Earlier this week, I reported that the Ohio Supreme Court was still considering the Acordia of Ohio v. Fishel case, a dispute that pits the language of a covenant not to compete against an Ohio statute whose purpose is to facilitate the transfer of assets in a merger. 

Yesterday, the Ohio Supreme Court issued its ruling in a 4-3 decision holding that the language of a covenant not to compete controls and will not be extended to the new company after a merger if the covenant’s language fails to specifically assign its rights to the new company. (A PDF copy of the slip opinion can be found below).

I wrote about the Acordia case last fall. Four employees challenged their non-competes, arguing that after a series of mergers, their non-competes were no longer enforceable. They argued that the literal language of their covenants was confined to the previous employer and did not extend to future companies or use language extending the covenant to the company’s “successors and assigns.” When the employees left several years later, they argued that their non-competes had begun to run at the time of the merger and were now expired. The trial court and the Court of Appeals for the First District agreed.

The Majority Opinion: The Majority’s analysis was simple:  apply the contract as written. Since the covenant did not include assignees nor provide for the assignment to a successor, the relationship terminated when the employer ceased to exist as a result of the merger, and the non-compete began to run (although technically there was no longer any employer to benefit from the non-compete). Thus, under its terms, the covenant had expired before the employees left to join a new employer

The majority was not troubled that it was treating the non-compete any differently than any other asset. Since the previous employer had elected to limit the benefit of the contract to that company alone, the new company got the same bargain that the asset (the non-compete) provided — namely, a non-compete confined to the previous company.

The Dissent:  The Dissent, however, believed that the Ohio statute governing mergers, Ohio R.C. 1701.82 and 1705.39, should have controlled. Those statutes, by their operation, vested all the assets and obligations of a constituent entity in the surviving entity without reversion or impairment. The Dissent reasoned that a covenant not to compete should be treated like any other asset and should inure to the benefit of the new company.
 
The Takeaway?  Ohio employers and companies better check their non-competes. If their agreements do not broadly define the “Company” to include successors and assigns or do not include a provision permitting the assignment of the covenant, they will be deemed to begin running in the event of a merger, acquisition or reorganization and perhaps expire before an employee joins a competitor.

Further Thoughts (May 26, 2012): One point that needs to be made, after further reflection, is that, under the logic of the Acordia decision, any kind of corporate reorganization could result in the loss of the benefit of the covenant not compete, non-solicitation agreement or non-disclosure agreement. In other words, if a business decides to change from an “S” corporation to a limited liability corporation and its agreements fail to include “successor or assign” language or fail to include a provision permitting an assignment, the time periods of those agreements would begin to run at the time of the reorganization.

2012-ohio-2297.pdf (66.95 kb)

Here are the noteworthy posts, articles and cases of the past week: Trade Secret and Non-Compete Cases and Posts:
  • A Utah jury has awarded more than $130 million to the developer USA Power LLC, after finding that utility PacifiCorp stole trade secrets from USA Power in order to build a power plant based on USA Power’s design. PacifiCorp must pay damages of nearly $18.2 million, along with $112.5 million for its unjust profits from the use of the trade secrets. And in an interesting twist, USA Power secured a verdict of $3.2 million against its former lawyers, Utah law firm Holme Roberts & Owen and attorney Jody Williams, for breaching their fiduciary duties to USA Power. 
  • The U.S. Court of Appeals for the Fifth Circuit recently vacated a $1.4 million judgment against the U.S. Navy for misappropriation of trade secrets on jurisdictional grounds, concluding that the case should have proceeded before the Federal Court of Claims. The plaintiffs, United States Marine Inc. and VT Halter Marine Inc., charged the Navy had disclosed designs for a high-speed military vessel to a competitor. 
  • In a rare trade secret case before the International Trade Commission (ITC), SI Group, Inc. has filed a complaint with the ITC requesting an investigation of Sino Legend (Zhangjiagang) Chemical Co., Ltd., Red Avenue Chemical Co. Ltd., and affiliates of those companies. SI Group, a manufacturer of chemical intermediates, is asking the ITC to grant, among other things, an order excluding from entry into the United States all rubber resins, including tackifiers, manufactured using SI Group trade secrets. It appears that the Federal Circuit’s holding in TianRui Group may now be taking hold and inspiring more trade cases before the ITC.
  • Caveat partners of Wisconsin law firms: Don’t even think about trying to impose non-competes on your associates, warns the State Bar of Wisconsin. For more on whether lawyers can be bound by non-competes, see my recent post.
  • Does a promotion and increased compensation result in a material change that voids a non-compete?  According to one Superior Court of Massachusetts, it does not, advises Michael Rosen in Foley & Hoag’s Massachusetts Non-Compete Blog. In Sentient Jet LLC v. Mackenzie, the court rejected the employee’s argument of material change because the parties did not act as it there was a change in the agreement’s fundamental terms.
  • Digital forensics expert Jim Vaughn has the second of his series on “The Use of Digital Forensics in Trade Secrets Matter” in Seyfarth Shaw’s Trading Secrets Blog.
  • “Is the Michigan Basketball Playbook a Trade Secret?” asks Rob Dean of Frith & Ellerman’s Virginia Non-Compete Blog? I know some people in Columbus that would pay a pretty penny for Michigan’s football playbook.
Computer Fraud and Abuse Cast Posts and Articles:
  • “Alleged voyeur boss cannot pursue Computer Fraud and Abuse Act claim,” advises Evan Brown in his Internet Cases Blog.
Cybersecurity Articles and Posts:
  • The Wall Street Journal has thrown its support behind the Cyber Intelligence Sharing Protection Act (CISPA) in a recent editorial, “Who is afraid of #CISPA?”
  • David Fagan and Stephen Satterfield report the “10 Steps for Responding to a Corporate Data Security Breach” in Corporate Counsel.
  • Catherine Dunn of Corporate Counsel has another interesting cybersecurity article, this one is entitled “Corporate Boards Still In the Dark About Cybersecurity.”
  • “Gmail’s Security Hole Could Lead to Mass Harvesting of Accounts” writes MIT’s technology review.
News You Can Use:
  • “Use social media? Memorize these vital 12 words” writes Suzanne Lucas of CBS Money Watch.

05212012Having just given a presentation on current developments in Ohio Covenant Not to Compete law, it made some sense to write a post summarizing a number of the more recent noteworthy trade secrets and covenant not to compete decisions here in the Buckeye State over the past few months.

Two Big Decisions Due from the Ohio Supreme Court:

The Ohio Supreme Court has two important cases in which decisions are expected soon. Both address issues that are hot topics right now in the trade secret and covenant not to compete community.

The first opinion should be issued in the American Chemical Ass’n v. Leadscope, Inc. case, which addresses whether the plaintiff ACS’s unsuccessful trade secrets case against its former employees and their fledgling company should give rise to a claim for malicious litigation. As two high profile cases have been brought recently against law firms and former employers for allegedly bringing trade secret actions in bad faith, this may prove to be a bellwether opinion. The ACS case also provides a lesson in the dangers of potentially overreaching in a weak trade secrets case, as well as the power of the “David v. Goliath” theme for juries.

As you might expect, the facts are fairly involved but essentially, ACS brought a claim against its former employees and their company, Leadscope, for allegedly stealing technology from ACS. In conjunction with the litigation, ACS also made it known that the technology was in dispute and made statements to others that Leadscope had improperly taken it from ACS, which substantially impacted Leadscope’s ability to get financing and run its business. 

At trial, the jury awarded over $26.5 million in compensatory and punitive damages to the defendants for their counterclaims of unfair competition (which was premised on a theory that the underlying litigation was malicious and in bad faith), intentional interference, and defamation; the judgment has swelled to $40 million with interest and attorneys fees. The individual defendants and Leadscope argued that ACS had commenced the litigation as part of a larger plan to disrupt, if not destroy, their new business. 

The Supreme Court is most likely grappling with the issue of whether unfair competition may include a theory of malicious litigation, a contention that has troubled the State of Ohio enough that the Ohio Attorney General’s Office filed an amicus brief and appeared and argued in support of ACS’s position. Oral argument took place in September, so a decision should be forthcoming soon. For a good summary of the oral argument and some handicapping of how some of the Justices might rule, please see former Appellate Judge Marianna Bettman’s Legally Speaking blog post on this decision.

The other case, Acordia of Ohio v. Fishel, involves another hot topic — namely, whether non-competes with four employees survived a series of successive mergers. (See my post on the OfficeMax v. Levesque case out of the First Circuit, which grappled with a similar issue).

In Acordia of Ohio, the trial court refused to enforce the non-competes because they were confined to the specifically named former employers, which had changed over time after a series of successive mergers. After each merger, the company holding the specific non-compete disappeared. According to the trial court, this effectively terminated employment under each non-compete and triggered the time period of each non-compete. By the time the four employees decided to leave and join a competitor, each of their non-competes had expired under this analysis.

The First Appellate District in Hamilton County (the county where Cincinnati is located for you out-of-staters) affirmed the ruling late last year, looking not only at the language of the agreements in question but relying on Ohio statutory law to support its holding (citing in particular, Ohio R.C. 1701.82(A)(3)), which deals with the legal effects of a merger of Ohio corporations). The First District relied on older Ohio Supreme Court authority holding that “the absorbed company ceases to exist as a separate business entity” and that “[b]ecause the predecessor companies ceased to exist following the respective mergers, the Fisher team’s employment ceased to exist following the respective mergers, the Fisher team’s employment with those companies was necessarily terminated at the time of the applicable merger.”

As I wrote last fall, this case pits the shortcomings of the covenant’s language against the common sense notion that something worth protecting survived the merger. Judge Bettman has a post on the oral arguments on this case as well. Again, a decision should be forthcoming soon.

Other Noteworthy Decisions:

The Tenth District Court of Appeals (which covers Franklin County, the county that includes Columbus, Ohio) issued two trade secret decisions on December 30, 2011. I wrote about one, Columbus Bookkeeping & Business Services, Inc. v. Ohio State Bookkeeping, Case No. 11AP-227 (Dec. 30 2011), in which the Tenth District took the unusual step of reversing a preliminary injunction issued against several former employees who were alleged to have misappropriated a customer list. The Tenth District was unimpressed with the trade secret bona fides of that customer lists and seemed troubled about the absence of a non-compete.

The Tenth District also issued an opinion in Columbus Steel Castings Co. v. King Tool Co., 2013 Ohio 6826 (10th Appellate Dist. Court of Appeals, Dec. 30, 2011), affirming the trial court’s entry of a permanent injunction imposing a royalty even though the jury had declined to award damages for the misappropriation of trade secrets by the defendant. For more on this case, see Seyfarth Shaw’s Trading Secrets blog post discussing this opinion.

In February, U.S. District Court Judge Michael R. Barrett denied a motion for a TRO because the plaintiff had publicly posted its alleged trade secret information online. In Allure Jewelers, Inc. v. Ulu, No. 1:12cv91, 2012 WL 367719 (S.D. Ohio Feb. 3, 2012), Judge Barrett emphasized that Allure’s Complaint failed to show any reasonable efforts of secrecy regarding pricing information, which was made publicly available on Allure’s website. Seyfarth Shaw’s Trading Secrets has a post on this case, also.

Finally, as I wrote last month, the Stark County Court of Common Pleas (Canton, Ohio) issued a ruling that may have significant repercussions within the radio and television industry and the manner in which they draft their non-competes in the future. In DeLuca v. DA Peterson, Judge Charles E. Brown, Jr. found that a radio station’s covenant not to compete did not prevent two radio co-hosts from launching an online streaming music website. 

Judge Brown reasoned that the covenant only prohibited the former employees from running a business that was “the same or essentially the same as a commercial radio station.” He concluded that that the new online venture fell outside the language of the non-compete because it did not use the public airwaves, required no FCC license, was not regulated by the FCC, and was not subject to the 60 mile transmission radius restricting radio stations. (A PDF copy of the opinion, which came out several days after his ruling from the bench, can be found here).


Here are the noteworthy posts, articles and cases of the past week:
 
 
Trade Secret and Non-Compete Cases and Posts: 

  • Could PepsiCo’s most valuable trade secrets be at risk? USA Today and The Wall Street Journal’s Law Blog are both reporting that the heirs of one of the men who developed the soft drink’s successful formula have sued PepsiCo in the Southern District of New York for a declaration that they can publish documents related to a 1931 reformulation of the Pepsi soda by their father, Richard Ritchie.
  • The Delaware Supreme Court has granted Martin Marietta’s request for an expedited appeal and ordered oral argument on May 25, with final case briefs due the day before. As readers of this blog know, Martin Marietta was enjoined from its hostile bid for Vulcan Materials because it was found to have improperly used confidential information in violation of its confidentiality agreements with Vulcan. 
  • The battle in the DuPont v. Kolon case rages on, as Kolon was unable to persuade U.S. District Court Judge Robert Payne to lift an order barring Kolon from making large asset transfers without giving DuPont an opportunity to challenge each transaction. Judge Payne also granted DuPont’s motion to compel certain asset-related discovery in its quest to collect on its $920 million judgment. (Copies of the opinions are attached as PDFs below).
  • North Carolina continues to be a less than hospitable forum for trade secrets claims, as Seyfarth Shaw’s Trading Secrets Blog and Littler’s Unfair Competition & Trade Secrets Counsel Blog both report on a recent case requiring greater specificity when pleading damages.
  • The Missouri Supreme Court recently upheld a verdict for tortious interference against a former manager who improperly encouraged employees to abandon her former employer and also improperly diverted a customer to her new company. Epstein Becker’s Trade Secrets & Noncompetes Blog notes these decisions are rare but that they can be compelling cases if an employer can prove the former employee was violating his or her duty of loyalty.
  • The Supreme Court of Wyoming has also been busy, as it recently held that continued employment is sufficient consideration for an invention assignment agreement, reports Kenneth Vanko in his Legal Developments in Non-Competition Agreements Blog.
  • A scientist accused of stealing secret formulas from a Utah chemistry company has pleaded guilty to one count of unlawful acess to a protected computer. Prabhu Mohapatra entered the plea on Friday in the U.S. District Court of Utah in exchange for prosecutors dropping 25 other trade secret theft charges against him. 
  • A former programmer for the Chicago hedge fund Citadel LLC has been indicted on federal charges of stealing its trade secrets, according to The Chicago Tribune. Yihao “Ben” Pu is charged with multiple counts of theft of confidential computer code used to develop trading strategies, according to the federal indictment filed last Friday. 
  • The FBI has launched an ad campaign stressing the importance of protecting trade secrets (see the picture above). The campaign consists of billboards in nine cities throughout the U.S.
  • Want to know more about Georgia’s non-compete statute? Seyfarth Shaw’s Trading Secrets Blog has a good summary on its provisions as it approaches its one-year anniversary.

Cybersecurity:

  • “Cyber-Threat Cooperation Emerging Between U.S. Industry and Government” reports Catherine Dunn of Corporate Counsel. 

Social Media and Trade Secrets:

  • A CFO of a publicly-traded fashion retailer lost his job over Twitter posts that disclosed confidential information. Francesa’s Holdings fired Gene Morphis because he “improperly communicated company information through social media,” reports The Wall Street Journal.

News You Can Use:

  • “Is the Obsession with Devices a Sickness?” asks The New York Times Bits Blog.
  • “How Mobile is Rapidly Evolving the World,” explains Mark Fidelman of Forbes.
  • “After Yahoo: Why do Powerful People Lie?” wonders Katherine Reynolds Lewis on CNN/Money.

DuPont v Kolon Memo Opinion.pdf (461.19 kb)

DuPont v Kolon Memo Opinion re Motion to Compel.pdf (330.92 kb)

The Ohio State Bar Association has invited me to speak at 2:00 p.m. this Friday afternoon as part of its annual “Advising Corporate Directors and Officers” Seminar. I’ll be presenting on the topic, “Drafting and Enforcing Covenants to Not Compete in the Present Economy: Noteworthy Legal Developments and Practical Pointers.” The seminar will provide a total of 6.0 CLE hours. 

Here is a rundown of all of the speakers and topics being offered:

8:30 a.m. – “Duties of Directors and Officers Under Ohio Law,” John Beavers & Kevin Kinross, Bricker & Eckler LLP (Columbus)

10:15 a.m. – “The SEC Whistleblower: Corporate Best Practices,” James Cummins, Waite Schneider Bayless & Chesley (Cincinnati) & Phyllis Brown, The Law Offices of Phyllis Brown, LLC (Cincinnati)

12:45 p.m. – “Seven Habits of Highly Ineffective Global Contract Negotiations,” Anthonio Fiore & Martijn Steger, Kegler Brown Hill & Ritter (Columbus)

2:00 p.m. – “Drafting and Enforcing Covenants to Not Compete in the Present Economy: Noteworthy Legal Developments and Practical Pointers,” John Marsh, Hahn Loeser & Parks LLP (Columbus)

3:00 p.m. – “Records Retention Policies,” Martin Susec, Nationwide (Columbus)

Registration begins at 8 a.m. at the offices of the Ohio State Bar Association (1700 Lake Shore Drive in Columbus). I have attached a PDF of the flyer with further information for those that are interested. Hope to see you there.

OSBA Seminar and Schedule.pdf (234.65 kb)

CBS followed through on its threat to sue ABC for allegedly misappropriating CBS’ trade secrets for ABC’s new reality show, Life in the Glass House, and it is seeking an injunction against ABC and 19 former producers and staffers who worked on CBS’ long-running reality show, Big Brother. In the lawsuit filed in federal court in Los Angeles last Thursday, CBS argues that the ABC show also infringes  its copyrights and that the producers are violating non-disclosure agreements they signed with CBS when they worked on the Big Brother series. (I have attached a PDF of the complaint, courtesy of The Hollywood Reporter’s website, below).

For those not familiar with the Big Brother series, it involves a contest among guests who live in a house and who are filmed continuously, perform challenges and tasks, and then ultimately vote one another off of the show. According to CBS, Glass House “replicates every key aspect of Big Brother, including, among other things, its plot, theme, mood, setting, pace, characters, sequence of events, and other concrete elements.” 

Of course, none of those elements represent a trade secret as they are available for the world to witness.  Rather, CBS identifies a number of technical processes that better enable the show to quickly cycle and capture various story lines and assist in streaming around the clock to maintain its fast pace and unique format. In the context of the breathless allegations of copying and theft, these appear to be somewhat mundane trade secrets, although we have witnessed relatively weak trade secret cases succeed in the past (see the AvidAir Helicopter v. Rolls Royce decision by the Eighth Circuit last year).

In essence, this dispute really boils down to a misappropriation of idea case. While the elements and standards for this type of claim differ from state to state, these cases have traditionally proven to be tough ones to win.  (See, for example, NBC’s successful defense of The Biggest Loser from a writer who claimed it stole her idea, “Phat Farm/Fat Farm — A Weight Loss Adventure,” as well as Tom Cruise and the producers of The Last Samurai’s recent jury verdict against two brothers who said they pitched them the idea for the movie first).

Glass House is set to debut on ABC on June 18 so there will likely be a request for a temporary restraining order, or perhaps even a preliminary injunction, over the next few weeks. As always, I will keep you posted on any developments.

CBS_ABC.pdf (1.81 mb)

For trade secret and non-compete lawyers, it was a productive Spring Meeting at the American Intellectual Property Law Association (AIPLA). Here are some of the highlights from Thursday’s trade secrets track “The Internationalization of Trade Secrets: Big Cases, Big Verdicts and Big Challenges” presentation:
 
Protecting Trade Secrets Overseas. Beth Apperley, AMD’s Corporate VP of Legal, provided a number of practical pointers on structuring agreements and other safeguards for an American company in need of protecting its trade secrets overseas or in its foreign operations. In particular, Beth emphasized the importance of engaging capable foreign counsel conversant in the laws of that state at the outset so that a company can do its homework on the jurisdiction’s trade secret law and remedies. This analysis will allow a company to evaluate how adequately it can protect those trade secrets in that foreign state and decide which trade secrets it wants to use or disclose there. Beth also advised that once a company makes the decision to do business in a foreign country, it is critical to scrutinize and perform due diligence on your future foreign partners.
 
Challenges of Litigating Trade Secrets Disputes against Foreign Defendants. Mike Songer of Crowell & Moring spoke next. Mike was the lead trial lawyer for DuPont in its epic battle with Kolon, a case that resulted in a $920 million verdict last year (in my view, the most important trade secret case last year and a solid No. 1 in my Top 10 for 2011). He was able to share some of his experiences and provide practical pointers involving personal jurisdiction and the inevitable complications with personal service and discovery under the Hague Convention and other treaties. His advice?  Plan for a lot of time for those processes. Mike also emphasized the importance of translators and he shared that they can make or break your trade secrets case against a foreign defendant. For example, in the deposition context, Mike recommended selecting a translator who is not only capable but tough, as battles over what a foreign witness may have said will invariably erupt over key testimony (i.e., did the witness say that he “took” the information or that he “only reviewed” it as it lay in plain sight?).
 
Litigating Spoliation of Evidence Disputes. Griffith Price of Finnegan Henderson spoke next and he used Judge Robert Payne of the Eastern District Court of Virginia’s seminal ruling last year in the DuPont v. Kolon case as a template for examining the emerging issues in spoliation of evidence. For those not familiar with the ruling, after a number of Kolon employees deleted or wrote over approximately 17,000 files, Judge Payne sanctioned Kolon by providing an adverse inference in the jury instructions about the missing evidence at trial,  a ruling that Mike Songer agreed had an significant impact on the jury in the DuPont case. In a highly entertaining but substantive presentation, Griff also weaved the importance of litigation holds and what happens to data and information when a party or former employee tries to delete or write over it on a computer. Griff’s key takeaway? The cover up is always worse than the crime.
 
Managing Mobile Employees and Their Personal Devices. Ron Johnstone, Vice President and Associate General Counsel of Yahoo Inc! provided some sobering advise under the topic of personal devices. Ron has concluded that as a practical matter, it is nearly impossible in the present employment environment to completely manage employees who are using their personal devices to access work files and confidential information. He advised that, short of banning that practice outright, companies have to accept the risk of security breaches, prepare for the worst, and manage employee expectations. To accomplish this, Ron recommended implementing and reinforcing a culture of security, reserving the ability to “wipe” devices clean if any devices are lost or stolen, ongoing training and annual acknowledgements, and otherwise managing employee expectations about the privacy that they will have to surrender in exchange for the convenience of using their personal devices for work. Ron also raised an unforeseen issue that increasingly arises in the context of personal devices: recovering the information for possible litigation, an important reminder given the spoliation and preservation issues raised by Griff.
 
Litigating Trade Secrets Cases in the ITC and the Impact of the TianRui Group decision. Bryan Wilson of Morrison & Foerster’s  Palo Alto office spoke about the pros and cons of litigating a trade secrets claim before the International Trade Commission (ITC). It appears that the ITC is an under-utilized tool for trade secret plaintiffs, as Bryan’s research only revealed two previous reported trade secret cases before the ITC. While the ITC may only allow a litigant to bar importation of a foreign product into the U.S., it does provide significantly more confidentiality than traditional lawsuits because of the ITC’s presumption of confidentiality and the fact that many filings are under seal and not available to the public. As for the decision in TainRui Group (for more on the opinion, check out this post), Bryan wondered whether the decision really reflects what the Federal Circuit Court of Appeals really thinks is happenining in China, as the majority opinion seemed to reflect a “somebody’s got to do something about China!” theme and the minority opinion seemed to suggest “what did you expect to happen in China”?
 
Legislative Update. Peter Torren of Weisbrod Mateis & Copley provided a comprehensive update on the Economic Espionage Act, the pending Cyber Information Sharing and Protection Act (CISPA), the New Jersey Uniform Trade Secret Act and relevant recent decisions construing those and other federal statutes. As a former federal prosecutor, Peter was dismayed by the recent rulings in U.S. v. Aleynikov and U.S. v. Nosal, noting that one recent commentator had characterized the decisions’ combined effect as “disastrous” for the IP community and a failure by the legal system to adequately protect the software community. Peter said the pending civil amendment to the EEA is still in committee and he urged the Senate to adopt language to eliminate a future result like Aleynikov.
 
On behalf of the AIPLA’s Trade Secrets Law Committee, I would like to thank the panel for the outstanding presentation, their hard work and practical insights. The content provided by the speakers at the Spring Meeting was especially tremendous. AIPLA’s Trade Secrets Law Committee Chair, Dan Westman, and I are going to see if the Committee can make that content available to AIPLA Trade Secret Committee members in the future, perhaps through webinars and other media.

Here are the noteworthy posts, articles and cases of the past week:   Trade Secret and Covenant Not to Compete Articles, Cases and Posts: 
  • Are CBS and ABC about to get in a row over the theft of trade secrets? According to The Hollywood Reporter, CBS attorneys have sent a strongly worded cease and desist letter that claims that a new ABC reality series, Life in the Glass House, is being produced by 18 Big Brother veterans who might reveal private information about the inner workings of the show. Spats over the misappropriation of ideas and pitches are common in the entertainment industry but rarely do you have two major networks threating to litigate against one another. 
  • Can a church assert a trade secrets claim? Northern California District Court Judge Lucy Koh has answered in the affirmative, rejecting a plaintiff’s claim that the Free Exercise clause would entangle courts in thorny constitutional issues, reports Professor Howard Friedman in his Religious Clause Blog. For more about this fascinating case, The Art of Living Foundation v. Doe, check out my post about this case last fall; it involves some interesting questions about determining the identity of anonymous whistleblowers who disclose confidential information over the Internet. 
  • If you want to enforce your non-compete in Massachusetts, you’d better comply with your own agreement, advises Foley & Hoag’s Massachusetts Non-Compete Blog. In that recent case, Ace Precision v. FHP Associates, a Massachusetts court concluded that the plaintiff, who was attempting to enforce a covenant accompanying an asset sale, could not enforce the non-compete because it had defaulted by failing to pay royalties under the agreement. 
  • A Sanofi Aventis scientist has been sentenced to 18 months in prison for stealing the pharmaceutical company’s trade secrets and putting them up for sale through the U.S. branch of a Chinese chemicals company. Yuan Li, 30 years old, was sentenced by New Jersey District Court Judge Joel Pisano as part of a plea agreement reached in January.
  • Former Silicon Valley engineer Subin Zhang was convicted of stealing trade secrets from his former employer Marvell Semiconductor by Northern California District Court Judge Ronald Whyte. Zhang was found guilty on three counts of theft and copying of trade secrets for downloading the trade secrets from a secure database, one count of duplication of trade secrets for loading those trade secrets onto a laptop, and one count of possession of stolen trade secrets. 
  • A recent New York trial court opinion, MSCI Inc. v. Jacob, has received a lot of attention from trade secret bloggers because it may be the first New York case requiring a plaintiff to identify its trade secrets before proceeding further with discovery. Womble Carlyle, Seyfarth Shaw, Littler and Epstein Becker’s blogs all have fine posts about the case. 
  • Ken Vanko has a good wrap-up of some recent developments, including a discussion of a recent Pennsylvania case, Outdoor Lighting Perspectives Franchising, Inc. v. OLP-Pittsburgh, Inc., involving a franchisee’s successful effort to scale back a broad non-compete. 
  • Russell Beck has updated his 50 state non-compete survey for those looking for developments in their state.
Cybersecurity:
  • Hacker Fight! “Pirates Bay Scolds Anonymous for Cyberattacks on Its Behalf,” reports Andy Greenberg of Forbes.
News You Can Use and Other Articles of Interest: 
  • Want to keep Google and others from tracking you? The New York Times has some tips on “How to Muddy Your Tracks on the Internet.” 
  • The Times also advises that “Taking E-Mail Vacations Can Reduce Stress, Study Says.” 
  • As for light reading, Mark Zuckerberg is getting a lot of attention as the Facebook IPO draws near, as New York Magazine gushes about “The Maturation of the Billionaire Boy-Man.”

On Monday, I wrote about recent media reports describing Delaware Chancery Court Judge Leon Strine, Jr.’s Opinion enforcing two confidentiality agreements between Martin Marietta and Vulcan to bar Martin Marietta from undertaking a hostile bid for Vulcan for the next four months (that post is below).  I have since been able to get a copy of the Opinion, which is attached as a PDF at the end of this post.  While it is not a light read (138 pages long), it is well written, well reasoned, and thoroughly entertaining. 

Given the prominence of the Delaware Chancery Court, the high profile nature of the dispute and the law firms involved (Skadden Arps and Wachtell Lipton), Judge Strine’s Opinion has generated tremendous media interest (see recent analyses provided by The Wall Street Journal and The New York Times to name just a few).  While it does not apply a traditional trade secret analysis (i.e., reasonableness of safeguards, readily ascertainable, valuable to competitors, etc.), it is still an important decision in an important jurisdiction laying out sound principles for enforcing a non-disclosure agreement (NDA).  As a result, it provides four important lessons for those in the trade secret community.
 
First, the Opinion should remind us that in the context of written confidentiality agreements, we should not hesitate to make forceful public policy arguments for their enforcement.  It is easy to get caught up in defending the language of a contract, but it is always important to emphasize the intent and goals of the contract at issue.  To that end, Vulcan’s counsel did a fine job of hammering the need for the enforcement of these agreements in the financial market so that future commercial parties could be confident that their disclosure of proprietary information would not be used against them. 

Judge Strine’s Opinion repeatedly emphasized those goals.  In particular, Judge Strine repeatedly wrote about the need for ensuring that these agreements continue to be meaningful as risk-reducing devices to enable companies to more readily consider voluntary, value-maximizing M&A transactions.  He also focused on the parties’ expectations and the importance of discouraging future parties from trying to “end-run contractual pre-disclosure procedures.” 
 
Second, in commercial contracts subject to 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  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.

Third, the Opinion reinforces the importance of making a reasonable request for injunctive relief.  At the trial/preliminary injunction hearing, Vulcan made what the court deemed to be a measured request for injunctive relief — namely, a four month injunction that would prevent Martin Marietta from offering its slate of directors at an upcoming Vulcan shareholder meeting.  Judge Strine commended Vulcan for that request and I suspect it also helped Vulcan win a number of close calls on credibility in what was a well-argued and hard-fought case.  Moreover, that request was particularly shrewd as it appears unlikely that an appellate court will be able to do anything before that June meeting.
 
Finally, it reminds us that courts are still willing to impose what amounts to a non-compete (or cooling off period) if they find that a defendant has misbehaved and substantially breached a confidentiality agreement.  Martin Marietta forcefully argued that Vulcan was trying to impose a condition not found in the agreement (in this case, what is known in the M&A community as a standstill agreement) but Judge Strine found that this remedy protected the expectations of both parties going into the NDA.  In this respect, this case mirrors many trade secret cases where a plaintiff argues that a non-disclosure agreement should be enforced to forbid future conduct to ensure that the goals of the agreement are met (most notably, the recent Allergan v. Merz case).

Not surprisingly, Martin Marietta has announced it will appeal from this ruling.  I will continue to monitor the case as there is sure to be future fireworks.

92437285-Chancellor-Strine-s-opinion-in-Martin-Marietta-Materials-v-Vulcan-Materials[1].pdf (352.98 kb)

05072012On Friday, Delaware Chancery Judge Leo Strine, Jr. issued a 100+ page opinion finding that gravel material supplier Martin Marietta Materials “thoroughly breached” confidentiality agreements with competitor Vulcan Materials during merger negotiations and as a result, its effort at a hostile takeover bid would be prohibited for the next four months. It appears that Martin Marietta used confidential information provided under the agreement to formulate the hostile bid.

The companies are the two largest construction materials suppliers in the United States. I have tried to get the opinion from the Chancery Court’s website but it does not appear to be available yet, so I am relying on the various media reports of this significant opinion.

According to Bloomberg, Martin Marietta sued on Dec. 12, 2011, the same day it made the hostile bid, in a preemptive move to get the court to rule that the offer wasn’t prohibited by a May 2010 confidentiality agreement between the companies. Vulcan countersued, seeking an injunction against the hostile bid. The takeover would have created the world’s largest producer of sand, gravel and crushed stone.

The Wall Street Journal has reported that Judge Strine ruled that allowing Martin Marietta to benefit from nonpublic materials supplied during friendly talks would set an unfair precedent for corporate deal-making overall. “If the cost of sharing information is to be at the mercy of the other party…a typical CEO [would] tend not to risk sharing,” Judge Strine wrote. “Rewarding a breaching party like Martin Marietta would encourage other parties to end-run contractual pre-disclosure procedures,” he added.

Injunctions like this are exceedingly rare and it will be interesting to see what Martin Marietta did to warrant this order. The opinion may prove to be an important one not only in hostile merger transactions but for many potential acquisitions involving smaller companies. Failed acquistions are among the more frequent types of trade secret disputes; given the prominence of the Delaware Chancery Court, this opinion could be an extremely important one in that context.

I will update this post when I am able to retrieve and review the opinion.