which we live. Autocrats are celebrated these days. And a hell of a lot of lawyers' fees could have been saved. We'd end up at exactly the same place. Since Goldfish admitted that Ogg hadn't taken anything and hadn't tried to solicit parents of the kids he taught, this third-world approach would have made no difference. I could end my analysis right there.
But I won't. I'll go beyond the framework we should use - WWUFD? - and ruminate some more.
***
The majority's opinion is kind of a boring, hackneyed read. Ultimately, it reaches the right result, but whatever happened to snark and sarcasm? Has it no place in appellate jurisprudence?
I give the majority some credit. It at least engages Goldfish's arguments and tries to reason through its motivations for filing suit. I would like to have seen some acknowledgment that Goldfish filed this suit not because Ogg was some grave competitive threat, but because it wanted to send a message to other competitors to stay away from its employees. In other words, I just would have liked to have seen more skepticism through the process of judicial engagement.
So I shall be that skeptic.
Goldfish claims that by using this non-compete agreement for instructors like Ogg it was trying to protect its "techniques and ways in which we do things in our curriculum." I've seen more specificity in a Trump policy proposal. What exactly is Goldfish talking about? Ogg, again a competitive swimmer, obtained the same kind of training and knowledge that any worker anywhere would gain just by working. Every business has "techniques" and "ways in which [they] do things." That hardly justifies the need to claim secrecy over everything or to prevent the movement of labor.
Goldfish even lets the parents observe these "techniques." True, most parents these days dick around on their cellphones while Little Johnny or Jane thrashes around in the water. I mean, what's more important than checking out what Aunt Judy has to say about planting her begonias? But Goldfish wants parents to know these techniques, presumably so they can work with their kids and help them learn. Without this transparency, the whole swim class would be kind of pointless. The curriculum is built on the opposite of secrecy.
The majority also skirts over an obvious point. Goldfish paid Ogg in such a way that undercuts any argument that it "invested" in some proprietary training. So we know that can't be what Goldfish is trying to protect. To be sure, there are a number of municipalities where Ogg earned less than the legal minimum wage. And the 20-mile restriction is awfully significant given that Ogg's pay scale may not have allowed him to cover the cost of driving outside the red zone. If I made as much as Ogg, I'd be eating bologna sandwiches and drinking Natural Light.
I am quite troubled by the majority's statement that it was "reasonable to prevent Ogg from using specific Goldfish methods for a one-year period." That doesn't at all square with its comment that those same instructional methods were not proprietary since they were displayed "in front of hundreds of people daily." The majority seems perfectly willing to accept the contract language for what it is, without evaluating whether the restriction itself protected anything the law deems reasonable. Since when was economic protectionism a legitimate business interest that warranted the court's indulgence?
***
We could have made short work of this case. This whole proceeding is uncomfortable and annoying, like water in the ears or that lingering chlorine smell that won't go away. For its part, I hope Goldfish is embarrassed by this. We should have issued a more straightforward ruling that said its non-compete is categorically unenforceable against retail employees who can't possibly cause damage or further a corporate espionage scheme.
I fear we are entering a new realm in which employers will use restrictive covenants by asserting broad, vague interests that are wholly disconnected from the realities of the environment in which they operate. And by doing so, they can tie up competitors and employee in expensive litigation, the cost of which is disproportionate to any conceivable economic gain they ever could possibly obtain through a victory.
We have a name for this in the law: abuse of process. Uncle Frank has a name for this at the Moose Lodge: a pile of crap.
***
For these reasons, I concur in the judgment and remain deeply skeptical that we live in an ordered, civilized society.
The analysis of this case is no more difficult than asking a simple question: What would Uncle Frank do?
***
I know of two people named Steven Ogg. One is a character actor in TV serial dramas like The Walking Dead and Better Call Saul. The other - the defendant in this case - is a kid who works a job that pays him just enough that one day, if he's frugal, he might be able to buy a used scooter or rent a cheap apartment.
Ogg, a former competitive swimmer, teaches little urchins how to swim at a quaint little place called Aqua-Tots. I mean, seriously, how cute is that name? Unfortunately for Ogg, he used to work at Goldfish Swim School doing basically the same thing. For his work as an instructor, Ogg netted $10.50 per hour. At some point, Goldfish promoted him to a position called "deck supervisor," which sounds more walking around than swimming. For this step up the corporate food-chain, Goldfish upped Ogg's pay by $1.50 per hour. He must have celebrated with a small Slurpee.
Aside from paying Ogg what amounts to minimum-wage work, Goldfish had him sign a one-year non-compete agreement that said he couldn't teach tots to swim within a 20-mile radius. Goldfish later terminated Ogg - apparently deciding he wasn't valued enough. Ogg did what most enterprising young adults do. He found another job.
It was at that point that Goldfish lost its proverbial shit. Ogg did not - it turns out - earn his next meager paycheck by flipping burgers at McDonald's, folding shirts at the Gap, or futzing around with neighborhood landscape projects. He took the job at Aqua-Tots, which technically put him in "breach" of the 20-mile restriction Goldfish had him sign. The record does not reveal any dickering over terms or conventional contract negotiation.
For reasons that confound and amaze, Goldfish decided it was worth the money to sue and keep Ogg from working at Aqua-Tots. It was at this point that the clerk's office should have read the complaint and sent it to my Uncle Frank. He would have called up the courthouse and demanded someone toss the whole file in the shredder. No one would have been worse off had this occurred.
True, this sounds a bit third-world, but these are the times in which we live. Autocrats are celebrated these days. And a hell of a lot of lawyers' fees could have been saved. We'd end up at exactly the same place. Since Goldfish admitted that Ogg hadn't taken anything and hadn't tried to solicit parents of the kids he taught, this third-world approach would have made no difference. I could end my analysis right there.
But I won't. I'll go beyond the framework we should use - WWUFD? - and ruminate some more.
***
The majority's opinion is kind of a boring, hackneyed read. Ultimately, it reaches the right result, but whatever happened to snark and sarcasm? Has it no place in appellate jurisprudence?
I give the majority some credit. It at least engages Goldfish's arguments and tries to reason through its motivations for filing suit. I would like to have seen some acknowledgment that Goldfish filed this suit not because Ogg was some grave competitive threat, but because it wanted to send a message to other competitors to stay away from its employees. In other words, I just would have liked to have seen more skepticism through the process of judicial engagement.
So I shall be that skeptic.
Goldfish claims that by using this non-compete agreement for instructors like Ogg it was trying to protect its "techniques and ways in which we do things in our curriculum." I've seen more specificity in a Trump policy proposal. What exactly is Goldfish talking about? Ogg, again a competitive swimmer, obtained the same kind of training and knowledge that any worker anywhere would gain just by working. Every business has "techniques" and "ways in which [they] do things." That hardly justifies the need to claim secrecy over everything or to prevent the movement of labor.
Goldfish even lets the parents observe these "techniques." True, most parents these days dick around on their cellphones while Little Johnny or Jane thrashes around in the water. I mean, what's more important than checking out what Aunt Judy has to say about planting her begonias? But Goldfish wants parents to know these techniques, presumably so they can work with their kids and help them learn. Without this transparency, the whole swim class would be kind of pointless. The curriculum is built on the opposite of secrecy.
The majority also skirts over an obvious point. Goldfish paid Ogg in such a way that undercuts any argument that it "invested" in some proprietary training. So we know that can't be what Goldfish is trying to protect. To be sure, there are a number of municipalities where Ogg earned less than the legal minimum wage. And the 20-mile restriction is awfully significant given that Ogg's pay scale may not have allowed him to cover the cost of driving outside the red zone. If I made as much as Ogg, I'd be eating bologna sandwiches and drinking Natural Light.
I am quite troubled by the majority's statement that it was "reasonable to prevent Ogg from using specific Goldfish methods for a one-year period." That doesn't at all square with its comment that those same instructional methods were not proprietary since they were displayed "in front of hundreds of people daily." The majority seems perfectly willing to accept the contract language for what it is, without evaluating whether the restriction itself protected anything the law deems reasonable. Since when was economic protectionism a legitimate business interest that warranted the court's indulgence?
***
We could have made short work of this case. This whole proceeding is uncomfortable and annoying, like water in the ears or that lingering chlorine smell that won't go away. For its part, I hope Goldfish is embarrassed by this. We should have issued a more straightforward ruling that said its non-compete is categorically unenforceable against retail employees who can't possibly cause damage or further a corporate espionage scheme.
I fear we are entering a new realm in which employers will use restrictive covenants by asserting broad, vague interests that are wholly disconnected from the realities of the environment in which they operate. And by doing so, they can tie up competitors and employee in expensive litigation, the cost of which is disproportionate to any conceivable economic gain they ever could possibly obtain through a victory.
We have a name for this in the law: abuse of process. Uncle Frank has a name for this at the Moose Lodge: a pile of crap.
***
For these reasons, I concur in the judgment and remain deeply skeptical that we live in an ordered, civilized society.
Friday, June 9, 2017
"Misappropriation" Is Where It's At
When I speak on trade secrets law - which is fairly often - I get skewered by some BigLaw types and self-described "experts" for suggesting lawyers need to focus on the element of "misappropriation."
So step back.
If a plaintiff files a lawsuit and argues trade secrets misappropriation, what does it need to prove?
Really stretching you, but here goes...
(1) That it has a trade secret; and
(2) That the defendant misappropriated it.
And that would be it.
My point is this, in a very general sense: As a defendant, I can't control what type of garbage the plaintiff pulls by claiming some very vague concept rises to the level of a trade secret - that is, it's so valuable that its competitors will gain a distinct economic advantage if secrecy is lost.
To parrot the person who currently is renting office space in the White House....trust me, folks. I have seen this so many times, I get physically ill. Misinformed plaintiff, bolstered by bumptious counsel, takes some "information" that couldn't possibly be valuable secret data and claims some monopolistic right to it against a former insider.
I know it's crap, and my client knows it's crap. But the legal system is not set up to get to a merits decision quickly on whether some concept, idea, or document is a "trade secret."
My other (also somewhat general) point is this: So listen, here's what I (and my client) can control. Whether the defendant engaged in an act of "misappropriation." Some know-it-all reading this post will rebut me and say that you can't determine whether there's been an act of misappropriation without knowing the trade secret.
To that, I say go find another practice area. I'll take my chances. Give me a judge or jury that uses common sense and won't be mesmerized by intricate (often contrived) theoretical arguments. All you're left with is trying to prove what your trade secret is and then dancing around the issue of how that involves my client. If my guy did nothing wrong, I'll win and you'll get your ass kicked again.
***
What do I mean by misappropriation? Theft, basically. In plain English, did you take something with you or share something to someone else that breached a confidentiality obligation?
There is a statute, of course, so using the Uniform Trade Secrets Act, I'll condense what the law commissioners have to say. Basically, a plaintiff can prove "misappropriation" in one of three ways:
So step back.
If a plaintiff files a lawsuit and argues trade secrets misappropriation, what does it need to prove?
Really stretching you, but here goes...
(1) That it has a trade secret; and
(2) That the defendant misappropriated it.
And that would be it.
My point is this, in a very general sense: As a defendant, I can't control what type of garbage the plaintiff pulls by claiming some very vague concept rises to the level of a trade secret - that is, it's so valuable that its competitors will gain a distinct economic advantage if secrecy is lost.
To parrot the person who currently is renting office space in the White House....trust me, folks. I have seen this so many times, I get physically ill. Misinformed plaintiff, bolstered by bumptious counsel, takes some "information" that couldn't possibly be valuable secret data and claims some monopolistic right to it against a former insider.
I know it's crap, and my client knows it's crap. But the legal system is not set up to get to a merits decision quickly on whether some concept, idea, or document is a "trade secret."
My other (also somewhat general) point is this: So listen, here's what I (and my client) can control. Whether the defendant engaged in an act of "misappropriation." Some know-it-all reading this post will rebut me and say that you can't determine whether there's been an act of misappropriation without knowing the trade secret.
To that, I say go find another practice area. I'll take my chances. Give me a judge or jury that uses common sense and won't be mesmerized by intricate (often contrived) theoretical arguments. All you're left with is trying to prove what your trade secret is and then dancing around the issue of how that involves my client. If my guy did nothing wrong, I'll win and you'll get your ass kicked again.
***
What do I mean by misappropriation? Theft, basically. In plain English, did you take something with you or share something to someone else that breached a confidentiality obligation?
There is a statute, of course, so using the Uniform Trade Secrets Act, I'll condense what the law commissioners have to say. Basically, a plaintiff can prove "misappropriation" in one of three ways:
- Improper acquisition. This is just what it sounds like. You acquired a trade secret by violating some duty the law recognizes. This is often a contract - like a non-disclosure agreement - but it also means the general obligation of loyalty employees have to their employers. That means you can't take an engineering drawing, e-mail yourself some business plan, or access a computer to download source code to a thumb drive. Those are all affirmative acts that one engages in to "acquire" information that may be trade-secret level data.
- Improper disclosure. This, too, ain't that hard. A "disclosure" means that one with access to a trade secret tells someone else what it is. This could be a new employer, a potential business partner, or a vendor. The idea here is simple - the act of misappropriation involves some third-party, who in turn may be liable to the trade-secret owner if that third-party had reason to know something nefarious was going on.
- Improper use. A plaintiff also could try to show improper use of a trade secret. This one is harder to prove, and it's here where the "inevitable disclosure" theory often creeps into litigation. In reality, the catch-phrase "inevitable disclosure" was the wrong way to describe the theory from the beginning - it should have been the "inevitable use" doctrine. This branch of "misappropriation" is the toughest to resolve in discovery, because it often pits varying theories of what exactly the defendant is using against the breadth of what the plaintiff is trying to protect. An example helps. Suppose the plaintiff claims that a new, unreleased product in development constitutes a trade secret. What if the defendant leaves and develops his own product that may share some similar functionality or engineering concept, but that differs in significant ways from what the plaintiff had in development? Aggressive plaintiffs' lawyers always will conjure some narrative to implicate "improper use." But the defendant will usually have the equities and the optics on his side.
***
Remember, too, that the available remedies often are directly linked with which branch of misappropriation is at issue. A case involving improper "use" is going to raise the specter of damages, whereas a quick injunction on improper acquisition or disclosure may mean that damages takes a back seat.
All that said, if you're a defendant or a defendant's counsel, focus on misappropriation. Doing so will allow you to shift the narrative and tell an understandable story to the court. You did nothing wrong regardless of what kind of story the plaintiff is telling about the value of its own information.
Friday, June 2, 2017
The Reading List (2017, No. 21): Levandowski's Gone
Non-Compete and Trade Secrets News for the week ended June 2, 2017
***
Waymo v. Uber
We know what the lead story is: Waymo's suit against Uber. It seems every week produces new drama in the trade secrets case of the year. Why is it such a deal? We're talking about a technological development - self-driving cars - that may be among the most significant in the past hundred years.
Anthony Levandowski - the star engineer behind Waymo's self-driving car technology - has been fired from Uber. Presumably, his termination is a direct result of Judge Alsup's rulings and orders compelling Uber to account for the 14,000 files Levandowski apparently took before leaving Google. That spelled a clear division in where Uber and Levandowski were headed with this dispute.
For a thorough deconstruction of Levandowski's firing, I highly recommend reading John Marsh's excellent analysis. I couldn't do it better and won't try.
Trade Secrets Injunctions
One of the more vexing procedural questions in trade secrets cases is the extent to which wrongful conduct will be enjoined. To be sure, that was one of the flashpoints of Judge Alsup's ruling that effectively barred Levandowski from working for Uber in any competing capacity. But it didn't strictly limit what Uber could do to develop self-driving technology independent of Levandowski.
On a far more mundane level (all cases are more mundane) is Systems Spray-Cooled, Inc. v. FCH Tech, Inc., No. 16 CV 1085, out of the Western District of Arkansas. There, the court grappled with how much competitive activity to enjoin after two ex-employees had misappropriated certain design drawings and pricing information. The misappropriation finding came as a direct result of the defendants' destruction of hard-drive evidence. Without a governing non-compete, the court was faced with how far to extend a trade-secrets injunction. And here, given the evidence destruction, the court carved a middle ground - barring not only the "use" of certain information (assuming it was still available after the destruction) but also some business activity that arose from the misappropriation itself. The court would not go so far as to prohibit the defendants from working in a competitive industry, but did prevent them from using certain designs to develop competing products.
The price for a broader injunction? A $5 million bond.
David Nosal Heads to Washington?
So what's up with this guy? Besides Levandowski and Sergey Aleynikov, few names have become more household in the trade-secrets arena than David Nosal. The ex-Korn/Ferry executive was convicted under the Computer Fraud and Abuse Act for obtaining the password of a current employee. That allowed Nosal and others to access a database containing valuable information on executive search candidates. (For in-depth coverage, read Professor Orin Kerr's analysis here and a lengthier piece in the Harvard Law Review.)
After Nosal's petition for en banc rehearing was denied by the Ninth Circuit, he appealed his CFAA conviction to the Supreme Court. Representing him? Neal Katyal of Hogan Lovells, the former Solicitor General and premier appellate litigator. Nosal's petition for writ of certiorari was filed May 5.
How much does a typical non-compete case cost?
Aside from "is this thing enforceable?" the question I get asked most is "what's this gonna cost?"
What am I referring to? Non-competes and non-compete suits, of course. No easy answers there, because there are a lot of variables at play. Those variables range from the plaintiff's attorney (competent, middler, or bumptious fool) to the scope of the wrongful conduct alleged. Generally, if the case involves a claim of trade secrets misappropriation with what appears to be some kind of a physical taking of information, the litigation is hard to budget.
But what about a garden-variety non-compete case, about a customer here or there or perhaps even a dispute over the type of work the employee is engaging in? Hard to piece together data, but an unreported case out of Washington noted the prevailing employee spent about $53,000. We know that because the appellate court upheld the fee award. That amount seems about right for a case that does not proceed to trial but instead gets resolved on summary judgment.
The case is Gaddis Events, Inc. v. Wu, No. 75227-8-I, and it's available here.
***
Waymo v. Uber
We know what the lead story is: Waymo's suit against Uber. It seems every week produces new drama in the trade secrets case of the year. Why is it such a deal? We're talking about a technological development - self-driving cars - that may be among the most significant in the past hundred years.
Anthony Levandowski - the star engineer behind Waymo's self-driving car technology - has been fired from Uber. Presumably, his termination is a direct result of Judge Alsup's rulings and orders compelling Uber to account for the 14,000 files Levandowski apparently took before leaving Google. That spelled a clear division in where Uber and Levandowski were headed with this dispute.
For a thorough deconstruction of Levandowski's firing, I highly recommend reading John Marsh's excellent analysis. I couldn't do it better and won't try.
Trade Secrets Injunctions
One of the more vexing procedural questions in trade secrets cases is the extent to which wrongful conduct will be enjoined. To be sure, that was one of the flashpoints of Judge Alsup's ruling that effectively barred Levandowski from working for Uber in any competing capacity. But it didn't strictly limit what Uber could do to develop self-driving technology independent of Levandowski.
On a far more mundane level (all cases are more mundane) is Systems Spray-Cooled, Inc. v. FCH Tech, Inc., No. 16 CV 1085, out of the Western District of Arkansas. There, the court grappled with how much competitive activity to enjoin after two ex-employees had misappropriated certain design drawings and pricing information. The misappropriation finding came as a direct result of the defendants' destruction of hard-drive evidence. Without a governing non-compete, the court was faced with how far to extend a trade-secrets injunction. And here, given the evidence destruction, the court carved a middle ground - barring not only the "use" of certain information (assuming it was still available after the destruction) but also some business activity that arose from the misappropriation itself. The court would not go so far as to prohibit the defendants from working in a competitive industry, but did prevent them from using certain designs to develop competing products.
The price for a broader injunction? A $5 million bond.
David Nosal Heads to Washington?
So what's up with this guy? Besides Levandowski and Sergey Aleynikov, few names have become more household in the trade-secrets arena than David Nosal. The ex-Korn/Ferry executive was convicted under the Computer Fraud and Abuse Act for obtaining the password of a current employee. That allowed Nosal and others to access a database containing valuable information on executive search candidates. (For in-depth coverage, read Professor Orin Kerr's analysis here and a lengthier piece in the Harvard Law Review.)
After Nosal's petition for en banc rehearing was denied by the Ninth Circuit, he appealed his CFAA conviction to the Supreme Court. Representing him? Neal Katyal of Hogan Lovells, the former Solicitor General and premier appellate litigator. Nosal's petition for writ of certiorari was filed May 5.
How much does a typical non-compete case cost?
Aside from "is this thing enforceable?" the question I get asked most is "what's this gonna cost?"
What am I referring to? Non-competes and non-compete suits, of course. No easy answers there, because there are a lot of variables at play. Those variables range from the plaintiff's attorney (competent, middler, or bumptious fool) to the scope of the wrongful conduct alleged. Generally, if the case involves a claim of trade secrets misappropriation with what appears to be some kind of a physical taking of information, the litigation is hard to budget.
But what about a garden-variety non-compete case, about a customer here or there or perhaps even a dispute over the type of work the employee is engaging in? Hard to piece together data, but an unreported case out of Washington noted the prevailing employee spent about $53,000. We know that because the appellate court upheld the fee award. That amount seems about right for a case that does not proceed to trial but instead gets resolved on summary judgment.
The case is Gaddis Events, Inc. v. Wu, No. 75227-8-I, and it's available here.
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