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

By Marcus Mintz

In a recent case filed in the United States District Court for the Northern District of Florida, Mainline Information Systems, Inc. v. Fordham, No. 11-137, 2011 WL 2938435 (N.D. Fl. July 21, 2011), the plaintiff sought a preliminary injunction against an individual defendant for tortious interference with business relationships and for misappropriation of trade secrets. Plaintiff provides integrated IT solutions for businesses and other related products and services. Plaintiff contended that the defendant was soliciting more than 20 of its employees directly, and an additional 14 employees indirectly, to terminate their employment relationships with plaintiff and join a competing company. Plaintiff also argued that defendant was seeking to misappropriate its trade secrets through the solicitation of its employees.

The district court denied plaintiff’s motion for preliminary injunction because plaintiff failed to demonstrate a “substantial likelihood” that plaintiff would prevail on the merits of either of its two claims, for tortious interference or misappropriation of trade secrets. At bottom, the court found that plaintiff had run into court without the evidence to support its claims. The court specifically found that plaintiff introduced no witnesses to testify at the preliminary injunction hearing and only presented two affidavits in support of its application for injunctive relief. One such affidavit was dismissed as “threadbare” in that it only asserted that the allegations of the complaint were true and correct. The second affidavit was made by one of plaintiff’s senior vice presidents who stated that defendant had, directly and indirectly, solicited plaintiff’s employees. Neither affidavit was sufficient to meet plaintiff’s burden to obtain a preliminary injunction, particularly in light of the evidence put forth by the defendant that contradicted plaintiff’s claims.

In contrast to the plaintiff, the defendant testified at the hearing and denied contacting the majority of the employees that plaintiff claimed were solicited by the defendant. The defendant also presented evidence from several of the purportedly solicited individuals who stated they were never contacted by defendant. Based on the foregoing evidence put forth by defendant, which directly contradicted plaintiff’s second affidavit, the court denied the motion for preliminary injunction as it related to tortious interference. Similarly, because no evidence was presented regarding defendant’s use of any trade secrets, the preliminary injunction was also denied as to defendant’s misappropriation claim.

The court’s brief ruling is an instruction to would-be litigants that argument by itself is insufficient to obtain injunctive relief in Florida’s district courts.

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White Wave International, Inc. filed an action in Florida against Lindsay Lohan, Lorit LLC, a company she has an indirect ownership interest in, and several other defendants arising out of a certain Confidentiality Agreement Between Firms (“CABF”) between White Wave and Lorit. It was alleged by White Wave that the CABF provided Lohan, Lorit and the other defendants with a time-limited opportunity to examine and obtain samples of White Wave’s product. It was further alleged that although Lorit made an offer to purchase the product from White Wave, the parties were unable to agree on a purchase price and the relationship was terminated. White Wave’s action arose, it alleged, when Lorit, Lohan and another defendant introduced a product which was claimed to contain the nearly identical ingredients as White Wave’s product.

White Wave’s complaint included five counts including breach of contract, theft of trade secrets (under the Uniform Trade Secrets Act), civil conspiracy, intentional interference with contract and deceptive and unfair trade practices. Lohan moved to dismiss the complaint as against her on the basis of lack of personal jurisdiction (notably, the action had been dismissed as against 3 other defendants previously on similar grounds).

Lohan argued that the court lacked personal jurisdiction over her because she did not have sufficient contacts with the State of Florida with respect to the facts that gave rise to the complaint, specifically regarding the CABF, Lorit or its business. White Wave argued that Lohan communicate with Florida citizens “through the internet” regarding Lorit’s product, and that consequently her physical presence in Florida was not necessary to confer jurisdiction.  Essentially, that her “telephonic, electronic, or written communications into Florida” regarding Lorit’s product were enough to invoke long-arm jurisdiction.

The court dismissed the action as against Lohan, finding that none of the activity prescribed to her by White Wave satisfied Florida's long-arm statute (subparagraphs (1)(a) through (h) of § 48.193 of the Florida Statutes).  Although the court agreed that “… a defendant does not have to be physically present in the state to commit a tort under § 48.193(1)(b)” and further that “[t]he Eleventh Circuit has consistently applied [a] broader construction of section (1)(b)”,  it further held that the cases in which the Eleventh Circuit has applied section (1)(b) to foreign torts causing injury within Florida, the conduct was directed at Florida residents, corporations, or property, and the harm was felt exclusively or primarily in Florida.  Because the alleged tortious act was the misappropriation of White Wave’s trade secrets, a misappropriation alleged to have occurred outside the State, the alleged tortious act was not directed at Florida residents, corporations or property and thus could not be used to invoke the long-arm statute.

As to the allegation that Lohan committed a tortious act within Florida “by making telephonic, electronic, or written communications” into the State, to wit her “internet communications” promoting Lorit’s product, the court found that the cause of action alleged, misappropriation of trade secrets, did not arise from said internet communications. Consequently the court ruled that the “tortious conduct” occurred outside of the state, and the damage alleged were insufficient to satisfy Florida's long-arm statute.

The court similarly rejected plaintiff’s argument that its civil conspiracy claim satisfied the long-arm statute.  White Wave argued that the long-arm statute conferred personal jurisdiction over an alleged conspirator where any other co-conspirator committed an act in Florida in furtherance of the conspiracy. The court found that the complaint failed to allege sufficient facts from which it could be reasonably inferred that the defendants, including Lohan, “…were part of a conspiracy either engineered in Florida or pursuant to which a tortious act in furtherance was committed in Florida.”

The court also rejected the argument that personal jurisdiction over Lohan could be established by the breach of contract provision of the Florida long-arm statute because the CABF was between White Wave and Lorit, and Lohan was only, at best under the facts alleged in the complaint, a member of the limited liability corporation. Consequently, the court found that she could not be personally liable for any liability of the limited liability corporation under the facts alleged, and therefore, jurisdiction under under the Florida long-arm statute failed there as well. As a result, the court did not reach Lohan’s due process arguments.

White Wave may decide to pursue its suit against Lohan in another forum where she is subject to personal jurisdiction, such as California.

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           In a recent decision, a California Second District Appellate Court upheld a trial court “issue sanction,” which effectively enforced, albeit temporarily, a five-year, unlimited geographic scope employee noncompete agreement against the defendant former employee. NewLife Sciences v. Weinstock, -- Cal.Rptr.3rd --, No. B223212, 2011 WL 2739653 (July 15, 2011). While such noncompete agreements are normally void and unenforceable under California’s well-known statutory bar against employee noncompetes (see Cal. Bus. & Prof. Code § 16600), the court stated that the temporary enforcement of the employee noncompete was a permissible issue sanction against the former employee, who time and time again refused to appear for depositions or answer hundreds of deposition questions. The court did not appear to rule on plaintiff’s argument that the noncompete fell within the sale-of-business exception under Section 16601, even though the court acknowledged that argument in its opinion. Section 16601 makes enforceable a reasonable non-competition clause executed by any “person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity . . . .”  Section 16601 protects the purchaser of a business against competition from the seller.

            Some may argue, and the dissent so stated, that the decision may conflict with California’s settled public policy against employee noncompetes. Nevertheless, the decision is an example that courts sometimes find ways to enforce noncompetes if there is strong evidence of the former employees’ untoward conduct, particularly discovery abuses.

The Parties and the TMR Device

           Plaintiff NewLife Sciences (“NLS”) purchased from defendant Weinstock and his company the patent rights to a Therapeutic Magnetic Resonance Device (“TMR”), which was developed for pain management therapy, and all the other assets of the company. As part of the transaction, NLS hired Weinstock (who was not a doctor) as its chief science and technology officer and board chairman for five years. Weinstock’s employment contract provided, in relevant part, that he (i) could be terminated at any time for “fraudulent or unlawful conduct,” (ii) could not compete with NLS while working there, and, (iii) for five years after his employment, could not compete “directly or indirectly with any activity now or in the future engaged in by NLS.” The post-employment noncompete contained no geographic limitation.

            NLS terminated Weinstock in December 2007 for administering TMR services outside of a physician’s presence, in violation of California law, FDA rules, and NLS policy. NLS demanded that Weinstock return to NLS all of its property, including the patented TMR devices. Weinstock did not do so. He continued marketing the devices, and administering treatments.

NLS’s Lawsuit and the Trial Court’s Ruling

            NLS sued Weinstock, claiming breach of the noncompete, and other tortious conduct directed at NLS. NLS produced evidence that Weinstock was smearing NLS in the marketplace, appeared on a television show pawning himself off as the owner of the TMR patent, and soliciting customers and investors for the TMR operations. The trial court denied Weinstock’s early motion to strike, which was based on the Section 16600 noncompete bar. Weinstock subsequently refused to appear for his deposition, answer relevant deposition questions, and produce documents as ordered by the court. Weinstock cited the statutory bar as justification for his refusal to respond to discovery. As punishment for what the trial court called his “arrogant and contemptuous disregard for the orders of this court,” the trial court entered a severe issue sanction against Weinstock, such that the following issues were established for all purposes in the litigation:

1.                  Weinstock breached his employment contract by competing with NLS while still employed;

2.                  The noncompete was enforceable;

3.                  Weinstock breached the noncompete post-employment by using the TMR device without proper physician supervision; and

4.                  Weinstock’s breach caused NLS damages.

            Based on the issue sanctions and NLS’s evidence, the trial court entered a preliminary injunction against Weinstock and his affiliated companies from competing with NLS throughout the litigation, including an injunction against making or marketing the TMR device or something similar, and soliciting new, potential or existing customers for TMR devices. The trial court later entered terminating sanctions against Weinstock, and awarded NLS default judgment against Weinstock. He appealed.

Appellate Court Decision and Dissent

            The Appellate Court upheld the trial court’s preliminary injunction and default judgment. The court did not examine the merits of the Weinstock’s Section 16600 or NLS’s 16601 argument. Rather, the court held that the trial court did not abuse its discretion by entering the issue sanction, and later awarding default judgment in favor of NLS and against Weinstock. Defendants’ repeated and willful non-compliance with the trial court’s discovery orders, the Appellate Court held, were sufficient to warrant the court’s sanctions.

            The dissent stated that the trial court should not have enforced an illegal noncompete by way of a discovery sanction. The trial court and the Appellate Court majority should not have set aside, in the name of discovery sanctions, California’s strong public policy against employee noncompetes. At a minimum, the dissent stated, the trial court should have held an evidentiary hearing on whether the noncompete fell under the Section 16601 sale-of-business exception.

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By Bob Stevens

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By Scott Schaefers

            In a recent decision involving whether a former employer could obtain a temporary restraining order under its broad non-competition agreement with its former employees and former software development company, the federal court in Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158 (N.D.Cal. July 1, 2011) granted plaintiff’s request and enjoined defendants from competing with plaintiff while using its proprietary information. The court attempted to balance plaintiff’s property interests in its confidential data and business reputation against California’s long held public policy against noncompetition agreements. Ultimately, the court held there was sufficient evidence of defendant’s alleged wrongdoing to justify a TRO. 

            The Richmond court effectively “blue penciled,” or reformed, plaintiff’s broad non-compete agreement, rolling back its provisions to conform with California’s “trade secret exception” to California’s statutory bar on employee non-competes. Such blue penciling is arguably inconsistent with several recent California state court decisions prohibiting such reformation of overbroad noncompetes. In the end, the case highlights the difficulty in applying a trade secret exception to Business and Professions Code section 16600 and determining whether sued-upon noncompete covenants are necessary to protect an employer’s trade secrets.

Plaintiff’s Allegations in Richmond Technologies

            The plaintiff in Richmond was a distributor of enterprise planning software. Plaintiff sued defendants, which were plaintiff’s source-code company and plaintiff’s former employees, for misusing plaintiff’s source code and proprietary customer data to unfairly compete with plaintiff, before and after defendants terminated their relationships with plaintiff. In doing so, defendants (plaintiff alleged) breached their noncompete, non-solicitation, and non-disclosure agreements with plaintiff, violated California’s unfair competition statute, and were liable under other related common law theories. Notably, plaintiff did not make a claim for trade secret misappropriation under California’s Uniform Trade Secret Act (Cal. Civ. Code § 3426.1 et seq.).

.           The noncompete agreement prohibited defendants from competing with plaintiff for one year after their relationships terminated, and the non-solicitation agreements prohibited defendants from soliciting plaintiff’s customers during defendants’ employment and for one year thereafter. There appeared to be no significant difference in the broad application of the non-solicitation and noncompete agreements; in fact, the non-solicitation agreements, which contained certain exceptions regarding time lapse and the employees pre-existing relationship with the customer, were narrower than the noncompete. The non-disclosure agreement prohibited defendants from using plaintiff’s proprietary data.

The Court’s Decision

            Even though the court denied an injunction based on plaintiff’s non-solicitation agreements because they were overbroad and likely unenforceable under California’s statutory bar against restrictive covenants (Cal. Bus. & Prof. Code § 16600), the court issued a limited injunction based on the non-competition agreement. The court noted and discussed at some length the “trade secret exception” under Section 16600, which, despite California’s strong public policy against non-competition agreements, permitted claims for breach of noncompete agreements if necessary to protect a trade secret. Retirement Group v. Galante, 176 Cal.App.4th 1226, 1237, 98 Cal.Rptr.3d 585 (Cal.Ct.App.2009) and Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 189 P.3d 285 (2008).  Plaintiff presented sufficient evidence, the court found, that:

• defendants had access to Richmond’s customers’ specialized requirements;
• defendants set up their competing business almost a year prior to terminating relationship with plaintiff;
• prior to terminating, defendants stopped using their Richmond e-mail accounts to communicate with plaintiff’s customer, and instead began using their Aumtech e-mail accounts;
• defendants listed plaintiff’s customers on Aumtech’s website as Aumtech customers;
• defendants contacted specific plaintiff customers and induced them to switch to defendants; and
• one of the individual defendants, prior to resigning from plaintiff, wiped her Richmond computer using three wiping programs, thus forever deleting many customer files and e-mails that Richmond needed to carry on its business with those customers.

            In light of this evidence, the court found that there were, at a minimum, “serious questions going to the merits” of plaintiff’s claims which justified its TRO.

            Nevertheless, to balance plaintiff’s interests against California’s policy against noncompetes, the court “narrowly” drew its injunction, such that defendants were prohibited from:

• holding out plaintiff’s customers on Aumtech’s website as defendants’ customers;
• initiating contact with plaintiff’s customers that defendants knew of or had contact with during their employment with plaintiff (except for broad-based marketing of its products), but defendants were not prohibited from responding to requests initiated by such customers;
• using plaintiff’s proprietary data to negotiate or do business with plaintiff’s customers, but defendants were allowed to do business with those customers so long as defendant’s did not use such plaintiff’s proprietary information; and
• using plaintiff’s source code in their business, but defendants were allowed to market and sell similar products so long as they did not use plaintiff’s trade secrets.

The Court’s Decision and State Court Authority

            The court’s findings are arguably inconsistent with recent California state court decisions; however, this is just a decision on the temporary restraining order and not a preliminary injunction. On the one hand, the Richmond court held that plaintiff’s broad non-solicitation agreements were unenforceable under Section 16600 because they were not “narrowly tailored” to protect plaintiff’s trade secrets, even though the agreements contained certain exceptions. Plaintiff’s noncompete agreement, however, was just as broad, if not more so - it provided that, upon defendants’ termination of their relationships with plaintiff and without exception, they “will not compete with [plaintiff] with similar product and or Service using its technology for a period of one year thereafter.” Nevertheless, the court issued the injunction under the noncompete.

             In effect, the court blue-penciled or reformed the noncompete to conform to the trade-secret exception under Section 16600. Such blue-penciling has been held impermissible by several California cases, including those which held that employers violate California’s unfair competition statute (Cal. Bus. & Prof. Code § 17200) by even requiring employees to sign overly broad noncompete agreements at the beginning of their employment. See Kolani v. Gluska, 64 Cal.App.4th 402, 407-08 (1998) (holding that trial court properly declined to rewrite illegal covenant not to compete into a narrow bar on theft of confidential information); D’Sa v. Playhut, Inc., 85 Cal.App.4th, 927, 934-35 (2000) (refusing to narrowly construe invalid covenant not to compete so as to make it enforceable); Dowell v. Biosense Webster, Inc., 179 Cal.App.4th 564, 579  (2009).                                                                     

Lessons Learned           

               The takeaways from the Richmond decision are that (1) California courts still struggle with whether there is a trade secret exception to Section 16600 that would permit certain narrow noncompete restrictions; (2) when drafting restrictive covenants, employers should make sure they are tailored to protect against the misuse of trade secrets; (3) employers should monitor employee’s conduct and keep an eye out for unlawful activity (defendants in Richmond allegedly engaged in unlawful activity for almost a year without plaintiff knowing), and (4) when suing a former employee for breach of contract and trade secret theft, recognize that courts will likely impose heavy pleading and proof burdens, and diligently investigate and document alleged misconduct.

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Starting this year, restrictive covenants in employment agreements and other business-related agreements in Georgia are subject to new rules governing who can enter into these agreements, how these agreements should be written, and how disputes will be handled by the courts.

What's changed - for businesses, the bench and the bar? What's remained the same? What can we do? What should we do?

Please join us for this webinar, the third in our 2011 Trade Secrets Webinar Series-as we break-down the new law, highlight important features, and provide tips on how to protect businesses' investment in their people and their confidential information in Georgia. Our experienced panel of Seyfarth attorneys will be joined by Kevin Levitas, a former member of Georgia House of Representatives, who played a key role in the passage of the new law.

When:

Thursday, July 21, 2011

2:00 p.m. to 3:15 p.m. Eastern

1:00 p.m. to 2:15 p.m. Central

12:00 p.m. to 1:15 p.m. Mountain

11:00 a.m. to 12:15 p.m. Pacific

 Who Should Attend:

General Counsel, In-House Labor and Employment Counsel, In-House Intellectual Property Counsel, HR Directors and HR Supervisors, Chief Technology Officers, Chief Security and Information Officers, and Competitive Intelligence Professionals

Speakers:

Kevin Levitas, Former Member Georgia House of Representatives

Erika Birg, Seyfarth Shaw LLP

Bob Stevens, Seyfarth Shaw LLP

Register Here

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A Robert Samuelson piece in the Washington Post on the mismatch between the skills of job seekers and the requirements for open positions may seem like an unlikely place to find an angle on non-compete restrictions. However, in his column on the unemployment rate, Samuelson makes an argument that touches on the role that non-competes can play for employers and employees. In explaining why many individuals who are currently unemployed have struggled to find jobs despite the fact that a number of employers have listed openings, Samuelson theorizes as to why many companies have not responded to the situation by increasing training for new employees:

Companies traditionally provided much training, but that may also have changed. Loyalties have weakened. Companies are more willing to fire; workers are more willing to jump ship. Training may seem a poor investment because workers won’t stay long enough to earn a return. In the McKinsey [Global Institute] survey, companies denied cutting training budgets. But [Georgetown’s Anthony] Carnevale and others think the training has altered. Before, firms provided more basic training in business or technology skills; now, firms expect workers to come with these skills and focus training on firm-specific practices and systems.

In a nutshell, Samuelson’s argument is that a fluid job market acts as a disincentive for employers to train new employees on the general skills required for a position. Rather, they are looking for employees who have the general skills already. 

If this analysis is correct, then one potential response by employers to the situation would be greater use of restrictive covenants because such covenants are an important tool for employers to protect their investment in training. An employer is more likely to spend time and money to train an employee if it knows that the employee is likely to stay for a significant period of time. A non-compete restriction acts as an incentive for an employee to stay. Moreover, the law in many states recognizes the linkage between training and non-compete provisions in that a significant expenditure in training can be a legitimate interest to support the enforcement of such a covenant. In short, if an issue in the job market is a concern that money spent on training will be wasted, then use of non-compete provisions can be a solution.

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