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

When we last wrote about IBM’s efforts to enjoin David Johnson, its former Vice President of Corporate Development, from joining Dell, Judge Stephen Robinson of the Southern District of New York had denied IBM’s second motion for preliminary injunction and the Second Circuit Court of Appeals was preparing to hold oral argument on the matter. The Court of Appeals has now issued a brief order upholding Judge Robinson’s decisions. After setting forth that it would review the District Court’s denials of the motions for preliminary injunction under the deferential abuse of discretion standard, the Court of Appeals upheld the denial of the first motion for preliminary injunction. In so doing, it cited to the trial court’s finding that Johnson was “extremely credible” and that IBM’s witness “lacked familiarity with documents bearing on the controversy.” The Court of Appeals also rejected IBM’s attacks on the trial court’s order denying the second preliminary injunction, finding that the trial court was correct when it held that it could not address the second motion because it concerned the same facts as the first motion, which was at that time before the Second Circuit.

The matter now returns to the trial court. In the last actions taken in the trial court prior to the resolution of the appeal, Johnson had moved to dismiss two counts of IBM’s Amended Complaint. The trial court had also denied Johnson’s request to stay discovery, instead directing the parties to agree on a scheduling order. The case will now proceed on those two fronts.

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On October 27, 2009, Robert Milligan and Carolyn Sieve published their article, "Establishing CFAA Violations By Former Employees," in the Employment Law 360.  The article further examines the Brekka decision we have posted about previously.  In particular, Robert and Carolyn point out that the Brekka decision may require employers to "rethink their strategies" for protecting company property. 

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In an article published today by the Daily Journal, "Economy Leads Companies to Sue Ex-Workers," (linked with permission) author Laura Ernde talks with a number of California practitioners about what they see happening with trade secrets litigation in the wake of the California Supreme Court's ruling in Edwards v. Arthur Anderson  and the economy.  

Although Ernde indicates that the anecdotal evidence is that interest in trade secrets is on an "upswing," according to Seyfarth Shaw's own Carolyn Sieve and Robert Milligan, research regarding filings in Los Angeles indicates that the actual number of lawsuits mentioning "trade secrets" has decreased over the last two years. 

Ernde's article also touches on the "inevitable disclosure" doctrine, noting that under FLIR v. Parrish, 2009 DJDAR 8598, the doctrine is no longer applicable in California. 

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Earlier this month, Starbucks Corp. filed a complaint in the U.S. District Court for the Western District of Washington to seek enforcement of a noncompetition agreement it entered into with former Division Senior Vice President Paul Twohig.

According to Starbucks, Twohig purportedly had accepted a position with Dunkin’ Donuts as its Brand Operations Officer, which would have been in violation of the non-competition agreement he entered into with Starbucks.

On Friday, October 23, 2009, Starbucks announced that it had resolved its dispute with Twohig. The settlement agreement included promises by Twohig that he would complete initial training at Dunkin’ Donuts, but would not otherwise work there until January 15, 2010, approximately ten months after Twohig left Starbucks’ employ.

In addition, Starbucks is to receive $500,000 as part of the settlement. Starbucks has not reported who will be responsible for this payment.

The case was Starbucks Corp. v. Paul Twohig, case number 09-01404, U.S. District Court for the Western District of Washington.

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Please join us for the first of our Trade Secrets Webinar Series
Monitoring the Revolving Door:
Protecting Your Trade Secrets in Today's Economy
on November 5, 2009

Seyfarth Shaw’s Trade Secrets, Computer Fraud, and Non-Competes Group is pleased to announce a comprehensive webinar series on trade secrets, computer fraud, and non-competes in today’s economy.

The first webinar will cover best practices for protecting your company’s trade secrets and managing risk from trade secret claims. Employer downsizing and competitive pressures have increased the need for companies to ensure that they have adequate protections in place to safeguard company assets. Rarely does a day go by without a news report of another high profile theft of important data from a company or the loss of key employees to competitors.

Topics slated for discussion in the first of our series of informative discussions include: 

• Identifying trade secrets
• Adequately protecting trade secrets  
• Conducting trade secret "audits"
• Implementing effective trade secrets policies and procedures

Date: November 5, 2009

Time: 
10 am – 11:30 am Pacific
11:00 am – 12:30 pm Mountain
12:00 pm – 1:30 pm Central
1:00 pm – 2:30 pm Eastern

Panelists:

Michael Wexler, Seyfarth Shaw LLP
Kurt Kappes, Seyfarth Shaw LLP
Robert Milligan, Seyfarth Shaw LLP

Register: www.seyfarth.com/events

Next Trade Secrets Webinar Program
Trade Secret Triage and Restrictive Covenant Relief
Wednesday, December 9, 2009 

Once an employee is out the door, the swift and certain reaction of management is essential to protecting the company's valuable business information.  Kate Perrelli and Erika Birg will discuss generally (1) immediate steps to take upon an employee's departure; (2) assessment of potential claims; (3) forensic analysis of electronic clues in support of potential claims; and (4) steps to prepare for litigation, if necessary.

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As mentioned in a previous blog entry, the U.S. Court of Appeals for the Ninth Circuit held in Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277 (9th Cir. 2009), that an in-term (during the term of the contract/relationship) covenant not to compete governed by California law was enforceable to the extent that it did not foreclose competition in a substantial share of a business, trade, or market. 

The Court overturned an arbitrator’s ruling that permitted a nationwide in-term covenant not to compete as a “manifest disregard of the law.” The Court relied on an apparent variant of the Ninth Circuit’s “narrow restraint” doctrine and older California state law authority to support a watered-down version of the covenant not to compete. 

As detailed in a recent article on Comedy Club authored by Robert Milligan and Jim McNairy and published in Business Law News ("BLN") Comedy Club is a significant decision because (1) the Court’s ruling relied in part on the so-called “narrow restraint” exception to California’s statutory prohibition against covenants not to compete, even after the California Supreme Court had just expressly rejected the narrow restraint exception in Edwards v. Arthur Andersen, 44 Cal. 4th 937 (2008); and (2) arbitration decisions are notoriously difficult to overturn, but the Ninth Circuit had little trouble doing so in Comedy Club.

As Robert and Jim explain in the BLN article, in light of Comedy Club, in-term covenants not to compete may be enforceable in the franchise context in California “to protect trademarks, trade names, and goodwill of a licensor” if they are narrowly tailored and do not foreclose a party from engaging in its business or trade in a substantial section of the market.

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In Pittman v. Coosa Med. Group PC, the Georgia Court of Appeals upheld a trial court's decision to grant an interlocutory injunction enforcing a non-compete provision that prevented Dr. H. Harris Pittman from practicing neurosurgery within a 30-mile radius of CMG’s principal office in Rome, Georgia. 

The non-compete provision is contained in an employment contract that Pittman signed with CMG in 1999. Pittman resigned from CMG on January 1, 2009, and started working for Redmond Neurosurgery, LLC that same day. Redmond’s office is located approximately five miles from CMG’s. CMG initiated a legal action against Pittman roughly one month after Pittman joined Redmond.

Pittman made three arguments on appeal in an attempt to convince the Court of Appeals that the trial court erred in enforcing the non-compete. The first argument is that CMG has no legitimate interest in enforcing the non-compete because Pitttman’s specialty – neurosurgery – and CMG’s line of business – neurology – are complementary, rather than competitive. The Court of Appeals rejected this argument, citing the testimony of CMG President, Dr. William Naguszewski, that Pittman’s decision to start working in the same geographic area led to “all sorts of questions get[ting] raised” about the practice and therefore impaired the reputations of CMG’s physicians. Naguszewski also testified that Pittman’s presence in the market would make it hard for CMG to recruit a replacement neurosurgeon, especially since Pittman testified that he intended to recruit neurosurgeons himself.

Pittman’s second argument was that CMG released him from the agreement. The record reflected that Pittman and CMG did indeed have negotiations regarding Pittman moving his practice, but the parties did not finalize a deal, so the Court of Appeals concluded that there was no meeting of the minds on an agreement to terminate the non-compete provision.

Finally, Pittman argued that CMG consented in his violation of the non-compete provision by referring patients to him at Redmond. However, Naguszewski testified that CMG’s physicians did so because the welfare of their patients trumped the contractual dispute. The Court of Appeals upheld the trial court’s finding that CMG’s physicians made these referrals based on their independent medical judgment and not in assent to Pittman’s competitive acts. Thus, the Court of Appeals upheld the trial court’s decision. 

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By Kate Perrelli and Erik Weibust

On October 7, 2009, the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development held a hearing on a non-compete bill, House No. 1799, sponsored by Representatives Will Brownsberger and Lori Ehrlich. Representatives Brownsberger and Ehrlich had each previously sponsored their own independent bills – Brownsberger’s based on California’s statute that bans non-compete agreements altogether, and Ehrlich’s based on Oregon’s statute that permits non-compete agreements with certain restrictions. The two Representatives have spent a considerable amount of time and energy over the past few months crafting a compromise bill, relying on input from proponents and opponents of non-compete agreements, including industry leaders, employees, trade associations, and attorneys. Several of these people testified before the committee about the need for predictability in the area of restrictive covenants -- for both employers and employees -- and the need to balance the interest of employer’s in protecting their confidential information, trade secrets, and goodwill, with those of employees in being able to switch jobs freely. Although this compromise bill in some respects codifies Massachusetts common law, there are four provisions in particular that warrant further review and refinement:

• The bill prohibits enforcement of non-compete agreements against employees who make less than $75,000 per year. One concern with this provision is that start-up companies often pay their employees lower salaries until they are able to obtain greater financing, yet provide them with as much, if not more, confidential information and trade secrets than higher paid employees at other companies. The bill ignores this scenario. In addition, there is no method in the bill for determining whether companies that pay hourly wages to their employees, such as staffing agencies, are subject to the law, as it is difficult to determine whether an employee will make more than $75,000 in a given year when they begin their employment, which is when they would be required to execute a non-compete agreement. The bill makes no exception or accommodation for these types of companies or others that would be adversely impacted by the $75,000 minimum.
   
• The bill limits non-compete agreements to one year, with the exception of a garden leave clause provision, pursuant to which the employer would pay the employee to sit on the sidelines for the term of the restriction. Courts in the Commonwealth often enforce as reasonable two-year non-compete agreements, and in some limited instances, for longer. A one year limitation may be insufficient in many situations. 
   
• Attorneys’ fees are mandatory for successful defendant-employees, yet they are merely permissive for successful plaintiff-employers, and are to be awarded only in the latter situation if the employer can show that the employee acted with bad faith, a very subjective standard. Moreover, an employee also receives attorneys’ fees if he or she files a declaratory judgment action challenging his or her non-compete agreement, provided that two days before doing so, the employee provides the former employer with specific measures that the employee would take to protect the employer’s confidential business interests, which measures are substantially adopted by a court as part of a hearing on preliminary injunctive relief. Again, this provision may place undue pressure on a start-up to accept an employee’s proposal to avoid incurring legal fees.   
   
• The bill rejects the inevitable disclosure doctrine, under which it is presumed that an employee who had access to a significant amount of confidential information and trade secrets will disclose that information, even if unintentionally, to his or her new employer. This doctrine plays the important role of acting as a backstop to non-compete agreements, or as the only protection where no non-compete agreement is executed, and is necessary to further protect employers against disclosure by such employees. Complete obliteration of this doctrine will affect certain industries more dramatically than others.

Kudos to the legislators, and the group that they enlisted to fashion this compromise bill.  Massachusetts has stepped back, at least for the time being, from the precipice of following California’s legislature’s path in banning non-competes altogether, and instead, has taken a big step forward to provide more clarity to a very complex, fact-specific area of Massachusetts law. There are steps left to be taken, but the current debate is healthy and productive.

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The BNA publication, Electronic Commerce & Law Report, recently quoted our own Carolyn Sieve, discussing the Brekka decision.  The Electronic Commerce & Law Report article, "Brekka Case Shows Need for Comprehensive Strategy to Shield Data from Insider Misuse," discussed how the Ninth Circuit recently joined a trend disfavoring Computer Fraud and Abuse Act (CFAA) claims brought by companies against disloyal employees. In LVRC Holdings LLC v. Brekka, the court resolved disagreement among federal district courts within the circuit about how the CFAA’s "authorization" standard applies to cases involving data theft by disloyal employees.

According to the article, the court explained that employers may be able to pursue claims under the CFAA, but only if employees violate clearly defined limits on access to company networks in the course of stealing proprietary information. Carolyn commented that the message from Brekka is that employers should not rely solely on potential CFAA claims to protect their proprietary information. She also noted, "The Brekka decision places more responsibility on the employer’s shoulders to provide notice to employees as to what is ‘authorized access.’" Carolyn recommended that employers determine what information they want to protect, implement security protocols to safeguard that information, and combine those efforts with systemic employee education regarding confidential and data use policies.

 A full copy of the article is available here.  It is reproduced with permission from Electronic Commerce & Law Report, 14 ECLR 1381 (Sept. 20, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

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Earlier this week, Starbucks Corp. sued a former executive in the U.S. District Court for the Western District of Washington, seeking enforcement of a noncompetition agreement. (Starbucks Corp. v. Paul Twohig, Civil Action No. 09-01404 (W.D. Wash.))

Former Division Senior Vice President Paul Twohig left Starbucks in March 2009, and, according to news reports, purportedly accepted a position with Dunkin' Donuts as its Brand Operations Officer.  According to the complaint, Twohig executed a noncompetition agreement in 2004, promising that he would not participate in the management, operation, or control of any direct competitors for 18 months after leaving Starbucks.

Starbucks alleges that, as Division Senior Vice President, Twohig controlled all aspects of Starbucks' retail operations in the Southeast, including developing the brand and creating business plans. And, Starbucks contends that after leaving the company in March, Twohig contacted Starbucks in August to ask whether it would release him from his noncompetition agreement, so that he could accept a position with Dunkin' Donuts. Starbucks declined to release Twohig from the contract.

Starbucks is seeking preliminary and permanent injunctive relief, damages and fees.

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Katherine (Kate) Perrelli (a Seyfarth Shaw partner in Boston) recently published an op-ed, “Is Banning Non-Competes the Answer for Massachusetts?" in the September 21, 2009 issue of Massachusetts Lawyers Weekly. In her article, Kate discusses two bills addressing non-competition agreements that are currently pending in the Massachusetts legislature; one bill would enforce reasonably tailored non-competes, while the other would ban them altogether.  A full copy of the article is available here. Kate outlines the supporting arguments of both critics and proponents of non-competition agreements. She explains that those criticizing non-competes claim that restrictive covenants limit employee mobility and industry innovation and should be banned altogether. Proponents of non-competes argue that banning them will hurt employers by negatively impacting employer research productivity and the employer’s ability to protect intellectual property. Kate contends that “reasonable and narrowly tailored non-competes, combined with non-solicitation and non-disclosure agreements, best balance the freedom and interests of the employee against the employer’s interest in protecting intellectual capital.” Kate notes that “while encouraging the free flow of employees and ideas in our economy is appealing, the Legislature should listen carefully to Massachusetts’ business leaders and examine relevant research closely before embracing an all outright ban. Such action may in the end have harmful effects on startups, current employers and the Massachusetts’ economy generally.” She further notes that “banning non-competes in Massachusetts would be a dramatic sea change for companies currently and considering, doing business here.”  A copy of joint proposed legislation is available here.  A hearing is scheduled for tomorrow, October 7, 2009, where debate will be heard on the competing bills.

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In a landmark decision just issued, the Illinois Appellate Court, Fourth District, ruled that an ex-employer seeking to enforce a covenant-not-to-compete against former sales personnel need only show that the time-and-territory restrictions are reasonable and need not prove, in addition, that there is a sufficient legitimate-business-interest in enforcement. 

In Sunbelt Rentals, Inc. v. Ehlers, No. 4-09-0290 (9/23/09), the appellate tribunal agreed with the trial judge that the defendants’ conduct amounted to breach of a reasonable contract and affirmed the entry of a preliminary injunction prohibiting the defendants from violating the covenant. The appellate court held for the first time that the plaintiff’s business interest – that is, a showing not only that the time-and-territory restrictions were reasonable but also that the ex-employer had a “near permanent relationship” with customers and/or that information it provided to ex-employees was confidential – is irrelevant. In the process, the court overruled a number of its own prior decisions and criticized the reasoning of virtually every previous Illinois intermediate appellate decision in point. 

Interestingly, the primary basis for this dramatic shift is the absence of any mention of the legitimate-business-interest test in a 2006 Illinois Supreme Court opinion (Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85) enforcing a restrictive covenant. (For entertainment, read the Sunbelt court’s explanation for affirming the circuit court judge notwithstanding that judge’s indisputable violation of the principle “that a trial court is not free to ignore binding precedent from the appellate court in its own district.”) 

Note that the time to seek rehearing of the Sunbeltdecision, or a petition for leave to appeal to the Illinois Supreme Court, has not yet expired.

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