Trading Secrets

Nondisclosure Agreement Found to Fall Short Without an Accompanying Non-Compete

esalcedo@seyfarth.com (Eddy Salcedo) — Fri, 10 Jul 2009 16:14:19 -0600

In the back and forth battle between companies and former employees regarding the confidential nature of customer information, the United States District Court for the District of Nebraska has just issued a decision of note in Softchoice Corp. v. MacKenzie, 08-cv-00249. By the decision, the Court dismissed the action as against the defendant, finding that despite plaintiff’s treatment of the information as secret, had plaintiff truly wished to protect the information it should have had defendant enter into a properly tailored covenant not to compete instead of only having him sign a nondisclosure agreement.

The action was brought by Softchoice against MacKenzie, a former employee, alleging the usual panoply of claims: breach of confidentiality, misappropriation of trade secrets and confidential business information, unfair competition and tortious interference with business relations. The confidential information was alleged to be customer contact information and pricing. MacKenzie had not signed a non-compete covenant, but had signed a nondisclosure agreement.

In dismissing the action, Judge Joseph F. Batailon found that:

“The plaintiff cannot succeed on its claims for breach of contract, misappropriation of trade secrets or unfair competition without a showing that the information he allegedly misappropriated was a trade secret … MacKenzie has [] shown that he obtained the only information that could arguably be categorized as ‘secret,’ that is, pricing information, from the potential customers themselves, who freely shared the information with him in hopes of obtaining a lower price. MacKenzie has also shown that his suppliers shared this sort of information …”

This segued into the Court’s interpretation of the extent nondisclosure agreements will protect customer information:

“Softchoice, or its predecessor, could have limited MacKenzie’s contact with his former customers, and consequently protected its pricing information, through a narrowly drawn, valid and enforceable covenant not to compete, but id did not do so. Softchoice cannot achieve by way of a nondisclosure agreement what it could not have obtained via a non-solicitation agreement …”

It will be interesting to watch if any other courts pick up on Judge Batailon’s interpretation of nondisclosure agreements.

Nevada Supreme Court Rules That Restrictive Employment Agreements Acquired Through Mergers Are Not Subject To Nevada's Strict Assignment Rule

rmilligan@seyfarth.com (Robert Milligan) — Thu, 02 Jul 2009 11:53:54 -0600

By Robert Milligan and summer associate Andrew Larratt-Smith

In a decision that encourages cost efficient corporate mergers in Nevada, the Nevada Supreme Court in HD Supply Facilities Maintenance v. Bymoan, 2009 WL 1635924 (June 11, 2009) recently ruled in an en banc decision that restrictive employment agreements acquired through corporate mergers do not require a showing that the agreements’ assignment provisions were negotiated at arm’s length or are supported by separate consideration.

The court clarified its previous decision in Traffic Control Servs. v. United Rentals, 120 Nev. 168, 172 (2004), which held that employee noncompetition agreements are nonassignable when acquired through an asset purchase transaction, absent an explicit assignment clause negotiated at arm’s length supported by separate consideration. The Traffic Control decision was based on the notion of “honoring an obligor’s choice to contract with only the original obligee, thereby ensuring that the obligor is not compelled to perform more than his or her original obligation.” Further, the decision supports the general proposition that personal services contract are not assignable absent consent. In its Traffic Control ruling, the Nevada Supreme Court used broad language, leading some to believe that the nonassignability of employee noncompetition agreements extended to agreements acquired as the result of mergers as well as to those acquired through asset purchase transactions.

But in HD Supply the Nevada Court distinguished employment restrictive covenants found in mergers from asset purchase transactions. The court emphasized the contractual nature of an asset purchase transaction, whereas a merger is a creation of statute. The court stated that in a merger “two corporations unite in a single corporate existence” whereas “the acquiring corporation in an asset purchase transaction becomes… a wholly new employer.” Consequently, the court reasoned that Traffic Control’s general rule of non-assignability did not apply to covenants of noncompetition, nonsolicitation, or confidentiality as a result of a merger.

The court found that when a relevant merger statute exists, the issue of a covenant’s assignability is not controversial, stating “[a]s the majority of courts have concluded when considering this issue, in a merger, the right to enforce the restrictive covenants of a merged corporation normally vests in the surviving entity.” Further, in support of its decision, the court noted that although Nevada courts have not addressed this exact issue before, the court had previously acknowledged a hard and fast distinction between the implications of a merger, which is a statutory creature, and an asset purchase, which is not.

Despite ruling that restrictive employment agreements acquired through mergers do not need to comply with the strict rule of assignability found in Traffic Control, under Nevada Revised Statute 613.200(4) and applicable case law, such covenants must still be reasonable in scope and duration. The HD Supply decision is significant because it removes a significant obstacle for businesses who obtain employment restrictive covenant agreements as a result of merger and thereby reduces additional costs arising out mergers in Nevada.

FLIR Systems, Inc. v. Parrish: A Cautionary Tale for Trade Secrets Misappropriation Plaintiffs

csieve@seyfarth.com (Carolyn Sieve) — Wed, 01 Jul 2009 15:09:03 -0600

The California Court of Appeal’s recent decision in FLIR Systems, Inc. v. Parrish, 2d Civil No. B209964, 2009 WL 1653103 (Cal. App. 2d Dist. June 15, 2009), affirming a $1.6 million attorney fee award to defendants upon a finding that the action was brought in bad faith, provides a useful and interesting discussion of various factors that may lead a court to conclude that a misappropriation case has been brought in bad faith. The decision highlights the importance of considering carefully whether to bring a misappropriation claim against former employees, particularly where there is little or no evidence of actual damage, or of actual misappropriation or threatened misappropriation.

In 2004, FLIR acquired the assets of Indigo, of which defendants Parrish and Fitzgibbons were officers. Indigo manufactures and sells microbolometers, devices used in connection with infrared cameras, night vision, and thermal imaging. After the sale, defendants continued to work for Indigo. About a year later, defendants decided to start a new company to mass produce bolometers. The new company was based on a business plan developed by Fitzgibbons several years before FLIR acquired Indigo. Before leaving Indigo, defendants advised FLIR and Indigo of their business plan and invited FLIR and Indigo to participate. FLIR rejected the offer.

In 2006, defendants began negotiations with Raytheon Company in accord with their business plan. Defendants assured FLIR and Indigo that they would not misappropriate Indigo’s trade secrets and that they would use an intellectual property filter similar to the one used at Indigo to prevent the misuse of trade secrets. In June 2006, FLIR and Indigo sued defendants on the theory that defendants could not mass produce low-cost microbolometers without misappropriating trade secrets. Upon learning of the lawsuit, Raytheon terminated business discussions with defendants, and one month after the suit was filed, defendants advised FLIR and Indigo that they would not go forward with their new business.

FLIR and Indigo, before trial, dismissed their damages claims and tried only the misappropriation of trade secrets and California Unfair Competition Act claims. On December 6-17, 2007, the case was tried. In a statement of decision issued in June 2008, the trial court found no misappropriation or threatened misappropriation of trade secrets. It was undisputed that defendants received no funding for their business plan, never started their new business, had no employees or customers, did not lease any facility or develop technology, and did not design, develop or sell any infrared products. The trial court ultimately denied permanent injunctive relief and awarded defendants $1,641,216.78 in attorney fees.

The California Uniform Trade Secrets Act allows for an award of reasonably attorney fees to the prevailing party where the claim was brought in bad faith. Civ. Code § 3426.4. The court ultimately held that FLIR and Indigo had essentially brought the action based on the doctrine of “inevitable disclosure,” as there was no evidence of misappropriation or threatened misappropriation, and the FLIR and Indigo witnesses were unaware of such evidence though they maintained suspicions that misappropriation would occur. Given that the “inevitable disclosure” doctrine has been definitively rejected in California, the Court found FLIR and Indigo to have brought and maintained the action in bad faith. The items the Court considered significant:

• The absence of any economic harm.

• The absence of any evidence of misappropriation or threatened misappropriation of trade secrets. Notably, there was evidence at trial that one of the defendants, Parrish, had downloaded technological data onto a hard drive before leaving Indigo, and that he destroyed the hard drive a few months before the lawsuit was filed. Although evidence that an employee has downloaded confidential information shortly before leaving his employer is typically significant to support a misappropriation claim, here, the evidence was discounted because defendants first learned of the download after the complaint was filed, so it was not a consideration for bringing suit, and the download was not a threatened misappropriation because there was no evidence that the contents of the hard drive, “if such contents existed, were improperly accessed, used, or copied before the drive was destroyed.”

• Evidence that FLIR and Indigo had an anticompetitive motive in filing the lawsuit. On this point, the court found significant the testimony of FLIR’s CEO, who testified that “we can’t tolerate a direct competitive threat by [Parrish] and [Fitzgibbons],” inferring that the CEO had no evidence of wrongdoing but was bothered that defendants planned to compete with FLIR in the future. The Court also found significant the fact that another FLIR officer had voted to file the lawsuit but had no personal knowledge that defendants had committed a wrongful act.

• Failure by FLIR and Indigo to identify what trade secrets would be subject to the permanent injunction. The Court found as “strong evidence of bad faith” FLIR and Indigo’s proposed injunction, which barred defendants from developing certain products for a 12-month period even if they did not use FLIR and Indigo’s technology or trade secrets.

• Imposition of unnecessary settlement conditions. When defendants notified FLIR and Indigo of their business plan, FLIR and Indigo responded with a demand for $75,000, a non-competition agreement, and agreement that defendants would not hire FLIR and Indigo’s employees, and agreement that they would not challenge Indigo’s patent applications. The Court found these restrictions to be unlawful restraints on trade.

• FLIR and Indigo’s experts at trial admitted there was no scientific methodology to predict trade secret misuse and agreed that no trade secrets were misappropriated.

The FLIR decision is a reminder to employers to be cautious when determining to bring a lawsuit against former employees for trade secret misappropriation. California courts may not tolerate the filing of misappropriation claims where it appears the employer is merely fearful or suspicious of wrongdoing. In such cases, the employer plaintiff risks not only a dismissal of its claims but the possibility of being sanctioned for bringing the action.

Georgia Supreme Court Holds that In-term Restrictive Covenants are Subject to Strict Scrutiny

melkon@seyfarth.com ( Michael Elkon) — Mon, 29 Jun 2009 18:36:24 -0600

In Atlanta Bread Co. Int’l, Inc. v. Lupton-Smith, S08G1815, 2009 WL 1834215 (Ga. Jun. 29, 2009), the Georgia Supreme Court today confirmed that in-term restrictive covenants are subject to the same strict scrutiny standard applied to post-term covenants and the same reasonableness standards of time, territory, and scope.

The question presented in Atlanta Bread Company was whether the in-term non-compete covenant in a franchise agreement between Atlanta Bread Company and Sean Lupton-Smith is enforceable under Georgia law. The covenant at issue states as follows:

During the term of this Agreement, neither [Lupton-Smith] nor any Principal Shareholder, for so long as such Principal Shareholder owns an Interest in [Lupton-Smith], may, without prior written consent of Franchisor, directly or indirectly engage in, or acquire any financial or beneficial interest in (including any interest in corporations, partnerships, trusts, unincorporated associations or joint ventures), advise, help, guarantee loans or make loans to, any bakery/deli business whose method of operation is similar to that employed by store units within the System.

During the term of the franchise agreements, Lupton-Smith opened and began operating a P.J.’s Coffee & Lounge in Atlanta, Georgia. Atlanta Bread Company sent a notice terminating the franchise agreement and litigation ensued. The trial court and Court of Appeals both found that the in-term non-compete provision was unenforceable under Georgia law because it failed to “meet[] the reasonableness standards promulgated in Georgia.”

The Supreme Court rejected Atlanta Bread Company’s argument that the provision is a loyalty provision rather than a non-compete provision, noting that

[a] plain reading of the clause shows that it prohibits the franchisee from engaging in a certain type of business during the term of the parties’ agreement and, thus, it is a partial restraint of trade designed to lessen competition. Such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy.

The Court rejected any contention that a franchise relationship should be treated differently, confirming that the court has held time and again” that franchise agreements and employment agreements are subject to the same strict scrutiny (meaning, among other things, that it cannot be blue-penciled). This analysis removes any doubt that the Court’s analysis in Atlanta Bread Company also will apply to in-term restrictive covenants in an employment agreement.

Inventions Agreements as Unfair Business Practices?

melkon@seyfarth.com ( Michael Elkon) — Mon, 29 Jun 2009 10:35:32 -0600

In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., No. C 07-05248 JW, 2009 WL 1481147 (N.D. Cal. May 20, 2009), the Northern District of California held that Applied Materials’ use of inventions agreements constituted unfair business practices under California law. Applied Materials, a California-based semiconductor company, brought claims for trade secret misappropriation and unfair competition against Advanced Micro-Fabrication Equipment, a start-up competitor. In the action, Applied Materials asserted that a number of its former employees had moved to AMEC and conceived inventions that belonged to Applied Materials pursuant to assignment clauses in the former employees’ employment agreements. The clauses stated as follows:

In case any invention is described in a patent application or is disclosed to third parties by me within one (1) year after terminating my employment with APPLIED, it is to be presumed that the invention was conceived or made during the period of my employment for APPLIED, and the invention will be assigned to APPLIED as provided by this Agreement, provided it relates to my work with APPLIED or any of its subsidiaries.

AMEC brought counterclaims for declaratory judgment and unfair competition, arguing that the assignment clauses are unenforceable non-compete agreements under California Business & Professions Code § 16600. AMEC then moved for summary judgment on its counterclaims.

The Northern District of California granted AMEC’s motion for summary judgment. Applied Materials argued that the assignment clauses merely created a rebuttable presumption that it owns its former employees inventions conceived in the first year after the end of their employment. The District Court rejected this interpretation, holding that the clauses plainly state that all such inventions “will be assigned” to Applied Materials. The district court further noted that the clauses state neither that an employee can rebut the presumption nor how an employee would do so.

The District Court went on to hold that the assignment clauses were unenforceable under California law for two reasons. First, the clauses are not limited to inventions using Applied Materials’ confidential information. Second, the clauses were not limited to inventions conceived by former Applied Materials employees while they were employed at Applied Materials, but instead extended to inventions conceived up to a full year after the end of employment.

Once the Court found that the assignment clauses were unenforceable, it therefore followed that it would grant AMEC’s claim for declaratory judgment. It also granted AMEC’s claim for unfair competition. The California Court of Appeal has held that the use of non-compete provisions that violate section 16600 of the Business & Professions Code constitutes an unlawful business practice under section 17200 of the Code. Thus, the Court held that Applied Materials’ use of the assignment clauses were unfair business practices as a matter of California law.

District Court Denies Request for Injunctive Relief in Financial Services Industry Dispute

melkon@seyfarth.com ( Michael Elkon) — Mon, 15 Jun 2009 18:25:31 -0600

In Smith Barney, Inc. v. Darling, No. 09-C-540, 2009 WL 1544756 (E.D. Wis. Jun. 3, 2009), the United States District Court for the Eastern District of Wisconsin denied Smith Barney’s request for temporary injunctive relief in aid of arbitration against five departing financial consultants and their new employer. Smith Barney sought an injunction to: (1) require the former employees to return all customer information; and (2) prevent the departing employees from soliciting Smith Barney customers. The former employees countered by arguing that the non-solicitation and non-disclosure covenants relied upon by Smith Barney were unenforceable under Wisconsin law. They also argued that they were entitled to retain client contact information.

The District Court agreed with the departing employees on all fronts. It found that the non-disclosure of confidential information provisions were unenforceable because they did not contain time limitations. (Wisconsin and Georgia are the only two states that we are aware of that have such requirements.) It also found that the non-solicitation of customers provisions found in the former employees’ employment agreements were unenforceable because they covered customers “whose name became known” to the former employees during their time at Smith Barney. The Court reasoned that the provision would cover individuals who came into Smith Barney’s office to ask for directions, as well as individuals whom the former employees met at softball games. In fact, the Court went so far as to point out that the restriction covered customers of the departing employees’ new employer – Robert W. Baird & Co. – about whose existence the departing employees learned during their employment with Smith Barney. The Court went on to conclude that additional non-solicitation covenants in various agreements with the five former employees were unenforceable because they covered customers that did not do business with Smith Barney and/or with whom the departing employees had not had contact in years. Because Wisconsin courts do not blue pencil otherwise unenforceable restrictive covenants, these flaws in the provisions were fatal.

The Court also addressed the impact of the Protocol for Broker Recruiting, to which Smith Barney is a signatory. Even though Baird & Co. is not a signatory to the Protocol, the departing employees argued that Smith Barney could not show entitlement to injunctive relief because it had tacitly conceded that departing employees are not a threat by signing the Protocol. Smith Barney countered by noting that some of the accounts at issue were excluded from the Protocol. The Court concluded that Smith Barney’s argument was “not sufficiently developed” to merit an award of temporary injunctive relief.

Ultimately, the Court ordered the departing employees to return or destroy client account information, but not client names, addresses, telephone numbers, and email addresses. The Court did not address explicitly in its published decision whether Smith Barney had shown that some or all of this information constituted a trade secret under Wisconsin law, despite the fact that Smith Barney had pled a claim for trade secret misappropriation against the defendants. The Court did state that Smith Barney could have an evidentiary hearing on an expedited basis, if it chose.

Georgia's New Non-Compete Statute and its Potential Effect on Technology Companies

ebirg@seyfarth.com (Erika Birg) — Thu, 11 Jun 2009 16:20:54 -0600

Seyfarth's Michael Elkon recently authored an article on Georgia's new non-compete law and its potential effects on technology companies. Using an extended metaphor to relate scenes from the movie Silence of the Lambs to the current legal regime, Michael argues that technology companies in particular should be interested in the statute because restrictive covenants matter so much to them:

Technology companies should be especially interested in HB 173. This is so because restrictive covenants are particularly important in the technology field. “Tech” companies have to be especially vigilant to protect their confidential, company-specific information because so much of their value is bound up in this information, unlike brick-and-mortar assets that dominate the balance sheets of companies in other industries. Instead, tech companies derive much of their worth from information that is, by its nature, portable. Also, because of the novelty of what tech companies often do, they are more likely to have key employees whose move to a competitor could have serious repercussions. The savvy tech company should have tailored agreements for its key employees, and HB 173 will give those companies more latitude in protecting their information and tailoring their agreements.

The article highlights a few of the new rules that Michael expects will be especially important for technology companies, such as the rules on the permissible scope of a non-compete or the requirements for a non-disclosure provision. Overall, Michael argues that the statute will provide greater flexibility for technology companies in protecting their interests, while acknowledging that technology companies may have a harder time poaching employees from their competitors.

Rambo Challenges California Court of Appeal Decision Regarding The Sufficiency Of Trade Secret Identification Statement For Pudding Product

rmilligan@seyfarth.com (Robert Milligan) — Tue, 26 May 2009 17:09:23 -0600

Attorneys for Sylvester Stallone and another named cross-defendant recently filed a petition for review with the California Supreme Court challenging a significant published California Court of Appeal decision (Brescia v. Angelin, 172 Cal.App.4^th 133 (March 17, 2009)) regarding the sufficiency of a trade secret identification statement.

In 2007, a Los Angeles Superior Court judge entered judgment in favor of Stallone and another cross-defendant on a claim for trade secret misappropriation in a cross-complaint brought against him and others by a manufacturer of high protein, low carbohydrate pudding.

In March 2009, a Court of Appeal for the Second Appellate District, Division Four reversed the judgment on the grounds, among other things, that cross-complainant’s trade secret identification statement was sufficient.

The parties have briefed Stallone’s petition for review, with Stallone’s reply filed with the California Supreme Court on May 22, 2009. The Supreme Court has yet to rule on the petition.

According to the Court of Appeal decision, the cross-complainant alleges that Stallone participated with other cross-defendants in misappropriating cross-complainant’s trade secrets, which are described in the cross-complaint as: “a formula, manufacturing process, marketing plan, funding plan and a distribution and sales plan for a high protein, low carbohydrate pudding with an extended shelf life and a stable and appealing consistency and most important, when mass produced, an appetizing flavor.” See id. at 139-140.

According to the decision, Stallone was the chairman of the board for a company (also a cross-defendant) that allegedly conspired to steal cross-complainant’s ideas for the alleged high protein, low carbohydrate pudding that was allegedly unlike any other pudding on the market. See id. at 139. The company and another allegedly began producing and selling a pudding based on cross-complainant’s formula and business plan. See id. at 139.

At the trial court level, judgment was entered in Stallone’s and another cross-defendant’s favor on the trade secret misappropriation claim, after the court sustained their demurrer to cross-complainant’s third amended cross-complaint, based on the alleged inadequacy of the manufacturer’s trade secret designation statement.

The trial court reasoned that the trade secret designation was defective, because it made “no attempt . . . to identify why certain aspects or all of the aspects of the manufacturing process are anything other than matters generally known to persons skilled in the field,” and “no attempt . . . to indicate why the peculiar product formulation here that is stated with precision is a trade secret, as opposed to the typical ingredients involved in formulating other low-calorie, low-fat puddings.” See id. at 142.

The trial court commented that cross-complainant’s submission was silent on the question whether the alleged trade secrets were known to skilled persons in the field: “So by its silence it's doomed to failure, because there's no attempt even to commence to describe why this formula is unique and not known to others. [] It just is a formula. Likewise, it is a cooking or manufacturing process of many steps. Some of which apparently, according to matters of which I believe I can take judicial notice are actually fairly familiar when you are trying to make a comparable product.” See id.

A California statute requires that trade secrets be identified with particularity before commencing discovery relating to the trade secret in suits alleging the misappropriation of trade secrets under California’s Uniform Trade Secrets Act.

Specifically, Code of Civil Procedure § 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate underSection 3426.5 of the Civil Code.

Cross-complainant appealed the trial court’s decision. On appeal, the Court of Appeal found that section 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates. The Court found that such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided by the claimant to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. The Court found that the trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.

Specifically, the Court held that cross-complainant’s trade secret designation met the reasonable particularity standard of section 2019.210. According to the designation statement, two alleged trade secrets were identified: the pudding formula and the manufacturing process. The statement “particularly described” the details of the pudding formula as of the last quarter of 2003, listing the 15 specific ingredients by common name and the percentage of the total pudding. The statement also listed the same 15 ingredients by their supplier and brand name and particularly described each step in the mixing, testing, and code marking of the pudding.

The Court concluded that cross-complainant’s statement was adequate because: 1) the statement permitted cross-defendants to investigate possible defenses; 2) there was no deficiency in the trade secret designation that would hamper its ability to protect the parties' proprietary information or to determine the scope of relevant discovery; and 3) there was no showing that the trial court was unable to understand the nature of the alleged secrets and fashion discovery.

The Court concluded that the nature of the identification required in any particular case need only be reasonable under the circumstances. The Court further stated the 2019.210 requirement cannot be divorced from the statutory goals which it is intended to serve and “[t]he identification is to be liberally construed, and reasonable doubts concerning its sufficiency are to be resolved in favor of allowing discovery to commence.”

The Court of Appeal decision received some media coverage after its publication.

The issues presented to the California Supreme Court on the petition for review are:

1) “Does Code of Civil Procedure section 2019.210 . . . permit plaintiffs to designate purported trade secrets by simply listing all of their product manufacturing specifications, without distinguishing them from matters known in the trade, thereby forcing defendants to guess as to what aspect(s) the plaintiffs will argue at trial constitutes the actual trade secret?

2) Does this new, diminished designation standard, which conflicts with the designation standard utilized for over a decade (which required plaintiffs to distinguish their purported secret from matters known in the trade) undermine the legislative intent behind Section 2019.210 and Business and Professions Code section 16600 . . .?.

3) Does this new designation standard create de facto non-compete covenants (unlimited as to time or geography), restraining the mobility of technical employees , and allowing employers to circumvent Edwards v. Arthur Andersen (2008) 44 Cal.4^th 937, 946 . . .?

4) When plaintiffs designate patented information as their trade secret, and cannot distinguish their purported secret from these patents, may trial courts take judicial notice of the designation and patents, and grant demurrer? Or, must trade secret defendants always face costly litigation, no matter how incurably insufficient the information designated as trade secret?”

Pending the California Supreme Court’s decision on the petition review, the Court of Appeal’s decision serves as a significant decision providing additional clarification concerning the disclosure requirements of Section 2019.210. We will provide an update once the Supreme Court issues a ruling on the petition for review.

Georgia Governor Signs HB 173

ebirg@seyfarth.com (Erika Birg) — Mon, 11 May 2009 16:53:43 -0600

On April 29, 2009, Governor Sonny Perdue signed HB 173, legislation intended to revamp the way that non-compete, non-solicit and non-disclosure agreements are enforced in Georgia.

District Court Rejects Employer's Attempt to Use the Computer Fraud & Abuse Act against Former Employees

melkon@seyfarth.com ( Michael Elkon) — Mon, 11 May 2009 15:22:28 -0600

In Lasco Foods, Inc. v. Hall and Shaw Sales, Marketing & Consulting, LLC, 600 F. Supp. 2d 1045 (E.D. Mo. 2009), the United States District Court for the Eastern District of Missouri dismissed an employer’s claim that two former employees violated the Computer Fraud & Abuse Act (“CFAA”), 18 U.S.C. § 1030, et seq., by deleting information from and refusing to return their company laptops after resigning. Lasco brought claims against former sales representatives Ronald Hall and Charles Shaw, as well as their new company, Hall and Shaw Sales, Marketing & Consulting. Included in the action were claims under the CFAA and the Stored Wire and Electronic Communications Act (“SECA”), 18 U.S.C. § 2701, et seq., as well as a number of claims under Missouri law.

Lasco alleged that Shaw “deleted confidential and trade secret information from Lasco’s computer” and “unlawfully copied or otherwise downloaded Lasco’s Trade Secret Information for his own personal use and for the use of HSSMC.” Lasco further alleged that Hall refused to return his Lasco laptop and that Lasco anticipated that a forensic examination of Hall’s laptop would reveal that he also deleted information from the laptop.

Hall and Shaw moved to dismiss the SECA and CFAA claims. The District Court found that federal courts have found that the general purpose of these two statutes “was to create a cause of action against computer hackers (e.g., electronic trespassers),” rather than rogue employees. Accordingly, because Lasco alleged that Hall and Shaw had unrestricted access to Lasco’s information on its computers, the District Court dismissed the claims under the CFAA and SECA because Lasco had not alleged that Hall and Shaw accessed Lasco’s information without authorization.

The District Court did find that Lasco had alleged sufficiently that it had suffered damage and loss by virtue of Hall and Shaw deleting information and forcing Lasco to take remedial measures. The District Court also found that Lasco had alleged interruption of service by asserting that Hall and Shaw had delayed before returning their computers. However, because Lasco could not show that Hall and Shaw were unauthorized users, its claim under the CFAA was dismissed, leaving Lasco to pursue state law claims.

California Court of Appeal Slaps Down Use of Anti-SLAPP Motion In Trade Secrets Case

csieve@seyfarth.com (Carolyn Sieve) — Wed, 22 Apr 2009 07:57:30 -0600

Under California Civil Procedure Code section 425.16, a defendant sued for exercising its constitutional rights may assert that the action is Strategic Litigation Against Public Participation (“SLAPP”) and move to strike the complaint on that basis. Section 425.16, also known as the “anti-SLAPP statute,” when properly invoked, can be a powerful defense tool because it imposes an automatic stay on discovery until a ruling on the motion, potentially forces the plaintiff to establish with evidence a “probability” that plaintiff will prevail on its claim, and exposes the plaintiff to a fee award if the motion is granted. The invocation of the anti-SLAPP statute in cases involving trade secrets disputes between business competitors will most likely be futile, however, as a recent decision by the California Court of Appeal indicates.

In World Financial Group, Inc. v. HBW Insurance & Financial Service, Inc. et al., 2009 WL 1019118 (Cal. App. 2d Dist. April 16, 2009), plaintiff World Financial Group, Inc. (“WFG”), a company that provides insurance, pension and financial services, sued its direct competitor, HBW Insurance & Financial Services, Inc. and a number of former WFG associates (collectively, “defendants”) for, among others, trade secret misappropriation and use of WFG’s confidential information to solicit WFG’s associates and customers.

Defendants filed an anti-SLAPP motion, arguing that all of WFG’s claims were based on defendants’ speech and conduct in furtherance of their right of free speech in connection with a public issue. Specifically, defendants claimed that their speech and conduct involved the pursuit of lawful employment, workforce mobility, and free competition, all of which are matters of public interest and protected policy. Both the trial court and appeals court disagreed, holding that defendants failed to meet their burden of showing that WFG’s complaint arose from speech and conduct in connection with a public issue. As the Court of Appeal explained, “[A]ll of the allegedly wrongful conduct and speech that plaintiffs attribute to defendants was committed in a business capacity, and was directed at a competitor’s associates and customers for the sole purpose of promoting the competing business as a superior employer and provider of products and services.”

The Court of Appeal also rejected defendants’ strategy of couching their argument in terms of society’s general interest in the subject matter of the dispute—lawful employment, free competition and employee mobility—rather than focusing on the specific speech or conduct at issue in the complaint. “The focus of the anti-SLAPP statute must be on the specific nature of the speech rather than on generalities that might be abstracted from it.” Applying the statute in the general manner defendants proposed, the Court of Appeal observed, would mean that “every case alleging breach of a noncompetition agreement or the related misappropriation of trade secrets would be categorically subject to the anti-SLAPP statute,” effectively eviscerating the unfair business practices laws.

Finally, even if defendants had argued that the specific speech and conduct at issue was protected, that argument would still be unavailing because the statements by which defendants attempted to solicit employees and customers were not of public interest, were irrelevant to WFG’s claims, and were merely incidental to the conduct upon which the complaint is based.

If defendants’ immediate goal was to delay discovery, then the use of the anti-SLAPP statute essentially accomplished that objective—for the short term. Beyond that, use of the anti-SLAPP statute to strike garden-variety misappropriation and non-solicitation claims, as confirmed in the World Financial Group decision, will likely be unsuccessful.

The Seyfarth Trade Secrets, Computer Fraud & Non-Competes practice group attorneys congratulate their colleagues, Brian Ashe, Erik von Zeipel, Daniel Sable, Kurt Kappes, and Timothy Nelson, who represented WFG at the trial and appellate levels!

Texas Supreme Court Implies a Promise to Provide Confidential Information to Uphold a Non-Compete Agreement

dcountiss@seyfarth.com (David Countiss) — Tue, 21 Apr 2009 13:52:07 -0600

The Texas Supreme Court has once again ruled in favor of enforcing non-competition agreements. On April 17, 2009, the Court held that “if the nature of the employment for which the employee is hired will reasonably require the employer to provide confidential information to the employee for the employee to accomplish the contemplated job duties, then the employer impliedly promises to provide confidential information and the covenant is enforceable so long as the other components of the Covenant Not to Compete Act are satisfied.” Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, No. 07-0490, 2009 WL 1028051, *1 (April 17, 2009). The other components of the Act involve whether the agreement’s terms are reasonable.

In Light v. Centel Cellular Co. of Tex., the Court interpreted the Act to require employers to promise to provide and actually to provide confidential information or trade secrets to employees “at the time the agreement is made.” 883 S.W.2d 642, 644-45 (Tex. 1994). This almost never happened and thus non-competes were difficult to enforce.

In 2006, the Court modified Light and held that the employer’s promise to provide confidential information or trade secrets is enforceable as long as the employer provides the information at some point during employment. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006). Thus, non-competes became easier to enforce.

The Court has now gone further and held that the employer’s promise to provide confidential information or trade secrets within the non-compete need not be express; it may be implied. Fielding at *1. Thus, as long as a covenant not to compete is “ancillary to or part of an otherwise enforceable agreement,” (i.e., an employee’s non-disclosure agreement) and the nature of the contemplated employment will reasonably require the employer to furnish the employee with confidential information, then the employer impliedly promises to provide the information and the contract is enforceable. In such a situation, the only remaining issue is the reasonableness of the terms, i.e., whether the restrictions are reasonable in length of time, geography, and scope of activity restrained by the agreement. This ruling makes it more difficult for an employee to challenge the formation of a covenant not to compete under the Act.

It is also important to note that the Court held “confidential information” may include client-specific information that a client provides to the employer such as the “clients’ names, billing information, and pertinent tax and financial information.” Id. at *6.

Fourth Circuit Court of Appeals Addresses whether Software can be a Trade Secret as a Total Compilation

melkon@seyfarth.com ( Michael Elkon) — Fri, 17 Apr 2009 04:37:44 -0600

In Decision Insights, Inc. v. Sentia Group, Inc., No. 07-1596, 2009 WL 367585 (4th Cir. Feb. 4, 2009), the Fourth Circuit Court of Appeals grappled with the distinction between a claim that elements of a software program are trade secrets and a claim that the program is a trade secret as a total compilation. The Court of Appeals determined that the district court considered the former, but not the latter, and reversed the district court’s grant of summary judgment.

Decision Insights brought claims against Sentia and a number of former Decision Insights employees, alleging that the former employees used Decision Insights’ trade secrets and confidential information when they formed Sentia to develop a competing software application. Included in Decision Insights’ complaint were claims for breach of restrictive covenants and for misappropriation of trade secrets. Decision Insights alleged that the former employees used their knowledge of its software code to develop a competing product in “record time” that produced the same results as Decision Insights’ software.

After a discovery dispute regarding Decision Insights’ identification of its trade secrets and confidential information, Sentia moved for summary judgment. The district court granted the motion, holding that Decision Insights had not shown the existence of trade secrets or confidential information. The district court also found that the non-compete provision signed by one employee was unenforceable under Virginia law and that there was no evidence that any of the employees had breached their non-disclosure provisions.

The Court of Appeals reversed the district court’s grant of summary judgment. In its ruling, the Court of Appeals drew a distinction between Decision Insights’ two trade secret claims. The Court of Appeals affirmed the trial court’s conclusion that Decision Insights did not properly describe the 12 processes within its software that it claimed were trade secrets. The Court of Appeals agreed with Sentia’s expert that Decision Insights’ description of the trade secrets was “incomplete and fragmented,” thus preventing a meaningful evaluation of the trade secrets.

However, the Court of Appeals held that the trial court erred by concluding that Decision Insights had not shown, as a matter of law, that the software program as a total compilation was a trade secret. Decision Insights produced its entire source code, as well as a flow chart and narrative explaining its software program as a whole. The Court of Appeals held that the district court did not consider whether the software could collectively constitute a trade secret. Thus, the Court of Appeals remanded the matter to the district court with instructions to determine whether: (1) Decision Insights adequately identified its software compilation as a trade secret; and, if so, (2) whether Decision Insights had established a triable issue of fact as to the existence of a trade secret.

Based on the Court of Appeals’ finding that the district court did not properly consider whether the software program as a total compilation constituted a trade secret, it also reversed the dismissal of Decision Insights’ claims for breach of contract against the former employees. The trial court had concluded that Decision Insights presented no evidence that the former employees had breached their non-disclosure of confidential information agreements. Once the Court of Appeals found that the trial court had not considered Decision Insights’ trade secret claim in totality, it also concluded that the district court did not properly consider whether the former employees breached their agreements.

The Court of Appeals similarly found that the district court erred in concluding that a non-compete provision in one of the former employees’ employment agreements was unenforceable. The district court found that Decision Insights did not show a legitimate business interest supporting the provision. The Court of Appeals reversed, stating that the district court’s conclusion on the non-compete provision was tainted by its failure to properly address Decision Insights’ trade secret claim.

New York Federal Court Rejects Attempt to Recast State-Law Trade Secrets and Unfair Competition Claims as Federal Antitrust Claims

jsiegel@seyfarth.com (Janet Siegel) — Thu, 09 Apr 2009 08:57:02 -0600

Emigra Group, LLC v. Fragomen, Del Rey, Bernsen & Loewy LLP, et al., No. 07 Civ. 10688 (LAK) (S.D.N.Y. Mar. 31, 2009).

In a decision that should be considerable reassurance to employers in general and law firms in particular, a district judge in New York has rejected an antitrust claim brought by a consulting firm against its former employer, an attorney who returned to his former law firm.

Emigra, an immigration consulting firm, sued its former vice president of operations, Ryan Freel, and the law firm that was his prior and subsequent employer after Freel resigned from Emigra and returned to practicing law at Fragomen, Del Rey, Bernsen & Loewy, an international immigration law firm headquartered in New York. Emigra alleged that Freel took confidential and trade secret information that he had obtained while employed by Emigra, including strategies, customer lists, pricing information, and profit and loss data; disclosed this information to Fragomen; and used it to contact Emigra’s customers on Fragomen’s behalf.

However, the court noted that while Emigra filed “the usual state law claims for misappropriation of trade secrets, unfair competition, and the like,…it did not seek a preliminary injunction.” Instead, Emigra asserted a number of antitrust claims and, the court noted, there is reason to believe that it did so in order to “gain access through pretrial discovery to precisely the sort of competitively sensitive information about Fragomen’s business that Emigra claims Freel improperly disclosed to Fragomen about Emigra’s business.”

In a lengthy 63-page opinion, the district judge granted the defendants’ summary judgment motion. Among other findings, the court concluded that Emigra had offered no evidence of price control, exclusion of competition, or monopoly power in violation of the antitrust laws, and that “a contrary conclusion would turn many disputes over the hiring by one competitor of an employee of another, the stuff of everyday commercial tort claims, into monopolization or attempted monopolization cases.” The court further noted that Emigra cannot avoid summary judgment through “gamesmanship” by withholding its own evidence while insisting that its competitor reveal its competitively sensitive information. For these and other reasons, the court dismissed the federal antitrust claims on the merits with prejudice, and declined to exercise supplemental jurisdiction over the remaining state-law trade secret and unfair competition claims. The decision serves as a warning to litigants who might consider pursuing questionable antitrust claims in federal court as a means for obtaining discovery that would not otherwise be available to them in a state court proceeding.

The Debate Regarding Non-Compete Provisions Heats Up in Massachusetts

ebirg@seyfarth.com (Erika Birg) — Wed, 08 Apr 2009 17:01:01 -0600

The Massachusetts House of Representatives has before it two competing bills relating to non-competition clauses to consider this Spring. Representative Lori Erlich has sponsored House Bill No. 1799, which sets forth the standards by which a non-compete provision could be measured for enforceability. The proposed statute includes (i) a ban on non-competes all together for any employee earning less than $100,000 in compensation, (ii) a mandate that any non-competition agreement entered into after employment must be based on consideration other than continued employment (presumably cash, although it is unclear), and (iii) the requirement that the employer must give the employee at least two weeks' notice of the agreement before it can become effective.

In addition, and this is perhaps the most rigorous demand -- a non-compete agreement may be enforceable only if the the employer pays to the employee "for the full restricted period and without offset for any income the employee may receive from other noncompetitive activities, a minimum of the greater of: (1) compensation equal to fifty percent of the employee's annual gross base salary and commissions at the time of the employee's termination or (2) $100,000." The proposed statute does not affect employee or customer non-solicitation agreements and expressly excludes the rights of companies to act to protect trade secrets and confidential information from misappropriation by way of an injunction.

The other statute, House Bill No. 1794 submitted by Representative Will Brownsberger, proposes to ban non-compete and non-solicitation agreements in their entirety. This bill reportedly is gaining support by those who believe that Massachusetts high-tech corridor has not been competitive with California's Silicon Valley because Massachusetts allows non-compete provisions and California does not.

Although both statutes apply only prospectively by their terms, if either is passed, they clearly would affect all future contracts with employees governed by Massachusetts' law.

Mobile Diagnostic Group Holdings v. Suer: Negotiating A Non-Competition Contract Does Not Subject A Non-Resident to Jurisdiction

jjarvis@seyfarth.com (Jason Jarvis) — Mon, 06 Apr 2009 09:40:34 -0600

In just a matter of weeks, we have a second case (see Consulting Engineers Corp. v. Geometric, Ltd.) in which plaintiffs sought to use a choice of law clause as a forum selection clause. In this case as well, the plaintiffs were unsuccessful.

A Delaware Court of Chancery recently held that it lacked jurisdiction over a non-resident against whom enforcement of a non-competition agreement was sought. See Mobile Diagnostic Group Holdings v. Suer, __ A.2d __, Case No. 4298, 2009 WL 763405 (Del. Ch. Mar. 24, 2009).

The Plaintiffs were a series of related entities largely organized in the State of Delaware. The Defendant, Robert Suer, was a sales professional and a resident of the State of California. Plaintiffs claimed that Suer had negotiated and executed a non-competition provision with the Plaintiffs as part of the Purchase Agreement concerning Plaintiffs’ acquisition of the company for which Suer worked, and they sought to enforce its provisions against him in Delaware Chancery Court. In turn, Suer moved to dismiss the complaint for lack of personal jurisdiction, pointing out that he had never resided in or even been to Delaware and had undertaken no acts or negotiations in Delaware.

The Chancery Court considered two arguments by the Plaintiffs for why Suer was subject to jurisdiction in Delaware. First, the Plaintiffs argued that he had consented to jurisdiction because, in the Purchase Agreement, the parties had agreed that Delaware law controlled service of process. The Chancery Court rejected that argument, noting that such a clause only indicates the choice of law for evaluating service, it does not establish jurisdiction. Furthermore, another clause in the Purchase Agreement concerning equitable remedies contemplated jurisdiction “in any court of the United States or any state thereof,” but did not demand it in any particular location.

Second, the Chancery Court considered Plaintiffs’ argument that Suer’s negotiations had opened him up to specific jurisdiction because their claim arose out of a “specific jurisdictional act.” The Chancery Court rejected this argument as well because the mere execution of a contract with a Delaware entity does not subject a party to jurisdiction in Delaware, and Suer had done no more than that. In this regard, the Chancery Court considered the case of General Motors (Hughes) Shareholder Litigation, Case No. 20269, 2005 WL 1098021 (Del Ch. May 4, 2005), where specific jurisdiction premised on a complex, negotiated agreement ultimately did result in jurisdiction, but it concluded that too many distinctions existed to apply it as Plaintiffs had requested. Most critically, unlike in General Motors, Suer did not participate in the selection of Delaware as a forum, even though Plaintiffs had created Delaware entities to consummate the Purchase Agreement.

This decision demonstrates again the need for companies entering into restrictive covenants either to bring actions in a forum in which there is no doubt as to jurisdiction or to ensure the proper forum selection and jurisdictional waiver clauses exist in the agreements themselves.

UNHEALTHY COMPETITION - Daily Journal

rmilligan@seyfarth.com (Robert Milligan) — Fri, 03 Apr 2009 12:21:23 -0600

April 02, 2009
Daily Journal Reprinted and/or posted with the permission of Daily Journal Corp. (2009).

By Robert Milligan and Nicholas Waddles

The California Supreme Court's decision in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), reaffirmed that employee non-competition agreements are void in California unless they fall within narrow exceptions to Business and Professions Code Section 16600.

Notwithstanding the Edwards decision, it may be possible for employers to enforce non-competition forfeiture provisions in California by including them in retirement plans subject to the Employee Retirement Income Security Act of 1974. ERISA is a federal statute that governs most employee benefit plans (except those provided by government entities and churches), including retirement plans. ERISA plans are protected by a well-formed pre-emption doctrine that applies to most state laws except those regulating insurance, banking or securities matters.

In a series of cases dating back as early as 1980, the 9th Circuit has examined the inclusion of non-competition forfeiture provisions in ERISA plans and has determined that such clauses are permissible under ERISA, with some limitation, and state law is pre-empted on this issue.

It is important to point out that a non-competition forfeiture provision in an ERISA plan cannot apply to any amount an employee voluntarily contributes to a plan because such amounts are always automatically 100 percent vested and not otherwise subject to forfeiture. Similarly, a forfeiture provision added to an ERISA plan could not apply to benefits earned prior to the adoption of the amendment.

Also, ERISA's vesting rules generally establish a maximum time period over which employer contributions to a plan must vest. At the time most of the relevant 9th Circuit cases were decided, ERISA permitted employers to choose between one of two vesting schedules for employer contributions. One schedule was a 10-year "cliff vesting" schedule whereby an employee was zero percent vested until he or she worked for the employer for 10 years, at which time the employee became 100 percent vested. The other schedule provided for a graduated vesting schedule that allowed an employee to vest in incremental percentages (usually 10-20 percent) over time, but not to exceed 15 years.

These vesting rules have been amended a number of times over the years, and currently, employer contributions to profit-sharing and 401(k) plans must vest under either a three-year cliff vesting schedule or a six-year graduated schedule at the rate of 20 percent, beginning with the second year of service.

Accordingly, including a forfeiture provision in a profit-sharing or 401(k) plan may not be as effective as it was when the relevant cases were decided. Now, however, it may be more effective to include non-competition forfeiture provisions in top-hat or other executive compensation plans (which are generally ERISA plans that are exempt from the vesting rules). And there are others commentators who have suggested adding forfeiture provisions to ERISA-covered severance plans as another way of achieving this goal. No 9th Circuit cases have examined whether a forfeiture provision could be included in a top-hat or ERISA-covered severance plan but the arguments in favor of ERISA pre-emption should be the same as in the relevant cases. Instructively, the 2nd Circuit has held that state law was pre-empted by ERISA in the context of a top-hat plan containing a non-competition forfeiture clause and found that the forfeiture provision was valid. One of the earliest cases to examine the inclusion of a non-competition forfeiture provision was the pre-ERISA case of Muggill v. The Reuben H. Donnelley Corporation, 62 Cal. 2d 239 (1965). In Muggill, the California Supreme Court analyzed the validity of a provision in a pension plan that provided that an employee's right to receive payments from the plan would be terminated if he went to work for a competitor. The court held that the pension plan became part of the employment contract and, therefore, the forfeiture provision was invalid under Section 16600 - "[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

ERISA was enacted in 1974 and, thereafter, the 9th Circuit's first occasion to analyze a non-competition forfeiture provision in an ERISA plan was in Hummell v. S.E. Rykoff & Co., 634 F.2d 446 (9th Cir. 1980). In Hummell, the court examined a plan provision that provided for the forfeiture of a percentage of the competing former employee's retirement benefits derived from employer contributions. The plan stated that the forfeiture provision only applied to former employees with less than 15 years of experience with the company who competed with the company (those with more than 15 years were fully vested, regardless of competitive activity).

In examining an issue of first impression, the court held that ERISA does not prohibit limited non-competition provisions that apply to amounts in excess of the minimum vesting requirements in ERISA. Ultimately, the court held that the forfeiture provision in the plan was invalid as to the plaintiff because he had more than the minimum years of service required to be 100 percent vested under that plan. Thus, the forfeiture provision was valid but it could not be applied by the company.

In Lojek v. Thomas, 716 F.2d 675 (9th Cir. 1983), the court examined a non-competition forfeiture provision contained in an ERISA-governed profit sharing plan sponsored by a law firm. The provision called for the forfeiture of all employer contributions made on behalf of an attorney who left the firm before completing 10 years of employment and engaged in competitive employment within two years of leaving within a five-county area.

The trial court granted partial summary judgment on a number of issues including that ERISA pre-empts Idaho state law on vesting and forfeiture of pension plan rights and non-competition forfeiture clauses are valid under ERISA. Lojek appealed arguing, inter alia, that Idaho common law on non-competition clauses should control and invalidated the provision. The court disagreed and held that the district court properly decided that ERISA pre-empted Idaho law and federal law governed the validity of the plan.

The plan at issue contained a vesting schedule more liberal than required by ERISA. It allowed attorneys to fully vest after completing five years of employment (the cliff vesting provision under ERISA at the time was 10 years). If an attorney worked for at least 10 years, the non-competition provision did not apply. As a result, the court held that the vesting schedule was valid.

Similarly, in Clark v. Lauren Young Tire Center Profit Sharing Trust, 816 F. 2nd 480 (9th Cir. 1987), the plaintiff argued that a forfeiture clause in an ERISA plan violated Oregon law and the plaintiff urged to the court to incorporate that law and invalidate the provision. In rejecting the plaintiff's argument, the court held that the reasoning in Lojek applied and that state law played "no part in assessing the validity of [a non-competition forfeiture provision] in an ERISA plan."

The court in Clark further held that non-competition forfeiture clauses in ERISA plans are valid so long as the plan provides that benefits earned after 10 years of service cannot be forfeited. Because ERISA's vesting requirements have been reduced, it is likely that a court reviewing facts similar to Clark today would require that the plan provide that benefits earned after three years of service cannot be forfeited (assuming the court followed the ERISA preemption authority).

Finally, in Weinfurther v. Source Services Corporation Employees Profit Sharing Plan and Trust, 759 F.Supp. 599 (N.D. Cal. 1991), the court reiterated that non-competition forfeiture clauses in the Ninth Circuit are valid (citing Lojek and Clark with approval).

Accordingly, based on the 9th Circuit authorities discussed above, employers have a plausible argument that non-competition forfeiture provisions included in ERISA plans should be analyzed under ERISA and are not subject to Business and Professions Code Section 16600. Employers should considering including ERISA plan provisions providing that an employee forfeits employer contributions exceeding ERISA's minimum vesting rules if the employee violates a non-competition provision included in the plan. The non-competition forfeiture provisions should be limited in scope and duration to the extent necessary to protect legitimate business interests.

Additionally, employers may consider trying to extend the ERISA approach to top-hat plans and ERISA severance plans (with structured payouts over time).

These approaches are not without risk and counsel should be consulted before including any non-competition forfeiture provisions as there is always a possibility that notwithstanding ERISA preemption that a court may find that it does not apply based on the strong public policy of Section 16600.

###

Georgia State Senate Approves Non-Compete Legislation

ebirg@seyfarth.com (Erika Birg) — Wed, 01 Apr 2009 14:36:46 -0600

On April 1, 2009, the Georgia Senate passed HB 173 on restrictive covenants. The vote tally was 45 in favor and 2 opposed. The legislation will now await Governor Sonny Perdue's signature.

While Illinois Senate Considers Dramatic Alterations to Illinois Trade Secrets Act, Illinois House of Representatives Seeks to Enact Non-Competition Statute

shumphrey@seyfarth.com (Scott Humphrey) — Tue, 31 Mar 2009 16:37:21 -0600

As discussed in our March 9^th and 17^th postings, Illinois Senate Bill SB 2149 seeks to dramatically alter the landscape of trade secret enforcement and litigation in Illinois by, among other things, (a) requiring disclosure of trade secrets before a party issues written or oral discovery; (b) awarding attorneys’ fees to the prevailing party in a trade secrets case; and (c) mandating that a court enter an attorneys’ fees award against any party that subsequently amends its initial trade secret disclosure. Apparently not to be outdone, the Illinois House of Representatives is considering whether to enact a statute that would dramatically limit an employer’s ability to enforce non-competition agreements, and change the way restrictive covenant cases are handled in Illinois.

Currently, non-competition/restrictive covenant enforcement is governed by Illinois case, as opposed to statutory, law. Illinois case law does not limit the type or category of employee who can be subject to a restrictive covenant. Instead, the court examines the covenant to determine if the covenant is reasonably written (i.e. reasonable in both temporal and geographic scope) to protect a “legitimate business interest.” A “legitimate business interest” exists if the employer demonstrates (1) near-permanent customer relationships that the employee would not know about but for his employment or (2) that the employee acquired trade secrets or other confidential information during his employment and subsequently tried to use the trade secrets for his own benefit. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 226 Ill. Dec. 331, 340, 685 N.E. 2d 434, 443 (2^nd Dist. 1997).

In contrast, House Bill HB 4040 limits non-compete enforcement to employees or independent contractors who:

• have substantial involvement in the executive management of the employer’s business;

• have direct and substantial contact with the employer’s customers;

• possess knowledge of the employer’s trade secrets and/or proprietary information;

• possess such unique skills that they have achieved “a high degree of public or industry notoriety, fame, or reputation as a representative of the employer,” or

• are among the highest paid 5% of the employer’s work force for the year immediately preceding the separation.

HB 4040 also changes Illinois law so that an employer loses the right to enforce a non-competition covenant if the employer fails to notify the new employee two weeks prior to the first day of his employment that a covenant not to compete is required, or if the covenant is not accompanied by a “material” advancement, promotion, bonus or compensation increase. In addition, HB 4040 alters the court’s ability to determine whether a non-competition covenant is reasonable in temporal and geographic scope (an analysis that is done on a case-by-case basis) by creating a rebuttable presumption that a non-competition covenant is invalid if:

• the covenant exceeds one year;

• the geographic restrictions in the covenant cover areas beyond which the former employee provided services “during the one year preceding his termination;”

• the covenant concerns personal services activities that the employee did not perform during the “one year preceding termination of the employment.”

One of the few similarities between HB 4040 and Illinois case law is that HB 4040 does allow the court to modify a non-competition covenant to “make the covenant reasonable under the circumstances.” However, HB 4040 goes on to state that, if a court chooses to modify the covenant, then the court cannot impose a damages award for the employee’s original breach of the covenant. Instead, the court can award damages only for conduct that occurs after the modification. Finally, HB 4040 instructs a court to interpret any attorneys’ fees provision found in a non-competition covenant as allowing either the employer or the employee to recover their attorneys’ fees; and further empowers the court to award attorneys’ fees to the employee if, through a declaratory judgment action brought by the employee, the court declares the non-competition covenant unenforceable.

We will continue to monitor HB 4040’s progress through the Illinois House of Representatives.

License to Steal?

ebirg@seyfarth.com (Erika Birg) — Tue, 31 Mar 2009 13:02:41 -0600

By Michael Levinson

Following up on our recent post about Faiveley Transport Malmo AB v. Wabtec Corporation, No. 08-5126 (2d Cir. March 9, 2009), the Second Circuit's reversal of the preliminary injunction in that case effectively granted a compulsory license to Wabtec, the likely trade secret misappropriator. The evidence showed that Wabtec was using the Faiveley air brake secrets to sell its own air brakes. The court reasoned that there was no evidence that Wabtec had or was threatening to disseminate Faiveley’s secrets any further. Indeed, Wabtec itself gained a competitive advantage by not further disclosing the secrets. The “only possible injury that [the] plaintiff may suffer is loss of sales to a competing product . . . [which] should be fully compensable by money damages.” As a result, according to the Second Circuit, Faiveley did not face irreparable injury sufficient to justify equitable relief.

Based on this analysis, the Second Circuit’s decision could be seen as a license to steal. It means that a trade secret misappropriator who “only” uses a purloined secret for its own benefit may not be enjoined. It would be as if a soft drink company could steal the formula for Coke, without fear of being enjoined, so long as it “merely” used the formula itself to compete with Coke and thus Coke could obtain money damages. This flies in the face of the well-accepted presumptions that trade secrets are unique and that their loss might not be able to be measured in money damages. This result could also empower misappropriators to steal their competitor’s secrets, confident that they can compel a license and that the worst that might happen if they get caught is that they would have to disgorge some amount of profits.