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.”

The Chicago Cubs, Errors, and Arbitration of Florida Non-Compete Agreements

Some clients prefer to resolve disputes in arbitration. In theory, an arbitration proceeding can more quickly and — in some instances — more cost effectively resolve disputes. However because most arbitration clauses call for binding arbitration, many clients prefer to litigate disputes in court. At least a defeat in a courtroom carries with it the ability to appeal. If the court makes a clear legal error, the argument goes, an appellate panel can collectively correct the error and “set matters right.”

The Chicago Cubs are a National League baseball team. Perhaps you’ve heard of them? Like an arbitration panel, it is difficult to overcome some of their errors. The Chicago Cubs, by almost any standard, had an excellent 2015 baseball season. An impressive pitching staff, an optimistic and experienced manager, and a great second-half team effort allowed the Cubs to win the National League Wildcard Playoff and to beat the St. Louis Cardinals in the opening series. Instant replay may have decided some of the calls. None of those calls was subject to arbitration.

Getting back to Florida Non-Competes, a client recently asked the question: “Can parties agree to arbitrate, rather than litigate, an otherwise valid Florida Non-Compete agreement?” The simple answer is “yes.” The question gets more complicated when the sale of a business raises possible violations of the Non-Compete agreement and no arbitration clause exists in the purchase and sale documents relating to the sale. At least one appellate court in Florida determined that the question of whether or not the employee ran afoul of the Non-Compete agreement was subject to arbitration, despite the fact that the documents controlling the sale of the business contained no such provision.

In the matter noted above, the two-year Non-Compete agreement stated that during “the period of his employment… and for a period of two years immediately following the termination of such employment for whatever reason, Employee shall not have any direct or indirect ownership or other financial interest in any business which competes with the Business of the Company.” The employment agreement stipulated that the parties arbitrate disputes. The parties entered into the employment agreement commensurate with an agreement for the Employee to sell the business to the new employer. Unlike the Employment Agreement, the agreements related to the sale of the business did not contain an arbitration clause.

We all know what happens next. The parties have a dispute over their mutual contract performance and alleged breaches. Seller ultimately accuses the Buyer of misrepresentations intended to induce the sale and a series of other acts inconsistent with the agreement to purchase the company. The Seller sues in state court claiming that the Buyer violated the terms related to the parties’ sale and purchase of the business.

Citing the very broad language of the Non-Compete agreement, the Buyer (Employer) seeks to have the dispute resolved in arbitration in accordance with the Non-Compete agreement, despite the fact that the issues raised in the Seller’s Complaint did not specifically relate to the Employment Agreement or a breach thereof. (See generally Sunsplash Events, Inc., Fla. 4th DCA 2014). The trial court ruled against the Buyer, favoring the argument that the causes of action arose under the agreements to purchase the business (no arbitration clause) and not under the employment agreement (arbitration clause). The appellate court disagreed. In a detailed analysis, the appellate court ruled that the very broad language of the employment agreement was sufficient to encompass the claims Seller brought in the state court. The appellate court found a nexus between the disagreement over the sale of the business and the simultaneously-entered employment agreement. As a result, the appellate court ordered the parties to arbitrate the dispute (rather than litigate it in state court).

Readers of this blog are aware that courts favor arbitration clauses. Generally, courts give very liberal interpretation to arbitration clauses and favor resolving disputes in arbitration whenever the facts allow. In the case noted above, the appellate court surmised that an arbitrator could hear the entire dispute because the issue of whether the Buyer’s alleged fraudulent inducement occurred might also involve a determination of whether the Seller breached the employment agreement. As a result, the arbitration clause of the employment agreement mandated an arbitration proceeding rather than an action in state court.

As for the Chicago Cubs, after a fine season and a triumphant start to the 2015 Playoffs, the journey ended when the New York Mets swept the Cubs in four games to earn a trip to the 2015 World Series.

The take-away is this: the question of whether or not to arbitrate is worthy of discussion with your counsel. In some instances arbitration is required even when not anticipated (or preferred). And if you’re a Cubs fan, there’s always next year. At Burr & Forman we have lawyers throughout the southeast skilled in this area of the law. We do not have attorneys capable of predicting when the Cubs might win the World Series.

Eight-Figure Judgments in Trade Secret Cases – Do We Have Your Attention Now?

The conventional wisdom among attorneys and litigants in the noncompete and trade secret arena is that the cases are all about the injunctions, usually at the TRO and interlocutory injunction stage.  Some judgments handed down around the country in the last month, however, prove that the damages portion of these cases can be just as devastating to a defendant deemed to be unfairly competing.

In my home state of Georgia, a Savannah jury rendered a $30 million verdict in favor of an energy services company in a suit against its former president and other executives.  The plaintiff alleged, and the jury obviously agreed, that some of the defendants stole trade secrets and wrongfully solicited customers as part of a conspiracy to “hit the ground running” upon jumping ship to their former employer’s rivals.

In St. Louis, a state court judge slammed a husband-wife team with a judgment of $10MM — $1.6MM in compensatory damages and $8.4MM in punitives — for misappropriating trade secrets from the husband’s former employer and working with a Chinese company to make and sell imitations of the plaintiff’s products — coatings for microchips.  The plaintiff and their attorneys, however, should hold off on the down payments for the victory Porsches — the defendants are reportedly nowhere to be found and may have left the country, most likely with pockets full of coated microchips.

Finally, a long-running, tank battle-like suit between two rival software companies finally ended (not counting the likely appeal) with the original plaintiff getting hit by a Nebraska jury with a $43.8MM award on the defendant’s counterclaim.  The plaintiff started the litigation by suing its rival for alleged software pirating, and those claims were rejected by a jury last year.  The defendant counterclaimed for breach of a nondisclosure agreement (entered, ironically, to try and head off the plaintiff’s pirating claims), antitrust violations, and tortious interference with business relationships, resulting in the crippling verdict. The moral of this story is that if you pick a fight, as the plaintiff did here, you better be prepared to finish it.

BURR POINT:  Former employees and businesses who are inclined to push the envelope on restrictive covenant agreements (“I’ll just do it until a judge shuts me down”) should be mindful of the potential exposure for tens of millions of dollars in compensatory damages, attorney’s fees and punitive damages to a party who thinks they’ve been wronged.

Florida Non-Competes: Physicians, Attorneys, Quarterbacks, Oh My…

Regular readers of this blog know that Florida law allows “valid restraints of trade,” under certain circumstances. Those restrictions apply to the employer-employee relationship when written and duly executed in accordance with Florida statutes. These restraints of trade are commonly called “Non-Compete” or “Non- Competition” agreements. There are similar restrictions that can prohibit a departing employee from using a former employer’s trade secrets.

Florida’s valid restraints of trade do not apply to attorneys. As a result, attorneys are not subject to non-compete agreements. Go figure.

Physicians, on the other hand, are often required to enter into non-compete agreements as conditions of employment. Recently a group of Florida physicians asked me whether Florida law recognizes a public policy argument that negates all non-compete agreements attempting to restrain doctors from practicing in the location of their choosing or seeing previous patients. The simple answer is “No,” however the analysis seldom ends there. Generally speaking, there is no statute or case law in Florida that negates the enforcement of an otherwise valid non-compete agreement against a physician or a physician’s practice. (There are cases that have disallowed the agreements, and there are cases in which the physician was found not to have violated the non-compete terms, however there are no cases that courts regularly cite or follow creating a public policy against restricting a physician’s practice after the physician departs from a prior employer.)

So what is a physician to do when she is attempting to relocate her practice or when she hopes to join a competitor? First, and perhaps most obviously, the physician can usually negotiate (read: pay money) to opt out of the non-compete agreement. Many times a physician’s non-compete agreement actually contains the manner and costs associated with the buy-out provision. The second vehicle to challenge a physician’s non-compete agreement is on the grounds of the definition of the reasonable restriction of geographic area. Some patients will travel great distances to see their doctor. The more specialized the physician’s practice, the more likely a court will recognize the need for a greater geographic restriction. (At the same time, the more specialized the physician’s practice, the more likely the physician can argue that an actual public policy concern justifies a court’s decision to allow an argument to render the non-compete void.)

What we have found over the years is that physician practices are not shy about enforcing non-compete agreements with departing physicians. At the same time, nearly all of these physician practice groups are far more interested in resolving these issues through (financial) negotiations than through the continuation of litigation. Either way, the law in this area is very nuanced and fact-specific. As with all non-compete cases, Florida courts are obligated to construe the written, executed agreements according to their plain terms, interpreting all ambiguities in favor of unrestricted employment.

Quarterbacks are entirely different. The typical non-compete comes in the form of untimely interceptions. As a life-long NY Giants fan it’s important to recognize that losing the first two regular-season games when holding a double-digit lead in the fourth quarter is simply non-competitive. This despite Eli Manning’s contract extension that included a guarantee of more than $60 million. Fortunately, the Giants held their fourth quarter lead in the third game. That’s more competitive. Note to Eli: please stay healthy. And Eli, if you suffer an injury, consider receiving your treatment down in Florida. We have some seriously great physicians here. They’re very competitive.

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.

A Short Primer on Tennessee’s Trade Secrets Law

In recent postings, we have discussed cases involving claims that a former employee wrongfully used the employer’s confidential information and trade secrets.  In TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., Davidson County Chancery Court, Docket No. 12-746-III, the employer alleged that its former employee used confidential information concerning wrestling talent to gain an unfair competitive advantage.  In Veit v. Event Logistics, Inc., Davidson County Chancery Court Docket No. 12-945-III, the former employee sued her former employer to determine whether her skills as an events coordinator and the identity of customers of event planning services were trade secrets under a separation agreement.

These cases are based on the principle that an employee has a general duty to not disclose confidential information or trade secrets belonging to her former employer.  In many cases, this general duty is memorialized by a written agreement which may include a non-compete agreement, though a contract is not required to protect trade secrets.  If the former employee violates her general duty and contractual obligations, the former employer may seek damages against her.

In Tennessee, the protection of trade secrets has been codified in the Uniform Trade Secrets Act (“UTSA”) found at Tenn. Code Ann. §§ 47-25-1701 et seq.  Under the UTSA, an employer may sue a former employee for the misappropriation and disclosure of trade secrets.

A “trade secret” is information in any form which gives a business a competitive advantage over other businesses which do not have that information.  Trade secrets include technical and nontechnical information, financial data, patterns, compilations, programs, devices, methods, techniques, processes, or plans that have economic value due to the fact that they are secret.  Confidential information is often treated as trade secrets.  One of the best known examples of a trade secret is the formula for Coke.  In TNA Entertainment, LLC, the trade secret at issue was contractual information related to wrestling talent.  In Veit, the trade secrets at issue were event coordinating skills and customer information.

An employee violates the UTSA when he discloses his employer’s trade secrets which he acquired by improper means (theft, bribery, or misrepresentation) or in violation of his duty to maintain its secrecy.  A new employer may also violate the UTSA if it uses the former employer’s trade secret which was improperly acquired or disclosed by the former employee.  Such an allegation was made in TNA Entertainment, LLC.

The UTSA gives an employer broad remedies if its former employee and the new employer acquires and uses its trade secrets.  These include injunctive relief, a court order requiring the return of and prohibiting the use of the former employer’s trade secrets.  In some cases, the court may award the former employer its actual damages and damages for unjust enrichment received by the defendants.  Punitive damages up to twice the award for actual damages and unjust enrichment along with attorney fees may be awarded in cases of willful and malicious misappropriation of trade secrets.

Tennessee law recognizes the need for fair competition in the marketplace.  However, it also recognizes and prohibits unfair competition arising out of the wrongful acquisition and use of trade secrets.  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.