In one of the biggest non-compete cases filed late last year, a Seattle federal judge has now rejected Amazon.com, Inc.’s effort to enforce its covenant not to compete against former cloud computing manager, Daniel Powers, who had joined Google three months after Amazon terminated him.  There are a number of noteworthy holdings in the December 27, 2012 decision by U.S. District Court Judge Richard A. Jones, a copy of which is attached as a PDF below.  However, what was most significant to me was the manner in which Google and Powers so effectively preempted potential claims of potential misappropriation and irreparable injury by taking steps to protect Amazon’s trade secrets and customer relationships. 

Background:  Powers had served as Amazon’s vice president in charge of global sales for Amazon Web Services before he was terminated by Amazon.  Last October, Amazon sued Powers to enforce its 18 month non-compete after it learned that he had become Google’s director of cloud platform sales. 

However before Powers joined Google, he and Google both agreed that Powers would not (1) use any of the trade secrets or confidential information of Amazon; (2) perform any cloud computing work for his first 6 months with Google; and (3) contact any of his former customers from Amazon.  Significantly, there was no evidence that Powers took anything from Amazon or that he had used any of the trade secrets that the district court concluded he likely had learned while at Amazon.
 
Those steps proved instrumental, as Judge Jones repeatedly emphasized the steps that Google and Powers had undertaken to safeguard those trade secrets, noting that Powers and Google had agreed to “virtually every restriction Amazon seeks in its injunction.”  These safeguards, and the absence of any misappropriation, further undermined Amazon’s ability to present a compelling argument as to irreparable injury, since the district court noted that a probability of the threat of irreparable injury was simply not present on this record.  As a result, he denied most of Amazon’s request to enforce its covenant not to compete and simply ordered that Powers not solicit Amazon customers through March 2013, which amounted to 9 months from the date of his termination.
 
Key Takeaways:  No. 1:  Google and Powers wisely defused Amazon’s non-compete.  Using Hewlett Packard’s playbook from the IBM v. Visentin case, Google and Powers left Amazon with very little room to maneuver.  They addressed Amazon’s legitimate interests in its trade secrets and customers by taking them off the table and their willingness to have him perform no cloud computing work for 6 months not only made them look reasonable but gutted Amazon’s ability to demonstrate the threat of irreparable injury.
 
No. 2:   Amazon’s decision not to conduct discovery cost it dearly.  For reasons that are not clear, Amazon elected not to pursue expedited discovery against Powers and Google, a fact that Judge Jones repeatedly emphasized in knocking down Amazon’s arguments as lacking.  For example, because Powers had not been at Amazon for the previous six months, Judge Jones noted that some of the information could conceivably be stale at this point in time; expedited discovery would have assisted in demonstrating that Powers had access to and had retained viable trade secrets.  Moreover, Amazon’s efforts to argue that Powers would inevitably disclose its trade secrets suffered because they could not demonstrate what he actually knew or retained, or show that the similarity of his old position and new position would lead to that inevitable disclosure.
 
No. 3:  Amazon did not identify the specific trade secrets it believed were at risk.  Perhaps for the same reason it was reluctant to engage in discovery (and thus expose its own trade secrets to Google), Amazon apparently elected not to provide evidence of specific trade secrets it believed were at risk and instead elected to rely more heavily on the protections it felt it had under the covenant not to compete.  Judge Jones identified this as a further ground for denying Amazon’s trade secrets claim.

No. 4:  An overly broad non-compete hurt Amazon.  The district court was troubled with the non-compete which had no geographical limitation and which covered all of Amazon’s business lines, even the ones in which Powers had never worked.  Consequently, the broad non-compete served to reinforce the reasonableness of the non-solicitation provision, which the court was willing to enforce.  The absence of specific trade secrets and threat of irreparable injury were the final nails in the coffin of the non-compete.

To sum up, this case shows the importance of solid planning and imposition of safeguards to protect an opposing party’s trade secrets and customer relationships.  For more on this important case, see the fine posts of Jonathan Pollard, Kenneth Vanko and Russell Beck.

Amazon v, Powers Decision.pdf (118.69 kb)

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:
 
Trade Secret and Non-Compete Posts and Cases: 
  • Two amendments to the Economic Espionage Act (EEA) have or will become law this week or next week. As expected, President Obama signed the Theft of Trade Secrets Clarification Act, which had unanimously passed the Senate and made its way through the House after a 388-4 vote. The Trade Secret Clarification Act has effectively reversed the narrow construction of the EEA by the U.S. Court of Appeals for the Second Circuit in U.S. v. Aleynikov. In that heavily-criticized decision, the Second Circuit had limited the application of the EEA’s §1832(a) to products that were sold or intended to be sold into interstate commerce. In addition to now ensuring that trade secrets related to internal products such as software are covered under §1832(a) of the EEA, the Act has also broadened that part of the statute to cover trade secrets for services. Finally, President Obama is expected to sign an amendment enhancing the penalties’ sections of the EEA, increasing, among other things, the potential financial penalty from $500,000 to $5,000,000 for stealing trade secrets for the benefit of a foreign power under §1831(a) and increasing penalties from at least $10,000,000 to perhaps 3 times the value of trade secrets for violations of §1832. For more on the amendments and their potential impact on prosecutions, see Ryan Davis’ article for Law360, “Trade Secrets Cases May Spike After US Strengthens Law.” 
  • Amazon has lost its effort to enjoin a former employee from working on any cloud computing project for Google, reports Jonathan Pollard in the non-compete blog. According to Jonathan, the Washington state court rejected Amazon ‘s broad injunctive request to bar Daniel Powers from working from Google in a thorough and well-reasoned opinion. The opinion emphasized, among other things, the fact that Powers did not take any documents or files with him, that Amazon had failed to identify its trade secrets with the requisite specificity, and that the request would have amounted to worldwide ban that was not warranted on the facts before the court. For more on the case, see my post about the filing of the complaint here. 
  • How important is it to have a provision requiring the return of confidential information? Pretty damned important, advises Epstein Becker’s Trade Secrets & Noncompete Blog which details a recent decision, Lincoln Chemical Corp. v. Dubois Chemicals Group, from the Northern District of Indiana that relied on such a provision for an injunction in that trade secrets dispute. 
  • “United Health Services Wins $6.9 Million Verdict in Non-Compete Claim Against Acadia Healthcare” reports John Paul Nefflen for Burr & Forman’s Non-Compete Trade Secrets Law Blog. 
  • For those interested in the take of other bloggers on major cases and developments in trade secret and non-compete law in 2012, check out Robert Milligan’s analysis of “Top 10 Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2012” for Seyfarth Shaw’s Trading Secrets Blog as well as Kenneth Vanko’s thoughts on “2012: Year-End Review and Top 10 List” for his Legal Developments in Non-Competition Agreements Blog. 
  • Kenneth also has a post on a recent opinion out of the Second Circuit construing Connecticut’s version of the Uniform Trade Secrets Act. According to Kenneth, the decision in McDermid, Inc. v. Dieter may prove to be a boon for plaintiffs seeking to protect trade secrets overseas. 
  • “The Four Keys To China Trade Secret Protection” advises Dan Harris in The China Law Blog. 
  • “Samsung Loses Bid To Seal Sales Data In Apple IP Dispute” reports Law360.  
Cybersecurity Articles and Posts: 
  • “The White House is Finalizing an Executive Order on Cybersecurity” report Dennis Olle and Padro Pavon of Carlton Fields for JDSupra. 
  • “Tackling Intellectual Property Issues in the Cloud” advises the bizcloud. 
  • Looking for tips for “Cyber Security for Smart Phone”? Then check out Peter S. Vogel’s post in his Internet, Information Technology & e-Discovery Blog. 
  • “Cyberlaw Predictions: Crucial Time at the Federal Trade Commission,” notes Thomas O’Toole for Bloomberg’s e-Commerce and Tech Blog.
News You Can Use: 
  • Looking for the discipline to keep those New Year’s resolutions? Then consider “How to Train Your Brain to Stay Focused” as advocated by Nadia Goodman for Entrepreneur.

01032013Last week, I reported on Nos. 10 through 8 of the Trade Secret Litigator’s Top 10 Trade Secret and Non-Compete of 2012.  Here are Nos. 4 through 7, with the top three to follow this weekend:

7.  PhoneDog v. Kravitz (U.S. Dist. Ct. for Northern Dist. of Cal.), Eagle v. Morgan (U.S. Dist. Ct. for Eastern Dist. of Penn.) and Christou v. Beatport (U.S. Dist. Ct. Col. May 2012).  As employers continue to grapple with managing their employees’ use of social media, these three cases illustrate the  consequences that can flow from uncertainty over who owns social media property such as a Twitter handle, a LinkedIn account or password log-in information.  As trade secret claims are tougher and tougher to assert because of the inherent visibility of social media information, employers can be expected to rely more on traditional claims of ownership for social media as a result of these cases.

PhoneDog v. Kravitz and Eagle v. Morgan have both received considerable media attention as they are among the first cases to address ownership of LinkedIn and Twitter accounts.  However, because they arose in situations where the employers failed to have formal policies or written agreements establishing the parameters for the ownership of social media, the employers were unable to secure conclusive determinations and forced to litigate the cases.  Indeed, in the PhoneDog case, the employee was able to keep the disputed Twitter handle as part of the settlement.  Ultimately, disputes like these will be less frequent as employers recognize the importance of policies and written agreements in ensuring that their social media accounts and log-in information remain their property.  For more on these cases, please see my posts here and here.

6. Acordia of Ohio v. Fishel (Supreme Court of Ohio) and DePuy Orthopaedics, Inc. v. Waxman (1st App. Dist. Florida).  In a year in which it became more difficult to enforce non-compete agreements, these decisions stood out because they held that in the context of a merger, non-compete provisions would survive and be enforced to the benefit of the new company.  The Acordia of Ohio case raised eyebrows here in Ohio because the Ohio Supreme Court initially declined to enforce the non-compete on the grounds that the covenants at issue did not specifically provide for assignment or have language establishing that they would benefit any successor or assign of the employer.  However, in a highly unusual development, the Ohio Supreme Court agreed to reconsider the decision and reversed itself in October.

5. U.S. v. Liew (U.S. Dist. Ct. for Northern Dist. of Cal.).  Why is a criminal case that has not even gone to trial and in which one of the major defendants was dismissed No. 5 in the Trade Secret Litigator’s Top 10?  The timing of this case and the willingness of the U.S. Department of Justice to indict a company (Pangang Group) owned by officials of the Chinese government are the reasons for its inclusion, as this case may ultimately be remembered as the tipping point in cementing the perception that China was a threat to the trade secrets of American companies.

It is important to remember that the unprecedented indictment of Pangang Group took place in February when Chinese Vice President Chair Xi Jinping was visiting the United States.  Prior to that visit, complaints about the misappropriation of the trade secrets were largely perceived as anecdotal.  In my view, there seemed to be a hesitancy on the part of many to complain about the perceived lack of protection of trade secrets in China, perhaps because raising these concerns might result in retaliation or that those raising them might be accused of racism.

However, about the time of that visit, leading media, including The Wall Street Journal and The New York Times ran a number of articles highlighting the complaints of many U.S. companies about the failure (or in some cases, the active participation) of the Chinese Government in cases of trade secret theft.  During that visit, Vice President Joe Biden and Senator John Kerry both were reported to have expressed concern about, among other things, the complaints of their constituents about the theft of trade secrets. 

In this context, the announcement of the indictment of Pangang Group signified an acknowledgement of the federal government to not only recognize the problem but take forceful action to combat it.  It also served as a catalyst for media attention, which in turn brought concerns about protection of trade secrets in China to the surface.

4.  American Chemical Society v. Leadscope (Ohio Supreme Court), SASCO v. Rosendin Electric (California 4th App. Dist.), MPI Release, LLC v. Loparex LLC (U.S. Dist Ct. for Southern Dist. of Indiana), and Best Medical Int’l v. Spellman (U.S. Dist. Ct. for Eastern Dist. of Pa.).  These four cases highlight the increasing dangers that can arise from an ill-advised trade secret case as they all involved awards against plaintiffs who were essentially found to have brought their trade secret cases in bad faith.  

The American Chemical Society case resulted in a jury verdict of over $26.5 million in compensatory and punitive damages in favor of the defendants, former employees who counterclaimed and successfully argued the underlying trade secret litigation against them was brought maliciously to destroy their company (it ultimately settled for about $20 million).  In SASCO, a California appellate court affirmed a significant award of attorneys fees after a plaintiff dismissed a weak trade secrets case.

The increasing frequency of these cases should serve as a powerful reminder that companies considering trade secret claims need to carefully evaluate those claims and remember the power of the “David v. Goliath” narrative in trade secret cases.

Stay tuned for Nos. 1 through 3 this weekend.

12292012It’s that time of the year when the media and bloggers provide story after story detailing the most important stories and events of the past year. The Trade Secret Litigator cannot resist that temptation either, especially because 2012 was another remarkable year for trade secrets and non-compete law. 

Not only were there a number of high profile cases that garnered significant media attention either because they involved high profile prosecutions or multi-million dollar verdicts, but there were a number of significant legislative developments on the state and federal level that served to reinforce the growing importance of this area of the law. 

Without further ado . . .

10. Motorola v. Lemko (N.D. Illinois, Feb. 2012), Milliken & Co. v. Morin (South Carolina Supreme Court), and Preston v. Marathon Oil (Federal Circuit, Aug. 2012).  These three cases arose out of claims that a former employee breached an “ownership” provision and attempted to misappropriate or patent technology that they helped develop while they were employees.  The Motorola v. Lemko case is perhaps the most notorious, since it resulted from the arrest of Hanjuan Jin, a former Motorola engineer who was apprehended just as she was about to board a one-way flight to Beijing with a cache of Motorola trade secrets.

Why do I think these ownership cases are important?  It is getting harder and harder to preserve the secrecy of trade secrets.  The growth of social media  has made it easier for employees to display or share information over the Internet.  Likewise, the increased ease and accessibility of new technology makes it easier for employees to move and transmit data and information. Finally, the ever-expanding growth of what is included within the Internet make it easier for an employee to argue that confidential information has already been made available to the public.  Having the ability, therefore, to enforce a provision that establishes that specific technology is the property of an employer may prove critical in cases where a claim of trade secrecy is in doubt.

9.  Martin Marietta v. Vulcan Materials (Delaware Chancery Court and Delaware Supreme Court 2012).  This high profile case did not involve trade secrets but instead arose out of claims that a corporate suitor misused confidential information in the context of a hostile takeover.  After finding that Martin Marietta misued the confidential information in connection with the hostile bid for Vulcan Materials, Chancery Court Judge Leon Strine, Jr. restrained Martin Marietta from taking any further actions for the next four months, which essentially ended Martin Marietta’s hostile bid.  His opinion was affirmed by the Delaware Supreme Court after an expedited appeal.

I think the case merits inclusion in the top ten for two reasons:  First, as many non-disclosure agreements provide for the application of Delaware law, any statement from a respected Chancery judge and the Delaware Supreme Court addressing the scope of these provisions is noteworthy.  Second, for purposes of potential claims under Delaware law,contractual stipulations that acknowledge irreparable injury in the event of a material breach will be enforced. In the post-eBay v. MercExchange world, many courts have increasingly been unwilling to presume irreparable injury and have required parties to make a showing of irreparable harm to justify an injunction.

However, in the wake of the Martin Marietta decision, commercial parties that rely on Delaware law are now armed with a powerful and well-reasoned decision that should make it easier for them to secure a presumption of irreparable harm provided their agreement includes this stipulation. In essence, Judge Strine gave Vulcan a pass on irreparable injury (compare the difficulties of establishing irreparable injury for an injunction for a patent these days, as the recent Apple v. Samsung ruling reinforces).  As these stipulations are frequently in license agreements and commercial NDAs, this could be a significant ruling for the trade secret community when enforcing contracts applying Delaware law.

8. Allergan v. Merz Pharmaceuticals (U.S. Central Dist. California, March 2012).  This case arose out of the alleged misappropriation of “Botox” trade secrets by Merz Pharmaceuticals, which hired a team of sales representatives and managers from Botox manufacturer Allergan to help Merz launch a competitive product Xeomin.  Although Merz prevailed at an early TRO by arguing that it was not using and did not intend to use Allergan’s trade secrets, subsequently-produced documents showed that sales and other confidential information had in fact been exchanged between Merz employees and the former Allergan employees. As a result, U.S. District Court Judge Andrew Guilford brought down the hammer, forbidding a March 15, 2012 rollout of Merz’s competing product, Xeomin, for ten months.

My post about this case received a tremendous amount of traffic (it was my second most visited post of the year) and the case received a fair amount of media scrutiny, thus easily justifying its inclusion in the top 10.  The unfortunate facts giving rise to the case provide the proverbial “cautionary tale” for in-house counsel about the challenges of trying to monitor a team of employees hired from a competitor for a high-stakes project.  Despite apparent good faith efforts by in-house counsel, Judge Guilford found that there was still a significant exchange of forbidden information between the newly hired employees and Merz employees.  For more on the lessons that the case provides to both inside and outside counsel, see my post here.

Stay tuned for my next installment, which will have Nos. 5 through 7.

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:    Trade Secret and Non-Compete Posts and Cases:
  • The U.S. District Court for the Northern District of California has issued a ruling on preemption, reports Paul Freehling of Seyfarth Shaw’s Trading Secrets Blog.  In Sunpower Corp. v. Solarcity, District Court Judge Lucy Koh dismissed claims for breach of confidence, conversion, trespass to chattels, tortious interference with prospective economic advantage, common law unfair competition, and unfair competition under Calif. Bus. & Prof. Code sec. 17200.  Judge Koh found that the plaintiff failed to plead facts (1) that its non-trade secret proprietary information was made property by some law other than the California Uniform Trade Secrets Act and (2) that those common law claims were predicated on something other than the misappropriation of trade secrets. (A hit tip also to Stuart Jasper who forwarded the opinion and his thorough analysis of the opinion to me as well).
  • “Do Companies Sue Competitors to Learn the Competitors’ Trade Secrets?” asks Keith J. Broady and Timothy C. Matson for Corporate Counsel.
  • “The Year that Was in Texas Non-Competes” recounts Rob Radcliff in his Smooth Transitions Blog.
  • Kenneth Vanko wrapped up his series (Parts II and III) on TROs and Non-Competes last week.  Both posts are excellent and should be read by every litigator.
  • “Push For More Animal Antibiotics Data Could Expose Secrets” reports Law360.  
Cybersecurity Articles and Posts:
  • “Obama Unveils Online Information Sharing Strategy To Fight Cyberterrorism” reports readwrite.
  • “Prosecuting Cyberespionage – Justice’s New Strategy” reports Stewart Baker for Steptoe’s Cyberblog.
  • “Integrating Employees’ Smart Devices Into the Workplace” advise Cynthia Larose and Narges Kakalia of Mintz Levin for The New York Law Journal.
  • “Prediction: BYOD may go away in 2013” says Paul Kenyon, co-founder and COO, Avecto for SC Magazine.  
News You Can Use:
  •  “Beware of Malware: Mobile Security Apps to Safeguard Your Phone” warns Bonnie Cha for All Things Digital.
  • “How Do You Spot The Thief Inside Your Company” advises Marc Weber Tobias for Forbes.
Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks: Trade Secret and Non-Compete Posts and Cases:
  • On Tuesday, the U.S. House of Representatives passed the Trade Secrets Clarification Act, 388 to 4, and the bill now goes to President Obama’s desk, hopefully for his signature, reports Robert Milligan and Jessica Mendelson for Seyfarth Shaw’s Trading Secrets Blog (Gene Quinn’s IPWatchdog also has a post on the bill). According to Robert, Jessica and Gene, the House can suspend its rules to address uncontroversial changes to law, provided 2/3 vote can be mustered. The Act was passed unanimously last month by the Senate in response to the U.S. Court of Appeals for the Second Circuit’s holding in U.S. v. Aleynikov (for more, see my posts on the Act and the Aleynikov decision).   
  • Speaking of Sergey Aleynikov, he has moved one step closer to getting his $2.4 million in attorneys fees reimbursed from the very employer from whom he was charged with stealing. According to Law360, U.S. District Court Judge Kevin McNulty expressed sympathy for Aleynikov’s position and denied motions for summary judgment filed by both sides, concluding that discovery was still needed. Employers may want to re-check their indemnification bylaws and rules and ensure that legal fees for defending against charges of theft from the company are carved out. Alison Frankel also has a post on the case in her On The Case Blog for Reuters. 
  • “Texas High Court Will Hear Russian Trade Secret Theft Case” reports Law360. The plaintiff, Moncrief Oil International, is asking the Texas Supreme Court to reverse the trial court’s dismissal of the case on personal jurisdiction grounds.
  • “Medical Device Industry Remains a Hotbed for NonCompete Cases,” reports Susan M. Guerette for Fisher & Phillips’ Trade Secrets and Non-Compete Blog.
  • Looking for a brush up on “Non-Compete Suits and TROs”? Check out Kenneth Vanko’s recent post in Legal Developments for Non-Competition Agreements.
  • “Microsoft, Motorola Want More Docs Sealed In Patent Row” citing trade secrets, reports Law360.
  • Another arbitration decision in the non-compete context is out, this time from Wisconsin, reports Epstein Becker’s Trade Secrets & Non-Competes Blog. In Engedal v. Menard, Inc., a Wisconsin Court of Appeals reversed a trial court’s finding that an arbitration provision was unconscionable because it had a non-compete provision.
  • “Ousted ISC Exec Can’t Use Broker’s Client Data, Court Rules,” again from Law360. The Texas Appellate Court found that investment firm ISC Group Inc. was entitled to a broader injunction in a trade secrets case against a former vice president to prevent him from using client data to solicit those clients to his new business.
  • “Indiana Court Reminds Us To Read Our Contracts And Protect Our Trade Secrets” notes Josh Durham in Poyner Spruill’s Under Lock & Key Blog.
Cybersecurity Articles and Posts:
  • “Find the Weakest Software Link Before Hackers Do” warns Judy Selby for Corporate Counsel.
  • “Defending against cyber-attacks: Can companies “hack back” against their attackers?” asks Todd Taylor for Inside Counsel.
  • “Ex-IBM privacy officer on preparing for the future of cybersecurity” writes Catherine Dunn for Corporate Counsel.
  • “The Legal Implications of BYOD: Preparing Personal Device Use Policies” from the Information Law Group.
News You Can Use:
  • “What Instagram’s New Terms of Service Mean for You” advises The New York Times Bits Blog.

Last week, The Boston Globe wrote an editorial entitled, “Easing up on non-competes, iRobot helps region, itself” applauding local employer iRobot for declining to enforce non-competes against some of its work force. In the editorial, The Globe cited Silicon Valley’s success as proof of the damage of non-competes on efforts to innovate and urges Massachusetts to adopt the California model. As December is traditionally a busy time for employee departures, and by extension, disputes over the enforcement of covenants not to compete, it seems as good as any time to ask the question, do non-competes really hinder innovation?

Why is This Important? The question is an important one because many states are considering whether they should adopt the California model, which strongly disfavors non-competes but allows robust trade secret protection as a safeguard against the theft of intellectual property. The Globe’s editorial cites the success of Silicon Valley, which it attributes (at least in part) to the greater employee mobility afforded by the absence of non-competes, and the resulting entrepreneurial culture that incubates as a result. 

As our economy appears to continue to trend from an industrial and manufacturing one to one more heavily rooted in intangible services and products (i.e., intellectual property), the protection of that IP and the tools to protect that IP, whether in the form of patent protection, trade secret laws or covenants not to compete, become even more important. 

The debate, like many today, engenders strong emotions and as a result, biases tend to heavily color the arguments, which in turn makes an analysis of the question fairly challenging. Based on my experience and review of the articles and posts in the debate, those favoring non-competes obviously tend to be employers, inventors, the HR community, and the attorneys that represent them (no huge surprise there). On the other side, employees, attorneys who represent them, and academics have consistently lined up against non-competes (no surprise here either).  I have been on both sides of this litigation (admittedly more frequently on the side of the employer seeking enforcement) but think I have the benefit of that experience to at least consider the question from each perspective.
 
As one might expect, this debate can’t be resolved in a single post, if it can be resolved at all.  What I hope to do over the next few weeks (or months) is identify a number of the key arguments that both sides have advanced and carefully look at those arguments in a series of posts. As always, I encourage my readers to join in the debate and comment.

Are Non-Compete Cases Increasing? I think the first question one has to ask is whether there is truly a problem here.  In other words, are covenants not to compete being used with a greater frequency today?  And, assuming that is the case, are they “over-enforced” to the degree that their detractors claim? 

My experience is that disputes over non-competes are in fact arising more frequently, if not necessarily taking the form of litigation, certainly in terms of jockeying prior to litigation. Admittedly, there is a chicken-and-the-egg quality to my observations, because I can’t truly discern whether there are simply more of these disputes or whether as these cases have become a larger part of my practice, I am simply involved in more of them. Nevertheless, my own anecdotal experience tends to align with the concern of those opposing non-competes — that they are being used more frequently.

My experience seems to be supported by the only real empirical research done on covenant not to compete and trade secret litigation, the studies undertaken by David Almeling and his colleagues from O’Melveny & Myers regarding federal and state litigation for the Gonzaga Law Review in 2010 and 2011. (Links to the two articles, “A Statistical Analysis of Trade Secret Litigation in Federal Courts” and “A Statistical Analysis of Trade Secret Litigation in State Courts” can be found here and here). For those unfamiliar with these important studies, David and his team analyzed the frequency of this litigation, as well as a number of key factors and holdings that appeared to reoccur in those cases. 

David and his team found that covenant not to compete and trade secret litigation was growing exponentially in federal courts and steadily increasing in state courts.  In the federal court survey, they found that this litigation was effectively doubling every 7 to 9 years and was expected to double again by 2017.  In the state court survey, they found that litigation was steadily growing, still a noteworthy finding because it is conventional wisdom that litigation generally is on the wane due to the impact of tort and class action reform legislation directed towards what was perceived to be a tide of litigation engulfing the business community in the 1980s and 1990s.

A couple of caveats. First, it is unclear from the research how much of the litigation was driven by disputes over non-competes or over simply trade secret disputes. As a general matter, the surveys noted that most of the cases involved disputes between employers and employees (78% in the state court cases and 53% in the federal cases), which would most likely include both non-compete and trade secret claims, except of course in California. 

Second, it is important to remember that the issues driving this debate are being fueled by the radical changes in technology, the transformation of our economy, and evolving perceptions about IP, phenomena that have really only begun to manifest themselves over the past 5 to 10 years. While David’s studies remain very important, things are unfolding at a pace that makes it difficult to discern the growth of this litigation over this time.

Stay tuned for the next installment, which will focus on the identity of parties most frequently involved in this litigation and the impact that has on the debate, as well as the related question of whether non-competes are being used excessively by employers.

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks: Cybersecurity Articles and Posts:
  • I normally lead with trade secret and non-compete articles, but a riveting article by Stewart Baker for Steptoe’s Cyberblog caught my eye this past weekend so I wanted to highlight it in this week’s Wrap-Up. In a chilling post entitled “The Importance of Cybersecurity,” Stewart Baker details a concerted and devastating cyberattack against a small California software company after the company publicly accused China of appropriating its parental filtering software, CYBERsitter, for a national Internet censoring project. The Santa Barbara company Solid Oak Software was nearly destroyed after wave after wave of cyberattack was directed against it over a three year period.
  • “Are Cloud Data Security Fears Overblown? A Sensible View” from Emma Byrne of NetApp for Forbes.
  • “Cybersecurity Is an Issue – Now What?” asks info security.
Trade Secret and Non-Compete Posts and Cases:
  • Allergan is in the news this week, as it was unable to dislodge itself from a New Jersey trade secret suit under the recently enacted Uniform Trade Secrets Act, according to Law360. District Court Judge Harry G. Carroll rejected Allergan’s argument that the bulk of the common law claims in plaintiff SCS Healthcare Marketing LLC’s suit was preempted by the new state law that took effect in January.
  • For those interested in the status of Mattel’s appeal of MGA’s $310 million award against it, check out Daniel Josh Salinas’ update on the oral argument at Seyfarth Shaw’s Trading Secrets blog.
  • “Should Employers Arbitrate Non-Compete Claims?” asks Rob Radcliff in his Smooth Transitions Blog.  Rob answers the question in a subsequent post entitled “More Thoughts on Arbitrating Non-Competes.”
  • Pizza and Trade Secrets:  Every Company has a ‘Secret Sauce'” advises Josh Durham in Poyner Spruill’s Under Lock & Key Blog.
  • In “Litigation Risks From Job Applicants With Non-Compete Agreements,” Devin Dolive of Burr & Forman details two recent Alabama decisions recognizing potential claims by job applicants whose offers were rescinded by potential employers over potential non-competes.
  • “Court Orders Monitoring to Ensure Employee does not Breach Non-Compete” reports Jackson Lewis’ Non-Compete & Trade Secrets Reporter.  This is a very unusual opinion out of Connecticut, since most courts would either grant or deny an injunction rather than involve themselves in on-going monitoring.
  • “Restrictive Covenants . . . Can Be Powerful Tools for Safeguarding Intangible assets” advises Michael D. Moberly for Business IP and Intangible Assets Blog.
Computer Fraud and Abuse Act Articles and Cases:
  • “Fifth Circuit Finds Company Not Liable for Alleged Violations of Computer Fraud and Abuse Act and Electronic Communications Privacy Act by its Regional Manager” writes Shawn Tuma for JDSupra.
  • In “Current Employee May Have Violated Computer Fraud and Abuse Act by Downloading for Secret New Employer,” Shawn also details a recent case out of Mississippi’s federal court.
News You Can Use:
  • “Why Too Much Information Makes Decision Making Harder” reports lifehacker.
  • “10 Incredibly Useful Email Productivity Tools and Add-ons” recommends Guiding Tech.

My post in August on the “7 Deadly Sins of Departing Employees” was well received, so for the sake of balance, I thought a post detailing the 7 deadly sins of former employers (and their attorneys) was in order.  Like the list that I complied in my earlier post, this list is composed of what I see as the same mistakes that former employers make time and time and time again in covenant not to compete and trade secret litigation.

1. Letting Your Emotions Dominate Your Decision-Making.  Trade secret and non-compete disputes are notoriously emotional affairs.  Fear, feelings of betrayal, uncertainty about whether a valuable technology or invention has been taken, all of these emotions and more come into play.  Employee departure and especially employee defection cases (i.e., mass exodus of employees to a competitor) can be a lot like business divorces. 

There has been an uptick in noteworthy “bad faith” cases (American Chemical Society v. Leadscope, SASCO v. Rosendin Electric), each of which involved an employer who appeared to allow its anger cloud its decision-making and who appeared to be using litigation either maliciously or in a retaliatory fashion.  Employers need to acknowledge that these emotions exist, to recognize that while they are understandable, they need to be controlled, and then to resolve to not let them dominate the decision-making process.

2. Failing to Update Your Written Agreements.  All too often, employers fail to update or double-check their agreements with their employees.  Sometimes the agreements are not with the right party (i.e., an employee has been transferred to a subsidiary or worked for another affiliate).  Sometimes the agreements fail to include language permitting their assignment or address what happens in the event of a merger or acquisition (see Acordia of Ohio v. Fishel here and here).  Sometimes the employee simply avoids or fails to sign the agreement (see the infamous IBM v. Johnson case, where an executive dodged a non-compete by putting off signing it at every turn).

If an employer wants to enforce its agreements, it needs to regularly check them, preferably on a semi-annual or annual basis.  This should ensure that these problems are addressed before litigation.
 
3. Fumbling the Exit Interview Process.  Make sure you have all electronic devices returned.  Make sure you copy the personal electronic devices of your employees for potential litigation.  Make sure you document the exit process:  Where are they going?  Have they been reminded of their contractual obligations?  Have they certified that they have returned all company property and confidential information?  All of these things may help you avoid litigation, or if litigation is inevitable, they will help you strengthen your hand.

4. Failing to Get Your Electronic Ducks in a Row.  Make sure your investigation is as thorough and complete as it can be before you pull the trigger on a lawsuit.  Ensure that you have segregated any potentially relevant information and instituted the appropriate chain of custody over that information.  If you are going to litigate, make sure that you have a litigation hold in place and avoid any actions that may result in inadvertent spoliation of evidence.  Given the importance of forensic and electronic discovery in trade secret cases, this is an important step for every employer to remember.

5.  Overselling Your Case at the TRO Stage.  Given the emotion and compression of time for gathering information and decision-making, there is frequently a tendency by both employers and their counsel to overstate the facts giving rise to their claims.  Make sure that you can factually back up what you are claiming because if you make a mistake or oversell, you know your opponent will point it out at the preliminary injunction hearing.
 
6.  Dithering on Whether to Follow Up.  It is genuinely surprising how many former employers will procrastinate making a decision after learning of a potential breach of a non-compete or misappropriation of trade secrets.  While it is important to make sure that you are prepared, waiting several weeks can cause a court to question whether in fact you have been irreparably harmed and make your request for an injunction all the more challenging.

Not every dispute requires a lawsuit.  Some situations only require a cease and desist letter. Others may threaten the viability of a company or business line, and litigation may be the only option. Confer with your inside and outside counsel and make sure that you determine the right approach, one that fits within your budget, and is consistent with your strategic business considerations, but do it promptly.

7. Overreaching in Your Demands to a Court.  Having decided to litigate, be reasonable in your demands.  TROs and preliminary injunctions have become tougher and tougher to get.  Courts are all too willing to deny an injunctive request that seems unreasonable on its facts.  It is important to recognize that courts strive to balance the legitimate needs of the employer and employee in every injunction and courts will naturally gravitate to the party that appears to be the most reasonable at this stage.
 
Moreover, as noted above, if you are unsuccessful in your trade secret or non-compete claim, you run the risk that your former employee may claim that you filed your case in bad faith. The American Chemical Society and SASCO cases are two high profile examples where former employees have prevailed by demonstrating that their employers set out to use the trade secrets case maliciously.  Therefore, keep it simple and keep it narrow at the outset; as the case unfolds and as the evidence supports your claims, then you can then be more aggressive.

Stay tuned for the next installment in my “7 Deadly Sins” Series, the 7 Deadly Sins of Hiring Employers.

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:    Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • David Almeling’s latest article, “7 Reasons Why Trade Secrets are Increasingly Important,” for the Berkley Technology Law Journal is now out and is a “must read” for all trade secret and non-compete lawyers. As regular readers of this blog know, I am a huge fan of David’s and I believe he is one of the important voices today in the trade secret legal community. In his latest article, David explains in considerable detail the seven key trends that have contributed to the increase in trade secret litigation and why he expects the growth in this area of the law will likely continue.
  • “Best Buy Hit With $5M Punitives For Stealing Trade Secrets,” reports Law360. U.S. District Court Judge Otis D. Wright II awarded TechForward $5 million in exemplary damages (TechForward had requested $22 million). A jury had recently awarded TechForward $22 million in compensatory damages.
  • A federal jury convicted a Michigan couple last Friday of stealing trade secrets for General Motors’ hybrid program.  Todd Sullivan’s Trade Secrets & Employee Defections Blog has more detail on the prosecution of and a link to an article reporting the conviction. According to Todd, the prosecution claimed that Shanshan Du, the ex-GM employee, copied GM’s private information on the motor control of hybrids and provided documents to her husband, Yu Qin. Prosecutors also accused Qin of using the data to seek business ventures and employment with GM’s competitors, including the Chinese automaker Chery Automobile Co. The couple will be sentenced in February 2013.
  • A programmer for the Federal Reserve System was sentenced to six months home arrest for stealing trade secrets, reports Law360. Bo Zhang, 32, was sentenced today to three years supervised release and six months home confinement by U.S. District Judge Paul Gardephe for stealing proprietary software code from the U.S. Department of the Treasury’s accounting and reporting program.
  • “Advertising Giant Leo Burnett in Non-Compete Fight Over Kellogg Account with Eight Former Employees” reports Jonathan Pollard in the non-compete blog.
  • Looking for more on the recent Trade Secrets Clarification Act? See Russell Beck’s thorough post as well as Seyfarth Shaw’s take on the proposed statute. (My post on the proposed Act can be found here).
  • For those in New York, Daniel Josh Salinas has a post for Seyfarth Shaw’s Trading Secrets Blog detailing the U.S. District Court for the Eastern District of New York’s recent decision rejecting a heightened pleading requirement for trade secrets claims. According to Josh, in Dorsett Industries v. United Groceries, the district court emphatically rejected that a trade secret plaintiff had that burden; in fact, the district court even allowed the claims to go forward despite the defendant’s claim that the plaintiff had been equivocal about whether trade secrets had even been misappropriated at this stage.
  • From the “When will they learn?” file, Kenneth Vanko details the latest unsuccessful effort by a plaintiff to argue that a restrictive covenant violates the Sherman Act.
  • In an article for Forbes entitled “Intellectual Property Awareness At Universities: Why Ignorance Is Not Bliss,” John Villesanor details a recent informal survey that revealed 68% of the engineering students questioned did not know enough to answer the question “what is a trade secret?” and 21% stated that they did not know enough to answer the question “what is a patent?”
  • “Myriad Updates: Clinical Trial Data as Trade Secrets and a Pending Certiorari Decision” from Dan Vorhaus for the Genomics Law Report.
Cybersecurity Articles and Posts:
  • The New York Times Bits Blog has a interesting article about a recent study by Mandiant of a cyberbreach of Coca Cola that took place in 2009.
  • “Facebook hacks its own employees to teach lessons” reports Mashable.
  • “Security Is Hard, But That Doesn’t Mean You Should Ignore It” admonishes Jon Evans for TechCrunch.
  • “Here We Go Again: Latest Draft Of White House Cybersecurity ‘Executive Order’ Is Leaked” shrugs TechDirt.
  • And on a related note, “Cybersecurity legislation is ‘top’ priority next Congress” advises The Hill. The article notes that House Homeland Security Committee Chairman Michael McCaul (R-Texas) “plans on meeting with industry players, including tech companies and critical infrastructure operators, to get their feedback on what measures they think should be in cybersecurity legislation.”
  • “The Biggest Cybersecurity Threats of 2013” predicts Tomer Teller for Forbes.
News You Can Use:
  • “Top 10 Security Issues That Will Destroy Your Computer In 2013,” warns Kenneth Rapoza for Forbes.