Trade Secrets & Noncompete Blog

Trade Secrets & Noncompete Blog

News & Updates On Developments in the Law of Restrictive Covenants, Unfair Competition & Trade Secrets

Federal Trade Secrets Bill Clears Important Hurdle

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David J. ClarkLast week, the Senate version of the Defend Trade Secrets Act (S. 1890) was passed with bipartisan support by the Senate Judiciary Committee.  As we have previously discussed on this blog, the bill is aimed at addressing alleged inadequacies in U.S. law through the creation of a federal private right of action for trade secret misappropriation.  The legislation would also provide injunctions to preserve evidence and prevent disclosure, and damages to account for economic harm to plaintiffs whose trade secrets are stolen.

Having cleared the Judiciary Committee — a step that eluded similar bills in recent years — the bill now could be brought by Senate Majority Leader Mitch McConnell to the Senate floor for a vote, and odds are that it could pass.

The counterpart bill in the House of Representatives remains for now in the Subcommittee on Courts, Intellectual Property and the Internet, but passage of the bill in the Senate could spur the Subcommittee to act.

Stay tuned for further developments on this potentially far-reaching legislation.

Non-compete Distance Measured as The “Crow Flies”

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A recent case out of Ohio offers an instructive lesson for those looking to probe the geographical limits of a non-compete agreement.  A dentist sold his dental practice and also continued to work as an employee there.  As part of the sale, he agreed not to compete for five years and was prohibited from working “within 30 miles” of the practice.  The relationship between the parties deteriorated and the dentist went to work for a competing firm.  The purchaser dentist filed suit claiming a breach of the non-compete.

The trial court ruled against the seller, noting that although the new practice was more than 30 miles away from the old one when driving, it was less than 30 miles measured by a straight line.  An Ohio appellate court affirmed the trial court’s decision on how to track miles.  The appellate court held that despite the assertion that “within 30 miles” is subject to differing interpretations, Ohio courts have consistently measured the geographical limits as straight lines or “as the crow flies.”  (Ginn v. Stonecreek Dental Care, Ohio Ct. App., CA2015-01-001, 10/26/15).

The prevailing party was awarded $125,000 in damages, plus interest, by a jury.  Additionally, the breaching party had to pay nearly $100,000 in legal fees as a result of the loss.  As is the case in many jurisdictions, in Ohio, damages are typically calculated by measuring lost profits.  This figure can be assessed using historical business data, as it was here, and an expert is not necessary to prove damages for all cases.  In this case, the fact that the seller had worked as an employee for six months prior to breach gave fairly reliable data as to the damage caused as a result of moving to a competitor.

For someone looking to craft a non-compete agreement that uses mileage as a measurement of distance, one should be aware of the way different state courts interpret such language.  It is also worthwhile considering the practical effects of a mileage condition on a non-compete, such that when a practice is sold, a customer is unlikely to leave with the seller.

Another Federal District Court Judge In Illinois Refuses To Apply The Illinois Appellate Court’s Fifield Decision

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Readers of this blog know that long settled understandings regarding what constitutes adequate consideration for a restrictive covenant in Illinois were turned upside down when the First District Appellate Court in Illinois held in Fifield v. Premier Dealer Services Inc., 2013 IL App. (1st) 120327 that, absent other consideration, two years of employment are required for a restrictive covenant to be supported by adequate consideration, regardless of whether the covenant was signed at the outset of employment or after, and regardless of whether the employee quit or was fired.

The Illinois Supreme Court declined to hear Fifield, but at least three federal district court judges in Illinois have refused to apply Fifield.

Just recently, another federal district court judge in Illinois also refused to apply Fifield.  This time it was Judge Robert M. Dow, Jr., who held in Traffic Tech, Inc. v. Kreiter, Case No. 14-CV-7528 (N.D. Ill. Dec. 18, 2015), that the “Illinois Supreme Court is not likely to adopt a two-year, bright line rule in assessing whether an employee was employed for a ‘substantial period of time’ so as to establish adequate consideration to support a post-employment restrictive covenant.”   The essence of Judge Dow’s ruling is that Fifield is a mis-reading of Illinois law, and that “Illinois law does not require a strict application of the two-year rule in assessing the enforceability of a non-solicitation clause (or any similar restrictive covenant).”

Because the case was before him on a motion to dismiss, Judge Dow did not ultimately rule on whether the defendant had received adequate consideration.

Given the split between the Illinois appellate court and at least four Illinois federal district court judges over the merits of Fifield, this will remain a hot issue for Illinois employers.   Unless and until the Illinois Supreme Court weighs in, Illinois employers hoping to enforce a restrictive covenant within two years after the signing date should be prepared to distinguish Fifield factually or legally.

Whatever Happened To That Federal Trade Secrets Law?

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About four months ago, to some fanfare, a handful of legislators in Congress introduced a bill called the Defend Trade Secrets Act of 2015.  The bill seeks to create a private right of action allowing companies to assert civil trade secret misappropriation claims under federal law (which would supplement the existing patchwork of state law remedies).  What has happened to the bill since then?  Is there still a chance that it could be signed into law?

Upon introduction, the respective versions of the bill, H.R. 3326 and S. 1890, were referred to the Judiciary Committees of the House and Senate.  Since then, there has been a steady stream of co-sponsors signing on in support of the bill, including 95 Representatives and 16 Senators as of the date of this blog post.  On October 1, 2015, the House bill was referred to the Subcommittee on Courts, Intellectual Property and the Internet.  On December 2, 2015, the Senate Judiciary Committee held hearings regarding the Senate bill.  So the Defend Trade Secrets Act has some momentum.

The proposed legislation is not without its critics, however.  In a November 17, 2015 letter to Congress, over 30 law professors raised a variety of concerns regarding the Defend Trade Secrets Act, including many that were previously raised in opposition to the 2014 version of the Defendant Trade Secrets Act.  They argue that the latest bill does not address cyber-espionage directly and rather is “likely to create new problems that could adversely impact domestic innovation, increase the duration and cost of trade secret litigation, and ultimately negatively affect economic growth.”

It appears that Congress’ consideration of the Defend Trade Secrets Act will continue at a deliberate pace, extending well into 2016.  We will continue to monitor the bill and provide updates as warranted.

Restrictive Covenant Binds Bad Leaver – Employment Law This Week

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One of the top stories on Employment Law This Week – Epstein Becker Green’s new video program – is about a bad leaver and the hefty price he had to pay.

A former VP of Fortinet, Inc., must pay nearly $1.7 million to the company, after poaching three of his subordinates when he left his job for a competitor. The former VP joked in an email that the employees he took with him were “three bullets to the back of the head” of his former employer. In the arbitration, a former California state judge ruled that the employee had breached his fiduciary duty and his contractual obligations not to recruit employees of the company for a year after he left.

See below to view the episode (the story starts circa 1:30) and read our own Peter Altieri’s blog post about this decision.

Bad Leaver Pays the Price

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A former California State judge in an arbitration awarded nearly $1.7 million to an employer against its former employee based primarily on his acts taken going out the door.  His joking email with a co-worker after recruiting three others, characterizing their resignations as “Three bullets to the back of the head” of his employer, was clearly shooting himself in the foot in the eyes of the arbitrator.  The Award is interesting for many reasons – – the interplay between fiduciary duties and non-solicitation of employees provisions, the allowable damages when such a fiduciary duty is breached by co-worker solicitation, and the overriding difference of treatment of bad leavers versus good leavers.

Michael Valentine, a corporate vice president of Fortinet, Inc., a California based network security company, left for a competitor, Sophos, in the end of 2013.  The arbitrator found that due to his recruiting of several subordinates, both before and after he resigned, he had breached his fiduciary duty as an officer of Fortinet and his contractual obligations not to solicit employees for one year after his employment ended.  Despite Valentine’s affirmative defense that the clause was barred by California’s public policy [see California Business & Professions Code 16-600, et seq. and Edwards v. Arthur Anderson LLP, cf. Loral Corp. v. Moyes], the arbitrator awarded significant damages for his recruitment activity based upon the breach of his fiduciary duties.

While it appears from the Award that much of the evidence of pre-resignation solicitation was purely inferential, the arbitrator viewed the efforts to cover up such evidence, and the sentiment expressed in the email as being a “despicable” act, such that it caused him to find liability for the recruitment of the three subordinates and to award punitive damages on top of both actual damages and general damages.

The arbitrator awarded actual damages, the amount expended to replace the employees based on the time spent by the executive who recruited the replacements, at his hourly equivalent salary rate, or $39,560.  The arbitrator found general damages of $150,000 based on the “intentional tortious breach of fiduciary duty” and attributed that to his sense of a reasonable amount of the loss of valuable employees causing harm to the employer for likely lost business caused by delays in performance and the start-up time for new employees.  Finally, based on Valentine’s willful and intentional breach of his fiduciary obligations causing direct harm to Fortinet, the arbitrator awarded $250,000 in punitive damages and attorneys’ fees pursuant to contract of $1.2 million plus costs, rendering the total Award to be in excess of $1.75 million.

Had Mr. Valentine not spoken with his co-workers about joining him before he resigned, had he not taken steps to cover up such evidence of solicitation, and, most importantly, had he not callously joked about his egregious breach of duty in such a vivid and morbid email, he may have gotten the benefit of California’s public policy disfavoring employee non-solicit agreements.  But when you are a bad leaver, judges and arbitrators are definitely more likely to find breaches of duties and contractual obligations and enforce such provisions to the fullest extent.

Pennsylvania Supreme Court Holds That Mere Continued Employment Is Not Adequate Consideration To Support A Restrictive Covenant

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Weighing in on an issue that is drawing attention nationwide, the Pennsylvania Supreme Court recently held, in Socko v. Mid-Atlantic Systems of CPA, Inc., that the mere continuation of employment is not sufficient consideration to support a restrictive covenant.  Rather, for there to be sufficient consideration, the Court held that the employee must receive “some corresponding benefit or a favorable change in employment status.”  As examples of such sufficient additional consideration, the Court cited “a promotion, a change from part-time to full-time employment, or even a change to a compensation package of bonuses, insurance benefits, and severance benefits.”   The Court did not, however, provide any detail as to the size of the additional consideration that must be provided; it merely gave examples of types of additional consideration.

In so ruling, the Pennsylvania Supreme Court came down on the same side of this issue as the Kentucky Supreme Court in 2014.  In contrast, the Wisconsin Supreme Court in 2015 held that continued employment of a current at-will employee is sufficient consideration to support a covenant not-to-compete.

We expect this to remain a hot topic and we will continue to monitor developments in this area.

Illinois Appellate Court Strikes Down Overbroad Noncompete, Nonsolicit, and Confidentiality Provisions and Also Refuses to Judicially Modify Them

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In a decision issued in late October, AssuredPartners, Inc. et al. v. William Schmitt, 2015 IL  App. (1st) 141863 (Ill. App. 2015),  the Illinois Appellate Court struck down as overbroad and unreasonable, the noncompete, nonsolicit and confidentiality provisions in an employment agreement.  The Court then refused to judicially modify or “blue pencil” these provisions because the Court deemed their deficiencies “too great to permit modification.”  This decision is essentially a primer on current Illinois law regarding restrictive covenants and confidentiality agreements.

Starting with the noncompetition provision at issue, the Court held that it was overbroad because it restricted the former employee, a wholesale insurance broker of lawyers’ professional liability insurance, from a broader scope of activities than those he engaged in during his employment (i.e., it prohibited him from working with all types of professional liability insurance, not just the type that he actually brokered).

Additionally, the Court held that the geographic scope of the noncompetition agreement (i.e., all 50 states and the territories of the United States) clearly exceeded “that which is necessary to protect ProAccess and Jamison from threats against its business interest” and that such geographic overbreadth imposed “an undue burden” on the employee “by forcing him to work in another country if he wishes to continue earning a living as a wholesale broker specializing in LPLI or any other type of professional liability insurance.”

Finally, the Court noted that the length of the restriction – 28 months – was a “significant period to impose on an employee whose effective term of employment . . . lasted only 20 months.”

Accordingly, the Court held that the noncompetition provision failed to meet the requirements of reasonableness set out in the Illinois Supreme Court’s most recent pronouncement in this area, Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871 (2011).

Turning next to the post-employment, customer non-solicitation provision, the Court likewise found it to be unreasonably overbroad, as it applied to actual and potential customers of the plaintiff entities and of their subsidiaries, regardless of whether they were involved in the same activities as the former employee – and regardless of whether the former employee ever had contact with them while working for ProAccess.

Finally, the Court turned to the contractual confidentiality provision, which “prohibit[ed] the use or disclosure of any ‘information, observations and data (including trade secrets) obtained by [Schmitt] during the course of [his] employment with [Jamison/ProAccess] concerning the business or affairs of [plaintiffs] and their respective Subsidiaries and Affiliates.”  The Court held that this clause was broad enough to cover “ virtually every fact, plan, proposal, data, and opinion that he became aware of during the time he was employed by ProAccess – without regard as to whether such information was in any way proprietary or confidential in nature, or whether he in fact obtained the information through a source outside of his work.  It is patently overbroad.”

Additionally, the Court noted that it “cannot assume that the information Schmitt acquired during his employment with ProAccess resulted solely from plaintiffs’ businesses, as opposed to the customer relationships that he had established prior to his employment.”  The Court emphasized that this confidentiality provision “does not merely restrict the dissemination of confidential information; it drastically limits Schmitt’s ability to work in the insurance industry by preventing him from using any knowledge that he gained while in plaintiffs’ employ, regardless of whether he gained such knowledge, directly or indirectly, as a result of his employment” (emphasis in original).

For good measure, the Court further explained that the confidentiality clause is not saved because of its exception for confidential information that “becomes generally known to and available for use by the public.”  The Court explained that “[t]here is a great deal of information that is not ‘generally’ known to the public; not all of it merits protection under a confidentiality provision.”

Because the Court found these deficiencies to be so significant, it held that they were “too great to permit modification.”  Accordingly, rather than judicially modify or “blue pencil” any of these provisions, the Court struck them down.

Over all, the notion that permeates throughout AssuredPartners is that the restrictions at issue were fundamentally unfair to the individual former employee.

Coming on the heels of the Illinois Appellate Court’s blockbuster decision in Fifield v. Premier Dealer Services, Inc. (in which the same court held that, absent other consideration, two years of employment is required for a restrictive covenant to be deemed supported by adequate consideration – even where the employee signed the restrictive covenant as a condition to his employment offer – and even where the employee voluntarily resigned), AssuredPartners is a reiteration of the degree of judicial scrutiny currently being applied to restrictive covenants in Illinois.

In light of these decisions, Illinois employers are advised to draft as narrowly as possible, to pay particular heed to the consideration provided, to carefully consider choice of law and forum selection provisions, and to review existing restrictive covenants in light of the degree of judicial scrutiny currently being applied.

Fifth Circuit Sides with Oklahoma on Non-Competes in State Law Clash – Employment Law This Week

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One of the top stories on Employment Law This Week – Epstein Becker Green’s new video program – is the Fifth Circuit’s ruling that a Texas bank cannot enforce non-compete agreements signed by four former employees based in Oklahoma, where courts do not recognize the pacts, because the agreements would violate Oklahoma’s strong public policy favoring worker mobility. The fundamental law of the state trumped the choice of law.

See below to view the episode or read more about this important decision in an earlier post on this blog.

Open Secret—Trans Pacific Partnership Terms Revealed But Trade Secret Provisions Still Murky

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This morning the Obama administration publicly released the previously-undisclosed text of the Trans Pacific Partnership, or TPP, revealing, among other things, the provisions related to trade secrets that had previously been discussed here.  As noted in that earlier piece, the administration had said that the TPP would “provide strong enforcement systems, including, for example, civil procedures, provisional measures, border measures, and criminal procedures and penalties for commercial-scale trademark counterfeiting and copyright or related rights piracy. In particular, TPP Parties will provide the legal means to prevent the misappropriation of trade secrets, and establish criminal procedures and penalties for trade secret theft, including by means of cyber-theft…,” according to the statement from Office of the United States Trade Representative (“USTR”).  The just released terms do specify that member parties must provide criminal procedures to combat trade secret theft, but it is not clear that any enhanced civil remedies will be required.

Chapter 18, at Article 18.78, addresses trade secret protections, and requires each member country to assure that “persons have the legal means to prevent trade secrets lawfully in their control from being disclosed to, acquired by, or used by others (including state-owned enterprises) without their consent in a manner contrary to honest commercial practices.” Article 18.78.1. The TPP then defines “a manner contrary to honest commercial practices” to mean “at least practices such as breach of contract, breach of confidence and inducement to breach, and includes the acquisition of undisclosed information by third parties that knew, or were grossly negligent in failing to know, that those practices were involved in the acquisition.”  That article then goes on to state in Article 18.78.2 that “each Party shall provide for criminal procedures and penalties (emphasis added) for one or more of the following:

  1. the unauthorised and wilful access to a trade secret held in a computer system;
  2. the unauthorised and wilful misappropriation of a trade secret, including by means of a computer system; or
  3. the fraudulent disclosure, or alternatively, the unauthorised and wilful disclosure, of a trade secret, including by means of a computer system.

While some would have wanted member nations to provide for both criminal and civil remedies so that trade secret owners might have a more direct role in enforcing their rights, the lack of direct mention in this article of civil remedies is not likely the area of greatest concern for such trade owners.

Of greater concern should be the somewhat strange language of Article 18.78.3:

With respect to the relevant acts referred to in paragraph 2, a Party may, as appropriate, limit the availability of its criminal procedures, or limit the level of penalties available, to one or more of the following cases in which:

(a) the acts are for the purposes of commercial advantage or financial gain;

(b) the acts are related to a product or service in national or international commerce;

(c) the acts are intended to injure the owner of such trade secret;

(d) the acts are directed by or for the benefit of or in association with a foreign economic entity; or

(e) the acts are detrimental to a Party’s economic interests, international relations, or national defence or national security. (emphasis added)

Let’s hope something got lost in the translation or in the printing because, reading section 2 and 3 together, it looks like member countries have to provide procedures addressing unauthorised and wilful access, misappropriation and disclosure unless those acts were undertaken for financial gain in commerce to the intended detriment of the trade secret owner, perhaps in connection with a foreign entity.  If that article really means what it says, the TPP has promised nothing regarding trade secrets.

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