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

By Paul Freehling

When the evidence of trade secret misappropriation and resulting substantial damages is compelling, defendants should expect to get hammered in court. A recent Massachusetts case is in point. There, despite a jury verdict for the defendants, the trial court entered judgment for the plaintiff which included a permanent injunction prohibiting the defendants from using the plaintiff’s manufacturing process trade secret and an order directing the defendants to dismantle the production line where the trade secret had been used. Defendants were forbidden from manufacturing a competing product for five years by any means and were assessed $8 million in damages, fees and costs. 

STR’s common law and statutory trade secret misappropriation claims were tried in the Superior Court simultaneously, the former to a jury and the latter to a judge. At trial, STR described its five-year effort to develop “an innovative method to produce a specialized encapsulant used in making solar cells.” STR showed how its 25% share of worldwide sales of that product declined when JPS begin making and selling a competing product, using the identical process, within one year after a key STR employee defected to JPS.   An expert witness calculated JPS’ profits resulting from the wrongdoing. 

Answering a special interrogatory, the jury found that STR’s trade secret had not been misappropriated. The trial judge disagreed. In addition to granting equitable relief, she awarded STR more than $1 million in damages (which she trebled pursuant to the applicable state statute), $3.9 million in attorney’s fees, and costs in excess of $1.1 million. The Appeals Court of Massachusetts affirmed and indicated that STR also would be entitled to reimbursement of its fees and costs incurred on appeal. Specialized Technology Resources, Inc. v. JPS Elastomerics Corp., No. 11-P-776 (Mass. App. Court, Nov. 23, 2011).

Several Massachusetts cases hold that (a) there is no right to a jury trial on statutory claims of the type involved here, and (b) the jury’s verdict with respect to common law causes of action parallel to the statutory claims is not binding on the judge in deciding whether the statute has been violated. So, the Superior Court judge was permitted to disregard the jury verdict. The defendants maintained, however, that no Supreme Judicial Court decision authorizes a trial judge, in a case where the statutory and common law actions are tried together, to decide questions of fact contrary to the findings of the jury as reported in special interrogatory answers. Nevertheless, one prior appellate court ruling upheld a trial judge’s finding, in a breach of warranty lawsuit, that the defendants were not liable notwithstanding the jury’s directly contrary answers to special verdict questions. Relying on that precedent, the decision below in favor of STR was affirmed. The entirety of the trial judge’s award of injunctive and monetary relief was determined to be within her discretion.

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By Molly Joyce

In the recent decision of The Capability Group, Inc. v. American Express Travel Related Services Company, Inc.,658 F.3d 75 (1st Cir. 2011), the United States Court of Appeals, First Circuit, affirmed summary judgment in favor of a defendant accused of, among other things, breaching a confidentiality agreement between the parties. The court found that the plaintiff, The Capability Group, failed to establish that AmEx, the defendant, caused plaintiff damages or irreparable injury warranting injunctive relief.

The dispute arose out of a contract entered into between the two parties in 2000, pursuant to which The Capability Group provided Six Sigma training and related materials to AmEx employees. The contract gave AmEx a license to distribute and use The Capability Group’s materials for training AmEx employees and contractors and consultants who AmEx considered integral to AmEx’s business initiatives. Pursuant to the terms of the contract, these contractors and consultants (and their employers), were required to sign confidentiality agreements restricting their use of The Capability Group’s materials. 

The Capability Group claimed that AmEx breached the agreement between the parties, in part, by distributing its materials to contractors and consultants who had not signed confidentiality agreements and allowing former employees to retain materials after they left AmEx.

AmEx conceded that, in some instances, it did not properly police the materials or obtain signed confidentiality agreements. AmEx nevertheless maintained that such breaches were minor, the materials had not been distributed or used outside of the company since 2005, and in any event, did not result in any damages to The Capability Group. The Capability Group argued that AmEx’s agreement to pay it under the contract for the materials evidenced the inherent value of the materials and that summary judgment was improper because a jury could conclude that but for AmEx’s failure to secure signed confidentiality agreements, the recipient companies would have paid The Capability Group to use them.

The First Circuit agreed with AmEx’s position that The Capability Group could not establish damages and noted that the materials at issue were furnished to help third parties in AmEx’s business and were not otherwise used. 

The Capability Group was similarly unsuccessful on its claim that it was entitled to an injunction against AmEx. The contract at issue stipulated that a breach of the confidentiality provisions would amount to “irreparable and continuing damage or injury” entitling The Capability Group to seek an injunction. Despite this provision, however, the court noted that injunctions are rarely warranted where there is no threat of future harm or continuing disclosure and parties have no power to compel a court to grant equitable relief that a court finds unnecessary.

The Capability Group v. American Express Travel Related Services Company, Inc. establishes that at least in the First Circuit, a plaintiff who claims a minor or technical breach of a confidentiality agreement, but cannot establish any particular damages, will not likely survive summary judgment. Similarly, even though a contract might state that the non-breaching party is entitled to injunctive relief in the event of a breach, a request for an injunction is almost always within the court’s discretion, and will likely be denied if the plaintiff cannot point to an ongoing or future threat of harm.

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By Robert Milligan and Joshua Salinas

In connection with proposed Congressional amendments to the federal Computer Fraud and Abuse Act (CFAA), on November 15, 2011, Department of Justice Deputy Chief Richard W. Downing (Computer Crime and Intellectual Property Section) emphasized the importance of an expansive CFAA before the House Committee on the Judiciary and came out against attempts by critics of the CFAA to restrict employers' ability to use the CFAA against employees who steal company data in violation of company computer usage policies. The Department of Justice prepared a statement in advance of Mr. Downing's live testimony.

Mr. Downing addressed concerns that an expansive reading of “exceeds authorized access” under the CFAA might subject computer users to prosecution for merely violating a website’s terms of use. We have blogged about recent cases in which courts have applied an expansive view of the CFAA. In U.S. v. Nosal, the Ninth Circuit Court of Appeal held that an employee’s violations of an  employer’s computer use policies constituted “exceeding authorized access.” A California district court in Facebook v. MaxBounty applied Nosal’s holding and found that Facebook could sufficiently state a claim under the CFAA because the defendant advertising company had violated Facebook’s terms of service policies. Note, the Ninth Circuit Court of Appeal recently ordered that Nosal be heard before an en banc panel. 

Mr. Downing stressed that a restrictive reading of the CFAA would make it difficult or impossible to deter and address serious insider threats, including threats by rogue employees working for competitors to steal their employers' data. Technology has become so pervasive that nearly every employee is required to access database with large amounts of information. Mr. Downing highlighted the importance of protecting the nation’s economic security and not just national security. Indeed, businesses should have confidence that their confidential, proprietary, and/or trade secret information is protected.

Mr. Downing provided several examples in which a restrictive reading of “exceeds authorized access” would allow violators to escape any liability for their wrongdoings. For example, in 2006 a contract systems administrator for a medical services provider used his authorized computer access to download thousands of employee names and social security numbers. See United States v. Salum, 578 F. 3d 682 (7th Cir. 2009).   In 2008, nine employees of Vangent, Inc. used their authorized computer access to obtain and disclose loan records and confidential information regarding President Obama and other well known political figures, celebrities, and sports figures. A restrictive reading of the CFAA would not only hurt employers, but would also hurt the public and customers whose information is often the subject of data theft.

Mr. Downing highlighted that the use of employer agreements and internal computer usage policies are routinely used for prosecuting offenders in such cases. Mr. Downing reiterated the Department of Justice's growing concern that advancements in computer technology have increased the vulnerability of businesses which rely on trade secret, confidential, and/or proprietary information. In the age of Wikileaks, Facebook, Twitter, and rapidly evolving social media, employees are able to leak company information to the entire world in only a matter of minutes. Mr. Downing and the Department of Justice support the ability of companies to be proactive and clearly communicate the restrictions on computer usage to employees and hold them accountable in civil and criminal court for violations of such policies. Restricting the CFAA to only hackers (rather than insiders) through proposed amendments to the CFAA would provide employees a license to steal company data and weaken a company's defenses in protecting its data.

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As previously reported on this blog, the Virginia Supreme Court recently issued an important new non-compete decision which impacts the enforceability of non-compete agreements in Virginia and serves as a reminder that employers may want to review their agreements with employees and update them as appropriate. Here is a Seyfarth One Minute Memo on this important new case.

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By Gary Glaser

The United States District Court for the Northern District of California recently ruled that PhoneDog, an “interactive mobile news and reviews web resource,” could proceed with its lawsuit against Noah Kravitz, a former employee, who it claims unlawfully continued using PhoneDog’s Twitter account after he quit. PhoneDog v. Noah Kravitz, No. C11-03474 MEJ, 2011 U.S. Dist. LEXIS 129229 (N.D.Cal.)(James)(November 8, 2011)(unpublished).

PhoneDog asserted 4 causes of action, two of which arose from its contention that Kravitz unlawfully misappropriated and/or converted PhoneDog’s trade secrets: namely, the compilation of subscribers to its Twitter account and the password used to access the account. And it was these claims anchored in PhoneDog’s trade secret claims that survived Kravitz’s motion to dismiss. 

PhoneDog reviews mobile products and services and provides users with the resources that they can use to research, compare prices, and shop from mobile carriers. Kravitz worked for PhoneDog as a product reviewer and video blogger. He was given access to PhoneDog’s Twitter Account “@PhoneDog_Noah”, using a password and used the Account to send out information and promote PhoneDog’s services on its behalf. The centerpiece of PhoneDog’s trade secret claims are that all PhoneDog_Name_Twitter Accounts and the passwords to such accounts used by PhoneDog’s employees -- like the one to which Kravitz was given access to and use of – constitute proprietary, confidential information. PhoneDog contends that the Twitter Account to which Kravitz was allowed to use on its behalf generated about 17,000 Twitter followers during Kravitz’s employment.

Kravitz countered by arguing that the Twitter Account cannot be a trade secret because the names of the Twitter Account followers are, and have always been “publically available for all to see at all times.” The passwords, he argues, are not trade secrets because they don’t derive any independent economic value as required under the Uniform Trade Secrets Act (“UTSA”), since they don’t provide any “substantial business advantage.” Instead, all they do, Kravitz contends, is permit the individual logging in to view information that is already publicly known. He argued that the password is also not protectable as a trade secret because he, and not PhoneDog, initially created the password, and that PhoneDog did not take reasonable efforts to maintain its secrecy.

In addition, Kravitz contended that PhoneDog failed to allege that he engaged in any act that constitutes “misappropriation,” as it is defined under the UTSA. Instead, he argued, PhoneDog merely alleged, in conclusory terms, that he used “improper means” to obtain the Twitter password and to continue to use the Twitter Account, which belonged to it, rather than him.

The Court denied Kravitz’s motion to dismiss both the misappropriation of trade secrets and the conversion claims. As to the misappropriation claim, the Court held that PhoneDog had described the subject matter of the trade secret with “sufficient particularity” and satisfied its pleading burden as to Kravitz’s alleged misappropriation by alleging that it had demanded that Kravitz relinquish use of the password and Twitter Account, but that he has refused to do so. And, with respect to Kravitz’s challenge to PhoneDog’s assertion that the password and the Account followers do, in fact, constitute trade secrets -- and whether Kravitz’s conduct constitutes misappropriation, the Court ruled that the such determinations require the consideration of evidence outside the scope of the pleading and should, therefore, be raised at summary judgment, rather than on a motion to dismiss.

The Court followed a similar approach in denying Kravitz’s motion to dismiss PhoneDog’s conversion claim. Kravitz challenged such claim on the ground that PhoneDog had not sufficiently alleged that it owns or has the right to immediately possess the Twitter Account.   He also argued that PhoneDog failed to adequately allege that he had engaged in his alleged act of conversion “knowingly” or “intentionally.” The Court, however, found that these issues lie “at the core of [the] lawsuit” and that, accordingly, an evidentiary record outside the pleading had to be developed before the Court could resolve such fact-specific issues.

The last two of the claims were dismissed by the Court, both of which alleged interference with prospective economic advantage – one intentional, and the other negligent. The basis for the dismissal of these claims was that California law does not protect “mere ‘potential’ relationships that are ‘at most a hope for an economic relationship and a desire for a future benefit.” Here, the Court found that it was unclear who the “users” of PhoneDog’s mobile news and review services are -- in other words, whether they are the 17,000 Account followers, consumers accessing PhoneDog’s website, or some other individuals, and what the nature of PhoneDog’s purported economic relationship is with these users. The Court also agreed with Kravitz that PhoneDog had failed to adequately allege any actual disruption of the relationship between it and its users or actual economic harm. With respect to the negligent interference with prospective economic advantage claim, the Court also agreed with Kravitz that PhoneDog had failed to allege that Kravitz owed it a duty of care.

The writer eagerly awaits the decision of this Court once a complete evidentiary record has been developed. However it ultimately rules, though, one can rest assured that this is but one more chapter in what we can anticipate will be a long line of cases addressing the issues of whether social media passwords and social media analogs to the classic customer list are “trade secrets,” and who, if anyone, truly “owns” them?   And, more broadly, whether any information available on the web can be considered a "trade secret."

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By David Monachino

New Jersey is one of the four remaining states that have not adopted some or all of the provisions of the Uniform Trade Secrets Act (Massachusetts, New York and Texas are the others), but instead NJ courts have relied wide range of common law decisions in order to establish a trade secret misappropriation claim. On September 26, 2011, the New Jersey Senate approved a bill known as the "New Jersey Trade Secrets Act" (A - 921), which provides statutory remedies and procedural guidance for the misappropriation of trade secrets. This proposed bill provides for damages for both actual loss suffered by a plaintiff and for any unjust enrichment of the defendant caused by the misappropriation of trade secrets. Damages also may include a reasonable royalty for unauthorized disclosure or use of the trade secrets. In cases of willful misappropriation, punitive damages and attorneys’ fees may be awarded. In addition, if a claim for misappropriation is brought in bad faith, attorneys’ fees may be awarded.

The New Jersey Act also has a couple of unique and helpful provisions, including a requirement that a court "preserve the secrecy of an alleged trade secret by reasonable means consistent with" court rules. There is also "a presumption in favor of granting protective orders in connection with discovery proceedings" as well as "provisions limiting access to confidential information to only the attorneys for the parties and their experts, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval."

The NJ Assembly has to vote on the Senate’s amended version of the bill before it is presented to Governor Chris Christie for his signature. The bill is expected to be voted upon after the November recess and Governor Christie then has 45 days to sign the bill into law. If the bill is singed, it will become effective immediately, but will not be retroactive. Assuming the law eventually passes, it is still important for companies doing business in NJ to define what may constitute proprietary information, especially if that definition is broader than the "trade secret" definition found in the statute. Either way -- whether the bill passes or not -- it remains important for a business to continue to take reasonable efforts to maintain the secrecy of any information that it deems confidential or risk losing trade secret protection.

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By Marcus Mintz

Earlier this month, the Virginia Supreme Court issued an opinion in which it clarified the burdens an employer must meet to enforce a non-compete against a former employee. Specifically, that the employer must demonstrate that the non-compete is no broader than necessary to protect the employer’s “legitimate business interests” and does not “unduly burden” the ex-employee’s right to earn a living. Home Paramount Pest Control Cos., Inc. v. Shaffer, No. 101837, 2011 WL 5248212 (Va. Nov. 4, 2011). In doing so, the Virginia Supreme Court overruled a 1989 opinion in which it upheld the exact same non-compete brought by the plaintiff’s predecessor-in-interest. See Paramount Termite Control Co. v. Rector, 238 Va. 171, 380 S.E.2d 922 (1989). While a dissenting justice took issue with the court’s departure from its prior decision and the effect it may have on parties looking to rely on established precedent, the majority held that its 1989 opinion was effectively eroded over time and its current holding reflected the current state of the law.

The case itself focused on the “function,” or activity, restrictions within the non-compete which the plaintiff, Home Paramount Pest Control Companies, Inc. (“Pest Control”), sought to enforce against its former employee, Justin Shaffer (“Shaffer”). Pest Control claimed that Shaffer’s new employment with a direct competitor violated his non-compete. The specific language at issue prohibited Shaffer from “engage[ing] directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent … stockholder” for two years in any area in which the employee worked on behalf of Pest Control. However, the case never went to the merits because the circuit court held that the activity restriction of the non-compete was overbroad on its face and consequently, was unenforceable.

Upon appeal, the Virginia Supreme Court affirmed the circuit court and held that the function restriction was facially over-broad because it could prevent Shaffer from performing any duties at a competitor, irrespective of whether such duties were similar to the duties Shaffer held at Pest Control or would have any effect on Pest Control’s legitimate business interests. For example, the court noted that on its face, the non-compete prohibits Shaffer from owning stock in a publicly-traded company which owned a pest control business and Pest Control was not found to have a legitimate business purpose “in such a sweeping prohibition.” After comparing the instant restrictions to non-competes which were upheld in several recent cases, the court affirmed the circuit court’s ruling that Pest Control failed to prove that its chosen language furthered its legitimate business interests and did not unduly burden Shaffer’s right to earn a living.

Ultimately, employers seeking to enforce a non-compete under Virginia law (as well as many other jurisdictions) must take care to utilize language which narrowly tailors the activity restrictions of a non-compete to actual services and/or activities which actually or potentially compete with the former employer and threaten its legitimate business interests.

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Courts around the country are split as to the circumstances under which the parties’ choice of law set forth in a non-compete agreement will be honored. In a recent diversity jurisdiction case ruling, Arizona U.S. District Court Judge David Campbell recently refused to enjoin violations of a non-compete clause which said that the law of Washington State applied. He held that Arizona had a greater interest than Washington in the case before him, and that Arizona’s “fundamental policy” (a) requires courts in that state to be less tolerant than courts in Washington with regard to enforcing broad non-compete clauses, and (b) prohibits Arizona jurists (unlike their Washington counterparts) from using a “blue pencil” to make such clauses reasonable. He concluded that an Arizona court would be unwilling to enforce the parties’ agreement in the circumstances here. Pathway Med. Technologies, Inc. v. Nelson, Case No. CV11-0857 PHX DGC (D.Ariz., Sept. 30, 2011).

For two years, Nelson was a sales representative in Arizona for Pathway, a developer, manufacturer and seller of medical devices for the treatment of arterial disease. While employed, he signed a confidentiality agreement in which he promised that for one year after his employment ceased, he would not “divert or take away,” or “attempt or assist” anyone else in diverting or taking away, any Pathway customer. The agreement recited that it is governed by Washington law. 

Following his resignation from Pathway, he was hired by a direct competitor and allegedly engaged in the prohibited conduct for the benefit of the competitor and the detriment of Pathway. Pathway sued Nelson and the competitor, and moved for temporary and preliminary injunctive relief. Judge Campbell denied both motions.

Arizona courts determine the enforceability of a choice of law provision in a non-compete clause by applying Sections 177 and 188 of the Restatement (Second) of Conflicts of Laws. According to the court’s reading of those sections, the parties’ choice will be honored only if they “could have agreed in their contract to the same provisions that the chosen law would impose, and could have done so under the law of the state with the most significant contacts with the transaction.” Washington law differs from that of Arizona in the two respects described above. First, Arizona “requires that non-compete provisions be narrowly drafted and no greater than necessary to protect the employer’s legitimate interests,” whereas Washington enforces agreements “even if they are quite broad and last for long periods of time.” Second, in contrast to the law of Washington, Arizona “courts may not rewrite non-compete agreements to make them reasonable.” 

The contract was negotiated and signed in Arizona, the state where Nelson lived and where he performed his duties both for Pathway and for its competitor. The court held that application of Washington law in this case would be contrary to the “fundamental policy” of Arizona law. The non-compete clause here had no express geographical limitations. Further, it applied to all Pathway customers including those with whom Nelson never had had contact. Finally, the phrases “divert or take away any customer,” and “attempt or assist” such diversion or taking away, were deemed to be unduly vague.

Employers who want to enforce non-compete agreements containing a choice of law provision must take care to select operative language that meets legal requirements not only of the chosen state but also those of the likely forum state if its law is different.

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            Once triggered by a debtor's bankruptcy petition, the automatic stay suspends a parties' right to commence or continue an action against property of the debtor’s estate. In general, a party can seek relief from the automatic stay for a variety of reasons, including for cause, lack of adequate protection or that the debtor has no equity in the property and the property is not necessary for reorganization. In a case of first impression, a district court in Pennsylvania has found that an injunction enforcing a non-compete provision in a franchise agreement was not a "claim" against the bankruptcy estate, under 11 U.S.C.S. § 101(12), since the injunction was a form of equitable relief for which an award of damages was not a viable alternative, and, thus, the injunction was not subject to the automatic stay.

            In In Re Stone Resources, Inc., __ B.R. __, 2011 U.S. Dist. LEXIS 4017925 (E.D. Pa. Bankr. September 11, 2011) (unpublished) the debtor entered into a franchise agreement in 2000 which allowed it to use the franchiser's trademarks and proprietary processes in its stone restoration and maintenance business. The agreement contained a covenant that prohibited the debtor from competing with the franchiser or its affiliates for two years after the agreement ended, and the franchiser sued the debtor in federal district court in May 2010, seeking an order enforcing that covenant. The U.S. District Court for the Eastern District of Pennsylvania issued a preliminary injunction in December 2010, which required the debtor to cease its business operations and turn over assets to the franchiser.

            The franchisee declared Chapter 11 bankruptcy in February 2011, and the franchiser asked the bankruptcy court to dismiss the debtor's bankruptcy case pursuant to 11 U.S.C.S. § 1112(b) or, in the alternative, to grant the franchiser relief from the automatic stay under 11 U.S.C.S. § 362(d) (1) so it could enforce the preliminary injunction. The bankruptcy court denied the franchiser's motion holding that there was no evidence that the debtor declared bankruptcy in bad faith, and lifting the stay so the franchiser could enforce the district court's injunction would have made it impossible for the debtor to reorganize its business and pay its creditors.

            The franchisor then appealed to the District Court. The District Court held that the bankruptcy court abused its discretion in denying franchisor’s motion for stay relief in order to enforce preliminary injunction ordering a debtor to, inter alia, cease and desist in the operation of a business in accordance with the terms of a covenant not to compete. The District Court found that where the only remedy available for a cause of action is an equitable remedy that claim is not dischargeable in bankruptcy and not subject to the automatic stay. 

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By Robert Milligan and Joshua Salinas

The best things in life are free, except for screensavers, games, and other software provided on-line that spy on your computer activity and gather your personal information, at least according to the consumer Plaintiffs in the recent data collection/privacy suit filed in Illinois federal court captioned Harris v. comScore, Inc., No. 11 C 5807, 2011 WL 4738357 (N.D. Ill. Oct. 7, 2011). The Plaintiffs in the case won't be forced to litigate the action in Virginia after a federal court recently denied comScore's attempt to enforce the forum selection provision contained in its licensing agreement.

The District Court for the Northern District of Illinois, Honorable Chief Judge James Holderman presiding, recently denied defendant comScore’s motions to dismiss and transfer venue because he found that comScore’s forum-selection clause was not reasonably communicated to the plaintiff consumers. In doing so, the court found that the terms and conditions of license agreements for free software downloads require a higher standard of notice to consumers.

According to Plaintiffs' complaint, Defendant comScore is an internet research company that allegedly monitors the computer and online activity of consumers that download its software. ComScore allegedly bundles its surveillance software with free programs, such as screensavers and games, to encourage consumers to download and install the software. Once installed, comScore’s surveillance software allegedly collects the computer user’s information and activity, which comScore then allegedly sells to its clients for marketing research.

Plaintiffs Mike Harris and Jeff Dunstan allegedly downloaded and installed comScore’s screensavers and games. Harris and Dunstan allegedly soon realized that comScore’s software continually and surreptitiously monitored their computer activity. Additionally, the software allegedly collected usernames, passwords, and credit card information. They brought a class action against comScore in Illinois federal court, and asserted claims, inter alia, under the Computer Fraud and Abuse Act, Electronic Communications Privacy Act, Stored Communications Act, and Illinois Consumer Fraud and Deceptive Practices Act.

ComScore moved to dismiss the case for improper venue or in the alternative, to transfer venue from Illinois to Virginia. ComScore argued that the terms and conditions in its User License Agreement contained a forum-selection clause that limited all litigation to courts in the State of Virginia. ComScore claimed that before anyone can install its software, the individual must first click a box acknowledging that he or she has read and agreed to the terms and conditions of the license agreement. Thus, comScore alleged that Harris and Dunstan agreed to the license agreement, and more importantly, the forum-selection clause that prohibited their lawsuit in Illinois.

Harris and Dunstan argued that comScore’s forum-selection clause was not enforceable because it was not reasonably communicated to them when they downloaded the software. They alleged that the comScore software’s installation process obscured the hyperlink to the license agreement, and thus the terms and conditions were not readily available.

Chief Judge Holderman cited several cases that enforced “click through” agreements, including some with forum-selection clauses. He noted that the key difference in this case was Harris and Dunstan’s allegation that the hyperlink to the User License Agreement was obscured.   Normally, click through agreements place consumers on at least inquiry or constructive notice. Consequently, in this case Harris and Dunstan should have known about the agreement because they were required to acknowledge their acceptance of the agreement before downloading comScore’s games and screensavers. In fact, Harris and Dunstan each clicked a box acknowledging that they read the terms and conditions of the agreement. Chief Judge Holderman held, however, that while there is a lower expectation of notice for free software: “Nonetheless, it is not reasonable to expect a user casually downloading free software to search for such an agreement if it is not immediately available and obvious where to obtain it.” Harris, 2011 WL 4738357, at *2. Thus, comScore could not hold Harris and Dunstan to its license agreement, and the included forum-selection clause, because it never provided them reasonable access to the terms and conditions.

The court concluded that the forum-selection clause was not reasonably communicated to the plaintiffs, and thus their action could proceed in Illinois.

Additionally, the court declined to transfer the case because at least one of the plaintiffs resided in Illinois, and also he downloaded and installed the software there.

This case is important because of its impact on requirement of notice for online license agreements. Online license agreements are now ubiquitous and users cannot avoid their obligations merely because they clicked “agree” without reading the terms of the agreement. Courts will generally enforce agreements where consumers are required to click the box and acknowledge that they read the agreement’s terms and conditions. This case is interesting because the court refused to find that the plaintiffs read the agreement even though they clicked a box confirming that they read the agreement. This case requires software and service providers to ensure that agreement terms and conditions are readily available; providers cannot merely rely on evidence that the consumer clicked a box.  For free software downloads, Harris concludes that consumers have less of a burden to look for any potential license agreements. Indeed, this case is favorable to consumers seeking to invalidate provisions in licensing agreements, but also reminds us that free rarely means free.

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By Kate Perrelli, Erik Weibust, and Ryan Malloy

On September 15, 2011, the Massachusetts legislature’s Joint Committee on Labor and Workforce Development heard testimony on House Bill 2293. The bill, originally introduced in 2009 as House Bill 1799, and as previously blogged on here, here, and here, aims to codify Massachusetts common law pertaining to non-compete agreements and to simultaneously afford greater procedural protections to those affected by the contractual restrictions on mobility in employment. 

Changes to the Previous Draft

            The revised bill was re-filed in January 2011. Changes include the elimination of a threshold that confined the use of non-compete agreements to employees earning over $75,000 per year in favor of a requirement that courts more broadly consider the economic impact on an affected employee before deciding whether to enforce a non-compete agreement. Additionally, it permits garden leave clauses of up to 2 years if the affected employee receives adequate compensation (the 1-year limit to non-compete agreement duration otherwise remains).  

            Bill 2293 also provides for mandatory attorneys’ fees to employees. However, an employer can avoid paying fees if the court determines that it took “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable.” Finally, the new bill would permit the signing of mid-employment non-compete agreements so long as “fair and reasonable” consideration is provided to the affected employee.

            Like its predecessor, Bill 2293 does not apply retroactively, nor does it affect non-solicitation, non-disclosure, or other non-employment related non-compete agreements, such as those in the context of the sale of a business. The bill continues to reject the inevitable disclosure doctrine, and provides that non-compete agreements must be in writing and signed by both parties.

The Legislative Hearing

            Nearly 15 affected individuals, ranging from hairdressers and parents of college-age children to attorneys and legislators, testified before the Committee last Thursday. Although most testified in favor of the bill, some voiced concerns about mandatory attorneys’ fee awards and the perceived threat of an upswing in costly litigation. For instance, a representative of the Smaller Business Association of New England (SBANE) insisted that small business owners, who must now pay to comply with the Wage Act and mandatory employee healthcare legislation would suffer an added financial hardship if this bill is passed and opined that the bill would permit judges to ignore contract terms and create an atmosphere of unpredictability surrounding non-compete agreement validity.   

            Other critics expressed concern about the bill, and in particular three specific issues: 1) the unclear definition of “fair and reasonable consideration”; 2) the presumption that a 6-month non-compete agreement is sufficient to protect employer interests; and 3) the court’s ability to deny enforcement of otherwise valid contractual obligations. There was a shared belief by some that the present state of the common law provides adequate coverage and that statutory modification of the law would adversely affect local industries, particularly in the current economic climate.   

            Others praised the bill’s efforts to reform a complex and unpredictable realm of common law. The Massachusetts Employment Lawyers Association (MELA), an employee-rights organization, asserted that non-compete reform is necessary because abusive practices are pervasive and employees are being exploited under the current law. Other concerns expressed about the status quo include that unlimited non-competes create a chilling effect on hiring. Of course, the common law does not generally permit unlimited non-competes, but rather only those that are reasonably limited in time and geographic scope. Likewise, Secretary of Housing and Economic Development Greg Bialeck voiced the Patrick administration’s view that reform is necessary and that now is the time to do so.

            The drafters of the bill insist that it is not intended to alter the substance of existing common law. Instead, the point of the statute is purportedly to add consistency and procedural protections for the benefit of employers and employees alike. In the drafters’ view, it will be easy for employers to avoid the mandatory payment of legal fees, for example, if they comply with the bill’s safe harbors.

            As evidenced by the testimony of both the bill’s drafters and constituents, several important issues remain outstanding in Massachusetts, particularly in the areas of attorneys’ fees and the court’s equitable power. Compromise will be necessary on many of these points. It may be some time before the dust settles and a final draft is presented to the legislature, but efforts to create a statutory scheme to guide the use and enforcement of non-compete agreements is well underway. 

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Lane, a 16-year employee of food distributor Nash Finch Co. in Nebraska, was terminated in June 2011. He promptly filed a declaratory judgment suit in a Nebraska state court against his former employer, challenging the enforceability of non-competition clauses in a series of incentive compensation plans in which he was a participant. His challenge included, but was not limited to, the Minnesota forum selection and choice of law provisions -- Nash Finch was headquartered in Minnesota -- which were included in the 2010 Long-Term Incentive Program (LTIP) but in none of its predecessors. After removing the case to federal court based on diversity of citizenship, Nash Finch moved to dismiss for improper venue or, alternatively, to transfer the entire case pursuant to 28 U.S.C. §1404(a), including the dispute over the plans without forum selection and choice of law requirements, to the federal court in Minnesota as a more convenient forum. The Nebraska court denied the motion to dismiss but, over Lane’s objection, granted the motion to transfer.   

Lane maintained that the non-competition clauses, as written, were not reasonably necessary to protect Nash Finch’s legitimate business interests and were unduly harsh and oppressive. He contended, among other things, that the clauses identified by name so many competitors for whom he was prohibited from working that he effectively was precluded from employment in the food distribution industry. He also insisted that (a) there was no consideration for the forum selection and choice of law provisions in the LTIP, and (b) the outcome of the case, if it was tried in a Minnesota court, would be contrary to Nebraska public policy because Minnesota permits blue penciling of restrictive covenants if necessary to protect a legitimate business interest whereas Nebraska courts do not. The Nebraska federal court declined to rule on the merits of those contentions.  However, it reasoned that the Minnesota court would be obligated to follow the same Restatement (Second) of Conflicts of Laws rules as would a Nebraska court in deciding whether to enforce the choice of law provision. Lane v. Nash Finch Co., Case No. 8:11 CV 241 (D.Neb., Sept. 26, 2011). 

Another interesting part of the opinion deals with denial of Nash Finch’s Federal Rule of Civil Procedure 12(b)(3) motion to dismiss for improper venue because of the forum selection clause. After examining the split of authority regarding such motions in similar circumstances, the court decided that venue was proper under 28 U.S.C. §1391. However, even though the other incentive programs did not contain a mandate that litigation must be filed in Minnesota, the court decided that judicial economy would be better served by resolution of all of Lane’s claims in a single forum.

This case involves an interesting application of Section 1404(a) to forum selection and choice of law provisions included in only the last of a series of employment agreements each of which contains a non-competition clause. The court decided that the plaintiff’s choice of a forum, in a lawsuit alleging that all of those clauses were unenforceable, was insufficient to prevent transfer to the federal court in the selected forum state even though only one of the agreement contained forum selection and choice of law provisions. As many seasoned non-compete litigators can attest, the forum selected for a non-compete action often plays a prominent role in whether the forum court will enforce the non-compete.

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