Trade secret and restrictive covenants are messy affairs. Accusations of theft, claims of betrayal of trust, skullduggery, late night visits to the office to remove documents, thumb drives and share files, computer forensics. But there is always a need to cut through this volatile morass and get to the heart of the dispute to determine whether there is truly a breach of an obligation triggering the right to relief from a court or jury.
In virtually all trade secret cases, there is a written agreement at the center of the dispute–a restrictive covenant, or a non-disclosure agreement (NDA), or an inventorship agreement or a licensing agreement–that should determine the obligations, if any, of the parties over the information at issue. If the trade secret owner is seeking a TRO or preliminary injunction, that request for an injunction should ensure an important decision is rendered promptly so that the parties get the necessary clarity over any obligations over that information. But what happens if a trade secret owner instead elects to seek damages or doesn’t have the grounds for an immediate injunction? Is there a tool that helps a party cut through these issues, frame the important questions for the court, and move its case forward? Let me introduce you to Federal Rule of Civil Procedure 42(b) and the Federal Declaratory Judgment Act, 28 U.S.C. § 2201(a), two critical mechanisms that should help parties in a trade secret dispute streamline their case.
What’s the benefit of bifurcation? Most trade secret cases involve multiple legal theories and claims — a claim for violation of any state Uniform Trade Secrets Act (UTSA) or the federal Defend Trade Secrets Act (DTSA), a claim for breach or specific performance of a contract (restrictive covenant, NDA or licensing agreement), a claim for breach of fiduciary duty, unfair competition or tortious interference with contract. The tort claims are frequently fact-intensive claims that also present genuine issues of material fact that are reserved for determination by a jury; these legal standards can make a summary resolution more difficult. And a claim for breach of contract (whether a restrictive covenant or NDA) also may present issues of fact when it comes to the elements of whether that contract was breached and what damages result, which again are issues that a jury should decide.
If the critical issue, however, has to do with the interpretation of the terms of a contract, or if it has to do with whether the contract is unenforceable, that is a question of law that many jurisdictions recognize as one that a court can resolve, rather than a jury. Let’s look at Ohio’s law for example. In Ohio, it is well established that the construction of a contract is a question of law that only the court—not a jury—decides. See Latina, v. Woodpath Dev. Co., 57 Ohio St. 3d 212, 214 (1991); Leber v. Smith, 70 Ohio St. 3d 548, 553 (1994); Alexander v. Buckeye Pipeline Co., 53 Ohio St. 2d 241, syllabus 1 (1978); see also ORC §2311.04 (“Issues of law must be tried by the court, unless referred as provided in the Rules of Civil Procedure.”). This means that if there are competing claims between the parties over the meaning of key terms or the obligations under those agreements, a court can and should decide them.
And in Ohio, both state and federal courts have recognized that “a non-compete clause’s enforceability is a matter of law for the court.” Chicago Title Ins. Corp. v. Magnuson, 487 F.3d 985, 990 (6th Cir. 2007); see also Firstenergy Solutions Corp. v. Flerick, 521 Fed. Appx. 521, 525-26 (6th Cir. 2013) (noting that “[i]n Ohio, a noncompete covenant is enforceable to the extent it is reasonable” and “whether a noncompete covenant is reasonable is a question of law,” citing Chicago Title). A challenge to enforceability of a restrictive covenant is a frequent defense by an employee. He or she may claim that the restrictive covenant is unenforceable for public policy reasons (for example, if it involves an employee who provides health care services or involves a low wage employee). Or it might involve a challenge due to the absence of a legitimate business interest necessary to justify that restrictive covenant (such as a situation where the client relationship has been terminated).
As I mentioned before, trade secret cases are messy, and therefore, expensive cases–lots of discovery and forensics, motion practice, etc. Consequently, if there is a procedure that can help the parties approach the court earlier in the life cycle of the lawsuit to decide what might be a case-dispositive ruling, that benefits the parties.
So what are the procedural tools to help you move things forward? To most efficiently get this relief, a party should include a claim for declaratory relief in their complaint or counterclaim asking the court to provide a ruling on the parties’ obligations, interpretation of key terms or enforceability of the agreement. Federal courts and many state courts have the ability to rule on claims seeking declaratory relief defining the obligations and responsibilities under the parties’ relationships or agreements.
But the critical tool is a request for bifurcation which is available under Federal Rule of Civil Procedure 42(b) or a counterpart under state law (again, in Ohio, under Ohio Rule of Civil Procedure 42(B), which is modelled on the federal rule). This rule allows you to divide up or bifurcate your trial. Under Rule 42(b), a district court “may order a separate trial of one or more separate issues, claims, crossclaims, counterclaims, or third-party claims” for “convenience, to avoid prejudice, or to expedite and economize” the case before it. The decision to bifurcate is discretionary but a compelling argument can be made that a decision regarding the interpretation or enforceability of an agreement that may be dispositive of key issues is worth pursuing. And while a party can also move for summary judgment under Rule 56, there is a chance that there might be a factual issue that can otherwise gum up that motion; in addition, sometimes these motions can take significant time for a court to consider and determine. In contrast, a one-day evidentiary hearing/trial on an agreement may be quicker, more efficient and perhaps even more cost effective than preparing and briefing a motion for summary judgment in some instances.
A case that I recently litigated illustrates how this can work. In Precision Strip, Inc. v. Dircksen, an employer and former employee made competing claims over the ownership of an invention. While the employment agreement included a provision determining ownership of inventions while an employee, the parties disagreed over whether it covered that invention, offering different interpretations of the relevant language. Both parties asserted declaratory relief claims seeking a ruling that they owned the invention, and as a result, the trial court ordered a bifurcation of that question from other claims that had been presented by the parties (including trade secret and other tort claims that might be determined by a jury). Over the objection of the employee, the trial court heard evidence about the employment agreement and the circumstances of the development of the invention; after hearing evidence and argument, the trial court determined that the invention fell within the terms of the employment agreement’s ownership provision and was the property of the employer. Ohio’s Court of Appeals for the Third District affirmed the trial court’s decision, a decision that ultimately led to the resolution of the other claims.