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.