Engineers Convicted for Theft of Trade Secrets

Two engineers were recently convicted under federal law for stealing trade secrets from Goodyear.  (United States v. Howley and Roberts, 2013 WL 399345 (Feb. 4, 2013 6th Cir.).)  Charles Roberts and Sean Howley worked as engineers for Wyko Tire Technology, a Tennessee Company.  Wyko supplied Goodyear with parts for tire-assembly machines.  Wyko also had an agreement with HaoHua South China Rubber Company to supply tire-building parts related to the swabbing-down process.  Unfortunately for Wyko, it had never built the parts it promised to HaoHua.  Goodyear, it turned out, was using machines like the ones Wyko needed to make.

Around the time Wyko entered the agreement with HaoHua, Goodyear asked Wyko to send a technician to repair some of its tire-assembly machines at a plant in Topeka, Kansas.  Instead of sending a technician, Wyko sent Roberts and Howley.  While Roberts and Howley were left unescorted for a few minutes, Howley used his cell-phone camera to take seven photos of a swabbing-down device on one of Goodyear’s tire-assembly machines.  When Howley returned to Tennessee, he sent the photos from his personal e-mail account to his Wyko account.  He then forwarded the photos to Roberts, stating that the photos were “not all great, but I think that they might tell us enough.”

Roberts, in turn, sent the photos to other members of Wyko’s design team.  He stated Goodyear was “somewhat guarded” because they knew Wyko was “working with competitors.”  He acknowledged that Howley was able to take the photos when Goodyear “left us on our own for a while.”  When Wyko’s IT manager discovered Roberts’ e-mail and pictures, he alerted Goodyear of the potentially illicit photos.  Goodyear notified the FBI which ultimately led to Roberts and Howley’s conviction.

Under federal law, a person who steals a trade secret that is produced or placed in interstate or foreign commerce can be fined and imprisoned up to 10 years.  (18 U.S.C. § 1832.)  A primary contention in the Roberts and Howley trial was whether the swabbing-down device Howley photographed was a “trade secret” covered by federal law.  Under federal law, information is a “trade secret” only if its owner has taken “reasonable measures” to keep the secret and the “information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.  (18 U.S.C. § 1839(3).)

Roberts and Howley’s convictions were supported in large part by Goodyear’s efforts to protect the secrecy of its tire-assembly machine’s design, including the swabbing-down device.  These included:

  1. protecting its Topeka, Kansas facility with a fence;
  2. requiring visitors to pass through a security checkpoint;
  3. requiring visitors to obtain advance permission before visiting the facility;
  4. requiring visitors to sign confidentiality agreements and agree not to take photographs during their visit; and
  5. requiring its suppliers, including Wyko, to keep Goodyear’s proprietary information secret.

The Court also found information regarding Goodyear’s swabbing down device was economically valuable because it was not “readily ascertainable through proper means” by the public, and Robert and Howley’s conduct shows the information they stole was important.

As shown by the convictions of Roberts and Howley, a company should take reasonable measures to protect its proprietary information.  The Court noted in Howley and Roberts the “’reasonable measures’ requirement does not mean a company must keep its own employees and suppliers in the dark about machines they need to do their work.”  However, a company cannot claim information is a trade secret if it does not treat the information like a trade secret.

It should also be noted that the same statute used to convict Roberts and Howley also imposes a fine up to $5,000,000 against a company which steals trade secrets.  Had Wyko used the stolen trade secrets and not alerted the FBI, it could have faced the same criminal charges and suffered significant economic loss.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Non-Compete Agreements Survive Labor Board Scrutiny — For Now

The National Labor Relations Act (the “NLRA”) has always applied to both unionized and non-unionized workplaces.  However, one of the priorities of President Obama’s appointees to the National Labor Relations Board (the “Board”) has been to maintain the NLRA’s relevance in today’s workplaces.  With union representation at historically low levels, this priority means making sure that the NLRA rights of employees in non-unionized workplaces are being protected.  For example, the Board has made clear that non-unionized employers’ “social media” policies can violate the NLRA — after all, such policies could, in theory, discourage employees from sharing (critical and unkind) thoughts about their employers online.  Likewise, the Board has said that mandatory arbitration agreements may violate the NLRA if such policies do not specifically inform employees of their rights to file unfair labor practice charges with the Board.  As might be expected, the Board’s latest decisions (and even the composition of the Board itself) have been challenged in numerous court cases, so all of this is something of a “moving target.”

Given current trends, it is natural to ask whether non-compete agreements might be next among common employment policies to be scrutinized by the Board.  The answer, for now, is no.  In 2012, the Director of Region 19 (covering parts of the Pacific Northwest) asked the Board’s Office of General Counsel for advice as to whether an insulation-installation company’s mandatory employment agreement — and in particular the non-compete and anti-moonlighting provisions of this agreement– might violate the NLRA.  Apparently, a union (the Heat and Frost Insulators and Asbestos Workers) had been trying to organize at this particular employer for some time.  The concern was whether the employer’s mandatory employment policies could interfere with union “salting.”  (A union “salt” is a job applicant who applies for work at a particular employer for the purpose of organizing the employer and who will, after being hired, try to persuade her co-workers to support the union.)  Because union “salts” may move from one workplace to another (and may also be on the union’s payroll), having an anti-moonlighting policy and a non-compete agreement could, in theory, interfere with “salting.”

The Office of General Counsel answered that, as to the non-compete provisions, these provisions “interfere[d] with employment in general,” but their effect on NLRA rights in particular was “too attenuated” to violate the NLRA.  The Office of General Counsel was, however, a little more skeptical about the anti-moonlighting provisions, especially if there might be evidence that such policies were discriminatorily enforced against union members.  For example, although a consistently-enforced policy barring the hiring of any job applicant currently on the payroll of some other employer (including a union) does not, in itself, violate the NLRA, an employer cannot suddenly adopt an anti-moonlighting policy for the purpose of weeding out union “salts” from other job applicants.  Thus, the Office of General Counsel suggested that the regional office investigate further the employer’s motivation for adopting the anti-moonlighting policy and the history of the employer’s enforcement of its policy.

In conclusion, an anti-moonlighting policy could, if adopted to keep the union out or enforced in a discriminatory fashion against union members, violate the NLRA, but for the moment, straight non-compete agreements have survived Board scrutiny.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Analysis of a Winning Argument for Enforcing a Non-Compete Agreement at the Preliminary Injunction Stage

On December 18, 2012, the United States District Court for the Western District of Tennessee entered an Order granting an employer’s application for a preliminary injunction preventing its former employees from soliciting the employer’s customers. The Order is an excellent example of issues employers should focus on when arguing for the
enforcement of non-compete agreements at the preliminary injunction stage.

In Smith & Nephew, Inc. v. Northwest Ortho Plus, Inc., et al., Docket No. 2:12-cv-02476, the employer claimed its former employees violated their non-compete agreements by diverting the employer’s customers to its direct competitors. The employer sought a preliminary injunction prohibiting the employees from breaching their non-compete agreements pending the resolution of the case at trial.

In order to prevail on its petition for a preliminary injunction, the employer had to prove: (1) it had a strong likelihood of proving the non-compete agreement should be enforced; (2) it would suffer irreparable harm if the non-compete agreement was not enforced pending trial; (3) third parties would not be harmed by enforcement of the non-compete agreement; and (4) the public interest would be served by enforcing the non-compete agreement pending trial.

In this case, the employer proved the final three factors by showing (1) it suffered irreparable harm when it lost customer goodwill because customer goodwill is difficult to calculate; (2) consumers of medical devices would not suffer because they could continue to purchase products from the plaintiff; and (3) there is a public interest in enforcing contracts as written.

As to the first factor, the employer showed there is a strong likelihood it would prevail in enforcing the non-compete agreement. First, the agreement protects the employer’s legitimate business interest by preventing the former employees from gaining an unfair advantage in future competition. Second, the agreement is reasonable because it resulted in little, if any hardship to the former employees and the public. Third, the agreement imposes time and territorial limits that are no greater than necessary to protect the employer’s legitimate business interest.

Employers seeking to enforce non-compete agreements should review this order. It provides a great example of how to argue a non-compete agreement at the preliminary injunction stage and applies the leading Tennessee non-compete cases in a ruling favorable to the employer.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Florida Appellate Court Says: “Independent Contractor” Still an Employee for Purposes of Enforcing Non-Compete Agreement

You hire an employee and pay her a salary.  In order to earn more money at your business, she voluntarily chooses to transition to “independent contractor” status.  Question:  Does that transition trigger the non-compete agreement executed at the time the employee started at the company?  Broadly interpreting the employer/employee employment contract, a Florida Appellate Court recently held that the employer could argue that the transition did not negatively affect the otherwise valid restriction.  This employer friendly decision ‒ a reversal of the trial court’s findings ‒ involved the following basic facts:

  • Employee signed a seemingly valid non-compete agreement restricting future employment for a 2 year period within a 100 mile radius of “any store, office, or facility of the company.”
  • During training, the former employee held a salaried position;
  • Once trained, the employee chose to act as an “independent contractor” allowing her to earn a commission and subjecting her to payments for her share of the business’s rent, supplies, utilities and insurance.  She was also responsible to pay taxes on her commissions;
  • The agreement contained the clause “Any subsequent change or changes in my duties, salary or compensation, will not affect the validity or scope of this Agreement . . . ;”
  • More than two years after her transition to “independent contractor,” the former employee started a competing business approximately 5 miles from the company’s offices.

In the employer’s suit to enforce its non-compete agreement it cited Florida Statute §542.335(1)(b) claiming that it had a legitimate business interest justifying the restrictive covenant.  The motion properly alleged that the restrictive covenants were reasonably necessary to protect the company’s established business interests pursuant to Florida Statute §542.335(1)(c).  Also included in the employer’s motion were the 4 elements required for a temporary injunction (irreparable harm, lack of an adequate remedy at law, substantial likelihood of success on the merits, and a public interest favoring entry of the injunction.)

In response, the former employee argued that even if valid, the 2 year restrictive period began to run when the former employee chose to become an independent contractor and was no longer salaried.  See Anarkali Boutique, Inc. v. Ortiz (Fla. 4th DCA 2012).

The appellate court reversed noting that Florida courts are required to construe a contract as a whole and to broadly give effect to every provision of the agreement.  Using that more broad interpretation of the contract, the appellate court held that the change in the former employee’s status from an employee to an independent contractor “did not cause the 2 year non-compete period to begin running.  Instead, the two year non-compete period did not begin running until the worker left the company.”  Id. Ultimately the Anarkali Boutique Court remanded the matter to allow the trial court to make factual findings as to whether or not the employer had proven the requirements set forth in Florida Statute §542.335.  Nonetheless, this case was a clear victory for the employer whose decision to allow employees to earn a larger salary and build a client base was not manipulated to undermine an otherwise duly negotiated restrictive covenant.

Practitioner’s Note:  Although the employer was able to pursue its arguments upholding its restrictive covenant, this case demonstrates another example of the importance of tailoring your non-compete agreement to the specific situation your business faces.  Had the non-compete agreement in this case ‒ where the employer knew in advance that it would offer salaried employees an opportunity to work on a commission-only basis ‒ it could have included in its non-compete agreement language broad enough to specifically address that situation.  Had the contract contained that language, the employer may have more easily retained its customers and would have, almost assuredly, limited the costs of litigation and enforcement.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.