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

By Paul Freehling

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

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Kate Perrelli, Erik Weibust, and Ryan Malloy

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

Changes to the Previous Draft

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

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

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

The Legislative Hearing

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

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

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On January 20, 2011, Massachusetts State Representatives Lori Ehrlich, William Brownsberger, and Alice Hanlong Peisch re-filed the Massachusetts non-compete bill, aptly entitled “An Act Relative to Noncompetition Agreements.”  The bill was originally submitted in late 2009 as House No. 1799, and since that time has undergone significant review, comment, and revision.  While much of the bill remains the same, its sponsors made changes to address several concerns the business community had expressed about particular provisions.  There is no current timeline for a vote on the bill, but we do expect there to be ample opportunity to provide additional input.

What Remains the Same As the Prior Bill?

The bill applies to non-compete agreements in the context of employment, including forfeiture for competition agreements (agreements that impose adverse financial consequences if an employee engages in competitive activities).  However, the bill specifically excludes non-solicitation agreements (both of customers and employees); non-compete agreements outside the employment context, such as those that are executed in the sale of a business; forfeiture agreements (agreements that impose adverse financial consequences as a result of termination regardless of whether the employee engages in competitive activities); and agreements not to reapply for employment.  The bill does not apply to non-disclosure or confidentiality agreements. 
In essence, the bill codifies the existing common law rules, which provide that non-compete agreements are enforceable only if they are reasonable in duration, geographic reach, and scope of proscribed activities necessary to protect the employer’s trade secrets, confidential information, or goodwill, and are consonant with public policy.  In addition, the bill does not change current Massachusetts law permitting courts to reform or modify unreasonable non-compete agreement provisions.

The bill requires non-competes to be in writing, signed by both parties, and “to the extent reasonably feasible,” they must be provided to the employee at least seven business days in advance of employment.  If the agreement is executed after the commencement of the employment relationship, the employee must be provided with notice and “fair and reasonable” consideration (beyond continued employment).

The bill restricts non-compete agreements to one year, except for “garden leave” clauses (agreements by which the employer agrees to pay the employee during the restricted period), which may last up to two years. 

The bill mandates the payment of attorneys’ fees to employees if a court refuses to enforce “a material restriction or reforms a restriction in a substantial respect,” or if it finds that the employer acted in bad faith.  Attorneys’ fees are not mandated, however, if a particular provision is “presumptively reasonable,” as defined by the statute, or if the employer made “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable,” even if a court refuses to enforce or reforms the provision.  An employer may be entitled to its legal fees if it prevails only if they are otherwise permitted by statute or contract, the agreement is presumptively reasonable, the non-compete was enforced, and the employee acted in bad faith.

What Has Changed From the Prior Bill?

Perhaps the most significant change in the current version of the bill is that it no longer restricts the use of non-compete agreements to employees making more than $75,000 per year.  Instead, the bill calls for courts to consider the economic circumstances of, and economic impact on, the employee.  This is important because there are many companies doing business in the Commonwealth, oftentimes start-ups, that employ individuals who are paid less than $75,000 per year, but who are otherwise provided with potentially lucrative equity interests, stock options, or the like.  The departure of these employees to a competitor can cripple a start-up company and can even cause hardship to well-established companies that may utilize these other types of non-monetary compensation and pay key employees less than $75,000.  This salary benchmark was also a concern for companies that employ part-time or seasonal employees, and staffing agencies, to name a few, which may not meet the $75,000 salary benchmark in a calendar year.    

Another change in the bill relates to the award of mandatory attorneys’ fees to employees.  While this provision remains in the bill, as discussed above, an employer can avoid paying fees if the court determines that it undertook “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable,” even if unsuccessful.  This provision, however, does not provide clear guidance to employers as to the parameters of such “objectively reasonable efforts,” and remains a significant departure from existing law that litigants pay their own attorneys’ fees, win or lose.

Like some other states, including California, the bill, in its prior and current versions, explicitly rejects the inevitable disclosure doctrine (which holds that even in the absence of an enforceable non-compete agreement, a former employee may be prevented from working for a competitor based on the expectation that the employment would inevitably lead to the disclosure of trade secrets or confidential information of the former employer).  The newest version of the bill, however, recognizes that employers may nevertheless protect themselves using other laws and agreements, including applicable trade secrets laws and non-disclosure agreements.   

Other changes from the last version of the bill include: (a) non-competes executed after the commencement of employment no longer must be accompanied by a 10% increase in salary to be presumptively reasonable; now, they must simply be supported by “fair and reasonable consideration”; (b) non-compete agreements no longer need to be separate documents; (c) garden leave clauses are permitted; and (d) the scope of restrictions placed on forfeiture agreements has been limited.

Finally, it is important to note that the bill is not retroactive, and will not apply to agreements entered into before January 1, 2012.

Seyfarth Shaw plans to monitor and participate in the legislative process and will report on the status and evolution of this bill on our blog, Trading Secrets, at www.tradesecretslaw.com.  If you have any questions or would like to provide input on the bill, please contact the Seyfarth Shaw attorney with whom you work or any Trade Secrets, Computer Fraud & Non-Compete attorney on our website (www.seyfarth.com/tradesecrets). Click here for Seyfarth Shaw's Management Alert on the bill.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Kate Perrelli and Erik Weibust

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Massachusetts House of Representatives has before it two competing bills relating to non-competition clauses to consider this Spring.  Representative Lori Erlich has sponsored House Bill No. 1799, which sets forth the standards by which a non-compete provision could be measured for enforceability.  The proposed statute includes (i) a ban on non-competes all together for any employee earning less than $100,000 in compensation, (ii) a mandate that any non-competition agreement entered into after employment must be based on consideration other than continued employment (presumably cash, although it is unclear), and (iii) the requirement that the employer must give the employee at least two weeks' notice of the agreement before it can become effective. 

In addition, and this is perhaps the most rigorous demand -- a non-compete agreement may be enforceable only if the the employer pays to the employee "for the full restricted period and without offset for any income the employee may receive from other noncompetitive activities, a minimum of the greater of:  (1) compensation equal to fifty percent of the employee's annual gross base salary and commissions at the time of the employee's termination or (2) $100,000." The proposed statute does not affect employee or customer non-solicitation agreements and expressly excludes the rights of companies to act to protect trade secrets and confidential information from misappropriation by way of an injunction. 

The other statute, House Bill No. 1794 submitted by Representative Will Brownsberger, proposes to ban non-compete and non-solicitation agreements in their entirety.  This bill reportedly is gaining support by those who believe that Massachusetts high-tech corridor has not been competitive with California's Silicon Valley because Massachusetts allows non-compete provisions and California does not.  

Although both statutes apply only prospectively by their terms, if either is passed, they clearly would affect all future contracts with employees governed by Massachusetts' law. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Massachusetts Rule of Professional Conduct 5.6 prohibits non-competition agreements for attorneys, and provides in part: “A lawyer shall not participate in offering or making . . . a partnership or employment agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement. . . .” The Massachusetts Supreme Judicial Court recently held that a law partnership agreement imposing financial consequences on all partners voluntarily withdrawing from the partnership, whether they compete with their prior firm or not, does not violate this rule.

In the case of Pierce & others v. Morrison Mahoney, LLP, the Supreme Judicial Court evaluated claims of former Morrison Mahoney partners that their partnership agreement’s amended separation clause violated Rule 5.6 because it provided that partners voluntarily leaving the partnership forfeited certain financial benefits if they departed before having served for 20 years as a partner or after having attained the age of sixty. Originally, the clause had restricted the financial benefits to partners who did not compete with the firm, but the Supreme Judicial Court held in a prior case concerning the same law firm that such a non-competitive restriction was against the public policy in favor of allowing clients to retain an attorney of their choosing and thus violated Rule 5.6. The firm revised the clause in response to the prior case.

Despite this revision, several partners who had left the firm challenged it as violating Rule 5.6, in that it worked a de facto constraint on competition. The Supreme Judicial Court, however, rejected that argument, noting that the revised policy did not provide any disincentive in taking a particular client. That the law firm had created an appropriate incentive for its partners to stay with the firm until they turned 60 or had been partners for 20 years did not violate public policy, according to the Supreme Judicial Court, and it rejected the claims of the former partners.

This case demonstrates that although attorney non-competition agreements remain against public policy, the purpose of that policy is to promote unfettered client access to attorneys, not, as the Supreme Judicial Court put it, to “protect lawyer mobility.” Law firms employing similar restrictions should take care that they are applied across the board to all partners leaving the firm, not just ones that compete with it. In that manner, incentive programs like the one employed by Morrison Mahoney will survive judicial scrutiny, at least in Massachusetts.

• Email This
• Print
• Comments
• Trackbacks
• Share Link