Trade Secrets & Noncompete Blog

Trade Secrets & Noncompete Blog

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

Another Illinois Appellate Decision Applies Fifield, But A Dissent Suggests That The Issue Of What Constitutes Adequate Consideration For A Restrictive Covenant In Illinois Remains Open For Judicial Discussion

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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, 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, and three federal judges in Illinois have declined to apply it.  However, the only other Illinois appellate court decision to address Fifield applied it without dissent.

Last week, the First District Appellate Court issued another decision applying Fifield, holding in McInnis v. Oag Motorcycle Ventures, Inc., 2015 IL (1st) 13097 that, in the absence of other consideration, 18 months of employment was not sufficient consideration for a restrictive covenant.  By itself, this ruling was not particularly noteworthy, except to the extent that the court confirmed that other consideration, combined with employment of less than 24 months, can constitute adequate consideration for a restrictive covenant.

What is noteworthy about this ruling, however, is the dissenting opinion by Justice Ellis, in which he wrote as follows:

I do not believe that a per se rule exists in Illinois, requiring that an at-will employee remain employed for at least two years – not one day less – after signing a restrictive covenant before sufficient consideration is found to exist.  Nor do I believe that a bright-line, two-year rule is warranted.  I also believe that the circumstances under which plaintiff left employment – whether he left voluntarily or was fired – are relevant to the determination.  Cases like these are inherently fact-specific, and I do not believe that this area of the law is the place for bright-line rules that remove relevant facts from consideration.

While a dissent carries no weight by itself, it may foretell a continued judicial discussion on this issue, particularly given that three different federal judges in Illinois have declined to follow Fifield based on their prediction that the Illinois Supreme Court would likely disagree with it.

Given that state supreme courts in Wisconsin and Kentucky both recently weighed in on whether mere continued employment is sufficient consideration for a non-compete (“yes” in Wisconsin, “no” in Kentucky) and given that the Pennsylvania Supreme Court recently heard oral argument on this issue, the question of what is adequate consideration for a restrictive covenant is one of the hottest topics in non-compete law.   Employers should continue to monitor this issue.

California Court Of Appeal Holds That Party Seeking To Enforce Forum Selection Clause As To Unwaivable Statutory Rights Has Burden To Show Enforcement Would Not Diminish Rights

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California Business & Professions Code § 16600 contains a strong public policy against non-competition agreements.  To address this prohibition, some employers have included choice of forum provisions in their employment contracts to give them the option of initiating an action in a more non-compete friendly jurisdiction and obtain leverage in the litigation.  Some federal district courts have enforced those forum selection clauses.  Marcelo v. Ivy Ventures, LLC, No. C 10-04609, 2010 U.S. Dist. LEXIS 134333 (N.D. Cal. Dec. 9, 2010); Google, Inc. v. Microsoft Corp., 415 F. Supp. 2d 1018 (N.D. Cal. 2005); Hartstein v. Rembrandt IP Solutions, 2012 U.S. Dist. LEXIS 105984 (N.D. Cal. July 30, 2012); see also Hegwer v. American Hearing and Assocs., 2012 U.S. Dist. LEXIS 24313 (N.D. Cal. Feb. 27, 2012); Swenson v. T-Mobile USA, Inc., 415 F. Supp. 2d 1101 (S.D. Cal. 2006) (in case filed by employee in California after former employer had commenced enforcement action in Washington, California court dismissed and held that “[e]nforcement of the [Washington] forum selection clause itself here does not contravene a strong public policy of California).

The California court of appeals holding in Verdugo v. Alliantgroup, L.P., (Cal. Ct. App., 4th App. Dist. 2015) may undermine that strategy.

Ordinarily, the party opposing the enforcement of a forum selection clause has the burden to show the enforcement of the clause would be unreasonable or unfair.  In Verdugo, the court held that the burden is reversed when the underlying claims are based on statutory rights that the California Legislature has deemed unwaivable.

In Verdugo, the plaintiff employee Rachel Verdugo sued her employer, Alliantgroup, in a class action asserting eight causes of action: (1) unpaid overtime wages under Cal. Labor Code § 1194; (2) failure to provide accurate itemized wage statements under Cal. Labor Code § 226; (3) failure to provide meal breaks under Cal. Labor Code § 226.7; (4) failure to pay all wages due at time of termination under Cal. Labor Code § 203; (5) failure to pay commissions under Cal. Labor Code §§ 200 to 204; (6) failure to pay vacation pay under Cal. Labor Code § 227.3; (7) unfair and unlawful business practices under Cal. Bus. & Prof. Code § 17200, et seq. and (8) civil penalties under the Cal. Labor Code Private Attorneys General Action of 2004.  Alliantgroup moved to stay or dismiss the action based on a forum section clause in an Employment Agreement signed by Verdugo.

Verdugo began her employment with Alliantgroup in 2007 in its Irvine, California office as an “Associate Director”.  Alliantgroup is headquartered in Texas, with offices in 11 states, including California.  Verdugo’s Employment Agreement included a combined forum selection and choice of law clause:

Choice of Law/Jurisdiction/Venue: This Agreement shall be governed in all respects, including, but not limited to, validity, interpretation, effect and performance by the laws of the State of Texas. The parties agree that proper subject matter and personal jurisdiction shall be had solely in [the] State of Texas. The sole venue for disputes arising hereunder shall be in Harris County, Texas.” (Italics, underscoring, and bold typeface omitted.)

The trial court granted Alliantgroup’s motion.  Verdugo appealed.

The Verdugo court began its analysis by noting the general standard that California favors enforcement of forum selection clauses, provided they are entered into freely and voluntarily, and provided their enforcement would not be unreasonable.  A mandatory forum selection clause—one that requires that a matter be litigated in a particular forum as opposed to merely permitting it—is given effect unless the enforcement would be unreasonable or unfair.  The Verdugo court pointed out that, despite this, California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates California public policy.

Alliantgroup argued that it was Verdugo’s burden to demonstrate that the forum selection clause should not be enforced.  The Verdugo court disagreed.  Citing Wimsatt v. Beverly Hills Weight etc. Internat., Inc., 32 Cal.App.4th 1511 (1995)(dealing with claims under California’s Franchise Investment Law) and America Online, Inc. v. Superior Court, 90 Cal.App.4th 1 (2001)(dealing with claims under California’s Consumer Legal Remedies Act), the Verdugo court held that where the claims at issue in the litigation are based on unwaivable statutory rights, the burden  shifts to the party seeking to enforce the forum selection clause to show that the forum selected will not diminish in any way the substantive rights afforded under California law.

Alliantgroup attempted to distinguish Wimsatt and America Online, arguing that, in each case, the statute at issue specifically stated that attempts to waive the protections of the law are void.  The Verdugo court dismissed this argument, noting that California Labor Code §§ 219 and 1194 include non-waiver language and further noting that case law recognized the protections of the Labor Code at issue were unwaivable.  Alliantgroup then tried to argue that Verdugo had not waived her rights, but merely agreed to litigate her claims in Texas.  The Verdugo court also dismissed this argument, holding that the forum selection clause had the potential to operate as a waiver, and it was Alliantgroup’s burden to show it would not.

Having held that Alliantgroup bore the burden of establishing that the selection of Texas as a forum would not diminish in any way the substantive rights afforded under California law to Verdugo, the Verdugo court proceeded to address whether Alliantgroup had met that burden.  The court first addressed whether it was necessary to conduct a comparative analysis of each state’s law to determine whether they offered materially different protections.  Citing America Online, the Verdugo court noted that there the court had found such an analysis unnecessary—enforcing the clause would deny a California resident the specific protections the California Legislature enacted and made unwaivable.  Nonetheless, noting that the America Online court had proceeded to conduct just such an analysis, the Verdugo court held such an analysis was necessary to determine whether enforcement of the forum selection and choice of law clauses would violate California’s public policy.  The Verdugo court held that the defendant could meet its burden only by showing that the foreign forum provides the same or greater rights than California, or that the foreign forum will apply California law.

Alliantgroup contended that a Texas court would, under Texas choice of law, most likely apply California law.  The Verdugo court found this unpersuasive, noting that Alliantgroup could have omitted any uncertainty by stipulating to the application of California law.  Instead, Alliantgroup “carefully preserved its ability to argue to a Texas court that it should apply Texas law. . . .”  Holding that Alliantgroup had failed to identify or compare Texas and California law on any of the relevant statutory claims, the Verdugo court held Alliantgroup had not met its burden.

Alliantgroup argued against a full reversal of the lower court’s ruling, arguing that the stay should be left in place on forum non conveniens grounds, with the right to resume litigation if the Texas court refused to apply California law and was thus, “unsuitable.”  The Verdugo court held that a California trial court lacked the power to simply stay the action on forum non conveniens grounds.  The Verdugo court held that the issue was not whether Texas was suitable for purposes of forum non conveniens—an analysis limited to whether the court lacks jurisdiction or the action is barred on statute of limitations grounds.  A Texas court’s decision to apply Texas law would not make Texas an unsuitable forum.  And the California trial court would not necessarily have a basis to resume proceedings.

Out of state employers seeking to enforce forum and choice of law clauses against California employees should be mindful that the clauses cannot be used to undercut the unwaivable protections of the California labor code.  An out of state employer that wishes to enforce a forum selection clause should be prepared to stipulate to application of California law as to the unwaivable protections of the California Labor Code on claims at issue if it wishes to have its choice of forum outside California enforced by a California court.

It remains to be seen to what extent this ruling may be used by employees to escape the effect of forum selection clauses in cases involving non-competition agreements.  Although Cal. Business & Professions § 16600 does not specifically use the term “waive,” it states that:  “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  Case law does not permit employers to use choice of law provisions to avoid the impact of Cal. Business & Professions § 16600 (Application Group, Inc. v. Hunter Group, Inc., 61 Cal.App.4th 881, 901-905 (1998)), but employers have used choice of forum clauses to enforce non-competition agreements.  Employers may anticipate that employees with non-competition agreements facing forum selection clauses that may result in enforcement of the terms will argue that the provisions of §16600 are not waivable and, pursuant to Verdugo, may not be litigated in foreign forums that would enforce them.

Recent Source Code Trade Secret Theft Conviction

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The Manhattan District Attorney’s office last week prevailed over Sergey Aleynikov, the former Goldman Sachs high frequency trading programmer accused of stealing computer source code from the bank, on just one count of the three of which he was charged.  It is somewhat hard to imagine how one might be found guilty of “unlawful use of secret scientific material” (N.Y. Penal Law § 165.07 as defined in § 155.00(6)), yet not get convicted for “unlawful duplication of computer related material” (N.Y. Penal Law § 156.30).

With Mr. Aleynikov previously avoiding federal charges of theft of trade secrets under the Economic Espionage Act and National Stolen Property Act, state prosecutors tried their hand on somewhat equivalent state statutes concerning computer crimes.  Whether the split decision will withstand review by the trial court judge and ultimately on appeal remains to be seen.

The underlying facts were not challenged at trial.  Mr. Aleynikov essentially admitted that he downloaded Goldman source code and attempted to cover his tracks by deleting the history of commands on his computer.  The focus of his defense was that he did not acquire a “major portion” of the economic value of the source code as required by the New York Penal Code Section at issue.  Also, he argued that he did not make a “tangible” reproduction of the files, another element required for proving unlawful use of secret scientific material.

That the jury took nearly a week to deliberate and required the jury instructions to be re-read and eventually provided in writing is indicative of how difficult it can be to try and prove any case involving the theft or unauthorized use of computer source code.  Given the ease with which such crimes can be accomplished, we are sure to see more developments of the law in this area in the immediate future.

Wisconsin Supreme Court Holds That Continued Employment Is Sufficient Consideration For A Non-Compete Signed By A Current At-Will Employee, Provided That The Employee Is Not Fired Shortly After Signing

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Over the past 24 months, one of the hottest issues in non-compete law has been whether continued at-will employment, by itself, is sufficient consideration for a non-compete.

Last week, in Runzheimer International v. Friedlen and Corporate Reimbursement Services, Inc., the Wisconsin Supreme weighed in on this issue, holding that continued employment is sufficient consideration for a non-compete signed by a current at-will employee.  However, the Court expressly qualified this holding by explaining that if an at-will employee is fired “shortly after signing” a non-compete, the non-compete would “likely” be voidable and subject to rescission. The Court further qualified its holding by stating that “an employer acting in such a deceitful manner may be breaching the doctrine of good faith and fair dealing.”

What the Court did not say, however, is how long an at-will employee must be employed after signing the non-compete.  There is verbiage in the majority opinion which suggests that so long as the employer does not fire the employee “moments after the employee signs the covenant,” the agreement will be enforceable.  Nevertheless, a concurring opinion states that the Court’s decision “in effect transforms the parties’ at-will employment contract into an employment contract for a reasonable duration.”  This issue will no doubt be fodder for future litigation.

In the meantime, the Pennsylvania Supreme Court is also in the process of deciding whether mere continued at-will employment is sufficient consideration for a non-compete, and the state and federal Courts in Illinois continue to wrestle with the length of at- will employment required to support a non-compete.

Stay tuned!

Massachusetts Court Defers Non-Compete Case To Arbitration Even Though Competitor Is Not A Signatory To Former Employee’s Employment Agreement

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In a recent case in Massachusetts, a Superior Court Judge denied a former employer’s motion for a restraining order in a case alleging a violation of a non-compete agreement and granted the cross motion of the former employee and current employer to compel arbitration even though the current employer was not a party to the arbitration clause which was included in the former employee’s Employment Agreement.

Facts

In Tibco Software, Inc. v Zephyr Health, Inc. and Kevin Willoe, Civil Action No 2015-844-BLS1 (Mass. Superior Court March 31, 2015), Plaintiff Tibco Software, Inc. (“Tibco”) filed a motion for a restraining order and expedited discovery alleging that co-defendant Kevin Willoe (‘Willoe”) breached the non-compete clause in his Employment Agreement with Tibco by working for a competitor, co-defendant Zephyr Health, Inc. (“Zephyr”) shortly after he quit.  Article IX of the Employment Agreement provided that the claims alleged in the Complaint were subject to arbitration.  Even though Zephyr was not a party to the Employment Agreement, both defendants moved to compel arbitration and to stay the action pending the outcome of the arbitration.

Analysis

What is interesting about this case is that the Court was willing to defer the matter to arbitration even though Tibco sought emergency relief to enforce the non-compete clause and even though Zephyr was not a signatory to the arbitration clause in Willoe’s Employment Agreement.  Relying on the representation of counsel for both defendants that the rules governing the arbitration authorized the arbitrator to issue preliminary injunctive relief, the Court left the question of such emergency relief to the arbitrator.

In granting the defendants’ request to stay the case pending the outcome of the arbitration, the Court cautioned the parties that if “there is any delay in the selection of the arbitrator[s], the plaintiff may request an emergency hearing on its motion for a preliminary injunction, such orders, if entered, to be in force only until the arbitrator[s] is selected.”

It is important to note that the Court limited its ruling to situations in which the former employer’s claims arose directly from the restrictions specifically contained in his Employment Agreement.  This approach, adopted by the Court, has been described as “the narrow view.”  Other courts, primarily in the federal sector, have adopted the “broad view” in which a non-signatory to such agreements may compel arbitration where “the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement…”  See Vassalluzzo v. Ernst & Young LLP, No. 06-4215-BLS2, 2007 WL 2076471 (Mass. Super. Ct. June 21, 2007).

Conclusion

Regardless of whether a court relies on this broad view or the more narrow view taken in Tibco, it is important to consider the ability of a non-signatory to an employment agreement to avoid emergency relief by moving to enforce an arbitration clause contained in the agreement.  This becomes one of the many important factors an employer must consider in deciding whether or not to include an arbitration provision in an employment agreement at all or at least to carve out such disputes which seek emergency relief from the courts.

Bill Regarding Non-Compete Agreements Introduced in New York Legislature

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A bill has been introduced in the New York State Legislature, aiming to clarify the laws of non-compete and non-solicit agreements in New York.

Introduced by Assemblyman Phil Steck on January 15, 2015 and by State Senator Andrew Lanza on March 20, 2015, the bill (A2147/S4447) is entitled “Policy Against Restraint of Trade,” and operates from the premise that the Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999) has led to confusion in the law of non-competes, particularly in the application of a balancing test in which an employer’s interest in enforcing a non-compete or non-solicit covenant is weighed against the employee’s interest in earning a livelihood.

Among other things, if enacted, the bill could render non-competes and non-solicit agreements in New York unenforceable unless they are reasonable in time and/or geographic scope, and only if the employee or independent contractor:

(1) left the business voluntarily and is unique (i.e., possesses trade secrets of the business or confidential information akin to a trade secret);

(2) is the seller of any portion of the business; or

(3) is a “learned professional” other than a lawyer.

The bill currently sits in the Committee on Labor in both chambers of the legislature, and so is a long way from being enacted.  We will monitor and report on any further legislative progress of the bill.

Chicago District Judge Issues Primer On Declaratory Judgment Actions Regarding The Enforceability Of Non-Compete Agreements

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Last week, Chicago district judge Charles Kocoras dismissed a declaratory judgment action challenging the enforceability of a facially broad form non-compete agreement signed by all employees of the Jimmy John’s sandwich chain.  Judge Kocoras held that the dispute was not judiciable because the plaintiffs lacked the requisite “reasonable apprehension” of litigation against them and because they failed to allege that they had actually engaged in conduct that would violate the non-compete.  (Judge Kocoras’ memorandum opinion also addressed significant joint employer, franchisor/franchisee, and FLSA issues which are beyond the scope of this blog.)

As an initial matter, Judge Kocoras noted that “[t]he Seventh Circuit has not addressed whether a claim for declaratory relief is judiciable in the context of non-compete provisions.”  Nevertheless, borrowing from an analogous Seventh Circuit decision involving a patent infringement/declaratory judgment action, Judge Kocoras held that in order to establish the existence of an actual case or controversy sufficient to support a claim for declaratory relief in the non-compete context, the plaintiffs must clear two threshold procedural hurdles.  “First, the Plaintiffs must have a ‘reasonable apprehension’ that the Defendants are going to file a lawsuit against them for violating the Non-Competition Agreement. Second, the Plaintiffs must allege that they were preparing to engage or had engaged in conduct that would compete with the Defendants.”

In his Jimmy John’s decision, Judge Kocoras held that the Plaintiffs did not satisfy either requirement.  As for whether the Plaintiffs had a “reasonable apprehension” that the Defendants might sue them, Judge Kocoras noted that “Jimmy John’s and the Franchisee Defendants have submitted two affidavits attesting to their intention not to enforce the Confidentiality and Non-Competition Agreements against the Plaintiffs ‘in the future.’”  In light of these affidavits and the fact that the Defendants had not taken any prior action to enforce the non-compete agreements against the Plaintiffs in the past, Judge Kocoras held that the Defendants “satisfied their burden of establishing that the challenged conduct will not ‘reappear in the future.’”

As for the second requirement, Judge Kocoras held that the Plaintiffs did not allege with sufficient specificity that they had prepared to engage or had engaged in prohibited activities.  For example, Judge Kocoras explained that one of the Plaintiffs “fail[ed] to specify if she applied, was interviewed, or was offered a position [with a prohibited competitor]” and that a mere “litany of possibilities does not amount to a violation of the terms of the Confidentiality or Non-Competition Agreement.”

So, from a strategic perspective, what does this case mean for future declaratory judgment actions regarding non-compete agreements?

Non-compete law remains a creature of state law and most non-compete cases are brought in state court.  Hence, the precedential impact of this decision may be limited.

That being said, the decision does provide strategic lessons to both sides in the non-compete declaratory judgment setting.  First, the standard for getting a declaratory judgment in federal court may be stricter than that in a particular state court.  Defendants may want to consider removing such cases to federal court, if possible, and plaintiffs may be wise to plead in a manner intended to minimize the risk of a successful removal.  Second, a federal court plaintiff seeking a declaration that a seemingly overbroad non-compete is unenforceable must plead sufficient facts to show a reasonable apprehension of enforcement litigation.  Third, when attempting to defend (or enforce) an otherwise facially overbroad non-compete, it may be prudent to expressly disclaim enforcement of the maximum limitations of the agreement (i.e., to effectively “self modify” the agreement before a court has an opportunity to rule on its enforceability).

No Future Employment Provisions In Employment Litigation Settlement Agreements May Violate California Law

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In another decision expansively interpreting California Business & Professions Code § 16600 and which could have a significant effect on employment litigation settlements, the Ninth Circuit Court of Appeals reversed the district court’s enforcement of a settlement agreement and remanded the case to the district court to determine whether a no employment provision in the agreement is a “restraint of substantial character” to the Plaintiff’s medical practice.  Golden v. California Emergency Physicians Medical Group; Med America; Mark Alderdice; Robert Buscho, United States Court of Appeals for the Ninth Circuit (No. 12-16514) (April 8, 2015).

The case has an interesting procedural history.  Dr. Golden is an emergency-room doctor who sued California Emergency Physicians Medical Group (“CEP”), among others, regarding his loss of staff membership at a medical facility.  His lawsuit was based on various state and federal causes of action, including racial discrimination.  The parties orally agreed in open court to settle the case and the settlement terms included “a substantial monetary amount,”  dismissal of the action, a release of CEP and a waiver of any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future (the “no-employment provision”).  Dr. Golden refused to sign the written agreement and attempted to have it set aside.  His attorney moved the court to withdraw as counsel, moved the court to intervene and further moved the court to enforce the settlement agreement so he could collect his contingency fee. In further proceedings a magistrate judge ordered Dr. Golden to sign an amended agreement, which recommendation was adopted by the district court judge who concluded the settlement agreement was not within the ambit of § 16600.  Dr. Golden refused to sign the agreement and filed a notice of appeal.

The court concluded the case was ripe for review because (1) Dr. Golden argued the agreement was currently void because the no-employment term was a material term and (2) Dr. Golden’s argument that the no-employment provision was void was in response to his former attorney’s motion to enforce the agreement.  The court concluded the issue before it concerned the present enforcement of the settlement agreement rather than the future interaction between the no-employment provision and his emergency medicine practice.

Dr. Golden argued because of CEP’s emergency medicine dominance in California and its aggressive plans to expand, the agreement would substantially limit his employment opportunities because CEP not only could refuse to employ him, it could terminate him without any liability if it subsequently acquired an interest in a facility where he would be working.

The court pointed out that § 16600’s scope is not limited to covenants not to compete between employees and their employers.  Rather, the court held, the text of § 16600 voids “every contract” that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.”  The court relied on the California Supreme Court decision in Chamberlain v. Augustine, 156 P2nd 479 (Cal. 1916) and concluded the issue is “not whether the contract constituted a covenant not to compete, but rather whether it imposes ‘a restraint of substantial character.'”  The court concluded that the § 16600 prohibition extends to any restraint of a substantial character no matter its form or scope and remanded the case to the district court to determine in the first instance whether the no-employment provision constitutes a restraint of substantial character to Dr. Golden’s medical practice.

Judge Kozinski dissented because the only limitation imposed by the agreement on Dr. Golden’s ability to practice his profession “at this time” (emphasis in original) was that he could not work for CEP.  Since his employment with CEP was the subject of the controversy in his lawsuit, it could not possibly violate § 16600 and it would mean few employment disputes could ever be settled.  Judge Kozinski opined the only real limitation on Dr. Golden’s ability to practice would be if, in the future, CEP acquired a facility at which he worked.  He concluded if that scenario occurred, Dr. Golden would have the ability to raise § 16600 as a defense to his dismissal and a court could adjudicate that issue based on the concrete circumstances which existed at that time.

We will be very interested to learn how the district court resolves this issue.  This case has important implications for employment law litigation in California because most settlement agreements contain a no future employment provision.  The district court’s decision following remand and any potential appeal should further clarify the issue.  However, employment attorneys will have to be very careful in including no employment provisions in settlement agreements.  Absent a provision providing  that any unenforceable terms may be severed from the agreement, attorneys must be careful in deciding whether  no employment provisions should be included in that, based on the Golden case, it might invalidate the settlement agreement if a court concludes the prohibition is a restraint of substantial character.

Federal Court in California Sheds Light on Computer Fraud and Abuse Act: Allegations of Indirect Access Held Insufficient To State Claim

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On March 20, 2015, a California federal court rejected an expansive reading of the Computer Fraud and Abuse Act (“CFAA”) urged by two plaintiff corporations that sought to hold a competitor and two of its directors liable under the CFAA, under an agency theory, for the actions of a former employee who allegedly downloaded and stole the corporations’ confidential trade secrets.

The plaintiffs, Koninklijke Philips N.V. and Philips Lumileds Lighting Company (“Lumileds”) are engaged in the business of Light Emitting Diode (“LED”) technology.  They alleged that Dr. Gangyi Chen, while employed, downloaded Lumileds’ trade secrets and confidential business information onto a portable storage device, then resigned and began working for a competitor in China, Elec-Tech International Co., Ltd. (“ETI”).  Six months after Dr. Chen began at ETI, in an amount of time that plaintiffs called unprecedented in the lighting industry, ETI announced two new high-energy LED lighting products.

The plaintiffs sued in federal court in California, bringing nine state law claims and one federal CFAA claim against various defendants, including Dr. Chen, ETI and two of ETI’s directors.  Plaintiffs’ CFAA allegations were that the defendants exceeded authorized access or otherwise accessed plaintiffs’ computers without authorization.  As against Dr. Chen, the allegations were that he directly accessed the data, but as to the other defendants, the allegations essentially were that Dr. Chen acted as an agent and a conduit through which the other agents gained unauthorized access to plaintiffs’ data.

In the decision in Koninklijke Philips N.V.  v. Elec-Tech International Co., Ltd. (N.D. Cal. March 20, 2015), the Court dismissed the CFAA claim, first holding that that Dr. Chen was authorized to access the information he allegedly stole from Lumileds, and therefore no CFAA claim was stated.  Second, the Court rejected plaintiffs’ indirect access theory of CFAA liability as to the other defendants, neatly summarizing its holding as follows:

If the Court accepted Plaintiffs’ argument here, that the mere pleading of an agency relationship between the insider and an outsider could render the outsider subject to liability under the CFAA, it would effectively federalize all trade secret misappropriation cases where parties use a computer to download sensitive or confidential trade secret information – which would be nearly every trade secret case nowadays, when companies maintain their files electronically rather than in physical cabinets.  Plaintiffs are really making a policy argument better directed to Congress instead of this Court, which must follow the clear direction from the Ninth Circuit as to who can and cannot be held liable under the CFAA.

While there have been efforts in Congress in recent years to pass a law creating a federal claim for trade secret misappropriation, Congress has not done so yet.  Until it does, this decision by the Northern District of California is a useful reminder that plaintiffs considering asserting claims under the “anti-hacking” CFAA must make sure that the facts fall within that statute’s relatively narrow confines.  If they do not, such plaintiffs likely will be limited to state law claims and remedies for trade secret misappropriation and the like, and probably will be constrained to proceed in state court, rather than federal court.

The Evolving Treatment of Fifield v. Premier Dealer Services, Inc.

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In Fifield v. Premier Dealer Services, Inc., an Illinois Appellate Court determined that, absent other consideration, at-will employment must continue for two years in order to constitute consideration for the enforcement of competition restrictions.  Clients continue to ask how Fifield has been applied by subsequent courts.  So far, the results have been mixed.  This month, the United States District Court for the Northern District of Illinois rejected Fifield’s bright line test in the case of Bankers Life and Casualty Co. v. Miller, 2015 U.S. Dist. LEXIS 14337 (N.D. Ill. Feb. 6, 2015).  In doing so, Judge Shah explained that in light of the Illinois Supreme Court’s recent decision emphasizing the need to consider the totality of the circumstances in evaluating competition restrictions, the Illinois Supreme Court “would not adopt a bright-line rule requiring continued employment for at least two years in all cases.”  Bankers Life, at *11-12.  Previously, Judge Castillo too rejected Fifield’s bright-line test in Montel Aetnastak, Inc. v. Miessen, 998 F. Supp. 2d 694 (N.D. Ill. 2014).  However, Judge Holderman reached a different result in Instant Technology, LLC v. Defazio, 2014 U.S. Dist. LEXIS 61232 (N.D. Ill. May 2, 2014) and determined that competition restrictions were not enforceable against employees who had worked for 10, 19, and 21 months and received only that employment as consideration for the restrictions.  Instant Technology is currently on appeal.   So far, however, the score in the United States District Court for the Northern District of Illinois is 2-1 against Fifield’s bright-line test.

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