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Trading Secrets

A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Beware of the Delaware Choice of Law in Non-Compete Agreements

Posted in Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants

shutterstock_6242524By Justin K. Beyer and Matthew I. Hafter

Delaware has long been one of the jurisdictions most friendly to the interests of corporations and is the state of incorporation for a significant majority of corporations. While that trend does not seem likely to change, a new Delaware Chancery Court decision should give pause to choice of law decisions of Delaware corporations with multi-jurisdictional work forces and operations in states other than Delaware.

Recent Ascension Case

In Ascension Ins. Holdings, LLC v. Underwood, C.A. No. 9897-VCG, 2015 Del. Ch. LEXIS 19 (Del Ch. Jan. 28, 2015) (unpublished), the Delaware Court of Chancery recently ruled that, despite a Delaware choice-of-law and venue provision contained in a non-compete agreement, California law applied to the agreement and under California law the agreement was void as a matter of law. In this case, the plaintiff (Ascension) sought an injunction against a former employee (Underwood) for violating a non-compete provision in an employment agreement entered into around the same time Ascension purchased Underwood’s business under an asset purchase agreement.

When Underwood terminated his employment relationship with Ascension, the five-year non-competition period under the asset purchase agreement lapsed. However, the separate non-compete provision of Underwood’s employment agreement provided a two-year tail at the end of the employment, which Ascension argued was specifically contemplated during the negotiations when acquiring Underwood’s business.

Ascension was incorporated in Delaware, but headquartered in California which is also where Underwood worked. In the employment agreement, parties selected Delaware law to govern. Delaware law generally enforces employee non-competition agreements if reasonable in scope and duration and if they advance a legitimate economic interest of the employer. California, in contrast, has a specific statute that renders a covenant not to compete unenforceable against an employee unless made in connection with his or her sale of substantially all of the assets and goodwill of a business non-competition agreements (Cal. Bus. & Prof. Code Sections 16600, 16601).

Choice of Law Analysis

The Chancery Court conducted a choice-of-law analysis to determine whether Delaware or California law would apply. The court found that the parties’ relationship was centered in California, the various contracts were negotiated and entered into there, and the territory in which the defendant employee would be restricted was located there. The court acknowledged that “[u]pholding freedom of contract is a fundamental policy of [Delaware]” but rejected the plaintiff employer’s argument that Delaware’s interest in that policy trumped California’s interest in not burdening its citizens with non-competition covenants. The Delaware court acknowledged that under the applicable California statute the non-compete in the asset purchase agreement would be enforceable to protect the acquired goodwill, but reasoned that the covenant in the employment agreement was directed to a different employer interest; concluding that the restriction in the employment agreement would be prohibited under California law. It held that “allowing parties to circumvent state policy-based contractual prohibitions through the promiscuous use of [choice-of-law] provisions would eliminate the right of the default state to have control over enforceability of contracts concerning its citizens.” On this basis, the Chancery Court denied the employer’s motion for preliminary injunction.

Practical Considerations

For Delaware corporations with employees in many states, this case presents a conundrum:

  • While there is clearly a value to having a single state law govern its relationship with employees in many states, and Delaware law is comparatively employer-friendly with respect to restrictive covenants, there is a risk that the law of each employee’s home state will control unless the corporation has a meaningful connection to Delaware.
  • Similarly, a Delaware corporation headquartered in a state with laws on restrictive covenants that are in the middle of the spectrum (enforceable but narrowly construed or with high proof thresholds) might opt for Delaware law because it is more favorable. But in that situation the employer should evaluate the risk that in reaching for the more friendly laws of Delaware it may lose the benefit of even the modestly friendly provisions of its home state and become subject to laws of each employee’s state which may render non-competition restrictions completely unenforceable or in other respects may be less favorable that those of the employer’s home state.
  • In mergers and acquisitions and similar transactions involving the sale of a business, acquirers commonly require restrictive covenants in both the sale agreement and in separate employment agreements. Acquirers should balance the risk that a court in any particular state may reject the choice-of-law provision that selects Delaware compared with the law of the state in which the acquirer has meaningful contacts.

Geographically Overbroad Non-Competes Held To Be Unenforceable

Posted in Non-Compete Enforceability, Practice & Procedure

shutterstock_230088844In unrelated decisions, two federal courts recently refused to enforce non-compete covenants in employment agreements that lack reasonable geographic limits.

Status of the cases. In one of the two lawsuits, the employment agreement included a Tennessee choice of law provision. Louisiana courts are more protective of employees than courts in Tennessee. Since the parties had contacts with both states, naturally the ex-employee contended that Louisiana law applied and the former employer disagreed. A Louisiana district court judge sided with the ex-employee, held that the non-compete violated Louisiana law, and granted summary judgment to the ex-employee. Bell v. L.P. Brown Co., Civ. Ac. No. 14-2772 (W.D. La., Feb. 2, 2015).

In the other case, an Arkansas district court judge ruled that the non-compete provision in the parties’ employment agreement violated Arkansas law. The former employer sued to enforce the non-compete, but the Eighth Circuit Court of Appeals affirmed the district court’s order dismissing the lawsuit. NanoMech, Inc. v. Suresh, No. 13-3671 (8th Cir. Feb. 6, 2015).

The covenants. Both companies’ covenants purported to be applicable during the employment period and for two years after termination. The temporal limits were not significant issues in either case.

  1. L.P. Brown Co.’s covenant. It prohibited, “within any U.S. cotton market,” (a) competing, directly or indirectly with the company (which was in the cotton and fiber industry), or (b) “becom[ing] employed by or perform[ing] services in any capacity for” any of its competitors.
  2. NanoMech’s covenant. This corporation “researches and develops nanotechnologies.” Its non-compete contained the employee’s commitment not to “be employed by, or consult in any business which competes with” NanoMech.

L.P. Brown Co.’s choice of law provision. Brown Co.’s principal place of business is in Memphis. Bell, a salesman, lives in Louisiana. He delivered the signed employment agreement to Brown Co. in Memphis, attended several sales meetings there, and picked up his company car and computer in Tennessee. His company-issued cell phone was shipped to him from Memphis. However, he worked out of his home, and his business cards showed his Louisiana address. He was Brown Co.’s only employee in Louisiana. His territory included parts of Louisiana, Tennessee, and two other states.

The court observed that Tennessee “generally upholds what it deems to be reasonable non-competition agreements, viewing [them] as promoting stable business and employment relationships.” By contrast, “Louisiana has long had a strong public policy in protecting its employees from restrictions on the common law right to work.” Analogizing to a Louisiana judicial ruling relating to a contractual forum selection clause in an employment agreement, the court in Brown Co. held that Tennessee law would apply to Bell only if, after the event giving rise to the litigation, he “expressly, knowingly, and voluntarily agreed to and ratified” the choice of law provision.

Contemporaneous with his delivery to Brown Co. of his resignation, Bell asked the company twice to release him from the non-compete (the company refused both requests). In addition, he executed an acknowledgement confirming that he had been reminded of the non-compete. The court held, however, that these acts failed to meet the Louisiana standard for application of Tennessee law because the parties did not discuss explicitly, and Bell did not unequivocally consent to, the choice of law provision.

Nano-Mech’s covenant. The Court of Appeals noted that under Arkansas law, which admittedly applied to the covenant, restraints in employment agreements are enforced only if they are “reasonably necessary to secure the interest of the” protected party and are “not so broad as to be injurious to the public interest.” NanoMech insisted that Suresh had had extensive access to the company’s trade secrets, that it competes with nanotechnology companies around the world, and that there was a risk she would disclose the confidential information if she worked for a NanoMech competitor. The appellate tribunal concluded, however, that an Arkansas court would not enforce a non-compete that contained neither a geographic nor a customer-specific restriction.

Takeaways. These opinions illustrate the importance of drafting employment agreement restrictive covenants that will be enforceable under whatever law is applicable. There is considerable variation among different states’ views regarding such provisions. So, a company with operations in a number of jurisdictions should tailor the wording to fit the locale. As these cases demonstrate, “one-size-fits-all” covenants may not be enforceable in every state where litigation concerning them might be filed. Seyfarth Shaw can provide state-by-state guidance regarding the language to use in employment agreements to maximize the likelihood that non-compete, non-solicitation and confidentiality provisions will be enforced.

Opposition Emerges to EU Trade Secrets Directive

Posted in Data Theft, International, Trade Secrets

shutterstock_102405310By any measure, the past few weeks have been eventful in Europe.  Given the number of challenges facing European lawmakers — from continued hostilities in Ukraine, to last-minute negotiations over Greek debt, to anti-terrorism measures — it’s unlikely that trade secrets protection is at the top of anyone’s agenda in Brussels or Strasbourg.  Still — as we have previously reported here — the European Commission’s proposed directive to protect trade secrets remains an important item on the European Parliament’s agenda for this year.  As we have argued, the proposed directive (if enacted) will substantially alter the legal landscape in Europe regarding trade secret protection and may enhance cross-border certainty within the EU by requiring all member states to provide certain minimum standards of protection for trade secrets.

Despite widespread support for the proposed directive, opposition to the proposal has now emerged.  Recently, the European Public Health Alliance (“EPHA”), a coalition of public health NGOs, patient groups, health professionals, and disease groups, voiced its opposition to the directive.  In a joint statement opposing the directive, EPHA argues that the current version of the proposed directive contains:

  • “An unreasonably broad definition of ’trade secrets’ that enables almost anything within a company to be deemed as such”;
  • “Overly-broad protection for companies, that could sue anyone who ‘unlawfully acquires, uses or discloses’ their so-called ‘trade secrets’”; and
  • “Inadequate safeguards that will not ensure that EU consumers, journalists, whistleblowers, researchers and workers have reliable access to important data that is in the public interest.”

The EPHA joint statement further argues that, under the proposed directive, (1) companies in the health, environment and food safety fields could refuse compliance with transparency policies even when the public interest is at stake; (2) the right to freedom of expression and information could be seriously harmed; and (3) the mobility of EU workers could be undermined.  Based on these concerns, the EPHA joint statement concludes that “this unbalanced piece of legislation would result in legal uncertainty” and that “unless radically amended by the Council and European Parliament, the proposed directive could endanger freedom of expression and information, corporate accountability, information sharing—possibly even innovation—in the EU.”  Accordingly, the EPHA urges the EU Council and the European Parliament to radically amend the directive by “limiting the definition of what constitutes a trade secret and strengthening safeguards and exceptions to ensure that data in the public interest cannot be protected as trade secrets.”

As we have previously noted in this blog, many features of the proposed directive, including its definition of “trade secrets,” are similar to provisions in the Uniform Trade Secrets Act, which the majority of U.S. jurisdictions have adopted.   Interestingly, in its joint statement, the EPHA observes that the text of the proposed directive “is strongly supported by multinational companies” and notes that industry coalitions in the EU and US have been lobbying for similar proposed trade secrets legislation in the U.S. Congress (which we have previously discussed in this blog).  Although the U.S. Congress did not enact neither of the trade secrets bills introduced last year, trade secrets protection also remains an important item on the agenda in Congress — though, as with the proposed EU directive, the proposed U.S. trade secrets legislation also has its opposition.

It is not yet clear how much support, or opposition, the proposed EU trade secrets directive has in the European Parliament.  We will continue to monitor progress of both the proposed EU directive and proposed legislation in the U.S. and will report on developments in this blog as they occur.

Non-Solicitation Covenant That Is Silent As To Its Scope May Be Unenforceable

Posted in Practice & Procedure, Restrictive Covenants

An employment agreement covenant prohibiting solicitation of co-employees, but not indicating what solicitations were prohibited, has been held to be invalid.

Status of the case.  A multi-count complaint filed in the D.C. District Court charged two former employees of the plaintiff with breaches of contract and tort violations.  The defendants moved to dismiss.   The court held that some of the eight counts stated causes of action, but one count the court did dismiss alleged that the defendants violated their covenant not to solicit the plaintiff’s employees.  The court held that the covenant was too vague to be enforceable because it did not specifically identify the solicitations that were impermissible.  Base One Technologies, Inc. v. Ali, Civ. Ac. No. 14-1520 (D.D.C., Jan. 20, 2015).

Base One’s business model.  Base One was in the business of recruiting and staffing telecommunications and financial information management personnel for clients.  The personnel that were recruited became employees of Base One.  Each was assigned to work at a particular Base One client according to the client’s needs and the employee’s skill set. 

Non-competition and non-solicitation covenant.  The two defendants were hired by Base One to work on an extensive computer-related project for a specific Base One client.  They both signed Base One’s employment agreements.  Those agreements stated that employees are likely to be “the principal intermediary and personal contact” between Base One and the client.  Further, recognizing that Base One’s employees frequently gain extensive knowledge of the client’s business and develop loyalties with the client, the agreements note that clients “might desire to place their IT business directly with” the employees — after the employees’ relationship with Base One has ended — rather than with Base One.  Accordingly, the agreements mandate that during and for one year after termination of the Base One employment relationship, employees shall not “market any [competitive] type services” to a Base One client the employee was serving, and shall not “solicit, contact, represent, or offer to represent” other Base One employees.

Alleged violation and lawsuit.  When the two defendants left the employ of Base One, they immediately went to work for the Base One client they had been serving.  Base One filed a complaint which included what the court described as “a veritable cornucopia of claims.”  Two counts alleged breach of contract.  One averred that the defendants violated the non-solicitation covenant by soliciting each other to work for the Base One competitor (the second breach of contract count alleged contravention of the non-compete provision).  The defendants’ motion to dismiss the former count was granted. 

The court’s reasons for dismissing the count regarding prohibited solicitation.  In the court’s view, the wording of the covenant “is so vague and ambiguous as to render it unenforceable.  . . . Although the Court can perhaps guess that [Base One] meant to prohibit solicitation or contact for the purpose of employment elsewhere, the provision does not so specify.”  Noting that the employment agreement contained a New York choice of law provision, and “Particularly in light of New York’s general hostility toward restrictive covenants in the context of employment, the Court will not redraft a poorly written, overbroad restraint in order to make it enforceable.”

Takeaways.  A motion to dismiss, or for summary judgment with respect to, allegations based on a “vague and ambiguous” contract provision might be denied on the ground that the parties’ intent regarding the meaning of the provision is an issue of fact to be resolved at trial.  See, e.g., Whelan Security Co. v. Kennebrew, 379 S.W.3d 835, 846 (Mo. Sup. Court 2012) (summary judgment inappropriate because “the lack of any language regarding the purpose of the employee non-solicitation clause prevents this Court from determining the purpose of the clause as a matter of law.  The intent of the parties must instead be determined by the use of parol evidence, creating a factual issue for the trier of fact”).  But the Base One court went a different route, granting the defendants’ Rule 12(b)(6) motion to dismiss the claim relating to a non-solicitation agreement which contained the identical ambiguity as in Whelan.  The moral of the story is that two courts sometimes issue diametrically opposite rulings when presented with the same question of law.

 

Upcoming Webinar: Protecting Confidential Information and Client Relationships in the Financial Services Industry

Posted in Restrictive Covenants, Trade Secrets

On Tuesday, March 10th at 12:00 p.m. central, in the second installment of our 2015 Trade Secret Webinars, Seyfarth attorneys Scott Humphrey, Jason Stiehl and James Yu will focus on trade secret and client relationship considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.  Topics will include:

  • Practical steps financial institutions can implement to protect trade secrets and client relationships.
  • What should you do if your trade secrets are improperly removed or disclosed, or if your former employee is violating his/her agreements.
  • How do you prosecute a case against a former employee who is a FINRA member.
  • The impact of the Protocol for Broker Recruiting on trade secrets and client relationships.

Our panel consists of attorneys with experience advising clients on restrictive covenant and trade secret issues.

 

 

 

There is no cost to attend this program, however, registration is required

If you have any questions, please contact events@seyfarth.com.

*CLE: CLE Credit for this webinar has been awarded in the following states: CA, IL and NY. CLE Credit is pending for the following states: GA, NJ, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

How Far Does the “Internet of Things” Reach?

Posted in Cybersecurity, Privacy, Social Media

With the FTC’s 2015 report “Internet of Things: Privacy & Security in a Connected World” (“Report”) the idea that more than just computers and phones are able to connect to the Internet. In fact, the Report states that the “IoT explosion is already around us.” This is true, and the Report goes on to describe some of the more interesting things that can be connected to the Internet which most of us don’t think about (e.g. smart health trackers, smoke detectors, and light bulbs). However, how vast is the actual IoT? And what does that mean to businesses?

As security professionals will tell you, if it has an IP address, it is a potential access point to your network. As such, it is a potential place where a hacker can find a way into your network and then “elevate permissions” into more sensitive parts of a network. This seemed to the be way that several recent large hacks occurred. Thus, the internet of things represents a potential security hole if one doesn’t consider all the different devices which can be hacked.

So – what is out there which has the ability to acquire an IP address (and thus is a hacking risk)?

These we know about:

  • Desktop Computers
  • Laptops
  • Tablets
  • Smartphones

But what about:

  • Copy machines
  • Printers
  • Fax machines
  • VoIP enabled Phones
  • Televisions
  • Bluetooth headsets
  • cash registers (Point-of-Sale terminals generally)
  • Handheld barcode readers
  • Smart thermostats
  • Keycard readers (for doors)
  • Security cameras
  • Light bulbs
  • Environmental control panels
  • Lab equipment
  • Medical diagnostic equipment
  • Warehouse inventory scanners
  • The fridge in the break room
  • Personal fitness monitors
  • Wristwatches (iWatch)
  • Armbands 
  • Glasses

And maybe even…

Shirts and other clothes.

As each one of these neat bits of technology start to take hold companies which allow them into the physical range to connect with the corporate network will need to have a strategy to manage the security risks inherent in all of them.

It’s not going to get any easier…

Seyfarth Shaw is Pleased to Announce the Publication of the Trading Secrets 2014 Year in Review!

Posted in Computer Fraud and Abuse Act, Non-Compete Enforceability, Trade Secrets

The 2014 Year in Review is a compilation of our significant blog posts from throughout last year and is categorized by specific topics such as: Trade Secrets Legislation; Trade Secrets; Computer Fraud and Abuse Act; Non-Compete & Restrictive Covenants; Legislation; International; and Social Media and Privacy. As demonstrated by specific blog entries, including our Top 10 Developments/Headlines and Trade Secrets, Computer Fraud, and Non-Competes Webinar Series – Year in Review, our blog authors stay on top of the latest developments in this area of law and provide timely and entertaining posts on significant new cases, legal developments, and legislation.

The 2014 Review also includes links to the recordings of all webinars in the 2014 Trade Secrets Webinar Series and all video blogs. We are kicking off the 2015 webinar series with a program entitled, “2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secret, Non-Compete, and Computer Fraud Law.” More information on our upcoming 2015 webinars is available in the program listing contained in this Review. Our highly successful blog and webinar series further demonstrate that Seyfarth Shaw’s national Trade Secret, Computer Fraud & Non-Competes Practice Group is one of the country’s preeminent groups dedicated to trade secrets, restrictive covenants, computer fraud, and unfair competition matters and is recognized as a Legal 500 leading firm.

Click on the picture to the right to download your copy today.

Clients and friends of the firm can request a CD or printed copy of the 2014 Review by clicking here.

Appellate Court Re-Affirms Key Aspects of Georgia Non-Compete Law

Posted in Practice & Procedure, Restrictive Covenants, Trade Secrets

A recent decision by the Georgia Court of Appeals, Holland Ins. Group, LLC v. Senior Life Ins. Co., 766 S.E.2d 187 (Nov. 20, 2014), includes several excellent reminders regarding the enforceability (and unenforceability) of restrictive covenants in Georgia.

Relevant Facts and Holding

William Holland and Senior Life Insurance Company entered into an agreement (“Agreement”) authorizing Holland to sell Senior Life’s insurance products as an independent agent.  Senior Life subsequently terminated the Agreement and notified Holland that it had “suspended” payment of commissions to Holland pending an investigation into whether Holland had violated restrictive covenants contained in the Agreement.  Holland then filed a complaint against Senior Life seeking injunctive relief and a declaratory judgment that the Agreement’s restrictive covenants were overbroad and thus, unenforceable.  Holland also filed a motion for judgment on the pleadings, which sought a declaratory judgment that: “(1) the non-solicitation and confidentiality provisions of the [Agreement] are unenforceable as a matter of law; and (2) the liquidated damages of the [Agreement] are void[.]”  The trial court denied Holland’s motion, and Holland appealed.

Although the Court of Appeals found no error in the trial court’s denial of Holland’s motion for judgment on the pleadings as to the Agreement’s non-solicitation and confidentiality provisions, it did reverse the trial court’s decision that the Agreement’s liquidated damages provision was valid.  The Court’s analysis on both of these issues is worth examining.

First, Holland contended that Section 5.5 of the Agreement, entitled “Confidentiality,” was overly broad.  The provision provides, in relevant part, that “[u]ntil this Agreement terminates and at all times thereafter, you will hold in the strictest confidence and not use in any manner detrimental to us, or disclose, publish, or divulge, directly or indirectly, to any individual or entity any Confidential and Proprietary Information[.]”  Section 5.5 defines “Confidential Proprietary Information” as:

certain confidential and proprietary information relating to our business, including, but not limited to, certain lists of or data relating to our Customers and Prospective Customers … and certain other information relating to our services, marketing techniques, business methods or finances, which information is generally not known to the public…. [Senior Life] take[s] all reasonable steps necessary to ensure that each and every component of the Confidential and Proprietary Information constitutes a “Trade Secret.”

Holland contended that the “Confidential and Proprietary Information” defined in Section 5.5 did not constitute a trade secret and, thus, the confidentiality covenant was void because it did not contain a time limit.  While Georgia law does not require a time limit to safeguard trade secrets, it is well established that a “nondisclosure clause with no time limit is unenforceable as to information that is not a trade secret.”  (Citation omitted.)  Allen v. Hub Cap Heaven, Inc., 225 Ga. App. 533, 539, 484 S.E.2d 259 (1997).

Ultimately, the Court of Appeals determined that it could not conclude as a matter of law that the “Confidential and Proprietary Information” defined in Section 5.5 of the Agreement was not a trade secret.  Instead, the Court believed that additional facts beyond those set forth in the relevant pleadings was needed to determine whether the information defined as Senior Life’s “Confidential and Proprietary Information” is a legitimate trade secret or merely confidential information relating to its business.  As a result, the Court found no error in the trial court’s denial of Holland’s motion for judgment on the pleadings as to this provision.

Second, Holland contended that Section 5.7 of the Agreement, entitled “General Remedies and Damages,” was unenforceable because the section included an overbroad non-compete clause.  Section 5.7 provides a “formula” for determining liquidated damages as well as other damages that could be imposed if it is found that Holland violated “the terms of this Agreement[.]”  That section also includes the following non-compete clause:

[n]otwithstanding our proprietary interest in our Customers and Prospective Customers, we recognize that upon termination of this Agreement, certain of our Customers may choose to sever their respective relationship with us in favor of you or any person engaging you after the termination of this Agreement, without any direct or indirect solicitation by you in violation of the terms of this Agreement. As such, … you hereby agree that, with respect to any Customer of ours who completely or partially severs his/her relationship with us in favor of you … you shall pay us an amount equal to 100% of the commissions you earned (whether accrued or actually received) from us with respect to the Severing Customer during the twenty-four (24) month period immediately preceding the termination of this Agreement.

(Emphasis supplied.)

The Court noted that, generally speaking, a restrictive covenant in Georgia “may not validly preclude the employee from accepting unsolicited business from customers of his former employer.” Vulcan Steel Structures, Inc. v. McCarty, 329 Ga. App. 220, 764 S.E.2d 458 (2014).  While an employer may properly protect itself from the risk that a former employee “might appropriate its customers by taking unfair advantage of client contacts developed while working for that employer,” the employer “cannot prevent [the employee] from merely accepting overtures from those customers.”  (Citation and punctuation omitted.)  Id.  Accordingly, the Court held that “because the plain language of Section 5.7 penalizes Holland from accepting the unsolicited business from Senior Life’s former clients, regardless of who initiated the contact, it is unreasonable and unenforceable.”

Takeaways

Holland Ins. Group reinforces several important aspects of Georgia restrictive covenant law that one should take into account when including these types of restrictions in employment agreements:

  1. Do not use the phrase “confidential information” interchangeably with “trade secrets.”  “Confidential information” and “trade secrets” are very separate and distinct legal terms.  If you do not fully appreciate the legal differences, it will likely result in severe enforceability issues.
  2. Utilizing a liquidated damage provision can be a very beneficial way to streamline litigation, but only if it is properly applied.  Tacking on a liquidated damages provision to a non-solicitation provision without first understanding Georgia non-solicitation law (and the interchange between the two) is never advisable.

If you have any questions about whether your restrictive covenant agreements comply with Georgia law, contact a Seyfarth Shaw trade secrets lawyer.

Appellate Court Holds That Non-Compete Agreement Assigned Pursuant to Bankruptcy Court Order is Enforceable by Assignee

Posted in Non-Compete Enforceability, Practice & Procedure, Trade Secrets

Courts are divided on the enforceability by an assignee of a non-compete covenant relating to personal services where the covenant does not state whether it is assignable and the employee does not consent to the assignment.

Status of the case.  A non-compete agreement signed by an employee of TSG, Inc., purported to be effective for two years after his termination and to be applicable to the whole of North America.  Subsequently, TSG, Inc. was adjudicated a bankrupt.  The trustee in bankruptcy assigned the agreement to TSG Finishing, a solvent, wholly-owned operating subsidiary of TSG, Inc., and the employee went to work for the subsidiary.  He had the same job title, and performed essentially the same tasks, as before.  Two years later, he resigned and accepted a similar position with a competitor.  The subsidiary sued him and moved for entry of a preliminary injunction.  The motion was denied, but the appellate tribunal reversed, remanded, and directed the trial court to enter the injunction.  TSG Finishing, LLC v. Bollinger, Case No. COA140623 (N.C. Court of Appeals, Dec. 31, 2014).

The assignor, the assignee, and the employee.  TSG, Inc. and its wholly-owned, operating subsidiary TSG Finishing, were in the business of “fabric finishing,” applying chemical coatings to textiles in order to provide customers with, for example, the desired color, stiffness, and abrasion resistance.  The fabric finishing process was complex and involved trade secrets. 

Bollinger was a long-time employee of TSG, Inc.  He signed the covenants in 2007 in exchange for a salary increase and a signing bonus.  

In 2009, TSG, Inc. filed a Ch. 11 bankruptcy petition.  Two years later, the bankruptcy trustee assigned a number of TSG, Inc.’s assets, including the covenants, to TSG Finishing which became Bollinger’s employer.  His title with each company was Quality Control Manager, and his duties were substantially the same.  TSG Finishing was headquartered in Pennsylvania.  He worked at a plant in North Carolina.  In 2013, he quit TSG Finishing and was employed by a nearby competitor and was given a similar job assignment.   

The non-compete.  The covenant was silent with regard to assignability.  It included a Pennsylvania choice-of-law provision.

Courts are split regarding the enforceability of personal service non-compete covenants assigned without the employee’s consent,  courts cite the following factors:

1. A covenant assigned simply by operation of law — for example, where the assignor corporation merely changed its state of incorporation or just converted to an LLC — usually is enforced.  See, e.g., Ochsner v. Relco Unisystems Corp., Case No. A13-2399 (Minn. Court of Appeals, Oct. 6, 2014), p. 6.

2. The employee may be deemed to have given implied consent if the covenant states that it is binding on the parties’ “successors and assigns.”  If the covenant contains no such words, but the employment agreement of which it is a part contains that language, judicial rulings are not uniform.

3. Courts are divided as to whether enforceability is impacted by the form of the assignment, for example, (a) a transfer to the assignee of all of the assignor’s assets, as opposed to (b) all of the assignor’s stock.  In either event, enforcement may be less likely if the assignor was not an operating business on the date of the transfer.  See, e.g., Cronimet Holdings, Inc., v. Keywell Metals, LLC, Case No. 14 C 3503 (N.D.Ill., Nov. 7, 2014) (slip opin. at 11-12).

4. If the assignee and the assignor are virtually identical, and particularly if they are closely affiliated, courts seem less hesitant to enforce assigned covenants.  The same is true if the employee’s job title, duties and responsibilities are no different after the assignment, especially if the employee received valuable consideration for signing.

5. Judges tend to be sympathetic to employees who may be unable to earn a living if the covenant is enforced.  However, judges also sympathize with assignees whose good will, confidential information, and investment would be at substantial risk in the absence of enforcement. 

The rulings here. 

The trial court concluded that the assignee was unlikely to succeed on the merits.  Among the primary factors which seem to have led to this result were the absence of a covenant provision permitting assignment, the enormous breadth of the covenant’s geographic scope, and the court’s view that a leading Pennsylvania case, Hess v. Gebhard & Co.,  808 A.2d 912, 922 (Pa. 2002) — which involved a sale of the assignor’s assets and held that the assignee could not enforce the covenant — was analogous. 

On review, the opposite result seems to have been reached primarily because of the extensive amount of time, effort, and expense the assignee (and the assignor) incurred in developing and protecting the trade secrets which were critical to the assignee’s business.  In the absence of enforcement, the competitor would be able to use that confidential information without making a similar investment.  In addition, the appellate judges deemed the Hess case to be distinguishable.  Also, the covenant did not have a provision prohibiting assignment, the assignor demonstrated that there were jobs the employee could perform even if the covenant was enforced, and substantial consideration was given for the covenant at signing. 

Takeaways.  There can be no certainty regarding the enforceability of a personal services non-compete assigned without the employee’s permission.  But consent may be inferred by, for example, a “successors and assigns” clause or if the nature of the employment immediately after the assignment is little different from what it was before.  If prejudice to the assignee resulting from not enforcing the covenant greatly outweighs the harm to the employee if it is, enforcement is likely.

Privacy & Security Are Back on the Agenda in DC

Posted in Cybersecurity, Legislation, Privacy

Cross Posted from Global Privacy Watch

The plethora of security incidents in the news have once again put security front and center of the international agenda. Predictably, this has triggered a number of responses from governments around the world. Some of these responses seem to have been ill-considered. However, one of the more comprehensive responses came out of the US President’s address to the Federal Trade Commission last week. A series of laws were proposed to address the increasing risks which are confronting individual security and privacy rights.

The President’s remarks at the FTC gives some valuable insight into where the US regulatory environment may end up in the next year or so. As a part of this analysis, one should focus on two very different agendas: Privacy and Security. These issues, while similar, are very different. Case in point, the UK PM’s comment around banning encryption could well result in increased security. However, it will absolutely damage individual privacy (and arguably also damage commercial security).

Security Breach Notification

President Obama has proposed a national standard for security breach notification. This is not the first time this proposal has been placed on the legislative agenda. While this is a step in the right direction, as is always the case, the devil is in the details.

One of the most challenging issues to deal with regarding a security breach is “what data” is impacted, and “does it matter”? In essence, the definition of “personal information” and the “harm” v. “access” triggers are the primary headache for those dealing with whether or not they have to provide notice. Elsewhere in the world, “personal information” is very broadly defined. Historically, the limiting definition of “personal information” was supposed to avoid over-notification. As has been pointed out, this does not seem to have worked.

Practically, it would be more useful to standardize the notice trigger around the concept of “harm”. This would operate to make the definition of “personal information” far less important. In effect, if there is a reasonable likelihood of harming someone with the information breached, a notice would be required. This “harm” concept is a well-established principle of tort law, and one that most lawyers are quite capable of dealing with when given the necessary facts. Removal of a variable always makes a solution more efficient, and the use of a results-driven variable such as “harm” should help avoid any unintended consequences which result in an imprecise definition of “personal information”. Let’s hope the Administration moves in this direction.

Another component which is concerning is the timing requirement around breach notification. While there have been instances of companies being slow to notify impacted consumers, notice is only going to be useful when you actually know what data was compromised, what was the source of the compromise, and who was responsible for the compromise. While a company may know it was breached, it may take well over 30 days to determine the scope and reasons for the breach. Without a clear understanding of the scope and reasons for a breach, an arbitrary 30-day notice requirement may lead to additional notice-fatigue. If this legislation is to be actually useful, there will need to be a considered discussion as to when the 30 day clock starts ticking; as well as when that clock can be stopped. Almost all the State breach statutes have a tolling period for law enforcement investigations. Hopefully, any national standard will at least have the same limitation.

Consumer Privacy Bill of Rights

Several years ago, the Obama administration presented a Consumer’s Privacy Bill of Rights as part of the US endorsement of the APEC Cross Border Privacy Rules System. There are 7 high-level principles contained in the Privacy Bill of Rights. These are: Transparency, Respect for Context, Individual Control, Focused (read: limited) Collection, Accuracy, Security and Accountability. As is usually the case, the high-level principles sound fine at first blush. However, the way they are implemented may have serious unintended consequences. For example, anti-fraud, development of new services, and IP protection are all activities which may become more challenging if the Individual Control principle does not include appropriate limitations. Additionally, some espouse a baseline set of obligations, regardless of individual choice, should be in place. Others point out that individuals often don’t have the time or expertise to exercise control in a meaningful way. Consequently, an over-broad reliance on Individual Choice may actually reduce the privacy protections of individuals.

Remedies

Along with the Privacy Bill of Rights, careful consideration will need to be taken around remedies. Some proposals for law have included private rights of action for violations of privacy. The current trend is to rely on the FTC or State Attorney’s General to enforce privacy rights. Regardless of one’s position on this issue, it is going to be a significant policy driver, with significant impacts to innovation and business growth. Policy makers and legislators will need input from their constituencies to avoid unintended negative consequences growth.

In anyone’s analysis, Privacy and Information Security are going to be hot topics on the agenda for the foreseeable future.