Federal Trade Secrets Protection — Finally Something Both Parties Can Agree On

In recent months, two bipartisan bills have been introduced in Congress providing for a Federal civil remedy for trade secret misappropriation — the Defend Trade Secrets Act , introduced in the Senate in April, and the Trade Secrets Protection Act, introduced in the House in July.   These companion bills are substantively similar in that they both amend the Economic Espionage Act of 1996 to establish a private right of action for a trade secret violation.  So far, the House bill is moving faster, having been approved on September 17, 2014, by the House Judiciary Committee and presumably moving toward a full House vote in the near future (or at least that’s what I learned on School House Rock).

The significance of these bills is that they finally extend Federal civil protection and regulation to trade secrets, currently the only category of intellectual property not so covered (copyrights, trademarks, and patents already have Federal protection).  The practical effect of these bills, if passed, will not be as game-changing as the casual observer might think, however.   The Uniform Trade Secrets Act (the “UTSA”) was first published in 1979, amended in 1985, and has been adopted by 47 states in some form, so civil remedies currently exist for trade secret theft and are similar to that offered in these two Federal bills.  Moreover, trade secret claims arising under state law often wind up in Federal Court based on diversity jurisdiction, so the access to Federal Courts is not as big of a deal as the bill sponsors might make it out to be.

Despite the similarities to the existing body of state statutes, however, the new bills, if passed, would certainly provide a new, improved hammer with which companies can pound unfair competitors and deceitful former employees. Some advantages of the proposed bills over the current state statutes based on the UTSA include the following:

  • Strong statement that trade secret protection is an important U.S. public policy;
  • Uniformity in trade secret law across the country;
  • Direct access to Federal Courts, regardless of the location of the parties or amount in controversy;
  • Longer statute of limitations;
  • Increased recoverable damages; and
  • Procedures for ex parte seizure of evidence.

BURR POINT: Rare bipartisan support, similar bills in both the House and Senate, and a quick and favorable reporting out of the House Judiciary point to Federal trade secrets legislation being something that this hamstrung Congress might actually be able to pass.

Georgia Court of Appeals Provides Ammunition for Saving Unenforceable Non-Competes

In the World War II epic Saving Private Ryan, Tom Hanks and his platoon of grunts cross dangerous enemy territory to rescue an American soldier before he becomes the fourth member of his family to be a casualty of the Big One.  In similar fashion, a trial court and a Georgia Court of Appeals panel in Fab’rik Boutique, Inc. v. Shops Around Lenox, Inc., 2014 Ga. App. LEXIS 612 (Ga. Ct. App. Sept. 8, 2014), led by Judge McFadden, recently marched through 40-plus years of hostile Georgia non-compete law to save an equally vulnerable restrictive covenant.

If you’ve been paying attention to this Blog or Georgia non-compete law in general, you know that May 11, 2011, is Liberation Day for Georgia restrictive covenants.  Following the enactment of Georgia’s  new non-compete statute, O.C.G.A. §13-8-50, et seq., restrictive covenants in agreements executed on or after May 11, 2011, were freed from the often draconian constraints of the prior body of case law governing, and usually dooming, Georgia non-compete agreements.  Of most significance, the new law allows a Court to blue-pencil (or modify, for you non-lawyers out there) an overbroad covenant so that it can be reasonable and thus enforceable.  Agreements that pre-date Non-compete Liberation Day, however, must strictly comply with the applicable body of case law or else be deemed not worth the paper they’re written on.  Decisions from state and Federal courts following the enactment of the new statute made it clear that they understood that Georgia non-compete law now existed in two parallel but supremely disparate dimensions — a litigant seeking to enforce a post-May 11, 2011 restrictive covenant could expect a benevolent jurist with a newly-sharpened blue-pencil eager to assist the over-zealous drafter of the non-compete by softening the effect of the over-reaching contractual language.  For those non-compete plaintiffs with a an older covenant, however, the judge’s ruling would likely continue to be as deadly as the bible-quoting sniper in Tom Hanks’ platoon.

InFab’rik,the Court of Appeals construed a restrictive covenant in a lease that prohibited the tenant, a women’s clothing boutique, from opening or operating “another store” within five miles of the leased premises.  Read literally, the clause would prevent the tenant’s owners from opening up an ice cream shop or hardware store in the restricted area, even though such uses would not be competitive with the tenant’s clothing store in the landlord’s retail center.  The tenant argued that under the pre-2011 strict scrutiny to be applied by Courts to restrictive covenants, the provision was grossly overbroad as drafted and thus unenforceable.

If I were a gambling man, I would have put my money on the tenant in succeeding in this argument, having seen many a similarly vague restrictive covenant felled by the prior body of employee-friendly non-compete law. I’m glad Vegas doesn’t take odds on appellate cases, however, because my wallet would be a little lighter today.  The Court of Appeals, recognizing that it could not use the new statute to blue-pencil the covenant, instead applied the rules of contract construction to narrow what it deemed to be an ambiguous phrase and held that, following such judicial construction, the covenant was reasonable and enforceable against the tenant.  In rationalizing its decision, the Court said that “the application of the rules of contract construction, and not the ‘blue pencil’ method, resolve any ambiguity in the lease.” Id. at *7.  It would be interesting to see how many of the legions of unenforceable non-competes from past opinions could be saved in similar fashion, but alas, that is an endeavor well-beyond the scope of this casual blog post.

BURR POINT:  The prevailing thought among non-compete lawyers In Georgia has been that pre-May 11, 2011 non-compete agreements would not receive any benefit of the change in public policy towards restrictive covenants heralded by the 2011 statute.  The most recent Court of Appeals case on the issue perhaps signals that there may yet be hope for Private Ryan-like older non-compete agreements under attack by a barrage of unfriendly pre-statutory case law.

No Non-Compete = Public Ridicule?

We all know that a well-drafted non-compete agreement is necessary to protect a company’s customer relationships and confidential information when an executive jumps ship.  What you might not have considered is that an employment agreement with inadequate post-termination restrictions might subject a company to criticism by shareholders or others.  In the instance described in a piece in The Globe and Mail (Vancouver), an executive compensation expert blasts the B.C. Lottery Corporation for failing to limit the post-employment activities of the former CEO of the lottery, who moved from what is described as a “highly sensitive” government position to a private company developing a Vancouver gambling casino.

In his criticism, the expert, Professor Michael Graydon, called the CEO’s agreement “poorly drafted and negotiated” and a “failure on the part of the  . . . board of directors.”  The agreement was only 3 ½ pages with a “bunch of holes” and, according to Mr. Graydon, did not contain a non-compete clause, as he thought it should have.  For its part, the lottery company responded that its standards of ethical business conduct, to which the CEO was bound,  provided sufficient protection.

BURR POINT:  Failing to adequately restrict an executive’s post-employment competitive activities is bad business, but it also might result in bad publicity.

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

Declaratory Judgments in Non-compete Cases – Electing Offense over Defense

After a weekend of gorging on football as well as turkey, I’ve got offense and defense on my mind, and a recent Georgia appellate decision got me to thinking about how those basic gridiron principles apply to non-compete cases.  The case, Lapolla Indus. V. Hess, No. A13A1097, 2013 Ga. App. LEXIS 926 (Ga. Ct. App. November 15, 2013), involved a variation of the usual scenario of an employee subject to a non-compete agreement leaving his position for a new employer.  The old employer, ready to get its money’s worth for a non-compete agreement it paid good money to an attorney to draft, sends a cease and desist letter to its former employee threatening to sue the employee for breach of contract and seeking an injunction, damages, and attorney’s fees.  The old employer, as happened in Lapolla, often also sends a letter to the new employer putting it on notice of the existence of the non-compete agreement and threatening to sue the new employer for tortuous interference with contract if it continues to employ the employee in contravention of the employee’s  covenants.

What usually happens is that the employee and new employer either throw the cease and desist letter in the trash or fire back a response letter informing the old employer of all the reasons why their accusations are legally or factually wrong and that they’ll counterclaim or seek attorney’s fees if the employer actually sues.  The Lapolla case highlights another option available to employees and their new employers in instances of a potential breach of a non-compete — the filing by the employee and/or the new employer of a declaratory judgment lawsuit seeking a ruling by the Court that the non-compete covenants are unenforceable.  Instead of waiting around to be sued, i.e. playing defense, the employee and new employer take control of the proverbial litigation ball and file their own lawsuit.

There are several potential benefits to the employee and new employer in this strategy:

  • the psychological benefits of being the Plaintiff;
  • choosing the forum to litigate the dispute, which may also dictate which state’s laws apply, which may in turn dictate the result;
  • quickly testing how serious the old employer is about enforcing the agreement;
  • forcing an early resolution of the dispute; and
  • minimizing exposure to liability by getting an answer on the legal issue of enforceability before moving on a hire that might potentially be a breach.

In Lapolla, the tactic worked, because the trial court refused to apply the Texas forum selection and choice of law clause in the non-compete agreement and ruled that the employee’s non-competition covenants with the former employer were unenforceable, and the Georgia Court of Appeals upheld that part of the ruling.

Burr Point:  When being accused of non-compete breaches, employees and their new employers should consider filing a declaratory judgment action.  While defense may win championships in football, an offensive mindset usually pays off when it comes to non-compete litigation.

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

Huge Verdict in Trade Secrets Case

It’s a little out of this blog’s Southeastern focus area, but a $22.7MM verdict in a Minnesota trade secrets and non-compete case, as reported by the West Central Tribune at wctrib.comshould be a reminder to all employees and employers that a violation in this area of the law can have disastrous consequences for a defendant. The plaintiff, a dairy and food processing equipment company, successfully argued that two former employees took confidential equipment designs from the company’s computer systems and used them on behalf of a Wisconsin-based competitor, Cheese Systems, Inc. The new employer was also found liable for interference with current or prospective contracts.

Maybe it’s just me, but my mental image of the defendants is this.

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

Do Non-Competes Help or Hinder the Growth of Business?

With the increasing use of non-competes across the business spectrum, a debate is starting to rage in state legislatures and in business forums about whether the prevalence of such agreements helps or hinders economic growth.  The proponents say that the agreements are necessary to protect successful businesses from being harmed by unscrupulous employees and these agreements actually encourage employers to involve more employees in the inner workings and strategic decisions of a company (since, the argument goes, employers are more comfortable that key information won’t be used to compete against them).   Detractors, on the other hand, say that non-competes chill entrepreneurship.  An interesting four-minute version of the debate was recently aired on Fox Business.  Even the entrepreneurs concede, however, that trade secrets and confidential business information should always be protectable.

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

Be Wary of Illinois Choice of Law Provisions in Non-Compete Agreements

Although this blog focuses on non-compete law in the Southeastern states, we often run into Chicago-based clients whose form non-compete agreements contain provisions requiring the contracts to be construed under Illinois law, even though the employees bound by the agreements are located in the Southeast.  A recent Illinois appellate decision, however, should make employers and practitioners think twice before voluntarily invoking Illinois law on non-competes.

In Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, 2013 Ill. App. LEXIS 424 (June 24, 2013), the Illinois Appellate Court, First Division, held that non-solicitation and non-competition covenants were unenforceable where the employee resigned after being employed for slightly longer than three months.  The Court found that the restrictive covenants in the employee’s agreement were not supported by adequate consideration, and therefore could not be enforced, because “Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant.” Id., at *14.  It appears that the only way around this two-year requirement under Illinois law is to have separate, adequate consideration for the non-compete covenants, such as a promise of guaranteed employment for a specified term or an adequate payment solely for the covenants.

In contrast, Georgia courts have long held that merely the promise of new or continued at-will employment is sufficient consideration for a non-compete agreement, with no requirement for a minimum duration of employment before the non-compete will be enforceable.  See Breed v. Nat. Credit Assn., 211 Ga. 629, 631-33, 88 S.E.2d 15 (1955).

BURR POINT:  Employers in the Southeast should consult with an attorney well-versed in non-compete law to ensure that the choice-of-law provisions in their employment agreements are not unnecessarily reducing the chances of having the non-compete provisions enforced, especially if their agreements have Illinois law as controlling.

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

Is An Assigned Non-Compete Agreement Enforceable?

In the case of a merger or acquisition, the successor company might take an assignment of the current non-compete agreements in favor of the predecessor company.  The enforceability of an assigned non-compete agreement, however, varies from state-to-state, as is true with most issues concerning non-compete law.  Below is a quick survey of how some of the states in the Southeast address the issue:

Georgia – Non-compete agreements, similar to most contracts in the state, are assignable provided that the duties under the agreement do not materially vary from the performance required by the original parties and provided that the contract is not for personal services.  West Coast Cambridge, Inc. v. Rice, 262 Ga. App. 106 (2003) (finding that successor partnership could enforce noncompete agreement against doctor because the law provided no prohibition against the assignment of the agreement and the agreement was expressly binding on successors and assigns, and noting that contract was not for personal services because it only obligated the doctor to not take certain actions).

Tennessee - Tennessee law recognizes that covenants not to compete are assignable absent specific language in the covenants prohibiting assignment.  See Packers Supply Co. v. Weber, 2008 Tenn. App. LEXIS 226 (Tenn. Ct. App. Apr. 14, 2008) (citing Bradford & Carson v. Montgomery Furniture Co., 115 Tenn. 610, 92 S.W. 1104 (Tenn. 1906)).

Alabama - Because non-compete agreements are disfavored as a restraint on trade (see Ala. Code § 8-1-1), a successor employer cannot enforce an employee’s covenant not to compete.  Construction Materials v. Kirkpatrick Concrete, 631 So. 2d 1006 (Ala. 1994) (refusing to enforce noncompete agreement for successor of employer and noting that the legislature’s omission of a specific provision in Ala. Code § 8-1-1 establishing a successor employer’s right to enforce an employee’s covenant with the predecessor employer creates an affirmative interference that this code section was not intended to allow enforcement by successor employers).

Florida - In Florida, the question is answered specifically by  Fla. Stat. § 542.335(1)(f)(2), which provides that a “court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is . . . an assignee or successor” provided that “the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.”  Recently, Florida’s First District Court of Appeal held that a general assignment clause (such as a statement that the agreement will “inure to the benefit of and be binding upon . . . assigns and successor) is sufficient to assign the agreement to a successor.  DePuy Orthopaedics, Inc. v. Waxman, 95 So. 3d 928 (Fla. Dist. Ct. App. 1st Dist. 2012).

BURR POINT:  Special attention should be paid when drafting a non-compete covenant to ensure that the assignability of the covenant is in accordance with the parties’ expectations and the applicable state law.

 

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

U.S. Supreme Court Rules That Arbitrators, Rather Than Courts, Determine The Enforceability Of Non-Compete Covenants In Arbitrable Agreements

Because non-compete agreements are governed by state law, it is rare that the U.S. Supreme Court issues a ruling affecting such contracts. This week’s decision in Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. __ (2012)(decided Nov. 26, 2012), however, announces a rule of which non-compete disputants and their counsel nationwide must necessarily take notice.

The Court held that when a non-compete agreement contains an arbitration clause that is subject to the Federal Arbitration Act (FAA), 9 U.S.C. §1 et seq., “it is for the arbitrator to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law.” Id. (citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-6 (2006)).  In so holding, the Court vacated an Oklahoma Supreme Court decision that declared the non-compete agreements to be against Oklahoma public policy and thus void and unenforceable.

The Court based its decision on the FAA’s “national policy favoring arbitration” and on the established rule of law that “when parties commit to arbitrate contractual disputes, . . . attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved ‘by the arbitrator in the first instance, not by a federal or state court.’” Id. (quoting Preston v. Ferrer, 552 U.S. 346,349(2008)).  The Court also cited the supremacy clause from the US. Constitution, Article VI, cl. 2.

BURR POINTThis decision goes in the “win” column for employers everywhere (except those who hire employees with non-competes), because it removes the ability of an employee to obtain relief in the court system when an employer seeks to avail itself of an arbitration clause in connection with the enforcement of a non-compete covenant.  The ruling makes a definite difference in jurisdictions in which the governing law often results in Courts voiding or modifying non-compete agreements for overbreadth.  Arbitrators have much more latitude than trial courts in how they apply the law (and arbitrator’s decisions are extremely difficult to get overturned) and are thus much less likely to void a non-compete covenant that was agreed upon by the parties.

The Difficulty of Proving Trade Secret Violations

A recent Georgia Court of Appeals opinion highlights the difficulty employers have in proving trade secret violations and thus reinforces the need for employers to use enforceable non-compete and non-solicitation covenants as their primary means of protecting against unfair use of confidential information by former employees.

In Contract Furniture Refinishing & Maintenance Corp. v. Remanufacturing & Design Group, LLC, 730 S.E. 2d. 708 (Ga. App. 2012), the plaintiff-employer sued its former employee and his new company for violations of the Georgia Trade Secrets Act, alleging that  the defendants had used the plaintiff’s sales and marketing reports in connection with the defendants’ competing business.   In affirming summary judgment for the defendants on the trade secrets claim, the Court of Appeals held that the following evidence was insufficient for the claim to proceed to trial:

  • The former employee remained employed by the plaintiff for four months while running operations for his newly formed competing company (without disclosing the new company to the plaintiff, of course);
  • The employee received thousands of pages of marketing and sales reports while employed with the plaintiff;
  • The employee’s new company made two successful bids on jobs for which the plaintiff provided the employee with leads;  both of the bids were nearly identical to bids previously submitted by the plaintiff, and one of them was submitted while the employee was still employed by the plaintiff, while the other was submitted a week after the employee resigned;
  • The employee used the same flash drive on both his personal computer and company-issued laptop on the day he resigned from the plaintiff;
  • The employee’s company-issued laptop, which he returned upon his resignation, had been stripped of all proprietary and customer information of the plaintiff.

As would be expected, the employee denied that he retained hard copies of any of the marketing reports, denied copying or transferring any files or information of the former employer, and denied providing any of the former employer’s information to the new company.   The employee had further explanations for how the new company found out about the two jobs for which it successfully bid without the misappropriation or use of information obtained from the former employer.

It might seem reasonable that the above-described competing evidence would be left for a jury to sort out.  The Court of Appeals even acknowledged that the employer-plaintiff produced “strong” circumstantial evidence of use or disclosure of alleged trade secrets.  In affirming the trial court’s summary judgment ruling against the employer, however, the court relied on the rule of law that “a finding of fact that may be inferred from, but is not demanded by, circumstantial evidence has no probative value against positive and uncontradicted evidence that no such fact exists, provided that the circumstantial evidence may be construed consistently with the direct evidence.”

BURR POINT:  To prevail on a trade secrets claim, an employer will usually need direct, as opposed to circumstantial, evidence of the misappropriation, which is often hard to come by.  Accordingly, employers need contractual non-compete and non-solicitation protection, in addition to that provided by trade secret statutes, to bolster their potential claims against an unfairly competing employee.