Supreme Court Relaxes Standard For Awarding Enhanced Damages In Patent Infringement Cases

After several years of handing down perceived anti-patent rulings, yesterday in Halo Elecs. v. Pulse Elecs., the Supreme Court gave patent owners an extra weapon against infringers by making it easier to recover enhanced damages. Section 284 of the Patent Act states that courts “may increase the damages up to three times the amount found or assessed,” but leaves it to the court’s discretion to determine when increased damages are appropriate. In 2007, the Federal Circuit announced the two-part Seagate test for determining whether infringement was willful, and therefore warranted enhanced damages. Under the Seagate test, to prove willfulness the patentee must show that (1) the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent; and (2) if objective recklessness is shown, the risk of infringement was either known or so obvious that it should have been known to the accused infringer. Importantly, the accused infringer could avoid a finding of objective recklessness if, during the infringement proceedings, it raises a substantial question as to the validity or noninfringement of the patent.

The Supreme Court rejected this test as overly rigid and impermissibly limiting the discretion of district courts to award enhanced damages. In particular, the Court noted that the objective prong of the Seagate test actually insulates some of the worst patent infringers from enhanced damages. For example, an infringer who intentionally infringes another’s patent, with no doubts about its validity or any notion of a defense, would still avoid enhanced damages if during the infringement litigation the infringer could present a reasonable but unsuccessful defense. The Court noted that culpability is generally judged based on the knowledge of the actor at the time of the challenged conduct, rejecting the use of after-the-fact defenses to avoid a finding of willfulness. Thus, the district court has discretion to award enhanced damages, though the Court cautioned that such punishment should generally be reserved for egregious cases.

The Court also reversed two procedural aspects of the Federal Circuit’s standard for determining enhanced damages. First, the Court rejected the clear and convincing standard previously required to prove recklessness, and instead adopted a preponderance of the evidence standard. The Court noted that Section 284 is silent with respect to the required evidentiary burden, but because Congress expressly specified higher standards of proof elsewhere in the Patent Act, the lower preponderance standard should apply to Section 284, as it does nearly every other issue in patent litigation. Second, the Court rejected the Federal Circuit’s standard for reviewing district court decisions regarding enhanced damages. Under Seagate, the objective recklessness determination was reviewed de novo, the subjective knowledge prong was reviewed for substantial evidence, and the ultimate decision to award enhanced damages was reviewed for abuse of discretion. Given that the Court rejected the two-part Seagate test, the Court also rejected the tripartite review framework, and instead ruled that decisions on enhanced damages should be reviewed for abuse of discretion. While the Court’s decision certainly makes enhanced damages less difficult to obtain, it remains to be seen how frequently district courts will award them.

Trump, Captain America, Deadpool and the Impact on Florida Non-Competition Agreements

*Co-authored by Charles LeCocq.

Competition is the name of the game this summer. The presidential hopefuls travel the country competing for votes. After knocking out Marco Rubio and Ted Cruz and more than a dozen other Republican Presidential hopefuls, Trump now competes against Hillary Clinton, while also competing for the votes of his former competitors. Hillary, meanwhile, battles Trump while still competing against Bernie. It is hardly a coincidence that our summer movie blockbusters in this heated election year feature themes of titan against titan. Batman fighting Superman. Iron-Man fighting Captain America. Of course, they ultimately compete for the hard-earned money and attention of the American people. Although audiences may want to see more of these dynamic crossover battles, well-crafted non-compete agreements can impact the ability of employees to leave their current position for a competitor’s new opportunity.

Employers can use non-compete agreements to retain uniquely valuable or skilled employees, or at least to keep them from using their talents at an employer’s direct competitor. If the agreement allows, the former employer can seek an injunction barring disallowed future employment, in addition to seeking damages. In a recent Florida case, a medical weight loss facility obtained an injunction when the trial court determined that a doctor breached his non-compete agreement. (See JDJ of Miami, Inc. v. Valdes, Fla. 11th Cir. Miami, 2016). In the contract, the doctor agreed that upon termination of his employment, he would not dispense prescription weight loss medicine or work at a competing weight loss clinic for an agreed period of time and within an agreed geographic area.  If a former employer can demonstrate to the trial court that the non-competition agreement is intended to protect a legitimate business interest, Florida courts typically enforce non-competition agreements. However, Florida law demands that an enforceable non-competition agreement contain reasonable geographic restrictions and expires after a reasonable period of time. In the doctor’s case, if he had wished to prescribe weight loss medication after his job ended, he should have waited 15 months or worked at a medical practice or facility located beyond the area of the agreed geographic restriction.

Starting in 2008, Marvel Studios began a system whereby studio-employed actors frequently reprise their characters in films loosely tied together within the same “universe.” Robert Downey, Jr., has reprised his role as Tony Stark/Iron-Man in at least seven feature films. Of those, only three were in the Iron-Man series. So what’s the concern with an actor playing the same character in multiple films? The concern is that Marvel has licensed several of its properties to other film studios. These studios employ actors to play those roles. Marvel recently acquired the right to use the famous web-slinger Spider-Man in the most recent Captain America film. Prior to this, Sony Pictures held exclusive film rights to the very popular crime-fighting arachnid. (Interestingly, Marvel only obtained the right to the Spider-Man character, not to the actor that currently portrays Spider-Man.)

So what happens when property and performer are intricately connected? Take the foul-mouthed, 4th-wall breaking Deadpool, the comic-book juggernaut that exceeded all box office expectations. Upon the colossal success of the Deadpool film, Marvel’s biggest stars and biggest fans now clamor for Deadpool to appear in a Marvel Studios film. Twentieth Century Fox owns the exclusive film rights. Unlike Spider-Man – a character that different actors have successfully portrayed – critics credit much of Deadpool’s success to actor Ryan Reynolds’ passionate performance. (Reynolds was a driving force behind the Deadpool project.) Without Reynolds, some industry analysts opine, future Deadpool films may not replicate the initial success.

Non-compete agreements and protection of signature art styles are more common in the entertainment industry than many people realize. While Pierce Brosnan was playing James Bond, he was contractually forbidden not to wear tuxedos in any non-Bond film. To see the translation of these agreements to real life, you can note that for a black-tie scene in The Thomas Crown Affair, Mr. Brosnan wore an unbuttoned dress shirt with an undone tie. Classy perhaps, but certainly unlike the always-dapper 007.

Donald Trump has proven that a Presidential hopeful need not have a resume reflective of a life in politics. Hillary Clinton has proven that perseverance can pay off. Bernie Sanders has proven that with a tailored platform, even a long-shot can make an impressive run. The competition for President of the United States continues. If competition drives your business, consider having in place well-drafted non-compete agreements to protect you from the inevitability of departing employees aiding the bottom line of your competitors. At Burr & Forman LLP we have attorneys across the Southeast capable of handling and advising on all of your non-compete and business issues. Now, about that wall…

**LeCocq is a 2016 Summer Associate in the Orlando office of Burr & Forman LLP. He is a law student at Florida State University College of Law.

The Multi-State Non-Compete Agreement – Part 3

Our most recent article in this series (May, 2015) addressed the first step of the analysis necessary for the multi-state employer’s design and implementation of a manageable, limited number of noncompete agreements compliant with most, if not all, applicable state laws. That article addressed the identification of the “protectable interests” amongst all employees with the goal of matching the appropriate employee categories with the “right blend” of restrictive covenants needed for each employee group. With that background, we move to the next step in the process; identifying which of the employees’ resident states pose unusually difficult procedural hurdles to the enforcement of restrictive covenants at the onset.

There are essentially 2 such key hurdles. The first involves those state laws which require extra “consideration” beyond just continued employment for the enforcement of employee noncompete agreements. These states include South Carolina, North Carolina, Kentucky, Illinois, Virginia, Minnesota, Oregon, Washington and a few others. Most state laws of this type require employers to condition the actual hiring or promotion of the employee on his/her execution of the noncompete agreement or alternatively, for employers to provide some extra, material, monetary benefit in exchange for the employee’s signature. Some state laws such as Illinois go so far as to require “employer clairvoyance,” essentially stating that even signing the noncompete at the time of hire is insufficient if the individual’s employment does not ultimately last at least 2 years. Regardless, employees in these states compile a subgroup deserving of special consideration. For these employees, the multi-state employer can either choose to enter into noncompete agreements only with new-hires or provide the employees of these states with some additional incentive (i.e. bonus) in return for their execution of the noncompete agreement.

The second initial hurdle involves a very limited number of state laws which require that in order to be enforceable, a noncompete must be “ancillary” to an actual employment contract. Translated, this means that a stand-alone noncompete agreement will not be enforceable in these states. The contract must contain other terms covering the actual wages, hours and conditions of employment in order to be enforceable. Here, and for purposes of employee residents of these few states, the multi-state employer will either need to create a separate, all-encompassing agreement, bypass these employees altogether or use the stand-alone agreement knowing in the end, it will be unenforceable.

Stay tuned! The next article in this series will help narrow the field even more, taking a close look at those state laws which sanction the “blue pencil.”

Does Bird’s Eye View Render Executive Non-Compete Unenforceable?

So here’s a good one for employers to ponder.  Let’s say you have an executive subject to a valid and seemingly enforceable non-compete agreement.  Because the agreement concerns an executive, we would normally presume that a court is likely to strictly read the terms of a non-compete agreement and enforce it accordingly.  Well, the Second Circuit Court of Appeals recently affirmed a decision that an executive whose level of seniority limited his knowledge of the details rendered him not subject to the terms of his otherwise-valid non-compete agreement.

In the typical case, an employee with specific knowledge – let’s use the example of an engineer – enters into a non-compete agreement that states, for instance, that he will not work for a competitor within the same geographic area of his current job responsibilities for one year after his departure, regardless of the reason for his departure.  If the agreement is otherwise enforceable, a Florida court would typically view the above-described restriction as valid.  After all, the engineer has specific knowledge the details of which could, in theory at least, give a competitor an advantage over the former employer.

Taking this analysis one step further, however, led at least one court to determine that the senior executive was so far removed from the mundane specifics of the actual work product, he was actually no longer subject to the non-compete agreement he voluntarily executed.  Which brings us to IBM v. Visentin, 2011 WL 672025 (SDNY 2011), aff’d 437 Fed Appx 53 (2d Cir. 2011).  I’ll keep the facts short, although the somewhat unique nature of the facts obviously resulted in a seemingly unexpected opinion.  Visentin worked at IBM, very successfully, for over a quarter of a century.  So successfully, in fact, that at the time he departed IBM for competitor Hewlett Packard he was in charge of a multi-billion dollar business unit.  He had executed a non-compete with a one year work restriction that on its face appeared to encompass his prospective employment with Hewlett Packard.  The agreement Visentin executed included a relatively standard three-year look-back stating that the agreement only pertained to those areas of IBM’s business in which Visentin worked in the three years prior to his departure.

When Visentin left, IBM sued, seeking injunctive relief based on Visentin’s alleged violation of the non-compete described above.  The federal district court denied the motion for a preliminary injunction.  (In cases to enforce non-compete agreements, denial of the preliminary injunction usually ends the dispute… unless the former employer appeals.)  IBM appealed, only to have the 2nd Circuit Court of Appeal affirm the lower court’s ruling.

While the denial of the preliminary injunction motion in Visentin presents a unique situation due to Visentin’s high level executive position, the district court’s lengthy holding contains some valuable insight in the analysis of non-compete issues.  Among the points raised was that the high level of the former employee’s position allowed him a supervisory capacity (he was a manager of a business line with expertise in making operations “efficient”), and yet insulated him from the specific technological goings-on and to detailed data potentially protected as a trade secret.  So in essence, because he maintained a bird’s-eye view of operations, rather than a position with direct creative input or a position “on the line,” he was insulated from information that would negate his former employer’s presumed competitive advantage.

The district court opinion went even further, at one point discussing that among known competitors with significant resources, the open flow of intelligence in the marketplace rendered the probability of harmful disclosure somewhat remote (if even possible).  Also interesting was the emphasis that success on a motion for preliminary injunction was challenging in the absence of known instances of disclosures of detailed information that clearly violated the non-compete agreement, or detailed information that the employee’s new position would require improper disclosure.  Given the bird’s-eye view Visentin had over the IBM business unit, pointing out specific instances of wrongful disclosures proved difficult.

So where does that leave employers seeking to enforce these agreements?  Certainly in Florida, there a many instances in which the courts uphold these agreements.  What is important to keep in mind, however, is the necessity of providing either enough detail in your non-compete/non-disclosure agreement to make enforcement easier, or to allege with enough specificity the actual information or trade secrets the disclosure of which could cause actual harm.  The case discussed in this article also points out that despite possible factual similarities, each non-compete rests on its own merits and brings to the dispute its own facts.  It is the nature of the information the employer seeks to protect and the factual circumstances surrounding the former employee’s duties and experience that will form the foundation of any successful argument regarding enforcement.

This is the part where I counsel you to get counsel.  Better yet, make sure you get counsel familiar with these issues.

Author Peter C. Vilmos, Esq. works in the Orlando office of Burr & Forman LLP, 407-540-6600.  Contact Peter or any attorney in Burr & Forman’s Non-Compete and Trade Secrets group for more information or for further inquiries.

Tennessee’s “Rule of Reasonableness” Allows Courts to Modify Non-Compete Agreements

On August 22, 2012, we reported on the Veit v. Event Logistics, Inc., a case pending in the Davidson County Chancery Court, Docket No. 12-945, in which an employee challenged her employer’s non-compete agreement.  The agreement prohibited the employee for a period of two years from (1) engaging in activities competing with the employer within a 50 mile radius of employer’s office in Nashville; (2) soliciting the employer’s customers with whom the employee had contact while employed by the employer; and (3) soliciting any of employer’s employees to terminate his/her employment.

At the temporary injunction stage of the litigation, the Court did not completely enforce or reject the non-compete agreement.  Rather, the Court modified the agreement to allow the employee to engage in certain activities so she could make a living while offering some level of protection for the employer.  In particular, the Court allowed the employee to engage in the same activities she did with the employer (with a monetary cap), but prohibited her from engaging in those activities with the employer’s clients.

The Court’s modification of the non-compete agreement in Veit is a good example of the “Rule of Reasonableness” Tennessee courts apply to non-compete agreements.  Generally, there are four approaches courts around the country will take in enforcing or rejecting a non-compete agreement.

  1. The court will not enforce the non-compete agreement because non-compete agreements are void as a matter of law.
  2. The court will enforce the non-compete agreement as written.
  3. The court will “blue-pencil” the non-compete.  This means the court will only strike offending provisions from the non-compete agreement, but will not add new provisions or otherwise modify the non-compete agreement.  If the “blue-pencil” approach leaves the non-compete agreement incomprehensible or cannot eliminate the offending provision, the court will reject the agreement all together.
  4. The court will equitably reform the non-compete agreement which can result in rewriting the agreement.  This approach balances between the goals of encouraging a free market place and preventing unfair competition.

Recognizing that the “all or nothing” approach of either enforcing or rejecting a non-compete agreement in its entirety and the “blue-pencil” approach led to undesirable results, Tennessee courts adopted the Rule of Reasonableness (“ROR”).  Under the ROR, Tennessee courts may rewrite the non-compete agreement to balance between the employer and employee’s competing interests.  The ROR is consistent with and is an extension of the rule that the terms of the non-compete agreement, including time and geographical limitations, must be reasonable.  The restrictions of the non-compete agreement must be no greater than necessary to protect the employer’s legitimate business interest.  (For a further discussion on the “reasonableness” requirements, see our May 9, 2012 blog post.)

Applying the ROR, the Court in Veit modified the non-compete agreement to allow the employee to make a living while protecting them employer’s interest in its customer base.  Though Tennessee Courts have the power to modify non-compete agreements, employers should carefully draft their agreements to avoid costly and uncertain litigation.  Though the ROR seeks to strike a balance between the employer and employee’s competing interests, a modified non-compete agreement could result in significant harm 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.

Potential Antitrust Implications in Resolving Disputes Over An Employee’s Non-Compete Agreement

Resolving non-compete disputes often involves more than just bringing an employee and her former employer together to reach some agreement; successful resolution may also require the involvement of the employee’s new employer as well. An employer who hires an employee subject to a valid non-compete agreement with a former employer is inviting legal claims by the former employer, including claims for “tortious interference” with contract. The new employer is often named as a co-defendant when a former employer sues the employee for breaching her non-compete. Almost by definition, therefore, when there is litigation between a former employer and a new employer over an employee’s non-compete agreement, this means that there are two competitors involved in the litigation. To resolve such a dispute out of court, an agreement must be reached among competitors. But when two or more competitors sit down and reach an agreement, there exists some risk of anti-competitive effects that could create potential liability under antitrust laws.

One potential antitrust predicament arising out of a dispute over a non-compete agreement can be illustrated by the following hypothetical: Suppose that Acme Widget Company, based in Arizona, has been selling widgets in the Southwest and beyond for 50 years.  As a result of its long track-record and reliable products, Acme Widget has a 90% market share in the Southwestern widget-market, although its market share is lower in the rest of the country (where the demand for widgets is not as great).  Acme Widget’s long-time sales manager, Mr. Wolf, is not sure about Acme Widget’s new business model (which would change the way he sells widgets) and is interested in finding new employment elsewhere.  He learns about a relatively new start-up venture based in Georgia, Coyote Widget Company.  Coyote Widget’s niche is finding customers who have never purchased widgets before, and Coyote Widget has been successfully exploiting the previously-untapped widget-market on the East Coast and in the Southeast.  Coyote Widget does sell widgets to a few customers located in Arizona and does sell to some former customers of Acme Widget.  However, because Coyote Widget’s business model focuses on exploiting previously-untapped markets, Coyote Widget is not particularly interested in selling widgets to Acme Widget’s existing customer-base.

Coyote Widget and Mr. Wolf think that they would be a good fit for one another, but Coyote Widget is concerned about the non-compete agreement that Mr. Wolf entered into with Acme Widget when he became Acme’s sales manager.  Acme Widget, for its part, would just as soon part ways with Mr. Wolf and wants to wish him well in his future endeavors.  Then again, Acme Widget is well aware that Mr. Wolf carries a lot of clout with its established customers and is wary about allowing any other widget-maker ready access to these customers.

The three parties (Acme Widget, Coyote Widget, and Mr. Wolf) remain interested in working out a solution.  At the start of negotiations, Coyote Widget and Mr. Wolf jointly propose that, if Mr. Wolf comes to work for Coyote Widget, he will not contact any customer with whom he worked while at Acme Widget for a two-year period (the term of his non-compete).  Acme Widget likes this proposal but is worried that it could be hard to police and might be subject to cheating.  For example, if one of Mr. Wolf’s former Acme customers contacts him at Coyote Widget, Mr. Wolf could refer him to another salesperson at Coyote Widget.  Mr. Wolf’s referral would likely carry significant weight with the customer, even if Mr. Wolf did not initiate the contact or manage the account himself.  Acme Widget also does not trust Coyote Widget’s representations that its business model is focused on previously-untapped markets and that it is not interested in Acme Widget’s customer-base.  Given Mr. Wolf’s long-time contacts in the industry, Acme Widget is concerned that the temptation could be too great for Coyote Widget; once Mr. Wolf is on staff, it would be too easy for Coyote Widget to start raiding Acme Widget’s customer-base.

However, following several rounds of negotiations, the parties reach what appears to be a solution:  Acme Widget will provide Coyote Widget with a list of customers serviced by Mr. Wolf, and Coyote Widget will agree not to accept business from any customer on this list for the next two years. For good measure, Coyote Widget has also offered to agree not to solicit any new customers in Arizona and has agreed to provide Acme Widget with a list of Coyote Widget’s existing customers in Arizona (a small number in any event). Such an agreement would be easy to enforce — if an Acme Widget customer later moves its account to Coyote Widget, Acme Widget will not have to worry about proving that Mr. Wolf initiated contact with the customer. All that Acme Widget would have to prove is either (i) that the customer moved its account from Acme Widget to Coyote Widget and is listed on Acme Widget’s list or (ii) that the customer is in Arizona and is not on Coyote Widget’s list. From Coyote Widget’s perspective, this agreement has few drawbacks, given Coyote Widget’s focus on the untapped widget-market on the East Coast and in the Southeast.

There is, however, a problem with this solution:  the federal Sherman Act and similar state statutes that may be on the books in states where Acme Widget and Coyote Widget do business. Indeed, whereas many potential antitrust violations are judged under a “rule of reason” analysis (wherein the court will conduct an analysis of potential anti-competitive effects), so-called “horizontal” agreements among competitors to allocate markets may be viewed as per se illegal. The potential antitrust violation in the above hypothetical could subject Acme Widget and Coyote Widget to both criminal and civil liability, and once a per se violation is shown, there are few arguments that either company could make in its defense.  For that matter, given that Acme Widget holds a 90% market share in the Southwestern widget-market and that Coyote Widget is a start-up that has made some inroads (however limited) into this market, this is exactly the sort of scenario that could invite antitrust scrutiny from regulators or from customers unhappy about Acme Widget’s high prices.

In conclusion, employers seeking to resolve disputes about non-compete agreements should be aware of other legal risks and exposures, including antitrust laws.  Too much focus on the non-compete agreement in dispute can sometimes lead to even greater exposures in other areas.

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

How To Avoid Trade Secret Disputes

Although non-compete and trade secret litigators by definition make our living from disputes involving unfair competition, often the most useful part of our practice involves advising clients on how to avoid litigation.  John Marsh of Hahn Loeser has compiled an excellent list for employers and their new hires, of things not to do when the employee leaves the old job, titled The Trade Secret Litigator’s 7 Deadly Sins of Departing Employees in Trade Secret and Non-Compete DisputesThis should be required reading for any transitioning employee; if universally followed, it could put trade secret lawyers out of business!

Two Recent High-Stakes Trade Secrets Decisions Demonstrate Broad Protection and Potential for Large Exposure

When a party breaches a confidentiality agreement, claims for misappropriation of trade secrets and breach of the confidentiality agreement are often asserted simultaneously. As two recent federal court decisions based on Texas law demonstrate, trade secrets law can sometimes protect employers where confidentiality agreements cannot. These cases also highlight the potential for very large exposure of violators.

On July 26, 2012, the U.S. Bankruptcy Court for the Western District of Texas entered a final judgment in the amount of $15,873,383 in favor of TXCO Resources, Inc. and against Peregrine Petroleum, L.L.C. for misappropriation of trade secrets. TXCO Res., Inc. v. Peregrine Petroleum, L.L.C. (In re TXCO Res., Inc.), 2012 Bankr. LEXIS 3425 (Bankr. W.D. Tex. July 26, 2012).  Both TXCO and Peregrine are oil and gas companies based in Texas.  Peregrine signed a confidentiality agreement that allowed it to obtain information about certain of TXCO’s properties. TXCO alleged that Peregrine breached the confidentiality agreement and misappropriated TXCO’s trade secrets, among other causes of action.  In a lengthy opinion issued after a 41-day bench trial, the Court found Peregrine was not liable for breach of the confidentiality agreement since TXCO could not prove that its damages were proximately caused by Peregrine’s breach. The Court did find, however, that Peregrine misappropriated TXCO’s trade secrets by using confidential information about TXCO’s land subsurface data, production data and operations data to acquire oil and gas leases formerly held by TXCO, which gave Peregrine a competitive advantage over TXCO and other companies.

In Raytheon Co. v. Indigo Sys. Corp., 2012 U.S. App. LEXIS 15892 (Fed. Cir. Aug. 1, 2012), the U.S. Court of Appeals for the Federal Circuit reversed the decision of the U.S. District Court of the Eastern District of Texas, which granted summary judgment against a misappropriation of trade secrets claim to Indigo and against Raytheon.  Raytheon and Indigo, who are both manufacturers of infrared imaging equipment, entered into a series of confidentiality agreements in 1996 in connection with consulting services to be provided by Indigo to Raytheon.  In 1997, Raytheon became concerned that Indigo was recruiting Raytheon personnel to gain access to Raytheon’s trade secrets, but Indigo assured Raytheon that these accusations were baseless.  Five years later, in 2007, Raytheon disassembled a camera of Indigo’s and discovered evidence of patent infringement and trade secret misappropriation and quickly brought suit.

In granting summary judgment to Indigo, the district court found that the confidentiality agreements were unrelated to the infrared technology at issue and found that Raytheon’s trade secret claim was barred by the three-year statute of limitations under Texas law. The appellate court discussed the “discovery rule,” which allows tolling for claims of trade secret misappropriation until when the plaintiff knew or reasonably should have known of the facts that give rise to the claim. The court also noted that the question of whether Raytheon “should have known” about its claims earlier was for the jury.  The Circuit Court held that the district court erred by resolving this factual question against Raytheon, the non-moving party, at summary judgment.

BURR POINT:  Trade secrets violations can lead to large judgments and the “discovery rule” can be used to preserve the ability to obtain these judgments for older claims.

Alabama Supreme Court Reverses Overly-Broad Injunction Prohibiting Competition Among Defense Contractors

Earlier this year, the Alabama Supreme Court reversed a preliminary injunction entered by the trial court in a case involving competing defense contractors at the Redstone Arsenal in Huntsville. See Monte Sano Research Corp. v. Kratos Defense & Securities Solutions, Inc., — So. 3d —, 2012 WL 1890693 (Ala. May 25, 2012).  The underlying litigation remains on-going, but the Alabama Supreme Court’s ruling can provide insight for those involved in non-compete litigation in Alabama courts or in non-compete disputes involving government contracts.

By way of background to Monte Sano, the U.S. government awards certain defense contracts (in this case, “Army Aviation and Missile Command Express” contracts) via multi-year “blanket purchase agreements” awarded to “prime contractors” in four different “domains”:  (i) logistics, (ii) programmatic, (iii) technical, and (iv) business and analytical.  In 2005, the Army awarded one such blanket purchase agreement in the technical domain to Computer Science Corporation (“CSC”), who thus became a prime contractor for certain work to be performed at the Redstone Arsenal.  One of the plaintiffs in Monte Sano, Kratos Defense & Securities Solutions, Inc. (“Kratos”), via a predecessor corporation, was part of CSC’s team (i.e., a potential sub-contractor) in obtaining this blanket purchase agreement for the technical domain.  However, simply being a member of the team does not guarantee that individual tasks will be awarded to a particular sub-contractor; additional bidding is involved at the task level.

In Monte Sano, two of the defendants, Steven Thornton and Steven Teague, previously worked for Plaintiff Kratos.  Thornton and Teague both left employment with Kratos in 2011 to work for defendant Monte Sano Research Corp. (“MSRC”).  MSRC was formed in 2009 and was allegedly partially owned by Teague (but not Thornton) at the time of its formation.  Prior to the departure of Thornton and Teague, CSC had entered into various sub-contracts with both Kratos and MSRC to perform work for a “task” under its “blanket purchase agreement” for the “technical” domain at the Redstone Arsenal.   Upon the departure of Thornton and Teague, Kratos immediately filed suit against MSRC, Thornton, and Teague, and obtained from the trial court a preliminary injunction prohibiting MSRC, Thornton, and Teague from procuring work from any “prime contractor” at the Redstone Arsenal.

Notably, although Thornton and Teague had previously entered into non-competition agreements with Kratos, these agreements were of limited duration and expired at the end of 2010.  As such, there were no explicit non-competition agreements in force when Thornton and Teague left Kratos’s employment.  There were, however, more generalized provisions in Kratos’s employee handbook regarding the duty to maintain confidential information and not to solicit Kratos’s employees or otherwise encourage employees to leave Kratos’s employment.  The handbook provisions regarding the duty to maintain confidential information had no time limit, and the duty not to encourage other Kratos employees to leave purported to last one-year beyond the end of employment.  Moreover, in Monte Sano, Kratos alleged that Teague had arranged lunches in which Kratos employees were informed of new opportunities with MSRC.  In bringing claims against Thornton and Teague, Kratos alleged that they had (i) breached their duties of loyalty and their fiduciary duties; (ii) tortiously interfered with Kratos’s contractual relations with the “prime contractor” CSC; and (iii) breached their contractual obligations as set out in Kratos’s employee handbook and elsewhere.  Kratos also brought tortious interference claims against MSRC.

The Alabama Supreme Court, however, reversed the preliminary injunction, noting that the injunction was overly broad because it prohibited MSRC from performing work for any prime contractor at the Redstone Arsenal, in any domain, and not just the technical domain implicated by Kratos’s contract with CSC.  (The evidence in this case showed that MSRC had also been negotiating with prime contractors, other than CSC, in other domains.)  The Alabama Supreme Court also noted that the trial court’s injunction order did not comply with Rule 65(d)(2) of the Alabama Rules of Civil Procedure because it did not provide specific reasons for its decision and did not address why Kratos did not have an adequate remedy at law.  In a concurring opinion, Justice Murdock noted that, because the preliminary injunction would have prevented MSRC from performing its sub-contract with CSC, CSC should also have been named as a party to the litigation.

As to “take aways” from the Monte Sano decision, the Alabama Supreme Court’s holding demonstrates the importance of having written non-competition agreements, such that employers faced with departing employees are not forced to rely on more generalized duties of loyalty and more generalized handbook provisions.  Monte Sano also emphasizes the risks of bringing “tortious interference” claims against a competitor who hires away employees when such claims are not supported by non-competition agreements with specific employees.

This said, the fact that the Monte Sano litigation made it as far it did (and is still on-going) shows that employers without explicit non-competition agreements are not without hope.  Had the preliminary injunction in Monte Sano been limited to the technical domain work covered by Kratos’s contracts with CSC, the Alabama Supreme Court’s decision might have been different, even in the absence of a non-competition agreement.  Thus, perhaps the biggest take away from Monte Sano is that it helps to be specific (and not over-reach), whether in drafting a non-competition agreement at the outset of employment or in seeking relief from a court after a competitor has hired away a key employee. For more clarification on the topic of non-compete agreements and clauses, please contact one of the Burr & Forman team members for assistance.

The Inevitable Disclosure Doctrine — A Glimmer of Hope in the Absence of a Non-Compete Agreement

In the hilarious movie Dumb and Dumber, the imbecilic and unattractive character played by Jim Carrey is told by the beautiful woman he is pursuing that the chances of them winding up together are about one in a million, to which he excitedly replies, “So you’re telling me there’s a chance!” Similarly, if an employer wants to enjoin a former employee from working for a competitor, but the employee is not under any sort of non-compete agreement with the former employer, has taken no company records and property, and has not revealed any confidential information or trade secrets to the new employer, the inevitable disclosure doctrine of trade secrets law provides the employer with at least a “chance” of getting the desired injunction.

The inevitable disclosure doctrine is used by employers to stop former employees from working for competitors, even in the absence of a non-compete agreement, on the basis that it is inevitable that the employee will use or disclose the former employer’s trade secrets in connection with the new employment. The significance of this theory is that the employer is not required to prove an actual misappropriation of a trade secret, but rather that the disclosure of the trade secret is inevitable based on the nature of the information and the circumstances of the employee’s new position.

As with all trade secret issues, the law on inevitable disclosure varies somewhat from state to state. For instance, California courts have rejected the doctrine as creating a “de facto covenant not to compete”, Bayer Corp. v. Roche Molecular Sys., Inc., 72 F. Supp. 2d 1111, 1120 (N.D. Cal. 1999), and held that the doctrine “cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets.”  Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 294 (4th Dist. 2002). The Third Circuit Federal Court of Appeals, however, applied a relatively lenient standard under Pennsylvania law for successfully using the theory, holding that an employer need only show a “substantial likelihood” of disclosure of a trade secret. Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102,110 (3d Cir. 2010). (For an excellent nationwide survey of the doctrine, see Ryan A. Wiesner, A State-by-State Analysis of Inevitable Disclosure: A Need for Uniformity and a Workable Standard, 16 Intellectual Property L. Rev. 211 (2012)).

The Georgia Supreme Court has recognized the inevitable disclosure doctrine, although not referring to it by name, in the case of Essex Group, Inc. v. Southwire Corp., 269 Ga. 553, 501 S.E. 2d 501 (1998). In that opinion, the court upheld the trial court’s injunction prohibiting Southwire’s former employee from working for Southwire’s direct competitor’s logistics department for a period of five years. As the basis for its ruling, the court concluded that the competitor had “sought to obtain, by the simple act of hiring [Southwire’s former employee], all the logistics information it had taken Southwire millions of dollars and years of testing and modifications to develop as part of Southwire’s plan to acquire a competitive edge over other cable and wire companies ….” Id. at 557. There was neither mention in the opinion of the employee having a non-compete agreement nor any mention of an actual misappropriation by the employee of the alleged trade secret. Instead, the implication of the decision was that disclosure of Southwire’s logistics system was inevitable because of the identity of Southwire and its competitor’s business.

BURR POINT: Even in the absence of an enforceable non-compete agreement, the inevitable disclosure doctrine provides a means for enjoining a former employee’s competitive activities in certain circumstances. For more information on the inevitable disclosure doctrine or how it might apply to your business, don’t hesitate to contact one of the Burr & Forman team members.