Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

The New Jersey Legislature was overwhelmingly in favor of a measure that would have barred employers from obtaining social media IDs and other social media related information from employees and applicants. Click here for A2878 as passed.  But Governor Chris Christie vetoed A-2878 because it would frustrate a business’s ability “to safeguard its business assets and proprietary information” and potentially conflict with regulatory requirements on businesses in regulated industries such as finance and healthcare. Click here for the Governor's Veto Statement. While the Governor thought the bill well-intentioned, he conditionally vetoed it for painting “with too broad a brush,” citing the trade secrets/proprietary information concern as a primary motivation: “In view of the over-breadth of this well-intentioned bill, I return it with my recommendations that it be more properly balanced between protecting the privacy of employees and job candidates, while ensuring that employers may appropriately screen job candidates, manage their personnel, and protect their business assets and proprietary information.”

The Governor specifically recommended the bill be revised to:

• Create an exception to allow investigation of work place misconduct or unauthorized transfer of confidential or proprietary data to a personal account;
• Add language confirming that an employer may view, access, or utilize information about a current or prospective employee that can be obtained in the public domain;
• Carve out of the definition of “personal account” any account, service or profile created, maintained, used or accessed by a current or prospective employee for business purposes of the employer or to engage in business related communications;
• Eliminate provisions that would create a civil cause of action for affected employees or applicants;
• Add a proviso stating that nothing in the act shall prevent an employer from implementing and enforcing a policy pertaining to the use of an employer issued electronic communications device or any accounts or services provided by the employer or that the employee uses for business purposes; and
• Add a proviso stating that nothing in the act should be construed to prevent an employer from complying with the requirements of State or federal statutes, rules or regulations, case law or rules of self-regulatory organizations.

Click here for the bill as revised after the Governor's veto statement.

These last two provisos are important ones, especially for the financial services industry and the healthcare industry. They are important because FINRA, for example, has laid out certain monitoring and record keeping requirements concerning social media used to communicate with clients and prospective clients concerning potential financial transactions. See, e.g., FINRA Guidance here.

There are likewise data security requirements emerging out of HIPAA and other bodies of law that may require security and monitoring of social media. Click here for a discussion of such issues by Dan Goldman (@danielg280), legal counsel at Mayo Clinic and Advisory Board member to the Mayo Clinic Center for Social Media. In an age of BYOD (Bring Your Own Device) and the consolidation of business and personal activity to a single mobile device, failure to include such exceptions would force employers into hard choices between required monitoring and desired seamlessness of the business/personal transition.

While many states have in the last year adopted such statutes, the interplay between the Governor and the Legislature in New Jersey plays out the competing interests nicely, and hopefully starts a trend toward a more measured approach to such questions. Accommodating these competing interests is not only a legislative challenge, but is one faced by employers and businesses every day.

On May 2, 2013, the Texas Uniform Trade Secrets Act (UTSA) was signed into law by Governor Rick Perry. The new law becomes effective on September 1, 2013. Nearly every state in the United States now has adopted some variation of the model Uniform Trade Secrets Act; only New York, Massachusetts and North Carolina have not.

The UTSA includes statutory definitions for terms such as trade secrets, misappropriation, and wrongful means, and provides several potential remedies for wrongs committed under the act, including injunctive relief, damages and attorneys’ fees.

Until now, claims of misappropriation of trade secrets in Texas were governed by Texas common law, which in large part is similar to the UTSA. Texas’ UTSA even varies from the model UTSA definition of trade secrets by including customer lists in the new statutory definition, as certain kinds of customer lists and other compilations are recognized as trade secrets under Texas common law.

One area in which Texas trade secret law will change come September 1 is in the possibility of recovering attorneys’ fees on a misappropriation claim, an element of relief that did not exist under Texas common law. Also, while Texas courts in the past have not expressly or consistently adopted the inevitable disclosure doctrine, plaintiffs asserting that doctrine in Texas will find some comfort in the UTSA’s prohibitions on “threatened,” as well as “actual” misappropriation.

Once enacted, the UTSA should serve to provide greater predictability for companies or individuals that are considering asserting claims in Texas courts for misappropriation of trade secrets. Texas’ adoption of the UTSA leaves New York as the only state which relies upon purely common law precedent with regard to trade secret claims. (Both Massachusetts and North Carolina have their own “Trade Secret Protection Acts.”)

So which state will be the next to adopt the UTSA? Massachusetts has a head start: on January 2, 2013, Bill H. 27 was introduced in the state legislature to enact the UTSA in Massachusetts, and that bill remains pending in the legislature.
 

Practitioners in the area of trade secret protection and employee mobility law are still trying to sort out the impact of a federal court jury verdict in San Francisco last month finding former Korn Ferry executive David Nosal guilty of two criminal counts stemming from his alleged misappropriation of the Company’s proprietary information after his departure. The long-running legal saga of Mr. Nosal, whose name is undoubtedly destined to become synonymous with several critical issues related to computer law, has been the subject of a previous post on our Trade Secret and Non-Compete blog. In short, following a script we have read many times before, Mr. Nosal was accused of leading a conspiracy of existing and former employees of Korn Ferry, the executive placement behemoth, with the intent of setting up a competing firm with a business model based largely on misappropriation of Korn Ferry’s proprietary information regarding potential placement prospects. The case was an unusual one because the alleged theft was so significant and brazen that it resulted in criminal prosecution of Nosal in federal court under the Computer Fraud and Abuse Act (CFAA).

The case has dragged on for nearly eight years. For a time, it looked as if the prosecution was on the ropes after the Ninth Circuit, in a much-anticipated en banc decision, ruled that six of the federal charges against Nosal could not be brought under the CFAA. The court of appeals decision, written by the famously tech-savvy Chief Judge Alex Kozinski ruled essentially that the alleged efforts by Nosal and his co-conspirators to purloin Korn Ferry’s critical database of prospects was not within the scope for the CFAA because it did constitute computer “hacking” as that term is commonly understood. The Ninth Circuit’s decision was at odds with the holdings of several other courts of appeal on similar issues. The Justice Department declined to challenge the Ninth Circuit’s decision in the Supreme Court, but the issue regarding the applicability of the CFAA in the context of trade secret misappropriation by employees or former employees seems inevitably destined for eventual High Court review.

Despite having its case dramatically trimmed in size, the government managed to secure a conviction of Nosal on two counts. His attorneys have already vowed an appeal. Perhaps it will be the Ninth Circuit’s decision in “Nosal II” that will make it to the High Court.

Criminal prosecutions in the context of trade secret misappropriations are of course rare but the Nosal case has been closely watched by attorneys who seek to protect trade secrets through civil litigation. The verdict obtained in San Francisco in this case may make federal prosecutors more willing to consider prosecution under the CFAA in egregious cases of trade secret theft involving computers, breathing some life back into the potential threat of criminal prosecution as the ultimate weapon in the employer’s arsenal of means to prevent or address trade secret misappropriation.

The circumstances of the Nosal case also show that the basic elements of an employer’s strategy for protecting its trade secrets remain the same. First, it is critical that the employer’s computer use policies be carefully drafted to define the proper limits of employee use and that they reflect the realities of how the employer conducts its business on a day-to-day basis. In its en banc decision, the Ninth Circuit rejected application of the CFAA on the facts presented, in part, out of fear that a broad application of the statute to an employee who violates his or her employer’s computer use policies could turn vast numbers of people into unwitting criminals. Judge Kozinski noted that employers’ computer use policies are typically “lengthy, opaque, subject to change, and seldom read.” Your Company’s computer use policies must be clear, current to business conditions, and verifiably published to employees.

Second, an employer that wishes to take full advantage of trade secret protection must in fact protect its trade secrets. In the Nosal appeal, Judge Kozinski also voiced concern that making an employee’s misuse of a work-provided computer a federal crime under the CFAA would be improper because such “crimes” are rarely prosecuted, which gives prosecutors excessive discretion to pursue selective prosecution. In the civil context, we see over and again situations where the employer is hobbled in getting injunctive relief to address trade secret theft because of its weak record of actually taking affirmative steps to protect the information at issue from misuse or disclosure. If a certain type of business information has real competitive value to your business – or to the competition – take demonstrable steps to protect it on a day-to-day basis, not just when an employee leaves to compete against you. Doing this takes discipline and conscious development of a corporate culture around this issue.

Third, the employer that wants real protection of its trade secrets must act quickly, aggressively, and effectively when misappropriation occurs. The forensic investigation supporting a claim for civil relief must be technically unassailable and understandable by a court in the context of the often hurried consideration of an application for temporary injunctive relief. Going to court quickly, effectively and frequently when trade secret misappropriation occurs can assist an employer in developing a reputation that it is not to be “messed with” regarding its proprietary information. Such a reputation can have a real prophylactic effect on employees contemplating possible trade secret mischief on their way out the door.

The Nosal saga continues on. This will not be our last word on this story.
 

Lawyers and clients alike often believe that it is easier to enforce a non-solicitation agreement than a non-competition agreement. Sometimes, that’s true. However, that does not mean that companies can do so without demonstrating a legitimate business interest in the enforcement of that non-solicitation agreement. The recent Illinois Appellate Court decision in Gastroenterology Consultants of the North Shore, S.C. v. Meiselman (2013 Il. App. 1st 123672) highlights this point.

In that case, a doctor named Meiselman left Gastroenterology Consultants (referred to here as GC for short) to work for NorthShore University HealthSystem Medical Group. In his new position, Meiselman treated any patient who sought out his services, including patients he treated while working for GC. GC sued, claiming that Meiselman’s conduct violated a restrictive covenant not to solicit any of its patients for a competitor located within 15 miles of GC’s offices for three years after separating employment, except in situations involving a genuine emergency. GC requested that the court issue a preliminary injunction, but the trial court refused after determining that GC had failed to show (among other things) that it had a legitimate business interest in enforcing Meiselman’s agreement.

The appellate court affirmed. The appellate court observed that, before Meiselman helped form GC, he had practiced medicine for approximately 10 years in the same geographic region later serviced by GC and treated thousands of patients there. Additionally, after Meiselman formed GC, he continued treating patients (and accepting referrals from physicians) with whom he had developed relationships prior to affiliating with GC. Furthermore, the appellate court spent a good bit of time in its opinion explaining that Meiselman’s practice at GC operated quite independently from GC itself: GC did not introduce Meiselman to his patients or physician-referral sources; physicians would refer patients to Meiselman individually rather than to GC generally; GC did not advertise, promote, or market Meiselman’s practice; Meiselman maintained his own office with its own telephone number; Meiselman billed for his services and his compensation was dependent on the revenue that he personally generated rather than GC’s revenue; and GC was not materially involved in other aspects of Meiselman’s practice aside from providing administrative support. Under those circumstances, the appellate court agreed with the trial court that GC did not have a legitimate business interest in enforcing the agreement.
 

Failure to protect corporate trade secrets had dire consequences for AGC, Inc., a Connecticut aviation component manufacturer forced to file a Chapter 11 bankruptcy on April 16, 2013. AGC blamed its circumstances in substantial part on the theft of its trade secrets by one of its former key executives who joined a rival competitor where he used the valuable proprietary information. AGC obtained little judicial sympathy because it failed to keep its trade secrets secret in the fashion required to be awarded injunctive relief.

Former AGC Vice President David J. Baillargeon was laid off in July 2009, due to a downturn in AGC’s business; and on his departure, he told the AGC President that he would regret terminating his employment. Baillargeon left the company with about one thousand pages of documents stored on a computer memory stick, including presentations, strategic plans, personnel information and pricing information, along with a three-ring binder containing AGC blueprints. He brought the information to his next job at an AGC competitor, Twin Manufacturing Co., and he used it to compete against AGC, resulting in AGC’s loss of approximately $2 million in annual revenue in addition to the expenses of a costly and largely unsuccessful trade secrets litigation against Baillargeon and Twin.

AGC sued Baillargeon and Twin in Connecticut state court in May 2010, alleging causes of action for violation of the Connecticut Uniform Trade Secrets Act (CUTSA), the Connecticut Unfair Trade Practices Act (CUTPA), breach of fiduciary duty and tortious interference with business and contractual relations. Unfortunately, AGC’s failure to protect its trade secrets and keep them confidential was a textbook example of what not to do if a company needs injunctive relief.

The particular trade secret at issue was AGC’s rubber injection molding work on aircraft engines by which rubber of appropriate shape and thickness is attached to various parts within the aircraft engine. Although AGC policies prohibited employees from disclosing confidential company information, AGC did not enter into a noncompete agreement with Baillargeon, and it failed to take the steps courts require for trade secret protection to be awarded. For example, AGC made a trade show PowerPoint presentation to showcase its capabilities to thousands of attendees, which included many competitors. There were no indications that any of the presentation was confidential or secret. No one attending the trade show was required to sign any confidentiality agreement. Color photographs of the rubber injection molding parts and devices were clearly visible during the presentation and customers were given the same presentation on a memory stick with no restrictions on its use. Also, AGC offered facility tours to customers, potential customers and competitors, who visited nearly every room in the facility, including the injection molding department, as well as a viewing of the injection apparatus and the mold that was used for it, while the visitors stood within mere feet of the apparatus. The mold designs were on public display for marketing purposes. Documents and drawings in plain view were not stamped “Confidential Trade Secrets”. No one was told that anything visible on the tour was confidential or secret. There was no controlled or limited disclosure during the tour, no legends of confidentiality on documents, no shielding of processes from plain view, and no segregation of proprietary information.

Consequently, in a March 2011 decision, the state court ruled that AGC failed to preserve the secrecy of its manufacturing processes or pricing and denied any relief under CUTSA. The court granted limited injunctive relief under CUTPA against Baillargeon for unfair or deceptive trade practices based on his theft and misuse of AGC’s property, which the court found had given Twin a minor head start in setting up its rubber injection molding business because it saved time in Twin’s creation of its drawings. There was insufficient evidence to hold Twin in violation of CUTPA. To prevent continuing violations of AGC’s property rights, Baillargeon was enjoined from using or disclosing AGC’s property and confidential and proprietary information, and he was ordered to return to AGC any property that he had taken when he was terminated.

AGC's litigation and bankruptcy confirm how essential it is for a company to take proactive and diligent steps to protect its confidential and proprietary trade secrets by keeping them secret, designating the information as “Confidential” and securing the trade secrets from plain view at the risk of great financial peril or even the company’s survival for failure to do so.
 

Co-authored by Mathew D. Dudek.

Social media has changed the way that companies and employees connect to clients and customers. As new uses for social networking emerge, legal issues in this area are arising.

In Eagle v. Morgan, et al., the United States District Court for the Eastern District of Pennsylvania was faced with one such issue: whether an employer could seize a former employee’s LinkedIn page and keep the page in operation following the employee’s termination. In that case, Linda Eagle, an executive with Edcomm Inc., had created a LinkedIn account using her work e-mail address as a sales and marketing tool. Eagle provided her LinkedIn password to certain other Edcomm employees so the employees could help monitor and update the account. Under “the LinkedIn ‘User Agreement,’ however, the account belonged to Eagle alone and she was individually bound by the User Agreement.” Following Eagle’s termination, Edcomm employees accessed the LinkedIn account and changed its password, effectively locking Eagle out of the account, and also updated Eagle’s LinkedIn page to reflect another Edcomm executive’s information, while still keeping a list of Eagle’s honors and awards. As a result, a Google search for Eagle or a search for her on LinkedIn would bring the user to Eagle’s LinkedIn account, which then bore the name, picture and credentials of the other Edcomm executive.

Eagle subsequently filed suit against Edcomm and certain individual employees, “the principal thrust of which is the alleged illegal use of Eagle’s LinkedIn account by Edcomm, to her economic detriment.”

 In addressing these claims, the court noted that on the day Eagle was terminated, Edcomm had not adopted a policy that informed its employees that their LinkedIn accounts were the property of Edcomm. Even if it had, however, the court stated that it was unclear whether such a policy would be legally valid under the contract between LinkedIn and Eagle, an individual user. Nevertheless, the court did not reach that issue given that there was no such policy in place when Eagle was terminated.

Ultimately, the court determined that Eagle’s “name” had commercial value which Edcomm had used to its own benefit. Based on this finding, the court ruled in favor of Eagle on state law claims of unauthorized use of name, invasion of privacy by misappropriation of identity, and misappropriation of identity. However, the court found Eagle’s request for damages legally insufficient because she “failed to point to one contract, one client, one prospect, or one deal that could have been, but was not obtained during the period she did not have full access to her LinkedIn account.”

Despite Eagle’s failure to establish specific damages, this case is a reminder that employers should review all policies which govern employee social media usage. Not only must such policies clearly set forth expectations regarding ownership of the account and what is and is not appropriate, such policies also need to be regularly updated to ensure compliance with the changing legal landscape, given that various state legislatures and the National Labor Relations Board are rapidly entering the fray over employee social media use and employer policies related thereto. For example, as of January 1, 2013, Illinois employers may not “request or require any employee or prospective employee to provide any password or other related account information in order to gain access to the employee’s or prospective employee’s account or profile on a social networking website or to demand access in any manner to an employee’s or prospective employee’s account or profile on a social networking website.” 820 ILCS 55/10(b)(1).
 

Earlier this month, the New Jersey Assembly introduced a new bill (Assembly Bill No. 3970) that proposes to invalidate non-competition, non-solicitation and confidentiality covenants of individuals who qualify for unemployment compensation. The bill does not seek to nullify covenants already in effect, merely those entered into after the date of the bill’s enactment. By permitting individuals subject to restrictive covenants to seek employment, the bill aims to reduce the State’s unemployment benefits expenditures.

Presently, New Jersey courts approve of restrictive covenants in employment contracts if they are reasonable. To be reasonable, they must protect the employer's legitimate interest, must not cause undue hardship for the former employee, and cannot be against the public interest. If passed, the bill would significantly limit employers’ ability to bind their employees to such restrictive covenants and potentially leave them without means to protect valuable confidential information and customer contacts.

With the introduction of the bill, New Jersey follows in the footsteps of Maryland, which proposed legislation on January 9 to bar non-compete covenants of those individuals who receive unemployment insurance benefits. Like the Maryland bill, the New Jersey bill has been referred to committee.
 

The potential antitrust impact of no-hire agreements between competitors has been a hot topic over the last few years, particularly in the high-tech industry where competition for the most talented programmers, developers and engineers is intense. An antitrust class action pending in the US District Court for the Northern District of California against six high tech firms -- Intuit, Apple, Google, Intel, Intuit and Pixar – illustrates just how high the stakes can be when a no-hire agreement among competitors is challenged under federal and state antitrust laws. The plaintiffs in that putative class action are five software engineers who claim that the defendants entered into a series of no-hire agreements between 2005 through 2009 that eliminated competition for labor, artificially reduced compensation and job mobility and cost employees to suffer hundreds of millions of dollars in lost wages. That class action stems from a similar antitrust action brought by the DOJ in 2010 against the same six firms, which asserted that the defendants violated Section 1 of the Sherman Act by agreeing that they would not cold-call each other's employees. Although the DOJ's antitrust action against Google, et al. settled shortly after it was filed, the class action challenge to the alleged no-hire agreements rages on. Additionally, on November 16, 2012, the DOJ filed a civil antitrust action against eBay, Inc., claiming that from 2006 to 2009, eBay violated federal antitrust laws by entering into a "handshake" agreement with Intuit to not hire each other's employees.

Does the recent spate of antitrust challenges to no-hire agreements mean that negotiated no-hire provisions, which are commonly found in settlement agreements and commercial contracts, face an increased risk of being held unenforceable or, even worse, giving rise to a claim for damages? Probably not. In the 2010 Competitive Impact Statement filed by the DOJ when it settled its antitrust action against Google, et al., the government acknowledged that no-hire agreements that are ancillary to legitimate, pro-competitive collaborations -- including contracts with consultants, settlement agreements or mergers and acquisitions -- are not per se unlawful under the Sherman Act.

But even a no-hire provision that is ancillary to a legitimate business interest can face a challenge under federal or state antitrust laws if it is broader than necessary to achieve the legitimate business objective. Such challenge could come from the DOJ, a state enforcement agency or even employees who claim to have been adversely affected by the no-hire. In the event of such a challenge, the no-hire agreement must satisfy the rule of reason test, which balances the restraint's procompetitive benefits against its anticompetitive effects.

In most cases, reasonable no-hire provisions that are ancillary to settlement agreements, consulting contracts, acquisition agreements and similar commercial transactions will satisfy the rule of reason test and present little if any risk of antitrust injury. Employers negotiating a no-hire provision in a settlement agreement or commercial contract can further minimize the risk of a successful antitrust challenge to a no-hire provision by observing a few basic principles. First, no-hire provisions should not be drafted as standalone agreements. Instead, they should be incorporated into a broader agreement so it is crystal clear that the no-hire provision is ancillary to a legitimate business interest, such as settling an employee poaching claim, retaining an outside consulting firm or facilitating a joint venture. Second, the no-hire agreement should be as narrowly tailored as possible by limiting its scope to specific categories of employees, products or services and geographic territories. Third, the no-hire should not be open-ended and should have a reasonable duration. The definition of reasonable in this context will depend to a large extent on the nature and size of the affected industry, the level of competition within the industry and the economic impact the no-hire provision will have within the industry. The inclusion of a severability clause, as well as a provision authorizing a court to “blue pencil” a potentially overbroad no-hire provision, can also be helpful. Finally, employers should carefully review any applicable state laws that could affect the enforceability of a no-hire provision. In California, for example, a no-hire provision that is perfectly reasonable under federal antitrust laws could still run afoul of California's statutory prohibition of restrictive covenants.

While the outcome and potential impact of the present challenges to no-hire agreements in the high-tech industry remains to be seen, employers can take some comfort that a carefully drafted no-hire provision is unlikely to violate any state or federal antitrust laws provided care is taken to ensure that it is ancillary to a legitimate business purpose, narrowly tailored to accomplish that business purpose and reasonable in scope.
 

It is common practice for a company, through its legal counsel, to send letters to former employees upon the employee’s resignation in an effort to remind the employee about his or her post-employment contractual obligations to the company, whether through a non-competition agreement, or non-solicitation / non-disclosure restrictive covenants. A recent court decision affirms that companies and their counsel are shielded from liability for defamation that may arise from the publication of those letters due to the absolute privilege protection.

In Wendy Murphy v. Living Social, Inc., a former employee, Wendy Murphy, voluntarily resigned from her employment as a marketing consultant to work for a competitor. Upon her departure, the company, through its in-house counsel, sent Ms. Murphy a letter reminding her of the terms of her employment agreement, which included obligations under a non-competition, non-solicitation, and non-disclosure agreement. Two weeks later, the company sent another letter to Ms. Murphy and Ms. Murphy’s new employer demanding that Ms. Murphy cease and desist from all solicitation of the company’s employees, customers, or prospective customers. The company specifically stated that it was considering taking legal action to protect its interests if the conduct did not stop.

Within days of receiving the second letter, Ms. Murphy filed suit alleging, among other things, that the cease and desist letter constituted libel per se and named both the company and its in-house counsel as defendants to the claim. In granting the company’s motion to dismiss the libel per se count, the U.S. District Court for the District of Columbia concluded that the former employee could not state a claim for libel because she could not establish the essential element that a false and defamatory statement was published “without privilege” to a third party. Specifically, the Court agreed that the statements made in the letter were protected by an absolute privilege because they were made in anticipation of litigation. Noting that the judicial proceedings privilege did not just protect statements within the course of litigation, the Court stated that it also extends to statements made prior to the commencement of litigation, such as the cease and desist letter at issue. Because the letter was written by the company’s attorney, advising the employee and her new employer of the employee’s contractual rights, and stated that the company was reserving its rights to take all legal action to protect its business interests, the statements were absolutely protected by the judicial proceedings privilege.

This case serves as a good reminder of the importance of the practical steps companies take to protect their trade secrets and customer confidential information. When an employee departs for a competitor, it is essential that during the exit interview process, company representatives remind the departing employee of his or her obligations under company policies, applicable employment agreements, and/or non-competition agreements. If evidence is obtained that makes it appear that an employee is violating the terms of his or her restrictive covenant obligations, sending a cease and desist letter, as LivingSocial did in this case, is important to further protect business interests. Importantly, so long as the letter accurately states the facts and merely points out the obligations of the employee without otherwise making accusations of false or illegal conduct, companies should feel comfortable to take these necessary steps without fear of a retaliatory lawsuit against them and their legal counsel asserting meritless claims of defamation.

Accordingly, if your company is not already using cease and desist letters in its arsenal of proactive measures to protect trade secrets and confidential information, now is the time to initiate this best practice.
 

Peter Steinmeyer, a Member of the Firm in the Labor and Employment practice and Managing Shareholder of the Chicago office, was quoted in an article in Law360.com titled "5 Tips for Drafting Employment Pacts in the Social Media Era." (Read the full version – subscription required.)

Following is an excerpt:

Facebook, LinkedIn and Twitter have radically changed how companies and employees connect to each other as well as clients or customers, and those changes have left the law — and employment contracts — struggling to keep up, lawyers say.

"Technology and society move quicker than the law, and the law is catching up right now," said Peter Steinmeyer, co-chairman of the noncompetes, unfair competition and trade secrets practice group at Epstein Becker Green. …

Exactly what constitutes "solicitation" may be the biggest unresolved question for lawyers trying to enforce agreements barring departing workers from luring clients or former co-workers away from a company in the social media realm, Steinmeyer said. …

"In the social media era, it makes sense to have a more specific definition of solicitation, but an awful lot of agreements simply use the word 'solicit' without defining what that means," Steinmeyer said. …

But in light of the uncertainty swirling around what constitutes a solicitation on the social media sphere, employers might want to go against the grain and make sure their nonsolicitation agreements are accompanied by restrictions that prohibit departing employees from doing business with their former customers, Steinmeyer said. …

In addition to making sure workers understand the significance of any confidential information they may have access to, companies should clearly label confidential information as such and hold exit interviews with departing employees that stress the need to protect confidential data, according to Steinmeyer.
 

A United States Magistrate Judge recently held that a plaintiff had a duty to preserve his Facebook account and that his deletion of it warranted an “adverse inference” jury instruction for failing to preserve it.

In Gatto v. United Air Lines, Inc. and Allied Aviation Services, Inc., the defendants sought discovery related to the plaintiff’s social activities, and made a document request for “documents and information related to social media accounts maintained by Plaintiff.” The parties also discussed the plaintiff’s Facebook account during a settlement conference. Accordingly, when the plaintiff subsequently deactivated his Facebook account, causing it to be permanently deleted by Facebook 14 days later, it led the defendants to request sanctions.

The Court approached the sanctions motion as it would any other involving alleged spoliation of evidence, ultimately holding that: “Plaintiff’s Facebook account was clearly within his control”; it “was relevant to the litigation”; “it is beyond dispute that Plaintiff had a duty to preserve his Facebook account at the time it was deactivated and deleted”; “[e]ven if Plaintiff did not intend to permanently deprive the defendants of the information associated with his Facebook account, there is no dispute that Plaintiff intentionally deactivated the account”; and that the defendants were “prejudiced because they have lost access to evidence that is potentially relevant to Plaintiff’s damages and credibility.” Accordingly, the Court granted the defendants’ request for an “adverse inference” jury instruction due to the plaintiff’s failure to preserve his Facebook account.

With the exponential growth of social media use by employees, employment disputes will increasingly involve social media. This particular case illustrates not only that well-established principles of evidence preservation apply to social media, but that counsel should specifically include social media in discovery requests.
 

In a new case filed by Charles Schwab & Co. Inc. against former employees who staggered their departures to a competitor, we have a prime example of the risks involved when a team departs over time versus simultaneously. To avoid claims of violations of fiduciary duties or non-poaching clauses, some advise that teams should have the junior members resign first and at a later time the senior members of the group should follow. This approach is fraught with the danger apparently exemplified by the allegations of misconduct made in a case brought by Schwab against several of its former employees in Texas state court yesterday.

According to the Petition, in 2009, Connie Mack Jr. left Schwab and his teammates Richard Rosso and Mark Blom to form his own financial advisory firm, Clarity Financial LLC. After Blom gave notice in March 2012 that he was resigning to go to work for Clarity, Schwab alleges it asked Rosso if he intended to join Blom and he responded that he had “no plans to leave.” The Petition alleges that thereafter Rosso engaged in conduct to deter other Schwab representatives from establishing relationships with Blom’s clients and that his subsequent contact with those clients enabled him to lay the foundation for his future departure to Clarity with those clients. Rosso allegedly compounded his “bad leaver” conduct by providing misleading information about his future business plans when he resigned from Schwab by saying he was pursuing a career in communications when he shortly thereafter joined his former team members at Clarity.

Schwab has a history of aggressively enforcing its restrictive covenants and its success has in the past hinged in part on pre-departure conduct. In a recent FINRA arbitration award, a panel awarded compensatory and punitive damages as well as attorneys’ fees against a broker who had spoken to customers about moving prior to his resignation.

The lesson to be learned from this situation is that it is often very difficult to manage and control the behavior of the team member(s) left behind. Communications among team members will necessarily continue and are laden with risks. On balance, the exposure to claims against the senior member of the team for breach of duty or of any non-solicit of employees covenant is often less than the consequences and resultant claims when departures are staged over time and inevitable mis-steps occur in the interim period. Former employers are also better equipped to handle a definitive all-at-once group departure rather than one where they are continually dealing with re-assignments, replacement and re-training.
 

On February 20, 2013, the White House published an “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets.” While the Strategy takes a macroeconomic view of, and approach to, the problems of trade secret theft, readers of this blog should consider the possibility that they may have practical experience in the future with one of the Strategy’s particular action items: promoting voluntary best practices by private industry to protect trade secrets.

In the Strategy, while couching its recommendations in the context of protecting the innovation that drives the American economy and supports jobs in the United States, the Obama Administration undertakes to pursue five action items: (1) focus diplomatic efforts to protect trade secrets overseas, (2) promote voluntary best practices by private industry, (3) enhance domestic law enforcement operations, (4) improve domestic legislation, and (5) public awareness and stakeholder outreach.

The second of these action items encourages and promises Administration support for efforts by companies and industry associations to “examine internal operations and policies to determine if current approaches are mitigating the risks and factors associated with trade secret misappropriation committed by corporate and state sponsors.” It also proposes areas that private industries could consider for voluntary best practices, including:

• research and development compartmentalization,
• information security policies,
• physical security policies, and
• human resources policies.

The Strategy notes that the development and adoption of voluntary best practices should be consistent with anti-trust laws, and would be intended only to offer suggestions to assist businesses in safeguarding information, not to establish some sort of minimum standard of protection.

While companies of course will set their own policies and practices with regard to trade secret protection, there may be benefits to participating, for example, in an association’s effort to develop an industry’s best practices. Companies should be on the lookout for such initiatives and consider whether it makes business sense to participate.
 

Co-authored with Ted A. Gehring.

Except for very limited statutory exceptions (which do not apply to most employer/employee disputes), California courts will not enforce non-compete agreements, or any restrictive covenant by which anyone is restrained from engaging in a lawful profession, trade or business. Cal. Bus. & Prof. Code § 16600. Since § 16600 embodies a strong California public policy, California law is clear that a party cannot circumvent the § 16600 restrictions with a choice of law provision that designates a more non-compete friendly jurisdiction as the applicable law. The Application Group, Inc. v. The Hunter Group, (1998) 61 Cal.App.4th 881, 888-89.

It appears, however, based on rulings by two federal district courts last year that employers might get some traction in this area by including a choice of venue or forum selection provision in their employment contracts and – through that provision – have the case transferred to a jurisdiction that will be more likely to enforce a restrictive covenant.

In M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972) (“Bremen”), the United States Supreme Court addressed forum selection clauses and held that a forum selection clause is unenforceable if: (1) it was the product of fraud, undue influence or overwhelming bargaining power; (2) the forum is so gravely difficult and inconvenient that the party challenging the clause will for all practical purposes be deprived of its day in court; or (3) the clause would contravene a strong public policy of the forum in which the suit is brought. Bremen, 407 U.S. at 15. A strong showing must be made to set aside the forum selection clause. Id. The California Supreme Court has set similar standards. Smith, Valentino & Smith, Inc. v. Superior Court, (1976) 17 Cal.3d 491, 496, (“We conclude that the forum selection clauses are valid and may be given effect, in the court’s discretion and in the absence of a showing that enforcement of such a clause would be unreasonable.”).

In both Hartstein v. Rembrandt IP Solutions, LLC, No. 12-2270 (N.D. Cal. July 30, 2012) and Hegwer v. American Hearing Aid Associates, No. C 11-04942 (N. D. Cal. Feb. 24, 2012), the Plaintiffs were former employees who had signed employment agreements containing restrictive covenants and which also contained, in part, forum selection clauses designating Pennsylvania as the appropriate forum. Both cases were filed in state court and removed to federal court. The Defendants filed motions to transfer or dismiss premised on the forum selection clause.

The Plaintiffs in each case argued, in part, that the motions should be denied because the more restrictive covenant friendly Pennsylvania courts would be more likely to enforce the non-compete which would, in turn, contravene a strong California public policy. Bremen, 407 U.S. at 15. Both federal district courts, however, focused on the reasonableness of the forum selection clause itself, rather than the reasonableness of the clauses’ effect. Both found that the possibility that a Pennsylvania court might enforce the non-compete was not a sufficient basis to invalidate the forum selection clause.

As such, employers that are based in jurisdictions more friendly to restrictive covenants (which would likely be any other state in the country), should consider including forum selection clauses designating the state of their corporate headquarters as the appropriate forum. Although these cases will no doubt be decided on a case by case basis depending on the particular factual circumstances, a forum selection clause will, in many instances, provide, at a minimum, more leverage for the employer in actual or threatened restrictive covenant litigation commenced in California.