To accommodate our global audience, the fifth installment in the 2014 Trade Secrets Webinar Series will be available as an on-demand broadcast on Thursday, July 31, 2014 at 9:00 a.m. Central. Please register to receive access to the broadcast.

Seyfarth attorneys Wan Li, Ming Henderson, Justine Turnbull and Daniel Hart  will focus on non-compete and trade secret considerations from an international perspective. Specifically, the webinar will involve a discussion of non-compete and trade secret issues in Europe, Australia, and China compared to the United States. This 90-minute webinar will provide valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries and ensure protection of their trade secrets and confidential information, including the effective use of non-compete and non-disclosure agreements.

Summary of Topics:

  • Overview of key rules for non-compete and non-disclosure agreements in Europe
  • Key principles of non-compete and non-disclosure agreements in the United Kingdom, France and Australia, including recent case developments
  • Latest developments in non-compete and trade secret law in China
  • The European Commission’s proposed directive on trade secrets protection throughout the European Union
  • Practical considerations under U.S. law for multinational employers to effectively protect their trade secrets and confidential information

 

 

There is no cost to attend this program, however, registration is required.

If you have any questions, please contact events@seyfarth.com .

*CLE: CLE Credit for this webinar has been awarded in the following states: CA, IL and NY. CLE Credit is pending for the following states: GA, NJ, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

 

We are pleased to announce the webinar “Trade Secret and Non-Compete Legislative Update” is now available as a podcast and webinar recording.

In Seyfarth’s fourth installment of its 2014 Trade Secrets Webinar series, Seyfarth attorneys discussed the significant changes to several laws regarding trade secrets,  restrictive covenants, and social media, as well as proposed legislation pending in other jurisdictions.

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

  • Employers should employ a holistic approach to the protection of their trade secrets and confidential information, whether or not Massachusetts bans non-compete restrictions altogether or adopts the Uniform Trade Secrets Act. Utilize non-solicit, non-disclosure and invention assignment agreements; implement entrance and exit interview protocols to educate employees on non-disclosure obligations; create a culture of confidentiality with regular training programs, and various levels of security access to confidential business information; regularly evaluate your trade secret protection policies/protocols; and forensically review computer usage of departing employees with access to confidential information.
  • As non-compete and trade secrets law continues to evolve, expect a greater trend toward uniformity in trade secrets law and a continued attempt to regulate trade secrets at the federal level.  Review your company’s policies and practices on a regular basis to ensure that they are consistent with the latest developments and continue to take proactive, practical measures to ensure that your trade secrets are subject to reasonable methods to maintain their secrecy.
  • Even if your company has operations in a state that does not prohibit employers from requiring employees and applicants to provide “personal” social media login information or access, your best bet is to avoid asking employees and applicants for this sort of information (unless account access is necessary to investigate workplace misconduct).  More and more states are considering laws prohibiting such actions, and it’s best to be ahead of the curve.

To accommodate our global audience, the fifth installment in the 2014 Trade Secrets Webinar Series, “International Trade Secrets and Non-Compete Law Update,”  will be available as an on-demand broadcast on July 31st! For registration and more upcoming events please visit our events page.

This Saturday, June 21, 2014, Seyfarth attorney, Justin K. Beyer, will present at the 19th Annual Chinese Biopharmaceutical Association Conference on Legal Challenges in Trade Secret Protection, at the University of Maryland’s Shady Grove Conference Center.  Through this panel discussion, Mr. Beyer will offer insights into what constitutes a trade secret, trade secrets unique to the pharmaceutical industry, and best practices for protecting those trade secrets. 

If you are attending the Chinese Biopharmaceutical Association’s Annual Meeting, please be sure to stop by our table in the exhibition room.

Employee mobility in the pharmaceutical industry is a significant concern for employers given the industry’s very significant investment in and reliance upon generating and protecting confidential, proprietary and trade secret information that is used to develop products and create and maintain customer relationships.

Non-competition and customer non-solicitation agreements are one of the primary tools available in most states to protect proprietary information and customer goodwill.  Whether non-compete/customer non-solicit provisions are enforceable often turns on whether such provisions seek to protect legitimate employer interests (such as proprietary information and customer goodwill) and are of a reasonable geographic scope and duration.

This blog post is the second in a series about protecting trade secrets and enforcing non-competition agreements in the pharmaceutical industry, and focuses on the role non-competition and customer non-solicitation agreements may play in the industry.

I. Timing is Important

Like any contract, non-compete agreements are potentially effective only if they are operative when needed.  The three most frequent employment events that employers should keep in mind when using non-compete agreements are (1) employee onboarding; (2) significant changes in job duties for existing employees; and (3) when exiting an employee that has been terminated or has resigned.  Although these timing considerations are important regardless of industry, they are particularly applicable in the pharmaceutical industry because of the intellectual property-intensive nature of the industry and significant numbers of personnel devoted to the research and development function.  R&D personnel sometimes are overlooked as a population to which non-competes should apply given their often “inward facing” responsibilities when compared to their executive, business development, marketing, and sales counterparts within the organization.

Onboarding is critical for two reasons: (1) It is the best time to ensure that a new employee will be subject to a non-compete and doing so at the inception of employment often dispenses with any arguments as to whether or not the non-compete is supported by sufficient “consideration,” as the vast majority of states that allow non-competes find that non-competes entered into at the inception of employment are supported by adequate consideration (the restriction on the employee is made in exchange for employment, compensation, being provided company confidential information etc.); and (2) It is another opportunity to confirm with new employees whether they are subject to an existing non-compete entered into with a prior employer. Ideally, the topic of the potential existence of a non-compete will have come up in and have been addressed in the interview process, but addressing this subject again in the onboarding process is an opportune time to discuss with a new employee any restrictions placed on him/her via a non-compete with a prior employer, particularly if the prior employer is a competitor within the pharmaceutical industry.

Significant changes in job duties, such as a promotion or moving into a significantly different role, are an opportunity to provide the company better protections for employees subject to an existing non-compete that has become outdated due the passage of time and/or change in law.  Many, but not all, states that enforce non-compete agreements recognize that “continued employment” is sufficient consideration to support the use of a non-compete agreement.  For those states where continued employment is not regarded as sufficient consideration, changes in job duties may present an opportunity to provide additional consideration in the form of a raise, grant of stock options, a bonus etc. that may, depending on one’s particular jurisdiction, enhance the likelihood that a non-compete will be enforceable.  In the pharmaceutical industry, job changes such as a move from bench scientist to manager or an executive position are examples of job changes that may afford the company with an opportunity to enhance its non-compete protections and spot and address any potential issues with “consideration” in imposing a new non-compete.

Exiting employees is a critical time to remind employees of their non-compete obligations and for the company to revisit any specific provisions within the non-compete that require awareness or action on the company’s part.  A proper exit interview is critical and may reveal that the exiting employee is going to a competitor or that the employee expressly denied going to a competitor only to later be discovered that the denial was disingenuous.  Learning at the employee’s exit that she/he is going to a competitor may also trigger “clawback” or “forfeiture” provisions within agreements.  Smythe v. Raycom Media, Inc., Case No. 1-13-CV-12 (CEJ) (E.D. Mo., Aug. 15, 2013) (because former employer’s Board was vested with discretion to determine former employee’s eligibility under the stock plans, the Board’s decision to effect forfeiture of stock unredeemed by former employee cannot be overturned unless the Board acted fraudulently or in bad faith); see also Lenel Systems Int’l., Inc. v. Smith, 106 A.D. 3d 1536, 966 N.Y.S.2d 618 (N.Y. App. Div. 2013) (where employee voluntarily terminates employment and joins competitor, company’s decision to effect forfeiture of employee’s unexercised stock options enforceable because employee had choice between compliance with non-compete or retention of stock options).  The intellectual property-intensive nature of, and prevalent use of stock options/grants within the pharmaceutical industry make adoption of employee non-compete exiting best practices essential.  This also counsels in favor of careful drafting of forfeiture or clawback provisions within non-compete agreements as the law as to these provisions can vary significantly from state to state.

II. One Size Fits All Agreements May Make For Easier Agreement Administration,  But Beware of Outliers

Employers, particularly large employers, often gain efficiencies in administering uniform non-compete/non-solicitation agreements across employee types. But like other technology-based industries, the pharmaceutical industry should take care to evaluate whether a one size fits all agreement is appropriate in light of (1) the often very diverse make-up of pharmaceutical company employee types (e.g., sales, executive, research and development), and (2) the core elements that nearly all jurisdictions consider when determining the validity of such agreements: (a) geographic scope, (b) duration, and (c) whether the restriction is reasonable (protects a legitimate business interest, such as protecting confidential information and/or company goodwill).

A non-compete agreement with a geographic scope tied to those areas where a pharmaceutical sales representative has actually called upon or served customers may be perfectly appropriate, whereas the same type of restriction would be insufficient to protect the company’s interest when applied to a senior executive or scientist within the company R&D group.  For example, if the employee subject to the restriction has been working to develop the company’s next potential blockbuster drug and/or is a senior business development executive, a relatively broad geographic scope may be called for and tolerated, depending on the state in which one seeks to enforce the agreement.  See, e.g., Estee Lauder Companies Inc. v. Batra, 430 F. Supp. 2d 158, 180-81 (S.D.N.Y. 2006) (upholding worldwide non-compete where scope of business and former employee’s responsibilities were international and included exposure to and use of trade secrets). Although worldwide non-competes are rare and difficult to justify, the nature of the proprietary information at issue and scope of the duties of the person subject to restriction are important considerations when drafting restrictive covenants.

The takeaway is that pharmaceutical companies should be purposeful in their use and tailoring of non-compete agreements to help ensure that those within their organizations who present the greatest risk in terms of capitalizing on company proprietary information and goodwill are subject to appropriate non-compete agreements, where permitted under applicable law.

III. Enforcement Best Practices–Planning and Pursuit

There are several things that employers within the pharmaceutical industry can do to enhance the likelihood that their efforts to enforce non-compete agreements are successful.  Planning on the front end through use of reasonable agreements and then taking appropriate action when a potential breach is detected will go a long way toward protecting company interests.  Specifically:

  1. Use agreements that are up to date and contain appropriate restrictions based on the law of the jurisdiction in which you contemplate potentially enforcing the agreement;
  2. Recent case law has potentially enhanced the enforceability of forum selection clauses. See, e.g., Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S. Ct. 568 (2013).  Consider designating the jurisdiction and law most favorable to enforcement of your agreements;
  3. Set up communication channels so that the appropriate personnel are aware of when high-risk employees are leaving (e.g., R&D talks to HR, HR talks to Legal, Legal talks to IT)
  4. Conduct thorough exit interviews, including ascertaining whether the former employee may be joining a competitor and in what capacity;
  5. Determine risk level based on employee type, job duties, and exposure to proprietary information.  Log items that should be and were/were not returned (e.g., electronic devices, inventor’s notebooks, etc.);
  6. Where former employee refuses exit interview or is otherwise evasive, consider running forensics on electronic devices to potentially ascertain if former employee is going to a competitor and whether she or he has taken any company data on the way out the door; and
  7. Create a record of your diligence: exit interview checklists and certifications; reminder of obligations letter(s); and cease and desist letters (former employee and, as appropriate, new employer).  However, balance “making a record” with tipping your hand and allowing the employee to get the jump on litigation by filing first in a non-desirable jurisdiction.

In a decision marked not-for-publication, a Minnesota Appeals Court affirmed the trial court’s invalidation of a two-year non-competition agreement signed by a long time employee.  He was discharged 11 years after he signed.  He then went to work for a competitor of his former employer.  The majority reasoned that the non-compete lacked independent consideration since it was not executed by 100% of similarly situated employees who had been asked to sign it.

Summary of the Case 

In April 1999, Nott Company (a supplier of fluid-power components and systems) notified all outside salespeople by letter that the company would be implementing a new compensation program effective May 1, 1999.  That program, which included a two-year non-compete covenant replacing a one-year agreement, added the possibility of a bonus to the prior salary-plus-commission arrangement.  The letter directed each recipient to sign and return the covenant by April 30.  All of the outside salespeople except one executed the new, longer term agreement.  In 2010, Nott discharged Eberhardt, a signer of the two-year covenant, who went to work for a Nott competitor.  Nott sued Eberhardt and his new employer.  At trial, at the close of Nott’s case, the court entered judgment for the defendants partially on the ground that Eberhardt’s non-compete was invalid.  The judgment was affirmed on appeal. Nott Co. v. Eberhardt, Case Nos. A13-1060 and 1390 (Minn. App., 6/2/14) (Hudson, J.) (Stauber, J., dissenting).

The Signers and Non-signers

Prior to 1999, all of Nott’s outside salespersons were signatories to one-year non-competition agreements.  One of those signatories, Cable, signed in 1995.  Eberhardt did not become an outside salesman until 1999. 

All of the outside salespersons, except for Cable, executed the new two-year covenant.  The date Eberhardt signed was disputed.  Nott claimed he signed in April 1999, before the new program went into effect on May 1.  He insisted that he did not sign until September 1999. 

The Lower Court and Appellate Decisions

The trial court found three reasons for tossing Nott’s case.  The appellate tribunal unanimously held that the lower court erred with respect to two of those reasons, but the third, lack of independent consideration, was upheld by a 2-1 vote. 

a. Opinion of the Court of Appeals majority:  The majority emphasized that Minnesota courts disfavor and scrutinize non-compete covenants.  Relying largely on a 1983 Minnesota Supreme Court decision (Freeman v. Duluth Clinic, Ltd., 334 N.W.2d 626), the majority said that Eberhartdt’s covenant was not supported by independent consideration.  They reasoned that since Cable, the non-signer, was given the same new compensation package as all the signers, the “court cannot find that an employee’s signing of the non-compete agreement was a condition of receiving the compensation plan.”    

b. The Freeman case:  Freeman involved a medical clinic.  A 1979 employment contract replaced an earlier, nearly identical, agreement but added a non-compete covenant.  All of the physicians received the same benefits.  Of the 70 physicians in 1979, only 56 — including Dr. Freeman — signed the covenant.  In 1982, the clinic fired Dr. Freeman, and he started his own private practice.  The clinic sued and won at trial.  With two justices dissenting, the Supreme Court reversed, holding that the provision was unenforceable for lack of consideration.  The majority wrote: “[T]he covenant signed by Dr. Freeman was not bargained for.  Absolutely no distinction was made between [the 56] signers and [the 14] non-signers.” 

c. Judge Stauber’s dissent in Eberhardt:  Judge Stauber quoted the comment by the dissenting justices in Freeman that there was “a mutuality of promises, which has always been held to be adequate consideration in contract cases.”  He noted that Nott’s and Eberhardt’s employment relationship under the new contract lasted more than a decade, with benefits to each, before he was terminated.  The judge added that 14 physicians in Freeman, not just one outside salesman in Eberhardt, failed to execute the covenant.  Finally, Judge Stauber stated that “a holding that one-hundred percent of all similarly situated employees must execute a non-compete agreement for its viability is not commercially practical in a free and competitive society.” 

Takeaways

A recent New York Times article reported that judges appear to be getting annoyed by a seeming avalanche of non-competition violation lawsuits, and many covenants are being invalidated.  Perhaps annoyance was an under-current of the Eberhardt decision.  In any event, the lessons to be learned are that, when a current employee is asked to sign a new covenant, (a) to be safe an employer should give something valuable in exchange (in Eberhardt, the opportunity to receive a bonus was new; nothing new was given in Freeman), and (b) the covenant should recite just what the consideration is.  On the other hand, some courts hold that employment itself may be adequate consideration for a covenant signed prior to starting work. 

As we have previously reported, in April of this year, Massachusetts Governor Deval Patrick introduced a sweeping economic growth bill (HB4045) that, if passed, would ban employee non-competes in the Commonwealth.  The bill has taken a somewhat convoluted path to date, and we wanted to update you on some notable twists and turns.

First, in mid-May, yet another bill (HB4082) was introduced that stripped those portions of Governor’s Patrick’s bill not dealing with trade secrets and non-competes (in other words, the vast majority of the 42-page bill), leaving only those sections that would adopt the Uniform Trade Secrets Act, repeal the current statutes regarding theft of trade secrets (Sections 42 and 42A of Chapter 93), and ban employee non-compete agreements.  This new bill is virtually identical to those provisions of Governor Patrick’s original bill (which, as of early this week, has now been stripped of the non-compete and Uniform Trade Secret Act provisions).  The introduction of HB4082 was likely due to concerns that Governor Patrick’s bill would not make swift enough progress, considering the wide scope of its other provisions that did not relate to employee non-compete agreements.  Earlier this week, this new bill was referred to the Joint Committee on Economic Development and Emerging Technologies.

Next, on May 29, 2014, the Joint Committee on Economic Development and Emerging Technologies held a hearing on Governor Patrick’s bill, including the provisions related to trade secrets and employee non-competes (which, until this week, were still included in the legislation).  We attended the all-day hearing and, unsurprisingly, much of the testimony was devoted to these provisions.

As the New York Times reported on Sunday, many of those who testified at the hearing opined that employee non-competes stifle competition.  For example, several legislators spoke of constituents who they deemed “trapped” in jobs because of non-competes signed years earlier, and insinuated that many employees are “ambushed” with non-compete agreements after they have quit their former jobs and rejected other offers.  The Boston Globe and the Boston Herald have each recently published articles about the purported perils of employee non-compete agreements, both of which (as well as the New York Times article) referenced a summer camp in Wellesley, Massachusetts that makes its camp counsellors sign them. 

Others, however, noted their concern with the way the bill was drafted, and expressed skepticism that an outright ban on employee non-competes would have uniformly positive effects.  For example, some testified that notwithstanding the fact that California bans employee non-competes, and likely because of this prohibition, there is increased trade secrets litigation in that state (which is typically much more costly and time consuming than non-compete litigation).  Indeed, should this phenomenon occur in Massachusetts, some of those testifying noted that expensive trade secret litigation could bankrupt small employers and startups—the same group of employers that Governor Patrick’s bill (as well as HB4082) was purportedly designed to help. 

Nevertheless, many of those who were opposed to the proposed ban on employee non-competes stated that they would be in favor of some form of non-compete reform (some citing with approval the compromise bill previously introduced by Senator William Brownsberger and Representative Lori Ehrlich in late 2012), but that an outright prohibition on the use of non-competes was simply a step too far.  The compromise bill, however, appears to be stalled if not dead on arrival. 

In yet another twist, just last week Massachusetts House Speaker Robert DeLeo announced plans to file an economic development package that would be similar to Governor Patrick’s bill in many respects, but conspicuously omits any provision affecting the enforceability of non-competes.  According to the Boston Globe, Speaker DeLeo said that “he has heard from many more companies that oppose a ban on noncompete agreements than favor one, in the weeks since Patrick outlined his proposal.”  It remains to be seen which approach will carry the day.

We will continue to monitor these bills, as well as any others that may be filed, and report back on any progress.  Please join us for our upcoming webinar on the latest legislative developments in trade secret, non-compete, and social media law.

We are pleased to let you know that the webinar “Barbarians at the Gate: Class Action Avoidance and Mitigation for Data Breach” is now available as a podcast and webinar recording.

In Seyfarth’s third installment of its 2014 Trade Secrets Webinar series, Seyfarth attorneys took a closer look at avoidance and mitigation techniques for data breaches, including where the class action plaintiff’s bar is going and what potential defenses and strategies companies can employ in such lawsuits.

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

  • A strong security program requires layers. You can’t rely just on technical safeguards and the IT group. You also need people and processes to help catch the threats which get through the cracks that technology cannot plug. As part of that layering, it isn’t just about the prevention of threats, it is also about detection and early warning of threats. This will allow for the isolation of a threat which has made it through the “front door” before it gets into the safe in the bedroom.
  • A company gets a greater return on investment by being prepared for a security breach.   Training employees on handling personal information engages them in the process, and raises awareness to reduce the risk of an incident or that an incident will go unnoticed.   Developing an incident response protocol and team with defined responsibilities allows a company to be more nimble and efficient when a potential incident occurs.  And, as the study we referenced demonstrates, companies that already have an incident response plan in place spend 1/3 less on security incidents than those that do not have an incident response protocol.
  • Increasingly courts are becoming more receptive to putative class claims alleging unlawful data breach in violation of statute or under the common law. Article III standing and lack of actual damages continue to be key defenses to such claims but courts are more receptive to creative claims based upon statutory language or contract interpretation. Companies should consider using arbitration agreements with class action waivers, as well as early dispositive motions to attempt to manage the risk of these dangerous suits.

Please join us for our next webinar on June 17, Trade Secret and Non-Compete Legislative Update

A state court issued a preliminary injunction for alleged trade secret misappropriation, but the enjoined parties successfully used post-injunction discovery to convince the court that the complaint was baseless.  Those parties then filed a federal court lawsuit for abuse of process and other torts.  In Peek v. Whittaker, Case No. 2:13-cv-01188 (W.D. Pa., May 22, 2014), the court held that most of the counts stated causes of action.

Summary of the Case 

R.E. Whittaker Co. filed a complaint in a Pennsylvania state court against two ex-employees and their business partner, alleging that they were about to use misappropriated trade secrets to launch a business in competition with Whittaker.  The court entered a preliminary injunction against the defendants.  However, the court ultimately concluded that no evidence supported Whittaker’s complaint and entered summary judgment for the defendants.  Two of them then sued Whittaker in a Pennsylvania federal court.  The majority of Whittaker’s motion to dismiss the complaint was denied. 

State Court Injunction

Whittaker sells commercial carpet cleaning machines and fluids.  In 2008, it filed a 10-count complaint in a Pennsylvania Court of Common Pleas against ex-employee Offutt, another ex-employee, and their business partner Peek.  Whittaker charged them with conspiracy to breach the ex-employees’ covenants with the company and to misappropriate the company’s trade secrets.  The defendants’ intent, according to Whittaker, was to use the purloined confidential information in competition with the company.  Following a multi-day evidentiary hearing, the court preliminarily enjoined the defendants from engaging in any activity competitive with Whittaker.  The injunction order was affirmed on appeal.  Whittaker sent copies of the order to the defendants’ potential customers and suppliers.

Post-Injunction Discovery

Discovery taken after the injunction order was entered disclosed that, contrary to Whittaker’s witnesses’ testimony at the injunction hearing, the defendants had misappropriated no Whittaker trade secrets.  Stating that the record was “much different” from the one on the basis of which the preliminary injunction had been issued, and that Whittaker had failed to show trade secret misappropriation, breach of contract, or damages caused by the defendants, the injunction was vacated and Whittaker’s complaint was tossed.  Whittaker did not appeal.

Federal Court Litigation 

Peek and Offutt sued Whittaker in federal court for abuse of process, unfair competition, false advertising, and other torts.  The complaint alleged that Whittaker’s state court complaint and preliminary injunction motion were filed for an improper purpose.  Further, Peek and Offutt averred that false evidence was used to obtain the injunction.  Whittaker’s motion to dismiss the complaint was denied in most respects.

Takeaways

The federal court opinion teaches that suing and obtaining an injunction against ex-employees for trade secret misappropriation, without persuasive supporting evidence of their wrongdoing, can backfire.  After more than five years of litigation, Whittaker has little to show for its efforts and expenditures, and it now is on the defensive in federal court.  Before filing spurious litigation against ex-employees intended to head off their post-termination competition with the former employer, that company should consider the potential adverse consequences if the defendants have the will and financial resources to stay the course.  In Whittaker, the ex-employees were knocked down, but they weren’t knocked out.

 

On Tuesday, June 17, 2014 at 12:00 p.m. central, in Seyfarth’s fourth installment of our 2014 Trade Secrets Webinar Series, Seyfarth attorneys Kate Perrelli, Dawn Mertineit and Daniel Hart will discuss the significant statutory changes to several jurisdictions’ laws regarding trade secrets and restrictive covenants and pending legislation proposed in additional jurisdictions over the past year.  As trade secrets and non-compete laws continue to evolve from state to state in piecemeal fashion, companies should continually revisit their trade secrets and non-compete strategies in light of the evolving legal landscape and legislative trends.

Topics will include:

  • Proposed statutory changes to restrictive covenant law in Massachusetts;
  • The proposed “Defend Trade Secrets Act” at the federal level and its implications for state trade secrets laws;
  • Recent adoption of the Uniform Trade Secrets Act (“UTSA”) in Texas;
  • Recent and proposed social media laws throughout the country;
  • Practical tips for anticipating trends in trade secret, non-compete, and social media law.

There is no cost to attend this program, however, registration is required.

 

If you have any questions, please contact events@seyfarth.com.

*CLE: CLE Credit for this webinar has been awarded in the following states: CA, IL and NY. CLE Credit is pending for the following states: GA, NJ, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

 

The former employer failed to prove that the parties entered into an effective non-compete agreement, and also failed to prove that the ex-employee had disclosed or had threatened to disclose trade secrets.  But, an Ohio federal judge entered a preliminary injunction forbidding her, until further order, from contacting her former employer’s clients and certain of its prospects.  PharMerica Corp. v. McElyia, Case No. 1:14-CV-00774 (N.D. Ohio, May 9, 2014) (Gwin, J.).

Summary of Case

McElyia was one of several salespersons employed by PharMerica, a provider of pharmacy products and services to skilled nursing facilities.  At the time she became a PharMerica employee, she covenanted to keep its client information confidential.  She never signed a non-competition agreement.  On the eve of her resignation, she downloaded to her personal computer extensive PharMerica documents.  Then she went to work for a competitor as its sole salesperson.  PharMerica sued her and her new employer.  She quickly returned the PharMerica documents.  But PharMerica nonetheless sought a TRO and preliminary injunction to prevent both defendants from competing with PharMerica.  The court denied PharMerica’s motions directed at McElyia’s new employer and the motion for a TRO against McElyia.  But after holding an evidentiary hearing on the preliminary injunction motion directed at her, the court enjoined her until after a trial from contacting PharMerica’s clients or any prospective clients she had called on during her final six months of employment by that company.  The injunction was conditioned on PharMerica posting a $50,000 bond.

Non-Compete Injunction without a Non-Compete Covenant

Judge Gwin concluded that there was insufficient evidence of an effective non-competition covenant.  PharMerica had asked McElyia to sign one.  It provided that she would not work for a competitor for six months, and would not solicit current clients and employees for one year, after her termination.  However, she declined to execute it. 

The judge found that when she took the PharMerica documents she intended to share them with her new employer, but he added that there was no evidence that she did disclose, or was threatening to disclose, PharMerica’s trade secrets.  Judge Gwin said that McElyia had not solicited any of PharMerica’s clients. 

Although the phrase “inevitable disclosure doctrine” does not appear in Judge Gwin’s opinion, perhaps it was a basis for entering the injunction.  He stated that “some Ohio courts do permit injunctions in the absence of a non-compete agreement and without a prior instance of disclosure” of trade secrets.  He cited only one decision.  While no injunction was entered in that case, the court there did reference (but distinguished) several “inevitable disclosure” cases.

Courts typically find “inevitable disclosure” only when there is a high probability, not a mere possibility, that trade secrets will be revealed.  Usually, (a) the parties executed a non-compete covenant, and/or (b) the ex-employee had disclosed or destroyed, or at least had threatened to disclose or destroy, confidential information.  Not so in PharMerica.  Further, injunctions to prevent “inevitable disclosure” of confidential information despite the absence of a non-compete covenant usually pertain to engineering data or technical manufacturing processes rather than mere marketing information as in PharMerica. 

Curiously, the opinion in PharMerica does not suggest the presence of either of two factors some courts have used to justify entering an “inevitable disclosure” injunction:

(a) the former employer went to considerable lengths and expense to develop the purloined information and to keep it confidential; and

(b) the ex-employee was a high-level executive for the former employer.

Takeaways

The facts and circumstances present in PharAmerica would more often warrant denial of an injunction against competition rather than justifications for entering one.  If the court was relying on the “inevitable disclosure” doctrine at all, it seems to have been treated as a de facto (partial) non-compete covenant even though the parties did not agree to one.  Moreover, the description of the “confidential” PharMerica information McElyea supposedly possessed was extremely general: “pricing, contract terms, and marketing and product packaging strategies.”  If the court intended to enjoin its use, more specific and identifiable data would have been required so that McElyia knew precisely what she was forbidden to disclose.

Significantly, the injunction did not order McElyea to refrain from using PharMerica’s trade secrets.  It simply circumscribed the universe of prospective clients she could contact.   

In the end, PharMerica may have achieved a pyrrhic victory.  Judge Gwin’s preliminary injunction is unlikely to be long-lasting, and the company has been required to post a rather large bond.  Perhaps the court simply intended to send a message to the parties that failure to resolve the case amicably could entail substantial risk.