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

This morning (September 24, 2008), Rep. Kevin Levitas and Sen. Judson Hill from the Georgia Legislature convened the first meeting of a legislative study committee reviewing the law of Georgia with respect to restrictive covenants in employment and business relationships. The House Committee is chaired by Representative Kevin Levitas, and includes the following members: Representative Tim Bearden; Representative Butch Parrish; Representative Richard Smith; Representative Brian Thomas; and Representative Al Williams. As Representative Levitas previously remarked,

“It is time that the legislature studied this issue in depth and provided clear guidance to the courts regarding the sustainability of these private agreements between private contracting parties and how to make them fair to all parties. . . .

 “It is imperative that we carefully examine all aspects of this important issue so that both employer and employee can know their rights and duties after employment has ended.

“Both parties need to know with certainty what they can and cannot do, and that is why legislation in this area is so important. In addition to providing certainty to the parties, clarifying the law will have a significant impact on Georgia’s economy and the ability of the state to attract businesses to this state and to keep them here.”

Levitas noted th[at] he expects that the committee will hear from a diversity of witnesses with differing viewpoints on the subject. Levitas said that he intends for the committee “to bring together all necessary points of view and to gather all of the facts so that we can, once and for all, clearly define and bring certainty to this important area of the law.”

Erika Birg, a partner with Seyfarth Shaw’s Trade Secrets, Non-Competes, and Computer Fraud team, led off the morning’s testimony, highlighting the background of restrictive covenant law in Georgia. A lively question-and-answer session followed between the committee members and Ms. Birg. The committee’s questions, although varied in substance, primarily involved how a court or a legislature would determine whether a covenant is “reasonable,” as well as how the legislature might craft legislation (and a constitutional amendment if needed) that would address the concerns of both Georgia employers and their valued employees. 

J. Henry Walker IV, a partner with the litigation group of Kilpatrick Stockton and former in-house litigation counsel for BellSouth, spoke, representing the Georgia Chamber of Commerce. Mr. Walker noted the Chamber’s support for the committee’s work directed towards re-vamping Georgia’s law to provide certainty for both employers and employees. Mr. Walker also discussed BellSouth v. Forsee, 265 Ga. App. 589 (2004), a case in which BellSouth lost the ability to enforce a non-compete for a high-level executive because of Georgia court’s prohibition on enforcing a non-compete that is not certain at the time of execution of the agreement. He highlighted that certainty in the law benefited all concerned – employers and employees alike. 

The committee then heard from R. Samuel Snider, Vice President and Lead Acquisition Counsel for LexisNexis, a subsidiary of Reed Elsevier, regarding the effect of Georgia’s admittedly confusing law on the company’s decision to relocate to Georgia following its acquisition of ChoicePoint. Mr. Snider focused on the needs of technology companies to protect both intangible intellectual property but also protect the companies’ investments in highly compensated and sought-after personnel. He noted that in such instances, restrictive covenants may be part of a negotiated employment arrangement.

The study committee is set to meet again this fall, before the Legislature reconvenes in January. As the date and time are set, we will post the information here.

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Nixon Peabody v. Taylor Wessing France, 2008 NY Slip Op. 51885(U) (Sup. Ct. Monroe Cty. Sept. 16, 2008).

A trial court in upstate Monroe County, New York earlier this month granted summary judgment for law firm Nixon Peabody LLP (“Nixon”), which sought a declaratory judgment and injunctive relief as a result of alleged tortious interference with prospective business relations by French law firm Taylor Wessing France (“Taylor Wessing”). 

On July 31, 2007, in anticipation of entering into merger discussions, the two firms had executed a Mutual Non-Disclosure Agreement (the “Agreement”) containing a non-solicitation provision stating that neither firm would “employ or offer partnership directly or indirectly” to any partners or attorneys of the other firm for a period of two years from the date of the agreement. The merger negotiations eventually broke down in October 2007. However, Taylor Wessing’s founding partner subsequently joined Nixon and brought with him a dozen of Taylor Wessing’s non-equity partners. 

When Taylor Wessing sought to enforce the Agreement’s non-solicitation provision, Nixon filed this action, seeking a declaration that the Agreement was unenforceable and requesting injunctive relief preventing Taylor Wessing from interfering with its former partners’ right to join Nixon. Taylor Wessing brought suit against Nixon in New York County Supreme Court (subsequently consolidated with the Monroe County action and transferred to Monroe County) asserting claims for breach of the Agreement, aiding and abetting a breach of fiduciary duty, and tortious interference with contractual relations.

In a detailed decision that could have significant consequences for law firms engaged in merger or acquisition talks, the Monroe County trial court held that the Agreement was unenforceable as violative of New York State public policy. Citing to a 1989 New York case that “codified” ethics opinions by the ABA and the New York County Lawyers Association, the court noted that it is unethical for an attorney to include a restrictive covenant in an employment contract with another attorney. However, the court went on to observe that the policy “embraced” by this rule is not limited solely to employment agreements, and that this authority has been “woven into the fabric of New York case law.” The court concluded that the rationale behind the rule — protecting lawyers’ autonomy and the ability of clients to freely chose their counsel — applies to the Agreement in this case which, as the court characterized it, contained “an out-right prohibition[n] on the practice of law,” to which the affected non-equity partners had not agreed and of which they had no knowledge.  The court also granted summary judgment in favor of Nixon on Taylor Wessing’s fiduciary duty and tortious interference claims. The slip opinion can be viewed here . 

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The Sixth Circuit Court of Appeals recently held that whether a trade secret is a protectable interest is an equitable question not affected by the lack of a written instrument. Niemi v. NHK Spring Company, --- F.3d ---, 2008 WL 4273123 (6th Cir. Sept. 19, 2008).

Richard Niemi is an individual engineer who provides various automobile company manufacturers with designs related to stabilizer bars for automobiles. In the early 1990s, Niemi had an idea for a new method of stabilizer-bar manufacturing, which interested his long term client, New Mather Metals (a subsidiary of Defendant NHK Spring Co.) Although the purchase order through which New Mather ordered the manufacturing tooling, which Niemi claimed to be a “trade secret,” included the clause that “no other or different terms or conditions shall apply to this order unless specifically agreed to in writing. . .”, Niemi claimed that he had assurances that his new method would be kept “confidential.” In order to protect itself from Niemi’s selling his designs to its competitors, New Mather requested that Niemi enter into a “exclusivity agreement,” which Niemi described as “reciprocal” despite any language in the instrument to that effect. “No further writing was needed, in Niemi’s estimation, because New Mather’s obligation represented a continuation of an arrangement that had been in place for 25 or 30 years . . . .” 

Niemi learned a few years later that New Mather had disclosed his stabilizer manufacturing trade secret to other designers, and he brought an action against New Mather and its parent companies for misappropriation of trade secrets, as well as for other claims. The district court ultimately granted summary judgment to Defendants on the trade secrets claim, finding that Niemi had not taken sufficient steps to keep his designs secret. 

In reviewing Niemi’s appeal of judgment against his trade secrets claim, the Sixth Circuit considered Ohio’s adopted Uniform Trade Secrets Act, particularly focusing on the factor requiring “reasonable” efforts to maintain secrecy. Ultimately, it concluded that there were direct, disputed material facts sufficient to warrant reversal of the district court.

The decision is most significant, however, for the reasoning underlying its rejection of one of Defendants’ arguments; namely, that Niemi’s “oral reciprocal exclusivity agreement” was barred by the statute of frauds. In rejecting that argument, the court quoted Ohio law in noting that “protection afforded by trade secret laws is not a function of property interests or contract rights, but of ‘equitable principles of good faith applicable to confidential relationships.’” In other words, whether there is a contract or property interest in the trade secrets is “irrelevant” because trade secret protection derives from equity.

The progenitor of the principle quoted by the Sixth Circuit was Justice Oliver Wendell Holmes’ opinion in Masland, where he observed that, in “explaining the nature of a trade secret . . . trade secret laws are not those of property but the equitable principles of good faith applicable to confidential relationships.” Valco Cincinnati v. N & D Machining Service, Inc., 492 N.E.2d 814, 817 (Ohio 1986) (citing E.I. Du pont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917) (Holmes, J.)). 

In any event, although the fundamental character of a trade secret may be one of confidence protected by equity, there is some dispute among the states regarding whether a trade secret is a property right. Compare Envirotech Corp. v. Callahan, 872 P.2d 487, 494 (Utah App. 1994) (trade secret is a property right) with ConFold Pacific, Inc. v. Polaris Industries, Inc., 433 F.3d 952, 959 (7th Cir. 2006) (holding that, under Wisconsin law, a trade secret is not a property right but instead an interest protectable by contract).

The Sixth Circuit is correct that the lack of a written instrument does not itself negate a claim under the Uniform Trade Secrets Act. Certainly, if the existence of a written agreement – such as the “oral” mutual exclusivity and confidentiality agreement present in Niemi – would tend to increase the likelihood of a protectable trade secret, then its absence should mitigate against it.  But the Sixth Circuit seemed to go a step further in concluding that because a trade secret’s nature is one of equity, the lack of a contractual or property claim renders wholly “irrelevant” the lack of a written instrument. 

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 Following is a Press Release from the Georgia House of Representatives.

Speaker Richardson Appoints Representative Kevin Levitas to Chair House Study Committee on Restrictive Covenants in the Commercial Arena

ATLANTA –Speaker of the House Glenn Richardson (R-Hiram) has appointed Representative Kevin Levitas (D-Atlanta) to chair the House Study Committee on Restrictive Covenants in the Commercial Arena.

“I am confident that Representative Levitas will be an asset to this study committee. He is an extremely diligent worker, and I know he will work well with the other Representatives appointed to this committee,” Richardson said.

House Resolution 1879 established the House Study Committee on Restrictive Covenants in the Commercial Arena to examine the proper functioning of restrictive covenants in today’s marketplace and to fulfill the legislature’s role in defining public policy in this area.  

A restrictive covenant is an agreement between an employer and an employee (or an independent contractor) that limits the ability of a former employee to unfairly compete against the employer after termination of employment. 

In the absence of clear direction from the General Assembly, Georgia courts have issued conflicting decisions and voided many of these agreements in their entirety, often on the basis of a strict reading of a technical defect in one part of an agreement. 

Levitas said, “It is time that the legislature studied this issue in depth and provided clear guidance to the courts regarding the sustainability of these private agreements between private contracting parties and how to make them fair to all parties.” Levitas said that the study committee will examine court precedent and hear testimony from witnesses regarding the effect of the current state of the law.

“I am honored that Speaker Richardson has appointed me to chair this study committee,” noted Levitas. “The history and treatment of restrictive covenants in Georgia have never been fully studied before by the General Assembly. It is imperative that we carefully examine all aspects of this important issue so that both employer and employee can know their rights and duties after employment has ended.”

Levitas remarked, “Both parties need to know with certainty what they can and cannot do, and that is why legislation in this area is so important. In addition to providing certainty to the parties, clarifying the law will have a significant impact on Georgia’s economy and the ability of the state to attract businesses to this state and to keep them here.”

Levitas noted the he expects that the committee will hear from a diversity of witnesses with differing viewpoints on the subject. Levitas said that he intends for the committee “to bring together all necessary points of view and to gather all of the facts so that we can, once and for all, clearly define and bring certainty to this important area of the law.”

The committee will hold its first meeting at 9:00 a.m. on Wednesday, September 24, in Room 132 of the State Capitol. The other members of the committee are: Representative Tim Bearden (R-Villa Rica), Representative Butch Parrish (R-Swainsboro), Representative Richard Smith (R-Columbus), Representative Brian Thomas (D-Lilburn) and Representative Al Williams (D-Midway).

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In this breach of employment contract and misappropriation of trade secrets case, plaintiff moved to compel production of e-mails from defendant’s personal Yahoo! account. 

Plaintiff contended that Defendant used this specific e-mail account to engage in the activities upon which this entire lawsuit is based. Defendant claimed that he could not produce these e-mails, because they had been destroyed by Yahoo!. However, the defendant offered only a copy of a generic response from Yahoo! about deactivating accounts.  The court declined to accept defendant’s explanation that production was "impossible," particularly given the important evidentiary value of the e-mails and the "feeble offering" by defendant in support of the contention. Indeed, the Court indicated that it "will not accept Defendant's position that [defendant] cannot produce these emails until assurance is given from an executive at Yahoo! responsible for such tasks that this request is indeed impossible."

In addition, the court held that defendant's representation that he was being "completely truthful" when he did not identify the account, because he knew it would be impossible to ultimately produce these e-mails, to be sanctionable: "It will figure largely into the sanctions ultimately awarded in this matter if it is learned that Defendant's failure to identify this account earlier is the cause of the alleged impossibility."  The court stated the particular sanctions awarded would depend on the outcome of defendant's efforts to obtain the documents, and what was revealed by these efforts as to defendant's actions, if any, that resulted in spoilation of evidence or other more serious discovery violations.

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On August 6, 2008, New York Governor David A. Paterson signed Bill S02393, dubbed the “Broadcast Employees Freedom to Work Act” into law. The act, amends the New York Labor Law so as to prohibit non-compete agreements in the broadcasting industry.  The enactment is effective immediately, and is codified as section 202-k of the Labor Law

Specifically, the newly minted Section 202-k provides that a “broadcasting industry employer shall not require as a condition of employment, whether in an employment contract or otherwise,” that a broadcast employee or prospective broadcast employee, after the conclusion of employment, refrain from obtaining subsequent employment “(a) in any specified geographic area, (b) for a specific period of time, or (c) with any particular employer or in any particular industry.” The act further declares as unenforceable any contractual provisions that would waive these prohibitions.

Within Section 202-k definition of “broadcasting industry employer” are companies operating television, radio, cable stations, networks, and/or internet or satellite-based services “similar to a broadcast station or network,” any broadcast entities “affiliated” with such entities, and “any other entity that provides broadcasting services such as news, weather, traffic, sports, or entertainment reports or programming.”  Likewise, a “broadcast employee” is defined as any on- or off-air employee of a broadcasting industry employer, “excluding management employees.”

The act provides that broadcast employees, as defined, can seek civil damages, including attorney’s fees and costs, as against a broadcasting industry employer violating Section 202-k.

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