Trade Secrets and Noncompete Blog

Missouri Supreme Court Affirms Tortious Interference Verdict Against Manager Who Went To A Competitor

Peter Steinmeyer — Thu, 10 May 2012 16:01:09 -0500

In Western Blue Print Company, LLC v. Myrna Roberts et al., the Missouri Supreme Court recently affirmed a tortious interference verdict against a manager who left to join a competitor, largely because the manager engaged in inappropriate conduct when departing one employer for another.

Tortious interference claims are commonly raised in disputes with former employees who leave to join a competitor. However, actual determinations of the merits of such claims are not common, and state supreme court parsings of such claims are even less common. Accordingly, this decision is worth reviewing.

As set forth in the opinion, Western Blue Print Company (“Western Blue”) is a document printing and management service. Myrna Roberts (“Roberts”) was one of its managers. She did not have a non-compete, and resigned without notice to join a competitor that she had helped form. After she did so, the University of Missouri chose not to renew a contract with Western Blue that Roberts had previously managed for it; rather, the university awarded the contract to Roberts’ new employer. The loss of that contract was the basis for a tortious interference claim by Western Blue against Roberts.

As a threshold matter, the Court held that even though this contract was “up for grabs” because it was subject to a competitive bid process, Western Blue “had a reasonable, valid business expectancy that it would win” the contract before Roberts’ resignation. As summarized by the Court, “Western Blue successfully bid on the contract the previous two times the university solicited bids and performed well fulfilling its obligations.” Moreover, just a few months before leaving Western Blue, Roberts purportedly told other Western Blue employees that she had the contract “locked up” for Western Blue. Accordingly, the Court found that Western Blue satisfied the threshold requirement of a reasonable, valid business expectancy.

The Court then turned its attention to whether Roberts used “improper means” to obtain the contract on behalf of her new employer, ultimately concluding that she did. In so finding, the Court noted that while she was still employed by Western Blue, Roberts “convinced other Western Blue employees to leave their jobs and work for [her new employer], instructing them to stagger their departures without notice” and “assur[ing] these employees she would be able to procure the university contract” for her new employer. Additionally, the Court noted that before resigning, Roberts deleted certain documents, and in so doing “hindered Western Blue’s ability to bid successfully” on the contract and impacted its ability “to complete its current contractual obligations to the university such that it negatively reflected on its bid.”

In sum, Western Blue prevailed on its tortious interference claim in large part because the Court found that Roberts engaged in misconduct when leaving Western Blue. Departing employees and their new employers should take heed.

New York Court Requires Specific Identification of Stolen Trade Secrets Before Allowing Discovery to Proceed

David Clark — Mon, 07 May 2012 10:43:27 -0500

In an important recent decision, the Supreme Court of the State of New York, New York County, required plaintiffs asserting a cause of action for misappropriation of trade secrets to identify the trade secrets with particularity before being able to proceed with discovery.

The plaintiffs -- MSCI Inc., Financial Engineering Associates, Inc., RiskMetrics Group, Inc., and RiskMetrics Solutions, Inc. -- offer sophisticated computer software to clients who participate in the global financial market. Plaintiffs’ allegations against their former worker Philip Jacob and his new employer Axioma, Inc. center upon computer source codes and their components and sequencing.

As discovery began, defendants served interrogatories seeking clarification as to what portions of plaintiffs’ source codes are alleged to be stolen trade secrets. At a discovery conference, the Court first allowed plaintiffs to answer such interrogatories by specifying what portions of its source code are not claimed to be trade secrets by providing a list of source code components that (1) are covered by third party licenses, (2) are in the public domain, or (3) otherwise are not claimed by plaintiffs to be trade secrets.

Defendants subsequently argued and persuaded the court that this was insufficient, and that the law requires that a plaintiff identify trade secrets with reasonable particularity early in the case. The court held that only “by distinguishing between the general knowledge in their field and their trade secrets, will the court be capable of setting the parameters of discovery and will defendants be able to prepare their defense.” The court further stated that it would be unfair to allow the plaintiffs to discover the defendants’ trade secrets prior to revealing their own, as this could allow the plaintiffs to tailor their theory of misappropriation to Axioma’s work, or even to misappropriate Axioma’s trade secrets!

Accordingly, the court ordered that the plaintiffs were precluded from seeking further discovery until they supplemented their responses to defendants’ interrogatories.

This decision appears to be the first of its kind in New York state court, but is in line with a trend seen in numerous other states.

The decision also calls to mind the inherent tension in asserting a claim for misappropriation of trade secrets in a publicly filed complaint without actually disclosing the secret information, a tension that often requires very careful drafting by practitioners. Going forward in New York, it appears that even if a trade secret plaintiff need not reveal the secret information in its complaint, it will need to identify such information with specificity shortly afterward (although perhaps not publicly) in order to proceed with discovery.

Are Employer Social Networking Accounts Protectable Trade Secrets?

Kara M. Maciel — Tue, 17 Apr 2012 09:01:25 -0500

Co-authored by Matthew H. Sorensen.

Social media has become an increasingly important tool for businesses to market their products and services. As the use of social media in business continues to grow, companies will face new challenges with respect to the protection of their confidential information and business goodwill, as several recent federal district court decisions demonstrate.

Christou v. Beatport, LLC (D. Colo. 2012), Ardis Health, LLC v. Nankivell (S.D.N.Y. 2011), and PhoneDog v. Kravitz (N.D. Cal. 2011) each involved former employees who took the login credentials for their employers’ business social media accounts when they left their employment. In each case, the companies alleged that the removal of the login credentials for their social media accounts by their former employees had significant negative consequences on their ability to effectively compete and market their products and services.

Earlier this year, the U.S. District Court for the District of Colorado addressed whether a nightclub owner’s MySpace page and its connections could constitute a protectable trade secret. In Christou v. Beatport, LLC, Bradley Roulier, a former partner in a business that ran two Denver nightclubs kept the login credentials for the clubs’ MySpace pages when he left the partnership to start his own competing nightclub. According to the complaint, the nightclubs’ MySpace pages each had over 10,000 “friends.” After leaving to start his own competing club, Mr. Roulier used the login credentials that he had taken to post updates to his former partner’s MySpace pages promoting his new night club. His former partner then sued him for misappropriation of its trade secrets – namely the login credentials for its MySpace pages and the “friend” connections for those pages. On Mr. Roulier’s motion to dismiss, the court found that the MySpace login credentials and the “friend” connections could constitute protectable trade secrets. The court concluded that the MySpace pages were password protected, that the “friend” connections for the clubs’ MySpace pages were more than just lists of potential customers, they also provided personal information about the “friends” and their preferences, and the clubs’ lists of “friends” could not be duplicated without a substantial amount of effort and expense.

In a similar case, Ardis Health, a former employee effectively froze her former employer out of its business social media websites by taking the login credentials for the accounts and refusing to return them to the former employer. The employee had formerly been responsible for creating and updating the company’s social media websites and was in sole possession of the login credentials for those websites at the time her employment was terminated. Accordingly, when she refused to return the login credentials after her termination, the employer could no longer access or update its websites. The employer was ultimately able to obtain a preliminary injunction requiring the former employee to return the login credentials for its social media websites based on the theory that the former employee’s unauthorized retention of that information constituted conversion. In finding that the company owned the rights to the login credentials for its social media sites, the court noted that the former employee had entered an agreement in which she had agreed that any work she created or developed during her employment would be the property of the company.

Finally, in PhoneDog, a former employee who had been responsible for establishing and operating a Twitter account for his employer that was designed to increase traffic to his employer’s website kept the login credentials for the account after he terminated his employment with the company, renamed the account, and kept its Twitter following. PhoneDog alleged its Twitter following was the equivalent of a proprietary customer list. PhoneDog also alleged that, by taking the account, the employee effectively decreased the number of visitors to the company’s website and thereby reduced the number of advertisers who were willing to purchase space on its website. On the former employee’s motion to dismiss, the U.S. District Court for the Northern District of California held that the Twitter account, its login credentials, and its followers could potentially constitute protectable trade secrets and that the unauthorized taking of the account and its login credentials constituted misappropriation.

It should be noted that the courts in both PhoneDog and Christou did not find that the plaintiffs had established that their social media accounts were trade secrets. Rather, the courts simply held that they had alleged sufficient facts to state a claim that those accounts were trade secrets. The question of whether the employers will be able to prove the facts necessary to prevail on their claims was left open and both plaintiffs may very well encounter difficulties in proving the facts necessary to prevail on their trade secrets claims later in their respective cases.

These cases demonstrate the importance of careful planning to protect a company’s social media presence and its business connections. Employers should ensure that they maintain a log of their social media account login credentials and that the log is appropriately updated. Further, companies are well advised to require employees who establish and maintain such accounts on behalf of the company to enter agreements that provide that the accounts and their login credentials are the sole property of the company. Departing employees should also be interviewed in connection with their exit to ensure that all company social media login credentials to which they had access have been returned. Finally, in the event that an employee takes the login credentials for the employer’s social media accounts when he or she leaves the company, it is essential for the employer to take prompt action to recover the information. Delay can result in the loss of legal protections for the accounts and any connections that they hold

Latham & Watkins Hit With Malicious Prosecution Suit After Unsuccessful Prosecution Of Trade Secrets Action

James Goodman — Tue, 17 Apr 2012 08:24:23 -0500

Co-authored by Ted Gehring.

On April 6, 2012, Latham & Watkins was sued for malicious prosecution in Los Angeles Superior Court. The suit alleges that the Plaintiffs, William Parrish and Timothy Fitzgibbons, were former officers and shareholders of Indigo Systems Corporation, which was purchased by FLIR Systems, Inc. in 2004. From 2004 to 2006 the Plaintiffs worked for FLIR, leaving in 2006 to start their own business. FLIR retained Latham and sued them for, among other things, misappropriation of trade secrets. The trial court denied FLIR’s request for a permanent injunction, found FLIR brought the trade secrets action in bad faith, and awarded attorney’s fees and costs of $1,641,216.78, which was less than the $2,399,650.55 in attorney’s fees that were requested. The trial court’s decision was affirmed on appeal. FLIR Systems, Inc. v. William Parrish, et al., 174 Cal.App.4th 1270 (2009).

The trial court and appellate court decisions (both of which are attached to the Complaint) make fascinating reading for trade secret practitioners – particularly those who practice in California.

The trial court based its bad faith finding on, in part, its conclusion that the lawsuit was pursued based on an “inevitable disclosure” theory and that doctrine is not recognized in California. FLIR argued that it was not proceeding on an inevitable disclosure theory; rather, it contended it was alleging “threatened misappropriation” under the Uniform Trade Secrets Act (California Civil Code § 3426.2(a)). The trial court rejected this argument, concluding threatened misappropriation is not a substitute for an inevitable disclosure theory, and that since FLIR had no evidence that indicated imminent trade secret misuse, there was no threatened misappropriation.

In finding that FLIR filed and prosecuted the action in bad faith, the court pointed out, among other things, that a third party ended business negotiations with Parrish and Fitzgibbons because the lawsuit had been filed, that they did not start their new business venture, and that at the time of trail had no plans to do so because that deal with the third party fell through. The court concluded that continuing the lawsuit for 18 months through trial effectively disrupted Parrish and Fitzgibbons’ plans to start a new company.

The appellate court also agreed with the trial court that FLIR engaged in bad faith settlement tactics by imposing unnecessary settlement conditions. In particular, FLIR responded to one settlement offer by demanding $75,000.00, a non-competition agreement, and an agreement that Parrish and Fitzgibbons would not hire FLIR’s employees or challenge certain patent applications. The court found that the settlement condition that Parrish and Fitzgibbons not work with certain third parties was an unlawful trade restraint, and that the condition that they not hire appellant’s employees likewise violated public policy, as did the demand that Parrish not communicate relevant information to the federal government about the patent application.

The malicious prosecution complaint against Latham alleges that there is a related malicious prosecution action against FLIR and that Plaintiffs did not discover the basis for the malicious prosecution action against Latham until May 2010, when FLIR indicated at a court conference in the related malicious prosecution action that they might by invoking the advice of counsel defense. So it appears there will be a statute of limitations defense to be litigated.

We will follow the progress of this case, and it will be interesting to see if Latham files a motion pursuant to California’s anti-SLAPP law (a strategic lawsuit against public participation – California Code of Civil Procedure 425.16).

In California, malicious prosecution actions are often “SLAPPed” early in the case. The SLAPP statute is designed to prevent lawsuits brought primarily to chill a valid exercise of constitutional rights of freedom of speech and petition, and FLIR’s original lawsuit is such a right. If Latham files a SLAPP motion, Parrish and Fitzgibbons would have to establish that there is a probability that they will prevail on the claim, and if Latham prevails, it would be entitled to its attorneys’ fees.

The initiation of a trade secret/unfair competition action against a start-up business can crush that business even if the action lacks merit. Here, it appears as if FLIR’s lawsuit was successful in preventing Parrish and Fitzgibbons from establishing their new business venture even though FLIR ultimately lost the case. In view of the two malicious prosecution actions and the strong language in trial court and appellate court decisions regarding FLIR’s motives and tactics, it remains to be seen whether FLIR’s prosecution of the underlying action was a good or bad business decision.

New York Appellate Court Upholds Contractual Provision Tolling Employee's Non-Compete Period Due To Employee's Violation of Non-Compete

David Clark — Wed, 21 Mar 2012 14:54:43 -0500

An increasingly common type of provision found in employment agreements, allowing for extension of an employee’s post-employment non-compete restrictions by a period of time that the employee violates the restrictions, was upheld in a recent decision by New York’s Appellate Division, First Department.

According to the complaint in Delta Enterprise Corp. v. Cohen, the plaintiff Delta Enterprise Corp. is in the business of manufacturing and selling juvenile furniture and other products for infants, toddlers and children. Many of Delta’s products are sold under licenses and use well-known cartoon and other names and images such as Barbie, Spongebob Squarepants, and Hot Wheels. Defendant Ralph Cohen worked in various positions over seven plus years at Delta, and was the co-head of the Toddler Furniture Division in 2009 and early 2010. The complaint alleges that Mr. Cohen misappropriated confidential information from Delta, and began operating a business, called Resolute Trade, in competition with Delta while he was still employed with Delta and afterwards, all in violation of a Confidentiality Agreement (which also contained several two-year non-competition and non-solicitation clauses). Mr. Cohen’s employment with Delta ended on March 1, 2010.

Delta sued Mr. Cohen nearly a year later and on March 1, 2011, secured a temporary restraining order directing Mr. Cohen, among other things, to refrain from engaging in business with any factories with which Delta conducted business, and from interfering with or disrupting any relations between Delta and any of its customers, licensors, employees, or vendors with regard to Delta’s products. After a preliminary injunction hearing, the Supreme Court, New York County, issued a preliminary injunction enjoining Mr. Cohen from taking such actions at any time up through and including February 28, 2012 (i.e., for two years after the end of his employment with Delta).

Although the Court awarded Delta the preliminary injunction, Delta appealed, arguing that it was error for the Court to enforce the two year restrictive covenants only through February 28, 2012, and to fail to enforce the Confidentiality Agreement’s provision tolling the expiration of the restrictive covenants during any period in which Mr. Cohen was in violation of the agreement. In a March 1, 2012 decision, the Appellate Division agreed, holding that the tolling provision should have been given effect and modifying the preliminary injunction to extend until March 1, 2013 (i.e., two years from the date of issuance of the temporary restraining order) or resolution at trial, whichever is earlier.

As more and more employers add such tolling provisions when drafting non-competition and non-solicitation agreements, this appellate court decision, which rejected Mr. Cohen’s arguments that the provision is unenforceable as a matter of law or violates public policy, could prove valuable in employers’ efforts to enforce such tolling provisions. It should be noted, however, that restrictive covenant agreements containing tolling provisions remain subject to judicial analysis as to whether they are necessary to protect the employer’s legitimate business interests, and are reasonable temporally and geographically. Also, the appellate decision specifically noted that Delta proffered an “abundance of unrefuted documentary evidence showing that it was likely that defendant had repeatedly breached multiple provisions of the agreement,” and that there was evidence that Mr. Cohen had consulted with counsel before executing the agreement and received $50,000 in consideration thereof.

Connecticut Supreme Court Rules That A Public Agency Can Create And Maintain Trade Secrets

David Poppick — Fri, 16 Mar 2012 14:10:19 -0500

The Supreme Court of Connecticut has ruled that a public agency, the University of Connecticut, can create and maintain trade secrets that are exempt from disclosure under the state’s Freedom of Information Act (“FOIA”). The trade secrets are databases of customer lists identifying the persons who paid to attend, donated to, inquired about, or participated in educational, cultural or athletic activities at the University, such as season ticket holders, donors and program subscribers.

In University of Connecticut v. Freedom of Information Commission, 303 Conn. 724, __A. 3d__ (Feb. 21, 2012), the Court rejected the State Freedom of Information Commission’s decision that the University’s databases could not be “trade secrets” under the FOIA disclosure exemption, based on the Commission’s conclusion that the University was a public entity that did not engage in “trade.” The Court ruled that a public agency that creates and maintains trade secret information is entitled to the same protection that would constitute a protected trade secret if the information was created by a private entity. The Court examined the nature of the information in the databases, the purposes for which the information was used, potential competitors and the economic benefit that the information might confer on competitors.

The Court concluded that the University is a public agency under the FOIA and required under the act to disclose public records, with certain exceptions, such as for trade secrets, including customer lists, that: (i) derive independent economic value, actual or potential, from not being generally known to and not readily ascertainable by proper means by other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain secrecy.

The Court reasoned that the FOIA definition focuses exclusively on the nature and accessibility of the information, not the status or characteristics of the entity creating and maintaining that information. Also, the definition of a “person” protected by the Connecticut Uniform Trade Secrets Act includes “government, governmental subdivision or agency or any other legal or commercial entity.” There is no requirement that the entity must be engaged in a “trade.” The Court found that the University spends considerable resources of the state, on its own or in partnership with others, for research and development of intellectual property and takes appropriate steps to maintain its secrecy. The Court concluded that the state’s ability to recoup costs or reap the financial benefits for those efforts would be undermined if anyone could obtain the information by a simple FOIA request. Therefore, the information met the statutory criteria for a trade secret exempt from the FOIA request.

Consequently, the Court’s decision allows a public agency, such as a public university, the same rights as a private person or entity to profit from research, investment and development of trade secrets that otherwise meet the requirements of the Connecticut Uniform Trade Secrets Act.

Employee Use of Social Media in the Workplace: How Companies Can Protect Trade Secrets and Prevent the Misappropriation of Confidential Information

Epstein Becker & Green, P.C. — Thu, 15 Mar 2012 16:00:39 -0500

Complimentary Briefing/Webinar - Protect Trade Secrets and Confidential Information in a Social Media Workplace

April 18, 2012 – EpsteinBeckerGreen Washington, DC Office
9:00 AM - 10:30 AM EDT - Briefing and Q&A
(Webinar to start at 9:00 AM EDT)

In a world where employers must store confidential business-sensitive data in multiple locations and the number of devices through which such information can be copied and transferred is ever increasing, it is vital for companies to take appropriate steps to safeguard their confidential information from misappropriation. This is particularly important in the current economic climate, where employees have become increasingly mobile. Additionally, the prevalence of the use of social media by current and former employees has increased the risks that valuable confidential business information may lose its protected status or fall into the hands of a competitor through improper disclosure.

Click here to learn more about the event and to register.

Utah Decision Broadly Construes The Uniform Trade Secrets Act's Preemption Provision

Peter Steinmeyer — Wed, 14 Mar 2012 16:47:46 -0500

In a decision recently issued by the Utah Court of Appeals, CDC Restoration & Construction, LC v. Tradesmen Contractors, LLC et al., the court broadly interpreted the preemption clause in the Uniform Trade Secrets Act (“UTSA”) to hold that it “preempts claims based on the unauthorized use of information, irrespective of whether that information meets the statutory definition of a trade secret.”

With various modifications, the UTSA has been adopted by all but a handful of states. One of its provisions expressly preempts conflicting tort and other common law or statutory civil causes of action “for misappropriation of a trade secret.” (The preemption provision does not, however, preempt contractual or criminal remedies, regardless of whether they are based upon misappropriation of a trade secret, or other civil remedies not based upon misappropriation of a trade secret.)

Some courts have interpreted the UTSA’s preemption clause narrowly, holding that it only preempts claims based on information that meets the statutory definition of a trade secret. Their rationale is that if the UTSA was held to preempt claims based on theft of information that is not a statutory trade secret, a wronged plaintiff might be left without any remedy.

Other courts (a majority that have addressed the issue, according to the opinion in CDC Restoration & Construction) take a broader view of the UTSA’s preemption clause, and hold that it preempts any claim based on the unauthorized use of information – regardless of whether that information meets the statutory definition of a trade secret, and regardless of whether such a broad reading might deprive a plaintiff of a remedy for the misappropriation of information which does not constitute a statutory trade secret. As explained in CDC Restoration & Construction, “[a] contrary approach would render the statutory preemption provision effectively meaningless, leaving prior law untouched and converting an exclusive remedy into just another basis for recovery” (internal quotations omitted).

Employers should draw two lessons from this case. First, when prosecuting or defending misappropriation of trade secrets claims, employers need to be aware of the different interpretations of the UTSA’s preemption provision in different states; a valid claim in one state may be preempted in another. Second, employers should protect themselves against broad UTSA preemption by having employees sign contractual provisions protecting their confidential information – regardless of whether such information constitutes a “trade secret” for purposes of the UTSA. After all, the UTSA does not preempt contractual remedies.

Our Updated Guide to Non-Compete Laws in Illinois

Peter Steinmeyer — Tue, 28 Feb 2012 18:20:19 -0500

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 Hafferkamp v. Llorca decision of the Second District of the Appellate Court of Illinois, which holds that Reliable Fire Equipment Company v. Arredondo, et al. (an Illinois Supreme Court decision which resolved several years of confusion over the appropriate standard for enforcing non-compete agreements in Illinois), should be applied “retroactively and proactively” to both future non-compete cases as well as pending non-compete cases that were filed before the date that Reliable Fire was decided.

The guide is part of a series of guides written and published by our firm, Epstein Becker Green, and the Practical Law Company.

Emotions Are No Substitute For Facts

Zachary C. Jackson — Thu, 23 Feb 2012 11:03:59 -0500

It’s no secret that restrictive covenant and trade secrets claims are sometimes used as leverage in business disputes. However, the recent case of Sean Morrison Entertainment v. Thompson, et al. (pending in Chicago federal court as Case No. 11-cv-2462) serves as a reminder that the need for leverage does not obviate the need for a good faith basis for any claim that is filed.

Apparently, the dispute in that case began when a TV production company called Sean Morrison Entertainment (“SME”) hired a number of mixed martial arts fighters to participate in a reality TV show. After the show was filmed, the fighters sued SME in Wisconsin claiming that they had not been paid for their work. SME responded by filing a separate suit in Chicago federal court against both the fighters and the lawyers that represented them in the Wisconsin case, accusing them of stealing SME’s trade secrets.

The fighters recently filed a motion asking the Chicago federal court to sanction SME under Rule 11 for filing frivolous claims in a jurisdiction with no connection to the dispute. The Motion argued that SME’s claims made no sense because “[t]he defendants are all professional MMA fighters; they are not owners or producers of reality based shows … Thus, defendants would have neither any reason, nor would they realize any benefit [from using] this … show in their business as professional fighters.” Additionally, the Motion argued that – irrespective of the bases of the underlying claims – the Court has no jurisdiction over this case because the defendants have zero connection to the state of Illinois: “Any competent first year law student who has taken Civil Procedure would be familiar with the case of International Shoe v. Washington … which mandates that … a defendant must have sufficient minimum contacts with a forum state to justify the imposition of personal jurisdiction against him. Either plaintiff’s counsel lacks the knowledge of a first-year law student, or more likely, its Illinois attorney chose to ignore the law and decided to file in Illinois anyways, because as an Illinois based LLC, this jurisdiction would be most convenient for plaintiff and its attorney. In either event, plaintiff’s counsel certainly made no effort to ascertain whether there was any legitimate basis to sustain personal jurisdiction here, and should be sanctioned accordingly.”

No one wants to be the recipient of a Rule 11 letter or motion. As a result, this case serves as a cautionary tale. Even in situations involving restrictive covenants or trade secrets where emotions often run high, lawyers and companies must critically evaluate the bases for their claims so that they can justify those claims to the Court.

The Business of Protecting Customer Relationships

Peter Altieri and David Clark — Fri, 27 Jan 2012 13:09:06 -0500

In an article appearing in the January 25, 2012 edition of www.law360.com, Peter L. Altieri and David J. Clark discuss how -- over a dozen years after the New York Court of Appeals specifically recognized, in BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999), that an employer may have a legitimate and protectable business interest in preventing former employees from exploiting or appropriating the relationships and goodwill of its customers which had been created and maintained at the employer’s expense -- some New York courts still appear to be reluctant to uphold contractual provisions in employment agreements that are designed simply to protect customer goodwill.

Canadian National Railway Company Sues Its Former CEO E. Hunter Harrison For Allegedly Violating Non-Compete And Non-Disclosure Obligations

Peter Steinmeyer — Wed, 25 Jan 2012 08:53:52 -0500

On January 23, 2012, the Canadian National Railway Company filed suit against its former Chief Executive Officer, E. Hunter Harrison, for allegedly violating certain non-compete and non-disclosure obligations. Peter A. Steinmeyer was interviewed about the lawsuit on the Business News Network’s show, “Headline with Howard Green.” To see the interview, click on this link: http://watch.bnn.ca/headline/january-2012/headline-january-24-2012/#clip606360.

New Jersey Adopts Statutory Trade Secret Protections

James P. Flynn — Tue, 10 Jan 2012 11:03:29 -0500

On Monday, January 9, 2012, Governor Chris Christie signed into the law the New Jersey Trade Secrets Act (NJTSA, http://www.njleg.state.nj.us/2010/Bills/S2500/2456_R1.HTM), the Garden State’s version of the Uniform Trade Secrets Act (UTSA). New Jersey, thus, becomes the forty-seventh state to adopt some form of UTSA. While the New Jersey Act will promote some level of uniformity in the approach to trade secrets issues, New Jersey specific changes to the uniform act promise that this statute will build upon, rather than depart from, New Jersey’s common law tradition of protection of trade secrets and other valuable business information.

Some New Jersey specific points in the legislation:

• The definition of “trade secret” under NJTSA is broader than under UTSA, as NJTSA incorporates the broader protections of New Jersey common law principles;

• NJTSA supplements, rather than displaces, New Jersey common law, as the statute states that the rights, remedies, and prohibitions under NJTSA “are in addition to and cumulative of any other rights, remedies, or prohibitions provided under common law or statutory law of this State”;

• NJTSA prohibits acquisitions of the trade secrets of another by “improper means,” and contains definitions of that term and “proper means” not found in UTSA;

• NJTSA makes mere or threatened acquisition by improper means of another’s trade secret actionable, and enjoinable, even if there is no concomitant likelihood of disclosure to or use by third party.

These NJTSA-specific provisions combine with UTSA’s allowing for recovery of attorneys’ fees and punitive damages to provide the holders of trade secrets a powerful new tool in New Jersey. Those who helped frame, over a multi-year time period, the bill as adopted in New Jersey included its sponsors, employer groups, and the New Jersey Law Revision Commission and its legal advisors, including the author of this post.

Federal Court In Chicago Refuses To Issue Injunction Based Upon Either An "Inevitable Disclosure" Claim Or A 24-Month Non-Compete With An "Extremely Broad" Geographic Scope

Peter Steinmeyer — Tue, 10 Jan 2012 09:31:12 -0500

Co-authored by Viktoria Lovei.

A federal judge in Chicago recently refused to issue an injunction based upon either the “inevitable disclosure” of trade secrets doctrine or a geographically broad, 24-month non-compete that did not have a narrowly drawn activity restriction. Triumph Packaging Group v. Ward, et al., No. 11-cv-7927 (N.D. Ill. Dec. 2, 2011).

The case was brought by Triumph, a manufacturer of packaging for consumer goods suppliers. It sought, among other things, to enjoin Ward, its former Chief Operating Officer, from assuming a position with AGI, a manufacturer of packaging primarily for the media and entertainment industries.

Triumph argued, among other things, that Ward’s employment with AGI would require him to inevitably use or disclose Triumph’s trade secrets. In evaluating Triumph's claim under the Illinois Trade Secrets Act (“ITSA”), the Court found that Triumph was reasonably likely to succeed in proving the existence of certain trade secrets. However, the Court concluded that Triumph was unlikely to succeed in establishing that the disclosure of such trade secrets by Ward was inevitable because the evidence demonstrated that Ward's role at AGI presented no reasonable danger of him using or disclosing Triumph's trade secrets. Specifically, the Court relied on its findings that: (1) Triumph and AGI were neither “fierce” nor “even direct” competitors because they focused on the manufacture of different types of packaging for mostly different industries and do not currently share any customers; (2) Ward's position at AGI was dissimilar from his position at Triumph in “a variety of ways”; (3) “there is no evidence in the record that Mr. Ward’s new position will require him to use or disclose Triumph’s trade secrets, and he testified credibly that he will not do so”; and (4) Triumph’s trade secrets were not applicable to AGI’s business.

With respect to Ward’s post-employment non-compete, the Court held that it was “extremely overbroad and likely unenforceable.” First, the Court held that it was “extremely broad in geographical scope” because it prohibited Ward “from working with any competitor ‘within any geographical area’ of where Triumph or its subsidiaries engage in business or have plans to engage in business.” Additionally, the Court noted that “the qualifying term ‘within any geographical area’ is unclear and does not provide any degree of certainty as to where Mr. Ward may work without violating the provision.” Second, the Court held that the “duration of the non-compete clause -- 24 months by default and 30 months if Mr. Ward breaches his obligations under the agreement during the prior 24 months – is very lengthy.” The Court agreed with Ward that where “temporal and geographic restrictions on an employee’s conduct are broad . . . the agreement’s activity restrictions should be correspondingly narrowly drawn to protect the employee’s ability to be employed in his chosen field.”

Because the Court found that the non-compete was “significantly overbroad in several ways,” it refused to modify or “blue-pencil” it.

Though not a path breaking decision, this case is nevertheless a reminder about the narrowness of the inevitable disclosure doctrine and the need to draft non-compete clauses as tightly as possible to address a company’s legitimate needs.

New York Court Finds Damage to Reputation of Commercial Insurance Broker Constitutes Irreparable Harm and Bars Solicitation of Broker's Clients and Employees

David Clark — Mon, 09 Jan 2012 16:28:14 -0500

In an exhaustive opinion, dated December 21, 2011, in the case Aon Risk Services, Northeast v. Cusack, Index No. 651673/11, 2011 WL 6955890, Justice Bernard Fried of the Supreme Court of New York, New York County, awarded a preliminary injunction sought by Plaintiffs Aon Risk Services, Northeast and Aon Corporation (collectively, “Aon”) against Aon’s former employee Michael Cusack and its competitor Alliant Insurance Services, Inc. (“Alliant”).

The case arose from a raid upon Aon’s business by Mr. Cusack, a senior executive and Managing Director at Aon, who resigned with several other senior executives on June 13, 2011 to join Alliant. That same day, 38 Aon employees left Aon to join Alliant, and 15 Aon clients soon followed. In the ensuing few months, 60 employees in total resigned from Aon to join Alliant, and Aon received more than 100 broker of record letters from clients transferring more than $20 million in revenue from Aon to Alliant.

After issuing temporary restraining orders in September and October 2011, the Court held a two day preliminary injunction hearing in November 2011, and in December 2011 issued its preliminary injunction, barring Mr. Cusack, Alliant, and other former Aon employees who were subject to restrictive covenants from, during the pendency of the litigation, (1) soliciting business or entering into any business relationship with any Aon client on whose account they worked, or (2) soliciting any Aon Construction Services Group employees to work for Alliant.

The substantial scope of the damage suffered by Aon provided the basis for the Court’s finding of irreparable harm. The Court found credible Aon’s assertions that “the loss of 60 employees and dozens of clients doing business with [Aon] in hundreds of lines of insurance and surety harms Aon’s goodwill, reputation in the marketplace with its clients and prospects, and relations with its remaining employees, because it causes clients to question Aon’s ability to service the business” and that competitors would be encouraged to solicit Aon’s employees, clients and prospects because they believe Aon to be “wounded.” Aon also argued, credibly to the Court, that monetary damages could not compensate for the loss of expertise and relationships of both employees and clients suffered by Aon, and that it was impossible to put a value on the loss of 60 Aon employees in one week.

A company that has been raided and is seeking an injunction sometimes hesitates to articulate in court filings the true extent of damage to its business, for fear that it will suffer reputational harm in the marketplace. If, however, the damage is already well-known and the loss of marketplace confidence is clear, a comprehensive recounting of such facts could help to secure some relief from a court as the company tries to rebuild its business, as shown by this recent court New York decision.

Eighth Circuit Holds That A Compilation Of Otherwise Public Information Can Be A Trade Secret

Peter Steinmeyer — Thu, 22 Dec 2011 14:49:31 -0500

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.

Download Our Updated Guide to Non-Compete Laws in Illinois

Peter Steinmeyer — Mon, 19 Dec 2011 12:54:26 -0500

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.

Illinois Supreme Court Clarifies Standard for Enforcing Non-Compete Agreements

Zachary C. Jackson — Wed, 07 Dec 2011 14:06:00 -0500

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.

EpsteinBeckerGreen Contributes to the Practical Law Company's "Labor and Employment"

Epstein Becker & Green, P.C. — Fri, 02 Dec 2011 12:06:04 -0500

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.

Virginia Supreme Court: An Enforceable Non-Compete Must be Narrowly Tailored to Protect Legitimate Business Interests

George B. Breen — Thu, 01 Dec 2011 09:51:31 -0500

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.