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

Co-authored by Viktoria Lovei.

The U.S. Court of Appeals for the Eighth Circuit recently held that compilations containing only minimal secret information nevertheless qualified for trade secret protection because the substantial investment involved in preparing them gave their owner a competitive advantage and because the owner undertook reasonable efforts to maintain their secrecy by labeling them with a proprietary legend and only distributing them to parties which signed a confidentiality agreement. AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corporation, Case No. 10-3444 (8th Cir. Dec. 13, 2011).

The case concerned FAA approved procedures developed by Rolls-Royce for the overhaul and repair of its helicopter engines. The procedures, including techniques and material specifications, were included in Distributor Overhaul Information Letters (“DOILs”) which, starting in 1994, were provided by Rolls-Royce exclusively to its Authorized Maintenance Centers (“AMCs”). While access to pre-1994 DOILs was not tightly controlled, later versions were issued subject to confidentiality agreements with AMCs and contained a proprietary rights legend. AvidAir, a company in the overhaul business, was not an AMC but nonetheless obtained updated DOILs which it was not authorized to receive.

The parties filed separate lawsuits against each other which were eventually consolidated. Among the issues raised were whether the DOILs are trade secrets and whether Rolls-Royce’s efforts to protect the DOILs constituted a “sham lawsuit” in violation of antitrust law and tortious interference.

The Eighth Circuit, applying the Uniform Trade Secrets Acts of Indiana and Missouri, held that AvidAir had misappropriated Rolls-Royce’s trade secrets. The Court rejected AvidAir’s argument that the revised DOILs did not qualify for trade secret protection because they contained no engineering advances and only a trivial amount of information that was not readily ascertainable from prior public versions. The Court explained that compilations are valuable if they afford a “competitive advantage” and are “not readily ascertainable,” even if “some or even most of the information [is] publicly available.” “Unlike patent law, which predicates protection on novelty and nonobviousness, trade secret laws are meant to govern commercial ethics” and prevent valuable information “from being misappropriated despite reasonable efforts to keep it secret.”

The Eighth Circuit found that the DOILs were trade secrets because they had value that resulted from Rolls-Royce’s “own research and testing” which allowed Avid Air to avoid the “burdensome expense of reverse engineering the updated specifications.” The Court further noted that AvidAir’s repeated attempts to obtain the information “without Rolls-Royce’s approval belies its claim that the information in the documents was readily ascertainable or not independently valuable.” In addition, the Court held that the documents qualified for trade secret protection because Rolls-Royce had undertaken reasonable efforts, which do not need to be “overly extravagant,” to maintain their secrecy by labeling them with a proprietary legend and only distributing them to parties which had signed a confidentiality agreement. The Court concluded that AvidAir’s unauthorized use of the documents constituted misappropriation and affirmed an award of damages and injunctive relief.

Having found in favor of Rolls-Royce on the issue of whether the DOILs were trade secrets, the Court held that AvidAir had no claim for tortious interference or violation of anti-trust law stemming from Rolls-Royce’s efforts to protect the confidentiality of the DOILs.
 

We are pleased to announce that an updated version of our guide, “Non-Compete Laws: Illinois,” is now available in PDF format. The updated guide reflects the recent decision of the Illinois Supreme Court in Reliable Fire Equipment Company v. Arredondo, et al., which resolved several years of confusion over the appropriate standard for enforcing non-compete agreements in Illinois. The guide is part of a series of guides written and published by our firm, EpsteinBeckerGreen, and the Practical Law Company.

On December 1, 2011, the Illinois Supreme Court issued its opinion in Reliable Fire Equipment Company v. Arredondo, et al., which resolved several years of confusion over the appropriate standard for enforcing non-compete agreements in Illinois.

The Confusion

For years, Illinois courts consistently explained that they would only enforce a non-compete agreement if: it was no more restrictive than necessary to protect an employer’s legitimate business interests; enforcement would not impose an undue burden on the employee; and enforcement would not injure the public. As a result, substantial case law focused on what would, and what would not, constitute a legitimate business interest sufficient to support the enforcement of a non-compete agreement.

In 2009, however, the Illinois Fourth District Appellate Court issued its opinion Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (2009). In that case, the court dismissed the requirement of a legitimate business interest as “judicial gloss” and explained that a non-compete agreement simply should be enforceable where its time and territory restrictions are reasonable. (According to the court, that analysis included consideration of whether enforcement would create an undue hardship on the employee or hurt the public.) The next year, the Illinois Second District Appellate Court issued its opinion in Steam Sales Corp. v. Summers, 405 Ill. App. 3d 442 (2010). While declining to directly address whether the Fourth District was correct in Sunbelt Rentals, the court nevertheless intimated that a 2006 Illinois Supreme Court case had imposed a standard different than the commonly used legitimate business interest test. Because Illinois courts generally follow the appellate courts in the jurisdiction in which they are located, after Steam Sales, the five appellate districts in Illinois were using at least three different approaches to analyze the enforceability of non-compete agreements.

The Fix

In May 2011, the Illinois Supreme Court agreed to hear an appeal in the case of Reliable Fire Equipment Company v. Arredondo, et al. to resolve this confusion.

On December 1, 2011, the Illinois Supreme Court issued its decision in Reliable Fire. In that decision, the court rejected the analyses of Sunbelt Rentals and Steam Sales Corp. and reaffirmed that a non-compete agreement is enforceable in Illinois only if: it is no greater than required to protect a legitimate business interest; it does not impose undue hardship on the employee; and it does not injure the public. The court also explained that whether or not an employer has a legitimate business interest depends on the totality of the facts and circumstances in each case. Some of the factors to be considered include the near-permanence of customer relationships, the employee’s acquisition of confidential information through employment, and the time and territory restrictions. However, the court also explained that those factors are merely some of the considerations, that they are not meant to be an exhaustive list of considerations, and that none of those factors carries any more weight than any other. Additionally, the court expressly stated that appellate court precedent concerning what will, and what will not, constitute a legitimate business interest remains intact, but that those cases should only be considered non-conclusive guidance.

The Practical Implications

While the Reliable Fire decision puts to rest any confusion caused by Sunbelt Rentals and Steam Sales, it provides little guidance to employers who are trying to craft or enforce non-compete agreements. Accordingly, employers will still need to pay close attention to the responsibilities of each position in crafting appropriate non-compete agreements, and pay close attention to the facts and circumstances of each potential violation to determine whether and how to enforce their non-compete agreements.

Several attorneys from the national law firm of EpsteinBeckerGreen contributed to the December 2011 issue of the Practical Law Company’s “Labor and Employment.” In that periodical’s “State Q&A” section, addressing the reasonable duration and geographic scope of non-compete agreements in various states, Peter A. Steinmeyer and David J. Clark authored the section regarding Illinois and George B. Breen, Frank C. Morris, Jr., and Casey M. Cosentino authored the section regarding Virginia.

Invalidating a non-compete agreement it found enforceable over 20 years earlier, on November 4, 2011 the Supreme Court of Virginia, in Home Paramount Pest Control Companies, Inc. vs. Shaffer, No. 101837, 2011 Va. Lexis 222 (2011) reaffirmed the position that a non-compete is enforceable if it is “narrowly drawn to protect the employer’s legitimate business interest…”.

Justin Shaffer, an employee of Home Paramount Pest Control Companies, Inc. (“Home Paramount”) signed an employment agreement containing a non-compete provision. The relevant portion of the provision was as follows:

The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, …”

About 7 months after signing the non-compete, Shaffer resigned and subsequently became employed by a competitor. Home Paramount sued alleging, among other things, that Shaffer had violated the non-compete. Shaffer responded by challenging the non-compete on the basis that it was overbroad and therefore unenforceable. The Circuit Court agreed.

On review, acknowledging that it had enforced an identical non-compete provision involving the same company in 1989, the Supreme Court noted that it considers the “function, geographic scope, and duration” elements of the restriction together, rather than as three separate issues. Looking at the function element, the Court reminded that it consistently examined whether “the prohibited activity is of the same type as that actually engaged in by the former employer”. Finding, on its face, that the agreement prohibited Shaffer from working for any business in the pest control industry in any capacity, even from engaging in an indirect manner, the Court held that the agreement was unenforceable. While it noted that this was a change from its prior holding, the Court pointed to a gradual refinement of its position over the years. It further noted that the clear overbreadth of the agreement rendered it unsaveable by a narrow tailoring of geographic scope or duration.

Home Paramount reminds employers seeking to utilize non-compete agreements that to be valid and enforceable, those agreements must be narrowly drawn - prohibiting activity of the same type as that actually engaged in by the employee while employed by the former employer.