Many of us are still trying to get our minds around the transformative effect of social media sites on the workplace, on litigation and, for purposes of this post, the trade secret practice area.

 

Social media’s impact has been both practical and substantive. On the practical side, when a a non-compete case comes through the door, one of the first things that I do is check to see if the potential defendant has a LinkedIn profile for background information. More often than not, my client has already scoped that profile out because the client remains “connected” to the former employee and can monitor, to some extent, the employee’s contacts and connections. The Virginia Non-Compete Blog, whose clients are generally employees on the receiving end of non-compete disputes, has likened this curiosity to a form of “cyber-stalking,” effectively using the analogy of a break-up and resulting matrimonial dispute to illustrate that point (it’s a great example, as Facebook and other social media have become an evidentiary boon to the matrimonial bar). As a result, it counsels its clients to take a hiatus from social media sites to avoid potential disagreements during this period of high tension, which is good advice.

 

Substantively, LinkedIn continues to be a topic of discussion in the trade secret community. I wrote a post last month on the Sasqua Group decision out of the Eastern District of New York and its potential impact on the protection of customer lists. Another issue recently raised in the context of LinkedIn is who truly owns the connections information that is listed within LinkedIn’s site. A case that was closely watched last year, TEKsystems, Inc. v. Hammernik, et al. (0:10-cv-00819-PJS-SRN) (D. Minn. 2010), addressed this issue — namely, whether a defendant’s use of LinkedIn was a violation of his non-solicitation agreements. 

 

In that case, TEKsystems accused one of the defendants of using LinkedIn to solicit TEKsystems’ contract employees and clients and identified approximately 20 TEKsystems contract employees that were solicited using LinkedIn. While that defendant admitted using LinkedIn to communicate with those individuals, he denied otherwise having communicated with them. He also argued that TEKsystems’ and its employees’ use of LinkedIn and Facebook for recruiting, promotional and other purposes voided any claim that any information posted on those sites was a trade secret or confidential.

 

No ruling was ever issued on the LinkedIn issues as the parties entered into a stipulated order enforcing the non-solicitation agreement and requiring the return of TEKsystems’ documents; however, the case generated tremendous interest as the first case to attempt to sort out these issues.

 

At the end of the day, the same fundamentals that apply to protecting trade secrets in other areas apply to the use of LinkedIn. First, to the extent that a company uses a non-solicitation or non-compete agreement, that agreement should specify that post-employment communications to customers made through an online social networking website including LinkedIn or Facebook constitute a violation of that agreement. This step will preserve the client’s contractual remedy, whatever the trade secret status of the contact information.

 

Second, any employment or non-solicitation agreement should include a confidentiality provision that expressly defines confidential information to include client identities and contact information and that it is the property of the employer. That provision should unambiguously state that confidential information may not be used or disclosed for any purpose other than on behalf of the employer, including through the use of social media, and again, identifying LinkedIn. 

 

Finally, employers should develop, disseminate, and, if necessary, train employees on company policies addressing the use of social media. Through these policies, employers should make sure that their employees understand which information is considered confidential and what information constitutes a trade secret. This will require companies to be vigilant about their employees’ use of social media and that they monitor that use from time to time to ensure that employees are complying with their written agreements and the company’s policies. Many companies have already created social media officers who are responsible for ensuring the creation and implantation of these social media policies. In the absence of follow-through to ensure compliance, a court may deem that failure as proof that trade secrets do not exist or are not sufficiently important to warrant protection.

Trade secret litigation is contentious by its very nature, and the issue that never fails to cause a litigant’s blood to boil is the effort by an opponent to discover trade secrets not directly at issue in a case. A decision last week in the high profile case brought by Apple over Samsung’s new Galaxy cell phone and computer tablet strikes a welcome blow in favor of confining discovery to the actual issues of the case.  
 
Typically in a discovery dispute over confidential information, the party claiming confidential status must make a prima facie showing of that status and show any disclosure might be harmful (this harm is presumed with competitors); the burden then shifts to the party seeking the discovery to show that such information is both relevant and necessary to the underlying action. Universal Del., Inc. v. Comdata Network, Inc., 2011 U.S. Dist. LEXIS 28963 (M.D. Tenn. Mar. 21, 2011); Spartanburg Reg’l Healthcare Sys. v. Hillenbrand Indus., 2005 U.S. Dist. LEXIS 30594 (W.D. Mich. Aug. 24, 2005). Where both parties meet their competing burdens, “the court then balances the need for discovery of the information against the alleged injury which will result from disclosure.” Universal Del., Inc., 2011 U.S. Dist. LEXIS 28963, at *6.
 
In Apple Inc. v. Samsung Electronics, Ltd., et al., Case No. 11:CV-01846-LHK, U.S. District Court for the Northern District of California, San Jose Division (June 21, 2011), Apple claims that Samsung’s Galaxy cell phones and computer tablets infringe its trade dress, trademarks, and utility and design patents. When Apple moved for expedited discovery against Samsung, Samsung insisted on “reciprocal” discovery on future Apple products, arguing that Apple had “opened the door to discovery of unreleased products” and its trade secrets. 
 
Apple opposed that request and argued its case was expressly limited to infringement of its existing product line, not on any next generation products that it might release in the future, and that those trade secrets as to subsequent product lines were irrelevant. On June 21, 2011, the court rejected Samsung’s motion to compel. Its clean and logical reasoning is best reflected in the following quote:
Ultimately, the essence of Apple’s claims is that Samsung has copied Apple’s products. Common sense suggests that allegations of copying are necessarily directed at Apple’s existing products, to which Samsung has access and could potentially mimic, and not at Apple’s unreleased, inaccessible, next generation products. Samsung has cited no case requiring a plaintiff in a trade dress or trademark case to produce its future products in a context similar to this one. Given these circumstances, the Court agrees with Apple that it simply has not put is next generation products at issue, at least with respect to its anticipated motion for a preliminary injunction, and Samsung does not need access to these products in order to oppose such a motion. 
(Opinion at p. 9) (A link to that opinion can be found below).
This decision benefits trade secret plaintiffs and defendants alike. Too frequently, a party perceives that it can gain leverage by trying to use discovery on this basis as a pressure point to secure an unfair tactical or strategic advantage. The purpose of the request may be to cause delay, distract the court from the merits of the dispute, to squeeze the opposing party to make him or her feel further at risk, or to simply wear down an adversary with the potential cost associated with this discovery. Although there will always be parties who will insist on pushing this envelope, one can hope that the clean and unassailable logic of this decision will be followed in other trade secret cases.

Apple Samsung Disc Ord.pdf (109.70 kb)

In a significant ruling for employers, the Texas Supreme Court held on Friday that stock options could serve as valid consideration to enforce a covenant not to compete. This is a pretty big decision as Texas has long been viewed as one of the more difficult jurisdictions to enforce a non-compete.
 
In Marsh USA Inc. and Marsh & McLennan Cos. Inc. v. Rex Cook, Case No. 90-0558 (June 24, 2011), Rex Cook, a long-time employee of over 20 years, signed an agreement with Marsh permitting him to exercise stock options in exchange for two-year non-solicitation agreement. Under the terms of the agreement, Cook agreed to be bound to that two-year non-solicitation period if he left the company within three years after exercising the stock options. When Cook left the firm less than two years later and joined a competitor, Marsh sued to enforce the non-solicitation agreement.
 
After both the trial and appellate court levels refused to enforce the non-solicitation agreement, the Texas Supreme Court reversed in a 6-3 opinion. The Supreme Court found that under Texas’ Covenants Not to Compete Act, “the consideration for the noncompeting agreement (stock options) is reasonably related to the company’s interest in protecting its good will, a business interest the Act recognizes as worthy of protection. The noncompete is thus not unenforceable on that basis.” The case has been remanded to the trial court for further proceedings.
 
The Texas Supreme Court’s opinion is not yet available online, but the parties’ briefs can be found here.  I will get a post out on that opinion once it becomes available.
 
John’s December 30, 2011 Edit:  From the “better late than never” file, I realized that I had not followed up with a post on this decision so I have now attached a PDF of the Texas Supreme Court’s decision below.
 

 

 

Marsh USA Inc. v. Cook.pdf (155.13 kb)

When protecting their trade secrets, many companies rightly focus on the agreements and safeguards that they have with their employees and business partners. However, an overlooked relationship that they should consider scrutinizing more closely is their relationship with their vendors and prospective vendors. 
 
Take the highly-publicized dispute that Goodyear had with its vendor Wyko Tire Technology. In 2007, two engineers from Wyko visited Goodyear’s Topeka, Kansas plant under the auspice of servicing Wyko equipment being used in that plant. According to the indictment in that case, they lied to their Goodyear escorts to get into the plant, they carried a cell phone camera into a restricted area, and one Wyko employee took seven photos of a highly proprietary roll over-ply down device while the other stood at a distance to look for Goodyear employees. The employees then emailed those pictures to others at a Wyko subsidiary, who later used them to design a similar process for Wyko’s use. The two Wyko engineers were prosecuted and convicted of 10 felony counts for trade secret theft and wire fraud last year. 
 
Employees may also be tempted to overreach in their relationships with vendors, which are inherently more difficult to monitor than relationships with co-workers or formal business partners. For example, in February, a senior manager of Home Depot plead guilty to stealing its secrets and turning them over to a vendor. According to the U.S. Attorney’s Office, while working as a senior manager in product engineering for the home improvement retailer in 2008, the manager “gave out confidential and proprietary pricing information, including the price that the company was paying the vendor’s competitors for the products that the vendor wanted to sell to the company.” He apparently did this in the hope that it would help him get a job with that vendor. (The Trade Secrets Blog has a thorough February 2010 post on this plea).
 
Other situations with vendors may present risks because of the informality that accompany those relationships, particularly in the early stages. As we all know, vendors frequently provide demonstrations highlighting the services that they provide and in many of these situations, employees arrange these meetings without appropriate safeguards, agreements or the involvement of key decision-makers. As a result, a company may find a vendor later claiming misappropriation of trade secrets and ensnared in litigation as a result. See Speed-Trac Technologies v. Estes Express Line, U.S. District Court for W.D. Carolina, Case No. 3:2008cv00101 (vendor sued prospective customer alleging customer misappropriated alleged trade secrets provided during presentation; summary judgment ultimately granted to customer).
 
A recent article by Josh Durham of Poyner Spruill in Charlotte provides some sound advice on how to manage these relationships. A prudent first step is to improve the vendor-invitation process by involving senior management, research and development departments and IT staff in the scheduling of these meetings so they can vet whether the process or technology being offered is a good fit within the organization and in the process, minimize the likelihood of problems. In addition, prior to these demonstrations, vendors may offer one-sided NDAs that are overly broad in their designation of what is confidential; again, involving key decision-makers should ensure that appropriate NDAs that are mutual and identify the appropriate parameters of confidentiality will be executed. Emphasizing that vendor relationships are also subject to company confidentiality policies and agreements. Finally, as the Goodyear and Home Depot incidents illustrate, vendor relationships should be closely monitored, especially situations involving former employees who join vendors or vendor visits that provide access to sensitive technology or permitted in restricted manufacturing areas.

A trade secrets plaintiff can now secure both a damages award for misappropriation of trade secrets and a permanent injunction to prevent further injury under Ohio’s version of the Uniform Trade Secret Act. In Litigation Management, Inc. v. Bourgeois, 2011 Ohio 2794 (June 9, 2011), the Court of Appeals for the Eighth Appellate District in Ohio (Cuyahoga County) has provided trade secret plaintiffs in Ohio with a powerful tool to protect their intellectual property. (For additional details on this case, I recommend the Trading Secrets Blog).
 
The plaintiff, LMI, provided litigation support specializing in analyzing medical records; it brought the case against several former employees who formed a competitor, Excelas. It appears that LMI discovered that its former employees had breached their non-competes and non-solicitation agreements after the expiration of those agreements (the opinion is less than clear on this point). As a result, LMI sued them and Excelas for money damages in the form of lost sales, arguing that the defendants misappropriated its pricing strategy and other trade secrets to secure those sales. At the close of evidence, the trial court found the agreements to be enforceable and enforced them in the “Greater Cleveland Metropolitan Area.” After the jury awarded damages for the lost sales in that geographic area, LMI then moved the trial court to enforce the agreements in the form of a permanent injunction. The trial court denied that request, reasoning that the plaintiff had already received an adequate remedy at law in the form of money damages and, therefore, an injunction was unnecessary.
 
The Eighth District Court of Appeals disagreed, noting that the damages award only remedied the plaintiff’s past damages, not its future damages. The Eighth District recognized that “injunctions concern the prevention of future harm, not compensation for, or punishment of, past harm” (Opinion at Para. 18). Without an injunction, the defendants would continue to have the benefit of the trade secrets post-trial and would continue to use them against the plaintiff.
 
In another noteworthy holding, the Eighth District found that the jury’s verdict created a rebuttable presumption of irreparable harm resulting from the loss of the proprietary information. As a result, it found that the defendant now bears the burden of proving that the injunction should not issue in this situation.
 
The take-away? This ruling greatly benefits a company which either discovers the misappropriation long after the misconduct has begun or could not secure an injunction at the outset of the case. Indeed, the Eighth District’s creation of a rebuttable presumption favoring a permanent injunction should provide that plaintiff with the ability to get that post-trial relief, a substantial weapon against the defendant found to have misappropriated trade secrets.

Two recent decisions in the news highlight the risks that may accompany hiring an employee subject to a potentially enforceable non-competition or non-solicitation agreement. 
 
The most recent decision involves an injunction enforcing the non-compete of a recently-hired employee even though the new employer, Avaya, took, in the district court’s own words,”scrupulous steps” to protect the former employer’s trade secrets after the hire. (Many thanks to the Massachusetts Non-Compete Blog for its fine post on this decision). On June 2, 2011, in Aspect Software, Inc. v. Barnett, Civil Action O. 11-10754-DJC, the United States District Court Court for the District of Massachusetts detailed the efforts of Avaya and the former employee, Gary Barnett, took to protect the plaintiff Aspect Software’s trade secrets before Barnett started his new job:
 
Barnett turned off his Aspect-issued Blackberry immediately after tendering his resignation, left his laptop computer in his office, and boxed all Aspect property in his home and made arrangements for a representative from Aspect to retrieve the boxes. Avaya included language in its employment offer to Barnett that specifically forbade him from using any Aspect trade secrets in the course of his employment with Avaya and, separately, incorporated by reference Barnett’s Agreement with Aspect. Avaya and Barnett subsequently entered into an “Employee Agreement Regarding Intellectual Property” that included similar protections.
 
In addition, Avaya’s Senior VP and President of Global Communication Solutions sent Barnett a detailed e-mail that provided the following ground rules:
  1. Do not retain any documents or information relating to Aspect’s business, in any form, that you obtained in your role as an Aspect employee.
  2. Do not disclose any document or information relating to Aspect’s business to anyone at Avaya and do not use such documents or information in your employment with Avaya.
  3. If Aspect comes up in any discussion or meeting that you are attending in your role as an Avaya employee, you should not provide any input.
  4. If, in the course of your employment with Avaya, you are asked for information relating to Aspect’s business, you must refrain from providing the information.
  5. Until April 19, 2012, do not have any communications with any Aspect employee about leaving his or her employment with Aspect.
  6. Until April 19, 2012, do not play any role in hiring anyone who was employed with Aspect in the 180 days prior to your involvement in the hiring process.
  7. Until April 19, 2012, do not have any communications with any Aspect customer, supplier, licensee, licensor or business relation about doing business with Aspect or Avaya.
  8. Until April 19, 2012, do not make any negative statements about Aspect to any Aspect customer, supplier, licensee, licensor or business relation.
Despite these steps and despite the court’s expression of appreciation for the efforts to “protect the integrity of Aspect’s trade secrets,” the district court nevertheless concluded that even if “wholly successful,” these steps would only reduce the harm flowing from the breach of the agreement and not the breach itself. In addition, the district court noted that these steps lacked the force of law and were merely contractual and voluntary in nature (which begs the question of whether an agreed order was ever addressed). Applying the inevitable disclosure doctrine, the district court concluded that an employee, no matter how conscientious, might ultimately use the forbidden information and as a result, the court enforced the non-compete. However, it is worth noting that the court required Aspect to post a $500,000 bond, a substantial condition for a case involving only one employee.
 
The other case involves a $7.86 million jury verdict against Houston’s University General Hospital and its affiliated companies Ascension Physician Solutions and Luxxus Health Systems for intentionally interfering with the contracts of a competitor, Prexus Health. University General Hospital had hired several senior executives who were subject to non-compete and confidentiality agreements with Prexus Health. The Harris County, Texas jury found that University General Hospital’s leadership wrongfully terminated a series of contractual agreements with Prexus, agreements which covered management and administrative services at University General’s 72-bed specialized hospital. The jury also found that Luxxus interfered with confidentiality and non-compete agreements by hiring the former Prexus executives and employees to perform the same services through companies controlled by University General executives.
 
How does a company avoid these potential issues? First, by debriefing any prospective employee about the existence of a non-compete, non-solicitation or non-disclosure agreement, an employer can avoid hiring a prospective employee altogether if it foresees a potential issue. The problem, however, with this approach is that in many industries that might substantially reduce, if not eliminate, the talent pool available to that employer. Second, in the event that a company has concerns about the scope, duration or enforceability of a former employee’s agreement (for example, few, if any, courts would enforce a worldwide non-compete), it should take steps similar to what Avaya did, as detailed above, to minimize any improper disclosures or contacts. Although the district court granted an injunction in that case, the district court’s language commending Avaya and Barnett suggests that it was conflicted about issuing the injunction but felt duty-bound to do so. The order directing a substantial bond ($500,000), however, speaks volumes about what the court thought was appropriate and suggests that the court used its discretion to shape a resolution or result more in line with the perceived equities of that case. Third, by taking the steps that Avaya did, a party should be able to avoid the situation that befell University General Hospital; if the new employee (and by extension, the new employer) is not using a former employer’s trade secrets or contacting former customers, the risk of a multi-million dollar verdict should be eliminated.

To what extent does one waive privilege if he or she comments about ongoing trade secret litigation in social media or other contexts? Given the substantial publicity surrounding the filing of several high-profile trade secret cases (most notably, the Paypal v. Google lawsuit and Wal-Mart’s lawsuit against whistleblower Bruce Ballard, both of which were covered by the Wall Street Journal, the New York Times, and other leading media), and the significance of social media in communicating the parties’ positions, this is an important consideration in the context of trade secret litigation. 
 
The public’s perception of the merits of a trade secret lawsuit may be as important as the rulings in that litigation, so companies often use print, digital and social media to communicate their positions to investors, venture capital firms, customers, vendors and key employees to assure them about the impact (or lack of impact) of that litigation on their bottom line. (An excellent example is Paypal’s splendid press release explaining its recent trade secret lawsuit against Google). These issues are particularly pronounced in many trade secret cases, where bet-the-company technology may be at issue, and where there is the resulting need to assure those constituencies that a company has exclusive rights to that technology and those parties should continue to work with and support that company.
 
A federal decision late last year details the importance of being careful about what commentary you or your client provide in any social media or blog about ongoing litigation. In Lenz v. Universal Music Corp., No. 07-3783 (N.D. Calif.), a federal magistrate found that the plaintiff had waived attorney/client privilege by commenting about her case in blogs and social media. (For more information about this and other rulings in this case, please check out the E-Commerce & TechLaw Blog for many fine posts on this case). Lenz arises out of an allegedly improper take down under the Digital Media Communications Act in connection with a video post on Google and it has led to a number of significant rulings in the DMCA context. However, Lenz has also serves as an important reminder of the potential impact of inadvertent social media disclosures on a pending lawsuit.
 
Last November, the magistrate in Lenz ruled that the plaintiff, Stephanie Lenz, had waived attorney-client privilege by writing about her case repeatedly in e-mail, on her blog, and in G-mail chat sessions. Through these online media, Lenz made representations about conversations she allegedly had with her Electronic Frontier Foundation (EEF) attorneys — conversations that involved why she sued Universal and discussions of legal strategies she was pursuing in her suit against Universal. As a result, the magistrate ruled that these online communications about the case amounted to a waiver of the privilege and that the communications were relevant to the plaintiff’s motives for filing suit against Universal. The magistrate ordered EFF to produce all documents previously requested by Universal which had been withheld due to a claim of attorney-client privilege; in addition, Ms. Lenz was ordered to submit to an additional deposition by Universal’s counsel on these issues.
 
As with many situations involving the use of social media, the same legal principles generally apply. For example, if a client were to do an interview with a local television station revealing his/her litigation strategy and motivations for an ongoing case, a court would likely find that client waived attorney/client privilege on those issues. Social media is no different, as far as the legal consequences that may flow from those disclosures. The difference is — to quote a recurring theme in this blog — the speed in which decisions are made in the context of social media and trade secret litigation.  In my television-interview example, there would be more time for deliberation, vetting and care in ensuring that no inadvertent disclosures were made. In contrast, in the social media context, decisions are made quickly and are driven by perceived desires to get your position out first, and by potential media deadlines. Throw in the pressure, speed and significance of many trade secret cases, and you have the proverbial witches’ brew for an inadvertent disclosure that complicates the litigation. 
 
The take-away: A careful and well-thought out press release at the start of a litigation should present no problem. However, once a trade secret lawsuit commences, prudence dictates that all potential social media communications about a case be directed through or with the approval of one person who can best appreciate the impact of those communications in these potentially conflicting contexts. More often than not, the best person to serve as that clearing house is in-house counsel, who is frequently most familiar with the competing legal, business and public relations aspects of the dispute and can balance them accordingly.

Are your trade secrets safe if you file them in a common format for redaction in the federal PACER system? A recent article in the ABA Journal suggests the answer may be “no.” The article details a study conducted by Timothy Lee, a Ph.D. candidate in computer science at Princeton, who found that he was able to effectively bypass the vector format that was supposed to redact trade secrets, personal information, and the names of witnesses, jurors or plaintiffs in 194 PACER filings. (Lee’s actual study can be found at Freedom to Tinker, a blog hosted by Princeton’s Center for Information Technology Policy; additionally, I’d recommend checking out Womble Carlyle’s Trade Secrets Blog and Seyfarth Shaw’s Trading Secrets for their insightful coverage of this study.) 
 
Lee’s study noted that the vector format used in PDF documents has multiple layers and is susceptible to the “lifting” of those layers to see information that was supposed to have been redacted. The format in question uses a blacked-out rectangle to redact the confidential information. According to Lee, lifting the black rectangles and extracting the information from these documents might be as easy as cutting and pasting. Lee wrote a computer program to detect redaction boxes within the 1.8 million PACER documents in Princeton’s collection; the software identified approximately 2,000 documents with redactions, and within that sample, 194 PACER filings had redactions that could be evaded. PACER reportedly has about 500 million documents in its system, although it is unclear how many include redacted documents using this format. Lee has cautioned that Princeton’s PACER documents are not taken from a random sample, so it is impossible to estimate just how many PACER documents might be subject to this issue. Whatever the quality of the sample, given the number of PACER documents and the number of redactions that are likely attached as PDFs, it is probably safe to assume that there are thousands of documents that might be susceptible to this problem.
 
It goes without saving that this study presents special concerns to the trade secret litigation community, as many litigants frequently use this form of redaction for PDF documents and exhibits containing the trade secrets at issue.  Moreover, this concern is amplified by the fact that many filings in trade secret cases are done on an expedited basis (i.e., supporting documents for a TRO or preliminary injunction) where the time to reflect on the technical consequences of those filings is compromised by the pace of that litigation.
 
The take-away from this potential problem is that the safest course is probably not to file any documents with PDF redactions using this type of formatting using the PACER system until this issue is resolved. Instead, it may be prudent to file them manually under seal with the clerk’s office with instructions, or hopefully, an accompanying order, not to have them placed on the PACER system. Securing guidance on how to handle this issue with the district court during the TRO conference would make the most sense, and until you have an order or acceptable protocol, the best course would likely be to serve courtesy copies of any sensitive supporting PDF documents containing these trade secrets with the court initially. 

Can you use a trade secret to manufacture a competing product in violation of a written agreement, so long as you don’t disclose it? Remarkably, in New York, the answer may be “yes.” The case that led to this holding is back in the news, as a May 13, 2011 opinion by the Southern District of New York has ordered the parties in that case to proceed to trial on claims that were not resolved in a Swedish arbitration. 
 
Two years ago, the U.S. Court of Appeals for the Second Circuit caused an imbroglio in the trade secret and IP community when it issued its holding in Faiveley Transport Malmo AB v. Wabtec Corporation, 559 F.3d 110 (2d Cir. 2009). In Faiveley, the Second Circuit took the remarkable step of reversing the district court’s preliminary injunction pending that Swedish arbitration and holding that the defendant could continue to use the trade secrets at issue in its manufacturing operations so long as it did not “disclose” the trade secrets to anyone else.
 
Faiveley arose in a situation involving an expired license for air brake technology. The defendant, Wabtec, had continued to use confidential information and trade secrets granted to it under that expired license to manufacture braking components for subway rail cars over the objection of the licensor, Faiveley. The Second Circuit reasoned that because Wabtec was benefiting from the confidential information in connection with its unlicensed use, it therefore had no incentive to “disclose” the information, and, consequently, the risk of improper disclosure was not present. Of course, in so ruling, the Second Circuit ignored the central goal underpinning confidentiality agreements and trade secret law – the ability to control, limit and/or exclude others from utilizing one’s property in the form of confidential information and trade secrets.   
 
As you might expect, this decision resulted in disbelief within the trade secret and IP legal community, with one leading commentator concluding that the decision amounted to a “license to steal”. Ironically, it appears that the plaintiff Faiveley ultimately was able to persuade the Swedish arbitration panel within the ICC to impose an injunction at a permanent injunction hearing. Unfortunately, those practicing in New York or using New York law still have to contend with the holding, which has been followed by both state and federal courts applying New York law.
 
The good news is that New York has not adopted the Uniform Trade Secrets Act, and, as a result, the damage inflicted by Faiveley  has been largely confined to the New York trade secret community. The bad news is that this case remains a dangerous precedent because many commercial agreements have New York choice of law provisions, which are frequently a default or compromise choice because of the perceived strength of the commercial federal and state court bench. Thus, lawyers and clients should be wary of agreeing to New York law in a NDA or trade secret context. If one is going to agree to New York law, it would be prudent to include language specifically forbidding any kind of use, such as manufacture or improvements, in addition to language forbidding disclosure. This would hopefully preserve a breach of contract claim and strengthen any trade secret claim in any future dispute.

If a company intends to enforce a non-competition agreement, it had better be prepared to convincingly show that it fully complied with the other terms of that agreement, at least in Pennsylvania. In Figueroa v. Precision Surgical, Inc., Case No.10-4449 (3rd Cir., April 12, 2011), the U.S. Court of Appeals for the Third Circuit refused to disturb the U.S. District Court of New Jersey’s decision not to enforce a non-compete because it held that there was a real issue as to whether the plaintiff, Precision Surgical, Inc., had failed to abide by the terms of the agreement it sought to enforce. (A special thanks to Paul Derrick of Cranfill, Sumner & Hartzog, LLP for bringing this case to my attention). More specifically, the court found that Precision had failed to clearly show that it had fully performed under the agreement because there were many facts that demonstrated it had improperly treated the defendant, Joseph Figueroa, as an employee rather than as an independent contractor, including allegedly failing to pay him all of the commissions to which he was due.   
 
The facts (and in particular, the terms of the controlling written agreement) are less than clear in the opinion, which makes it difficult to determine the severity of the alleged breaches. In 2003, Figueroa executed an Independent Contractor Agreement (“ICA“) with Precision that included a two year non-compete and non-solicitation provisions as well as a non-disclosure obligation. Figueroa chafed under the restrictions that were increasingly placed on his efforts by Precision. After the parties sparred over a deduction from his commissions, Precision told Figueroa that it was abandoning the independent contractor model and asked him to sign a new agreement as an employee.  When he refused, Precision terminated the ICA. Figueroa then commenced a preemptive action to challenge the non-compete.
 
There are a number of facts that the district court and the Third Circuit found compelling in finding that Precision was possibly in breach. For example, Precision imposed “primary and secondary levels of reporting authority, as well as dress requirements, training obligations, and sales goals” upon Figueroa (Op. at 6). The Third Circuit also found it noteworthy that Figueroa wasn’t allowed to solicit clients without Precision’s involvement, that he was given an employment identification picture, a Precision business card and Precision headquarters telephone number, that he was required to devote 100% of his time to Precision, and that he was required to inform Precision of future marketing opportunities. These factors led the court to conclude that Figueroa was treated more like an employee than as an independent contractor in derogation of the ICA.
 
Perhaps of greater significance was Precision’s inability to refute Figueroa’s contention that it had failed to pay him his full commissions. Again, the record is less than clear but it appears, reading between the lines, that Precision required Figueroa to hire a subcontractor owned by Precision’s president, and then refused to reimburse him when Figueroa elected to hire another subcontractor instead.  
 
Although not emphasized in the opinion, an important fact appears to have been that Precision terminated the ICA because Figueroa refused to convert to the new agreement formally making him an employee. This act reinforced the theme of the fundamental breach of the agreement, as well as the unfairness of enforcing the covenant not to compete when it appeared that Precision was trying to change the rules.
 
Figueroa should serve as a good wake-up call for companies looking to enforce a non-compete or non-solicitation agreement. If a business is looking to enforce a non-compete or non-solicitation agreement, it should make sure that it has fully complied with its own contract. If a company owes travel expenses, severance, a commission or some other payment, it should ensure those payments have been made at the termination or exit interview stage if it is contemplating enforcing a non-compete or non-solicitation agreement. Likewise, it would be wise to take a step back and look critically at the contract and/or relationship that will be scrutinized to ensure that any potential claims of breach or other defenses can be defused.
 
On the flip side, if you are an employee, independent contractor, or other party who might be subject to a non-compete upon the termination of a relationship, Figueroa makes clear the importance of documenting what you believe to be material breaches of your agreement. As courts are increasingly tough on these agreements, the argument that the plaintiff failed to comply with its own agreement is a powerful club to wield.