Before the Defend Trade Secrets Act (“DTSA”) became federal law in the spring of 2016, Supreme Court watchers would likely care little about prospective justices’ approach to trade secrets matters.  Such matters were the province of state law, and the phrase “trade secret” might be avoided, even in passing, in the opinions of the Supreme Court for entire terms or more.  But with DTSA cases being reported with increasing regularity, differences in interpretation are beginning to emerge.  Supreme Court attention may follow.

Because DTSA says that “misappropriation of a trade secret” can involve unlawful acquisition of a trade secret, or improper disclosure of a trade secret, or unauthorized use of a trade secret, the impact of the statute’s May 11, 2016 “effective date” has been the subject of some debate.  For instance, should the act apply to a trade secret unlawfully acquired on May 10, 2016 but improperly used or disclosed on May 12, 2016 or thereafter?  Likewise, what if a trade secret unlawfully acquired and used before May 10, 2016 is used again after May 11, 2016?  These issues have come up in cases in March and January 2017 in the Northern District of California, in March 2017 in the Eastern District of Pennsylvania, and earlier in the Middle District of Florida.  The answers and analysis found in these opinions is not always entirely consistent, which suggests that this issue under DTSA  as well as others will continue to be litigated.

Should differences arise between circuits, the Supreme Court might be called upon to interpret the reach of DTSA. In that vein, one might wish to look at the Court’s newest member, Neil Gorsuch, and his opinions while a 10th Circuit judge in Storagecraft Technology Corp. v. Kirby, 744 F. 3d 1183 (10th Circuit 2014), and in Russo v. Ballard Medical Products, 550 F. 3d 1004 (10th Circuit 2008). Each reveal interesting elements of Judge — now Justice — Gorsuch’s approach to trade secrets matters.

Storagecraft proves interesting opinion on several levels.  That case involved the Utah trade secrets act in a case coming to the 10th Circuit after being brought in the federal district court as a matter of diversity jurisdiction.  In addressing one of the appealing defendant’s arguments, the Gorsuch opinion rejected the notion that one need show that a defendant facilitated another’s commercial gain to recover under the statute:

Continue Reading Court’s Newest Member Has Trade Secret Protecting Track Record

Weighing in on an issue that is drawing attention nationwide, the Pennsylvania Supreme Court recently held, in Socko v. Mid-Atlantic Systems of CPA, Inc., that the mere continuation of employment is not sufficient consideration to support a restrictive covenant.  Rather, for there to be sufficient consideration, the Court held that the employee must receive “some corresponding benefit or a favorable change in employment status.”  As examples of such sufficient additional consideration, the Court cited “a promotion, a change from part-time to full-time employment, or even a change to a compensation package of bonuses, insurance benefits, and severance benefits.”   The Court did not, however, provide any detail as to the size of the additional consideration that must be provided; it merely gave examples of types of additional consideration.

In so ruling, the Pennsylvania Supreme Court came down on the same side of this issue as the Kentucky Supreme Court in 2014.  In contrast, the Wisconsin Supreme Court in 2015 held that continued employment of a current at-will employee is sufficient consideration to support a covenant not-to-compete.

We expect this to remain a hot topic and we will continue to monitor developments in this area.

Most lawyers learn during their first year in law school that courts won’t inquire into the adequacy of consideration for a contract and that, as a result, a “mere peppercorn” can constitute consideration. It’s important to remember, though, that in many states, restrictive covenants are an exception to that rule.

The recent decision in the Pennsylvania Superior Court case of Socko v. Mid-Atlantic Systems of CPA, Inc. (2014 PA Super 103) illustrates this principle. The case involved a salesman in the basement waterproofing industry. He signed a noncompete agreement during his at-will employment. Continued at-will employment doesn’t constitute consideration for a noncompete signed under those circumstances under Pennsylvania law. However, the company argued that there was sufficient consideration for the salesman’s non-compete because: a) the Pennsylvania Uniform Written Obligations Act, 33 P.S. 6, provides that “[a] written…promise…shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement…that the signer intends to be legally bound”; and b) the salesman’s noncompete stated that the parties “intend[ed] to be bound” by its terms.

The court determined that the Act was designed to apply where the adequacy of consideration is not a factor to be considered in determining a contract’s validity or enforceability. The court then observed that restrictive covenants are different than other contracts because the Pennsylvania Supreme Court has held that it is appropriate to inquire about the adequacy of consideration for restrictive covenants. As a result, the court determined that the Act is inapplicable to restrictive covenants, and that the Act could not rectify the lack of consideration for the salesman’s noncompete. The court reiterated that in Pennsylvania, “when the restrictive covenant is added to an existing employment relationship,…to restrict himself the employee must receive a corresponding benefit or a change in job status.”

In Pharmethod, Inc. v. Caserta, __ F.3d __ (3d Cir. 2010), the Third Circuit vacated and remanded the district court’s entry of a preliminary injunction enforcing a no-compete based on the trial judge’s failure to fully explain his factual and legal conclusions. The case is noteworthy because the Third Circuit provided what amounts to a primer on Pennsylvania non-compete law to help guide the district court on remand. Here is a summary of the Third Circuit’s guidance:

• Restrictive covenants are not favored in Pennsylvania and, due to the inherently unequal bargaining positions of employer and employee, such agreements are closely scrutinized. The court is required to balance the employer’s protectable business interest against the employee’s interest in earning a living in his or her chosen profession, and then balance the result against the public interest.

• In balancing such equities, some Pennsylvania courts are reluctant to enforce restrictive covenants against an employee who was involuntarily terminated.

• In Pennsylvania, post-employment restrictive covenants are enforceable if: (i) they are incident to an employment relationship between the parties; (ii) the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and (iii) the restrictions imposed are reasonably limited in duration and geographic extent.

• Legitimate business interests that may be protected by a restrictive covenant include protecting trade secrets, confidential information, good will or unique/extraordinary skills. Eliminating competition or gaining an economic advantage do not constitute legitimate business interests.

• Geographic restrictions must also be reasonable. Courts will uphold restrictive covenants with broad geographic limits only where the employee’s duties and customers were equally broad.

• Pennsylvania courts may “blue pencil” restrictive covenants by granting enforcement that is limited to those portions which are reasonably necessary for the protection of the employer. However, Pennsylvania case law favors non-enforcement of gratuitously overbroad restrictive covenants.