On March 7, 2019, a group of six United States senators from both sides of the aisle submitted a letter to the Government Accountability Office (GAO) requesting a federal investigation into the use of non-compete agreements on the basis that their widening use in recent years raises concerns about their negative impact on both workers and the national economy.  Specifically, the letter asks the GAO to assess the following three questions:

  1. What is known about the prevalence of non-compete agreements in particular fields, including low-wage occupations?
  2. What is known about the effects of non-compete agreements on the workforce and the economy, including employment, wages and benefits, innovation, and entrepreneurship?
  3. What steps have selected states taken to limit the use of these agreements, and what is known about the effect these actions have had on employees and employers?

Continue Reading U.S. Senators Request Review of Non-Compete Agreements by the Government Accountability Office

Untitled-1As directed by the court of appeals, a district court judge reconsidered his denial of a non-compete covenant case injunction but reached the same result on reconsideration.  He also stated why he would not have extended the covenant’s expiration date even if he had been inclined to enter the injunction.  Ocean Beauty Seafoods LLC v. Pacific Seafood Group Acquisition Co., No. C14-1072 (W.D.Wash., Oct. 30, 2014) (Ricardo S. Martinez, J.), remanded, No. 14-35950 (9th Cir., May 8, 2015), on remand, (W.D. Wash., June 25, 2015).

Status of the case.  Last October, a federal district court judge in Seattle denied a motion for preliminary injunction in a lawsuit alleging violation of a non-competition covenant.  The unsuccessful movant appealed to the Ninth Circuit Court of Appeals.  Concluding that the lower court had made a number of factual, legal and procedural errors, the appellate court remanded for the district court’s reconsideration.  Last month, the Seattle judge again declined to issue an injunction order.  He also explained why, if he had issued the order, he would not have equitably tolled expiration of the one-year covenant.

Background When Michael Coulston first became a Pacific Seafood employee in January 2011, he signed a covenant barring him, for 12 months after termination, from engaging in business with a competitor of the company in any “geographic area” in which it does business.  The covenant was governed by Oregon law.  In July 2014, he left Pacific and went to work for Ocean Beauty.  Both companies are seafood processors and distributors on the West Coast.  Pacific sued Ocean Beauty and Coulston.

Judge Martinez’s initial denial of a preliminary injunction.  In his 2014 decision, Judge Martinez determined that Pacific Seafood (a) had failed to demonstrate a likelihood of success on the merits of its claim against Ocean Beauty and Coulston, and (b) had failed to show that it would sustain irreparable harm absent injunctive relief.  There was no definition of “geographic area” in the covenant.  The judge said it appeared to encompass the entire west coast of the U.S. which he found to be unreasonable since Coulston had a more limited territory.  Moreover, Judge Martinez held that Coulston was not shown to have diverted, or was likely to divert, any business to Ocean Beauty based on his knowledge of Pacific’s business practices.

The Ninth Circuit’s decision.  Marked as a “Memorandum” and “Not for Publication,” the appellate court’s ruling took issue with Judge Martinez’s findings, conclusions and denial of Pacific Seafood’s motion to supplement the record.  According to the appeals court, Coulston’s territory while he worked for Pacific was more extensive than the district court indicated and, moreover, Oregon law does not render a covenant automatically unenforceable even if it covers an overly broad territory.  Further, Pacific was held to have a protectable interest in information Coulston possessed regarding Pacific’s “marketing plans and product allocation.”  The Ninth Circuit also noted that the trial court seemingly did not appreciate the difference between evidence of actual harm and a showing of a likelihood of harm.  The trial court’s denial of Pacific’s motion to supplement the record was said to be an abuse of discretion as well.  The case was remanded to Judge Martinez for reconsideration.  Finally, in a footnote, the appellate court directed the district court, if it grants a preliminary injunction, to consider equitably extending the non-compete’s one-year term.

Judge Martinez’s second denial of an injunction.  On remand, the judge said he “remains unconvinced” that “the geographic scope of the non-compete agreement is reasonable.”  Further, he stated that the record before him did not persuade him that “there is a substantial risk Ocean Beauty would be able to divert a significant part of Pacific Seafood’s business given Mr. Coulston’s knowledge” or that he was “likely to divert business to Ocean Beauty based on any such knowledge.”  So, Judge Martinez again found a failure by Pacific to show that it would suffer irreparable harm in the absence of an injunction.

In light of the Ninth Circuit’s footnote, and recognizing that the appellate court might disagree with his second denial of an injunction, Judge Martinez discussed equitable tolling.  The issue potentially was relevant because of the imminent expiration of Coulston’s one-year non-compete.  The judge noted that the Oregon Supreme Court, the Ninth Circuit and many other courts of appeal have declined to extend a covenant that has expired or is about to expire, and he said that the record before him warranted a similar ruling in this case.

Takeaways.  Counsel drafting, seeking to enforce, or defending against an effort to enforce, a non-compete should consider the following:

  • Equitable tolling.  A non-competition agreement often expresses the parties’ intent that the employer shall be entitled to an extension of the injunction period equal to the length of time during which the ex-employee engaged in illicit competition.  The non-compete in the Ocean Beauty litigation did not include such a provision.  Arguably, Pacific Seafood’s request for tolling asked the court to amend the covenant by adding a term to which Coulston had not consented.  But a contrary contention could be made: assuming the covenant was enforceable, failure equitably to toll would deprive Pacific of the benefit of its bargain which was for 12 months’ freedom from Coulston’s competition.  A party seeking equitable tolling should present persuasive, admissible evidence justifying an extension of the non-compete period.
  • Geographic scope and time limit of the non-compete.  Larger and longer are not necessarily preferable when it comes to the area and temporal provisions set forth in a restrictive covenant.  If excessive, they may cause unenforceability.  Geographic scope and time limit terms may approach, but they should never exceed, the maximums that are reasonable under the circumstances.
  • Be gracious to a judge whose prior opinion has been remanded for reconsideration.  Judge Martinez emphasized that he disagreed with the appellate court’s order, and he did not take kindly to what he viewed as Pacific Seafood rubbing his face in the remand order.  His second opinion expressed annoyance — to say the least — at what he called Pacific’s “rejoic[ing] in reiterating the numerous ‘errors’ found by the Ninth Circuit.”  He also took “exception to the tone” of Pacific’s briefs and Pacific’s “apparent lack of respect for this Court and its prior findings.”  If Pacific wanted to generate sympathy for its legal position, understatement might have been more effective.  However, he might have reached the same result in any event.

 

By Robert Milligan and Joshua Salinas

As part of our annual tradition, we are pleased to present our discussion of the top 10 developments/headlines in trade secret, computer fraud, and non-compete law for 2013. Please join us for our complimentary webinar on March 6, 2014, at 10:00 a.m. P.S.T., where we will discuss them in greater detail. As with all of our other webinars (including the 12 installments in our 2013 Trade Secrets webinar series), this webinar will be recorded and later uploaded to our Trading Secrets blog to view at your convenience.

Last year we predicted that social media would continue to generate disputes in trade secret, computer fraud, and non-compete law, as well as in privacy law.  2013 did not disappoint with significant social media decisions involving the ownership of social media accounts and “followers” and “connections,” as well as cases addressing liability or consequences for actions taken on social media, such as updating one’s status, communicating with “restricted” connections, creating fake social media accounts, or deleting one’s account during pending litigation.

We also saw more states (e.g., Arkansas, Utah, New Mexico, California, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington) enact legislation to protect employees’ “personal” social media accounts and we expect more states to follow.

The circuit split regarding the interpretation of what is unlawful access under the Computer Fraud and Abuse Act (“CFAA”) remains unresolved and another case will need to make its way up to the Supreme Court or legislation passed to clarify its scope as federal courts continue to reach differing results concerning whether employees can be held liable under for violating computer use or access policies.

There have also been several legislative efforts to modify trade secret, computer fraud, or non-compete law in various jurisdictions.  Texas adopted a version of the Uniform Trade Secrets Act, leaving Massachusetts and New York as the lone holdouts. Oklahoma passed legislation expressly permitting employee non-solicit agreements. Massachusetts, Michigan, Illinois, New Jersey, Maryland, Minnesota, and Connecticut considered bills that would provide certain limitations on non-compete agreements but they were not adopted.

We expect more legislative activity in 2014, particularly regarding privacy, the scope of the CFAA, and trade secret legislation to curb foreign trade secret theft and cyber-attacks.

Finally, while the Snowden kerfuffle and NSA snooping captured the headlines in 2013, government agencies remained active, including some high profile prosecutions under the Economic Espionage Act, the release of the Obama Administration’s Strategy on Mitigating the Theft of U.S. Trade Secrets,  and the National Labor Relations Board’s continued scrutiny of employers’ social media policies. We expect more government activity in this space in 2014.

Here is our listing of top developments/headlines in trade secret, computer fraud, and non-compete law for 2013 in no particular order:

1)         Dust Off Those Agreements . . . Significant New Non-Compete Cases Keep Employers On Their Toes

Employers were kept on their toes with some significant non-compete decisions which forced some employers to update their agreements and onboarding/exiting practices. First, in Fifield v. Premier Dealer Services, an Illinois appellate court found that less than two years employment is inadequate consideration to enforce a non-compete against an at-will employee where no other consideration was given for the non-compete. Second, in Dawson v. Ameritox, an Alabama federal court found that a non-compete executed prior to employment was unenforceable. Next, in Corporate Tech. v. Hartnett, a Massachusetts federal court held that initiating contact was not necessary for finding solicitation in breach of a customer non-solicitation agreement. Lastly, in Assurance Data v. Malyevac, the Virginia Supreme Court found that a demurrer (i.e., a pleading challenge) should not be used to determine the enforceability of non-compete provisions but rather evidence should be introduced before making such a determination.

2)         Continued Split of Authority On the Computer Fraud and Abuse Act and Efforts to Reform CFAA and Enhance Federal Trade Secret and Cybersecurity Law

Courts in Massachusetts, Minnesota, and New York joined the Ninth Circuit’s narrow reading of the CFAA and limited its applicability to pure hacking scenarios rather violations of employer computer usage or access policies. Additionally, in 2013, Representative Zoe Lofgren introduced Aaron’s Law, named after the political hackvist Aaron Swartz, to reform of the Computer Fraud and Abuse Act. Her proposed legislation would limit the CFAA to pure hacking scenarios and exclude violations of computer usage policies and internet terms of service from its scope. Lofgren also introduced legislation which would create a federal civil cause of action in federal court for trade secret misappropriation. Other legislation to prevent intellectual property theft was also introduced including the Deter Cyber Theft Act, which aims to block products that contain intellectual property stolen from U.S. companies by foreign countries from being sold in the United States. The Cyber Economic Espionage Accountability Act was also introduced and allows U.S. authorities to “punish criminals backed by China, Russia or other foreign governments for cyberspying and theft.” We expect Congress to consider similar legislation in 2014.

3)         Texas Adopts Uniform Trade Secrets Act

Texas joined forty-seven other states in adopting some version of the Uniform Trade Secrets Act. Until recently, Texas common law governed misappropriation of trade secrets lawsuits in Texas. The new changes under the Texas UTSA (which we discuss in more detail here) provide protection for customer lists, the ability to recover attorneys’ fees, a presumption in favor of granting protective orders to preserve the secrecy of trade secrets during pending litigation, and that information obtained by reverse engineering does not meet the definition of a trade secret.  Legislation has been introduced in Massachusetts to adopt the Act but has yet to pass. For additional information on recent trade secret and non-compete legislative updates, check out our webinar “Trade Secrets and Non-Compete Legislative Update.”

4)         High Profile Prosecutions and Trials under Computer Fraud and Abuse Act and Economic Espionage Act

2013 saw several high profile prosecutions and trials under the CFAA and Economic Espionage Act. Bradley Manning, who allegedly leaked confidential government documents, to WikiLeaks, and Andrew ‘Weev’ Auernheimer, who allegedly hacked AT&T’s servers, were both convicted under the CFAA. Executive recruiter David Nosal was convicted by a San Francisco jury of violating federal trade secret laws and the CFAA and sentenced to one year and a day in federal prison.  In U.S v. Jin, the Seventh Circuit upheld the conviction of a Chicago woman sentenced to four years in prison for stealing trade secrets of her employer before boarding a plane for China. For additional information on criminal liability for trade secret misappropriation, check out our webinar “The Stakes Just Got Higher: Criminal Prosecution of Trade Secret Misappropriation.”

5)         More Social Media Privacy Legislation

Arkansas, Utah, New Mexico, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington all passed legislation social media privacy legislation in 2013 that prohibited employers from asking or insisting that their employees provide access to their personal social networking accounts. California extended its current social media privacy law to specify that it encompassed public employers.  We expect more states to enact social media privacy legislation in 2014.

6)         Continued Uncertainty on the Scope of Trade Secret Preemption

Courts have continued struggled with the scope and timing of applying preemption in trade secret cases but there is a growing movement to displace common law tort claims for the theft of information. Such claims are typically tortious interference with contract, conversion, unfair competition, and breach of fiduciary duty. In essence, plaintiffs may only be left with breach of contract and a trade secret claim for the theft of information if a jurisdiction has adopted a broad preemption perspective. Courts in western states such as Arizona, Hawaii, Nevada, Utah, and Washington have preempted “confidential information” theft claims under their respective trade secret preemption statutes.

In K.F. Jacobsen v. Gaylor, an Oregon federal court, however, found that a conversion claim for theft of confidential information was not preempted. In Triage Consulting Group v. IMA, a Pennsylvania federal court permitted the pleading of preempted claims in the alternative. Additionally, in Angelica Textile Svcs. v. Park, a California Court of Appeal found that there was no preemption of claims for breach of contract, unfair competition, conversion, or tortious interference because the claims were based on facts distinct from the trade secret claim and the conversion claim asserted the theft of tangible documents. In contrast, in Anheuser-Busch v. Clark, a California federal court found that a return of personal property claim based on the taking of “confidential, proprietary, and/or trade secret information” was preempted because there was no other basis beside trade secrets law for a property right in the taken information. For additional information on the practical impact of preemption on protecting trade secrets and litigating trade secret cases, check out our webinar “How and Why California is Different When it Comes to Trade Secrets and Non-Competes.”

7)         Growing Challenge of Protecting of Information in the Cloud with Increasing Prevalence of BYOD and Online Storage

While the benefits of cloud computing are well documented, the growth of third party online data storage has facilitated the ability for rogue employees to take valuable trade secrets and other proprietary company electronic files, in the matter of minutes,  if not seconds. The increasing use of mobile devices and cloud technologies by companies both large and small is likely to result in more mobile devices and online storage being relevant in litigation. A recent article in The Recorder entitled “Trade Secrets Spat Center on Cloud,” observed that the existence of cloud computing services within the workplace makes it “harder for companies to distinguish true data breaches from false alarms.”

An insightful Symantec/Ponemon study on employees’ beliefs about IP and data theft was released in 2013. It surveyed 3,317 employees in 6 countries (U.S., U.K., France, Brazil, China, South Korea). According to the survey, 1 in 3 employees move work files to file sharing apps (e.g. Drop Box). Half of employees who left/lost their jobs kept confidential information 40% plan to use confidential information at new job. The top reasons employees believe data theft acceptable: (1) does not harm the company does not strictly enforce its policies; (2) information is not secured and generally available; or (3) employee would not receive any economic gain.  The results of this study serve as a reminder that employers must be vigilant to ensure that they have robust agreements and policies with their employees as well as other sound trade secret protections, including employee training and IT security, to protect their valuable trade secrets and company data before they are compromised and stolen. Employers should implement policies and agreements to restrict or clarify the use of cloud computing services for storing and sharing company data by employees. Some employers may prefer to simply block all access to such cloud computing services and document the same in their policies and agreements. For a further discussion about steps and responses companies can take when their confidential information and/or trade secrets appear, or are threatened to appear, on the Internet, check out our webinar “My Company’s Confidential Information is Posted on the Internet! What Can I Do?

8)         Continued Significance of Choice of Law and Forum Selection Provisions In Non-Compete and Trade Secret Disputes

The U.S. Supreme Court’s recent decision in Atlantic Marine v. U.S.D.C. for the W.D. of Texas appears to strengthen the enforceability of forum selection clauses as it held that courts should ordinarily transfer cases pursuant to applicable and enforceable forum selection clauses in all but the most extraordinary circumstances. While Atlantic Marine did not concern restrictive covenant agreements or the employer-employee context, it may nonetheless make it more difficult for current and/or former employees to circumvent the forum selection clauses contained in their non-compete or trade secret protection agreements. Many federal courts continue to enforce out-of-state forum selection clauses in non-compete disputes (see AJZN v. Yu and Meras Eng’r’g v. CH2O), while some courts have disregarded forum selection clauses in such disputes “in the interests of justice.”  The Federal Circuit in Convolve and MIT v. Compaq and Seagate, held that information at issue lost its trade secret protection when the trade secret holder disclosed the information because it failed to comply with the confidential marking requirement set forth in a non-disclosure agreement. Accordingly, trade secret holders should be careful what their non-disclosure agreements say about trade secret protection otherwise they may lose such protection if they fail to follow such agreements.

9)         Social Media Continues to Change Traditional Legal Definitions and Analyses  

Social media continues to change the way we define various activities in employment, litigation, and our everyday lives. A Pennsylvania federal district court in the closely watched Eagle v. Morgan case found that a former employee was able to successfully prove her causes of action against her former employer for the theft of her LinkedIn account, but she was unable to prove damages with reasonable certainty. Recent cases in Massachusetts and Oklahoma held that social media posts, updates and communications with former customers did not violate their non-solicitation restrictive covenants with their former employer. In the litigation context, a  New Jersey federal court issued sanctions against a litigant for deleting his Facebook profile, while a New York federal court allowed the FTC to effectuate service of process on foreign defendants through Facebook. The Fourth Circuit held that “liking” something on Facebook is “a form of free speech protected by the First Amendment.” Federal district courts in Nevada and New Jersey illustrated the growing trend of courts finding that individuals may lack a reasonable expectation of privacy in social media posts. For further discussion on the relationship between social media and trade secrets, check out our webinar “Employee Privacy and Social Networking: Can Your Trade Secret Survive?

10)       ITC Remains Attractive Forum to Address Trade Secret Theft

The Federal Circuit caught the attention of the ITC and trade secret litigators alike when it ruled in TianRui Group Co. v. ITC that the ITC can exercise its jurisdiction over acts of misappropriation occurring entirely in China. Since then, victims of trade secret theft by foreign entities are increasingly seeking relief from the ITC (e.g. In the Matter of Certain Rubber Resins and Processes for Manufacturing Same (Inv. No. 337-TA-849)). For valuable insight on protecting trade secrets and confidential information in China and other Asian countries, including the effective use of non-compete and non-disclosure agreements, please check out our recent webinar titled, “Trade Secret and Non-Compete Considerations in Asia.“

We thank everyone who followed us this year and we really appreciate all of your support. We also thank everyone who helped us make the ABA’s Top 100 Law Blogs list. We will continue to provide up-to-the-minute information on the latest legal trends and cases across the country, as well as important thought leadership and resource links and materials.

Don’t forget to register to receive a copy of our Annual Blog Year in Review.

Can Oregon employers bring conversion claims against employees who misappropriate confidential information without having their claims preempted by the state’s Uniform Trade Secrets Act? According to a recent Oregon federal district court opinion, the answer is “yes”; however, in several other states, the answer is “no”.

This result highlights the continued divergence of opinion across the nation concerning the viability of tort or statutory claims based upon the theft of information that may not rise to the level of a trade secret.

It matters because such claims are often easier to prove than trade secret claims, particularly before juries who may have high expectations for trade secret classification. They also provide a wider variety of remedies than contract claims, exposing defendants to liability for all harm proximately caused by the defendants’ conduct. Additionally, such claims may not be subject to the stringent discovery requirements for trade secret claims in some states which require the identification of the stolen information with particularity before discovery commences.

Simply put, theft of information claims (whether based upon common law business torts or statute) provide employers with additional leverage to protect their companies from employees and competitors that may use such information but arguably are inconsistent with the preemption provisions found in many states’ Uniform Trade Secrets Acts.  

In KF Jacobsen v. Gaylor, Case No. 3:12-cv-02062-AC, — F.Supp.2d —-, 2013 WL 2318853 (D. Or. 2013), an employer filed suit against its former employee alleging that, when he departed, he took with him a variety of confidential and proprietary files. The employer’s complaint included claims for violation of the Oregon Trade Secrets Act (“OTSA”), the Computer Fraud and Abuse Act, the Stored Communications Act, and conversion.

The employee then brought a motion to dismiss arguing that the employer’s conversion claim was preempted by its claim under the OTSA and that a plaintiff may not base a conversion claim on taking copies of information. The employer argued that its conversion claim was not preempted by the OTSA to the extent it sought damages for the conversion of information other than trade secrets and that it had adequately alleged that the employee exercised control over the copied information in a manner inconsistent with the employer’s rights as owner of the information. In its complaint, the employer described the documents allegedly misappropriated by employee as “some of which may be additional misappropriated trade secrets of plaintiff or confidential and proprietary information of plaintiff.” (emphasis added).

The OTSA supersedes “conflicting tort, restitution or other law of Oregon providing civil remedies for misappropriation of a trade secret.” OR. REV. STAT. 646.473(1). Actions seeking contractual and criminal remedies are not affected by the Trade Secrets Act. OR. REV. STAT. 646.473(2)(a) and (c). Additionally, a plaintiff may still pursue an action for “civil remedies that are not based upon misappropriation of a trade secret.” OR. REV. STAT. 646.473(b).

The court indicated that Oregon courts have not addressed the extent to which the OTSA preempts civil remedies. The court acknowledged that a number of courts in other states have extended the preemptive effect of the language found in OR. REV. STAT. 646.473 to claims that are based on the same operative facts as a claim for trade secret misappropriation. See id. (citing Penalty Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284, 1297-98 (11th Cir. 2003) and Hutchinson v. KFC Corp., 809 F.Supp. 68, 72 (D. Nev. 1992). The court further acknowledged that an Oregon federal district court had specifically held that the OTSA preempts conversion claims based on alleged misappropriation of trade secrets. See id. (citing Kante v. Nike, Inc., No. CV 07-1407-HU, 2008 WL5246090, *4 (D. Or. Dec. 16, 2008). (emphasis added).

The employer argued that its allegations were broad enough, when read together to allege that employee may have in his possession information that is not trade secret information and, therefore, not covered by the OTSA. The court found that the term “confidential and proprietary information” could be construed broadly enough to include information that does not fall with the definition of “trade secret” under the OTSA. Consequently, the court found that the conversion claim seeks damages for the conversion of information other than trade secrets, and thus was not preempted by the OTSA.

The employee also argued that, even if the employer’s claim were not preempted, the employer still could not assert conversion because he did not interfere with the employer’s ability to access or control their documents. The employee argued that he “merely copied documents…at a time when he had the authority to do so.” The court did not find this argument persuasive. It stated that the “the gravamen of the tort [of conversion] is the defendant’s intent to exercise control over the chattel inconsistently with the plaintiff’s rights.” The court found that employee’s alleged copying, retaining, and sharing of the information with third parties, without the employer’s consent, was inconsistent with the employer’s control over the documents and the information in the documents, and its right to keep the information confidential. Accordingly, the court found that the employer had sufficiently alleged in its pleading that the employee “exercised control over the chattel inconsistently” with employer’s rights to maintain the confidentiality of the information.

With the court’s rejection of the employee’s arguments against the conversion claim, the court confirmed that the employer could state a claim based upon the theft of confidential information. There is, however, an interesting footnote in the court’s opinion that could limit the applicability of its analysis. In this footnote, the court stated that conversion “generally covers only chattel or tangible property.” According to the court, neither party raised the issue of whether the employee misappropriated tangible property, rather than intangible property “not subject to conversion.” Accordingly, whether the confidential information at issue (either in hard copy or electronic form) qualifies for protection remains an open question in the case. With the prevalence of information sharing/transfer through email, Drop Box, social media, and flash drives, this is an important distinction to keep in mind and is worth following as the case progresses. Nevertheless for Oregon employers who face the situation of an employee who walks out the door with confidential information, this decision lays out a path to plead a claim for conversion (at least for now).

This decision comes in the wake of several other preemption rulings which have reached different results.

A federal district court in California, for example, recently held claims for intentional interference with contractual relations, intentional interference with prospective economic advantage, unfair competition, breach of fiduciary duty were preempted or subject to supersession. Other California courts have reached different results.

Additionally, another California federal district court recently found that a return of personal property claim based on the taking of “confidential, proprietary, and/or trade secret information” was preempted. In that case, the court analyzed three different approaches to preemption employed by California courts. Under one approach, a claim has been found exempt from supersession so long as the claim requires the allegation of “something more” than just trade secrets misappropriation. Another approach has found a claim exempt from supersession unless it is based on the taking of information that is ultimately adjudged to be a trade secret. Lastly, other courts have found information theft claims are only saved from supersession if a plaintiff “assert[s] some other basis” beside trade secrets law for a property right in the information at issue.” In the case, the court granted the motion to dismiss and adopted the third approach “given CUTSA’s breadth and structure, its purpose of promoting uniformity, and the broad superseding effect of the narrower uniform trade secrets.”

The California Supreme Court has yet to determinatively address the supersessive scope of CUTSA, but may eventually resolve this difference of opinion.

Courts in western states such as Arizona, Hawaii, Nevada, Utah, and Washington have reached similar results preempting “confidential information” theft claims under their respective trade secret preemption statutes. A Pennsylvania federal court, however, recently found that preemption should not be determined on the pleadings and a New Jersey state court determined that common law claims were not displaced by New Jersey’s new trade secret statute.

The only certainty in this area appears to be its variety (even within states). For some best practices to protect confidential information in light of this uncertainly, please see our previous blog post. Additionally, I will be leading a presentation at the ABA Annual Meeting in San Francisco, California this Friday, August 9, 2013 at 2:00 p.m.-3:30 p.m. p.s.t. on Hot Topics in Trade Secrets Law Across the Country. Please consider attending to learn more about the latest in trade secret preemption and other hot topics in trade secrets law.

By Ryan Malloy and Robert Milligan

The New Hampshire legislature recently passed a new state law that will require the disclosure of non-compete and non-piracy agreements to potential employees prior to making offers of new employment and to existing employees with an offer of change in job classification. Governor Lynch signed the bill on May 15, 2012. Under the new law, any agreement that is not in compliance with the law shall be void and unenforceable.

The new law is effective July 14, 2012. Employers using non-compete and/or non-piracy agreements must plan accordingly. We previously alerted our readers to this legislation after New Hampshire’s House recommended the bill in March. The full text of the law can be found here. The law has some similarities to Oregon’s non-compete statute which also has pre-offer disclosure requirements.

Some legal commentators have noted that New Hampshire courts generally look with disfavor on non-compete agreements and they have criticized the new law for its lack of clarity concerning the meaning of non-piracy agreements. Based upon the statutory language, it is unclear whether non-piracy agreements means non-solicitation clauses or also includes non-disclosure clauses. Additionally, “change in job classification” is not defined under the law. ” “Change in job classification” could mean promotion, lateral move, demotion, or change in title. Case law or additional legislation will need to further define the statutory language.

Employers conducting business in New Hampshire will want to take this new law into account and comply in the hiring and employment process with New Hampshire employees.  

 

By Robert Milligan and Joshua Salinas

In light of Valentine’s Day, a blog involving two competitors specializing in heart rhythm therapy seems fitting. The Oregon district court case is Biotronik, Inc. v. Medtronic, USA, Inc., No. 03:11-cv-00366-HU, 2012 WL 14031 (D. Or. Jan. 4, 2012), where the Honorable Judge Michael H. Simon, found the amount in controversy for federal diversity jurisdiction satisfied, even though the plaintiff sought only declaratory relief and did not claim damages exceeding $75,000. 

The interesting aspect of this case is that Judge Simon determined the value of the amount in controversy based on the plaintiff’s potential liability for defendants’ allegations in a separate out-of-state lawsuit.

The Parties and Background Facts

Plaintiff Biotronik, Inc. and Defendants Medtronic USA, Inc. and Medtronic, Inc. (collectively “Medtronic”) are competitors in the cardiac rhythm management device (“CRMD”) industry. CRMDs electrically stimulate the heart to pump blood when the heart is unable to keep a steady beat. Inherent in this highly competitive and technologically complex market is the necessity to have skilled salespeople with a great deal of technical knowledge. Thus, companies such as Medtronic retain noncompetition and non-solicitation agreements to protect the training and resources they invest in their employees.

A dispute arose when several employees left Medtronic to work for Biotronik. Medtronic believed former employee Rory Carmichael had wrongfully solicited these employees and caused them to leave for Biotronik.

Medtronic sued Carmichael in Minnesota state court, alleging that he solicited Medtronic’s employees, on behalf of and/or for the benefit of Biotronik, in breach his Employment and Separation Agreements with Medtronic. At the time of the alleged solicitations, Carmichael was not yet an employee of Biotronik. Medtronic did not join Biotronik in the Minnesota action because Medtronic allegedly lacked sufficient evidence to sue for tortious interference with contract. 

Biotronik’s Declaratory Relief

Biotronik formally hired Carmichael while the Minnesota action was still pending, and immediately brought a declaratory relief action against Medtronic in Oregon state court. Biotronik sought two declarations:

            1. “Biotronik has the right to employ Carmichael, free from any Post-Termination Obligations relating to noncompetition and non-solicitation that are set forth in the [Employee Agreement] and the Parties’ Agreement; and

            2. “Biotronik did not cause any violation of any of the Post-Termination Obligations set forth in [Carmichael’s Employee Agreement].”

Medtronic removed the case to federal district court based on diversity of citizenship; Biotronik was an Oregon corporation and Medtronic a Minnesota corporation. Medtronic then moved to dismiss the case for improper jurisdiction, or in the alternative, transfer to Minnesota. Medtronic hoped to transfer the case to Minnesota, which has a stronger policy in enforcing noncompetition and non-solicitation agreements compared to Oregon.

Biotronik on the other hand moved to remand the case back to Oregon state court and maintain any “home field advantage,” contending that the amount in controversy did not exceed the $75,000 requirement for federal jurisdiction. 

Determining the Amount in Controversy

Judge Simon stated that when a removed lawsuit seeks declaratory or injunctive relief, the amount in controversy is measured by the value of the “object of litigation.” (See Hung v. Wash.State Apple. Adver. Comm’n, 432 U.S. 333 (1977)). The object of litigation here was Biotronik’s potential liability to Medtronic – the value of liability if Biotronik was in fact found liable in the Minnesota action for causing Carmichael to wrongfully solicit Medtronic’s employees. 

The value of that potential liability was the liquidated damages provision in Carmichael’s Separation Agreement, which required Carmichael to repay Medtronic all post-termination compensation and additional consideration he received from his Employment and Separation Agreements. Judge Simon found the amount in controversy satisfied because the amount of these repayments would exceed $75,000.

Judge Simon found federal diversity jurisdiction satisfied, but denied Medtronic’s request for dismissal or transfer.

Important Takeaways:

  1. Noncompetition and non-solicitation cases often involve a “race to the courthouse” to file  first and secure the home forum and applicable state law because states differ in their policies toward the enforcement of non-compete clauses. 
     
  2. Plaintiffs seeking to avoid the removal of their declaratory relief actions to federal court, and potentially face dismissal or transfer, should narrow the language of their declarations to restrict the scope of their potential liability. Judge Simon noted that Biotronik’s first declaration regarding its mere ability to employ Carmichael would not have satisfied the amount in controversy requirement. Biotronik’s broad language in its second declaration, however, opened the door and allowed Judge Simon to consider Biotronik’s potential liability for causing “any violation of any of [Carmichael’s] Post-Termination Obligations.”
     
  3. Defendants seeking to remove a plaintiff’s declaratory relief actions to federal court, to ultimately dismiss or transfer the case, should anticipate this strategy when initiating any early lawsuits. While the ideal strategy for employers is to file actions in one’s own state first, the new employer is usually in the best position to know when the alleged breacher/employee is officially hired. Moreover, while there may not be sufficient evidence to join the new employer in an initial lawsuit, as in Medtronic’s case, the scope of the allegations concerning the new employer in a complaint or other pleadings may help expand the scope of the new employer’s potential liability. Thus, if the new employer’s later declarations are too broad, the allegations in the early lawsuit may help widen the scope of potential damages to satisfy the amount in controversy for federal diversity jurisdiction, and help assist in a future motion to dismiss or transfer.

 

By Robert Milligan and summer associate Alana Friedman

A federal district court in Oregon recently granted a motion to stay in a dual-state non-compete matter based on the first-to-file rule, even though the two cases were filed only a few hours apart. The first-to-file rule provides that, when similar cases have been filed in different federal district courts, it is within the court’s discretion to dismiss the second filed action when it involves the same parties and issues.

In Biotronik, Inc. v. Guidance Sales Corp., 2009 WL 1838322 (D. Or. Jun. 22, 2009), Judge King of the United States District Court for the District of Oregon granted Guidance Sales Corporation’s (“GSC”) motion to stay against GSC’s competitor, Biotronik, Inc (“Biotronik”). The court granted the motion to stay based on the first-to-file rule.  Id. at *3. 

Biotronik and GSC are competitors in the distribution of cardiac rhythm management devices such as pacemakers and defibrillators. Biotronik is an Oregon corporation and GSC is an Indiana corporation with its principal place of business in Minnesota. 

On April 10, 2009, twelve GSC employees ended their employment at GSC and began working at Biotronik. The employees signed agreements with GSC containing non-compete, non-solicit, and non-disclosure provisions. The agreements contained Minnesota forum and choice of law provisions. 

On April 14, 2009, at approximately 12:26 p.m PDT, GSC filed suit in the United States District Court for the District of Minnesota seeking damages from Biotronik and the twelve defecting employees for allegedly breaching their employment agreements. GSC also alleged several employees breached their duty of loyalty as well as their non-disclosure and non-solicitation agreements. GSC further alleged that Biotronik tortiously interfered with GSC’s contract with its employees and aided and abetted the employees’ breach of their duty of loyalty to GSC. Finally, GSC sought a declaration that its non-compete agreement with each of the twelve employees was valid and enforceable and that Minnesota law applies.

Later that same day, Biotronik filed suit in Oregon state court at approximately 5:11 p.m. PDT (Biotronik apparently e-mailed the complaint to GSC at 3:42 p.m. PDT in advance of the filing). Biotronik sought a declaration that the twelve employees, and one additional former GSC employee also working for Biotronik, were in compliance with all of the “enforceable” restrictive covenants contained in the agreements they signed while employed by GSC. The former employees were not named parties to the action. The case was later removed to the federal district court in Oregon and assigned to Judge King.

On April 29, 2009, the Minnesota federal court entered a stipulated temporary restraining order and order for expedited discovery. The tro required Biotronik to return confidential information and prohibited Biotronik from inducing the employees to solicit other GSC employees to leave. The employees were also prohibited from disclosing or retaining confidential information and soliciting current GSC employees to leave.

GSC then moved to have the federal case in Oregon dismissed or stayed under the first-to-file rule. The court found that the first-to-file rule was applicable because Biotronik and GSC are parties to both actions and the issues are substantially similar since both cases seek to determine the enforceability of the non-competition agreement. Id. at *2 (relying on Pacesetter Sys., Inc. v. Medtronic, Inc., 678 F. 2d 93, 94-95 (9th Cir. 1982)). 

Although the court noted that rigid application of the first-to-file rule was not required, especially where the cases were filed only hours apart, it nevertheless chose to enforce the rule. The court provided two reasons as to why it was appropriate to grant the stay and allow the Minnesota case to proceed. Id. at *3. First, the Minnesota case would more thoroughly resolve the dispute because it involved more issues than the Oregon case. The court reasoned that Biotronik would still have to defend some of the charges in the Minnesota action even if the Oregon case proceeded. Second, the Minnesota action had progressed more quickly than the Oregon action since the parties in the Minnesota action had already agreed to a temporary restraining order and discovery had already begun.  Id. The court also noted that Biotronik had not relied on any of the exceptions of the first-to-file rule, such as bad faith, anticipatory suit, and forum shopping. Id.(citing Alltrade, Inc. v. Uniweld Prods., Inc., 946 F.2d 622, 628 (9th Cir. 1991)) (emphasis added).

The court summed up its decision by stating that, “[i]n short, application of the first-to-file rule will promote the interest of judicial economy and avoid the possibility of conflicting judgments.” Id. 

The case serves an important reminder that, depending upon the circumstances, filing suit first can make a difference when it comes to enforcing non-competition and non-solicitation covenants against former employees and their new employers, and vice versa. However, where there is demonstrated evidence of forum shopping, the court may decline to apply the "first-filed" rule.