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

Posted on March 31, 2009 by Scott Humphrey

As discussed in our March 9th and 17th 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 (2nd 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.

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License to Steal?

Posted on March 31, 2009 by Seyfarth Shaw LLP

 

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.

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Dunder Mifflin v. Michael Scott

Posted on March 29, 2009 by Michael Elkon

Roughly two months ago, we wrote about Michael Scott and Dwight Schrute, two fictional characters on NBC’s sit-com The Office, stealing the trade secrets of a competitor: Prince Paper. On last Thursday night’s episode, we learned the fate of Prince Paper: it went out of business. (5:35 into the linked clip.) Is this a result of Dunder Mifflin taking Prince Paper’s key customers? The show leaves this question unanswered.

Last Thursday night’s episode also illustrates a classic series of violations of the duty of loyalty by Michael Scott. At the close of the preceding week’s episode, Scott had given two weeks’ notice of his resignation from Dunder Mifflin. In last Thursday night’s episode, Scott learns that Prince Paper (where Scott had hoped to move after resigning) has gone out of business and then decides to open his own competing paper company, creatively named “Michael Scott Paper Company.” Scott proceeds to solicit a number of other employees in the office, including all three of the branch’s sales representatives, to resign from Dunder Mifflin, and join his new competitor. (The various solicitation efforts start at 6:30 in the clip and run for much of the episode.) Scott goes to the lengths of soliciting one employee in the branch parking lot and a second in the men’s room. Scott also spends company time asking Pam Beesley, the branch receptionist, to change the Dunder Mifflin invoice to say “Michael Scott Paper Company.” (8:35 into the clip.) Finally, the show strongly implies that Scott took a customer list because his new boss, Regional Vice President Charles Minor, asks the branch employees about “the client list that Michael was supposed to be working on.” (17:15 into the clip.)

Scott’s removal of a client list would be a case of trade secret misappropriation. Although the law on the duty of loyalty varies from state to state, Scott’s solicitation of employees for a competing venture while still employed by Dunder Mifflin would violate the duty of loyalty in most states. There are at least two cases in Georgia that reach this conclusion. U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 717 F. Supp. 1565, 1576 (N.D. Ga. 1989); E.D. Lacey Mills v. Keith, 183 Ga. App. 357, 362-363, 359 S.E.2d 148 (1987). More importantly for Dunder Mifflin and its Scranton branch, Pennsylvania law is similar. Reading Radio, Inc. v. Fink, 833 A.2d 199, 211 (Pa. Super. Ct. 2003). Scott’s use of company time and resources to create an order form for his new company would also be an issue for him.

While Prince Paper illustrated what an employer should not do in safeguarding its interests, Minor gives a lesson in an appropriate response. (Minor’s character is a level-headed, model manager, which is what creates comedic tension with the unorthodox, oft-inept Scott.) Minor keeps tabs on Scott after he hands in his two weeks’ notice. Minor intervenes when Scott is alone with sales representative Jim Halpert. Finally, Minor has Scott escorted out of the building by security when he learns that Scott is planning on starting a competing paper company. Dunder Mifflin likely would be in a good position to argue that it takes reasonable steps to protect its interests based on Minor’s actions.

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Damage Assessment Not Enough: For Purposes of the CFAA, Apparently "Loss" Does Mean "Damage"

Posted on March 28, 2009 by Seyfarth Shaw LLP

 

BY JASON STIEHL

            In recent years, courts in the Northern District of Illinois have made clear that without actual harm to data, a plaintiff cannot claim “damage” under the Consumer Fraud and Abuse Act, 18 U.S.C. 1030 et seq. (“CFAA”). See, e.g., Garelli Wong & Assoc. v. Nichols, 551 F. Supp. 2d 704, 704 (N.D. Ill. 2008) (holding there was no “damage” because the defendant’s “unauthorized acts of copying and e-mailing [Plaintiff’s] computer files did not impair the integrity or availability of the information in the Database and did not cause any interruption of service.”) To circumvent this strict reading of the CFAA, companies have used the term “loss” in the statute, arguing that a company suffered a “loss” by undertaking efforts to investigate and assess what “damage” may have been caused.   18 U.S.C. 1030 (e)(11) (defining “loss” to include “conducting a damage assessment.”).  A recent case calls into question whether such allegations will continue to suffice.

            In Kluber Skahan & Associates, Inc. v. Cordogan, Clark & Assoc., Inc., the court addressed whether allegations of a “loss” suffered within two years were sufficient to toll the limitation period under the CFAA, which requires a case to be brought within two years of discovery of any “damage.” In answering in the negative, Judge Zagel further shortened the reach of the CFAA. In Kluber, the court defined the elements of CFAA as requiring proof of: (1) damage or loss, (2) as a result of (3) a violation of some other provision of section 1030, and (4) conduct involving one of the facts set forth in section 1030 (c)(4)(A)(i). Kluber Skahan & Associates, Inc. v. Cordogan, Clark & Assoc., Inc., No. 08-cv-1529, 2009 WL 466812, * 6 (N.D. Ill. Feb. 25, 2009). The court undertook an analysis of the definitions of “loss” and “damage” under Section 1030, finding that the words were not only different in definition, but different in concept. Specifically, the court stated “whereas ‘damage’ contemplates harms to data and information, ‘loss’ refers to monetary harms.” Id. at * 7. The court went one step further, announcing that “Section 1030(g) does not require damage for a CFAA claim to arise.” Id. at *8 n. 14.   It is ironic that with such an emphasis on the distinction between these harms, the court would later take effort to amalgamate them.

            Ultimately, the court refused to toll the limitations period, holding that Congress explicitly chose to provide a two-year limitation for injury-discovery regardless of whether a “loss” had occurred. Id. at * 8 (“It was well within Congress’ power to include a separate two-year limitation of the discovery of loss. The text of the CFAA reflects that Congress declined to do so, and so will I.”). It supported its decision by emphasizing that the purpose of the statute is primarily criminal and that the statute was not meant to “cover the disloyal employee who walks off with confidential information.” Id (citing Am. Family Mut. Ins. Co. v. Rickman, 554 F. Supp. 2d 766, 771 (N.D. Ohio 2008)). Thus, it concluded that “[l]osses are monetary harms attenuated from the underlying concern of the Act: damage to data.” Id. 

 
            Thus, although courts have been quick to distinguish, both by definition and concept, “damage” and “loss,” it appears that, at least in the Northern District of Illinois, a plaintiff will need to demonstrate some “damage” to prove a “loss” for purposes of pursuing a CFAA claim.

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In 'Ashland Management,' confidentiality knows no bounds.

Posted on March 27, 2009 by Gary Glaser
By Gary Glaser & Brian Murphy
March 23, 2009

We live in a world where global markets are falling all around us; where competition is keener than ever, and where a company's confidential business information, or "trade secrets," may provide it with its only critical edge over competitors. As a result, it is more important than ever to protect such intellectual property. That's why employers frequently require their employees to sign agreements containing restrictive covenants that prohibit them from leaving to go to work for a competitor, from soliciting the employer's customers, and from stealing the company's trade secrets. And that's why restrictive covenant litigation appears to be on the rise.

Unfortunately, however, restrictive covenants - whether styled as covenants not to compete, more limited non-solicitation agreements,1 confidentiality agreements or a combination of the three - are heavily disfavored under New York law. This stems from New York's strong public policy favoring an individual's ability to earn a livelihood. See, e.g., Columbia Ribbon & Mfg. Co. v. A-1-A Corp., 42 NY2d 496, 499, 398 NYS2d 1004, 1006 (1977); Reed, Roberts Assocs. Inc. v. Strauman, 40 NY2d 303, 307, 386 NYS2d 677, 680 (1976). Courts will generally enforce agreements that contain restrictive covenants only where the restrictions are reasonably limited geographically and temporally and the enforcement is necessary to protect a valid business interest. See Columbia Ribbon, 42 NY2d at 499.

The valid business interest, or protectable interest, is most often defined to include confidential customer information; where the employee performed "unique or extraordinary" services; or where necessary to protect against the misappropriation or exploitation of an employer's goodwill, see BDO Seidman v. Hirschberg, 93 NY2d 382 (1999). In the case of covenants restraining competition, New York courts also require a demonstration that the restriction: (i) is no greater than is required for protection of the legitimate interest of the employer; (ii) does not impose undue hardship on the employee; and (iii) is not injurious to the public. Id. at 388-89.

Unfortunately, it is often difficult to decipher the legal bases that underlie many decisions in this area, and there is a host of apparent inconsistency among seemingly similar cases. This is largely because such cases are, by their very nature, exceedingly fact-intensive requiring, a fact-specific, case-by-case, analysis.

A breath of fresh air just blew in from the direction of the Appellate Division, First Department, however, in its decision in Ashland Management Inc. v. Altair Investments NA LLC, 869 NYS2d 465, 2008 N.Y. Slip Op. 10061 (1st Dept. 2008). The clarity of the decision in Ashland Management stands out from the body of somewhat confusing and at times apparently inconsistent cases in this area. In one stroke of their collective pens, the majority strengthened the enforceability of confidentiality agreements binding former employees, and at least implicitly reinforced the viability of confidentiality-based restrictions on the solicitation of the customers of one's former employer even absent an express no-solicitation agreement.

The primary significance of the decision is the court's enforcement of a confidentiality agreement of unlimited duration2 against two former employees. And it did so while expressly holding that it is not necessary for an employee to have provided "unique or extraordinary services" in order to justify enforcing such a perpetual confidentiality agreement. One of the former employees was a portfolio manager, and the other was involved in quantitative research. Ashland Management is in the business of providing investment advice and management to high net worth individuals and entities, and both employees left Ashland Management to form Altair Investments.

Meaning and Scope

Since long before Ashland Management, confidentiality agreements have enjoyed wider latitude than the other types of restrictive covenants. This is largely because they normally do not operate to unreasonably interfere with an individual's ability to earn a livelihood, and because the subject of the agreement, confidential business information, is a readily identifiable protectable interest. See Geritrex Corp. v. DermaRite Indus., LLC, 910 F.Supp. 955, 959 (SDNY 1996). Moreover, an employer's interest in its confidential or proprietary business information is so strong that a former employee is often bound not to disclose it even in the absence of an express agreement because of the common law duty of loyalty and fiduciary duty of good faith and fair dealing. See, e.g., North Atl. Instruments Inc. v. Haber, 188 F.3d 38, 47-48 (2d Cir. 1999).

Indeed, all but four of the 50 states have adopted the Uniform Trade Secrets Act (UTSA), in recognition of the recognized role of trade secrets in commerce, and one of those - New York - might well jump on the UTSA bandwagon this year3: on Feb. 26, 2009, legislation was proposed in the New York State Assembly to adopt the UTSA.4 Nevertheless, merely labeling information "confidential" or a "trade secret" is insufficient to confer legally protectable status upon it. Rather, New York courts will consider the extent to which the information is known outside the business, the measures taken to guard the information, the value of the information to the business, the amount of money or time expended in developing the information, and the ease or difficulty with which the information could be properly acquired or duplicated. See Ivy Mar Co. Inc. v. C.R. Seasons Ltd., 907 F.Supp. 547, 556 (SDNY 1995), and cases cited therein.

The permissible temporal scope of restrictive covenants has been addressed by New York courts at length, although with often dizzying variations. This results, in large part, from the extremely fact-intensive analysis required in each case. New York courts evaluate the reasonableness of temporal (as well as other) restrictions in the context of the nature of the particular industry involved, the strength and nature of the particular business interests asserted to justifying the requested restriction, and the nature of the activity being restricted. Unfortunately, however, it is difficult to discern definitive guidelines for evaluating the permissibility of a particular durational limitation in a restrictive covenant. It is axiomatic, however, that where the agreement effects a restriction on working for a competitor generally forever or prohibits solicitation of clients in perpetuity, the agreement will be unenforceable as a matter of law in New York. That is what makes the decision in Ashland so significant.

'Ashland' Facts and Decision

In Ashland, the First Department had before it a restrictive covenant that was limited to a confidentiality agreement which provided in relevant part that the two individual defendants would "not, at any time during or after the termination of his or her employment . . . reveal, divulge or make known to any person . . . any records, data, trade secrets, know-how, methods of operations, strategies, processes, computer programs, personnel information . . . or any other confidential or propriety information of the Company or any Client . . . used by the Company and made known . . . to the Employee by reason of his or her employment by the Company."

There was no time limitation whatsoever on the obligations of confidentiality which were imposed. Accordingly, by nevertheless finding the confidentiality agreement enforceable, the court chipped away at any blanket prohibition on unlimited durational periods for restrictive covenants - at least those limited to expressly protecting the employer's confidential and trade secret information.

In August 2003, the individual defendants resigned from Ashland to form a competing business, Altair. In an effort to raise their profile, they distributed investment performance data to the plaintiff's clients, contacted plaintiff's clients to inform them of their departure, and after they had officially resigned, began soliciting plaintiff's clients on behalf of Altair by using client contact information and performance data allegedly taken from Ashland.

Plaintiff commenced an action in January 2004 seeking damages and injunctive relief. The Supreme Court, New York County, issued a preliminary injunction enjoining defendants from "(1) using, disseminating or exploiting information derived or copied from any of Plaintiff's records . . . and (2) soliciting any of the individual brokers, custodians or consultants of plaintiff's institutional clients that [defendants] were either introduced to through their employee relationship with plaintiff or learned of from any of the Confidential Information." Plaintiff also sought damages for, inter alia, breach of fiduciary duty and breach of the confidentiality agreements. The Supreme Court denied defendants' motion for summary judgment as to these causes of action, and defendants appealed.

The First Department affirmed the denial of summary judgment. The court began with the settled pronouncements of Reed, Roberts and BDO Seidman, stating that restrictive covenants are subject to specific enforcement to the extent that they are reasonable in time and geography and necessary to protect a valid interest. The court then immediately tackled the lack of a durational limit - the focus of the dissent - holding that the absence of a durational limitation does not render a confidentiality agreement void as a matter of law. While the court noted that restrictive covenants are generally unenforceable if their duration is unreasonable, the court differentiated confidentiality agreements that do not directly impact competition from other restrictive covenants, which may prevent a former employee from pursuing his or her livelihood.

Temporal Restrictions

Ashland is significant in its analysis of the temporal restrictions in several respects. First, by its holding, the court clarified that a temporally unlimited confidentiality agreement is not unenforceable as a matter of law. The majority distinguished itself from the dissent, which appeared to treat the confidentiality agreements at issue as classic non-compete agreements, for which the lack of a temporal restriction would indeed prove problematic. The majority further explained that contrary to what the dissent would have held, whether a former employee provided "unique or extraordinary" services is not a determining factor of enforceability but rather, a component of the analysis as to whether the covenant is temporally reasonable under the circumstances.

The court also held that a court may modify an unlimited durational restriction to one more reasonable under the circumstances, although it did not modify the restriction here. While the majority's holding in this regard is simply an application of well-established New York law, the dissent argued that a court cannot sever an unlimited durational restriction because an unlimited restriction is, in effect, no restriction at all. The majority dismissed this form over substance argument and rested on the power of a court to enforce a covenant "to the extent it deems reasonable." See BDO Seidman, 93 NY2d at 394-395; see also Alside Div. of Associated Materials v. Leclair, 295 AD2d 873, 874, 743 NYS2d 898, 899 (3d Dept. 2002); Unisource Worldwide v. Valenti, 196 F.Supp.2d 269, 277 (EDNY 2002).

Further, the court provided exceedingly useful ammunition to employers seeking to effect a non-solicitation restriction through a confidentiality agreement. Specifically, the dissent noted that plaintiff conceded in its brief that the confidentiality agreement itself also precluded solicitation of certain clients since their very solicitation would, by definition, involve a misappropriation and use of the company's confidential information which the employees had covenanted not to use. This was not discussed by the majority, but they were plainly aware of this point. Accordingly, Ashland Management at least implicitly reaffirms the principle that even absent an express nonsolicitation agreement, a confidentiality agreement may be effective to prohibit solicitation of customers whose identities can be known solely by reference to the employer's confidential information. (We wouldn't suggest arguing for an implied perpetual restriction on solicitation, however.)

Significantly, the court also reaffirmed the principle that it is not necessary to show that an employee physically took documents containing confidential information to be actionable: rather, where the individual is party to a confidentiality agreement, and the confidential information at issue constitutes a "trade secret," "whether defendants' use of that information was a result of casual memory is irrelevant." Ashland, 869 NYS2d at 470.

Steps to Take

So what should an employer do?

• Use confidentiality agreements, as well as other restrictive covenants, but use them smartly: don't overreach; limit them to what is necessary to protect your legitimate business interests.

• Protect your confidential information: keep it secure, both from the third parties and from your own employees who don't have a "need to know."

• Adopt hiring and exit strategies designed to protect your confidential information. And be both vigilant and consistent.

Gary Glaser (gglaser@seyfarth.com) is a partner and Brian Murphy (bmurphy@seyfarth.com) is an associate in the labor and employment department of the New York office of Seyfarth Shaw.

Endnotes:

1. Of customers or employees, the latter which, when conducted en masse, is known as "raiding."

2. The confidentiality covenant in question similarly contained no geographic restriction - a point noted by the dissent. However, the decision of the court focuses solely on the lack of a durational element, which is, accordingly, the primary focus of this article.

3. The other three states are Massachusetts, New Jersey and Texas.

4. The bill is designated A6185, and the stated purpose of it, consistent with the holdings in Ashland Management, is " . . . to provide improved trade secret protection to industry."

"Reprinted with permission from the March 23, 2009 issue of the New York Law Journal. © 2009 Incisive Media US Properties, LLC. Further duplication without permission is prohibited. All rights reserved."

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The Doctor is Out: Georgia Court of Appeals Upholds Enforcement of Non-compete Provision

Posted on March 27, 2009 by Michael Elkon

In Azzouz v. Prime Pediatrics, P.C., Case No. A08A2340, 2009 WL 619189 (Ga. App. Mar. 12, 2009), the Georgia Court of Appeals upheld a trial court’s grant of an interlocutory injunction on behalf of Prime Pediatrics, P.C. against Dr. Rami Azzouz. Dr. Azzouz entered into a detailed non-competition provision upon the commencement of his employment with Prime. The provision is as follows:

Employee hereby covenants and agrees with Employer that during his employment pursuant to the terms of this Agreement and for a period of two (2) years following the termination of his employment for any reason, the Employee shall not practice pediatric medicine or any pediatric sub-speciality within the following counties located in the State of Georgia: Whitfield, Murray, Gordon, Catoosa, and Walker except as an Employee of the Employer pursuant to the terms of this Employment Agreement.

Nothing contained herein however shall be construed so as to prohibit the Employee from practicing medicine as a pediatrician outside the territory set forth above before the expiration of said two (2) years, or within the territory as described above after the expiration of two (2) years, nor from prohibiting the Employee from practicing specifically any specialty of medicine other than pediatrics....

The parties agree that prohibited competition shall include maintaining pediatric privileges at any hospital located in the prohibited area, advertising in any form, including but not limited to, telephone, white and yellow pages, radio, newspaper advertisements, signage advertising, keeping or maintaining an office within the prohibited geographical area, posting web-sites showing business locations in the prohibited geographical area, or mailings to patients of Employer within the prohibited geographical area.

Non-compete provisions in Georgia typically are limited to the language of the first paragraph of Dr. Azzouz’s non-compete section: a prohibition on competing in a specific field and a specific geographic area for a specific period of time. Prime Pediatrics added the subsequent paragraphs that have the effect of providing greater detail as to what is and is not prohibited by the provision. These subsequent paragraphs proved important when Dr. Azzouz left Prime Pediatrics to open a competing practice and litigation ensued.

Dr. Azzouz argued that the third paragraph barred him from working in any hospital that advertises within the five-county area covered by the non-compete provision. If this interpretation were correct, then the non-compete provision would have been overly broad and unenforceable. The Court of Appeals found that this paragraph was “not constructed perfectly” and then proceeded to add in semicolons to make the provision clearer:

The parties agree that prohibited competition shall include ..., advertising in any form, including but not limited to [ (1) ] telephone, white and yellow pages, radio, newspaper advertisements, signage advertising, keeping or maintaining an office within the prohibited geographical area[; (2) ] posting to web sites showing business locations within the prohibited geographical area [;] or [3] mailings to patients of Employer within the prohibited geographical area.

In so doing, the Court of Appeals relied on O.C.G.A. § 13-2-2(6), which provides that the rules of grammatical construction may be disregarded when interpreting a contract in order to give effect to the parties’ intent. Although the Court of Appeals’ action could be construed as blue-penciling (which is prohibited in Georgia for restrictive covenants in the employment context), the Court of Appeals was able to rely on statutory and common law authority that permits minor changes for grammatical purposes.

The Court of Appeals also cited the second paragraph of the non-compete section, noting that Dr. Azzouz’s construction of the third paragraph was inconsistent with the provision of the second paragraph stating that Dr. Azzouz was free to practice any specialty of medicine other than pediatrics. In the end, the additional paragraphs following the basic non-compete provision first gave Dr. Azzouz an angle of attack and then negated that angle.

Azzouz is interesting because Court of Appeals assumed that the trial court’s factual conclusions were correct. Yet, in other instances, the Court of Appeals has refused to enforce non-compete provisions based on fact-specific arguments made by defendants before a trial court. For instance, in Beacon Sec. Technology, Inc. v. Beasley, 286 Ga. App. 11, 648 S.E.2d 440 (2007), the Court of Appeals refused to enforce a non-compete provision because the record reflected that the employer did not prove that the employee performed each of the prohibited activities in each of the counties listed in the non-compete provision. It is possible that Azzouz could have made a similar argument regarding his provision of pediatric services in the five-county area covered by the non-compete provision, but he failed to get a transcript of the proceedings below.

Azzouz further illustrates that non-compete provisions, although disfavored under Georgia law, are useful in certain professions. Georgia has a strict rule that a non-compete provision has to be limited to the geographic area worked by an employee. This can create problems for employees who have very large assigned areas (such as sales personnel with nationwide books of business) or employees who have no assigned areas (such as research scientists). Physicians, on the other hand, typically see patients from defined geographic areas. As such, it often can be easier to draft and enforce a non-compete provision against a doctor.

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Consulting Engineers Corp. v. Geometric, Ltd.: Fourth Circuit Holds That Negotiating Non-Competition Agreements Does Not Subject A Company To Personal Jurisdiction

Posted on March 26, 2009 by Jason Jarvis

The United States Court of Appeals for the Fourth Circuit recently affirmed the denial of jurisdiction by the United States District Court for the Eastern District of Virginia over two companies foreign to the Commonwealth of Virginia. See Consulting Engineers Corp. v. Geometric, Ltd., --- F.3d ---, 2009 WL 738165 (4th Cir. Mar. 23, 2009). Consulting Engineers Corporation (“CEC”) sued Geometric Limited and another company, Structure Works, LLC, in Virginia, for claims arising out of Geometric’s hiring of one of CEC’s critical employees.

Structure Works, a Colorado corporation, hired Geometric, an Indian corporation, to handle a software design project in India. Structure Works suggested that CEC assist Geometric with one aspect of the project, which the two companies agreed to pursue. CEC and Geometric therefore entered into a non-disclosure agreement (NDA I), which included a restriction on recruiting certain employees from the other. CEC also negotiated a separate non-disclosure agreement (NDA II) with Structure Works. In each of these two negotiated agreements, each of the companies, through e-mail and a few telephone calls, negotiated from their respective home state or country (Virginia for CEC, Colorado for Structure Works, and India for Geometric). NDA II contained a choice of law and forum selection clause provision naming Colorado. NDA I contained only a choice of law provision naming Virginia.

After executing the NDAs, the parties held one face-to-face meeting in India, after which time negotiations continued for a few months before Structure Works and Geometric ultimately went their separate way from CEC. During those few months, Geometric had hired away from CEC one of the employees specifically listed in NDA I as protected from solicitation by Geometric. CEC eventually sued both Structure Works and Geometric in Virginia State Court for claims relating to the hiring away of the employee. Specifically, it alleged tortious interference, conspiracy to injure another in trade, and violation of Virginia’s Uniform Trade Secrets Act. The Defendants removed the case to federal district court and then moved to dismiss for lack of personal jurisdiction, a motion granted by the district court.

CEC appealed to the Fourth Circuit, arguing that the exchange of e-mails and telephone calls was sufficient to establish “minimum contacts” with Virginia, where it was located and where it brought the action, in part because of the heavy reliance on technology in the negotiation and execution of the NDAs. CEC also argued that the choice of law provision in NDA I indicated that the Defendants had agreed to jurisdiction in Virginia. Finally, CEC argued that the “effects” of the allegedly tortious action (hiring away the employee in India) occurred in Virginia. For these reasons, CEC argued, the district court had erred in granting the motion to dismiss. In response, the Defendants pointed out that they had not been to Virginia, they did not operate in Virginia, the telephone calls were limited, and the e-mails insufficient to establish specific jurisdiction over them. Likewise in favor of a lack of jurisdiction was the fact that the choice of law provision in NDA I was not a forum selection clause and therefore only persuasive at best as to jurisdiction.

The Fourth Circuit had little trouble agreeing with the Defendants. It relied on all of the factors above in refusing to find that the district court had erred in rejecting specific jurisdiction over the Defendants. Notably, the Fourth Circuit considered the emphasis on technology to be a red herring, noting that “technology cannot eviscerate the constitutional limits” on a state’s jurisdiction. It also recognized that India was the only place in which the alleged conduct occurred, the only place the parties had met, and the only place in which the subject matter of the agreements would be pursued. Thus, the Fourth Circuit affirmed the motion to dismiss.

In sum, the Fourth Circuit’s decision held that negotiations with a company located in the forum state does not alone subject a company to jurisdiction in the forum state. Moreover, e-mails and telephone calls are not themselves sufficient to satisfy jurisdiction because technological means of communications are entitled to no special considerations in determining jurisdiction. Finally, the Fourth Circuit recognized a distinction between choice of law provisions and forum selection clauses: the former concerns which law is to be applied in the lawsuit and the latter where the lawsuit is to be brought.

 
 

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Proposed Changes to Illinois Trade Secrets Act Pass Through Senate Judiciary Committee -- Full Senate Vote Expected Within Weeks

Posted on March 17, 2009 by Scott Humphrey

As discussed in our March 9th posting, Illinois Senate bill SB 2149 seeks to 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) requiring attorneys'  fees be awarded to the prevailing party in a trade secrets case; and c) ordering a court to enter an attorneys' fees award against any party that subsequently amends their initial trade secret disclosure. SB 2149 passed through the Senate Judiciary Committee on March 12, 2009, and will now proceed to a full senate vote. The vote likely will occur within the next few weeks. If approved by the Senate (which is quite likely since SB 2149 spent less than one week before the Senate Judiciary Committee), SB 2149 will be sent to the Illinois House of Representatives Judiciary Committee for review and approval. If the House Judiciary Committee subsequently approves SB 2149, SB 2149 will then be considered and voted upon by the entire House of Representatives. We will continue to monitor the bill and its progression through the Illinois General Assembly.
 

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Georgia Court of Appeals Repeats Requirements for Non-compete and Non-disclosure Covenants

Posted on March 13, 2009 by Michael Elkon

In Global Link Logistics, Inc. v. Briles, No. A08A1871, (Ga. App. Feb. 18, 2009), the Georgia Court of Appeals recently reiterated Georgia court’s requirements for non-compete and non-disclosure covenants. The case involved the departure of Jim Briles from Global Link Logistics to a competitor. Briles moved for a declaratory judgment stating that the restrictive covenants in his employment agreement – a non-compete provision and a non-disclosure of confidential information provision – were unenforceable. Global Link answered and moved to compel arbitration. The trial court found that the restrictive covenants were unenforceable.

The Court of Appeals upheld the trial court’s finding. It held that the non-disclosure provision was unenforceable because it purported to cover Briles’s “observations” and was therefore overly broad. The provision also lacked a time limit, as required by Georgia law. As far as we know, Georgia is unique among all 50 states in the latter requirement. 

The Court of Appeals held that the non-compete provision was unenforceable for two reasons. First, it purported to prevent Briles from working as an “owner, operator, manager, employee, officer, director, consultant, advisor, representative or otherwise.” As such, the prohibition was an impermissible “in any capacity” restriction. Second, it purported to bar solicitation of all of Global Link’s customers, regardless of whether Briles had material contact with them. 

Faced with hostile law, Global Link made two additional arguments. It asserted that Briles’s agreement should be viewed under Georgia’s more lenient degree of scrutiny afforded to restrictive covenants executed in connection with the sale of a business. The Court of Appeals rejected this argument, concluding that Briles did not own an interest in Global Link’s predecessor when he executed the agreement in question. Thus, the fact that he acquired an equity stake in Global Link when it purchased the predecessor was immaterial. 

Global Link also argued that the trial court’s order ignored Georgia’s policy of deferring to actions previously filed in other jurisdictions, as well as the parties’ own forum selection clause, and that it undermined state and federal policy favoring arbitration. The Court of Appeals dismissed each of these arguments. It found that Briles had obtained relief from the trial court after Global Link had dismissed an action filed against Briles in Delaware and before either party commenced arbitration. Moreover, the Court of Appeals cited to the language of the arbitration provision in Briles’s employment agreement, which specifically stated that the parties could obtain injunctive relief in court prior to arbitration.

Global Link illustrates the difficulties in enforcing a restrictive covenant in Georgia. The Court of Appeals was able to pick from any one of a number of rules to knock out the restrictive covenants. The decision also highlights the fact that the relaxed scrutiny for restrictive covenants in the sale of a business context applies only if the covenant was signed as part of the actual sale.

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Georgia House of Representatives Passes Restrictive Covenant Legislation

Posted on March 13, 2009 by Michael Elkon

Yesterday afternoon, the Georgia House of Representatives passed HB 173, a bill that would set forth a comprehensive statutory framework for interpreting restrictive covenant agreements. The current version of the bill is linked here. The final vote was a resounding 137 in favor and 22 against. HB 173 will now progress to the Georgia Senate for consideration. The bill passed the House on cross-over day, the last day in which a bill can pass one house of the Georgia Assembly in order to be considered by the other.

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Next Stop, District Court (again)! Second Circuit Vacates Injunction Barring Disclosure of Trade Secrets Concerning New York City Subway Brakes

Posted on March 13, 2009 by Janet Siegel

Opening with a tribute to the iconic New York City subway system, complete with citations to sources as diverse as Leonard Bernstein and The Bonfire of the Vanities, the Second Circuit Court of Appeals earlier this week vacated and remanded a preliminary injunction barring a braking system manufacturer from disclosing proprietary drawings and other information to the New York City Transit Authority during the contracting process. 

In 1993, SAB Wabco (Faiveley Transport Malmo AB’s predecessor-in-interest) entered into a license agreement with then-sister company Wabco (Wabtec’s predecessor-in-interest) that gave Wabco the authority to use SAB Wabco’s “know-how,” including manufacturing data, specifications, designs, plans, and trade secret information. Among other information, this included details related to BFC TBU, described by the court as “a unique air brake system designed to stop trains quickly and smoothly, if not always quietly.”

When the agreement terminated at the end of 2005, Wabtec began to develop its own line of BFC TBU through reverse-engineering, and in 2007 was awarded a sole source contract to provide the braking system for the Transit Authority’s overhaul of a certain class of subway cars. Faiveley sought a preliminary injunction in federal district court, asserting that the BFC TBU information constituted trade secrets that Wabtec was misappropriating by manufacturing the braking system and disclosing information to the Transit Authority during the contracting process. The district court granted the injunction.

On appeal, however, the Second Circuit held that although the district court had not erred in finding that Faiveley was likely to succeed on the merits of its misappropriation claim, there was no evidence of irreparable harm and, thus, no basis for entry of a preliminary injunction. Most notably, the court made a point of correcting the misapplication of the law by some district courts that had erroneously read Second Circuit precedent as meaning that a presumption of irreparable harm automatically arises upon the determination that a trade secret has been misappropriated. Instead, the court clarified that, although a rebuttable presumption of irreparable harm may arise where there is a danger that the trade secrets will be disseminated to a “wider audience” or their value otherwise impaired, no such presumption is warranted where “a misappropriator seeks only to use those secrets—without further dissemination or irreparable impairment of value—in pursuit of profits” because such harm can be compensated with money damages.

Thus, the Second Circuit found that no injunction was merited here because the evidence showed only that Wabtec had used Faiveley’s proprietary information to gain a competitive advantage, but had not disseminated any trade secrets and, indeed, was treating the information with the same confidentiality given its own proprietary information. Because there was no risk that Wabtec would further disclose or irreparably harm Faiveley’s trade secrets, the court vacated the injunction and remanded the matter to the district court. This decision serves as an important reminder of the facts that must be alleged and established to prove irreparable harm when seeking temporary or preliminary injunctive relief for trade secret misappropriation.

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HB 173 Heads to the Floor of the Georgia House of Representatives Today

Posted on March 12, 2009 by Seyfarth Shaw LLP

HB 173, which we have written about before, heads to a vote before the Georgia House of Representatives today.  The legislation  dramatically changes the way Georgia court's will review restrictive covenants (non-competes, non-solicitation agreements) and fixes the time limit imposed on confidentiality restrictions (eliminating the two-year restriction).  To find out how to reach your State Representative to express your views, click here.  

If the bill does not pass today, it is my understanding that it will not be given any further consideration this session.

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ILLINOIS GENERAL ASSEMBLY CONSIDERING DRAMATIC CHANGES TO TRADE SECRETS ACT - INCLUDING MANDATORY ATTORNEYS' FEES

Posted on March 9, 2009 by Scott Humphrey

A new bill recently introduced in the Illinois State Senate would dramatically change the Illinois Trade Secrets Act (765 ILCS 1065/1 et at.) and alter the landscape of trade secret litigation in Illinois. The bill, SB 2149, requires a party asserting trade secret misappropriation to serve on the opposing party, before commencing any written or oral discovery, a written statement that describes "with reasonable specificity the trade secrets which have allegedly been improperly used, disclosed or misappropriated." The bill requires a party to obtain leave of court to supplement its written statement and 180 days after submitting its statement to identify additional trade secret misappropriation. More importantly, any court that allows a party to amend its written statement must also enter an attorneys’ fees award against the amending party for attorneys’ fees the opposing party incurred as result of the amended statement.

In addition, the new bill allows the prevailing party to recover its attorneys’ fees and also orders the court to award attorneys’ fees if:

a. the court finds that a party submitted a written statement of trade secrets which was false, knowingly inaccurate, or "which it knew or should have known was objectively unreasonable in scope;"

b. the court finds that a party resisted a motion to dissolve an injunction without reasonable cause based in law or fact; or

c. a party amends their written statement and, in doing so, abandons previously disclosed trade secrets.

Finally, the proposed bill allows the court to award attorneys’ fees if the court:

a. finds that a damages claim for trade secret misappropriation is "objectively specious and has been maintained without substantial proof of economic injury approximately caused by improper use;"

b. modifies an injunction because the injunction is "impermissibly overbroad, vague or ambiguous;"

c. finds that a request for injunctive relief is substantially greater than what is necessary to protect "legitimate economic interests" regarding the improper use, disclosure or misappropriation of trade secrets.

We will continue to monitor this bill and its progression through the Illinois General Assembly.

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"Say Cheese, you're Enjoined!": Southern District of Illinois Enters Preliminary Injunction against Husband-Wife Team in the School Photo Industry

Posted on March 9, 2009 by Michael Elkon

In Hal Wagner Studios, Inc. v. Elliott, No. 3:09-CV-31-MJR, 2009 WL 424432 (S.D. Ill. Feb. 19, 2009), Judge Michael Reagan of the Southern District of Illinois entered a preliminary injunction against Kris Elliott (Wagner’s former general manager for its Edwardsville, Illinois office) and a number of former Wagner employees, including Elliott’s wife, Pam. The facts of the case are as follows:

Wagner is in the business of supplying photography services to local schools. In 1994, Wagner purchased the assets of Mr. Elliott’s business, Delmar Studios, for $245,000. As part of the sale, Mr. Elliott executed a non-compete provision, forbidding him from doing the following for 18 months after the end of his employment with Wagner: (1) soliciting or selling school photography accounts from Elliott’s territory, which was defined in the agreement; (2) disclosing a list of said accounts; or (3) otherwise competing for the accounts. Pam Elliott did not sign a non-compete agreement.

On December 31, 2008, Elliott and six co-workers (including his wife) mailed resignation letters to Wagner’s headquarters in St. Louis, Missouri. Defendants’ resignations left Wagner’s Edwardsville office bereft of personnel save for two short term employees. The Elliotts and at least one other Defendant then commenced employment with Herff Jones, Inc., a competitor of Wagner. On January 2, 2009, the Elliotts sent out a solicitation letter on behalf of Herff Jones to approximately 50 schools serviced by Wagner’s Edwardsville office. In that letter, the Elliotts referred to themselves collectively 16 times. Kris Elliott then had his wife, Pam, solicit those schools because she was not covered by a non-compete agreement. Pam Elliott obtained contracts from 21 of the schools.

Upon inspection of the Edwardsville office after Defendants’ resignations, Wagner determined that a number of business documents had been taken, printed, and/or deleted from the company’s office and computers. Specifically, Wagner could not locate its contracts with the vast majority of schools serviced by the Edwardsville office. Wagner further determined that the Elliotts had removed “The Bible,” a rolodex containing the contact information for Wagner customers serviced by the office. 

Wagner filed an action against Defendants on January 9, 2009. The Court entered a temporary restraining order against Defendants on January 13, 2009. In that order, Judge Reagan ordered the Elliotts to return all Wagner property in their possession. Judge Reagan declined to enjoin Defendants on the basis of Kris Elliott’s non-compete provision because of a dispute regarding alleged modifications to the provision. Following a preliminary injunction hearing that took place from February 2-4, the Court entered an order granting a preliminary injunction on February 6 and codified that ruling in its decision published on February 19. 

In the decision, the Court reiterated its finding that Defendants would have to return all Wagner property in their possession. Judge Reagan specifically noted that Defendants’ actions in taking Wagner property made it very difficult for Wagner to service its clients.

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Georgia House Judiciary Committee Passes Restrictive Covenant Legislation

Posted on March 6, 2009 by Michael Elkon

This afternoon, the Judiciary Committee of the Georgia House of Representatives unanimously passed HB 173 and HR 178, which would set forth a statutory and constitutional framework for interpreting restrictive covenant agreements related, in particular, to employment. 

The House Civil Judiciary Subcommittee debated HB 173, leading to a number of changes. Specifically, the Subcommittee added language setting forth a test (analogous to the exempt/non-exempt test under the Fair Labor Standards Act) to determine whether an employee can be subject to a non-compete provision.  Additionally, the Subcommittee added in language permitting courts to take the economic hardship of an employee into account when deciding whether to enforce a restrictive covenant.  Finally, the Subcommittee added in language to ensure that courts cannot expand the scope of a restrictive covenant; they can only strike language or reduce the scope of the restrictions based on a rule of reasonableness.  The bill passed out of the Subcommittee on March 2, 2009 with a “do pass” recommendation.

The full Judiciary Committee considered the legislation this afternoon.  After brief explanatory remarks from the bill’s chief sponsor, Rep. Kevin Levitas, Committee Chairman Wendell Willard expressed happiness with the changes to the bill over the past year.  The Committee then passed the bill unanimously. 

HB 173 and its companion, HR 178 (a recommended constitutional amendment related to the legislation), will now be before the House Rules Committee.  If the Rules Committee passes the bill and the resolution, then they will be eligible for consideration by the House of Representatives itself before teh session ends.

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