Trade Secrets and Noncompete Blog

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.

California Court Of Appeal Reverses Trial Court Order Compelling Disclosure Of Trade Secret Source Code

James Goodman — Mon, 28 Nov 2011 14:46:00 -0500

In Sybase, Inc. v. Superior Court of Alameda County, No. A132541, 2011 WL 5117117 (2011), the Court of Appeal of the State of California First Appellate District found, in an unpublished opinion, that the trial court abused its discretion when it ordered the production of a trade secret source code. The court found that the real party in interest did not meet the evidentiary burden imposed by the California Supreme Court in Bridgestone/Firestone, Inc. v. Superior Court, 7 Cal.App. 4th 1384 (1992) (“Bridgestone”) which set forth the standards governing whether a trade secret must be disclosed in litigation.

Plaintiff in the underlying action, Sybase, Inc. (“Sybase”), a developer of data management software, sued ANTs Software, Inc. (“ANTs”) for, among other things, breach of a written contract and unfair competition arising out of the alleged breach of an employee non-solicit provision.

Sybase sought damages based, in part, on the reduced functionality of its product due to the departure of the key engineer (Mathew) who was solicited. Sybase claimed that because of the engineer’s departure it would never be able to release the product it originally intended to develop and, therefore, it developed a different product (code named “Aries”), which it asserted was much less functional and drew less customer interest.

ANTs sought disclosure of the Aries source code, which the parties agreed was a trade secret, Sybase objected and ANTs moved to compel, claiming that it needed the Aries source code to defend against Sybase’s claims. ANTs supported its motion with, among other things, excerpts from the deposition transcripts of two Sybase engineers, which testimony indicated that certain integration issues were unrelated to Mathew’s departure. Sybase argued, in part, that it needed to examine the source code to determine whether the integration failure issues had anything to do with Mathew’s departure. The trial court issued an order compelling the production of the Aries source code, finding that ANTs could not adequately defend the case without access to the source code. The court subsequently entered a protective order, which set forth specific procedures to protect the source code.

Sybase filed a petition for writ of mandate with the Court of Appeal, which found that ANTs had not met the particularized showing required by Bridgestone. The court noted that in Bridgestone expert testimony showed a review of the trade secret formulas at issue would be “helpful” to the defense of the action, but the expert did not describe with precision how and why the formulas were a “predicate” to his ability to reach conclusions and disclosure was ultimately denied. The Court of Appeal found that ANTs likewise failed to establish with sufficient particularity that the disclosure of the trade secret was necessary for a fair resolution of the action.

ANTs contended the source code was necessary to determine why its product was not integrated. The court rejected this argument because ANTs failed to demonstrate the source code for Aries would in fact provide the information it sought and because ANTs’ own evidence showed it would be able to obtain deposition testimony that addressed this issue.

The court also found that ANTs did not present sufficient evidence to show that the Aries source code would reflect the extent to which it incorporates or was influenced by another software product, and suggested that that expert testimony could have been submitted to establish that threshold question.

Finally, the court rejected ANTs’ theory that it needed to examine the Aries source code to refute or evaluate Sybase’s claim that the product it had ultimately brought to the market lacked the robust features and was less functional than an integrated product would have been. The court found that ANTs did not have to examine the product’s source code in order to defend against the allegation that the product itself was less functional and that an expert could reach any necessary conclusions about the product’s functionality by examining the product instead of the source code.

Importantly, the court declined ANTs’ request to remand to the trial court with directions, which would have allowed it to present specific expert declaration evidence to establish why the source code was necessary to its defense. The court stated that existing law reasonably identified the applicable standards and it would not grant “a second bite at the apple.”

The take away here is that before a litigant moves to compel trade secret information which it deems critical to its prosecution or defense of a claim, it must fully develop the trial court record and present particularized evidence to establish why the information is relevant and necessary. If it does not, it may not get a second opportunity to do so.

Erroneous Jury Instructions Cause Kansas Supreme Court To Reverse Jury Verdict In Trade Secret/Restrictive Covenant Case

Peter Steinmeyer — Tue, 22 Nov 2011 15:54:32 -0500

Co-authored by Viktoria Lovei.

The Supreme Court of Kansas recently issued an opinion in Wolfe Electric, Inc. v. Duckworth and Global Cooking Systems, LLC, No. 99,536 (Ka. Oct. 21, 2011), a trade secret misappropriation and restrictive covenant case brought by a manufacturer of conveyor pizza ovens, Wolfe Electric, against its former president, Duckworth, and his new conveyor pizza oven company, Global Cooking Systems. At trial, the jury had found in favor of Wolfe Electric on all causes of action, including breach of contract and misappropriation of trade secrets in violation of the Kansas Uniform Trade Secrets Act (“KUTSA”), and awarded it damages in a variety of categories. The defendants appealed the jury verdict on numerous grounds and the Supreme Court reversed the jury verdict and remanded the case back to the trial court. While there were numerous issues before the Supreme Court, the court’s reversal was based on its finding that multiple jury instructions were erroneous. In particular, the Supreme Court held that the jury instructions did not properly conform to KUTSA by allowing defendants to be held liable for misappropriating confidential information when KUTSA only prohibits the misappropriation of trade secrets. The court found that the trial court also erred by providing various instructions which allowed the jury to find defendants liable for actions (e.g., merely forming a competitive business) which were not prohibited by the narrow restrictive covenants in Duckworth’s employment contract. In that regard, the Supreme Court also held that because the interpretation of a contract is a question of law for the court to decide, the trial court erred by allowing the jury to interpret Duckworth’s employment contract.

While not presenting any new substantive trade secret or non-compete issues, the decision reaffirms that erroneous jury instructions are ripe grounds for appeal and potentially reversal and should therefore be scrutinized closely to ensure that they accurately state the law.

Another Instance of Alleged Trade Secret Misappropriation Results in Federal Criminal Indictment

Peter Steinmeyer — Mon, 17 Oct 2011 12:03:17 -0500

Co-authored by Viktoria Lovei.

Following up on a recent post, U.S. v. Pu presents another instance of a trade secret theft case with an international component that the federal authorities have decided to prosecute. Yihao Pu, a former quantitative financial engineer for Citadel LLC, was arrested last Wednesday for allegedly stealing proprietary information related to the Chicago-based company’s trading system as part of a plan to launch his own hedge fund in China. After filing its own civil suit against Pu on August 29, 2011 and obtaining a temporary restraining order, Citadel brought the matter to the federal authorities. In this instance, the company chose both to take rapid action on its own to protect its trade secrets as well as to refer the matter to federal law enforcement authorities. The civil case is Citadel LLC v. Yihao Ben Pu, 11CH30493, Cook County, Illinois and the federal case is U.S. v. Pu in the Northern District of Illinois.

Once Again, An Alleged International Trade Secrets Heist Draws A Federal Indictment

Peter Steinmeyer — Thu, 06 Oct 2011 13:31:13 -0500

* Co-authored by Viktoria Lovei.

As we have noted in prior blog posts, alleged thefts of trade secrets are generally handled through the civil court system, and rarely result in criminal prosecution. Nevertheless, where there is an international component to the case or where the magnitude of the alleged theft is particularly significant, the prosecuting authorities will step in, as recently happened in Chicago.

Last week, Chunlai Yang, a former senior software engineer for Chicago-based CME Group, Inc., was indicted in federal court in Chicago and charged with two counts of theft of trade secrets. In the indictment, the government alleges that Yang stole the global exchange operator’s proprietary source code while pursuing, and in furtherance of, business plans to improve a chemical electronic trading exchange in China. Each count against Yang carries a maximum penalty of 10 years in prison and a $250,000 fine. The government also seeks forfeiture of computers and equipment allegedly used by Yang as well as any property or proceeds derived from his alleged criminal actions. Yang pled not guilty earlier this week.

In a press release, U.S. Attorney Patrick J. Fitzgerald stated: “This case is an excellent example of how law enforcement and corporations can work together to protect trade secrets. CME Group brought this matter to the attention of federal authorities and fully cooperated with the investigation. Economic espionage is a crime that effects [sic] both the interests of corporations and our national interest in protecting intellectual property. We will continue to working [sic] collaboratively with the private sector to investigate and prosecute trade secret theft.”

Notwithstanding the government’s willingness to step in to protect trade secrets in appropriate cases, private companies face a dilemma when deciding whether to bring in the government. On the one hand, government prosecution is much cheaper than civil litigation and such prosecutions send a strong message. On the other hand, the company loses control of the case when the government takes over. With that loss of control, the company also loses control over the information and the true trade secret nature of it comes under heightened scrutiny -- and not necessarily in a closed courtroom.

When It Comes to Non-Compete Agreements, It's Best to Know Exactly What Your Company Is Acquiring

Zachary C. Jackson — Tue, 27 Sep 2011 13:16:55 -0500

Restrictive covenants such as non-compete and non-solicitation agreements are frequently used in connection with acquisitions to protect the underlying value of the transaction. After all, an acquiring company typically values the target company based in part on the revenue it generates from its stable of customers. Therefore, the acquiring company often requires the target company’s employees to execute restrictive covenants that limit their ability to “jump ship” after the acquisition closes and erode the value of the transaction by luring away customers. Recently, the United States Court of Appeals for the First Circuit issued a decision which underscores the importance of carefully examining and understanding any restrictive covenant that may be acquired through a transaction.

In OfficeMax, Inc. v. Levesque, et al., Case No. 10-2423 (1st Cir. 2011), a company called LS&H had required employees to execute restrictive covenants in 1996 just before it was acquired by Boise Cascade. The agreements provided that the restrictive covenants would continue for “12 months after termination of…employment with LS&H.” Under the agreements, the employees also agreed that they would sign restrictive covenants in “substantially the same form” if requested by Boise Cascade after the acquisition. After the transaction closed, Boise Cascade did in fact request that the employees execute restrictive covenants in “substantially the same form,” but they refused. When OfficeMax later acquired Boise Cascade, OfficeMax too requested that the employees execute new restrictive covenants, but again they refused. In 2009 and 2010, two employees who had executed the restrictive covenants with LS&H terminated their employment with OfficeMax. OfficeMax sued them and obtained a preliminary injunction based on those agreements from the trial court. On appeal, however, the First Circuit vacated that injunction. The Court observed that the plain language of the agreements did not state that they ran for “12 months after termination of…employment with LS&H or any of its successors or assigns.” Furthermore, the Court explained that there would be no reason for the agreements to require that the employees sign substantially similar agreements with the successor if the restrictive covenants were already designed to run from 12 months after the employees separated employment with that successor. As a result, the Court concluded that the restrictive covenant period ended 12 months after Boise Cascade’s acquisition of LS&H in 1996, and had already expired by the time the employees left OfficeMax in 2009 and 2010.

The opinion thus serves as a cautionary tale for companies to make sure that they review the language and structure of restrictive covenants that they may be purchasing as part of an acquisition.

Ohio Court of Appeals Upholds Usage of Undefined, Industry "Term-of-Art" in No-Compete

Peter Steinmeyer — Thu, 15 Sep 2011 12:02:26 -0500

When drafting no-competes, questions about the required level of detail always arise; more detail is generally better than less, but not always. The required level of detail in a no-compete was among the questions addressed by the Ohio Court of Appeals last week in Osei-Tutu Owusu, M.D. v. Hope Cancer Of Northwest Ohio, Inc., a no-compete case involving a physician, Dr. Owusu.

During negotiations over the terms of his no-compete, Dr. Owusu rejected a proposal that he be restricted from practicing within a specific 35-mile radius. Nevertheless, he ultimately signed a no-compete which defined his post-employment restricted area as “the primary service area of Lima, Ohio and the primary service area of Van Wert, Ohio.”

At trial, “Dr. Owusu acknowledged that he was aware that the Agreement he signed contained a Non-Compete Clause referring to the ‘primary service area,’ but claimed he did not understand what that meant and argued that it was vague and unenforceable.” His former employer, in contrast, argued that the term “‘primary service area’ was a term commonly used in the healthcare industry, and that it could easily be ascertained by using patient zip codes to statistically determine what was the geographic area from which a hospital or practice drew the majority of its patients.”

The trial court sided with Dr. Owusu, holding that “the language of ‘primary service area’ was too indefinite and uncertain to be enforceable,” based partly on testimony that the signers of the agreement “did not know specifically what geographical area that terminology encompassed at the time they signed the Agreement.”

The Ohio Court of Appeals, however, disagreed, holding that the “[l]ack of a specific definition for this phrase did not make the contract void or indefinite but merely required the trial court to use rules of construction to determine what would be a reasonable meaning for the terminology.” It further explained that “[t]here are numerous examples of cases where a contract contained an industry ‘term-of-art’ that may not have been defined in the agreement, but could easily be construed based upon industry standards and common usages.” Thus, rather than invalidating a key portion of the no-compete, “[t]he trial court should have determined the meaning and the extent of the primary service area . . .”

While this case does not set down any universal guideposts on the required degree of detail in a no-compete, it certainly highlights the issue and the accompanying risks for all parties.

Update on the Confusion in Illinois Non-Compete Law

Zachary C. Jackson — Wed, 14 Sep 2011 09:27:53 -0500

Illinois’ appellate courts are divided into five districts. Illinois’ lower (or trial) courts typically follow the decisions of the appellate district in which they are located. Unfortunately for employees and employers alike, those districts currently disagree about the appropriate standard for enforcing non-compete agreements. As a result, the enforceability of non-compete agreements in Illinois currently depends in part on where a lawsuit is filed.

The most recent appellate case that added to this confusion was the Illinois Court of Appeals for the Second District’s December 2010 opinion in Reliable Fire Equipment Company v. Arredondo, which we blogged about here. However, earlier this year, the Illinois Supreme Court granted leave to appeal in that case so that it could resolve the disagreement in the various appellate districts. Oral argument in that case has now been set for September 22, 2011. As a result, we may be one step closer to resolving the current confusion in Illinois non-compete law. Stay tuned.

Practical Reminder: If You Want to Be Able to Toll Your Restrictive Covenants, It's Best to Say So

Zachary C. Jackson — Mon, 12 Sep 2011 12:15:22 -0500

Restrictive covenant agreements often contain “tolling” provisions which extend the duration of the covenants by the time of any violation. Sometimes, employers do not include tolling provisions in their restrictive covenant agreements, but nevertheless subsequently request that a court use its discretion to extend the duration of those covenants by the time of a violation anyways. A recent opinion from the United States Court of Appeals for the First Circuit highlights the danger in not including a tolling provision in a restrictive covenant agreement.

In EMC Corporation v. Arturi, __ F.3d __ (1st Cir. Aug. 26, 2011), EMC requested a preliminary injunction prohibiting its former employee from using its confidential information, from competing with EMC, and from soliciting EMC customers. The trial court issued a preliminary injunction prohibiting the disclosure of confidential information. However, the trial court refused to issue an injunction prohibiting the former employee from competing or soliciting EMC’s customers because the one-year time periods in those restrictive covenants had already elapsed and there was no tolling provision to extend them. On appeal, the First Circuit affirmed the trial court’s refusal to extend the non-compete and non-solicit provisions absent a tolling provision. The court explained that under the governing Massachusetts law, “when the period of restraint has expired, even when the delay was substantially caused by the time consumed in legal appeals, specific relief is inappropriate and the injured party is left to his damages remedy.” The First Circuit also specifically pointed out that “EMC could have contracted…for tolling the term of the restriction during litigation, or for a period of restriction to commence upon preliminary finding of breach. But it did not.”

Thus, EMC serves as a cautionary reminder to employers to include tolling provisions in their restrictive covenant agreements if they want to increase the likelihood that a court will subsequently extend the duration of those restrictive covenants by the period of any violation.

Download Guide To Connecticut Trade Secrets Laws, Published By EpsteinBeckerGreen And The Practical Law Company

David Clark — Fri, 29 Jul 2011 14:41:06 -0500

The national law firm of EpsteinBeckerGreen, in conjunction with the Practical Law Company, recently wrote and published a statewide guide on the trade secrets laws of Connecticut.

“Trade Secret Laws: Connecticut” is written by David S. Poppick of EpsteinBeckerGreen in a “question and answer” format, addressing trade secret and confidentiality laws affecting employers and employees. The focus is on the legal requirements related to protecting trade secrets and confidential information.

“Trade Secret Laws: Connecticut” is the latest in a line of similar guides which EpsteinBeckerGreen and the Practical Law Company have published, regarding non-compete laws of Illinois, Massachusetts, New Jersey and Connecticut, and trade secrets laws of the District of Columbia, Illinois, Massachusetts, and New Jersey. See our prior posts here and here regarding those guides.

You May Think That All Non-Compete Agreements Are Unenforceable Under California Law, But You Would Be Wrong

Peter Steinmeyer — Mon, 25 Jul 2011 13:42:30 -0500

Co-authored by Betsy Johnson and Viktoria Lovei.

Contrary to popular perception, California law does not bar all restrictive covenants in the employment context. Rather, in certain very narrow circumstances (i.e., non-competes arising in connection with the sale or dissolution of certain businesses), non-competes are permissible under California law.

The General Prohibition of Non-Competes Under California Law

Under California Business and Professions Code § 16600, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Cal. Bus. & Profs. Code § 16600 (2008). In Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), the California Supreme Court confirmed the viability and breadth of section 16600 and expressly rejected a line of Ninth Circuit cases which had upheld sufficiently narrow restrictive covenants that only barred a party from pursuing a small or limited part of its business. Id. at 948-49. The California Supreme Court in Edwards held that “noncompetition agreements are invalid, even if narrowly drawn, unless they fall within the applicable statutory exceptions of section 16601, 16602, or 16602.5.” Id. at 955. These three exceptions are discussed below.

Non-Competes Arising From the Sale of a Business

The first exception arises in the context of the sale of a business entity. Section 16601 permits a party selling the goodwill or all of their ownership interest in a business to agree to refrain from competition within the business’s geographic area, so long as the buyer intends to carry on a like business therein. Cal. Bus. & Profs. Code § 16601. See Vacco Industries, Inc. v. Van Den Berg, 5 Cal.App.4th 34, 47 (1992) (upholding the enforceability of a non-compete agreement lasting as long as the employer conducted business in the area against shareholder/officer who sold all of his shares in the company pursuant to a stock sale). A merger agreement, whereby an employee sells his business interest in a company in exchange for shares of the newly merged company, is considered to be a transaction within the exception of section 16601. Hilb, Royal & Hamilton Ins. Services v. Robb, 33 Cal.App.4th 1812, 1824-1825 (1995) (upholding agreement entered into in conjunction with merger which prohibited competition in several countries for a 3-year period of time). Section 16601 thereby allows the buyer of a business to protect its investment by enforcing a covenant not to compete against the seller. However, this exception is only applicable to business owners (or persons who own at least a material portion of business); it would not, for example, be used to justify a non-compete for a seller (or selling employee) who only owns a very small percentage of a business entity. There is no “bright-line” definition for determining what is a material portion of the business.

Non-Competes Arising in Conjunction With the Dissolution Of Or Dissociation From a Partnership

Section 16602, the partnership exception to California’s ban on non-compete agreements, permits, in the event of a dissolution of or dissociation from a partnership, an agreement that the departing partner not compete within the specified geographic area of the partnership’s business, so long as any other member of the partnership intends to carry on the business in the specified area. Cal. Bus. & Profs. Code § 16602. Unlike section 16601, there is no requirement under the partnership exception that compensation for goodwill in the partnership be transferred. South Bay Radiology Medical Associates v. Asher, 220 Cal.App.3d 1074, 1083 (1990). Section 16602 has been held applicable to partnerships involving accountants, attorneys, and physicians. See Swenson v. File, 3 Cal.3d 389 (1970); Howard v. Babcock, 6 Cal.4th 409 (1993); South Bay Radiology, 220 Cal.App.3d 1073. Courts have found that such covenants, rather than prohibiting competition, place a price on competition by, for example, permitting the departing partner to contract for compensation in return for refraining from engaging in competing business activity, or vice versa. Babcock, 6 Cal.4th at 417-24.

Non-Competes Arising in the Context of the Dissolution Of a Limited Liability Company

Like the partnership exception to California’s non-enforcement of covenants not to compete, section 16602.5 provides that in the event of the dissolution of a limited liability company, any member may agree not to carry on a similar business within the specified geographic area where the company’s business was transacted, so long as any other member intends to carry on the business in the specified area. Cal. Bus. & Profs. Code § 16602.5. Currently, there is no case law interpreting section 16602.5, which became effective in 2007. However, the section’s similarity to section 16602 indicates that it will be applied in a comparable manner by courts.

Despite California’s general hostility towards the enforcement of covenants not to compete in the employment context, these exceptions provide employers with valid methods under California law to protect their business interests from potential competitive harm caused by sellers and departing partners or members. Nevertheless, given the scarcity of case law interpreting these provisions, employers should proceed cautiously before relying on them.