Chief Federal District Judge In Chicago Declines To Follow Illinois Appellate Court Holding That, Absent Other Consideration, Two Years Of Employment Is Required Consideration For A Restrictive Covenant

Judge Ruben Castillo, the Chief Judge for the United States District Court for the Northern District of Illinois, recently declined to follow a widely publicized Illinois Appellate Court decision in which the Appellate Court held that, absent other consideration, two years of employment is required consideration for a restrictive covenant in Illinois.

Background

In the summer of 2013, long held beliefs about the required consideration for a restrictive covenant under Illinois law were thrown a curve when the Illinois Appellate Court for the First District (i.e., Cook County) 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. Fifield v. Premier Dealer Services, Inc., 373 Ill. Dec. 379, 993 N.E. 2d 938 (Ill.App. 1 Dist. June 24, 2013). To our knowledge, Fifield is the only Illinois state court decision to hold that an offer of employment by itself is insufficient consideration for a restrictive covenant; neither the Illinois Supreme Court nor any other Illinois appellate district has so held.

Fifield generated significant discussion among practitioners, as well as some expectation that the Illinois Supreme Court would weigh in. However, in September 2013, the Illinois Supreme Court decided not to review Fifield.

The First Post-Fifield Decision

Earlier this year, Judge Castillo issued the first and only published decision to date to address Fifield. In that decision, Judge Castillo specifically declined to follow Fifield. Montel Aetnastak, Inc. and Montel Inc. v. Kristine Miessen et al., No 13 C 3801, 2014 U.S. Dist. LEXIS 11889 (N.D. Ill. Jan. 28, 2014).

Montel involved an individual who had voluntarily resigned 15 months after signing a non-compete. When her employer brought suit to enforce her non-compete, she argued, among other things, that because she was only employed for 15 months after signing the non-compete, it was not supported by sufficient consideration and was therefore unenforceable.

While acknowledging Fifield’s holding, Judge Castillo found that “Illinois law does not . . . provide a clear rule to apply in this instance.” In support of this conclusion, Judge Castillo cited several Illinois appellate decisions regarding the adequacy of consideration for a non-compete, including a decision in which “employment for a year was considered a ‘substantial period’ of employment,” a decision in which the court noted that “factors other than the time period of the continued employment . . . may need to be considered,” and a decision in which the court “considered the raises and bonuses received by the defendants, their voluntary resignation, and the increased responsibilities they received after signing a restrictive covenant.”

Ultimately, Judge Castillo held that “[g]iven the contradictory holdings of the lower Illinois courts and the lack of a clear direction from the Illinois Supreme Court, this Court does not find it appropriate to apply a bright line rule” regarding what constitutes sufficient consideration for a non-compete. Instead, Judge Castillo chose to employ “the fact-specific approach employed by some Illinois courts.” In so doing, he found that the defendant’s 15 months of employment after she signed the non-compete, plus the fact that she had voluntarily resigned, were sufficient to conclude that “she was provided with a ‘substantial period’ of employment.” Judge Castillo therefore held that the defendant “was provided adequate consideration to support the enforceability of the employment agreement.”

To date, no published decision has cited or discussed Montel.

A developing split within the Illinois Appellate Court?

More recently, the Illinois Appellate Court for the Second District (i.e., a different appellate district than the one which issued Fifield) issued an unpublished decision involving the enforceability of a non-compete agreement signed by an employee who resigned 19 months after signing it. Critical Care Systems, Inc. v. Dennis Heuer and IV Solutions, LLC, No. 2-13-0745, 2014 Ill.App. Unpub. LEXIS 283 (Ill. App. 2d Dist. Feb. 18, 2014). Even though the decision focused on whether the non-compete was enforceable (the Court held that it was not), the decision does not discuss the fact that the employee was only employed for 19 months after signing the non-compete, nor does it even mention Fifield. Given that Fifield could have provided a ready-made alternative basis for the Court’s holding, the silence on this issue is potentially notable given the publicity received by Fifield over the past nine months. (On the other hand, judicial “tea reading” is a dangerous art; there are many reasons why the Court may not have touched upon this issue.)

The only sure takeaway from these developments is that there are more to come on this issue. Stay tuned.
 

Conspiracy to Sell Trade Secrets to Chinese Companies Brings Conviction for Economic Espionage

On March 5, 2014, the U.S. Attorney’s Office in San Francisco secured the first-ever federal jury conviction on charges brought under the Economic Espionage Act of 1996. The defendants -- two individuals (Walter Liew and Robert Maegerle) and Mr. Liew’s company USA Performance Technology Inc. -- were convicted of stealing DuPont Co.’s method for making titanium dioxide, a “white pigment” chemical used to whiten various products from cars to the middle of Oreo cookies, which garners $17 billion in sales worldwide.

Prosecutors said that Liew and his wife launched their small California company in the 1990s, aimed at exploiting China’s desire to build a DuPont-like factory to make the chemical. The couple then recruited former DuPont scientists with the goal of winning Chinese contracts. Mr. Maegerle worked for DuPont as an engineer from 1956 to 1991 before joining the Liews and, according to prosecutors, providing the Liews with detailed information about DuPont’s Taiwan factory. Tze Chao, another former DuPont scientist who worked with Liews, pleaded guilty in 2012 to conspiracy to commit economic espionage, and another former DuPont engineer linked to the case, Tim Spitler, committed suicide. Mr. Liew allegedly received over $20 million from the Pangang Group (companies purportedly controlled by the government of the People’s Republic of China) for efforts to deliver the chemical recipe to China.

With a clean sweep by the prosecution of guilty findings on the verdict sheet, the defendants’ arguments that the Chinese obtained the information from public sources, such as expired patents, and that nothing was stolen from DuPont were not convincing. Mr. Liew (facing a maximum of 20 years in prison) and Mr. Maegerle (facing a maximum of 15 years) are scheduled to be sentenced on June 10.

The verdict is but the latest high-profile example of the consequences possible when trade secrets are stolen. The U.S. Attorney’s Office and other government agencies have made it a priority to fight economic espionage and trade secret theft that threaten U.S. economic and national security interests. In its current form, the Economic Espionage Act allows only federal prosecutors to bring criminal trade secrets charges against persons who have stolen trade secrets. Perhaps due to the complexities of the subject matter in trade secret cases, prosecutors have primarily pursued such charges in bench trials. Achieving a jury verdict against Mr. Liew and his co-defendants perhaps will open the door to further jury trials on such charges.
 

The Enforceability Of Employee Non-Solicits Remains Unclear In California

The high profile lawsuit filed on February 11, 2014 by Anschutz Entertainment Group against Shervin Mirhashemi and his new employer, Legends Hospitality, LLC, again raises the question of when a California Court of Appeal will decide whether employee non-solicits are enforceable in California. The Complaint alleges that Mirhashemi started as an AEG in-house attorney and was promoted over time to executive positions and was paid millions of dollars. The Complaint also alleges that Mirhashemi signed various employment agreements at least one of which provided, in part, that he would not “directly or indirectly” “participate in any effort to entice away from [AEG] … any person who is employed by [AEG].”

Is the foregoing language an enforceable covenant or a violation of California public policy?

The 1985 California Court of Appeal decision in Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985) held that the employee non-solicit provision at issue was enforceable for at least one year because California Business & Professions Code §16600 “does not necessarily affect an agreement that delimits how he can compete.” Id. at 276. It concluded that the employee non-solicit was enforceable because it “only slightly affects” the employees at issue. Id. at 279.

When the California Supreme Court rendered decision in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) and held that customer non-solicits were unenforceable, it noted that Edward’s agreement likewise contained an employee non-solicit, but since Edwards did not dispute that portion of the agreement or contend that it was unenforceable, it did not address the employee-non-solicit in its holding. Id. at fn. 4. The Court in Anderson held that all non-competes that do not fall within the three statutory exceptions are invalid and it further held that the “limited” or “narrow” restraint exception developed by the Ninth Circuit was not the law in California. Based on the analysis in Edwards, it is unclear whether the Loral Court’s conclusion that a provision which “delimits how [an employee] can compete” and is enforceable because it “only slightly affects” employee mobility can be squared with Anderson’s holding that there is no narrow restraint exception in Section 16600.

The determination of this issue will resolve a significant open issue in California unfair competition law.
 

Knocking Out A Trade Secret Claim--Your Own If You Are Not Careful

A recent federal court decision in California illustrates the care that plaintiffs should take when pleading their own claims in trade secrets cases, lest they provide defendants a ready basis for dismissal. In a January 9, 2014 decision in Jobscience, Inc. v. CV Partners, Inc., et al., the federal district court in the Northern District of California dismissed state law based trade secrets claims as pre-empted by the federal Copyright Act. Luckily for the plaintiff in that case, the plaintiff had actually obtained a copyright registration on the relevant materials and included a copyright infringement claim in the complaint. Thus, plaintiff may still obtain relief in that very action. But it may not ultimately be full relief.

Indeed, the dismissal of the trade secret claim is a cautionary tale. Another plaintiff, without the foresight to actually obtain copyright registrations on the relevant materials, could have been denied a means of achieving any relief, or at least could have had its right to such relief delayed, through the dismissal of a trade secret claim. That is because the complaint in the matter rested on a fairly narrow factual basis, albeit one not too different from that seen in many trade secret complaints:

The complaint alleges that defendant Metcalf "gained access to Plaintiff's trade secrets consisting of software code and other proprietary information." "Plaintiff invested substantial time, money, and skill in developing its proprietary software applications, software code, methods and other trade secrets. Defendants spent very little time and effort in converting those same software applications for their own use"…Plaintiff alleges that defendants "misappropriat[ed] and conver[ted] Plaintiff's software application for their own use" and "stole and converted Plaintiff's proprietary software applications."

The court found that the copyrightable nature of software code and the lack of any particular specificity as to the other aspects of any claimed trade secret meant that these allegations did not sufficiently establish the existence of a trade secret under California, and instead meant that the trade secret, conversion, and unfair competition claims were pre-empted by the federal Copyright Act

One can, however, assert successfully trade secret claims alongside copyright claims, or concerning otherwise copyrightable material. One must merely do it correctly. First, the Jobscience plaintiff made allegations that “fail[ed] to show claims of unfair competition and conversion based on facts distinct from the copyright infringement claim.” (emphasis added) One makes this distinction by framing allegations so as to make clear that the state law created a right that is other than something equivalent to the rights protected by federal copyright law. This means showing that the state law claim requires an “extra element” instead of, or in addition to, the acts of reproduction, performance, distribution or display at issue under copyright law. That “extra element” should be pled to make the state law claim a qualitatively different claim than one under the federal copyright laws. Additionally, one may avoid pre-emption by making clear allegations that the trade secret claim rests on facts, items and information other than and in addition to the sort of works that fall within the protections of the Copyright Act under Sections 102 and 103.

The key then to making such trade secrets claims involves, as one court noted, “making plausible allegations that extend beyond software” or other copyrightable works. Spear Marketing, Inc. v. BancorpSouth Bank, No. 3:!2-CV-3583-B (N.D. Tex. July 1, 2013). That means making allegations not necessarily limited to specific expressions, such as is implied in referencing only software code. It means making sure that there are allegations concerning customer lists, business plans, marketing strategies, and customer preferences. These types of trade secrets do not fall under the subject matter of copyright and are therefore not preempted by the Copyright Act.

This is important because copyright law can only protect particular expressions of trade secret, while a trade secret claim can extend to the substance of the trade secret, however expressed.
 

New York Appellate Court Finds Florida Restrictive Covenant Statute "Truly Obnoxious"

The New York Appellate Division, Fourth Department, recently held in Brown & Brown v. Johnson, 1109 CA 13-00340 (February 6, 2014) that a Florida choice-of-law provision in an employment agreement among a Florida corporation, its New York subsidiary and a New York based and resident employee containing restrictive covenants is unenforceable because it is “truly obnoxious” to New York public policy.

Defendant Theresa A. Johnson was hired by plaintiffs, insurance intermediaries, in December 2006 to provide actuarial analysis for plaintiffs. On her first day of work, Johnson was presented with a number of documents to sign, including an Employment Agreement, which contained the three covenants at issue: a non-solicitation covenant, prohibiting solicitation or servicing any client of plaintiffs’ New York offices for two years after termination of Johnson’s employment; a confidentiality covenant, prohibiting disclosure or use of plaintiffs’ confidential information; and a non-inducement covenant, prohibiting Johnson from inducing plaintiffs’ New York employees to leave plaintiffs’ employment for two years after termination of Johnson’s employment. The Agreement also stated that it would be governed by and construed and enforced according to Florida law.

Florida has perhaps the most comprehensive and detailed state statutes concerning restrictive covenants and enforceability. In conducting its analysis in order to vitiate Johnson’s non-solicit of customers restriction, the Court honed in on two specific areas that differ markedly from New York common-law, despite the fact that there are many more harmonious provisions and seemingly similar policy considerations. Since the Florida statute expressly forbids courts from considering the hardship imposed upon an employee in evaluating the reasonableness of the restrictive covenant (Fla. Stat. § 542.335(1)(g)(1)) and also provides that any such covenant must be construed in favor of providing protection to all legitimate business interests of the party seeking enforcement, it was found to be “truly obnoxious” to the policies articulated in BDO Seidman and its progeny under New York law.

If you are an employer and use Florida law as the controlling law in your agreement for employees located outside of Florida (and particularly for those in New York) you may want to reconsider choice of Florida law in light of the holding in Brown & Brown. The two provisions of the Florida law found “truly obnoxious” pervade almost any restrictive covenant analysis. While the Court could have rested its reasoning on the explicit language in Florida that provides you need not consider any undue hardship on the employee in conducting the enforceability analysis, it went further to provide that since Florida law requires courts to construe restrictive covenants in favor of the party seeking to protect its legitimate business interests (Florida Statutes § 542.335(1)(h)), it was especially obnoxious on that basis as well. The latter conclusion affects any restrictive covenant analysis in New York, not only non-competes but also non-solicits, non-service, non-poach or other more specific and narrow restrictions. While one may not agree with the Court’s analysis or conclusion, anyone trying to enforce in New York (and perhaps any state other than Florida) any restrictive covenant controlled by Florida law will have to reckon with the Brown & Brown holding.
 

Chicago Federal Court Holds That A Contractual Limitation On A Corporation's Ability To Compete Should Not Be Analyzed Like An Employer/Employee Non-Compete

A federal judge in Chicago recently held that when a corporation enters into a contract with another corporation under which it agrees not to engage in certain competitive activities, that agreement not to compete should not be analyzed like an employer/employee non-compete. Owens Trophies, Inc. f/k/a R.S. Owens and Company, Inc. v. Bluestone Designs & Creations, Inc. and Society Awards (N.D. Ill. January 14, 2014). Rather, the Court held that because there is no imbalance of power between the parties in that situation, the enforceability of the contract should be analyzed like any other arms-length transaction, and the employer-employee restrictive covenant framework is inapplicable.

According to the decision, the plaintiff Owens Trophies had entered into a contract with defendant Bluestone, under which Bluestone agreed not to provide the products which it manufactured for Owens Trophies (Emmy Awards) to any other person or entity. Notwithstanding that agreement, Bluestone allegedly produced Emmy Awards for a competitor of Owens Trophies.

After learning about Bluestone’s alleged actions, Owens Trophies sued Bluestone under various theories, including violation of the non-compete. In defense, Bluestone asserted that the non-compete was unenforceable because it was not supported by a legitimate business interest. The Court held that because the employer-employee restrictive covenant framework was inapplicable, Owens Trophies need not show that the restriction was supported by a legitimate business interest. Nevertheless, the Court further held that even if Owens Trophies was in fact required to show a legitimate business interest, it did so because it allegedly provided Bluestone with confidential information that was material to the production of Emmy Awards.

While any restrictive covenant should be drafted with caution, corporation-corporation restrictions such as this one are likely to be reviewed with much greater judicial deference than an employer-employee restriction.
 

SDNY Judge Instructively Opines On Employee No Hire Agreement

A recent decision from the United States District Court for the Southern District of New York, Reed Elsevier Inc. v. Transitions Holding Co., Inc., provides a useful overview of New York law on restrictive covenants. At issue was an employee non-poach agreement between two companies entered as a result of a settlement in the context of the earlier hiring of another senior executive with a non-compete. Not an unusual situation. What is somewhat unique is that the alleged “poaching” occurred in the context of the acquisition of the restricted employee’s company - - not the recruitment of the restricted employee. The Court determined not to enforce the non-hire finding that the plaintiff was unable to demonstrate that it would meet any of the four recognized “legitimate business interests” necessary to overcome the strong presumption of unenforceability of restrictive covenants under New York law.

Although the facts and circumstances presented in this case are rather unique, the Court’s review of the applicable New York case law to obtain enforcement could be quite useful to practitioners in the area. New York courts have recognized four legitimate interests that may be asserted to support a restrictive covenant: (1) protection of trade secrets, (2) protection of confidential customer information, (3) protection of the employer’s client base, and (4) protection against irreparable harm where the employee’s services are unique or extraordinary. Cenveo Corp. v. Diversapack LLC, 09 Civ. 7544(SAS), 2009 WL 3169484, at *7 (S.D.N.Y.2009) (citing BDO Seidman v. Hirshberg, 93 N.Y. 382, 388-89 (1999)).

The Reed Elsevier Court then proceeds to do the analysis under these elements (other than customer information which was not applicable). Regarding (1) protection of trade secrets, the Court noted that the confidentiality restriction in the employee’s agreement served to provide that protection and that an enhanced ability to market a product alone was insufficient to create a protected interest. Element (3), protection of the employer’s client base, required a showing that “the employee must work closely with the client or customer over a long period of time, especially where his services are a significant part of the total transaction.” In order to meet the fourth element, unique or extraordinary employee, the Court observed two sets of circumstances to constitute uniqueness. The first category applies to types of employment where the employee’s services depend on the employee’s special talents; examples include “musicians, professional athletes, actors, and the like.” Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70 (2d Cir. 1999). The second, more recently recognized category, applies to employees who work as brokers, traders, or salespersons; the courts have found such employees’ services to be unique based on their unique relationship with the customers with whom they deal. Id. at 71; see also Maltby v. Harlow Meyer Savage, Inc., 166 Misc.2d 481, 633 N.Y.S. 926 (Sup.Ct.N.Y.Cnty.1995), aff’d 637 N.Y.S.2d 110 (1st Dep’t 1996); Natsource LLC v. Paribello, 151 F.Supp.2d 465, 469 (S.D.N.Y.2001).

Finally, the Court addressed the argument that risk of employee attrition should be considered a legitimate interest and rejected that concept finding that at least federal courts applying New York law have consistently determined that the four factors alone create the exclusive list to be considered.

While one might not agree with the Court’s application of the facts to the law, its recitation of the applicable law serves as a good guidepost for any restrictive covenant analysis under New York law.

Michigan Federal Court OKs Former Employer's Cease and Desist Letter to New Employer

When an individual threatens to disclose a company’s confidential information gained during employment at the company to a new employer, the common first reaction by the company is to send a “cease and desist” letter to the individual, and also a similar letter to the new employer. Yet before sending such a cease and desist letter to the new employer, the company may wonder whether it is opening itself up to potential liability -- on a tortious interference claim by the individual -- if the new employer should turn around and fire the individual on the basis of the allegations in the letter.

Companies with such concerns received a bit of reassurance in a January 21, 2014 opinion and order in Rick Bonds v. Philips Electronic North America, issued by the U.S. District Court for the Eastern District of Michigan, Southern Division. In that case, Rick Bonds had been employed with Philips Electronic North America or its predecessors (“Philips”) since 1996 as a field service engineer who maintained and repaired medical imaging equipment. He was subject to at least two confidentiality agreements concerning Philips’ confidential information. According to the opinion and order, in early 2009, Mr. Bonds surreptitiously began working for Philips’ competitor Barrington Medical Imaging, LLC as a field service engineer -- while still employed by Philips! Mr. Bonds continued his dual employment until July 2009, when Philips discovered what was going on and terminated Mr. Bonds’ employment.

A month after terminating his employment, Philips sent a cease and desist letter to Mr. Bonds, reminding him of his continuing obligations to Philips with respect to its confidential information. Philips sent a copy of this letter via fax to Barrington, and less than a week later, Barrington terminated Mr. Bonds’ employment.

Over two years later, on January 27, 2012, Mr. Bonds sued Philips, asserting a single claim for tortious interference with his business relationship with Barrington. Philips asserted counterclaims for breach of the confidentiality agreements, unfair competition and misappropriation of trade secrets. After discovery, Philips moved for summary judgment dismissing Mr. Bonds’ tortious interference claim.

In granting summary judgment dismissing Mr. Bonds’ claim, the court noted that to meet the elements of a tortious interference with business relationship claim, the plaintiff must demonstrate that the defendant “acted both intentionally and either improperly or without justification.” The court held that Mr. Bonds failed to present any “specific, affirmative acts that corroborate an improper motive of interference,” and that Philips’ actions to protect its confidential information were not improper because they were motivated by legitimate business reasons. Indeed, the court went so far as stating “concern about potential disclosure is exactly the kind of legitimate business reason that insulates [Philips] from liability.”

So companies should rest easy when sending a cease and desist to an individual’s new employer, provided that letter avoids defamatory comments and is sent in furtherance of the company’s legitimate business interests (which might include confidential information and/or customer relationships) and is not a malicious attempt to get the employee fired.
 

Since Fifield Is Not Going Away Any Time Soon, Illinois Employers Should Consider Revising the Consideration Provided for Restrictive Covenants

In June 2013, the Illinois Appellate Court for the First District (i.e., Cook County) 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. Fifield v. Premier Dealer Services, Inc., Docket No. 1-12-0327 (Ill.App. 1 Dist. June 24, 2013). To our knowledge, Fifield is the only Illinois state court decision to hold that an offer of employment by itself is insufficient consideration for a restrictive covenant; neither the Illinois Supreme Court nor any other Illinois appellate district has so held.

Fifield generated significant discussion among practitioners, as well as some expectation that the Illinois Supreme Court would weigh in. However, in September 2013, the Illinois Supreme Court decided not to review Fifield and, to date, no published decision has either cited it or applied it. Furthermore, the state legislature has taken no action to legislatively modify Fifield, nor does any such action appear imminent.

What Employers Should Do Now

Absent further developments in the Illinois courts (such as a split among the state appellate districts) or legislative intervention, Illinois employers hoping to enforce restrictive covenants within two years after the signing date should be prepared to distinguish Fifield factually or legally. Employers that are concerned about their ability to do so, or that want to err on the side of caution, should act now to address the implications of Fifield.

Accordingly, employers should consider these options:

1) Where there is a plausible nexus to another state, an employer can include a choice-of-law provision designating the law of a state with more favorable laws regarding the enforceability of restrictive covenants (e.g., the state where the employer’s headquarters is located or where the employee actually works). Illinois courts generally enforce contractual choice-of-law provisions unless they violate the fundamental public policy of a state with a materially greater interest in the situation or where the parties and contract do not have a substantial relationship with the chosen state.

2) Employers can provide consideration in addition to an offer of employment or continued employment. Examples of such possible “additional consideration” include a cash payment, stock options, training, education, a raise, additional paid time off, guaranteed severance, or a promotion. Unfortunately, while Fifield suggests that such “additional consideration” is required in order to enforce a covenant against an employee employed for less than two years, it provides no guidance as to how much “additional consideration” would be required, and there is no Illinois case law that sets out a formula as to how much consideration is appropriate in a given circumstance. In the absence of judicial guidance, it would be prudent for an employer to be as generous as possible and to provide consideration that is more than de minimis (e.g., offering “additional consideration” with a monetary value of at least $1,000).

3) Employers can agree to continue the employee’s salary during any restricted period, thereby alleviating the concern in Fifield about consideration being illusory.

4) Employers can evade Fifield entirely by having employees agree to a “garden leave” or “required notice” clause, rather than a traditional non-compete or non-solicit clause. Under such a provision, an employee is required to give advance notice of his or her resignation (e.g., 30 – 90 days) and, during the notice period, the employee remains on the employer’s payroll and owes the employer a fiduciary duty of loyalty (and therefore cannot work for a competitor during that period). “Garden leave” is a concept that arose in the United Kingdom and, over the past few years, has begun to become more common in the United States. Although there are relatively few cases interpreting garden leave clauses in the United States, because the employee remains on the payroll and because garden leave provisions tend to be shorter in duration than traditional restrictive covenants, they are less onerous to the individual and thus more likely to be enforced.

Regardless of the “additional consideration” ultimately decided upon, the restrictive covenant itself should both explicitly recite the consideration provided to the employee for signing it and further provide that the employee acknowledges the consideration and its adequacy.
 

Not in My Backyard: Bringing Claims Against Employees In the Corporate HQ's Home State May Not Be as Easy As You Think

By Nancy L. Gunzenhauser and Ian Carleton Schaefer.

How can an employee of a national employer not “work” where her employer works? How can such an employee not be subject to suit in the corporation’s backyard?

According to a recent New Jersey state court decision, a technology consultant for a New Jersey corporation who worked in Illinois and provided no services to New Jersey based clients could not be subject to suit in New Jersey. This decision is instructive for technology companies with a significant national workforce (particularly if they leverage remote/agile workers) in how to structure the employment relationship to gain home-field advantage in litigation.

In Baanyan Software Services Inc. v. Hima Bindhu Kuncha, Kuncha began working as a computer systems analyst for Baanyan in February 2011. While Kuncha was an employee of the New Jersey-headquartered technology company, she never actually worked within the state. Instead, she performed work on behalf of several of Baanyan’s clients, including her subsequent employer Halcyon, from her home state of Illinois or Ohio. None of Kuncha’s work was in New Jersey, nor did she ever travel to headquarters or perform work for any of Baanyan’s New Jersey-based clients. When Kuncha left to work for Halcyon, Baanyan brought a lawsuit in New Jersey alleging breach of contract, tortious interference with business relationships, and fraud, among other claims.

When a party brings a lawsuit, the defendant must have personal jurisdiction, meaning some minimal contact with the state or federal district in which she is being sued. The New Jersey appellate court found that Kuncha did not have sufficient “contacts” with New Jersey to be sued there, even though her employer was headquartered in the state, she received payment from the New Jersey corporation, and submitted timesheets and reports to the home office. The court noted that subjecting the former employee to a lawsuit in New Jersey would “offend traditional notions of fair play and substantial justice.” The court further determined that any contacts the former employee may have had with New Jersey were “attenuated at best,” and were insufficient to subject Kuncha to personal jurisdiction.

So -- how can a technology employer, with a global (and often remote or agile) workforce, manage its ability to bring suit against former employees where it chooses (especially if it chooses to sue in the headquarters’ backyard)? As the Baanyan case instructs, in order to gain personal jurisdiction over a former employee, the employee must have “purposefully availed” herself to the state. Employers may employ a variety of approaches to hail its former employees to its corporate backyard, including requiring employees to make periodic trips to the company headquarters to attend meetings, engaging employees with headquarter-clients, and setting up reporting relationships with HQ managers. Employers may also consider including contractual provisions in employment or confidentiality agreements in which the employee consents to submit to personal jurisdiction in the state courts where headquarters are situated.

Finally, the case also serves as a reminder to employers: before bringing in action to enforce a restrictive covenant in a particular jurisdiction, due consideration should be given as to whether the employee in question had sufficient contacts with the contemplated state. Otherwise, the court may dismiss the action with the order: “Not in My Backyard.”
 

The Courts Continue To Wrestle With The Interpretation Of The Computer Fraud And Abuse Act

On November 13, 2013, my partner Jim Goodman and I presented a national webinar discussing recent developments in Trade Secrets and Non-Competes. In that webinar, I discussed the split in the Circuits’ interpretation of the Computer Fraud and Abuse Act (CFAA).  (Access to the recording and presentation is by request only.)  I have also blogged on the most recent case that had been decided in the District of Massachusetts dealing with the interpretation of the CFAA, Advanced Micro Devices, Inc. v. Robert Feldstein, C.A. No. 13-40007-TSH, 2013 U.S. Dist. LEXIS 81206 (D. Mass. Jun. 10, 2013).

The issue that the courts are wrestling with is how to interpret the meaning of the terms “exceeds authorized access” and “without authorization,” which are in the CFAA. The issue has unfortunately not been resolved by the United States Supreme Court. Until then, different interpretations will continue to exist in the federal courts.

Recently, Chief Magistrate Judge Leo T. Sorokin rendered the latest opinion in the District of Massachusetts on the issue in MOCA Systems Inc. v. Bernier, C.A. No. 13-10738-LTS, 2013 U.S. Dist. LEXIS 161071 (D. Mass. Nov. 12, 2013). In that case, he refused to dismiss a CFAA claim, but allowed the defendants to bring the claim up later in the case at the summary judgment stage.

MOCA Systems sued Bernier (its former CEO) and Pernier Systems, the company he founded, claiming that Bernier improperly accessed MOCA’s computer systems for the purpose of competing with MOCA. The defendants moved to dismiss the Complaint.

Judge Sorokin quoted the language from the CFAA that has caused the split by the courts which states that a defendant is civilly liable where he or she “knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.” 18 U.S.C. § 1030(a)(4) (emphasis added).

Judge Sorokin acknowledged that there are two views that the Courts have taken interpreting this language, commonly referred to as the “narrow” view and the “broad” view. The Courts that take the narrow view interpret the CFAA as limited to hacking. Thus, as long as the individual has authority to access the computer, he or she does not act “without authority” or “exceed” his or her “authorization” even though the employee used the information for personal needs after leaving the company. Those Courts that take the “broad” view focus on unauthorized use by the former employee on the theory that the former employee exceeds his or her authorization when the information is used in a way that is adverse to the company or violated the company’s policy.

In MOCA, the Court acknowledged that in the District of Massachusetts, in Advanced Micro Devices, Inc. v. Feldstein, District Judge Hillman recently found that the narrow construction was “preferable.” The Court also acknowledged that there is even a split in the District of Massachusetts. (See District Judge Gorton’s decision in Guest-Tek Interactive Entm’t, Inc. v. Pullen, 665 F. Supp. 2d 42, 45 (D. Mass. 2009), in which he followed the broader line of cases.) However, in MOCA, Magistrate Judge Sorokin chose to defer the issue until summary judgment just as Judge Hillman did in Advanced Micro Devices and said that he didn’t have to decide whether to adopt the “narrow” or the “broad view” at this early stage since the facts in the case “suffice under either standard.” In reaching this conclusion, he relied on the allegations in the Complaint which, assuming they are true, state that Bernier accessed the company-owned computer after he left the Company, which would support the claim that Bernier acted “without authority.”

This case illustrates once more that Courts are trying to deal with the differing interpretations of the CFAA and defer a final decision on the issue when the facts support that approach. Until the U.S. Supreme Court finally issues a definitive interpretation of the CFAA, we will continue to see different results issued by Courts depending which Court and in some cases, which judge, hears the case.
 

Pre-emption Under The California Uniform Trade Secrets Act

Co-authored by Ted A. Gehring.  

There are three important holdings from the recent California Court of Appeal opinion in Angelica Textile Services, Inc. v. Park, 220 Cal. App. 4th 495 (2013).

First, while the California Uniform Trade Secrets Act (“CUTSA”) preempts tort claims based upon the same nucleus of operative facts as a claim for misappropriation of trade secrets, it does not preempt contract causes of action, even when based on the alleged misappropriation of trade secrets.

Second, even where tort claims may be related to an alleged claim for misappropriation of trade secrets, provided the theory of liability is independent from the claim of misappropriation of trade secrets, CUTSA will not preempt the claim.

And third, California’s broad prohibition against non-competition agreements—as codified at California Business and Professions Code Section 16600—does not apply to limitations on an employee’s conduct during the term of employment.

In Angelica, the plaintiff, Angelica Textile Services, sued its former employee, Jaye Park, and his new company on causes of action for misappropriation of trade secrets, breach of contract, conversion, breach of fiduciary duty, unfair competition, interference with business relations and conversion after Park, while still employed by Angelica, began working with Angelica’s customers using information from his employment at Angelica to create a laundry business to compete with Angelica. Park was a market vice-president at Angelica and had an agreement with Angelica that he would not, during his employment, become interested, directly or indirectly, in any business similar to Angelica’s business. On summary judgment the trial court dismissed the claims for breach of contract, conversion, breach of fiduciary duty, unfair competition, interference with business relations and conversion, holding that those claims were based upon the misappropriation of trade secrets and therefore preempted by CUTSA. At trial, a jury found against Angelica on its remaining CUTSA claim.

Angelica appealed. On appeal, the Angelica court reversed the trial court’s dismissal of the non-CUTSA claims.

As to the breach of contract claim, the Angelica court cited the language of the statute that “contractual remedies, whether or not based upon misappropriation of a trade secret,” (emphasis added) are not preempted by CUTSA. The Angelica court further held that, in any event, Angelica’s breach of contract claim was based on Park’s violation of the non-competition agreement. The Angelica court rejected Park’s claim that the non-competition agreement was invalid, holding that Section 16600 “has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends,” but does “not affect limitations on an employee’s conduct or duties while employed.”

As to the common law tort claims, the Angelica court held that none of the claims were based on the misappropriation of trade secrets and therefore, where not preempted. Citing Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210 (2010), the Angelica court held that CUTSA “does not displace noncontract claims that, although related to a trade secret misappropriation, are independent and based on facts distinct from the facts that support the misappropriation claims.” During discovery, Angelica had answered interrogatories asking the company to state all facts that supported their claims. The company had answered by stating that all of its claims were supported by the misappropriation of trade secrets. However, in response to the motion for summary judgment, Angelica produced evidence (which it claimed it learned of after responding to discovery) that provided independent bases of liability under the tort claims, including Park’s violation of his non-competition agreement and his duty of loyalty to Angelica and Park’s taking of documents that—even if not trade secrets—were still tangible property subject to a conversion claim. The Angelica court held that, based upon this new evidence of independently wrongful conduct, it was error for the trial court to conclude Angelica’s tort claims were displaced by CUTSA.
 

Recent Connecticut Decision Sheds Light On Non-Compete Enforceability

On October 23, 2013 Judge Hiller of the Connecticut Superior Court declined to enforce a one year non-compete brought by a lighting and lighting design company against one of its former designers, Chris Brown.  See the decision in Sylvan Shemitz Designs, Inc. v. Brown

In March 2013, Brown resigned his job for the plaintiff, and went to work at Acuity, a larger company that had four separate divisions focused in lighting controls. The plaintiff sued Brown and alleged that he breached a 2011 non-compete agreement, which indicated he could not work for one year for businesses in the United States that receive 25 percent of revenue from developing, manufacturing or selling lighting control systems. The court found that the geographic restraints and one-year duration of the noncompete agreement were reasonable. The restriction on “any” employment, no matter how important or menial, was not reasonable. Signing a new non-compete mid employment was deemed sufficient consideration where it reduced the length of the restriction from two years to one.

The Court determined that the plaintiff failed to prove that the defendant currently is involved in research and development in the area of lighting controls or that Acuity intends to pursue the same product lines in which the defendant obtained experience when working for the plaintiff. Currently, the defendant is responsible to design control layouts. He does not appear to be in a position to use his knowledge of the plaintiff’s business operations to harm the plaintiff. “Taken as a whole,” wrote the court, "the plaintiff has failed to demonstrate how the defendant, whose efforts for Acuity are both of a different character and deal with different products than those on which he worked while with the plaintiff, is in a position to cause irreparable harm.”

Finally, the court held that plaintiff failed to prove irreparable harm. Plaintiff needed to show it had or would likely suffer some economic harm beyond attorneys’ fees in prosecuting the action. Mere speculation of harm was not sufficient to justify a finding of irreparable harm.
 

Rare Complete Dismissal Of Non-Compete Case At Pleading Stage

There are three important “take-aways” from New York Supreme Court Justice Charles E. Ramos’ recent decision in Greystone Funding Corporation v. Kutner: (1) termination “without cause” is not a per se prohibition of enforcement of a non-compete unless the language of the contract as in this case so provides; (2) conclusory allegations of breach of fiduciary duty, tortious interference and unfair competition are inadequate and will be dismissed unless supported by facts on each element of proof; and (3) customer and prospect identity and impressions about them are sufficiently sensitive to warrant cause for sealing of a record under 22 NYCRR § 216.1.

Kutner was a senior mortgage originator for Greystone and had a two-year non-compete provision in his employment agreement. That restriction, however, by its explicit terms expired immediately if Greystone terminated Kutner “without cause” rather than two years hence. Justice Ramos thus dismissed the breach of contract action relying on the terms of the agreement itself and not on any “per se” application of unenforceability. While some believe such a doctrine exists in New York, I have written previously why I believe it does not. See After Termination “Without Cause:” Restrictive Covenants, NYLJ February 8, 2007.

Despite the fact that the Complaint alleged that while still employed by Greystone Kutner had recruited co-workers to join him at a competing mortgage lending business and, upon information and belief, he had formed and actively operated a competing business while still employed by Greystone, Justice Ramos held that the Complaint was not plead with sufficient particularity on each element of each cause of action and dismissed the tortious interference, breach of fiduciary duty, unfair competition and related claims. To my knowledge, it is one of the first New York State court decisions to put plaintiffs to a Twombly and Iqbal standard of pleading in a non-compete case.

Finally, trade secret cases always present the conundrum of pleading with sufficient specificity yet not disclosing actual trade secret and proprietary information so as to lose the protections afforded to such information. Justice Ramos properly found “good cause” as required by 22 NYCRR § 216.1 where the information “contained impressions and contemporaneous notes that could harm Greystone’s competitive advantage by having access to a large compilation of their business leads and their internal and contemporaneous impressions.” Relying on Mancheski v. Gabelli Group Capital Partners, 39 A.D.3d 499, 503 (2d Dept 2007) (argued by this author!), Justice Ramos granted the motion to seal portions of the record in this action.

New Jersey Federal Court Decision Concerning Flavor & Fragrance Formulas Presents Enforcement Conundrum For Trade Secret Owners

When an employee trusted with access to trade secret information leaves to join a competitor, many former employers have concerns. Merely warning a former employee and his/her new employer not to make use of the former employer’s “trade secrets and confidential information” may be insufficient to hold the new employer accountable for such employee’s transgressions, at least according to one New Jersey federal district court. As that court said in Givaudan Fragrances Corporation v. Krivda, decided October 25, 2013, “The onus is on the former employer to come forward and put the current employer on specific notice of trade secret protection, or else lose that protection. This burden includes immediately describing the alleged trade secret with precision so as to inform the defendant exactly what the plaintiff is alleging to have been misappropriated.” The court went on to grant partial summary judgment to defendant limiting plaintiffs to 34 of the 616 formulas of concern to the plaintiff because plaintiff had failed to fulfill its obligation to put defendant on notice of what trade secrets plaintiff contended were at issue by advising defendant specifically of the details of 582 of the formulas at issue. This is a duty that a plaintiff must fulfill by specific “disclosure at the outset of the litigation, if not before.”

Read literally, such a rule would create a real conundrum for trade secret owners. According to the court, plaintiff should have “disclosed the specification of each formula,” because “then appropriate discovery procedures could have precisely identified whether [defendant] had received any or all of the allegedly purloined formulas.” While that is true, and makes perhaps a certain amount of sense within any litigation, the court also suggested that such specificity may be required pre-litigation. But, informing a competitor pre-litigation and without the benefit of a protective order of, as the court noted, “exactly what the plaintiff is alleging to have been misappropriated” could itself amount to disclosure that ends the secrecy attendant to the protected information. Yet, relying on more general descriptions would seem insufficient to provide the sort of notice that the court in Givauden seemed to require. While the court in Givauden was dealing with a situation in which plaintiff’s discovery responses defining its trade secrets had remained throughout the litigation a bit too circumspect, the court’s language expressly goes beyond the litigation context to pre-litigation notice issues. In fact, the Givauden court, citing Fox v. Millman, 210 N.J. 401, 425-27 (2012), stated that “The law does not ‘impose on [subsequent employers] like Mane an affirmative duty to undertake an inquiry, independent of the information given to them by [the employee] as to the source’ of the employee’s work product. An employer is permitted to rely on the representations of the employee that no breach occurred without any further duty of inquiry. The employee’s contractual or fiduciary ‘duty to safeguard confidential information’ is not imputed to subsequent employers.” Because the Givauden court saw the law this way, it concluded that a subsequent employer’s duty would only arise upon being given sufficiently detailed information to require inquiry.

Despite Givauden, trade secret owners should be slow to provide a former employee’s new employer thedetailed specifics of the trade secrets of concern. Unilateral disclosure at the outset aimed at ameliorating suspected previous unauthorized disclosures seems ill-considered. Reading between the lines of Givauden, it seems that the court tired of plaintiff’s years-long, unvaried approach of lack of specificity. The lesson of Givauden is not, therefore, to disclose too early, but to avoid disclosing too late. Failing to disclose during the course of discovery, with a protective order in place, just smells funny to the court and leaves a bad taste in its mouth.