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.