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.

Tom Brady, Deflategate, and Florida Non-Competes

On far too many levels, Tom Brady is a star. “Deflategate” or not. Whether he actively participated in deflategate, passively participated in deflategate, or did not at all participate in deflategate, Tom Brady is a star. He belongs in the Hall of Fame. The committee no-doubt will vote him into the Hall of Fame at his earliest eligibility. He’s earned it.

Brady is competitive. No one questions that Brady’s competitive drive is one of the many keys to his continued success and longevity. Indeed, the well-known fact that Brady is competitive has caused many pundits to presume that he was either actually aware of the deflated footballs or was simply experienced enough to greatly suspect something was awry. Competition drives athletes.

Competition also drives successful businesses.

Free trade, in theory, increases competition. Competition forces innovation, higher productivity, better quality, lower prices or some combination of these elements to allow the marketplace to provide suitable options for everyone. Americans embrace competition. Americans reward competition. Our legal system is intentionally set up as an “adversary system” that demands competition.

Florida law recognizes this.

Florida law also recognizes an individual’s freedom to enter into contracts. When it comes to employment, Florida is called “at-will”. That means, essentially, that as long as you don’t violate Florida or federal discrimination laws (or the company’s internal employment rules or agreements), an employer can terminate an employee at any time, for any lawful reason. As anyone familiar with this blog also knows, Florida law also allows “valid restraints of trade” with regard to employment under certain circumstances found among Florida’s anti-trust statutes. The more common phrases for these valid restraints of trade are non-competition agreements or non-compete agreements. In Florida it is lawful for an employer to have the employee enter into a non-compete agreement as a condition of employment. Even a long-term employee can lose her or his job if the employer demands the execution of a non-compete agreement and the employee refuses to enter one. These Florida statutes neither apply to everyone, nor do these statutes apply equally. Florida law distinguishes among employees, allowing longer periods of non-competition for upper level management. As you might expect, Florida law also mandates that the restraint from future employment is reasonably intended to protect the employer’s legitimate ongoing business interests. Because Florida courts generally favor competition over restraints of trade, all Florida non-compete agreements are strictly construed. As a result, it’s critical to involve an experienced attorney when drafting or reviewing a non-compete agreement.

Tom Brady is one seriously competitive quarterback. Nearly every team in the NFL would substantially improve with Tom Brady under center. What if you’re the best at your position? What if you’re the Tom Brady of your profession? What if your competitive nature resulted in your success beyond even your employer’s wildest dreams? Does Florida law allow an exception? Yes and no. Lawyers are not subject to Florida’s restraint of trade statutes. (Go figure.) However Florida’s “valid restraint of trade” laws apply to doctors and nearly all other employees.

Brady is exceptional in many ways. Fortunately for football fans, deflategate suspension or not, Brady’s competitive spirit remains unrestrained.

The Multi-State Non-Compete Agreement “Drilled Down”

Our February article addressed the options available to the multi-state employer attempting to design its non-compete agreements within the “tangled mess” of the various state laws applicable to agreements for employees who reside within those various states. In that article, we advised that unless management has the resources to design, update and manage separate agreements tailored to each applicable state law, the best alternative is to design an “asset protection program” to include as few versions of the agreement as possible, tailoring each version to as many, similar state laws and job categories as possible. In this and subsequent articles, we will dig deeper into the variety of business and state law issues involved in this process.

Initially, employers should identify all employee/independent contractor responsibility levels and titles to be covered by the company’s non-compete agreements and the states in which those employees/contractors reside. Here, it is important to note that most state laws will not support the enforcement of a non-compete covenant unless the employer has a material, protectable interest supporting its post-employment non-compete restrictions. Translated, this means that most state laws will not support the enforcement of non-compete or even customer non-solicitation covenants signed by non-supervisory, non-sales and non-managerial employees. So, don’t expect to enforce a non-compete or non-solicitation covenant when it comes to your administrative assistant or your production employees. Furthermore, a detailed analysis of each employee category in the context of applicable state laws as opposed to a “one-size-fits-all” agreement will aid in the enforcement process. By way of example, it may be ill-advised to include non-compete and customer non-solicitation covenants within the agreements designated for North Carolina-based scientists because such scientists do not have access to customers or secret formulas which could be damaging if they leave for a competitor. In states such as North Carolina where the enforcement of a non-compete or customer non-solicitation is somewhat unpredictable, a good solid confidential information covenant may be preferred.

Along these same lines, this first step will also pave the way for other critical discussions with your counsel. The four primary types of employee restrictive covenants – the non-compete, customer non-solicitation, employee non-solciitaion and confidential information covenants – have varying applications depending on the nature and level of employee to which the agreement is directed. Each occupies what could be described as a “sliding scale of enforceability. Non-compete covenants which, to some degree or another, restrict a former employee’s subsequent employment in the industry are the most difficult to enforce, followed by the customer non-solicitation, the employee non-solicitation and finally, the confidential information covenant. As such a careful categorization of targeted protectable interests for each employee category and the state laws involved for each will help ensure enforcement and reduce the number of agreement versions your Company is required to manage and update.

We will expand on this analysis in future articles, taking a closer look at other key components of this analysis including adequate consideration, blue-penciling laws and the non-compete versus non-solicitation analysis.

New Year’s Resolution Continued: the Multi-State Non-Compete Agreement

With (most of) 2015 ahead, it is an opportune time to continue with our theme of employee non-compete agreements and resolving to review, assess and update your company’s agreements as a critical component of your ongoing and vital asset protection program. It goes without saying that an otherwise good start to the new year can come to an abrupt end when the company learns that a valued employee has “jumped ship” to the competitor because she knew what we didn’t; that her non-compete agreement with our company was outdated and no longer worth the proverbial paper on which it is written.

If your company employs individuals in two or more states, your “starting point” for this project is different (and more complex) from that of the Company which employs individuals in just one state. The underlying premise is one with which you are probably familiar; the laws surrounding the enforcement (or lack thereof) of non-compete agreements are matters of varying state, not federal law.

Assuming your Company has the financial and human resources to draft, implement, monitor and amend non-compete agreements tailored to the specific laws of each state in which it employs individuals, that is likely your best option. State-law tailored agreements which can be monitored and kept current with the ever changing legal landscape undoubtedly increase the likelihood of enforcement – at least in the short term. But, this is a very time consuming and expensive process that often, for legitimate reasons, falls by the wayside. While multi-state employers start out with great intentions and often spend a significant amount of money and time on the front-end of this project, higher priorities take over and these tailored agreements are rarely monitored in accordance with and therefore left victim to ever-changing state laws.

Most multi-state employers take a different route; limiting the number of versions of their non-compete agreements to one or very few. Certainly, from contract management, assessment and enforcement perspectives, one or a very limited number of versions lends itself to a more manageable program. That said, the drafting and enforcement of standardized, multi-state, non-compete agreements can also be a very complex and somewhat treacherous mine field of issues, deserving of a significant amount of managerial and experienced legal analysis on the front-end. Most often, the adoption of this type of “non-compete program” involves a detailed analysis of the laws of the states where employees reside, the duties and titles of the employees who will be asked to execute and similar issues. But, in the end, the multi-state employer has a solid foundation for this component of its asset management program for years to come.

We will expand on this analysis in future articles, taking a closer look at its key components including adequate consideration, blue-penciling laws and the non-compete versus non-solicitation analysis.

Derek Jeter Retires: Can He Compete?

For two decades Yankees fans and baseball aficionados everywhere have reveled in Derek Jeter’s statesmanship and poise. Jeter exemplified leadership. Despite having played alongside several teammates embroiled in controversy, Jeter remained above the fray. He spoke with his bat. He spoke with his glove. His ability to keep his tongue spoke loudly enough for all to hear. He was, as all baseball fans know, a fierce competitor. Yankees fans around the globe imagine a day when Jeter might return to the organization. Will he coach? Will he manage? Will he run the front office?

Jeter is not the first employee to retire after years of dedicated and valuable service. Nor is Derek Jeter a typical employee.   If a professional baseball team offered Derek Jeter the job of Manager ̶ any baseball team ̶ Yankees fans would likely collectively say “Good for you, Captain.”

This author is unaware of any instance in which a retiring baseball player was subject to a non-competition agreement. However not all successful retiring employees in Florida face as easy a path to continued success. Readers of this blog are well aware that under defined circumstances Florida law allows employers and employees to negotiate non-competition agreements that can restrict for a limited period of time the former employee’s future employment. Under Florida law, an employer and its employee can agree on future restrictions pertaining to location, specialty and time period. An employer and its employee can agree on what information constitutes a trade secret and on limitations to the former employee’s use of the employer’s trade secrets.

Can you imagine the trade secrets an athlete like Derek Jeter must possess? Insight on the various pitchers throughout the league could prove invaluable to a Yankees competitor. Jeter’s insight into the Yankees organization itself could prove invaluable to a Yankees competitor. Sure, professionals throughout baseball command high salaries to possess just such insight.   Professional scouts abound. Each Manager is aware of the characteristics of nearly every other player in the league. And yet how many of them has faced a 97 MPH fastball and deftly flicked it into right field with a runner in scoring position to win the game?

It’s true, an employer and employee in Florida can agree on limitations to the employee’s future employment upon his or her departure from a current job. If you’re subject to non-competition agreement in Florida and are restricted from working in your chosen field for a period of time, you need not panic. Rumor has it that a job is now available in the Bronx. The Yankees need a shortstop.

On the other hand, if you lack that particular talent and need legal advice on Florida non-competition agreements, make sure you call an attorney experienced in this area of the law. At Burr & Forman we have attorneys in nine offices throughout the Southeast experienced in dealing with these issues. And yes, Derek, we also need a shortstop…

Joan Rivers and Non-Competition Agreements: Can We Talk?

Sadly, Joan Rivers ̶ the famous comedienne who was perhaps best known for sitting down with celebrities and asking “can we talk?” ̶ died recently at the age of 81. Ms. Rivers’ self-deprecating nature and ability to use laughter to put people either at ease or to otherwise coerce them to divulge information often resulted in her getting the scoop. This unique ability allowed her to remain popular and visible for decades. And how, you might ask, does Ms. Rivers’ story relate at all to Florida non-competition agreements? To borrow a phrase: let’s talk.

If you have followed this blog (or merely happened upon it through an internet search) you likely already know that under Florida law the legal bases for non-competition agreements are found in the statutes under the name “Valid Restraints of Trade.” After all, that is exactly what a non-competition agreement does: it restricts, for a defined period, a former employee from working in a field that might compete with the former employer. The result is a “restraint of trade,” which is to say an obvious restriction on the future employment of the former employee. If drafted properly, a non-competition agreement is legally enforceable against the former employee. The question is: Does it always make sense for a company to litigate a potential violation of an otherwise valid non-competition agreement?

This is certainly a topic worthy of serious discussion. Courts strictly enforce non-competition agreements. When interpreting any ambiguities within these agreements, courts are also compelled to reach an interpretation that favors the former employee’s right to unrestricted work. This is an important factor to consider, because almost all non-competition agreements include a provision for the prevailing party in any enforcement action to have the losing party pay its attorneys’ fees and costs. As a result, what might look like a very strong case for a company against a former employee for violation of a non-competition agreement can turn into a prolonged and expensive battle over potential ambiguities in the agreement.

And now the benefit of talking: Ask yourself why your company wanted its employees to execute a written non-competition agreement. Did the employee’s potential departure pose a unique business risk to your company? Ask yourself what exactly it is you want to protect. Is there a specific trade secret at risk? Is there a client relationship at risk? If the overarching reason for the non-competition agreement is a client relationship, then consider whether the client will react positively to knowledge that your company initiated an action to enforce its non-competition agreement, thus potentially keeping the client from working with someone familiar? Once you answer these and any other relevant questions regarding the need and origin of your non-competition agreement, ask yourself one more. Ask yourself: “What is in the best interests of my company right now?” If, after consulting with your legal counsel and the company decision-makers, you remain confident that the best strategy is to quickly file an enforcement action, then the best thing to do is to secure competent counsel and to work with counsel to immediately set a company budget line-item specifically intended to fund the effort. On the other hand, sometimes the best thing about having your employees execute a valid non-competition agreement is your ability to negotiate a reasonable pay-out at the time of the employee’s departure. If you decide to negotiate instead of seeking to enforce, then the manner in which your company can benefit is often limitless. This is also the time when you can exercise an extreme amount of corporate creativity. Will a simple cash pay-out accommodate whatever pecuniary loss your company anticipates with the employee’s departure? Will your company benefit from entering into a joint venture agreement with the departing employee (presumably on favorable terms)? Is there a realistic opportunity to protect existing client relationships in the absence of the former employee? What is the value to the former employee to continue to work with your company’s (otherwise restricted) clients and contacts? In other words, talk it out within the company. You might discover that early interventional negotiation you will better serve the company’s overall goals than an often-unpredictable legal battle.

And so, back to Joan Rivers, sometimes it’s best to ask: “Can we talk?” Litigating a non-competition claim certainly sends a message to all departing employees that the company is willing to seek strict enforcement of its employer/employee agreements. It’s just not always your company’s best legal strategy.

This blog ends, like most others in this series, with some advice. When it comes to a decision of how to enforce a non-competition agreement, to drafting an enforceable non-competition agreement, or to litigating over the validity of a non-competition agreement, it’s necessary to arm your company with competent legal counsel experienced in these matters. At Burr & Forman we have experienced attorneys throughout the Southeast ready to address your questions and concerns.

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.

Ice Storms, My Secret Internet and Other Myths

Winter is around the corner.  On the calendar, however, it’s not yet here.  Surely Mother Nature is aware of this.  Still, an ice storm currently engulfs large swaths of our nation and is leaving many of us without power or heat.  If your new business was recently served with a lawsuit seeking an injunction against it to stop allegedly unlawful competition, then you can probably relate to those in the grips of the current storm.

The situation:  A successful closely held corporation sues a new competitor in its industry.  The complaint alleges that the new competitor hired a former employee with knowledge that the former employee and former employer had executed a non-competition agreement.  The complaint against the new competitor seeks an injunction.  If you’re familiar with this column, then you know that this scenario is rather commonplace.  Sometimes, however, the former employer/plaintiff can seek relief that a court deems unreasonable.  One such instance occurs with internet-based companies, or even with internet-reliant companies.

Here’s an example:  You own a company that sells goods over the internet.  You discover that your former employee is working for a new competitor seemingly in violation of his non-competition agreement.  Although there is no evidence that your business is damaged or will suffer damages as a result of the new competitor’s entry into the marketplace, your lawsuit seeks to enjoin the former employee from working for the competitor.  Your lawsuit also includes a claim against the new competitor for tortuous interference with your contract with the former employee.  So far, this legal action presents relatively straightforward issues.  Then you decide to make matters more complicated.

We often see former employers attempt to overreach when seeking damages.  You might, for instance, sue for alleged violation of trade secrets (claiming that the employee gave protected information to the new competitor).  Or you might sue for unfair and deceptive trade practices.  While this aggressive approach could potentially force the new competitor to agree to willingly close its business, it’s more likely than not that you’ve created a situation in which litigation (and associated litigation costs) could escalate.  Particularly with internet-based businesses, the capability to drive business to a particular website is seldom a secret.  While there are certainly professionals who claim that they can use unique search engine optimization (SEO) techniques to increase your exposure, many businesses discover that they can directly pay the search engines themselves to increase their traffic.  And that information is essentially available through the search engines for companies willing to pay for it.

As a result, your new competitor may actually get significant traffic to its website without ever attempting to steal your “trade secrets” in its efforts to do so.  Even if challenged, a “trade secret” that is dependent on information a search engine would otherwise make publicly available is difficult to uphold in court.  To some ˗ if your company is more financially capable of bearing the financial costs and personnel strain of the litigation storm ˗ this fight might seem worthwhile.  Consider, on the other hand, the possibility that if you lose in your efforts to prove unfair and deceptive trade practices you may actually have to pay prevailing party attorney’s fees and costs to the new competitor.  Why?  Because “deceptive and unfair trade practice” statutes usually contain clauses that allow courts to award prevailing party attorney’s fees and costs.  In other words, if the new competitor can hold on long enough to defeat your claim for deceptive and unfair trade practices, your company could end up paying your competitor’s legal bill (even if the court finds grounds to enter the injunction you sought).

Does that scenario denude or devalue your carefully drafted non-competition agreement?  No, it does not.  What the above scenario is intended to provide is a cautionary warning that when dealing with a pest, sometimes a fly swatter gives you a better result than a grenade.  Many times your well-pled motion for injunctive relief will achieve your business goals without having to prove the elements of the additional allegations.  Less cost to you, same effect on your newly-enjoined former-competitor.

Navigating the many laws and difficult language in the area of non-competition agreements can perplex even the most sophisticated business professionals.  This is the point in the blog when you are urged to seek refuge from this complexity with an attorney experienced in these issues and capable of both advising and litigating, if necessary.

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.