Non-Compete Enforceability

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05022013

Here are the noteworthy trade secret, restrictive covenant and cybersecurity posts from the month of August (warning, there are a lot):

Defend Trade Secrets Act

  • Munger Tolles’ Miriam Kim, Carolyn Hoecker Luedtke and Laura Smolowe have put together another fine summary of the trends they are tracking under the Defend Trade Secrets Act.  There are several interesting findings in the summary.  For example, state courts and state law remain the preferred forum and substantive law for trade secrets claimants, at least at this time.  According to the summary, while 378 DTSA cases have been filed in federal and state courts, more than 515 complaints with trade secret claims have been filed with no DTSA claims in federal and state courts throughout the U.S.  I have to admit that I was surprised by this finding, as I expected that litigants would be eager to secure a federal forum using the DTSA.  I suspect that most of those state law cases involve restrictive covenants and that the plaintiffs are more comfortable with a local judge enforcing a non-compete or want to avoid entanglements arising from the DTSA’s limitations on injunctions.  Or it might be that they simply want to go with the law they know best, which would be the more developed state trade secret law regime.  In any event, a very interesting finding.
  • One of the more recent (and unexpected) developments under the DTSA has been the number of motions to dismiss challenging DTSA claims.  Olga May has a post for Fish & Richardson’s Litigation Blog detailing those decisions on those motions, which range from challenges to the specificity of the trade secrets pleaded to whether the complaint comports with the standards under Twombly and Iqbal.
  • For an update on the modest number of ex parte seizure order filings under the DTSA, see Michael Renuad of Mintz Levn’s article in the National Law Journal.

Continue Reading Monthly Wrap Up (Sept. 8, 2017): Noteworthy Trade Secrets, Non-Compete and Cybersecurity Posts from Around the Web

A recent decision by U.S. District Court for the Northern District of Illinois addresses a very timely and novel question:  can a website provider enforce the equivalent of a covenant not compete through an online clickwrap agreement?  In TopstepTrader, LLC v. OneUp Trader, LLC, Case No. 17 C 4412 (N.D. Illinois June 28, 2017), the U.S. District Court for the Northern District of Illinois rejected one website provider’s effort to do just that, reasoning that the provider was attempting to use its website’s terms and conditions to improperly restrict competition under Illinois non-compete law.  The opinion, which can be found here, may prove to be a significant one as courts wrestle with the enforceability of online terms of condition that may limit competition or the use of information publicly available through those websites.  (A shout out to Evan Brown’s Internet Cases for first reporting on this case). Continue Reading Can A Website Provider Use A “Clickwrap” Agreement to Enforce A Non-Compete?

05022013

Here are the noteworthy trade secret, restrictive covenant and cybersecurity posts from the past month or so:

The Defend Trade Secrets Act

  • The U.S. District Court for the Eastern District of Texas has found that certain deer registry information qualified as a combination trade secret under the DTSA and Oklahoma’s version of the UTSA, as explained by Michael Weil and Tierra Piens for Orrick’s Trade Secrets Watch blog.
  • The issue of whether the DTSA applies to misappropriation that may have taken place prior to the DTSA’s enactment has been one of the more frequent areas of litigation under the DTSA.  Jonathan Shapiro of Epstein Becker has a summary on these cases for Law360.

Continue Reading Monthly Wrap Up (July 31, 2017): Noteworthy Trade Secret and Non-Compete Posts From Around the Web

05022013

Given the increasing number and quality of fine posts about trade secret, non-compete and cybersecurity issues, I am resurrecting my regular updates post  (although it will be monthly rather than weekly).  Without further adieu, here are the noteworthy posts of the past month:

Defend Trade Secrets Act:

  • With the recent passage of the 1-year anniversary of the DTSA, there have been a number of interesting posts that have detailed compilations about the cases filed with DTSA claims over the past year.    Professor David Opderbeck of Seton Hall has an interesting guest post for Patently O and Fish & Richardson’s Claire Collins, Jeffrey Schneidman and Carol Simons have some noteworthy statistics in their Litigation Blog as well.
  • Finnegan’s John Williamson, Paula Miller and Jon Self have a guest post nicely summarizing the extra-territorial reach of the DTSA and other statutes for the IP Watchdog.
  • Robert Milligan and Josh Salinas offer their take on likely developments for the DTSA in its second year in Seyfarth’s Trading Secrets Blog.
  • Maxwell Goss has a post that suggests that reports of the death of the inevitable disclosure doctrine under the DTSA may be greatly exaggerated in his Law and the Creative Economy Blog.

Continue Reading Monthly Wrap Up (June 16, 2017): Noteworthy Trade Secret, Non-Compete and Cybersecurity Posts from the Web

AT_YOUR_OWN_RISKWhen moving to enforce a non-compete, the last thing a litigator wants to do is to stumble out of the gates and struggle over a profound legal issue that could delay consideration of that normally urgent request.   A new and little-talked-about section of the Defend Trade Secrets Act (DTSA), however, has the potential to trip up employers seeking to enforce non-competes if they are not prepared to address this new entanglement.

There has been a significant amount of commentary about the DTSA and its new amendments since President Obama signed the DTSA into law on May 11, 2016. The “whistle-blower” immunity and ex parte seizure order, for example, have generated the most discussion to this point.  However, the section of the DTSA that may have the greatest future impact on litigation under the DTSA is 18 U.S.C. §1839(3)(A)(i)(1)(I), which prohibits injunctions that “prevent a person from entering into an employment relationship.”

That new provision, which I will refer to as the “No-Ban-on-Employment” provision, was intended to curb, if not eliminate, the use of the inevitable disclosure doctrine under the DTSA.  However, it may have a significant unintended consequence–namely, it may complicate employers’ efforts to enforce non-competes through temporary restraining orders (TRO), the key legal mechanism for non-compete disputes.  For the reasons below, employers may want to reconsider invoking the DTSA when they want to enforce their non-competes because of the potential complications of this section’s language and instead opt to file them in state court, at least in the short-term.  As the DTSA is likely to overtake the Uniform Trade Secret Act (UTSA) as the dominant statutory regime for trade secret law, this DTSA provision may well set another blow in motion to the viability of the non-compete as an effective tool to protect trade secrets.

Continue Reading Does the Defend Trade Secrets Act Contain a Potential Roadblock for Non-Competes? Why the DTSA’s Limitations on the Inevitable Disclosure Doctrine May Complicate Enforcing Non-Competes

Michigan-2Legislative efforts to ban non-competes in Massachusetts and Minnesota have garnered lots of media attention over the past year or so, and now, a Michigan legislator has introduced a bill seeking a similar ban for Michigan’s companies and residents. Michigan House Bill 4198, introduced just over two weeks ago by State Representative Peter Lucido (R – Washington Township) seeks to ban non-competes in all employment situations. (A shout-out to Bernie Fuhs of Buzel & Long for announcing the bill’s introduction.)

House Bill 4198 limits restrictive covenants to agreements for the sale of a business (the bill also outlines conditions for the enforceability of those covenants), and to make clear those are the only restrictive covenants that will survive, the bill expressly states that, “any term in an agreement an employer obtains from an employee, contract laborer, or other individual that prohibits or limits the individual from engaging in employment is void.”

The ban proposed by Representative Lucido’s bill is very broad; too broad, in my view. By carving out the existing Michigan statute providing for the enforceability of non-competes that protect a reasonable business interest (Section 4a of MCL 445.774a), and replacing it with the new language above, the new bill would also effectively ban narrowly-tailored non-solicitation clauses, and potentially even confidentiality agreements. Under the new bill, an employee could legitimately take the position that in abiding by a confidentiality agreement, he or she is limited from engaging in employment with a competitor and have the agreement declared void, freeing the employee from any restriction on using, disclosing or sharing a former employer’s trade secrets. Consequently, if enacted, the bill could be extraordinarily disruptive to efforts by employers to protect trade secrets in Michigan, in addition to banning outright all restrictive covenants in the employment context.

According to Butzel & Long, the bill has been referred to the Michigan House’s Commerce and Trade Committee. Representative Lucido apparently has indicated that he is interested in moving the bill through committee as soon as possible.

While I certainly think reform for some categories of non-competes is in order (a discussion for another day), banning all restrictive covenants is akin to burning down the house to make toast. By making the bill so broad, Representative Lucido is throwing down the gauntlet to Michigan’s business community. In fact, bills seeking non-compete bans introduced in other states have failed due to similar overreaches because they better enabled the business community to generate grass roots opposition, due to their breadth.

The Trade Secret Litigator will monitor the bill’s progress closely and keep you posted.

As employers continue to sort out the legal implications of social media in the context of restrictive covenants, a Massachusetts court has recently held that the mere posting of a former employee’s new position on a LinkedIn profile does not qualify as a solicitation under her agreement with her former employer. The former employer, KNF&T Staffing Resources, had complained that the change in her profile resulted in a solicitation that was sent to her more than 500 contacts, including customers. (A hat tip to Sheri Qualters who has a fine summary of the case for The National Law Journal).

In KNF&T Inc. v. Muller, KNF&T filed an action in Suffolk Superior Court against its former vice president Charlotte Muller and her new employer, claiming Muller violated her one-year non-compete agreement in various ways. On October 24, 2013, Associate Justice Thomas P. Billings denied KNF&T’s bid for a preliminary injunction, finding that she was not directly competing with her former employer in her new position and that evidence of any violation was “between weak and non-existent.” 

As for KNF&T’s claim regarding the LinkedIn profile, Justice Billings found that Muller’s update about her new job was full of generic terms like “Staffing Services” and “Recruiting.” “So long as Muller has not and does not, prior to April 12, 2014, solicit or accept business in the Fields of Placement for herself or others (including her new employer), she will not have violated the covenant not to compete,” Billings wrote. (A PDF of the opinion can be found below).

The Takeaway: First, Justice Billings’ holding is consistent with other recent social media rulings that require some overt act that is directed or targeted to particular customers. A mere update in a profile that reflects a change in employment, with generic terms describing that employment, that is sent to all contacts in LinkedIn (which would likely include former classmates, competitors as well as customers) is simply not enough. 

On the other hand, targeted communications or emails to particular customers through LinkedIn could qualify as a solicitation. Whether a communication qualifies as a solicitation generally depends on the context and circumstances of the communication, as Ken Vanko’s excellent discussion of the recent opinion out of the U.S. Court of Appeals Court of Appeals, Corporate Technologies v. Hartnett, illustrates.

Second, the opinion reinforces the importance of employment agreements that address the ownership of social media and profiles or contacts that might be found in LinkedIn. If these are indeed important to an employer, they should be addressed in the employment agreement.

KNF&T v Muller – Order.pdf (4.49 mb)

Today’s post wraps up the Trade Secret Litigator’s Five Golden Rules for on-boarding a new employee and, fittingly, falls on Halloween. Today’s remaining Golden Rules primarily address the steps an employer needs to take in managing the employee who has been hired, and, as the case law reveals, may prevent various tricks (and rarely treats) to the new employer.

Golden Rule No. 3. The Visentin Rule: Protect the Legitimate Business Interests of the Former Employer. Having taken the steps to avoid or minimize risk during the hiring process, an employer still has to properly manage the employee once he/she joins the company, especially if that employee has a non-compete or non-solicitation agreement with his/her former employer. Fortunately, one of the leading cases on managing an employee with a covenant not to compete provides a textbook example of how to handle this situation. That case, IBM v. Visentin, came out of the U.S. District Court for the Southern District of New York and was affirmed by the U.S. Court of Appeals for the Second Circuit in 2012. In Visentin, the new employer, Hewlett-Packard undertook a number of affirmative steps to ensure that IBM’s trade secrets were protected and agreed that the new employee would not solicit his former customers for the remainder of the term of the non-compete.

The Southern District and Second Circuit approved of these efforts and refused to enjoin the employee – a mid-level manager – from working at HP. In the absence of any proof of misconduct by the employee, those courts found that this was a proper way to protect IBM’s trade secret and customer relationship interests while balancing the former employee’s right to find proper gainful employment.

The Visentin approach was also applied effectively by Google earlier this year in a high-profile dispute over its hiring of a cloud computing services manager who had worked previously for Amazon.com and was subject to a non-compete. As in Visentin, the Washington district court found that in the absence of evidence of misconduct by the former employee, Amazon.com’s interests were adequately protected by the safeguards put in place by Google to protect its trade secrets.

Of course, this approach is not foolproof, as the holding in a recent Massachusetts case, Aspect Software v. Barnett, unfortunately demonstrates. In that case, despite similar good faith efforts by the new employer and former employee, the court still enforced the non-compete at issue, although it commended the new employer and former employee for their efforts.

At the end of the day, an employer will increase its odds of avoiding litigation or minimizing its risk in that litigation by taking affirmative steps to prevent the use or disclosure of the competitor’s trade secrets and minimize intrusion into legitimately protected customer relationships. I have found that these steps are particularly effective in the “cease and desist” letter stage because they serve to put the former employer on notice that it may not have a basis for a lawsuit and can effectively give that employer pause before initiating litigation.

Golden Rule No. 4: If Litigation is Possible, Preserve, Preserve, Preserve. Given the reality of BYOD and the overlap between work and personal time, it is practically inevitable that some confidential information will make its way onto an employee’s personal computer or devices. This sometimes puts an employee between the proverbial rock and a hard place: if the employee deletes the information, there may be a claim of spoliation of evidence or a claim of some nefarious purpose behind the deletion. Alternatively, if the employee does not remove or delete the confidential information, he or she will almost certainly be accused of having improperly used or taken it.

As a result, if there is a chance of litigation, it is critical to preserve what was on the devices before deleting it. This means that forensic computer consultant will need to be engaged and likely image all devices before the information is removed and the devices sanitized under the guidance of counsel and that consultant. The images will then need to be kept by outside counsel so that they can be produced in litigation, if necessary.

Golden Rule No. 5: Keep a Close Eye on Mass Hirings. As readers of this blog know, cases involving the hiring of a team of people from a competitor (especially a sales team) generate the greatest waves and present the greatest risk of trade secret litigation by a former employer. The group dynamics in these situations also seem to foster greater opportunities for mischief — i.e., more pressure on business units and new hires to perform, the fact that the team may have been hired for a specific product, client or opportunity, etc. This means that in-house counsel and HR administrators need to monitor, follow up on, and continue to train these teams on the importance of preserving the confidentiality of the legitimate trade secrets of their former employer.

Last year’s Allergan v. Merz case out of the U.S. District Court for the Central District of California illustrates the special dangers associated with hiring teams of people. In that case, a federal judge issued a permanent injunction enjoining the rollout of the cosmetic drug Xeomin for 10 months because he found that a sales team hired from Allergan had improperly used confidential marketing and customer information for Botox in connection with the prospective launch of Xeomin. Based on statements made at an early hearing, the outside and in-house counsel did not know about communications between the new sales team and its managers disseminating that confidential information and argued that Merz had no intention of using Allergan’s trade secrets. However, a year after defeating a TRO, Merz’s counsel produced documents that were contrary to those representations.

How can in-house counsel and outside counsel avoid this disaster? It starts with a culture of security and responsibility. Both in-house and outside counsel need to know that their business people have their back and that a culture respecting the rules outlined above will be enforced. In the Allergan v. Merz case, the disconnect between what was apparently going on at the Merz business level and what the lawyers understood was going on is striking. This suggests, at least to me, that the appropriate follow up was not done to ensure that counsel’s representations about not using Allergan’s trade secrets would be followed.

The best way to ensure new teams are following the rules of their new employer includes: (1) an emphatic initial face-to-face meeting communicating the importance of leaving the prior employer’s trade secrets behind, preferably chaired by the head of the business group, (2) periodic follow up, certifications and acknowledgements that no trade secrets or confidential information are being used or retained, and (3) training to reinforce those principles. However, all of the follow up in the world will be ineffective if managers and supervisors have not bought into these principles and do not enforce them among their team.

In sum, as these cases illustrate, courts will generally reward the employer who imposes safeguards and acts responsibly; conversely, the failure to on-board properly can be catastrophic.

When hiring an employee away from a competitor, one of the last things a company wants is to be embroiled in litigation with that competitor over accusations that it hired the employee for the purpose of stealing that competitor’s trade secrets. Consequently, the process of “on-boarding” a new employee — taking steps to make sure that the employee is properly and lawfully brought aboard a company to minimize risk of litigation by the former employer — is proving to be an increasingly important one and needs to be part of every trade secret lawyer, in-house lawyer and HR administrator’s trade secrets toolkit.

On-boarding is becoming a bigger and bigger issue, and was a topic of much discussion at the recent AIPLA Trade Secret Summit, as both in-house counsel and outside counsel noted that on-boarding was increasing as a part of their practice (I have noticed an uptick in this area as well in my practice this year). There have also been a number of recent articles on the topic of on-boarding (Seyfarth Shaw has two entertaining YouTube videos on best and worst on-boarding practices and Karin McGinnis wrote a fine post last month for Corporate Counsel).

Why this increase in concern over on-boarding? One reason is an improving economy that is in turn causing companies to increase their hiring from the ranks of their competitors. Another factor is the increase in non-compete and trade secret litigation generally, and companies’ growing awareness of the risks of that litigation if they do not manage their hiring process correctly.

The process of on-boarding can be a challenging and delicate one. There are potential conflicts for the unwary, as the interests of the new employee and the new employer may not always be aligned and separate counsel may be required. In addition, those challenges are compounded by the prevalence of ESI, BYOD and other workplace technologies that serve to complicate the transition process. In short, in any important employee transition, in-house counsel, and frequently outside counsel, now need to be involved.

Despite these potential complexities, I believe there are five basic Golden Rules to remember. I will cover the first two Golden Rules today and wrap up with the remaining three rules tomorrow:

Rule No. 1: Ask for and Review All Employment Agreements. This the first and most important of the Golden Rules, because without it, you are almost certainly flying blind in the hiring process. Courts will no longer tolerate an employer turning a blind eye to an agreement and will hold it accountable if there is any trade secret misappropriation or improper breach of a restrictive covenant. Courts expect a new employer to conduct some analysis of the agreement and to have taken steps to protect the legitimate business interests of the former employer (to be addressed in tomorrow’s post). You can’t protect those interests if you don’t know what the former employer and new employee agreed to during their relationship.

Don’t confine your analysis to the most recent employment agreement as there may be previous ones that come into play if the last one is defective or unenforceable for some reason. And if you are concerned about confidentiality, arrange for counsel for the employee who can at least review it and advise the employee (be mindful of conflicts though). A prospective employee’s claim that he does not remember any agreement or does not have a copy should be a red flag and, and perhaps even grounds for not hiring him/her.

Once you have and review the employee’s agreement, your company may decide that the employee is still worth pursuing because the non-compete is too broad or unfair, or because you conclude that you can hire the person and still manage to protect the legitimate interests of a competitor (tomorrow’s post). Given the increasing judicial ambivalence to restrictive covenants, that may be a risk worth taking. However, you cannot take any reasoned approach until you know what issues are presented under that agreement.

Rule No. 2: Leave All Former Employer’s Trade Secrets Behind. It would be nice if you had a special hermetically-sealed chamber through which you could direct the new employee so that he/she could emerge on the first day of work completely sanitized of all his/her previous employer’s trade secrets. Until that technology is available, however, a new employer has to clearly and emphatically prohibit the prospective employee from using or bringing his previous employer’s trade secrets with him/her. This means copies of all customer lists, contact information, marketing and business strategies and other potentially proprietary information of the previous employer need to be returned to the former employer before the employee transitions.

Of course, it is not that simple anymore in the era of BYOD and the 24/7 work cycle. The reality is that we all work at home and that frequently digital or paper copies of confidential information sometimes make their way into personal devices or inadvertently find their way into a home office desk drawer. Consequently, not only should an employer instruct the new employee to leave everything behind but it should remind him/her to double-check personal devices and their desks and files at home. Finally, an employer needs to reinforce the consequences that might ensue (suspension, termination, etc.) should the employee bring or attempt to use his or her employer’s trade secrets. All of this should be in writing and preferably a term in the new employee’s agreement. This agreement will not only protect an employer but will also provide cover to the new employee in any subsequent litigation because it will be proof of the steps taken to protect the trade secrets of the former employer.

I remember an in-house speaker emphasizing that one of his former bosses used to send a polite but direct letter to each new employee that told them to leave everything behind because the confidential information of the competitor would no longer be needed. I thought this approach, a simple letter that only concerned this subject, was a very effective way of reinforcing the importance of a culture of integrity and responsibility in the trade secrets context. This approach may be particularly useful when hiring researchers, coders or others who might be involved in the development of products for a competitor.

Of course, the new employer and former employee may face a claim of inevitable disclosure — i.e., that the employee simply cannot be trusted to not use or disclose those trade secrets in a competitive setting. However, as I have written before, courts have increasingly viewed this doctrine with disfavor and are requiring some evidence of misconduct before they are willing to enjoin an otherwise proper hire from going forward.

Stay tuned for tomorrow’s post which will cover Golden Rules 3, 4 and 5.

Here are some noteworthy posts from the past week and some catch-up on other posts from the past couple of weeks:
 
Trade Secret and Non-Compete Cases, Posts and Articles:

  • “CBS Settles Dispute Over ABC’s ‘Glass House,'” reports Law360. For more on this long-running trade secrets dispute, see my posts from last year here and here.
  • In “Bloomberg reveals safeguards for client info,” The Wall Street Journal reports on the various safeguards Bloomberg is committing to after the imbroglio last year when its journalists improperly accessed and reported on the subscriber information of its Wall Street clients.
  • “Failure To Define Trade Secrets Establishes Subjective Bad Faith For Attorneys’ Fees Award Under California UTSA,” advises James Goodman for Epstein Becker’s Trade Secrets & Noncompete Blog.
  • “Do Non-Compete Agreements Stifle Innovation?” Distil Networks CEO Rami Essaid and LevelEleven CEO Bob Marsh debate the impact of non-compete agreements.
  • “Concerns Over Economic Growth Leads Some States to Limit Non-Compete Agreements,” advises John Paul Nefflen for Burr & Forman’s Non-Compete Trade Secrets Blog.
  • “How to draft an enforceable noncompete agreement in 5 steps,” recommends Jon Hyman for the Ohio Employer’s Law Blog.
  • “Do the Final Episodes of ‘Breaking Bad’ Qualify As Trade Secrets?” asks Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • “New Hampshire Court Voids Non-Compete Clause in Independent Contractor Agreement,” reports Paul Freehling for Seyfarth Shaw’s Trading Secrets Blog.
  • “On Non-Compete Agreements: A Response to the Wall Street Journal’s Recent Article,” advises Jonathan Pollard for the non-compete blog.
  • For those in Michigan, “Dana Can’t Prove Trade Secrets Theft, Judge Rules,” reports Law360.
  • For more on the Dana case, see, “Accessing trade secrets is not the same as misappropriating trade secrets” by Tim Bukher for LawTechie.
  • “Is the DOJ Avoiding Domestic Trade Secret Cases?” asks Jan Wolfe for The AmLaw Litigation Daily.
  • “You Need To Work Harder To Fight Trade Secret Theft,” warn Michael Bunis and Anna Dray-Siegel of Choate Hall & Stewart LLP for Law360.
  • For those in Massachusetts, see Michael Rosen’s recent post, “More on ‘Material Change’ and Legislative Update,” for Foley Hoag’s Massachusetts Noncompete Law Blog.

Cybersecurity Posts and Articles:

  • “White House Posts Preliminary Cybersecurity Incentives,” advises Jessica Goldenberg for Proskauer’s Privacy Law Blog.
  • “Tackling Cyber Security Challenges in the Healthcare Industry,” reports Healthtech.

Computer Fraud & Abuse Act Posts and Articles:

  • “IP Cloaking Violates Computer Fraud and Abuse Act, Judge Rules,” advises David Kravets for Wired.
  • “Southern District of Georgia Judge Narrowly Construes Computer Fraud and Abuse Act,” advises Neil Weinrich for Berman Fink Van Horn’s Georgia Non-Compete and Trade Secrets News Blog.
  • David Nosal’s criminal conviction under the CFAA has been upheld by the U.S. District Court for the Northern District of California, reports Bob Egelko in, “Executive’s conviction upheld in trade-secrets theft,” for SFGate.
  • “It’s Time to Reform the Computer Fraud and Abuse Act,” argues Scientific American.