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

A new study of federal court trade secret litigation confirms that the number of lawsuits involving alleged trade secret misappropriation continues to grow exponentially. According to the study, which was published in the Gonzaga Law Review on March 17, 2010, the number of federal court “trade secret cases doubled in the seven years from 1988 to 1995, and doubled again in the nine years from 1995 to 2004.”

Other interesting findings in the study include the following:

• “In over 85% of trade secret cases, the alleged misappropriator was someone the trade secret owner knew – either an employee or a business partner.”

• The usage of confidentiality agreements significantly increases the likelihood that a court will find that a trade secret owner took reasonable measures to protect the purported trade secrets.

• The Northern District of Illinois (i.e., Chicago) handles the largest number of trade secret lawsuits, and “Courts applied the laws of Illinois, California, or New York in almost 30% of trade secret cases.”

• When seeking injunctive relief, owners of trade secrets had a much higher rate of success against employees (about whom extensive pre-filing investigations can be done) than against a business partner (with respect to which the trade secret owner may have only limited information).

• Similarly, trade secret litigation against employees is “much more likely to conclude early in the litigation” than is trade secret litigation against a business partner.

For anyone interested in this area of the law, the study is well worth reading.
 

A former engineer and salesman for DuPont, Michael Mitchell, was recently sentenced to 18 months in prison after pleading guilty to stealing trade secrets and providing them to a Korean rival of DuPont.

According to the parties’ agreed statement of facts, during his final years at DuPont, Mitchell had become disgruntled, and he was eventually terminated for poor performance. Upon his termination, DuPont did all of the right things: it reminded Mitchell of the nondisclosure provisions of his employment contract; it demanded that he return any proprietary DuPont information; and it had him sign an employment termination statement affirming that he had done so.

Mitchell, in contrast, did all of the wrong things: he kept numerous DuPont computer files containing sensitive and proprietary information; he entered in to a consulting agreement with the rival Korean company and provided DuPont trade secrets to it; and, in what ultimately led to his downfall, he contacted current and retired DuPont employees to seek still other information desired by the Korean company, and some of them reported him to DuPont management. The end result was a federal search warrant, a forensic examination of Mitchell’s computers, Mitchell’s agreement to become a cooperating undercover witness and, now, his time behind bars.

While the moral of this story is that stealing trade secrets is a crime that does not pay, a secondary moral is that when the heist is big enough, call the FBI.
 

A bill recently introduced in the Illinois House of Representatives, the “Illinois Covenants Not To Compete Act,” would substantially alter the law regarding non-competition agreements in Illinois. In most respects, it would limit the enforceability of no-competes and make them easier for individuals to challenge. However, in certain respects, the bill would make no-competes easier to enforce. The same bill was introduced last year and went nowhere.

In pertinent part, the bill would limit the enforceability of no-competes by providing as follows:

• No-competes would be unenforceable against everyone other than a “key employee” or “key independent contractor” (categories which are actually fairly broadly defined in the bill);

• Mere continued employment would no longer be adequate consideration to support a no-compete; rather, the employer would have to provide “a material advancement or promotion” or “a material bonus or material increase” in salary; and

• There would be rebuttable presumptions that: any restriction exceeding one year is unenforceable; any geographic restriction that extends beyond the region in which the individual provided services is unenforceable; and any restriction on an individual’s ability to perform services other than services of the same type performed for that employer is unenforceable.

The bill would also make it far easier for an individual to challenge a no-compete, because it provides that any individual can bring a declaratory judgment action to challenge the enforceability of his/her no-compete and if the challenge is successful, the employer would have to pay his/her legal fees (but if the individual loses, they would not have to pay the employer’s fees).

In a related vein, the bill would make it riskier for many employers to try to enforce no-competes, because it provides that any “one way” fee shifting provision in a no-compete (i.e., a clause providing that if an employer has to incur attorney’s fees to enforce the agreement, the individual must pay the employer’s fees) shall be construed to provide for “two way” fee shifting (i.e., loser pays, regardless of which side loses).

Notwithstanding the foregoing provisions, in certain respects the bill would actually make no-competes more enforceable because it would make it far easier to establish the existence of a legitimate business interest sufficient to justify a no-compete (a high threshold to clear under current Illinois law) and because it expands the ability of judges to modify restrictions in a no-compete to make them enforceable.

Additionally, the proposed law contains a number of broad exceptions. Specifically, it would not apply to anti-raiding provisions (which bar former employees from recruiting their former colleagues); anti-solicitation clauses (which bar customer solicitations); confidentiality agreements (which protect confidential information); “employee choice” clauses in incentive compensation programs (which require the forfeiture of incentive compensation in the event an individual engages in prohibited conduct); and agreements between corporations, partnerships, limited liability corporations or partnerships, and their shareholders, partners, and members.

As of this writing, the bill has not attracted significant public attention or commentary, but we will monitor its progress in the months to come.