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

Wade Roush reports on xconomy.com  that a Massachusetts legislator is reintroducing legislation in Massachusetts with the intent to ban non-compete agreements.    According to Roush's article,

The bill Huang and Brownsberger are writing would outlaw non-compete agreements in new employment contracts in Massachusetts. It wouldn’t pertain to mergers, acquisitions, or other situations where competition becomes an issue, and it wouldn’t be retroactive. And it would do nothing to change the law regarding the other trade-secrets protections companies employ, such as non-disclosure agreements.

The article indicates that there may be hearings in the Spring.

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Massachusetts Rule of Professional Conduct 5.6 prohibits non-competition agreements for attorneys, and provides in part: “A lawyer shall not participate in offering or making . . . a partnership or employment agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement. . . .” The Massachusetts Supreme Judicial Court recently held that a law partnership agreement imposing financial consequences on all partners voluntarily withdrawing from the partnership, whether they compete with their prior firm or not, does not violate this rule.

In the case of Pierce & others v. Morrison Mahoney, LLP, the Supreme Judicial Court evaluated claims of former Morrison Mahoney partners that their partnership agreement’s amended separation clause violated Rule 5.6 because it provided that partners voluntarily leaving the partnership forfeited certain financial benefits if they departed before having served for 20 years as a partner or after having attained the age of sixty. Originally, the clause had restricted the financial benefits to partners who did not compete with the firm, but the Supreme Judicial Court held in a prior case concerning the same law firm that such a non-competitive restriction was against the public policy in favor of allowing clients to retain an attorney of their choosing and thus violated Rule 5.6. The firm revised the clause in response to the prior case.

Despite this revision, several partners who had left the firm challenged it as violating Rule 5.6, in that it worked a de facto constraint on competition. The Supreme Judicial Court, however, rejected that argument, noting that the revised policy did not provide any disincentive in taking a particular client. That the law firm had created an appropriate incentive for its partners to stay with the firm until they turned 60 or had been partners for 20 years did not violate public policy, according to the Supreme Judicial Court, and it rejected the claims of the former partners.

This case demonstrates that although attorney non-competition agreements remain against public policy, the purpose of that policy is to promote unfettered client access to attorneys, not, as the Supreme Judicial Court put it, to “protect lawyer mobility.” Law firms employing similar restrictions should take care that they are applied across the board to all partners leaving the firm, not just ones that compete with it. In that manner, incentive programs like the one employed by Morrison Mahoney will survive judicial scrutiny, at least in Massachusetts.

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Board of Regents, State of Iowa and University of Iowa v. Warren, No. 8-620 / 08-0017 (Iowa Ct. App.).

The Iowa Court of Appeals last week affirmed a trial court’s denial of an injunction sought by the College of Medicine at the University of Iowa to prevent a former professor from practicing medicine in a nearby city.

Since 2001, Dr. Thomas Warren had been employed as an assistant professor where he spent approximately eighty percent of his time conducting cancer research. With his remaining time, he provided medical care to patients at Cancer Care of Iowa City and at the University of Iowa Hospitals and Clinics under a “Faculty Practice Plan,” which was directed by and generated revenue for the University. When he began working at the University, Dr. Warren signed a non-compete agreement in which he agreed that, following a voluntary termination of his employment, he would refrain for a two-year period from engaging in the practice of medicine in any community in which he had practiced through his College of Medicine-sponsored program, defined as encompassing a fifty-mile radius from the practice sites.

Shortly after resigning from the University in 2005, Dr. Warren began treating patients at Iowa Blood and Cancer Care in Cedar Rapids, but did not bring any former patients with him. Several months later, the Board of Regents and the University sought to enforce the non-compete agreement, arguing that the University competed for patients against other facilities in the county where Dr. Warren now worked.

Although the Iowa courts have a reputation for being pro-employer in terms of enforcing restrictive covenants, the appellate court affirmed the denial of the injunction. Under Iowa law, the long-standing legal standard is whether the restriction is reasonably necessary to protect the employer’s business, unreasonably restrictive of the employee’s rights, and prejudicial to the public interest. Here, the court concluded that the University had failed to show that it suffered or will suffer a loss of business at its hospitals and clinics, as Dr. Warren had not developed close relationships with his patients and had not attempted to solicit them to follow him to his new employer. The court also found that the public interest weighed heavily against enforcement of the agreement based on the shortage of physicians in Cedar Rapids and the resulting negative effect on the community if Dr. Warren is not permitted to treat cancer patients there. The court noted that although the time and geographic area restrictions do not appear to be unduly restrictive, it need not address this element because the other elements militated against enforcement. It remains to be seen whether the University will seek to appeal this to the state supreme court.
 

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By Tim Nelson and Robert Milligan

The recent decision of California’s Third Appellate District in Wallis v. PHL Associates, Inc. underscores the importance of following the terms of a protective order in trade secret litigation and acting cautiously when handling materials that arguably may be protected under a protective order.

In Wallis, the trial court imposed sanctions of $43,678.42 against an attorney and her clients. The sanctions arose out of alleged conduct by the attorney and her clients in response to a declaration and accompanying documents that opposing counsel attempted to filed under seal pursuant to a protective order, but which inadvertently ended up in the court’s public file.

Opposing counsel filed an attorney declaration with over 800 pages of documents attached, which included his client’s alleged trade secrets. The caption for the declaration indicated that it was to be filed under seal. At the bottom of each page of the declaration was a footer that indicated that it was to be filed under seal. In addition, some of the individual pages of documents that were attached were marked as confidential. The declaration was placed in an envelope and sealed, and a copy of the first page of the declaration was affixed to the envelope that indicated it was to be filed under seal. Notwithstanding the caption that the confidential declaration and exhibits thereto were to be filed under seal, the filing was made available to the public.

According to the appellate court’s decision, the sanctioned attorney discovered that the confidential declaration was in the court’s public file. She claimed she notified opposing counsel of the problem, but according to the appellate court her only evidence was a cryptic reference in an opposition brief. The attorney also claimed that she spoke to someone at the State Bar ethics hotline regarding the issue, although according to the appellate court, there was no indication that she discussed the protective order. 

The attorney allegedly notified her client that the declaration was in the court’s public file. The client then sent three people to view the public file and to take notes so that an argument could be made that the alleged trade secrets had been publicly disclosed. The client also had a copying service make a digital copy of the confidential declaration. The client apparently had third parties view the declaration to shield the client from violating the protective order but to make the argument that the trade secrets had been disclosed. There was also evidence that the confidential declaration had been posted on the internet, but emails that indicated where the declaration was posted had been deleted by one of the clients.

On appeal, the attorney and her clients argued that the trial court abused its discretion because the circumstances showed that they believed the declaration was not entitled to the protection of the protective order and that the declaration did not contain trade secrets. They also argued that the sanctions order was premature because there had yet to be a determination that the information attached to the declaration constituted protectable trade secrets.

The appellate court affirmed the imposition of sanctions. The appellate court found that the attorney’s actions were frivolous and were taken in bad faith. The appellate court found that the totality of the circumstances made it clear, and would have made it clear to any reasonable attorney, that the confidential declaration was to be filed under seal and was protected by the protective order. Furthermore, if the attorney truly believed that the declaration was not confidential, her remedy was to bring the issue to the court’s attention and have the court make the determination, according to the appellate court. The appellate court also found that the actions taken by the clients were frivolous and were taken in bad faith.

The Wallis decision makes clear the need to honor the terms of protective orders in trade secret cases and to act cautiously when handling materials that may arguably be protected under a protective order. Parties and their counsel who fail to do so risk the imposition of sanctions.

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In D.L. Anderson’s Lakeside Leisure Co. v. Anderson, the Wisconsin Supreme Court recently upheld an award of damages for violation of a non-compete provision in a sale of business agreement. The facts of situation are as follows:

D.L. Anderson built D.L. Anderson Co., a business offering a range of marine services and products, such as shore landscaping and manufacturing and selling and servicing piers and lifts. He sold the business for $891,000 to Scott and Steven Statz in 2000. Of the purchase price, $400,000 was allocated as consideration for Anderson executing a non-compete provision that forbade him from engaging in the business of providing marine products and services within a 120-mile radius of the business. The non-compete provision also prevented Anderson from allowing his name to be used in the industry; $200,000 of the purchase price was allocated to the business’s goodwill and for use of the trade name.

Starting in 2002, Anderson performed a number of acts that the Statzes alleged violated the non-compete agreement. Specifically, Anderson: (1) worked on the development of a boat for installing and removing boatlifts; (2) acted as a factory representative of a company that manufactured and distributed boat lifts; (3) established a new business (one mile from his prior location) named “The Sailboat House at Anderson Marine” that sold, stored, and repaired boats and sold marine accessories; and (4) publicized his ability to perform shoreline restoration work.

The Statzes sued Anderson in September 2004. In April 2006, a jury awarded compensatory and punitive damages to the Statzes for breach of the non-compete provision and trademark infringement. After the entry of the verdict, the Statzes moved for injunctive relief and asked that the non-compete provision be extended by 591 days, pursuant to a tolling provision in the sale agreement. The Statzes also requested recovery of their attorney’s fees pursuant to the agreement. The trial court granted these requests. 

The Wisconsin Court of Appeals upheld the findings of breach of the agreement and trademark infringement, as well as the damages awarded for breach of the agreement. The Court of Appeals reversed the damages award for trademark infringement and remanded the attorney’s fees issue to the trial court for further consideration.

The Wisconsin Supreme Court upheld the award of compensatory damages for the violation of the non-compete provision. In so doing, the Supreme Court found that the Statzes presented evidence showing a decrease in gross receipts for pier installation, as well as testimony attributing the decline to Anderson’s competitive activities in areas where the Statzes had previously made sales. This evidence was sufficient to uphold the award of compensatory damages. 

The Supreme Court also upheld the extension of the non-compete period. In so doing, the Supreme Court recited the Court of Appeals’s finding that the extension of the period was proper because of the jury’s findings that Anderson violated the non-compete provision and the Statzes suffered damages as a result.

The Supreme Court upheld the jury’s verdict that Anderson infringed upon the trademark that he sold to the Statzes. The Supreme Court reversed the Court of Appeals’s finding that the Statzes provided insufficient evidence to support the damages awarded by the jury for infringement. In so doing, the Supreme Court found that the Statzes were not required to offer evidence of actual confusion and negative impressions on the part of customers; the $200,000 allocated to the goodwill was sufficient to support the award, as was the testimony of the Statzes as to the value of the goodwill. The Supreme Court also cited to testimony presented by the Statzes that established customer confusion and frustration resulting from billing issues caused by Anderson operating his similarly named business. The Supreme Court concluded that the jury did not have to apportion damages with mathematical precision because of the nature of the tort. 

Because the Court of Appeals’s decision to remand the attorney’s fees question was based on its reversal of the award of compensatory damages for trademark infringement, the Supreme Court reinstated the award of attorney’s fees. The Supreme Court remanded the matter to the trial court for consideration of an award of attorney’s fees to the Statzes for fees incurred during the appellate process.

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