Throughout 2018, Seyfarth Shaw’s dedicated Trade Secrets, Computer Fraud & Non-Competes Practice Group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever-changing area of law. The series consisted of seven webinars:

  1. 2017 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete and Computer Fraud Law
  2. Protecting Confidential Information and Client Relationships in the Financial Services Industry
  3. The Anatomy of a Trade Secret Audit
  4. Protecting Trade Secrets from Cyber and Other Threats
  5. 2018 Massachusetts Non-Compete and Trade Secrets Reform
  6. Protecting Trade Secrets Abroad and Enforcing Rights Abroad and in the U.S.
  7. Criminal Trade Secret Theft: What You Need to Know

As a conclusion to this well-received 2018 webinar series, we compiled a list of key takeaway points for each program, which are listed below. For those clients who missed any of the programs in this year’s series, recordings of the webinars are available on the blog, or you may click on the title of each available webinar below for the online recording. Seyfarth Trade Secrets, Computer Fraud & Non-Compete attorneys are happy to discuss presenting similar presentations to your company for CLE credit. Seyfarth will continue its trade secrets webinar programming in 2019, and we will release the 2019 trade secrets webinar series topics in the coming weeks. Continue Reading 2018 Trade Secrets and Non-Competes Webinar Series Year in Review

On Wednesday, November 28, 2018, at 1:00 to 2:30 p.m. Eastern, Seyfarth Partner and Trade Secrets, Computer Fraud & Non-Compete Practice Group Co-Chair Robert Milligan is presenting a Strafford live webinar. The “Drafting Enforceable Non-compete and Non-Solicitation Agreements: Compliance with New State Statutes and Case Law” webinar panel will discuss recent legislative and case law trends regarding non-compete and non-solicitation agreements, offer best practices for structuring permissible contracts, and explain how to determine whether existing agreements are lawful.

The webinar will focus on the following topics:

  • What are the recent legislative changes affecting restrictive covenants?
  • What are the recent case law decisions affecting non-compete and non-solicitation agreements?
  • How can employers structure restrictive covenants to comply with new laws and decisions?
  • How can employment counsel analyze existing agreements for compliance?

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

What Businesses Need to Know About Non-Compete and Trade Secrets Law

Seyfarth’s Trade Secrets, Computer Fraud, and Non-Competes Practice Group is pleased to provide the 2018-2019 edition of our one-stop 50 State Desktop Reference, which surveys the most-asked questions related to the use of restrictive covenants and intellectual capital protection in all 50 states, including the recent non-compete legislation passed in Massachusetts this August. For the company executive, in-house counsel, or HR professional, we hope this guide will provide a starting point to answer your questions about protecting your company’s most valuable and confidential assets.

To request a hard copy or a pdf of the 2018-2019 edition of the 50 State Desktop Reference, click the button below.

Earlier this month, the Texarkana Court of Appeals took the extraordinary measure of affirming an award of plaintiff attorney’s fees against a defendant for willful and malicious misappropriation of trade secrets in an amount that was ultimately more than 50 times higher than the plaintiff’s actual awarded damages.

Samuel D. Orbison worked for an oil and gas company, Ma-Tex Rope Company, Inc., for five years and signed an employment agreement containing a non-competition agreement, a non-disclosure agreement, and a non-solicitation agreement. During his tenure with Ma-Tex, Orbison became the coordinator of Ma-Tex’s recertification department until he resigned and began working for its competitor, American Pipe Inspections, Inc. (API), in the same position he had filled with Ma-Tex. When Ma-Tex learned that Orbison had begun soliciting recertification work from Ma-Tex’s customers, it sued Orbison and API for, among other claims, breach of contract and misappropriation of trade secrets. Continue Reading In Trade Secret Misappropriation Case, Texas Court of Appeals Affirms Attorney’s Fees Award Approaching $220,000 where Actual Damages Were $4,000

On Monday, January 29th, Faraday & Future Inc., the electric car manufacturer founded by Chinese billionaire and entrepreneur Jia Yueting, filed a one-count Defend Trade Secrets Act complaint against Evelozcity, Inc., an electric car manufacturer that was recently created by Faraday & Future’s former CFO and CTO.  The case is Faraday & Future Inc. v. Evelozcity Inc., 18-cv-00737, U.S. District Court, Central District of California (Western Division). Continue Reading Start-Up Car Companies Clash in Electrifying Trade Secrets Case

An employment agreement covenant prohibiting solicitation of co-employees, but not indicating what solicitations were prohibited, has been held to be invalid.

Status of the case.  A multi-count complaint filed in the D.C. District Court charged two former employees of the plaintiff with breaches of contract and tort violations.  The defendants moved to dismiss.   The court held that some of the eight counts stated causes of action, but one count the court did dismiss alleged that the defendants violated their covenant not to solicit the plaintiff’s employees.  The court held that the covenant was too vague to be enforceable because it did not specifically identify the solicitations that were impermissible.  Base One Technologies, Inc. v. Ali, Civ. Ac. No. 14-1520 (D.D.C., Jan. 20, 2015).

Base One’s business model.  Base One was in the business of recruiting and staffing telecommunications and financial information management personnel for clients.  The personnel that were recruited became employees of Base One.  Each was assigned to work at a particular Base One client according to the client’s needs and the employee’s skill set. 

Non-competition and non-solicitation covenant.  The two defendants were hired by Base One to work on an extensive computer-related project for a specific Base One client.  They both signed Base One’s employment agreements.  Those agreements stated that employees are likely to be “the principal intermediary and personal contact” between Base One and the client.  Further, recognizing that Base One’s employees frequently gain extensive knowledge of the client’s business and develop loyalties with the client, the agreements note that clients “might desire to place their IT business directly with” the employees — after the employees’ relationship with Base One has ended — rather than with Base One.  Accordingly, the agreements mandate that during and for one year after termination of the Base One employment relationship, employees shall not “market any [competitive] type services” to a Base One client the employee was serving, and shall not “solicit, contact, represent, or offer to represent” other Base One employees.

Alleged violation and lawsuit.  When the two defendants left the employ of Base One, they immediately went to work for the Base One client they had been serving.  Base One filed a complaint which included what the court described as “a veritable cornucopia of claims.”  Two counts alleged breach of contract.  One averred that the defendants violated the non-solicitation covenant by soliciting each other to work for the Base One competitor (the second breach of contract count alleged contravention of the non-compete provision).  The defendants’ motion to dismiss the former count was granted. 

The court’s reasons for dismissing the count regarding prohibited solicitation.  In the court’s view, the wording of the covenant “is so vague and ambiguous as to render it unenforceable.  . . . Although the Court can perhaps guess that [Base One] meant to prohibit solicitation or contact for the purpose of employment elsewhere, the provision does not so specify.”  Noting that the employment agreement contained a New York choice of law provision, and “Particularly in light of New York’s general hostility toward restrictive covenants in the context of employment, the Court will not redraft a poorly written, overbroad restraint in order to make it enforceable.”

Takeaways.  A motion to dismiss, or for summary judgment with respect to, allegations based on a “vague and ambiguous” contract provision might be denied on the ground that the parties’ intent regarding the meaning of the provision is an issue of fact to be resolved at trial.  See, e.g., Whelan Security Co. v. Kennebrew, 379 S.W.3d 835, 846 (Mo. Sup. Court 2012) (summary judgment inappropriate because “the lack of any language regarding the purpose of the employee non-solicitation clause prevents this Court from determining the purpose of the clause as a matter of law.  The intent of the parties must instead be determined by the use of parol evidence, creating a factual issue for the trier of fact”).  But the Base One court went a different route, granting the defendants’ Rule 12(b)(6) motion to dismiss the claim relating to a non-solicitation agreement which contained the identical ambiguity as in Whelan.  The moral of the story is that two courts sometimes issue diametrically opposite rulings when presented with the same question of law.

 

Notwithstanding a forum-selection provision in the parties’ consulting agreement designating the Northern District of Georgia as the place for litigating non-competition and non-solicitation covenants disputes, a Georgia federal judge transferred covenant violation litigation to the Middle District of Florida. Also, the judge explained why he thought that an arbitration clause was unenforceable, but he said that the Florida court should make the decision. Direct Response Products, Inc. v. Roderick, Case No. 1:11-cv-0945-WSD (N.D. GA, Nov. 1, 2013).

Summary of the case

Direct Response, a DeKalb County, Georgia company, stages sales events for automobile dealerships. Roderick was an independent contractor who marketed the events to dealers. After Roderick terminated the relationship, and allegedly began competing with Direct Response and soliciting members of Direct Response’s sales team to join him, Direct Response filed a diversity jurisdiction case against him in the federal court in DeKalb County. The parties’ agreement included a forum selection clause specifying that county as the place for litigating any dispute. At all relevant times, Roderick lived and worked in Florida. He moved to dismiss on various grounds including supposedly improper venue. In the alternative, he moved to stay the action because, he claimed, the agreement contained a mandatory arbitration provision. All of his motions to dismiss were denied but, on the court’s own motion, the case was transferred to Florida “in the interest of justice.” The Georgia judge declined to rule on Roderick’s alternative motion but suggested that it should be denied by the transferee court.

The parties’ contentions and court’s decision regarding venue

Roderick asserted that his territory did not include Georgia and that, if the breach he is alleged to have committed took place at all, it was in Florida and not in Georgia. Direct Response countered that the effects of the alleged breach would be manifested in DeKalb County. Further, the agreement was executed there, Roderick was trained in Georgia, and he was given access to confidential and proprietary information there. Finally, the agreement provided that all civil actions regarding Direct Response “must be processed in” DeKalb County; under the circumstances, that provision seems reasonable.

The Georgia federal judge denied Roderick’s venue motion but, nonetheless, held that the “required focus” in determining the proper venue for this case is the site of the alleged breach, where Roderick is allegedly competing. Exercising the court’s discretion under 28 U.S.C. § 1406(a), the case was transferred to Florida

Arbitration

The arbitration provision consisted of only two sentences. The first merely specifies what discovery rules are applicable in the arbitration proceeding and states, without any attachment or explanation: “Use the standard ‘one shot’ provision.” The second sentence simply reserves the parties’ “right to apply to a court of competent jurisdiction for equitable relief as necessary to preserve and enforce their rights under this Agreement.”

The court cited “the strong federal policy supporting arbitration” and said Georgia law provides that “an arbitration clause does not need to be detailed to be enforceable.” However, it “must have sufficient specificity to show what is to be arbitrated.” Here, the arbitration provision was silent in that regard as well as where the proceedings were to take place, what process was to be used for selecting a neutral, etc. Thus, it is not surprising that the Georgia judge was skeptical about Roderick’s claim that arbitration was mandated. Moreover, the parties’ testimony was diametrically opposite. The president and owner of Direct Response insisted that his intent was to delete the arbitration provision altogether but it was accidentally left in the agreement. Roderick asserted that he initialed the page with the arbitration clause and intended to include it. The Florida judge will have to decide whether the case is to be litigated or arbitrated.

Takeaways

This case makes clear that even a reasonable forum selection clause might be disregarded if the court decides that transfer to a different venue serves “the interest of justice.” Further, the opinion here reminds us that a judge may disclose how he or she would resolve certain contested issues and yet leave the actual ruling to a different decision-maker.

Contractual choice of law provisions often seek to apply the law of the state that, when applied by a court to the contract at issue, is most likely to result in favorable interpretations, application, and/or enforcement of those provisions in the contract most valued by the contracting parties. However, when the law chosen is of a state different than the state in which the contract appears to be headed for litigation, the parties to the contract may “race” to get their respective lawsuits on file and obtain a judgment in the jurisdiction that they perceive most favorable to their position. 

Given the patchwork of laws from state-to-state concerning the enforceability of non-compete and non-solicitation agreements, choice of law provisions in agreements containing such clauses is often a significant strategic consideration.  

The Ninth Circuit’s recent decision in Ruiz v. Affinity Logistics Corp., 2012 WL 388171 (9th Cir. February 8, 2012), likely will be applied in “race to judgment” cases to argue that the law of the state with the greatest connection to the negotiation, subject matter, and performance of the underlying contract should be applied to the issues in suit. In Ruiz, the Ninth Circuit held that a contractual choice of law provision calling for the application of Georgia law was unenforceable because California had a materially greater interest than Georgia in the outcome of the case. See Seyfarth’s One Minute Memo for a fuller description of Ruiz.

The Ruiz court analyzed five factors in determining whether California had a materially greater interest than Georgia in determining the issues in suit: (1) the place of contracting, (2) the place of negotiation for the contract, (3) the place of performance, (4) the location of the subject matter of the contract, and (5) the domicile, residence, nationality, place of incorporation, and place of business of the parties. The Ninth Circuit’s factors, which are somewhat reminiscent of a “minimum contacts” analysis used to determine personal jurisdiction, place an emphasis on tying the chosen law to the state where the parties actually spent most to their time creating, entering into, and performing the contract.

While only time will tell, it is likely that the five factors applied in Ruiz will be used by litigants in the Ninth Circuit to argue against the enforceability of choice of law clauses applying the law of a state where the functional connections set forth in Ruiz do not exist. Given this, parties may do well when drafting choice of law provisions to, where possible, choose the law of a state where the functional connections set forth in Ruiz may be satisfied.

By Bob Stevensand Daniel Hart

As we have discussed on this blog before, on May 11, 2011, Georgia reissued its new Restrictive Covenant Act (the “New Act”). The New Act reflected a fundamental change in Georgia’s law regarding restrictive covenants because it permitted Georgia courts to “blue pencil” (i.e., partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under then-existing Georgia case law. While the New Act permits Georgia courts to partially enforce overbroad restrictive covenants, it does not require that they do so.

For the first time since Georgia passed the New Act, a Court in Georgia has elected to exercise its discretion to blue pencil restrictive covenants that it found to be overbroad. In Pointenorth Insur. Group v. Zander, No. 1:11-cv-3262-RWS, 2011 U.S. Dist. LEXIS 113413 (N. D. Ga. Sept. 30, 2011), the Court found that, among other things, the non-solicitation covenant contained in the employment agreement at issue was overbroad because it extended to any of the former employer’s clients, not just the ones with whom the former employee had contact during her employment. 

Rather than attempting to excise or mark out the overbroad provision and enforce the remaining restrictive covenants, the Court modified or altered the restrictive covenant and enjoined the former employee only from soliciting the clients with whom she had contact while employed by the plaintiff. The Court also enjoined the new employer from soliciting the same clients. 

This suggests that at least the Court interprets the New Act as providing it with the discretion to re-write restrictive covenants to make them enforceable, rather than merely providing a court with the power to remove overbroad covenants. It remains to be seen if other courts in Georgia follow the Pointenorth Court’s lead and use the New Act as a basis for re-writing restrictive covenants that are found to be overbroad. For the time being, this decision represents the lone voice on the stage and indicates that there may be a willingness to modify restrictive covenants instead of simply excising them and enforcing the remaining provisions.

A recent Indiana Court of Appeals opinion, designated as non-precedential, discussed that state’s law concerning non-competition agreements. Most significant, the court upheld a commitment not to solicit the employer’s current or recent customers for two years even though the covenant contains no geographical limitation. However, provisions precluding any “contact with” such customers, and forbidding acceptance of “referrals of” them, were “blue penciled.” The court reversed the entry of summary judgment for the ex-employees and remanded for trial. Think Tank Software Dev. Corp. v. Chester, Inc., No. 64A03-1003-PL-172 (Ind. Ct. Appeals, Apr. 11, 2011).

Think Tank Software Development Corporation, and a number of companies affiliated with it (collectively, “Think Tank”), sued 10 former employees almost all of whom went to work for defendant Chester, Inc. Think Tank and Chester are competitors, engaging in what the court called “computer-related business activities.” Think Tank alleged violation of covenants not to compete and misappropriation of trade secrets. 

After more than five years of motion practice and discovery, the trial court granted summary judgment to the defendants on the grounds that the covenant not to compete “is overbroad and is therefore unenforceable . . . and cannot be reformed,” and that the property rights in which Think Tank claimed confidentiality did not constitute trade secrets. What the trial court apparently viewed as the covenant’s fatal flaw was that it was unlimited as to an applicable territory. Further, the affidavit of a former Think Tank director of technology seemingly demonstrated that the company had no protectable business information.

The Court of Appeals disagreed. Although upholding a two-year restriction on solicitation of recent former customers, the appellate court struck as unreasonable the prohibition against contacting them. Similarly, the court approved a ban on selling to, servicing, consulting, or negotiating with those customers, but a prohibition on acceptance of referrals of new customers — for example, by the ex-employer’s customers — was invalidated. Indiana recognizes “blue penciling” as an option for a court. The absence of a territorial restriction was not fatal, according to the court, because “the class of prohibited contacts [customers who had been such within two years of the former employees’ termination] is well defined and specific, thereby eliminating the need for any geographical limitation.” 

As for trade secrets, the appellate tribunal held that Think Tank sufficiently raised genuine issues of material fact with respect to whether the company’s “customer identities” and “tailored solutions to the customers’ information technology needs combine to form confidential information.” Similarly, Think Tank provided enough evidence of “its extensive security provisions in protecting” that information to withstand a motion for summary judgment.

The enforceability of a non-compete and non-solicitation agreement in a particular case frequently turns on the applicable facts and circumstances, the precise wording of the restriction, and the jurisdiction. The question of whether particular information qualifies as a trade secret also is fact-intensive. When in doubt, contact a Seyfarth Shaw Trade Secrets Group attorney.