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Trading Secrets

A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Trade Secret Mediation: Advice from a Mediator’s Perspective

Posted in Trade Secrets

As a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy this blog entry on mediation of trade secret cases by mediator Erica Bristol, Principal of EB Resolution Services.

-Robert Milligan, Editor of Trading Secrets

By Erica Bristol

Trade secret litigation often involves deep levels of distrust, heated emotional exchanges, suspicion and anger on the part of parties and counsel.  One source of the problem lies at the heart of a trade secret misappropriation claim: the allegation that a “theft” has occurred, and each party’s perception of the other party resulting from that allegation.  The plaintiff alleges its property has been stolen by the defendant.  If the plaintiff desires to avoid the time and expense of trial, the victim must now negotiate with the thief, adding insult to injury.  The defendant, on the other hand, may express outrage at being accused of theft, and suspect the litigation is merely a fishing expedition by the plaintiff to uncover the defendant’s own trade secrets.

The allegation of theft sets the parties on a difficult path from the very outset, which can affect the likelihood of reaching a settlement during the mediation session.   How then, can the parties overcome these issues and reach agreement during mediation?  The following tips may be helpful when mediating trade secret disputes.

Know the Definition of “Trade Secret” in the Relevant Jurisdiction.  Counsel sometimes approach trade secret mediation with an incorrect definition of what a “trade secret” is within the relevant jurisdiction.  One example is the “customer list.”  Plaintiff’s counsel will sometimes argue that customer names and addresses, without more, are sufficient for trade secret protection.  However, courts have held that certain customer information, such as names of contact persons that can easily be obtained by a phone call and addresses that are obtainable via the internet and directories, is not a trade secret.  Defense counsel may take the position that customer names and information are not trade secrets, without making sure the information is easily obtainable, in the public domain or otherwise qualifies as a trade secret.  The lack of a clear definition can lead to disputes as to the level of protection afforded.  Counsel should review trade secret statutes and cases within the relevant jurisdiction to determine the proper definition of  “trade secret” and advise the mediator if the issue is disputed, so that it may be addressed during the mediation (and so that counsel does not argue an unsupportable position to the detriment of the client).

Respond to Communications From Opposing Counsel.  Very often an overlooked or delayed response to an email, the failure to return a phone call or a rude comment may be interpreted by opposing counsel as a sign of disrespect, which can fan the flames in an already heated situation and affect a party’s willingness to settle.  Resist the temptation to lobby a rude or disrespectful comment in response to one received from opposing counsel.  Promptly respond to communications in a professional manner to reduce the chance of misunderstandings, and to keep the channels of communication open.

Try to Develop Some Level of Trust and Cooperation, If At All Possible.  Trade secret mediations often turn on the level of trust and cooperation between the parties.  It is extremely helpful to establish an agreement that the parties will act in good faith during the mediation session.  If Plaintiff’s counsel has any suspicion the defendant is playing “hide the ball,” or defendant’s counsel feels plaintiff is seeking to engage in a fishing expedition, it will be difficult to obtain concessions from a party or reach settlement.  The more open, honest, transparent and authentic each party is (or each party appears to be), the less contentious the mediation will be and the more likely a settlement can be reached.  Even if the parties cannot develop a level of trust, it is helpful to reach some basic level of cooperation to assist in reaching settlement.

Conduct a Thorough Investigation The First Time Around.  Counsel (both in-house and outside law firm) who do not have experience with trade secret disputes or who are not familiar with the internal workings of computer software, networks, IT departments and staff, should promptly seek the advice of trade secret counsel or a consultant.  This will help to ensure that employees and contractors are properly instructed on how to search internal systems/networks; to conduct successful witness interviews by asking the right questions; to ensure the investigation is complete so there are no surprises later on; and to avoid spoliation of evidence.  An incomplete or faulty investigation, especially if discovered during the mediation, may raise suspicions and require the session to be suspended so that a supplemental investigation can be performed, resulting in increased time, expense and frustration for all involved.

Accept That You May Never Get all the Answers.  Trade secret cases often involve a substantive investigation into a party’s computers, networks, systems and personnel to discover if trade secrets have been wrongfully misappropriated.  Depending on the manner in which systems and software are configured, whether company policies are/were in place and the availability and reliability of witnesses, it may not be possible to develop a full picture of whether misappropriation has actually occurred.  There usually comes a time when counsel and client must accept this fact, and decisions must be made based on the information available at that moment.  It may not be worth the effort and expense to continue an investigation or conduct additional discovery.  The difficulty is knowing when to “stop,” and convincing the client to do the same.  Emotions and distrust may impede a party’s ability to think clearly and make a rational decision on the matter, but it must be done, especially when it is in the best interest of the client to reach a settlement during the mediation session.

Make Sure Expert Reports are Easy to Understand. Sometimes a party will introduce an expert’s forensic computer report during the mediation for the participants to review.  Reports such as these are extremely helpful in determining what information resided in the defendant’s computer system, and whether that information constituted plaintiff’s trade secrets.  On occasion, the expert’s report is such a maze of jumbled, unintelligible graphs, charts, data and technical speak that it requires an instructional manual.  Explaining difficult reports during mediation can waste precious time that could be better used for settlement discussions.  Counsel should make sure the graphs, charts, legends and data in expert reports are clear and easy to understand; the explanatory text is written in layman’s terms, not industry speak; and the results and implications are clear.  Simple expert reports will minimize the time spent reviewing and explaining the report, and maximize the time spent on negotiating settlement terms.

Parties to a trade secret dispute may experience distrust, incomplete information and a lack of communication and cooperation. This can set the tone of the mediation session, impede the parties’ willingness to cooperate and reduce the likelihood of reaching settlement.  Overcoming these obstacles can be an uphill battle for the parties and the mediator.  These obstacles can be overcome by working through, and in spite of, a lack of trust and incomplete information; finding areas of cooperation and trust; keeping the lines of communication open; and working in the client’s best interest to resolve the dispute so that the client can get “back to business.”  Counsel and clients must commit to the process in order to overcome the barriers to settlement and achieve success in trade secret mediation.

———————–

Erica Bristol is an intellectual property attorney and mediator.  She is the Principal of EB Resolution Services, a mediation service provider in Encino, California, specializing in Intellectual Property law disputes.   

Webinar Recap! Protecting Confidential Information and Client Relationships in the Financial Services Industry

Posted in Trade Secrets

We are pleased to announce the webinar “Protecting Confidential Information and Client Relationships in the Financial Services Industry” is now available as a podcast and webinar recording.

In Seyfarth’s sixth installment of its 2014 Trade Secrets Webinar series, attorneys Scott Humphrey, Jason Stiehl and Rebecca Woods, focused on trade secret and client relationship considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.

As a conclusion to this well-received webinar, we compiled a list of key takeaway points, which are listed below.

  • Enforcement of restrictive covenants and confidentiality obligations for FINRA and non-FINRA members are different. Although FINRA allows a former employer to initially file an injunction action before both the Court and FINRA, FINRA, not the Court, will ultimately decide whether to enter a permanent injunction and/or whether the former employer is entitled to damages as a result of the former employee’s illegal conduct.
  • Address restrictive covenant enforcement and trade secret protection before a crisis situation arises. An early understanding of the viability of your restrictive covenants and the steps that you have taken to ensure that your confidential information remains confidential will allow you to successfully and swiftly evaluate your legal options when a crisis arises.
  • Understand the Protocol for Broker Recruiting’s impact on your restrictive covenant and confidentially requirements. The Protocol significantly limits the use of restrictive covenants and allows departing brokers to take client and account information with them to their new firm.
  • Use of cloud-based services is increasing, including in the financial services industry. This creates different risks for protecting trade secrets with potential theft, exposure, or loss from cloud providers, hackers, and rogue or sloppy employees. A comprehensive and preventative slate of measures should be considered in order to ensure protection from each of these threats and to manage and mitigate the consequences of a compromise of protected information. “Analog” protections, such as confidentiality agreements, employee training, and basic security safeguards remain relevant. “Cloud” protections should be added, however, and include maximizing technology-based security features, negotiating savvy and strong vendor agreements, and obtaining properly-scaled cyber-insurance coverage. Care should also be taken to ensure that compromise of proprietary information that includes personal information may trigger federal and/or state breach notification obligations.

Please join us for our next webinar on September 17th, Ins and Outs of Prosecuting and Defending Trade Secret Injunction Cases

 

NLRB Rules That “Liking” A Facebook Comment Is Protected Activity

Posted in Social Media

By Jeffrey A. Berman and Candice T. Zee

The National Labor Relation Board (“Board”) issued its latest decision on social media issues on August 22, 2014.  In Triple Play Sports Bar & Grille, 361 NLRB No. 31 (2014), the Board ruled that a Facebook discussion regarding an employer’s tax withholding calculations and an employee’s “like” of the discussion constituted concerted activities protected by the National Labor Relations Act (“Act”).  The Board also held that the employer’s internet and blogging policy violated the Act.

The employer, Triple Play Sports Bar and Grille, is a bar and restaurant.  In 2011, at least two employees discovered that they owed more in state income taxes than they expected.  Employees discussed the situation at work and complained to Triple Play, which had planned a staff meeting to discuss the employees’ concerns.  Prior to the meeting, a former employee posted the following “status update” to her Facebook page:

Maybe someone should do the owners of Triple Play a favor and buy it from them.  They can’t even do the tax paperwork correctly!!! Now I OWE money…Wtf!!!

Several Facebook friends posted comments in response to the status update, including two of Triple Play’s employees.  One employee commented, “I owe too.  Such an asshole.”  A second employee “Liked” the former employee’s status update, but posted no comment.  When Triple Play discovered that two of its employees had participated in the Facebook discussion, it terminated their employment for disloyalty.

The Board held that Triple Play violated the Act by terminating the employees’ for engaging in activities protected by the NLRA.  In its analysis, the Board first determined that the Facebook discussion at issue should not be analyzed under the Atlantic Steel Co., 245 NLRB 814 (1979) standard.  To determine whether an employee loses the Act’s protection under Atlantic Steel, the Board balances four factors: (1) the place of the discussion; (2) the subject matter of the discussion; (3) the nature of the employee’s outburst; and (4) whether the outburst was provoked by the employer’s unfair labor practices.  The Board noted that the first factor alone supported its conclusion that Atlantic Steel’s framework is tailored for workplace confrontations with the employer, and not for the type of employee activities in this case.

Instead, the Board applied the standards set forth by the US Supreme Court in the Jefferson Standard and Linn cases.  In Jefferson Standard, the Court upheld the discharge of employees who publicly attacked the quality of their employer’s product and business practices without relating their criticisms to a labor controversy.  NLRB v. Electrical Workers Local 1229 (Jefferson Standard), 346 US 464 (1953).  In Linn, the Court limited state-law remedies for defamation in the course of a union-organizing campaign to instances where the complainant could show that “the defamatory statements were circulated with malice” and caused damage.  Linn v. Plant Guards Local 114, 383 US 53, 64-65 (1966).

Applying Jefferson Standard and Linn to the facts of the case, the Board determined that both the employees’ comments and “like” in response to the Facebook post constituted a dialogue among employees about working conditions that was protected by the Act. The Board determined that the evidence did not establish that the discussion was directed to the general public. Although the record did not establish the former employee’s privacy settings on Facebook, the Board noted that the comments were posted on an individual’s personal page rather than a company page providing information on its products or services. The Board concluded that the employees’ comments were not “so disloyal as to lose the Act’s protection” because they did not disparage their employers products or services, or undermine its reputation. The Board also held that the comments were not defamatory, but simply a statement of a negative personal opinion of Respondent’s owner.

The Board also found that the Triple Play’s Internet/Blogging policy in the employee handbook violated Section 8(a)(1) of the Act. The policy warned that “engaging in inappropriate discussions about the company, management, and/or co-workers, the employee may be violating the law and is subject to disciplinary action, up to and including termination of employment.”

The Board held that the policy was overly broad and unlawfully chilled employees in the exercise of their Section 7 rights. It further noted that Triple Play’s subsequent termination of the employees who engaged in the Facebook discussion further demonstrated the employer’s improper prohibition of Section 7 activity. The Board ordered Triple Play to discontinue using the policy.

In his dissent, Member Miscimarra agreed with his colleagues that Triple Play unlawfully discharged the employees and questioned them about their Facebook activity. He disagreed, however with the finding that the Internet/Blogging policy violated the Act. Member Miscrimarra noted that the language of the policy did not expressly or implicitly restrict Section 7 activity, and was not applied to restrict protected activity. Specifically, Triple Play did not apply or refer to the policy when it discharged the employees.

What does this mean for employers? Employers must tread lightly before disciplining employees for social media comments that might appear to be critical of their employer. Employers should also review their social media policies to make sure that they are not in violation of the Act. Remember, the employees in this case were not a part of any union or labor organization.

Appellate Court Orders Trial Judge To Rewrite Parties’ Non-Compete Covenant To Make It Enforceable

Posted in Non-Compete Enforceability, Practice & Procedure

An asset purchase and sale agreement included unusual non-competition provisions. They authorized a court to redo any time, scope and area restrictions held to be unenforceable. 

The North Carolina Court of Appeals held that the covenant’s territorial restriction was overbroad. Notwithstanding the state’s “strict blue pencil doctrine,” which limits a judge’s authority to revise a non-compete clause, the appellate court directed the trial judge to rewrite the invalid restriction and then to try the issue of whether the clause was violated.  Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, No. COA 14-185 (N.C. App., 8/5/14) (Hunter, J., joined by McGee, J.; Elmore, J., dissenting).

Summary of the Case

In connection with a purchase and sale of two companies, the parties executed a five-year non-competition, non-solicitation and confidentiality agreement.  Subsequently, the purchaser sued the sellers in a North Carolina court, alleging that they were violating the non-compete covenant and engaging in other wrongdoing.  Without giving any specific reasons, the lower court granted the defendants’ motion for summary judgment.  A few days ago, in a 2-1 decision, the appellate tribunal reversed, remanded, and directed the trial judge “to revise the territorial area of the non-compete to include” only those areas where the acquired companies had customers at the time of the transaction.  The appellate court also held that the plaintiff presented evidence showing genuine issues of material fact which precluded summary judgment. 

The Asset Sale

Beverage Systems was organized in 2009 to provide and service beverage dispensing equipment, and to sell beverage products.  In September of that year, the company bought the assets of two entities engaged in those activities.  The purchase price included $10,000 specifically for the non-compete covenant.

The Covenant

The agreement of purchase and sale provided that, for the earlier of five years or “such other period of time as may be the maximum permissible period of enforceability,” the sellers shall not have any involvement with a North or South Carolina company engaged in the same business as the purchaser.  Although not mentioned by the appellate court, the agreement (a copy of which is in the record on appeal) also stated that the parties believe the restrictions as written “are reasonable and necessary to protect the [purchasers’] legitimate business interests” and “are not overbroad, overlong or unfair.”  Further, the parties consented (a) to substituting “automatically” the maximum reasonable period, scope and geographical area for any stated period, scope or area “held to be invalid, illegal or unenforceable in any respect,” and (b) to allowing a court “to revise the restrictions contained [in the covenant] to cover the maximum period, scope and area permitted by law.”   

North Carolina’s “strict blue pencil doctrine.”

A judge in that state is permitted, but not required, to alter “a distinctly separable part of a [restrictive employment] covenant in order to render the provision reasonable.”  However, a jurist “may not otherwise revise or rewrite the covenant.”    

The Trial Court’s Decision

The parties’ briefs in the trial court focused on the question of whether the territorial restrictions were reasonable.  Without expressly answering that question, the court entered summary judgment for the defendants and explained only that the decision was based on “review of the file, the Briefs . . . and upon consideration of oral argument of counsel for all the parties.”

The Appellate Decision

The appellate tribunal’s majority concluded that the broad territorial restriction, encompassing some areas where the sellers had not been engaged in business, was invalid.  Citing Outdoor Lighting Perspectives Franchising, Inc. v. Harders, 747 S.E.2d 256 (N.C. App. 2013), a case not mentioned by the parties in any brief in the trial or appellate courts, the majority said that the purchase and sale agreement as written rendered the “strict blue pencil doctrine” inapplicable.  Accordingly, the trial judge was ordered “to revise the non-compete provisions after determining where in North Carolina and South Carolina it would be reasonable to enforce” those provisions.  Then, “once the trial court revises the non-compete to include only those areas reasonably necessary to protect plaintiff’s business interests,” that court must decide whether the covenant has been violated.  

The Outdoor Lighting Case

The majority said Outdoor Lighting construed “similar language” and indicated “a willingness of our Courts to recognize and enforce revised non-compete agreements when the parties contract for the right to” make revisions.  There, a franchise agreement gave the franchisor “the right to modify the non-competition provision” by reducing its scope.  The franchisor attempted to exercise that right, but the propriety of this “private ‘blue penciling’” was not adjudicated because, even as modified, the provision was held to be unreasonable.  

Judge Elmore’s Dissent in Beverage Systems

Judge Elmore expressed his opinion that  Outdoor Lighting provides no basis for the Beverage Systems majority to direct “the trial court to undertake the revising and rewriting of the non-compete.”  He stated that Outdoor Lighting “addressed a franchisor’s (a party to the non-compete), . . . right to modify a non-compete outside the scope of a business sales contract.”  That case, he said, was distinguishable.  It did not concern an assets purchase and sale transaction, did not involve a contractual provision allowing a non-party to revise a non-competition clause, and did not reflect an appellate tribunal’s direction to a trial judge to rewrite the clause.

Judge Elmore continued: Under the blue pencil doctrine, a “trial court has the authority to enforce portions of a non-compete that are reasonable and disregard the remaining portions if the non-compete divides the restricted area into distinct units.  While the non-compete in the case at bar divides the restricted territory into North Carolina and South Carolina, . . . neither of those restrictions taken separately [is] reasonable.”  Further, he disagreed with the majority’s conclusion that there were material disputed issues of fact.  Thus, in his view, summary judgment for the defendants was proper.

Takeaways

The Beverage Systems contract contained the parties’ stipulation that they considered the non-competition, non-solicitation, and confidentiality provisions to be reasonable and that, if invalidated, they should be salvaged to the maximum extent possible.  The contract also stated that a court could redo the duration, territory, and scope of prohibited activities clauses to the extent they were determined to be illegal.  The lesson learned is that, in the instance of a non-compete in a purchase and sale transaction, careful drafting might serve to persuade a judge to rewrite an unreasonable provision.  This result could be achieved notwithstanding a “strict blue pencil doctrine” which, as Judge Elmore wrote, “drastically restricts a court’s authority to modify” an unlawful restriction. 

ABA Annual Meeting Recap: Latest Developments in Trade Secret and Non-Compete Law

Posted in Legislation, Trade Secrets

As a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy this blog entry summarizing a recent presentation at the ABA Annual Meeting in Boston, Massachusetts on the Latest Developments in Trade Secret and Non-Compete Law by ABA Law Student Reporter Melissa Lauretti, a law student at the University of Connecticut.

-Robert Milligan, Editor of Trading Secrets

By Melissa Lauretti

In today’s competitive marketplace, organizations are prepared to invest time and resources in protecting their trade secrets as it is estimated that companies in the United States lose $160 to $480 billion each year due to trade secret misappropriation. Recently, there have been legislative efforts at the federal level to enhance the protection of trade secrets, namely by creating a federal civil cause of action for trade secret theft. While many companies support the expansion of legal remedies against misappropriators, organizations must also proactively protect their confidential information by educating their employees and implementing industry best practices.

The CLE program “Latest Developments in Trade Secret and Non-Compete Law” provided attendees with an overview of legislative efforts to enhance the protection of trade secrets at the federal and state levels, highlighted legislative activities and court rulings related to the enforceability of non-compete agreements in various states, discussed legislative developments in the areas of social media and cyber espionage, and described best practices for protecting trade secrets at the corporate level. Robert Milligan, Partner in the Litigation and Labor & Employment Departments of Seyfarth Shaw LLP and Co-Chair of its Trade Secrets, Non-Compete and Computer Fraud group served as the program’s moderator. Katherine Perrelli, Partner and Chair of Seyfarth Shaw’s national Litigation Department; Jerry Cohen, Partner at Burns & Levinson, LLP; and Karen Tompkins, Senior Legal Counsel, Employment at Stryker Corporation shared their insights as panelists.

Federal Legislative Activity

Presently there is no federal civil cause of action for trade secret misappropriation, so plaintiffs are often resigned to vindicating their rights in state courts. However, there are bills pending in the United States Senate and House of Representatives that, if enacted, would provide a federal civil cause of action for trade secret theft. The panelists discussed the merits of these pieces of legislation. For example, the Defend Trade Secrets Act of 2014 would allow a plaintiff to obtain a seizure order, but some have questioned whether this remedy may be subject to abuse and have concerns about implementation. The Trade Secrets Protection Act of 2014, which was introduced in the House of Representatives in July 2014, refines the seizure provisions in the Defend Trade Secrets Act of 2014 and also provides trade secret owners with extensive remedies for trade secret misappropriation. Congress is expected to weigh in on the two trade secret bills after it returns from August recess.

State Legislative Developments

At the state level, there has been increased activity in the trade secrets and non-compete arenas. Texas became the 48th state to adopt the Uniform Trade Secrets Act; New York and Massachusetts are the only states that have not yet adopted a version of the Act. This past legislative session, the Massachusetts legislature considered a bill to adopt the Uniform Trade Secrets Act. Although the legislation failed, panelist Katherine Perrelli noted that it is likely that discussions will continue in the next legislative session.

In terms of non-compete agreements, there are various nuances and differences among states. The legislatures of New Jersey and Maryland proposed bans on enforcing non-compete agreements against employees who claim unemployment, while legislatures in Massachusetts and Minnesota considered restrictions and bans on non-compete agreements. Given the differences in the enforcement of non-compete agreements among states, it is particularly important for multi-state employers to remain abreast of legislative developments. Seyfarth Shaw’s 2014-2015 50 State Desktop Reference: What Employers Need to Know About Non-Compete and Trade Secrets Law is one resource that employers can use to remain informed of the diverse non-compete landscape.

Preemption

The panel discussed the differences across the nation in how courts have addressed trade secret preemption. While some states permit plaintiffs to bring common law claims, such as breach of duty of loyalty and tortious interference, along with trade secret claims arising out of the misuse of company trade secrets, other states do not permit plaintiffs to bring such claims and preempt common law claims.

Best Practices for Protecting Trade Secrets and Drafting Non-Compete Agreements

In light of the present legal and legislative landscape, the panelists provided attendees with practical tips for protecting trade secrets and drafting non-compete agreements. According to a 2013 Symantec/Ponemon study that surveyed 3,317 employees, half of the employees who left their jobs retained their employers’ confidential information, and forty percent of those individuals planned to use that information in their new roles. Thus, educating employees about the importance of protecting company information is a vital part of an organization’s protection and enforcement process.

In terms of safeguarding proprietary company information, it is recommended that companies:

  • conduct entrance and exit interviews with employees;
  • educate managers and human resources professionals regarding the company-owned items that employees must return upon their departure;
  • transparently communicate the company’s policies regarding the monitoring of employees’ electronic devices and communications to employees;
  • disable employees’ access to company and computer networks at the time of departure;
  • creature a culture of compliance and confidentiality where employees recognize the value of protecting trade secrets in a supportive and collaborative environment; and
  • share best practices within their industries to protect valuable business data.

As to non-compete agreements, express representations and clear drafting are keys to enforcement. Employers should ensure that they research states’ practices on enforcing forum selection clauses, and draft forum specification and choice of law provisions with that information in mind, including provisions concerning personal jurisdiction and representations concerning connections to the forum state. Similarly, employers should ensure that agreements address full-time, part-time, and consultant relationships in recognition of the fact that employees may fluidly shift roles within an organization. Finally, employers should ensure that employees receive sufficient consideration for signing non-compete agreements, which may vary by state; specifically, continued employment is sufficient consideration in many states, but in other venues, employers must give employees additional consideration, such as a bonus, before the non-compete is enforceable.

Massachusetts Governor Makes Last Ditch Effort to Pass Non-Compete Legislation Before His Term Ends

Posted in Legislation, Non-Compete Enforceability

As you may recall, we recently reported that Massachusetts legislators’ attempts to pass a bill altering the landscape of non-compete enforceability (including Governor Deval Patrick’s bold push to ban non-compete agreements altogether) failed yet again.  As has become a nearly perennial event in the Commonwealth, efforts to push legislation through by the close of the session were frenzied, but ultimately much ado about nothing.

Surprisingly, now that the formal legislative session has ended (and before a new one begins next January), Governor Patrick has reintroduced non-compete legislation, although tellingly, this version is much more measured than his previous proposal.  Indeed, instead of proposing to ban non-compete agreements altogether, Governor Patrick’s new proposal mirrors the most recent compromise bill introduced by Senator Will Brownsberger and Representative Lori Erlich, which was overwhelmingly approved in the Senate but failed to pass before the end of the session. 

To wit, like the previous compromise bill, the newly introduced Patrick bill would require:

(a) that non-competes be in writing and signed by both the employee and the employer, and expressly state that the employee has the right to consult with counsel prior to signing;

(b) that to the extent reasonably feasible, employees be given five business days’ advance notice; and

(c) that if entered into after commencement of employment (but not in connection with a separation agreement), non-competes must be supported by fair and reasonable consideration in addition to continued employment, and notice must be provided at least ten business days before the agreement is to be effective; and where the non-compete is part of a separation agreement, the employee must be given seven days to rescind acceptance.

The bill also creates presumptions of reasonableness as to duration (6 months), geographic reach (the area in which employee, during the last two years of employment, provided services, or had a material presence or influence), and the scope of proscribed activities (specific types of services provided by the employee during last two years of employment).  It also bans the use of non-competes for workers classified as nonexempt under the Fair Labor Standards Act (i.e., hourly workers).

Finally, the bill allows courts to reform non-competes only where the provision to be altered is either presumptively reasonable as described above, or where the employer made “objectively reasonable efforts to draft the particular provision so that it would be presumptively reasonable”.

It’s unclear what progress will be made on this bill, if any.  Now that the formal legislative session has ended, many legislators are focused on their reelection campaigns.  No votes will be taken on the bill until next year’s formal session commences in January of 2015, when a whole new crop of legislators will be getting to work – along with a new governor, as Governor Patrick is not running for reelection this year.

Stay tuned for any new developments!

What You Need to Know About Trade Secrets in India

Posted in International, Trade Secrets

As a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy this blog entry about trade secrets in India by technology and corporate attorneys Sajai Singh and Soumya Patnaik of J. Sagar Associates in Bengaluru, India. Sajai serves as the President of ITechLaw, a leading technology law organization.  This entry is part two of a two part series on non-competes and trade secrets in India.

-Robert Milligan, Editor of Trading Secrets

By Sajai Singh and Soumya Patnaik

Of all the intellectual property generated by a company, its trade secrets are perhaps the most important. However, unfortunately, in India, they are also the most neglected and vulnerable. This vulnerability is due to the fact that India offers no statutory recognition to an establishment’s trade secrets. Unlike other jurisdictions, trade secrets are not covered within the purview of Intellectual Property law in India. Companies therefore, have to rely on contractual and common law mechanisms to protect and prevent their proprietary information from falling into the hands of third parties, especially, competitors. Recognising the intrinsic value and vulnerability of trade secrets, courts in India, have generally upheld trade secret protection. This note sketches the broad outline of trade secret protection law existing in India, and examines some of the principles laid down by Indian courts  in that regard.

 Protection of Trade Secrets in India

The law protecting a company’s trade secrets is derived from principles of the law of torts, restitution, agency, quasi-contract, property and contracts. In the absence of statutory regulation, companies have sought protection for their confidential information under two main heads, contractual obligations and equitable/implied confidentiality obligations.

a.      Contractual Protection

Non-disclosure agreements remain the primary mechanism for protection of proprietary information in India. Indian courts have recognised the right of an employer to prevent disclosure of classified information by an employee or ex-employee, through covenants in the employment agreement. In one case[1], the Bombay High Court, while considering a confidentiality clause in an agreement, stated that if such clause prevents the employee from divulging any secret information of a specific nature after termination of his service, an injunction in accordance with the terms of such clause, would be reasonable and justified in law.

Similarly, courts have also upheld the validity of restrictive clauses in agreements such as technology transfer agreements, which impose negative covenants on parties, not to disclose or use the information received under the agreement, for any purpose other than that agreed to.

b.      Equitable protection

Courts of law in India have not restricted the ambit of trade secret protection to relationships governed by contracts. In the case of John Richard Brady v. Chemical Process Equipments P. Ltd.[2] the Delhi High Court invoked a wider equitable jurisdiction, and awarded an injunction even in the absence of a contract, based on an implied obligation to maintain confidentiality on the part of the employee. Similarly, in the Homag India case[3], the Karnataka High Court held that the non-existence of an actionable right would not be assumed, merely due to the absence of a contract between the parties, as long as the petitioner could establish the wrongful disclosure of its proprietary information by the defendant.

Need for Legislation

In India’s increasingly competitive environment the protection of proprietary information often foretells the success or failure of a business. Indian companies are keen on protecting their intellectual property under the label of trade secrets rather than patents, as it affords them greater autonomy and secrecy. Therefore, there is a pressing need for a concrete legislation recognising and protecting trade secrets in India. In 2008, the Ministry of Science and Technology, published a draft legislation titled the National Innovation Act, 2008 (‘Innovation Bill’) that sought to codify and consolidate the law of confidentiality and aid in protecting confidential information, trade secrets and innovation. However, the Parliament, till date, has not directed its attention to the Innovation Bill, and consequently, trade secrets in India, remain unregulated.


[1] VN Deshpande v. Arvind Mills AIR 1946 Bom 423

[2] AIR 1987 Delhi 372

[3] Homag India Pvt. Ltd. vs. Mr. Ulfath Ali Khan and IMA AG Asia Pacific PTE. Ltd  MANU/KA/1569/2012

There is still time to register! Seyfarth Shaw LLP Webinar: Protecting Confidential Information and Client Relationships in the Financial Services Industry

Posted in Trade Secrets

Don’t forget to come and hear Trade Secret and Industry specialists Scott Humphrey, Jason Stiehl and Rebecca Woods discuss steps Financial Services Companies can take to protect their trade secrets and confidential information.  During this one hour webinar, Seyfarth attorneys will talk about practical steps financial institutions can implement to protect trade secrets and client relationships, what you should do if your trade secrets are improperly removed or disclosed, and how to prosecute a case against a former employee who is a FINRA member.  They will also assess the impact cloud computing has on trade secrets in the Financial Services Industry and steps institution’s can take to protect their trade secrets in today’s digital age.  Lastly, they will discuss the impact of the Protocol for Broker Recruiting on trade secrets and client relationships.  We hope you can attend!

For more information and how to register for this webinar, click here.

What You Need to Know About Non-Compete Covenants in India

Posted in International, Non-Compete Enforceability, Practice & Procedure

As a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy this blog entry about non-compete covenants in India by technology and corporate attorneys Sajai Singh and Soumya Patnaik of J. Sagar Associates in Bengaluru, India. Sajai serves as the President of ITechLaw, a leading technology law organization.  This entry is part one of a two part series on non-competes and trade secrets in India.

-Robert Milligan, Editor of Trading Secrets

By Sajai Singh and Soumya Patnaik

A non-compete covenant is a contract, or a clause in a contract, limiting a party from competing with the business or trade of another party. Most commonly such covenants are entered into between employers and their employees, or between companies during a transaction involving transfer of business or goodwill.

Legal Status of Non-Compete Covenants

Section 27 of the Indian Contract Act, 1872 (“ICA”) provides the test for determining the legality of non-compete covenants in India. Section 27 of the ICA states that “every agreement by which any one is retrained from exercising a lawful profession, trade or business of any kind, is to that extent, void.” The only statutory exception to this is an agreement not to carry on business, of which goodwill is sold.

An agreement in restraint of trade has been identified as one in which a party agrees with any other party to restrict his liberty in the future to carry on trade, business or profession, with other persons who are not parties to the contract in such a manner as he chooses. Non-compete clauses have therefore, time and again, been regarded by courts in India, as restrictive clauses, which undermine a party’s freedom to engage in trade. A literal interpretation, of Section 27 invalidates all non-compete covenants, irrespective of their reasonableness, or consideration paid for such covenants. In an employment situation however, such clauses are usually held to be valid during the period of employment, but invalid post-termination.

In Krishan Murgai v. Superintendance Company of India[1], the Delhi High Court deliberated over whether a contract of employment, entered into by the appellant with the respondent, which prohibited him from engaging in similar business as that of the respondent, during his employment, and for a further period of 2 years after the termination of his employment was violative of Section 27 of the ICA. The court held that Section 27 does not distinguish between reasonable or unreasonable restraint of trade and therefore any restraint imposed on the employee after the term of employment, would prima facie be void and unenforceable.

In Star India Pvt. Ltd. v. Laxmiraj Seetharam Nayak & Anr[2], the Bombay High Court had to determine whether an injunction could be granted in furtherance of a negative stipulation, in the nature of a non-compete clause, in an employment agreement. The Bombay High Court held that the injunctive relief sought would not be granted where its effect would be to compel the employee to continue in the services of the employer, against his will.

In Taprogge Gesellschaft MBH v. IAEC India Ltd[3], the Bombay High Court held that a restraint operating after termination of the contract to secure freedom from competition from a person, who no longer worked within the contract, was void. The court refused to enforce the negative covenant and held that, even if such a covenant was valid under German law, it could not be enforced in India.

Exceptions to the Rule

Restraint imposed on freedom of trade and business, has been recognised as valid in certain circumstances.

Exception 1

The first of such circumstances is contained in the statutory exception to Section 27, which provides that, if a party sells the goodwill of his business to another he can agree with the buyer that he will not carry on a similar business within the specified local limits. As per Section 27, “one who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits; so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regarding being had to the nature of the business.”

In such cases, courts will generally grant suitable injunctive remedies, to prevent a contracting party from carrying on a trade or business, the goodwill of which has been transferred by him for good consideration.

Second Exception

The second exception has been carved out by courts, by subjecting Section 27 to a less literal construction, and pertains to employment relationships. In the case of Niranjan Shankar Golikari v. Century Spinning & Mfg. Co.[4], the Supreme Court held that restrictions that are to operate only while the employee is contractually bound to serve his employer are never regarded as being in restraint of trade, at common law, or under Section 27. Therefore, where a clause imposes a partial restraint, prohibiting the employee from performing services in the same area of business, as that of the employer, during the stipulated period of the agreement, such restraint would not violate Section 27.

As far as post-termination employment restraints are concerned, it has been reiterated time and again, that in order to restrain an employee from joining a competitor, the onus would be on the employer to prove that there is actual theft of confidential and proprietary information, and that the loss of trade secrets, or the disclosure of trade secrets to the competitor has caused or is likely to cause damage/loss to the employer. Even in this case, it is likely that courts would only restrain the employee from disclosing any confidential/proprietary information to the competitor, but may not necessarily prohibit him from joining the competing organisation. In any event, the burden of proof in such cases is on the employer, and is very high.

Third Exception

The third exception relates to the restrictions on a franchisee’s right to deal with competing products during the subsistence of the franchise agreement. In M/S Gujarat Bottling Co. Ltd. v. The Coca Cola Co.[5], the Supreme Court held that some terms of commercial contracts have passed into the accepted currency of contractual or conveyancing relations, and aim at promoting trade and business. Such terms due to their nature and purpose cannot be said to enter into the field of restraint of trade. In this case, the Supreme Court held that a negative stipulation in a franchising agreement, restraining the franchisee from dealing with competing goods, during the subsistence of the franchising agreement, could not be regarded as restraint of the franchisee’s right to trade.

The need for change

Although the need to protect contractual autonomy and liberty has been repeatedly expounded by Indian courts, non-compete clauses have been consistently held to be invalid, by virtue of Section 27 of the ICA. Under the present statutory framework, a company is almost paralyzed in terms of preventing an employee with access to confidential information and intimate knowledge of its trade secrets, from moving to a competitor.  


[1] AIR 1979 Del 232

[2]2003 (3) Bom CR 563

[3] AIR 1988 Bom 157

[4] AIR 1976 SC 1098

[5] AIR 1995 SC 2372

Shanghai Courts Provide Additional Relief to Employers for Breach of Non-Compete Agreements

Posted in International, Non-Compete Enforceability, Trade Secrets

Non-compete agreements are widely used by employers in certain industry sectors in China to protect their trade secrets and confidential information.

In China, employers may require the employee to continue to perform the non-compete obligation and pay liquidated damages in accordance with the non-compete agreement after breach occurs.

In the past, however, the following uncertainties could impede the employer from obtaining effective remedies against the departing employee.

First, although it is clear that an employee breaching a non-compete agreement must continue to perform his/her obligations under the agreement regardless of whether he/she has paid liquidated damages, it was unclear whether the courts would provide for mandatory enforcement when the employee refuses to perform such obligation.

Second, although the employer is entitled to liquidated damages from the employee breaching the non-compete agreement, courts tend to adjust the amount of the liquidated damages by considering the actual loss of the employer, and the salary as well as the non-compete compensation received by the employee.  In many cases, employers may not receive the full amount of the agreed liquidated damages.

Two recent Shanghai cases demonstrate that employers may now obtain more complete remedies for breach of non-compete agreements.

In the first case, the Shanghai Labor Dispute Arbitration Committee issued an arbitration award requiring the employee to continue to perform the agreed non-compete obligation owed to the former employer.  However, the employee refused to perform such obligation after the arbitration award took effect.  Upon the request of the former employer, the People’s Court of Pudong District in Shanghai issued an order to mandatorily enforce the arbitration award, which forced the employee to terminate employment with the new employer, which is a competitor. 

In the second case, the People’s Court of Xuhui District in Shanghai found in favor of the employer on its claim for the agreed liquidated damages (RMB 150,000) to be paid by the former employee for her breach of the non-compete duty.  Compared with the salary and non-compete compensation of the employee, the employee’s agreed liquidated damages was much higher.  In other cases, courts have lower the agreed liquidated damages based on the principle of equality and fairness.  However, in this case, the court held that since the actual loss to the employer was difficult to calculate, the liquidated damages should be paid in accordance with the amount agreed by both parties.  In principle, employees are obliged to continue to perform the non-compete agreement regardless of whether liquidated damages are payable.  In this case, since the non-compete agreement had expired, the employee was only obliged to pay the agreed liquidated damages.  

These two recent Shanghai decisions provide employers with authority for more effective remedies for breach of non-compete agreements. The first case demonstrates that injunctive relief for breach of non-compete agreements is available. The second case demonstrates that the court will support the liquidated damages agreed by the two parties.  In addition to liquidated damages, the employee is obliged to continue to perform his/her non-compete obligation until the agreed term expires.  We will keep a close eye on other significant non-compete and trade secrets cases in China.