Here are this week's noteworthy posts and articles on trade secrets, non-competes and cybersecurity: Trade Secrets and Non-Competes:
News You Can Use:
EI Du Pont v Kolon Recusal Opinion.pdf (1.18 mb)
Tags: trade secrets, non-compete, covenant not to compete, cybersecurity
California | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | DuPont v. Kolon | Economic Espionage Act | Intellectual Property | IP Litigation | New York | Non-Compete Enforceability | Restrictive Covenants | Texas | Trade Secrets | Weekly Wrap-Up Posts
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:
TianRui Group v. ITC Judgment Issued as Mandate.pdf (85.46 kb)
U.S. v. Hanjuan Jin Memorandum.pdf (2.16 mb)
Tags: trade secrets, cybersecuirty, non-competes, covenant not to compete
China | Cybersecurity | Economic Espionage Act | Illinois | Intellectual Property | IP Litigation | International | International Trade Commission | Legislation | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets | Weekly Wrap-Up Posts
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.
We will reveal our top three cases next week, so please stay tuned. In the meantime, have a safe and happy new year.
Tags: trade secrets, non compete, covenant not to compete, confidential information, IBM, Visentin, Aspect Software, Avaya, Barnett, Nosal, Computer Fraud and Abuse Act, CFAA, Mattel, MGA, Facebook, MaxBounty
Computer Fraud and Abuse Act (CFAA) | General | Intellectual Property | Copyrights | IP Litigation | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets
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.
Tags: trade secrets, top ten, non-compete, restrictive covenant, Cisco, Hewlett-Packard, Reliable Fire Insurance, Marsh USA, Cook, Mark Chandler, covenant not to compete, TCW, Gundlach, Illinois, Texas, California
General | Intellectual Property | IP Litigation | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets
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.
Tags: non-compete, restrictive covenant, covenant not to compete, trade secrets, Montana, Wrig, Junkermier, fired, employee, legitimate business interest
General | Injunctions | Intellectual Property | IP Litigation | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets
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.
Tags: merger, acquisition, Ohio Supreme Court, First Appellate District, non-compete, covenant not to compete, restrictive covenant, Accordia of Ohio, Fishel, Hamilton County, OfficeMax, LeVesque, First Circuit
General | Intellectual Property | IP Litigation | Technology Transactions | Non-Compete Enforceability | Restrictive Covenants
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.
Tags: non-compete, Illinois, Reliable Fire Equipment, Arredondo, covenant not to compete, trade secrets, Illinois Supreme Court, Sunbelt Rentals, restrictive covenant
General | Illinois | Intellectual Property | IP Litigation | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets
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)
Tags: Non-compete, covenant not to compete, OfficeMax, First Circuit, acquisition, trade secret, confidentiality
Marsh USA Inc. v. Cook.pdf (155.13 kb)
Tags: Non-compete, non-solicitation, Texas, marsh, stock options, consideration, covenant not to compete
General | Intellectual Property | IP Litigation | Non-Compete Enforceability | Restrictive Covenants | Texas
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