Trading Secrets

Judge Karas: Mark Papermaster will Inevitably Disclose IBM Trade Secrets in Working for Apple

melkon@seyfarth.com ( Michael Elkon) — Tue, 25 Nov 2008 17:35:52 -0600

On November 21, 2008, Judge Kenneth Karas of the Southern District of New York published his November 7, 2008 Amended Opinion and Order granting IBM’s Motion for Preliminary Injunction against former IBM executive Mark Papermaster. Judge Karas granted the Motion following extensive briefing from the parties, as well as a November 6, 2008 hearing on the Motion. The parties did not offer in-court witness testimony at the hearing, instead choosing to rely on the affidavits that they had submitted. Interestingly, Judge Karas notes at the outset of the Opinion and Order that IBM learned for the first time at the hearing that Papermaster had started work with Apple.

In the Facts section of the Opinion and Order, Judge Karas synthesizes the numerous affidavits submitted by the parties. Judge Karas does reference IBM’s new type of digital storage device, the mention of which led a number of tech-focused analysts following the case to write about the possibility that IBM’s new “Racetrack” technology is at the heart of the matter. That said, Judge Karas does not reference this technology in the “Discussion” section, indicating that Racetrack is not at the center of the dispute (at least not at present).

In evaluating the legal merits of IBM’s Motion, Judge Karas engages in an analysis of whether Papermaster would inevitably disclose the IBM trade secrets known to him. In so doing, Judge Karas takes IBM’s argument, which had focused on Papermaster breaching the restrictive covenants contained in his Noncompetition Agreement, and shifts it to an inevitable disclosure argument, which is more focused on trade secret misappropriation than breach of contract.

Judge Karas articulates that Papermaster’s new role makes him responsible for improving Apple’s iPods and iPhones, “that is, to make sure that they store more information, do it more quickly, and use less power in doing so.” Judge Karas concludes that Papermaster would inevitably disclose his knowledge of microprocessors and the “Power” architecture in performing the responsibilities of his position at Apple. In support of his conclusion, Judge Karas cites to Apple’s reference to Papermaster’s knowledge of microprocessor design in its internal deliberations prior to hiring Papermaster.

Judge Karas also focuses on the sequence of events that led to Apple hiring Papermaster. Apple initially elected not to offer Papermaster the position heading its iPod/iPhone division in early 2008. Apple then purchased P.A. Semi, a microchip company that competes with IBM in the microprocessor market, in April 2008. Apple subsequently re-interviewed Papermaster and offered him the position of Senior Vice President, Device Hardware Engineering on October 10, 2008. Apple’s change of heart regarding Papermaster after it purchased P.A. Semi led Judge Karas to conclude that Papermaster would inevitably disclose IBM trade secrets in setting the technical specifications for the microprocessors that P.A. Semi may produce for the iPod and iPhone.

Although it is by no means the centerpiece of his Opinion and Order, Judge Karas also addresses IBM’s claim that Papermaster would breach his Noncompetition Agreement by working for Apple. The Judge finds that the Agreement is reasonable in geographic and temporal scope. He also determines that Papermaster would violate the Agreement by working for Apple because Apple competes with IBM in the chip market, especially after purchasing P.A. Semi.

Papermaster filed a Notice of Interlocutory Appeal on November 20, 2008. In that Notice, Papermaster is appealing Judge Karas’s decision granting IBM’s Motion for Preliminary Injunction. The Court has sent the certified record to the Second Circuit Court of Appeals, although the appeal has not yet been docketed.

Judge Karas: Mark Papermaster will Inevitably Disclose IBM Trade Secrets in Working for Apple

melkon@seyfarth.com ( Michael Elkon) — Tue, 25 Nov 2008 17:35:52 -0600

Developments in the IBM v. Papermaster Litigation

melkon@seyfarth.com ( Michael Elkon) — Wed, 19 Nov 2008 22:29:31 -0600

There have been several developments in the litigation between IBM and its former executive Mark Papermaster since the Court enjoined Papermaster from working for Apple on November 6, 2008. First, the Court has ordered IBM to post a bond in the amount of $3,000,000 to cover any potential finding that IBM wrongfully obtained its injunction against Papermaster.

Papermaster filed his Answer, Affirmative Defenses, and Counterclaims on November 13, 2008. In his Counterclaims, Papermaster sets forth his arguments that the non-compete provision of his Noncompetition Agreement with IBM is unenforceable. Papermaster argues that the provision purports to prevent him from working for any company that competes with IBM, even if: (1) he is not working for the part of the company that competes with IBM; or (2) he is not doing work similar to the work he performed for IBM. Papermaster also argues that the worldwide scope of the non-compete is overly broad, as is the one-year time limitation because of the speed with which information becomes outdated in the world of technology. Finally, Papermaster argues that the New York choice of law provision in the agreement is unenforceable because he lives in Texas, he will be working for a California company, and he has no contacts with New York. Papermaster does not seek any relief in the Counterclaims beyond a declaratory judgment that the Noncompetition Agreement is overly broad and that it should be governed by Texas or California law.

One particular footnote in IBM’s Reply in Support of its Motion for Preliminary Injunction has led to a good deal of speculation regarding IBM’s motivation and interest in bringing its claims against Papermaster. In footnote 1 of its Reply, IBM states that it has developed a memory device that would enable an iPod to store 500,000 songs, all while being cheaper to produce. This device also would permit an iPod to run on a single battery charge for weeks at a time. IBM does not contend that Papermaster worked on this particular technology.

Various observers of the technology industry have speculated that the unnamed technology referenced in the footnote is “racetrack memory,” a technology that allegedly uses the spin of an electron to keep track of data. If the observers are correct, then they may have put meat on the bones of one of IBM’s arguments to counter Papermaster’s claim that IBM and Apple do not compete. The argument, as set forth in IBM’s Reply, is that Apple used to buy personal computer chips from IBM and now buys iPod and iPhone chips from Intel, an IBM competitor. If Apple used its P.A. Semi to produce chips for the iPod and iPhone, the argument goes, then it will deprive IBM of the chance to sell such chips to Apple.

Put On a Short Leash

esalcedo@seyfarth.com (Eddy Salcedo) — Fri, 14 Nov 2008 08:49:16 -0600

New York Supreme Court Justice Debra James has issued a preliminary injunction restraining a former employee of a dog care business, which provides services such as dog walking, feeding and grooming, from competing with his former employer within a ten (10) mile radius of his former employer’s business. The action is entitled The Paw Shop, LLC v. Brian Mestre, New York County Supreme Court, Index No.: 601950/08, and Justice James’s order has likely left the Defendant growling.

Defendant commenced employment with Plaintiff in January 2007 as a receptionist, kennel manager, driver and assistant dog trainer. On July 27, 2007, Defendant signed an “Employee Non-Compete Agreement,” which included a two year, ten (10) mile radius restrictive covenant against direct competition with Plaintiff. The covenant was to be effective from the date of termination, and the restrictive radius was to be measured from the location of Plaintiff’s business at the time of termination; the covenant was to be effective regardless of the reason of Defendant’s termination. At the time of entering into the non-compete agreement, Defendant received a pay-raise as consideration.

Defendant’s employment was terminated in May 2008, and Plaintiff shortly thereafter commenced the action and moved for the preliminary injunction enforcing the restrictive covenant, alleging that the Defendant had been observed performing dog walking services for the Plaintiff’s clients within the restricted radius.

In granting Plaintiff’s motion, Justice James found that the duration and scope of the restrictive covenant were not “unduly burdensome to the defendant.” Although silent as to its reasoning with regards to the duration, the Court found that the ten (10) mile radius was reasonable because: “defendant lives more than ten miles away from plaintiff’s business, and during the period of the covenant may certainly provide services to dog owners in the neighborhood where he resides.”

The Court found that the Defendant’s services were likely to be “unique” and/or “extraordinary,” by reason of affidavits of former customers of Plaintiff averring such. Ironically, these affidavits were submitted by Defendant in opposition to the motion. Surprisingly, given the result, the Court found that Plaintiff had failed to make a showing that Defendant had either used Plaintiff’s customer lists or used confidential client information. Regardless of this lack of showing, however, the Court nevertheless granted the preliminary injunction, citing holding finding that Plaintiff was being irreparably harmed by Defendant’s providing dog walking services to Plaintiff’s clients within the restricted area.

Court Enjoins Former High-Level IBM Executive from Working for Apple

melkon@seyfarth.com ( Michael Elkon) — Tue, 11 Nov 2008 13:37:13 -0600

On November 6, 2008, Judge Kenneth Karas of the United States District Court for the Southern District of New York granted preliminary injunctive relief to IBM and ordered that a former executive, Mark Papermaster, refrain from working for Apple.

According to IBM’s Complaint, Papermaster worked for IBM as a member of the Company’s elite Integration and Values Team, which has a hand in developing corporate strategy. On June 21, 2006, Papermaster executed a Noncompetition Agreement with IBM that forbids Papermaster from engaging in or associating with any competitors within the area for which Papermaster had job responsibilities at IBM. At the time of his resignation, Papermaster served as IBM’s Vice President for a unit that designs and delivers servers using “blade” technology.

Papermaster announced his intent to resign on October 13, 2008. IBM made efforts to retain Papermaster, offering him a salary increase, as well as the possibility of a year’s salary in return for not competing against the company. Papermaster declined these offers and resigned from employment with IBM on October 21, 2008. Papermaster set his last day of employment as October 24, 2008. Upon joining Apple, Papermaster was slated to become the Senior Vice President for Devices Hardware Engineering. According to Apple, Papermaster would supervise the development of iPods and iPhones in this position.

On October 22, 2008, IBM sued Papermaster in the Southern District of New York, and filed a Motion for Preliminary Injunction two days later. In the Complaint, IBM asserts that Papermaster breached the terms of the Noncompetition Agreement and misappropriated trade secrets. IBM specifically alleges that it competes with Apple in three areas: servers, personal computers, and microprocessors. The Noncompetition Agreement contains an exclusive jurisdiction clause mandating that all actions under the Agreement take place in the state and federal courts for Westchester County, New York.

Papermaster responded to IBM’s Motion for Preliminary Injunction with several arguments. Papermaster argued that Apple does not compete with IBM because Apple is in the consumer electronic products market, whereas IBM focuses on business systems such as servers and IT infrastructure. More specifically, Papermaster claimed that the needs of microprocessors for servers and consumer electronics are different, with the former emphasizing speed and the latter emphasizing efficient use of power. Papermaster also contended that IBM could not show that it faced irreparable injury because it permitted Papermaster to continue to work for IBM and access its confidential information for two weeks after Papermaster stated his intention to resign. If Papermaster was privy to so much IBM confidential information and represented such a competitive threat, the argument goes, then why was he permitted to remain employed by IBM with unfettered access to its various systems and facilities after announcing his intention to join Apple?

Papermaster also argued that injunctive relief was inappropriate because the Noncompetition Agreement was unenforceable as written for two reasons. First, Papermaster offered that the Agreement was overbroad in that it purported to prevent him for working for a competitor, regardless of whether his acts were actually competitive. Second, Papermaster contended that the one-year time period covered by the non-compete provision was an “eternity” in the electronics industry and thus should not be considered reasonable under the circumstances. Third, Papermaster asserted that the agreement was overbroad because IBM claimed that the Agreement purported to cover the entire world. Papermaster further asserted in a footnote that because Papermaster lives in Texas and works in California, New York law should not govern the dispute, but it acknowledged that it did not have the space to fully develop this argument. You can find IBM's reply brief here.

Although Judge Karas granted IBM’s Motion for Preliminary Injunction at the conclusion of the November 6, 2008 hearing, in the entry for the case on the Court’s docket, Judge Karas sets forth that an Opinion will follow. Until such time, it is unclear which arguments the Court found persuasive. The case nonetheless continues. At present, the parties are litigating the issue of the amount of a bond to be paid by IBM to the Court. It also is likely that the parties will now want to engage in expedited discovery, a topic that will be discussed in a November 18, 2008 court conference.

Federal Grand Jury Indicts Former Intel Employee For Theft Of Trade Secrets

dorr@seyfarth.com (Dana Orr) — Mon, 10 Nov 2008 08:21:47 -0600

In August, federal prosecutors charged Biswamohan Pani, a former Intel Corp. engineer, with theft of trade secrets from his former employer, Intel. This week, a Massachusetts grand jury added four new counts of wire fraud. If convicted, Pani could serve up to 10 years in prison for the theft of trade secrets count, and up to 20 years on each count of wire fraud.

Federal prosecutors in Massachusetts allege that after Pani resigned from Intel in May 2008, he downloaded confidential documents and trade secrets worth $1 billion, including new microprocessor chip designs. Pani accessed the internal Intel network via his Intel-issued laptop, downloading "mission-critical" documents.

It is reported that Pani told his supervisors that he was leaving Intel to work for a hedge fund, but in reality he had accepted a job months earlier with Intel’s main competitor, Advanced Micro Devices, Inc., and began working there days after his resignation from Intel, but while still employed by Intel. For a brief period, Pani was on both AMD’s and Intel’s payrolls due to accrued, unused vacation time at Intel. Intel owns 80% of the worldwide market for microprocessors, and AMD owns the rest.

An FBI search of Pani’s home recovered eight Intel documents classified as “secret,” “top secret,” and “confidential.” Pani told FBI investigators that he planned to give the information to his wife, who also works for Intel. AMD is not accused of any misconduct, and there is no evidence that AMD had any involvement in or awareness of Pani’s actions. Pani, of course, is no longer employed by AMD.

Supreme Court of Canada Upholds Verdict Against Employee Defectors

melkon@seyfarth.com ( Michael Elkon) — Mon, 10 Nov 2008 05:17:13 -0600

In RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54, the Supreme Court of Canada recently addressed a verdict against a group of departing employees by a British Columbia trial court.

RBC operated an office in Cranbrook, British Columbia. In November 2000, almost every employee in the office abruptly resigned and moved to Merrill Lynch. Don Delamont, the RBC branch manager, coordinated the move. The departing employees copied and retained a number of files relating to RBC customers before resigning.

RBC sued, asserting the following claims:

Against its former employees for breach of fiduciary duty, breach of implied contractual term not to compete unfairly upon leaving RBC’s employ, breach of implied contractual term to give reasonable notice of termination, and an action for misuse of confidential information;
Against Merrill Lynch and its local manager James Michaud for breach of duty in tort for inducing RBC staff to terminate their contracts of employment without notice and to breach their contractual obligation not to compete unfairly; and
Against all the respondents for conspiracy and conversion, the latter related to the removal of documents known to be the property of RBC.

The trial court found for RBC and awarded damgaes on a variety of theories against the departing employees, Merrill Lynch, and Michaud.

On appeal, the British Columbia Court of Appeal overturned two categories of damages: (1) an award of five years worth of lost profits in the amount of $1,483,239 against Delamont for breaching his duty of good faith by coordinating the departure of almost all of the employees from the office that he supervised; and (2) an award of $225,000 for unfair competition against the departing employees.

On review by the Supreme Court of Canada, the highest court reinstated the award against Delamont, rejecting the Court of Appeal’s reasoning that the collapse of the branch was not a foreseeable result of Delamont orchestrating the departure of the office’s investment advisors. Instead, the Supreme Court concluded that Delamont had a duty of good faith (akin to the duty of loyalty set forth in most American states) to manage and retain the investment advisors at his branch. The Court also decided that Delamont violated that duty by facilitating the resignation of the investment advisors and that Delamont was therefore liable for RBC’s lost profits incurred as a result of the collapse of the branch. Notably, the dissent points out that the trial court decided that Delamont did not owe a fiduciary duty to RBC. Therefore, the dissent attacks any award of damages against Delamont based on the judicial creation of a category of "quasi-fiduciary" employees who are liable to their employers if they do not perform their job duties properly.

From there, the Supreme Court decision focuses primarily on the proper calculation of damages, finding that a former branch manager can be liable for five years' worth of lost profits for facilitating the departure of the employees under his supervision.

In contrast, the Supreme Court overturned the award of $225,000 for unfair competition against the departing employees to the extent that it was awarded based on a duty not to compete. The Court held that employees in Canada owe a duty to provide reasonable notice to their employers before resigning, but that they do not owe a duty not to compete during the notice period (absent a non-compete agreement establishing otherwise). The case highlights a difference between Canadian and American law: the requirement in Canada that an employee provide "reasonable notice" before resigning. And, courts in Canada have discretion to determine what that reasonable notice period will be.

The trial court determined that a reasonable notice period for the employees would have been 2.5 weeks and thus assessed damages in the amount of $40,000 against the employees for failing to provide notice. The Supreme Court held that this category of damages was proper, but the additional award of $225,000 based on the departing employees' competing during the 2.5 week period was not proper because the employees were not required to refrain from competing.

The Supreme Court further found that the $225,000 award against the departing employees could not be based on the departing employees’ retention of RBC documents because any award for lost profits resulting from the retention and use of the documents was covered already by the lost profits award against Delamont.

Non-compete Litigation in the Financial Services Industry

melkon@seyfarth.com ( Michael Elkon) — Sun, 02 Nov 2008 12:34:35 -0600

As a result of the instability in the financial markets generally and at financial institutions in particular, the financial services industry has experienced significant turnover in 2008. The below chart recently found in the New York Times reflects that the financial services industry has experienced more layoffs than any other industry.

Because of the importance of relationships between brokers and other customer-facing personnel in the financial services industry on the one hand and customers on the other, restrictive covenants are commonplace in the industry. These covenants typically take the form of: (1) customer non-solicitation covenants, in which employees agree not to solicit the clients of their former employees for a set period of time; and (2) non-disclosure covenants, in which employees agree not to use confidential information such as client lists and account or trading information.

It is likely that the significant turnover in the financial services industry will lead to an increase in the number of disputes between financial firms and their former employers, especially as those employees who were laid off find new positions in the industry and seek to mine relationships with former customers. (The obvious exception here is that employees laid off by liquidating financial institutions do not face the prospect of being sued by their former employers.)

an additional factor that can lead to an increase in restrictive covenant litigation in the financial services industry is the prevalence of larger firms buying smaller or distressed firms. Acquisitions of new companies often lead to restrictive covenant litigation because the employees of the purchased company find themselves working in a new work culture. A common scenario in such a situation is for the employee to bristle at the new culture, leave the company shortly after the acquisition, and then solicit their former clients.

One factor that will reduce the tide of restrictive covenant litigation is the Protocol for Broker Recruiting. The Protocol, which has been signed by a number of (but by no means all) financial services institutions, identifies with particularity the information that departing brokers may take to their new employers. The Protocol also sets forth the clients that departing brokers may solicit after leaving. The Protocol was created for the purpose of reducing litigation between financial institutions and normalizing the process of broker movement. As such, it becomes especially important in the current environment for financial services institutions.

Texas Dance Instructor Jailed for Contempt of Court Order Enforcing Non-Compete

ebirg@seyfarth.com (Erika Birg) — Mon, 20 Oct 2008 09:22:41 -0600

Eric Rush (a/k/a Eric Romero), a 37-year old dance instructor in Texas, was jailed last week when he violated the Court's order enforcing his non-compete agreement with his former employer, Arthur Murray Dance Studios in Plano, Texas. The Associated Press reported that Rush a/k/a Romero was unrepentent.

Rush acknowledged in a jailhouse interview that he advertised his services and provided forbidden dance lessons to students in the area.

But in his defense, Rush said, he couldn't help himself.

"I love to dance," Rush told The Dallas Morning News. "It's my soul."

(Assoc. Press Oct. 18, 2008.)

Georgia Supreme Court to Review Franchise Non-Compete Case

ebirg@seyfarth.com (Erika Birg) — Sat, 11 Oct 2008 07:34:38 -0600

Earlier this year, the Georgia Court of Appeals made news in Atlanta Bread Company Int'l v. Lupton-Smith, Court of Appeals Case No. A08A0348, when it struck down in-term restrictive covenants of a franchisee on the grounds that the in-term restrictive covenants did not pass the test of reasonableness applied to post-term restrictive covenants. In this case, the franchisee had opened several allegedly competing stores at the same time that he was operating Atlanta Bread Company franchises. Atlanta Bread Company then terminated his franchise. The Court of Appeals ruled that the post-term restrictive covenants and the in-term covenants were inextricably tied and because the post-term restrictive covenants did not pass muster, the in-term covenants also failed.

The case has sparked great interest within the franchise community, as the International Franchise Association has indicated that the lower court decision would wreak havoc on franchise systems in Georgia by rendering "unenforceable the in-term restrictive covenants in the vast majority of franchise contracts for businesses operated in Georgia, including many of the most well-known and respected franchises in the world." The Court of Appeals ruling was cast as opening the door for franchisees potentially to compete with their own franchisors during the term of the franchise agreement. Georgia applies strict scrutiny review to post-termination restrictive covenants between franchisees and franchisors, which is the same standard applied to such agreements between employees and employers. As a result, Georgia will not blue pencil such an agreement, even though it will blue pencil a non-competition covenant contained in the sale of a business.

On October 6, 2008, The Georgia Supreme Court granted Atlanta Bread Company's petition for certiorari. The Court agreed to hear, in particular, the following questions:

1. Did the [Court of Appeals] err in holding that under Jackson & Coker v. Hart, 261 Ga. 371 (1991), the reasonableness standard applicable to post-termination restrictive covenants also applies to in-term restrictive covenants?

2. Did the [Court of Appeals] err in applying to in-term restrictive covenants in franchise agreements the rule against allowing the blue-pencil doctrine of severability.

The Supreme Court's decision to grant certiorari means that oral argument is mandatory. The case will proceed on the January 2009 oral argument calendar.

New Ninth Circuit Case Acknowledges Trade Secrets Exception to Business and Professions Code Section 16600

jmcnairy@seyfarth.com (James McNairy) — Wed, 01 Oct 2008 13:39:12 -0600

By James McNairy & Robert Milligan

A new Ninth Circuit case, Asset Marketing Systems, Inc. v. Gagnon, 2008 WL 4138181 (Sept. 9, 2008), acknowledges (at least in dicta) that there is a trade secrets exception to Business and Professions Code Section 16600.

In the case, Gagnon, an independent contractor who developed computer programs for AMS, a field marketing organization, alleged, among other things that AMS had misappropriated his trade secrets that were contained in the programs’ source code.

The Ninth Circuit rejected Gagnon’s claims that AMS misappropriated his trade secrets. The Ninth Circuit affirmed the district court’s determination that Gagnon had granted AMS an implied, unlimited license to retain, use, and modify the software, thus destroying any trade secret status the code might have had.

In rejecting Gagnon’s trade secret claim, the Court affirmed the district court’s holding that the noncompetition agreements signed by Gagnon’s employees were invalid. Gagnon contended that even if AMS obtained an implied license, it still misappropriated his trade secrets that were contained in the programs’ source code by hiring away his employees in violation of their employment agreements. One of the provisions in the employees’ agreements was an agreement not to engage in any employment or personal contractual agreement for AMS for twenty-four months without written consent from Gagnon.

Citing the California Supreme Court’s recent decision in Edwards v. Arthur Andersen LLP, 189 P.3d. 285, 288 (2008), the Ninth Circuit stated (arguably in dicta) that noncompetition agreements in California are invalid unless necessary to protect an employer’s trade secrets. The California Supreme Court in Edwards, however, specifically did not address what it called the so-called trade secret exception to Bus. & Prof. Code § 16600 and rejected the Ninth Circuit’s narrow restraint exception to section 16600 (the “narrow restraint” exception interpreted section 16600 to allow noncompetition agreements where departing employees were barred from pursuing only a small or limited part of a business, trade or profession). According to the Ninth Circuit, the non-competition agreements that Gagnon had his employees execute “were no longer enforceable” because they were no longer necessary to protect Gagnon’s trade secrets against AMS.

In this first post-Edwards published Ninth Circuit decision regarding section 16600, the Court did not provide any specific analysis concerning the nature of the trade secrets exception and what one must show to make defensible use of it. The Court’s dicta appears to suggest that non-competition agreements executed “to protect” an employer’s trade secrets will be enforceable. But as with most things legal, with trade secrets, the devil is in the details. What exactly the Court meant by a non-competition agreement to protect trade secrets is unclear. Further, mere assertions in employee/employer noncompetition agreements that the agreement has been executed “to protect” trade secrets without more is unlikely to withstand challenge.

Georgia House & Senate Committees Meet to Consider Restrictive Covenants in the Commercial Arena

melkon@seyfarth.com ( Michael Elkon) — Wed, 24 Sep 2008 15:01:54 -0600

This morning (September 24, 2008), Rep. Kevin Levitas and Sen. Judson Hill from the Georgia Legislature convened the first meeting of a legislative study committee reviewing the law of Georgia with respect to restrictive covenants in employment and business relationships. The House Committee is chaired by Representative Kevin Levitas, and includes the following members: Representative Tim Bearden; Representative Butch Parrish; Representative Richard Smith; Representative Brian Thomas; and Representative Al Williams. As Representative Levitas previously remarked,

“It is time that the legislature studied this issue in depth and provided clear guidance to the courts regarding the sustainability of these private agreements between private contracting parties and how to make them fair to all parties. . . .

“It is imperative that we carefully examine all aspects of this important issue so that both employer and employee can know their rights and duties after employment has ended.

“Both parties need to know with certainty what they can and cannot do, and that is why legislation in this area is so important. In addition to providing certainty to the parties, clarifying the law will have a significant impact on Georgia’s economy and the ability of the state to attract businesses to this state and to keep them here.”

Levitas noted th[at] he expects that the committee will hear from a diversity of witnesses with differing viewpoints on the subject. Levitas said that he intends for the committee “to bring together all necessary points of view and to gather all of the facts so that we can, once and for all, clearly define and bring certainty to this important area of the law.”

Erika Birg, a partner with Seyfarth Shaw’s Trade Secrets, Non-Competes, and Computer Fraud team, led off the morning’s testimony, highlighting the background of restrictive covenant law in Georgia. A lively question-and-answer session followed between the committee members and Ms. Birg. The committee’s questions, although varied in substance, primarily involved how a court or a legislature would determine whether a covenant is “reasonable,” as well as how the legislature might craft legislation (and a constitutional amendment if needed) that would address the concerns of both Georgia employers and their valued employees.

J. Henry Walker IV, a partner with the litigation group of Kilpatrick Stockton and former in-house litigation counsel for BellSouth, spoke, representing the Georgia Chamber of Commerce. Mr. Walker noted the Chamber’s support for the committee’s work directed towards re-vamping Georgia’s law to provide certainty for both employers and employees. Mr. Walker also discussed BellSouth v. Forsee, 265 Ga. App. 589 (2004), a case in which BellSouth lost the ability to enforce a non-compete for a high-level executive because of Georgia court’s prohibition on enforcing a non-compete that is not certain at the time of execution of the agreement. He highlighted that certainty in the law benefited all concerned – employers and employees alike.

The committee then heard from R. Samuel Snider, Vice President and Lead Acquisition Counsel for LexisNexis, a subsidiary of Reed Elsevier, regarding the effect of Georgia’s admittedly confusing law on the company’s decision to relocate to Georgia following its acquisition of ChoicePoint. Mr. Snider focused on the needs of technology companies to protect both intangible intellectual property but also protect the companies’ investments in highly compensated and sought-after personnel. He noted that in such instances, restrictive covenants may be part of a negotiated employment arrangement.

The study committee is set to meet again this fall, before the Legislature reconvenes in January. As the date and time are set, we will post the information here.

New York State Court Rules that Noncompete Agreement Between Law Firms Previously Engaged In Merger Talks Is Unenforceable as Violative of Public Policy.

jsiegel@seyfarth.com (Janet Siegel) — Tue, 23 Sep 2008 17:28:27 -0600

Nixon Peabody v. Taylor Wessing France, 2008 NY Slip Op. 51885(U) (Sup. Ct. Monroe Cty. Sept. 16, 2008).

A trial court in upstate Monroe County, New York earlier this month granted summary judgment for law firm Nixon Peabody LLP (“Nixon”), which sought a declaratory judgment and injunctive relief as a result of alleged tortious interference with prospective business relations by French law firm Taylor Wessing France (“Taylor Wessing”).

On July 31, 2007, in anticipation of entering into merger discussions, the two firms had executed a Mutual Non-Disclosure Agreement (the “Agreement”) containing a non-solicitation provision stating that neither firm would “employ or offer partnership directly or indirectly” to any partners or attorneys of the other firm for a period of two years from the date of the agreement. The merger negotiations eventually broke down in October 2007. However, Taylor Wessing’s founding partner subsequently joined Nixon and brought with him a dozen of Taylor Wessing’s non-equity partners.

When Taylor Wessing sought to enforce the Agreement’s non-solicitation provision, Nixon filed this action, seeking a declaration that the Agreement was unenforceable and requesting injunctive relief preventing Taylor Wessing from interfering with its former partners’ right to join Nixon. Taylor Wessing brought suit against Nixon in New York County Supreme Court (subsequently consolidated with the Monroe County action and transferred to Monroe County) asserting claims for breach of the Agreement, aiding and abetting a breach of fiduciary duty, and tortious interference with contractual relations.

In a detailed decision that could have significant consequences for law firms engaged in merger or acquisition talks, the Monroe County trial court held that the Agreement was unenforceable as violative of New York State public policy. Citing to a 1989 New York case that “codified” ethics opinions by the ABA and the New York County Lawyers Association, the court noted that it is unethical for an attorney to include a restrictive covenant in an employment contract with another attorney. However, the court went on to observe that the policy “embraced” by this rule is not limited solely to employment agreements, and that this authority has been “woven into the fabric of New York case law.” The court concluded that the rationale behind the rule — protecting lawyers’ autonomy and the ability of clients to freely chose their counsel — applies to the Agreement in this case which, as the court characterized it, contained “an out-right prohibition[n] on the practice of law,” to which the affected non-equity partners had not agreed and of which they had no knowledge. The court also granted summary judgment in favor of Nixon on Taylor Wessing’s fiduciary duty and tortious interference claims. The slip opinion can be viewed here .

Trade Secrets Derive From "Equitable Principles" Rather Than Property or Contract Rights

jjarvis@seyfarth.com (Jason Jarvis) — Mon, 22 Sep 2008 16:09:58 -0600

The Sixth Circuit Court of Appeals recently held that whether a trade secret is a protectable interest is an equitable question not affected by the lack of a written instrument. Niemi v. NHK Spring Company, --- F.3d ---, 2008 WL 4273123 (6th Cir. Sept. 19, 2008).

Richard Niemi is an individual engineer who provides various automobile company manufacturers with designs related to stabilizer bars for automobiles. In the early 1990s, Niemi had an idea for a new method of stabilizer-bar manufacturing, which interested his long term client, New Mather Metals (a subsidiary of Defendant NHK Spring Co.) Although the purchase order through which New Mather ordered the manufacturing tooling, which Niemi claimed to be a “trade secret,” included the clause that “no other or different terms or conditions shall apply to this order unless specifically agreed to in writing. . .”, Niemi claimed that he had assurances that his new method would be kept “confidential.” In order to protect itself from Niemi’s selling his designs to its competitors, New Mather requested that Niemi enter into a “exclusivity agreement,” which Niemi described as “reciprocal” despite any language in the instrument to that effect. “No further writing was needed, in Niemi’s estimation, because New Mather’s obligation represented a continuation of an arrangement that had been in place for 25 or 30 years . . . .”

Niemi learned a few years later that New Mather had disclosed his stabilizer manufacturing trade secret to other designers, and he brought an action against New Mather and its parent companies for misappropriation of trade secrets, as well as for other claims. The district court ultimately granted summary judgment to Defendants on the trade secrets claim, finding that Niemi had not taken sufficient steps to keep his designs secret.

In reviewing Niemi’s appeal of judgment against his trade secrets claim, the Sixth Circuit considered Ohio’s adopted Uniform Trade Secrets Act, particularly focusing on the factor requiring “reasonable” efforts to maintain secrecy. Ultimately, it concluded that there were direct, disputed material facts sufficient to warrant reversal of the district court.

The decision is most significant, however, for the reasoning underlying its rejection of one of Defendants’ arguments; namely, that Niemi’s “oral reciprocal exclusivity agreement” was barred by the statute of frauds. In rejecting that argument, the court quoted Ohio law in noting that “protection afforded by trade secret laws is not a function of property interests or contract rights, but of ‘equitable principles of good faith applicable to confidential relationships.’” In other words, whether there is a contract or property interest in the trade secrets is “irrelevant” because trade secret protection derives from equity.

The progenitor of the principle quoted by the Sixth Circuit was Justice Oliver Wendell Holmes’ opinion in Masland, where he observed that, in “explaining the nature of a trade secret . . . trade secret laws are not those of property but the equitable principles of good faith applicable to confidential relationships.” Valco Cincinnati v. N & D Machining Service, Inc., 492 N.E.2d 814, 817 (Ohio 1986) (citing E.I. Du pont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917) (Holmes, J.)).

In any event, although the fundamental character of a trade secret may be one of confidence protected by equity, there is some dispute among the states regarding whether a trade secret is a property right. Compare Envirotech Corp. v. Callahan, 872 P.2d 487, 494 (Utah App. 1994) (trade secret is a property right) with ConFold Pacific, Inc. v. Polaris Industries, Inc., 433 F.3d 952, 959 (7th Cir. 2006) (holding that, under Wisconsin law, a trade secret is not a property right but instead an interest protectable by contract).

The Sixth Circuit is correct that the lack of a written instrument does not itself negate a claim under the Uniform Trade Secrets Act. Certainly, if the existence of a written agreement – such as the “oral” mutual exclusivity and confidentiality agreement present in Niemi – would tend to increase the likelihood of a protectable trade secret, then its absence should mitigate against it. But the Sixth Circuit seemed to go a step further in concluding that because a trade secret’s nature is one of equity, the lack of a contractual or property claim renders wholly “irrelevant” the lack of a written instrument.

Georgia House Study Committee to Meet on Restrictive Covenants in the Commercial Arena

ebirg@seyfarth.com (Erika Birg) — Sun, 21 Sep 2008 08:54:28 -0600

Following is a Press Release from the Georgia House of Representatives.

PRESS RELEASE

FOR IMMEDIATE RELEASE	Contact: Lindsey Thompson
August 26, 2008	(404) 656-5020
	lindsey.thompson@house.ga.gov

Speaker Richardson Appoints Representative Kevin Levitas to Chair House Study Committee on Restrictive Covenants in the Commercial Arena

ATLANTA –Speaker of the House Glenn Richardson (R-Hiram) has appointed Representative Kevin Levitas (D-Atlanta) to chair the House Study Committee on Restrictive Covenants in the Commercial Arena.

“I am confident that Representative Levitas will be an asset to this study committee. He is an extremely diligent worker, and I know he will work well with the other Representatives appointed to this committee,” Richardson said.

House Resolution 1879 established the House Study Committee on Restrictive Covenants in the Commercial Arena to examine the proper functioning of restrictive covenants in today’s marketplace and to fulfill the legislature’s role in defining public policy in this area.

A restrictive covenant is an agreement between an employer and an employee (or an independent contractor) that limits the ability of a former employee to unfairly compete against the employer after termination of employment.

In the absence of clear direction from the General Assembly, Georgia courts have issued conflicting decisions and voided many of these agreements in their entirety, often on the basis of a strict reading of a technical defect in one part of an agreement.

Levitas said, “It is time that the legislature studied this issue in depth and provided clear guidance to the courts regarding the sustainability of these private agreements between private contracting parties and how to make them fair to all parties.” Levitas said that the study committee will examine court precedent and hear testimony from witnesses regarding the effect of the current state of the law.

“I am honored that Speaker Richardson has appointed me to chair this study committee,” noted Levitas. “The history and treatment of restrictive covenants in Georgia have never been fully studied before by the General Assembly. It is imperative that we carefully examine all aspects of this important issue so that both employer and employee can know their rights and duties after employment has ended.”

Levitas remarked, “Both parties need to know with certainty what they can and cannot do, and that is why legislation in this area is so important. In addition to providing certainty to the parties, clarifying the law will have a significant impact on Georgia’s economy and the ability of the state to attract businesses to this state and to keep them here.”

Levitas noted the he expects that the committee will hear from a diversity of witnesses with differing viewpoints on the subject. Levitas said that he intends for the committee “to bring together all necessary points of view and to gather all of the facts so that we can, once and for all, clearly define and bring certainty to this important area of the law.”

The committee will hold its first meeting at 9:00 a.m. on Wednesday, September 24, in Room 132 of the State Capitol. The other members of the committee are: Representative Tim Bearden (R-Villa Rica), Representative Butch Parrish (R-Swainsboro), Representative Richard Smith (R-Columbus), Representative Brian Thomas (D-Lilburn) and Representative Al Williams (D-Midway).

###

Infinite Energy, Inc. v. Thai Heng Chang, 2008 WL 4098329 (N.D. Fla. Aug. 29, 2008) by David Monachino

ebirg@seyfarth.com (Erika Birg) — Thu, 11 Sep 2008 15:25:20 -0600

In this breach of employment contract and misappropriation of trade secrets case, plaintiff moved to compel production of e-mails from defendant’s personal Yahoo! account.

Plaintiff contended that Defendant used this specific e-mail account to engage in the activities upon which this entire lawsuit is based. Defendant claimed that he could not produce these e-mails, because they had been destroyed by Yahoo!. However, the defendant offered only a copy of a generic response from Yahoo! about deactivating accounts. The court declined to accept defendant’s explanation that production was "impossible," particularly given the important evidentiary value of the e-mails and the "feeble offering" by defendant in support of the contention. Indeed, the Court indicated that it "will not accept Defendant's position that [defendant] cannot produce these emails until assurance is given from an executive at Yahoo! responsible for such tasks that this request is indeed impossible."

In addition, the court held that defendant's representation that he was being "completely truthful" when he did not identify the account, because he knew it would be impossible to ultimately produce these e-mails, to be sanctionable: "It will figure largely into the sanctions ultimately awarded in this matter if it is learned that Defendant's failure to identify this account earlier is the cause of the alleged impossibility." The court stated the particular sanctions awarded would depend on the outcome of defendant's efforts to obtain the documents, and what was revealed by these efforts as to defendant's actions, if any, that resulted in spoilation of evidence or other more serious discovery violations.

New York Bars Non-Compete Agreements for Broadcast Industry

esalcedo@seyfarth.com (Eddy Salcedo) — Wed, 10 Sep 2008 17:36:55 -0600

On August 6, 2008, New York Governor David A. Paterson signed Bill S02393, dubbed the “Broadcast Employees Freedom to Work Act” into law. The act, amends the New York Labor Law so as to prohibit non-compete agreements in the broadcasting industry. The enactment is effective immediately, and is codified as section 202-k of the Labor Law

Specifically, the newly minted Section 202-k provides that a “broadcasting industry employer shall not require as a condition of employment, whether in an employment contract or otherwise,” that a broadcast employee or prospective broadcast employee, after the conclusion of employment, refrain from obtaining subsequent employment “(a) in any specified geographic area, (b) for a specific period of time, or (c) with any particular employer or in any particular industry.” The act further declares as unenforceable any contractual provisions that would waive these prohibitions.

Within Section 202-k definition of “broadcasting industry employer” are companies operating television, radio, cable stations, networks, and/or internet or satellite-based services “similar to a broadcast station or network,” any broadcast entities “affiliated” with such entities, and “any other entity that provides broadcasting services such as news, weather, traffic, sports, or entertainment reports or programming.” Likewise, a “broadcast employee” is defined as any on- or off-air employee of a broadcasting industry employer, “excluding management employees.”

The act provides that broadcast employees, as defined, can seek civil damages, including attorney’s fees and costs, as against a broadcasting industry employer violating Section 202-k.

Illinois Appellate Court Rules That Restrictive Covenant Prohibiting Real Estate Sales Manager From Soliciting Former Employer's Agents Is Not Unreasonable As A Matter Of Law

jsiegel@seyfarth.com (Janet Siegel) — Wed, 27 Aug 2008 14:28:15 -0600

In Baird and Warner Residential Sales, Inc. v. Mazzone, No. 1-07-2179, the Illinois Appellate Court, First District reversed the circuit court’s determination that a restrictive covenant between Patricia Mazzone and her former employer, real estate broker Baird & Warner, was unenforceable as a matter of law. The ruling was issued in June as an unpublished order but was later published on August 15, 2008, upon the motion of Baird & Warner, which requested publication to provide guidance to the real estate industry where restrictive covenants are commonplace.

Baird & Warner sued Mazzone and her current employer, competing broker Midwest Realty Ventures, seeking to enjoin Mazzone for violating the restrictive covenant that prohibited her from soliciting Baird and Warner employees and independent contractors for one year following the end of her employment there. Although the circuit court initially granted a temporary restraining order and ordered expedited discovery, Mazzone and Midwest Realty quickly moved to dismiss on the ground that the non-solicitation agreement was unreasonable, overly broad, and thus enforceable because it sought to impose a “poison pill” whereby any competitor that hired any Baird & Warner manager was then precluded from hiring any of Baird & Warner’s thousands of employees and independent contractors.

Baird & Warner opposed the motion, contending that, based on other language in the agreement, the covenant should be interpreted to apply only to the Baird & Warner office where Mazzone had worked. But the circuit court dismissed the complaint and dissolved the TRO, concluding that the plain language of the agreement was not limited to the one office and declining to “blue pencil” the agreement because doing so would discourage precise drafting of agreements.

In an interlocutory appeal, the Appellate Court determined that even though the agreement was ambiguous as to whether it applied to one office or all of the company’s employees, “there is insufficient evidence to support a finding that the agreement was overly broad.” The court noted that under Illinois law, a court determining the reasonableness of a restrictive covenant should consider, among other factors, the hardship caused to the employee and the effect upon the general public. Here, the court concluded, there was no evidence on the face of the complaint to weigh those factors, and therefore it cannot be determined that the covenant is unreasonable as a matter of law.

Based on this ruling, the court concluded that it need not address Baird & Warner’s alternative argument that the circuit court erred in refusing to exercise its “blue pencil” powers to modify the non-solicitation agreement to render it enforceable.

Two Ships Passing In The Night: Is It A Maritime Or Non-Compete Contract? Williamson v. Recovery Ltd. Partnership

jjarvis@seyfarth.com (Jason Jarvis) — Tue, 26 Aug 2008 11:07:30 -0600

A maritime attachment arising out of a contract action is appropriate where the underlying contract’s nature and character is one of maritime and not simply a non-competition agreement, the Second Circuit ruled recently in Williamson v. Recovery Ltd. Partnership, __ F.3d __, 2008 WL 3876570 (Aug. 22, 2008).

The plaintiffs in Williamson had assisted a recovery operation for the S.S. Central America, a steamship that sank off the coast of South Carolina in 1857. In return for a fraction of a percentage of any recovery, the plaintiffs had executed non-disclosure and non-competition agreements. After a successful recovery operation, defendants were able to sell the gold, silver, and valuable artifacts recovered from the S.S. Central America. But defendants never paid the plaintiffs their share, forcing the plaintiffs to bring a breach of contract action in Ohio State Court.

Defendants removed the State Court action to federal court, and plaintiffs then filed a maritime action in the United States District Court for the Southern District of New York, in which plaintiffs sought an attachment on the salvage from the S.S. Central America. After the district court resolved, among other things, an order to show cause on the attachment in favor of plaintiffs, defendants appealed.

On appeal before the Second Circuit, the defendants argued that plaintiffs’ non-compete agreements were not maritime contracts (and thus there was no federal jurisdiction and prejudgment interest), but instead only non-competition agreements. The Second Circuit disagreed, noting that the test for whether a contract sounds in maritime law is its nature and character, and whether the contracts “principle objective . . . is maritime commerce . . . .” Thus, because the principle objective of the non-competition agreements concerned maritime operations (a salvage recovery operation), the Second Circuit concluded that “[w]hile the Defendants may be correct in stating that these are just standard non-compete, nondisclosure, and lease contract agreements, they are incorrect in arguing that the contracts are therefore not maritime contracts.”

Accordingly, companies entering into non-competition and non-disclosure agreements regarding maritime commerce should expect those contracts to provide federal maritime jurisdiction as non-competition agreements and maritime contracts are not mutually exclusive.

Federal District Court Declines Supplemental Jurisdiction In An Employment-Related Dispute Where The CFAA Was The Sole Basis For Federal Jurisdiction

jmcnairy@seyfarth.com (James McNairy) — Fri, 22 Aug 2008 13:32:14 -0600

In Contemporary Services Corp. v. Hartman, 2008 WL 3049891 (C.D. Cal.), the United States District Court for the Central District of California recently declined supplemental jurisdiction over state law claims removed to the court where federal jurisdiction was based solely on the Computer Fraud and Abuse Act, 18 U.S.C. § 1030. Finding that state issues substantially predominated, the court noted that the “[e]lements and facts that Plaintiffs must prove to establish their CFAA claim are different from what they must prove to establish their other claims.”

The court retained jurisdiction over the CFAA claim and remanded all of the state law claims.

Plaintiffs filed suit in state court against defendant Hartman, asserting seven claims for relief: (1) violation of the CFAA; (2) Breach of Fiduciary Duty; (3) Conversion; (4) Breach of Contract; (5) Fraud; (6) Intentional Interference with Prospective Economic Advantage; and (7) Breach of Fiduciary Duty. Defendant removed the case to federal district court. Defendant moved to remand the case to state court. Defendant also moved to dismiss several of plaintiff's claims.

Plaintiffs filed a First Amended Complaint in which they abandoned their sixth and seventh causes of action. Defendant answered and filed five counterclaims arising under state law for: (1) Unpaid Wages; (2) Waiting Time Penalties; (3) Violation of Cal. Lab. Code § 2802; (4) Indemnification under Cal. Lab Code § 2802 and Cal. Corp. Code § 317; and (5) Unfair Competition Under Cal. Bus. & Prof. Code § 17200.

Turning to plaintiffs’ motion for remand, the district court held that “[i]n all important respects, this action involves an employment dispute between the parties that has given rise to nine state law claims and counterclaims which substantially predominate over the sole federal claim.” Continuing, the court noted that all of the claims and counterclaims derived from the facts triggered by defendant's decision to leave plaintiffs' employment, including that defendant allegedly breached her fiduciary duties owed to plaintiffs by deleting work product stored on her work computer and defrauding plaintiffs by making false representations about the information contained on plaintiffs' shared drive and computer.

Defendant's counterclaims for unpaid wages and unfair competition arose from Plaintiffs' alleged conduct after defendant ended her employment.

Distinguishing the CFAA from the other claims in suit, the court noted “[T]he elements and facts that Plaintiffs must prove to establish their CFAA claim are different from what they must prove to establish their other claims.” Plaintiffs' claims for breach of fiduciary duty and breach of contract derive from the parties' rights and responsibilities under the employment contract. Plaintiffs' claim for fraud arises from Defendant's alleged misrepresentations during her employment. Defendant's counterclaims for unpaid wages and indemnification were based on Plaintiffs' conduct after defendant returned the computer and left their employment.

In contrast, to prove a CFAA claim, one must show that the computer in question was a “protected computer,” and that the conduct involved one of five categories of harm that are a necessary element of a civil action under the CFAA. As plaintiffs did here, claimants most often meet the “harm” element by alleging a loss of at least $5,000 in value. When relying on this element, under 18 U.S.C. § 1030(a)(5)(B), plaintiffs are limited to economic damages.

Finally, the court found it “[n]oteworthy that the relief Plaintiffs seek under the CFAA is not unique to that claim; Plaintiffs also seek compensatory damages and injunctive relief pursuant to all four of their state claims for relief. *** In short, even as to the array of remedies that Plaintiffs seek, their state claims predominate; indeed, rather than “trailing” the federal remedies, the state-based claims encompass additional prayers for relief, such as punitive damages.”