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

Last year, the Gonzaga Law Review published an exhaustive study of federal court trade secret litigation. This week, it published a companion study of state appellate court decisions involving trade secrets during the period between 1995 and 2009.

Among the state study’s more interesting findings are these:

• “In the vast majority of trade secret cases, the alleged misappropriator was someone the trade secret owner knew. Specifically, the alleged misappropriator was an employee or a business partner 93% of the time in this state study.”
   
• “both the state and federal studies confirm that confidentiality agreements with employees and business partners are the most important factors” when courts decide whether a trade secret owner took reasonable measures to protect the purported trade secrets.
   
• “Of the varied subject matter that can qualify as a trade secret, two categories comprise the vast majority (94%) of trade secrets litigated in state courts: internal business trade secrets (i.e., customer lists and internal business information) and technical trade secrets (i.e., formulas, technical information, and software or computer programs). Internal business trade secrets were litigated in 70% of state cases, and technical trade secrets were litigated in 36%.”
   
• “About half of all state appellate cases are heard in only five states: California (16%), Texas (11%), Ohio (10%), New York (6%), and Georgia (6%).” 
   
• “State courts appear to be a tougher venue for trade secret owners who are suing business partners than for those suing employees – trade secret owners won 42% of the time on appeal when the owner sued an employee, but only 34% when the owner sued a business partner.”

The study is well worth reading for anyone who follows this area of the law.
 

In October of 2009, the Illinois Court of Appeals for the Fourth District decided Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (4th Dist. 2009). In that opinion, the Court rejected the requirement that an employer must have a legitimate business interest in order to enforce a non-compete agreement -- a requirement in Illinois Courts for decades. According to the Court in Sunbelt Rentals, an employer need only show that a non-compete agreement has a reasonable geographic limitation and lasts for a reasonable period of time in order to enforce that agreement. Since that decision, few courts have cited to Sunbelt Rentals and those that have cited to it have declined to squarely address whether it was correctly decided.

In December of 2010, however, the Illinois Court of Appeals for the Second District decided Reliable Fire Equipment Company v. Arredondo, et al., ___ Ill. App. 3d ____ (2d Dist. 2010). In that case, the Court directly addressed Sunbelt Rentals and ultimately rejected its analysis. According to the Court in Reliable Fire, restraints on trade have long been disfavored by the Courts and the "legitimate business interest test" remains an important "threshold question" which allows the Court to analyze "whether the employer has an interest other than suppression of ordinary competition."

Additionally, the Court's lead opinion acknowledged that prior decisions had generally recognized legitimate business interests in only two situations: 1) where the employer had near-permanent customer relationships and the employee would not have had contact with those customers but for his or her employment; or 2) where an employee was exposed to the employer's confidential or trade secret information during his or her employment. However, that opinion went on to explain that limiting the analysis to whether the employer's interest fell into one of those two categories "may be unduly restrictive. Other criteria may exist that warrant protection under the law beyond those enumerated in the two traditional prongs of the legitimate-business-interest test." Consequently, the Court left the door open to recognize legitimate business interests beyond the two traditional situations.

Unfortunately, the significance of the lead opinion in Reliable Fire is muddled by a special concurrence and a dissent – both of which are more critical of the traditional formulation of the legitimate business interest test and both of which are open to a more flexible analysis of what constitutes a protectable business interest sufficient to warrant a non-compete. Indeed, as stated by the dissent, the decision in Reliable Fire “will serve only to confuse bench and bar and the employers and employees of Illinois.”

Illinois Courts follow the Appellate Courts in their district. As a result, now more than ever, employers must be cognizant of the different standards for enforcing non-compete agreements; they now differ from Chicago, to Chicago's suburbs, to down-state Illinois.
 

Last year, I reported on the status of a new non-compete bill that, for the first time in Massachusetts, attempted to codify its non-competition law. After summarizing the details of the bill in April, I reported in October that the bill had died in Committee. However, as stated at that time, Senator Brownsberger, one of its sponsors, promised to present a new bill on the same subject in a future session. Well, the future is now.

The new bill clarifies and modifies the old bill, mostly in an attempt to satisfy businesses that found portions of the bill unacceptable. As modified, the new bill appears to have a good chance of passing this coming spring. Rather than summarize each provision of the modified bill, this article highlights some of its unique provisions.

Highlights of the Modified Bill

1. The new non-compete bill is limited to employment agreements. The bill specifically does not include: agreements not to solicit or hire employees from the employer; agreements not to solicit customers of the employer; non-competition agreements made in connection with the sale of a business; or agreements by employees not to reapply for employment after termination.

2. The new bill limits the length of a valid non-compete agreement to one year, however, it re-introduces the concept of garden leave, which is the only method in which one can extend the covenant not to compete to two years.

3. Unlike the old bill, the modified bill excludes any salary that one must exceed for the agreement to be enforceable. Instead, the new bill simply states that the employee’s compensation be “reasonably adequate,” thus allowing the court to take into consideration the economic impact on the employee.

4. In addition to non-competition agreements entered into at or in anticipation of hire, the new bill also deals specifically with agreements that are entered into during the term of employment. No longer is “continued employment” adequate consideration alone, a concept that some Massachusetts courts have already questioned. If the bill becomes law, the employee must also receive “fair and reasonable” consideration if the agreement is signed during the term of employment.

5. The new bill provides that the non-compete agreement must be in writing and signed by both parties, along with prescribed minimum notice requirements to the employee, before it becomes effective.

6. The new bill rejects the inevitable disclosure doctrine.

7. The new bill creates presumptions of what constitutes reasonable duration and scope of the non-compete agreement, thus providing some guidance to the parties.

There are other important provisions in the attached bill and I am sure that amendments will be proposed before the final bill is presented for a vote. As always, I will keep you posted.