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

In Atlanta Bread Co. Int’l, Inc. v. Lupton-Smith, S08G1815, 2009 WL 1834215 (Ga. Jun. 29, 2009), the Georgia Supreme Court today confirmed that in-term restrictive covenants are subject to the same strict scrutiny standard applied to post-term covenants and the same reasonableness standards of time, territory, and scope. 

The question presented in Atlanta Bread Company was whether the in-term non-compete covenant in a franchise agreement between Atlanta Bread Company and Sean Lupton-Smith is enforceable under Georgia law. The covenant at issue states as follows:

During the term of this Agreement, neither [Lupton-Smith] nor any Principal Shareholder, for so long as such Principal Shareholder owns an Interest in [Lupton-Smith], may, without prior written consent of Franchisor, directly or indirectly engage in, or acquire any financial or beneficial interest in (including any interest in corporations, partnerships, trusts, unincorporated associations or joint ventures), advise, help, guarantee loans or make loans to, any bakery/deli business whose method of operation is similar to that employed by store units within the System.

During the term of the franchise agreements, Lupton-Smith opened and began operating a P.J.’s Coffee & Lounge in Atlanta, Georgia. Atlanta Bread Company sent a notice terminating the franchise agreement and litigation ensued. The trial court and Court of Appeals both found that the in-term non-compete provision was unenforceable under Georgia law because it failed to “meet[] the reasonableness standards promulgated in Georgia.” 

The Supreme Court rejected Atlanta Bread Company’s argument that the provision is a loyalty provision rather than a non-compete provision, noting that

[a] plain reading of the clause shows that it prohibits the franchisee from engaging in a certain type of business during the term of the parties’ agreement and, thus, it is a partial restraint of trade designed to lessen competition. Such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy.

The Court rejected any contention that a franchise relationship should be treated differently, confirming that the court has held time and again” that franchise agreements and employment agreements are subject to the same strict scrutiny (meaning, among other things, that it cannot be blue-penciled). This analysis removes any doubt that the Court’s analysis in Atlanta Bread Company also will apply to in-term restrictive covenants in an employment agreement. 

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In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., No. C 07-05248 JW, 2009 WL 1481147 (N.D. Cal. May 20, 2009), the Northern District of California held that Applied Materials’ use of inventions agreements constituted unfair business practices under California law. Applied Materials, a California-based semiconductor company, brought claims for trade secret misappropriation and unfair competition against Advanced Micro-Fabrication Equipment, a start-up competitor. In the action, Applied Materials asserted that a number of its former employees had moved to AMEC and conceived inventions that belonged to Applied Materials pursuant to assignment clauses in the former employees’ employment agreements. The clauses stated as follows:

In case any invention is described in a patent application or is disclosed to third parties by me within one (1) year after terminating my employment with APPLIED, it is to be presumed that the invention was conceived or made during the period of my employment for APPLIED, and the invention will be assigned to APPLIED as provided by this Agreement, provided it relates to my work with APPLIED or any of its subsidiaries.

AMEC brought counterclaims for declaratory judgment and unfair competition, arguing that the assignment clauses are unenforceable non-compete agreements under California Business & Professions Code § 16600. AMEC then moved for summary judgment on its counterclaims. 

The Northern District of California granted AMEC’s motion for summary judgment. Applied Materials argued that the assignment clauses merely created a rebuttable presumption that it owns its former employees inventions conceived in the first year after the end of their employment. The District Court rejected this interpretation, holding that the clauses plainly state that all such inventions “will be assigned” to Applied Materials. The district court further noted that the clauses state neither that an employee can rebut the presumption nor how an employee would do so.

The District Court went on to hold that the assignment clauses were unenforceable under California law for two reasons. First, the clauses are not limited to inventions using Applied Materials’ confidential information. Second, the clauses were not limited to inventions conceived by former Applied Materials employees while they were employed at Applied Materials, but instead extended to inventions conceived up to a full year after the end of employment. 

Once the Court found that the assignment clauses were unenforceable, it therefore followed that it would grant AMEC’s claim for declaratory judgment. It also granted AMEC’s claim for unfair competition. The California Court of Appeal has held that the use of non-compete provisions that violate section 16600 of the Business & Professions Code constitutes an unlawful business practice under section 17200 of the Code. Thus, the Court held that Applied Materials’ use of the assignment clauses were unfair business practices as a matter of California law.

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In Smith Barney, Inc. v. Darling, No. 09-C-540, 2009 WL 1544756 (E.D. Wis. Jun. 3, 2009), the United States District Court for the Eastern District of Wisconsin denied Smith Barney’s request for temporary injunctive relief in aid of arbitration against five departing financial consultants and their new employer. Smith Barney sought an injunction to: (1) require the former employees to return all customer information; and (2) prevent the departing employees from soliciting Smith Barney customers. The former employees countered by arguing that the non-solicitation and non-disclosure covenants relied upon by Smith Barney were unenforceable under Wisconsin law. They also argued that they were entitled to retain client contact information.

The District Court agreed with the departing employees on all fronts. It found that the non-disclosure of confidential information provisions were unenforceable because they did not contain time limitations. (Wisconsin and Georgia are the only two states that we are aware of that have such requirements.) It also found that the non-solicitation of customers provisions found in the former employees’ employment agreements were unenforceable because they covered customers “whose name became known” to the former employees during their time at Smith Barney. The Court reasoned that the provision would cover individuals who came into Smith Barney’s office to ask for directions, as well as individuals whom the former employees met at softball games. In fact, the Court went so far as to point out that the restriction covered customers of the departing employees’ new employer – Robert W. Baird & Co. – about whose existence the departing employees learned during their employment with Smith Barney. The Court went on to conclude that additional non-solicitation covenants in various agreements with the five former employees were unenforceable because they covered customers that did not do business with Smith Barney and/or with whom the departing employees had not had contact in years. Because Wisconsin courts do not blue pencil otherwise unenforceable restrictive covenants, these flaws in the provisions were fatal.

The Court also addressed the impact of the Protocol for Broker Recruiting, to which Smith Barney is a signatory. Even though Baird & Co. is not a signatory to the Protocol, the departing employees argued that Smith Barney could not show entitlement to injunctive relief because it had tacitly conceded that departing employees are not a threat by signing the Protocol. Smith Barney countered by noting that some of the accounts at issue were excluded from the Protocol. The Court concluded that Smith Barney’s argument was “not sufficiently developed” to merit an award of temporary injunctive relief. 

Ultimately, the Court ordered the departing employees to return or destroy client account information, but not client names, addresses, telephone numbers, and email addresses. The Court did not address explicitly in its published decision whether Smith Barney had shown that some or all of this information constituted a trade secret under Wisconsin law, despite the fact that Smith Barney had pled a claim for trade secret misappropriation against the defendants. The Court did state that Smith Barney could have an evidentiary hearing on an expedited basis, if it chose.

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Seyfarth's Michael Elkon recently authored an article on Georgia's new non-compete law and its potential effects on technology companies.  Using an extended metaphor to relate scenes from the movie Silence of the Lambs to the current legal regime, Michael argues that technology companies in particular should be interested in the statute because restrictive covenants matter so much to them:

Technology companies should be especially interested in HB 173. This is so because restrictive covenants are particularly important in the technology field. “Tech” companies have to be especially vigilant to protect their confidential, company-specific information because so much of their value is bound up in this information, unlike brick-and-mortar assets that dominate the balance sheets of companies in other industries. Instead, tech companies derive much of their worth from information that is, by its nature, portable. Also, because of the novelty of what tech companies often do, they are more likely to have key employees whose move to a competitor could have serious repercussions. The savvy tech company should have tailored agreements for its key employees, and HB 173 will give those companies more latitude in protecting their information and tailoring their agreements.

The article highlights a few of the new rules that Michael expects will be especially important for technology companies, such as the rules on the permissible scope of a non-compete or the requirements for a non-disclosure provision. Overall, Michael argues that the statute will provide greater flexibility for technology companies in protecting their interests, while acknowledging that technology companies may have a harder time poaching employees from their competitors.

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