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Thursday Wrap-Up (February 23, 2012): Noteworthy Trade Secret, Non-Compete and Cybersecurity Stories from the Web

 
by John Marsh 23. February 2012 11:30

Here are this week's noteworthy posts and articles on trade secrets, non-competes and cybersecurity:
 
Trade Secrets and Non-Competes:

  • The conviction of former Goldman Sachs' programmer, Sergey Aleynikov, under the Economic Espionage Act (EEA) for stealing Goldman's source code was overturned by the Second Circuit Court of Appeals within hours after oral argument last week. The Second Circuit issued a short order advising of a more detailed opinion later, but no grounds were provided. According to a thorough article in the New York Times, the Second Circuit likely focused upon "whether Goldman’s high-frequency trading system, and the code upon which it was built, was a 'product produced for interstate commerce' within the meaning of the statute." This promises to be an important opinion under the EEA and I will post later when it comes out.
  • IBM used an unconventional defense -- the plaintiff's deceased mother -- to prevail in a trade secret case in the Northern District of California. Alison Frankel's On the Case Blog reports that in Bierman v. IBM, IBM successfully argued that the statute of limitations barred the plaintiff's claims because he could not produce evidence that his deceased mother, to whom he transferred his technology for several years, was unaware of the alleged misappropriation.
  • In the latest salvo in the DuPont v. Kolon dispute, Eastern District Court of Virginia Judge Robert Payne denied Kolon's request to have him recuse himself because of his role in a 1985 patent dispute for DuPont while he was a partner with McGuire Woods, one of the law firms representing DuPont. The decision, which was issued in the remaining antitrust portion of the case brought by Kolon, rejected Kolon's arguments on the merits and as untimely. (A link to the opinion can be found below).
  • The Texas Employment Law Update Blog reports on a recent decision refusing to enforce a forfeiture provision in a stock incentive program that was triggered by a non-compete violation. The decision, Drennen v. Exxon Mobile Corp., found that the provision in question did not comply with the Texas Covenant Not to Compete Act.
  • Seyfarth Shaw's Trading Secrets Blog has an outstanding post about a recent decision by the Southern District of California, Platinum Logistics v. Mainfreight, involving the Computer Fraud and Abuse Act (CFAA). This is a rare CFAA decision from a court within the Ninth Circuit, as the district courts and litigants await the Ninth Circuit's en banc reconsideration of U.S. v. Nosal. According to Robert Milligan, the former employee's breach of her non-disclosure agreements could qualify as a violation of the CFAA as it is currently interpreted.
  • For you compulsive test takers, take a crack at the hypotheticals offered up in a recent post entitled "Would You Know a Trade Secret If It Jumped Up and Bit You?" on Coatings World.  
  • And for those who don't think the issue of trade secret misappropriation in China has reached the tipping point, take a look at The Onion, which provides its own parody of the recent Hanjuan Jin conviction. In the post, The Onion reports that a Motorola engineer was convicted of stealing "the plots to the next three Droid commercials" and "closely guarded, highly advanced tablet and smartphone tech specs that Motorola originally stole from Apple and Samsung." Ouch.


Cybersecurity:

  • Stroz Friedberrg, the renowned security firm, confirms in an article, "Securing Corporate Data in a Law Office's Computer Network," that lawyers and law firms are hacking targets. The article by Catherine Dunn in the Corporate Counsel site confirms a number of points in an earlier post of mine, including the use of "spear-phishing" to trick unsuspecting lawyers. It also provides an excellent checklist of steps a firm and its lawyers can take to protect themselves from these attacks.
  • According to Wired, Anonymous is promising regularly scheduled attacks on Fridays. Although Anonymous' mastery of the news cycle may be suspect, the government is taking them seriously on other fronts.  According to the Wall Street Journal, National Security Agency director, Gen. Keith Alexander warns that Anonymous could have the ability within the next year or two to bring about a limited power outage through a cyberattack.

News You Can Use:

  • With all the news about app providers downloading personal information, you may want to take a look at "Smartphone Security Blankets," an article that appeared in last weekend's New York Times, as well as Smart Money's "Keeping Prying Eyes Off Your Phone."

EI Du Pont v Kolon Recusal Opinion.pdf (1.18 mb)

 

Thursday Wrap Up (Feb. 16, 2012): Noteworthy Trade Secret, Non-Compete and Cybersecurity Articles from the Web

 
by John Marsh 16. February 2012 11:00

Here are the noteworthy trade secret, covenant not to compete and cybersecurity stories from the past week; as you will see, it was an extremely busy week and a significant number of the posts address China, no doubt because of the U.S. visit of Chinese Vice President Xi Jinping:

Trade Secrets and Non-Competes:

  • Any reversal of the TianRui Group v. ITC decision will have to come from the U.S. Supreme Court as the Federal Circuit just declined to reconsider the decision en banc (thanks to Wil Rao for the update; Wil represented the American company that initiated the underlying ITC action). TianRui Group was one of the most significant trade secret decisions of 2011 as it provided for a remedy (a ban on importation) for products incorporating misappropriated trade secrets overseas.  (A copy of the order entering judgment is attached below).
  • The Delaware Non-Compete Law Blog describes a recent case, Chesapeake Insurance Advisors, Inc. v. Williams Insurance Agency, Inc., that confirms the Delaware Chancery Court's unwillingness to "blue pencil" an overly broad non-compete or non-solicitation provision. Let this serve as a warning to anyone drafting an agreement governed by Delaware law.
  • Hanjuan Jin, a former Motorola Engineer, was convicted last week of stealing Motorola's trade secrets but avoided the more serious economic espionage charges. (I have attached a PDF copy of the 77-page opinion below). In a story that borders on being an urban myth in trade secret circles, Jin was detained by federal agents at Chicago's O'Hare International Airport in 2007 during a random security search before she could board a flight to Beijing on a one-way ticket. That discovery led to the subsequent litigation between Motorola and a number of its former employees, a case that settled last month after the district court denied the former employees' motions for summary judgment and set it for trial.
  • Senator John Kerry apparently gave visiting Chinese VP Xi an earful about the experience of a Massachusetts company that believes its trade secrets were stolen in China and has been frustrated by the Chinese legal system. In a New York Times article entitled "U.S. to Share Cautionary Tale of Trade Secret Theft With Chinese Official," the company, American Superconductors, "saw 70 percent of its business evaporate last year after a Chinese partner enticed one of its employees to steal the crown jewel of its technology." 
  • Seyfarth Shaw's Trading Secrets Blog has a nice summary of the recent decision by the Illinois Appellate Court, Second District, in Hafferkamp v. Llorca retroactively applying the Illinois Supreme Court's holding in Reliable Fire Insurance v. Arrendondo. As readers of this blog will recall, in Reliable Fire Insurance, the Illinois Supreme Court required that a court determine whether there was in fact a legitimate business interest in support of a non-compete.
  • Kenneth Vanko's Legal Developments in Non-Compete Law Blog is reporting that the Illinois legislature is considering leveling the playing field for employees who prevail in non-compete disputes. According to Kenneth, House Bill 5198 would amend the Illinois Code of Civil Procedure to allow a circuit court to shift attorneys' fees to a prevailing defendant if a contract under which a plaintiff sues allows for the plaintiff to recover fees.
  • The Connecticut Supreme Court has sided with the University of Connecticut's decision to withhold information about its boosters. The university said lists naming its donors and other supporters qualify as trade secrets that other institutions could use to lure away its fans' dollars and loyalty and are therefore exempt from public records requests under Connecticut law.

Cybersecurity:

  • Both the New York Times and Wall Street Journal ran stories this week about the present efforts within the Senate to move forward on the Cybersecurity Act of 2012. The New York Times wonders whether the ghosts of SOPA and PIPA will complicate passage of that legislation.
  • The New York Times' Bits Blog entitled "How Much Have Foreign Hackers Stolen?" quotes Mike McConnell, the former director of national intelligence and now vice chairman at Booz Allen Hamilton, as estimating that foreign cyberthieves steal 867 terabytes of data from the United States, or “nearly four times the amount of data collected in the archives of the Library of Congress” on a daily basis. That, my friends, is a lot of data.
  • The Wall Street Journal also ran a major story (it was on the front page in the print edition) describing the nearly-decade long efforts of Chinese hackers directed towards Nortel. According to the article, "Chinese Hackers Suspected in Long-Term Nortel Breach," the hackers had the passwords of Nortel's CEO and six other senior executives and unfettered access to its trade secrets from 2000 to 2009. It is a chilling read.

News You Can Use:

  • Planning on traveling to China anytime soon? In an article entitled "Traveling Light in a Time of Digital Thievery," the New York Times (who else this week?) quotes security experts that recommend leaving laptops, smartphones and other mobile devices behind and bringing "clean" loaner devices. 
  • For those looking to protect their trade secrets in the cloud, David McGrath and Charles Stewart have an interesting article, "Minimizing the Risk of Data Theft Through Cloud Computing."

TianRui Group v. ITC Judgment Issued as Mandate.pdf (85.46 kb)

U.S. v. Hanjuan Jin Memorandum.pdf (2.16 mb)

 

The Year in Review: The 10 Decisions That Shaped Trade Secret and Non-Compete Law in 2011 (Nos. 4 through 6)

 
by John Marsh 31. December 2011 14:00

Today's post features Nos. 4 through 6 of the Top Ten Trade Secret and Non-Compete Decisions of 2011. They are:

6. IBM v. Visentin (U.S. District Court for the Southern District of New York and U.S. Court Appeals for the Second Circuit) and Aspect Software v. Barnett (U.S. District Court for Massachusetts)
These two cases presented the same issue -- to what extent should a non-compete be enforced when the new employer and former employee have put safeguards in place to protect the plaintiff's trade secrets and customer relationships. Both of these cases provide a fine example of what a company should do if it wants to hire an employee with a non-compete but minimize potential entanglements with the former employer (see my previous blog post on the Aspect Software case  where the former employee and new employer incorporated 8 steps to safeguard the plaintiff's interests).
 
However, taken together, these two cases also reinforce another feature of non-compete and trade secret cases -- their unpredictability.  In Visentin, the Southern District of New York (and later, the Second Circuit) found that the former employee and the new employer (HP) had acted reasonably to protect the business interests of the former employer (IBM) and that the non-compete should not be enforced to prevent the employee's new job with HP.  In contrast, in Aspect Software, although the district court commended the former employee and his new employer, Avaya, for "the scrupulous steps" they took to safeguard the plaintiff's trade secrets and customer relationships, it still enforced the non-compete because of concerns that the employee would inevitably use his former employer's trade secrets.  

As increased employee mobility and a poor economy continue into 2012, look for more cases like Visentin and Aspect Software.  Courts will be forced to balance the interests of all parties and still protect the legitimate interests of the former employer.  These cases may have a profound impact on the viability of the inevitable disclosure doctrine, the traditional counterweight to an employee's assurances about his or her good faith efforts to protect the former employer's trade secrets.

5. Mattel v. MGA (U.S. District Court for the Southern District of California, Los Angeles)
Will it ever end? 

When I first started putting this list together, I thought about using movie titles to highlight the key qualities of each case.  When it came to selecting a title for this bitter case, plenty came to mind -- "There Will Be Blood" and "Drag Me to Hell" certainly would have captured it nicely.  However, the most fitting title is probably "Reversal of Fortune" as this epic lawsuit, at least in its most recent round, has swung decisively in favor of MGA.

If you are reading this post, you are likely familiar with the history of this dispute which began in 2003, when Mattel first sued MGA for stealing the idea for the pouty-lipped Bratz Line through a former Mattel employee.  In 2008, Mattel won a $100 million jury verdict, only to see that judgment reversed by the Ninth Circuit.  Then, in April 2011, MGA prevailed during the second jury trial, not only persuading the jury to reject Mattel's claims but also to award MGA $83 million on its trade secret counterclaims.  That award swelled to $310 million when the district court imposed exemplary damages and attorneys fees in post-trial proceedings.
 
What will the next ruling bring?  No one really knows, as the trade secret version of Jarndyce and Jarndyce continues to work its way through California's federal courts.

4. U.S. v. Nosal (U.S. Court of Appeals for the Ninth Circuit)
The scope of the Computer Fraud and Abuse Act (CFAA) continues to beguile litigants and courts alike, and no CFAA case raised more eyebrows in 2011 than the Ninth Circuit's decision in U.S. v. Nosal, 642 F.3d 781 (9th Cir. Apr. 28, 2011). In Nosal, the Ninth Circuit held that the violation of a computer use policy that placed "clear and conspicuous restrictions on the employees’ access” to the employer’s computer system and the specific data at issue could be enough to qualify as conduct that exceeded authorized access, a necesssary element of a CFAA claim. 

Given this taffy-like definition of the critical "accessed without authorization" requirement, Nosal's holding has been applied broadly in other contexts. For example, in September, the Northern District of California applied Nosal's reasoning to online agreements in a civil dispute between commercial parties.  In Facebook v. MaxBounty, Case No. CV-10-4712-JF (N.D. Cal, Sept. 14, 2011), that district court found that a violation of Facebook's terms of use could qualify as access without authorization under the CFAA.
 
Nosal has generated more critical commentary than any other CFAA case in recent memory. While it was initially welcomed by many in the trade secret community because it would bolster employers' protections under the CFAA, libertarian groups such as the Electronic Frontier Foundation argued that Nosal could criminalize the very acts outlined above as violations of broadly written Terms of Service.
 
Perhaps as a result of this uproar, the Ninth Circuit indicated on October 27, 2011 that it would rehear Nosal en banc and advised district courts that Nosal was not to be used as precedent in the meantime.  Oral argument was heard on December 15, 2011 and even those reading the tea leaves left in the wake of that argument are having difficulty divining what the Ninth Circuit will do.

We will reveal our top three cases next week, so please stay tuned. In the meantime, have a safe and happy new year.

 

The Year in Review: The Top 10 Decisions that Shaped Trade Secret and Non-Compete Law in 2011 (Nos. 7 to 10)

 
by John Marsh 30. December 2011 13:00

The end of the year always brings a number of thoughtful (and some not so thoughtful) reflections on the top ten major events of the past year (Top Ten News Stories, Top Ten Songs, Ten Worst Movies, etc.). As 2011 comes to a close, it's clear that it has been a remarkable year for the trade secret and non-compete bar, so I couldn't resist assembling a Top Ten List of the most significant trade secret and non-compete decisions for 2011.  

As I worked on my list, what struck me most was the number of strong contenders for 2011 (the honorable mention list will bear this out).  Even though I confined my list to civil cases (leaving out a number of high profile federal prosecutions) and decided not to include recent legislative developments (such as the proposed amendment to the Economic Espionage Act, New Jersey's enactment of the Uniform Trade Secrets Act (UTSA) and Georgia's recent Non-Compete Statute), I could have easily put together a compelling top twenty list. 

That being said, without further ado, here are Numbers 10 through 7:
 
10. TCW Group Inc. v. Jeffrey Gundlach (Los Angeles County Superior Court)
This high profile trade secret dispute between TCW, the asset-management affiliate of Societe Generale SA, and its former star bond trader, Jeffrey Gundlach, had a lot to offer:  significant media coverage, salacious allegations (TCW had a field day detailing Gundlach's left-behind stash of pornography, sexual devices and drug paraphernalia for the media circus; despite TCW's gallant effort to slip those vices into evidence, the trial court properly excluded them), and, of course, a very large verdict.  After a six week trial, the jury awarded $66.7 million to Gundlach for unpaid wages but also found that he stole TCW's trade secrets.  The valuation of those trade secrets, which TCW claimed exceeded $81 million, was to be decided in post-trial proceedings before the trial court. 
 
The sheer theatrics of this case, which apparently settled yesterday, compel a seat at the Top Ten table.  However, the absence of a seminal ruling kept this entertaining soap opera out of the Top Five.
 
9. Marsh USA Inc. v. Cook (Texas Supreme Court)
Texas has been perceived as ambivalent when it comes to enforcing non-competes, but the Texas Supreme Court's decision in Marsh USA Inc. v. Cook on June 24, 2011 appears to signal that Texas is now moving away from its previous strict enforcement.  In Marsh USA, the Texas Supreme Court abandoned a formalistic approach to analyzing consideration supporting a non-compete, rejecting the former employee's argument that his non-compete lacked appropriate consideration because the consideration in question (stock options) did not reasonably relate to the interest that the former employer sought to protect. 
 
The decision does not break any new ground, at least outside of Texas.  Rather, what merited its inclusion in the Top Ten boiled down to demographics -- namely, the fact that the highest court of the second most populous state is now more readily willing to enforce covenants not to compete.  As the Texas economy continues to chug along (Forbes identified Austin (No. 1), San Antonio (No. 4), Houston (No. 5) and Dallas (No. 7) in its top ten projected boomtowns earlier this year) and Texas continues to grow, its legal decisions may come to increasingly shape the national debate, just as California has for the past several decades.
 
8. Reliable Fire Equip. v. Arredondo (Illinois Supreme Court)
As one of the more populous states having adopted the UTSA and recognizing non-competes, Illinois has long been an important bellwether state for trade secret protection.  Not surprisingly, when the Illinois Supreme Court issued its ruling in Reliable Fire Equip. v. Arredondo on December 1, 2011, resolving a split that had emerged among the intermediate courts of appeal within Illinois, many followed the decision closely. 

As I wrote earlier this month about this decision, the Illinois Supreme Court held that a company must come forward with proof of a legitimate business interest to justify the imposition of a non-compete.  While this decision will likely lead to more litigation due to the fact-based nature of that inquiry, it will ensure that companies do not wield their non-competes without supporting trade secrets, customers or other legitimate reasons to justify enforcement of the restrictive covenant at issue.  Look for other courts to follow the Illinois Supreme Court's lead in this era of employee mobility.
 
7. Hewlett-Packard v. Perez, Perez v. Hewlett-Packard and Cisco's Blog (Santa Clara County Superior Court, California and Harris County, Texas)
High profile trade secret cases frequently involve a race to the courthouse as the former employer and ex-employee jockey to secure a definitive ruling from the forum they believe will adopt their legal position on the non-compete in question. This year's featured "race to the courthouse" was the dispute between Hewlett-Packard and its former Chief Technologist, Paul Perez, who left HP in November to join Cisco.

As regular readers of this blog will remember, this dispute generated tremendous interest because of the unusual step taken by Cisco's General Counsel, Mark Chandler, of issuing a blog post calling out what Cisco perceived to be HP's repeated efforts to prevent its former employees from working for Cisco.  Chandler's blog post challenged HP's new leadership to adhere to its previous values of mobility and opportunity.

The case was also noteworthy because the Texas trial court refrained from the opportunity to rule first on the Perez non-compete, despite the fact that the Perez had been a Texas resident and had suddenly moved to California, ostensibly to secure the protections of California law.  The Texas court's abstention appears to have been rooted in its irritation at HP's failure to notify Perez's counsel of the TRO conference and to advise the Texas court of a previously-scheduled conference set to go in California later that day on these same issues (at least this was the account provided in Chandler's blog post; there was no ruling on the Harris County docket when I last looked).  The California court subsequently allowed Perez to work for Cisco so long as he did not use or reveal any of HP's trade secrets or confidential information.
 
Stay tuned for Nos. 6 through 4 in my next post.

 

Enforcing a Non-Compete Against a Fired Employee: Is it Worth It?

 
by John Marsh 16. December 2011 10:45

A recent decision by the Montana Supreme Court raises one of the trickier situations in the trade secret and non-compete practice: Can you, or better yet, should you, enforce a covenant not to compete against an employee that you just fired?  In Wrig v. Junkermier, Case No. DA 11-0147 (Nov. 22, 2011), the Montana Supreme Court held "an employer normally lacks a legitimate business interest in a covenant when it chooses to end the employment relationship." Applying that rule, the court refused to enforce a non-compete after the employer elected not to renew the employee's contract.
 
Many courts are, at best, ambivalent about non-competes and some are even hostile towards them (California forbids them except in the most limited of circumstances). Trying to enforce a restrictive covenant against an employee who has just been terminated in The Great Recession may be no easy task. Whatever the law, in these situations, an employer will need to overcome the sense that it is "piling on" or rubbing it with that employee.

Most jurisdictions require that a company show a legitimate business interest, such as the protection of trade secrets or customer relationships, that justifies enforcement of a non-compete. In this sense, Montana has now joined Illinois and many other states that require that showing. In the case of a fired employee, however, a court may expect a compelling showing of that interest. In the absence of that showing, a court may reason that the employer's claim that the recently-fired employee now suddenly poses a competitive threat is disingenuous. Or, as the Montana Supreme Court put it, "[a]n employer’s decision to end the employment relationship reveals the employer’s belief that the employee is incapable of generating profits for the employer." (For a more thorough analysis of the facts and reasoning of the Wrig decision, check out Non-Compete and Trade Secrets Blog's fine post on this case).
 
Of course, the circumstances giving rise to the termination will be key. As the Montana Supreme Court recognized, a protectable interest may be found if the firing arose from misconduct of the employee. Thus, as in any injunction case, the conduct of the employee, as well as the employer, will heavily influence the court's exercise of discretion.
 
The takeaway? As an employer, take a long, hard look at whether it is worth the time and expense to enforce the non-compete of a fired employee. Be prepared to face an uphill fight if your client has fired or laid off the employee. Having documentation supporting a termination for cause will be critical but also do not understimate the importance of demonstrating a compelling trade secret or customer relationship interest.

 

Acordia of Ohio v. Fishel: The Ohio Supreme Court Considers Whether a Merger Triggers a Non-Compete

 
by John Marsh 5. December 2011 10:45

A merger's impact on the non-competes of the merged company remains a hot topic (see my October 7, 2011 post about the U.S. Court of Appeals for the First Circuit's reasoning in OfficeMax v. LeVesque, which found the non-competes at issue did not protect the new company). Three weeks ago, the Ohio Supreme Court heard oral argument in a case, Acordia of Ohio LLC v. Fishel, that will go a long way in determining whether non-competes that do not specifically address the new company survive a merger in Ohio.

In Acordia of Ohio, the trial court refused to enforce the four non-competes in question. It ruled that under the specific language of those contracts, the restrictive covenants were confined to the specifically named employers, which 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 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 Fishel team's employment ceased to exist following the respective mergers, the Fishel team's employment with those companies was necessarily terminated at the time of the applicable merger." 

Former Ohio Court of Appeals Judge Marianna Brown Bettman's Legally Speaking Ohio Blog has a fine summary of the questions asked by the Ohio Supreme Court Justices at the November 15, 2011 oral argument.  It is tough to handicap how the Court will rule. Logically, the employees' position does not make sense: if the company in fact disappears, what is there to trigger, let alone compete against or protect, since there is no company left?  On the other hand, Ohio courts have shown increasing antipathy to non-competes over the past four years; given the language of the non-competes and the apparent absence of a provision allowing for the assignment to successors or assigns, it is altogether possible that the Supreme Court could affirm that the non-competes expired. This one is too close to call.

The takeaway? A better definition of "Company" under the Agreement (one that explicitly includes successors and assigns) as well as a provision providing that the agreement shall inure to the benefit of the parties' successors and assigns would have better protected the employers. In addition, to remove all doubt, perhaps the simplest approach would be for all of the employees re-sign their non-competes with the new employer just before or after the merger.

 

Reliable Fire Equipment v. Arredondo: Illinois Supreme Court Holds Non-Competes Must Be Supported by Legitimate Business Interests under "Totality of Circumstances"

 
by John Marsh 1. December 2011 22:00

Earlier today, the Illinois Supreme Court issued a much-anticipated ruling in Reliable Fire Equipment v. Arredondo, Illinois Supreme Court, Case No. 111871 (Dec. 1, 2011), holding that Illinois trial courts are required to determine whether a legitimate business interest exists based on the totality of the facts and circumstances of each individual case. 

In Reliable Fire Equipment, the trial court found the two non-competes before it to be unenforceable because the employer had failed to prove the existence of a legitimate business interest in support of the two non-competes. In what the Illinois Supreme Court described as a sharply divided panel, the appellate court nevertheless affirmed that decision.

According to the Legal Developments in Non-Competes blog by Illinois lawyer Kenneth Vanko, a three-way split had developed among Illinois Appellate District courts on how a legitimate business interest was to be analyzed. One line of cases had applied a categorical test that limited legitimate interests to customer relationships and confidential information, another had apparently questioned whether that requirement was even necessary, and the third had applied a fact-based analysis based on the circumstances of each case. Kenneth predicted, correctly it turns out, that the Illinois Supreme Court would adopt the fact-based analysis for determining business interests.

The Illinois Supreme Court reiterated that proof of a legitimate business interest was still required and that a covenant not to compete would only be enforced as reasonable if (1) it was no greater than required to protect the legitimate business interest of the employer; (2) did not impose an undue hardship on the employee; and (3) was not injurious to the public. In so doing, the Supreme Court explicitly rejected the holding of Sunbelt Rentals, Inc. v. Ehlers, 394 Ill.App.3d 421 (2009), which had held that an employer did not need to demonstrate a legitimate business interest when it sought to enforce a restrictive covenant. This came as no great surprise as the Sunbelt decision has been criticized and a number of Illinois appellate courts had declined to follow it.

Instead, the Illinois Supreme Court concluded that there must be an examination of the underlying business interest, focusing on the totality of the facts and circumstances of each individual case. Factors such as the near-permanence of the customer relationships to be protected, the employee's acquisition of trade secrets or confidential information through his employment, and the time and place restrictions within the covenant are all to be considered and weighed.

The takeaway? Illinois trial courts are now indisputably vested with tremendous discretion to determine what qualifies as a legitimate business interest. While this ruling will lead to less certainty (something that is always good for lawyers, less so for their clients), one can hope it will lead to more equitable and practical results. 

 

OfficeMax v. Levesque: A Painful Lesson for Post-Acquisition Enforcement of Non-Competes

 
by John Marsh 7. October 2011 11:00

In the employment context, courts frequently construe the language of a non-compete against the employer who drafted it, reasoning that the employer's stronger bargaining position and the public policy against restraints of trade favor that approach. As a result, drafting errors, ambiguities or other issues can come back to not only haunt the employer who drafted an agreement but a business that ultimately acquires or merges with that employer. Case in point is the recent ruling in OfficeMax v. Levesque, Case No. 10-2423, U.S. Court of Appeals for the First Circuit (Sept. 29, 2011); in that case, the First Circuit applied a literalistic approach to the non-competes at issue and found that they were no longer enforceable because they had expired 15 years before. (A PDF copy of the opinion is below and thanks to Zachary C. Jackson who wrote an article about this case in JDSupra).
 
In 1996, David Levesque and Dana Rattray were asked by their employer LS&H, an office services company, to sign non-competes in anticipation of its acquisition by another office services company, BCOP. The non-competes expressly contemplated that the acquisition was the reason for the non-competes; in addition, Levesque and Rattray specifically agreed to enter into substantially similar non-competes with BCOP after the acquisition. However, the specific provisions detailing the scope of the non-competes stated they would run "[f]or a period of 12 months after termination of my employment with LS&H." After BCOP completed the acquisition, Levesque and Rattray refused to sign new non-competes but were permitted to continue working at BCOP. In 2004, BCOP merged with OfficeMax.

Levesque was terminated in 2009 and Rattray resigned in 2010. Both tried to find work in the printing services business, but ultimately found that they could only find work in the office supply business. (This factor, although not discussed, likely had some impact on the First Circuit's determination). When OfficeMax brought separate actions to enforce the non-competes, the district court enforced them. The First Circuit, however, reversed. The First Circuit empahsized the fact that despite the parties' awareness of the imminence of the acquisition, the non-compete's language was nevertheless limited to LS&H and did not mention BCOP or any successor or assign. As a result, the plain language of that provision had to control.
 
There are three lessons to be drawn from OfficeMax: (1) from the drafting standpoint, broadly defining the "employer" or "company" to include affiliates and successors and assigns would have included BCOP and OfficeMax; (2) insisting upon execution of the new non-competes as a condition of employment after the acquisition would have eliminated this possibility; and (3) from the acquirer's perspective, thorough diligence and insistence on new agreements with broader language prior to the acquisition would have remedied this problem.

OfficeMax v. Levesque.pdf (81.51 kb)

 

Texas Supreme Court Finds Stock Options Qualify as Valid Consideration for Non-Compete

 
by John Marsh 27. June 2011 10:00

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)

About John Marsh

John Marsh Hahn Law AttorneyI’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@hahnlaw.com.

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