Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

In a 2-1 decision, the Illinois Appellate Court, Third District, affirmed summary judgment awarded to an ex-employee in an action brought by the ex-employer to enforce an employment agreement restrictive covenant. Brown & Brown, Inc. v. Mudron, No. 3-06-0908 (Ill. App., 3d Dist., Mar. 11, 2008). The agreement provided that it was to be construed in accordance with Florida law where the ex-employer is incorporated. Even though Section 542.335(g) of the Florida statutes provides expressly that “a court: (1) Shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought,” the court ruled that Illinois law was applicable (based on Section 187 of the Restatement (Second) of Conflict of Laws), that the Florida statute “is contrary to Illinois’s fundamental public policy,” and that Illinois law requires consideration of the hardship a restrictive covenant imposes on the ex-employee.

The court also held that the covenant was unenforceable because it was supported by inadequate consideration. The ex-employee resigned approximately seven months after signing the employment agreement. Noting that “Illinois courts depart from the traditional rule that the law does not inquire into the adequacy of consideration, only its existence,” the court held that “[s]uch a short period of time of continued employment is not sufficient consideration under Illinois law to support the restrictive covenant.”

The dissenting justice was aghast at the ruling regarding inadequacy of consideration. In the case cited by the majority as support for that ruling, the court had emphasized the peculiar facts present there: the covenant was signed by the employee in exchange for a promised promotion which was given and then almost immediately retracted, whereupon the employee quit. There is a “[b]ig difference,” the dissenting justice observed, between an employee like the one in the cited case who resigns “because the consideration failed,” and the Mudron majority’s holding “that the consideration failed because [the ex-employee] quit.” He added that the majority’s decision “renders all restrictive employment covenants illusory in this state. They would all be voidable at the whim of the employee.” Further, Mudron was a breach of contract lawsuit, whereas the cited case was an action for an injunction in which the court had “observed that even a peppercorn of consideration is sufficient to support a finding of adequate consideration when one seeks damages at law while more should be required when one seeks equitable relief.”

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In Navair v. IFR Americas, the Tenth Circuit reversed the district court’s grant of summary judgment to defendants, holding that an extension of time to a distribution agreement should be for a reasonable time even if no specific term is agreed upon by the parties.

Plaintiff Navair, Inc. was the exclusive Canadian distributor for IFR, a military communications equipment manufacturer. Under a long-running series of distribution agreements, when Navair would find a buyer for IFR equipment, IFR would agree to sell the equipment to Navair at a discount, and Navair could then resell the equipment for a profit. In other words, Navair would enter into a purchase and sale agreement with a customer on reliance of a below-fair market value price from IFR and sell the equipment at fair market value to its own customer. But after almost 30 years of this relationship, IFR told Navair that it would not renew their relationship, based in part on allegations that Navair was in violation of its noncompetition clause. Rather than immediately terminating their distribution agreement, however, the parties entered into two open-ended extensions.

Navair and the Canadian Government entered into a purchase and sale contract for IFR equipment a few months after termination of the Navair—IFR agreement. It was unclear if this contract occurred within the extension period, but the district court concluded that it did not. The Tenth Circuit disagreed. Because the parties had agreed to an extension, it reasoned, even though they had not set a specific time for the extension to end, the extension would be in effect for “a reasonable time.”

This case bears noting for two reasons. First, violations of a non-compete, particularly in a business-to-business context, can have other ramifications than simply an injunction or potential damages. Second, companies should be sure that the terms of their agreements are clear and that all essential terms of the contract (including expiration) is clearly conveyed to the opposing party. From the tenor of the Court’s language in remanding the case, it sounds like IFR will learn an expensive lesson.

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Stanley Steemer licensed AAA Abachman to operate a carpet and upholstery cleaning business under the Stanley Steemer name. The franchise agreement gave Abachman “the sole right to use Stanley Steemer’s ‘trademarks, service marks, patents, and trade secrets’ in its carpet and upholstery cleaning business within its assigned territory.”

After Abachman had secured this right, however, Stanley Steemer licensed a second company to operate a “duct cleaning” business in an overlapping geographic area. Abachman complained to Stanley Steemer that this second license violated its exclusive rights in the area, and, after being rebuffed, sought a declaratory judgment that this was so. The parties’ cross summary judgment motions resulted in judgment for the defendant, Stanley Steemer, on the basis that the franchise agreement granted exclusive rights only as to “carpet” and “upholstery” cleaning, not “duct” cleaning. Abachman appealed to the 11th Circuit.

The central issue in the appeal was whether the contract between Abachman and Stanley Steemer afforded Abachman an exclusive right in Stanley Steemer’s mark generally, or only as to carpet and upholstery. The relevant portion of the agreement gave “Abachman the exclusive and perpetual rights ‘to own and operate a Stanley Steemer carpet and upholstery cleaning business (hereinafter referred to as a ‘Stanley Steemer Business’) in the ... ‘Franchisee’s Area’[ ] and to use the trademarks, services marks, patents, [and] trade secrets ... solely in a Stanley Steemer Business in that area and in no other manner.’”

The per curiam decision affirmed the district court, holding that this language provided an exclusive right to the Stanley Steemer mark only as to “carpet and upholstery.” Relying on the language “and in no other manner,” the Court held that this unambiguous language foreclosed any broader understanding of the contract, even a subsequent term requiring payment by Abachman to Stanley Steemer for “any additional sale resulting from or associated with the name Stanley Steemer.”

Although there was a weak, facial argument that the broad language “trademarks, services marks, patents and trade secrets” is broader than only “carpet and upholstery cleaning” if done under the Stanley Steemer name, it seems clear that the Court concluded from the contract language quoted in its opinion that such use is constrained to “Stanley Steemer Business,” a term defined as “a Stanley Steemer carpet and upholstery cleaning business.”

Although neither a trendsetting case nor a departure from black letter law, this case is a good reminder that clearly written, descriptive contract language is (still) critical and definitive in disputes. Here, Stanley Steemer did a good job of providing both the breadth necessary for Abachman to run a successful franchise and at the same time limiting that franchise strictly so as to enter into a separate agreement with another entity.

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On February 29, 2008, Allen Cotten pleaded guilty in U.S. District Court in Sacramento to stealing microwave technologies from his former employer, Genesis Microwave, Inc., and selling or offering them for sale to foreign governments and military contractors. In a scheme that lasted two years, Cotten downloaded confidential information from Genesis computers, including plans, designs, and specifications for microwave technologies that, according to the U.S. Attorney’s Office, have military applications such as “enhancing navigation and guidance capabilities, radar jamming, electronic countermeasures, and the ability to locate and pinpoint enemy signals during warfare.” Cotten also stole mechanical parts and hardware made with the confidential plans belonging to Genesis, and both sold and offered to sell those components to foreign governments and military contractors. At his sentencing hearing in May, Cotten faces up to ten years’ imprisonment and a fine of $250,000.

Cotton’s illegal activities were uncovered by the Export Enforcement Task Force comprised of various federal agencies, including the Department of Justice, FBI, Immigration and Customs Enforcement, Department of Commerce, Department of Defense, and the armed services. The task force was created to detect, investigate, and prosecute cases involving the theft or export of sensitive technology.

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In almost every trade secret/restrictive covenant dispute, a company whose trade secret information has been stolen must confront the possibility that its customers will be dragged into the dispute. One company decided to take the bull by the horns pre-litigation and sent a letter to all of its customers notifying them of a misappropriation by one of its former employees and “suggesting” that, to avoid potential involvement in any ensuing litigation “as a material witness, or otherwise,” the customers should not do business with the former employee.

Unsurprisingly, the former employee sued his former employer for defamation. The former employer brought a motion to strike the defamation complaint under California’s anti-SLAPP statute, which authorizes a court to dispose of lawsuits that are brought to chill “the valid exercise of constitutional rights,” such as the right of free speech. The trial court’s decision to grant the former employer’s anti-SLAPP motion and strike the defamation complaint was upheld yesterday by the Court of Appeal . See Neville v. Chudacoff, __ Cal.Rptr.3d __, 2008 WL 650658 (Cal.App. 2d. Dist. March 12, 2008).

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In a February 29, 2008 Order, the Northern District of California entered a preliminary injunction against four defendants on behalf of Verigy US, Inc. Verigy demonstrated in discovery that Romi Omar Mayder, the principal of Silicon Test Systems, Inc., e-mailed a number of sensitive documents to a business partner, Robert Pochowski. The documents concerned technology for testing flash memory cards.

In granting the preliminary injunction, the district court rejected a number of arguments put forward by Defendants. Defendants first argued that a difference of opinion between Verigy witnesses regarding the application of Verigy’s confidentiality policy, but the court found that the existence of such a policy, along with non-disclosure agreements, was sufficient for Verigy to show reasonable efforts to maintain the secrecy of its information.

Defendants further argued that the items alleged by Verigy to be trade secrets were publicly known elements. However, the court concluded that Verigy demonstrated that the combination of those elements was not publicly known and was therefore entitled to protection as a trade secret.

Finally, Defendants argued that the product they ultimately developed did not utilize Verigy’s trade secrets because Defendants made significant changes to the final product. The court rejected this argument, holding that Defendants’ use of Verigy’s items gave Defendants a head start in ultimately developing their final product, even if the final product varied from the Verigy plans. Additionally, the court relied upon Defendants’ misappropriation of Verigy information regarding the requirements of other vendors in concluding that Defendants’ actions gave them an unwarranted competitive advantage.

The court was also forced to grapple with the question of the duration of the injunction restricting Defendants marketing or selling their product. To answer this question, the court had to determine how much of a temporal head start Defendants obtained by misappropriating Verigy’s trade secrets. The court determined that Mayder took eight months at Verigy working on the project in question, but then elected to shorten the injunction period to five months because: (1) some of the technology used on the project was publicly available; and (2) Defendants’ final product ultimately went in a different direction than the product sold by Verigy.

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