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.

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.

It’s Not the Heat, It’s the Humidity

When you live in Florida, you tend to hear that expression for far too many months of the year.  Even during the winter, weather reports often include information on the “sun index” indicating the level of sunscreen you might need in order to survive your next trip to the local grocery store.  Visitors from the southwest, where temperatures earlier this month reached over 100°F, are quick to inform Floridians that it’s hot in Phoenix, “but it’s a dry heat.”

Well, if you’re looking for things other than the weather to make you sweat, you might take a look at your company’s policy on whether or not a departing employee can go to work for a competitor.  Presumably, your direct competitor will now reap the benefit of the many hours and significant financial commitment your business expended.  And as a business owner, you might ask: “What can I do?”  In many circumstances, your best business move is to protect your businesses’ interests with a carefully crafted non-competition agreement.

The rules for non-competition agreements vary from state to state.  Some states basically do not allow them (or greatly disfavor them).  Other states have no legislation concerning non-competition agreements, choosing instead to allow the legal system to define the issue on a case-by-case basis.  Indiana, for instance, recently allowed a five-year non-competition agreement, concluding that both the length of time (five years), and the restriction (a two county area) were reasonable.    See Mayne v. O’Bannon Publishing Co. d/b/a Corydon Instant Press.  In Florida, the legislature has created a statute that specifically defines the basic structure of contracts that Florida law allows to validly restrain trade.  Key among the allowed restraints of trade are non-competition agreements and limitations on the use of a company’s trade secrets after an employee leaves the company.

Although defined in the statutes, Florida law also requires that the courts interpret non-competition agreements in favor of the employee in those circumstances when the agreement is vague or missing terms.  Even when parties are careful to define terms in a non-competition agreement, the contract cannot confine future employment beyond the statutory guidelines, nor are non-competition agreements immune from legal challenges regarding their breadth, their validity, or their applicability to particular circumstances.

In the real world, employees leave for new positions every day.  They pursue opportunities at other companies.  They perceive opportunities to start companies of their own.  They move on.  Nonetheless, thoughtfully crafted non-competition agreements can significantly help a business retain key employees, or – at the very least – make it far more difficult for departing employees to immediately join a competitor or start a competing business.  As in most contracts, the more specific the limitation (and the more reasonable the limitation relative to the possible damage a departing employee might cause your business), the more likely a court will uphold the contract.  If, for instance, your business is confined to a particular county, then restricting a departing employee from working in an entirely different State makes little sense.  After all, how would that departure negatively impact your business?  So take care to have your attorney tailor your non-competition agreement in a manner that reflects your business and that provides you the protection you deserve for those inevitable situations when an employee critical to your bottom line decides to see if the grass is greener elsewhere.

Which takes us back to the heat and the humidity.  While it’s tough to argue that the humidity can turn your Florida summer from a sauna to a steam bath, it’s also tough to deny that – if nothing else – the rain and the humidity do an excellent job of keeping our lawns green year-round.  If keeping critical employees around makes sense to the financial health of your company, consider hiring an attorney familiar with drafting non-competition agreements.  Under certain circumstances, it could literally save your business.

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.

Liquidated Damages and Non-Competes

In many disputes over non-competition agreements, the litigation focuses on obtaining the temporary restraining order and/or preliminary injunction to stop the competition before the real damage is done.  However, in cases where preliminary injunctive relief cannot be obtained and/or is not appropriate (e.g., because the competition has already taken place and the damage has been already done), the question of what damages were actually caused by the breach of the agreement can be a thorny one.  One possible way around this “thorny” issue, as recently examined by the United States Court of Appeals for the Fifth Circuit, is the inclusion of a liquidated-damages clause.

The non-competition agreement examined by the Fifth Circuit in International Marine, L.L.C. v. Delta Towing, L.L.C., 704 F.3d 350 (5th Cir. 2013), was not an employment non-compete but rather formed part of an agreement for the sale of tugboats.  Delta Towing was in the business of chartering tugboats and sold two of its tugboats to International Marine.  Delta Towing understood that International Marine was looking to purchase the tugboats for “in house use” only and that it would not directly compete with Delta Towing by chartering out tugboats to third parties.  The combined sales price for the two tugboats was $4 million, which, as noted in the district court’s ruling appealed to the Fifth Circuit, represented a significant discount on their fair market value.  However, Delta Towing got something in return for the lower price, namely, International Marine’s agreement that it would not use the tugboats to compete with Delta Towing.  As part of its agreement to purchase the tugboats, International Marine agreed to give Delta Towing the right of first refusal before International Marine could charter its vessels out to third parties.  International Marine’s agreement was backed by a liquidated-damages provision, under which International Marine agreed to pay Delta Towing $250,000 per violation of these non-compete provisions.

Following the sale, Delta Towing discovered, after the fact, that International Marine had been chartering out the tugboats it had purchased and had not informed Delta Towing of these charters such that it could have exercised its contractual right of first refusal.  Delta Towing sued in the United States District Court for the Eastern District of Louisiana, and the district judge ruled that the liquidated-damages provision was enforceable.  International Marine appealed this ruling to the Fifth Circuit, but the Fifth Circuit affirmed, noting the difficulty inherent in calculating damages for breaches of covenants not to compete.  Given this inherent difficulty, the Fifth Circuit determined that the liquidated-damages provisions were “reasonably related” to anticipated damages in this case and that International Marine had failed to show that these provisions provided for an impermissible “penalty.”

So what “take aways” can be made from an agreement for the sale of tugboats, and can these same principles be applied to employment non-competes?  Although “liquidated damages” clauses may be less helpful in the case of an agreement between an employer and employee — in part because a departing employee may lack the financial resources to pay monetary damages — similar provisions are often found in the agreements that staffing agencies and consulting companies enter into with their clients.  For example, a consulting company providing specialized “manpower” to a client may be concerned that the client might decide “to cut out the middleman” by hiring the consulting company’s employees directly.  As a result, the consulting company may require its clients to sign “no hire” agreements backed by a liquidated-damages clause.  In other words, what works for the sale of tugboats may sometimes work for employment-related agreements as well.

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.

Protecting Your Closely Held Business

A client recently came to me with a problem lawyers often hear: the client’s family-owned business needed to hire new employees to keep up with the growth. In particular, the company needed additional sales force and additional operators in the field. The problem was that in order to train and then oversee these new employees, the client had to disclose to them both its pricing guidelines and its field techniques. This particular business (which was highly regulated and dealt with restricted and often dangerous chemicals) kept its customer base because – like most successful businesses – it provided excellent customer service combined with very competitive pricing.

The owner feared that once his customers became acquainted with the new sales personnel and/or the new field technicians, the new employees could use their knowledge of the company’s pricing guidelines and field techniques in order to start a competing business. Fortunately, under Chapter 542, Florida Statutes, we were able to craft a document that lawfully restricted the new employees’ ability to quickly begin a competing company and that gave the client peace of mind to continue the company’s expansion.

A primer on Chapter 542, Florida Statutes

The short title for Chapter 542 Florida Statutes is “Florida Antitrust Act of 1980.” So basically it’s a statute “to complement the body of federal law prohibiting restraints of trade or commerce in order to foster effective competition.” See 542.16. Fla. Stat. However within the statute is the current language in 542.335 Fla. Stat., entitled Valid restraints of trade or commerce.

Within this section, Florida law allows restrictive covenants, “so long as such contracts are reasonable in time, area, and line of business”. It is important to note, however, that Florida law strictly construes restrictive covenants, all of which are unenforceable unless set forth in writing signed by the person against whom enforcement is sought. It is also essential that the restrictive covenant itself is only valid if the party seeking enforcement can demonstrate a “legitimate business interest” worthy of protection. Examples of legitimate business interests include:

1. Trade secrets;
2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets;
3. Substantial relationships with existing or perspective clients, patients or customers;
4. Good will associated with a trade name, a trademark, a service mark, or “trade dress,” a specific geographic location, or a specific marketing or trade area;
5. Extraordinary or specialized training.

As you might imagine with any strictly interpreted statute, failure to prove the legitimate business interest will render a restrictive covenant unlawful, void and unenforceable. The statute also shifts the burden from the entity seeking to enforce the restrictive covenant to the person opposing enforcement upon prima facie showing that the restraint is reasonably necessary. Defenses to these actions include that the restrictive covenant is “overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interests.”

If the court determines that one of these defenses exists, then the statute directs the court to modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.

Fortunately, Florida law also sets forth some parameters to help both drafters of restrictive covenants and parties seeking to enforce or defend enforcement actions with some guidelines as to the validity of any particular restriction. As one might expect, the more vital the need to protect a “legitimate business interest,” the longer the period Florida law will deem as reasonable. For instance, as long as the restrictive covenant does not deal with the sale of a business or professional practice or an equitable interest in any other type of business or professional practice (including a partnership or limited liability company), then as to a former employee, agent, or independent contractor the court shall presume reasonable in time any restraint that is six months or less in duration and shall presume unreasonable in time any restraint that is more than two years in duration. If a party seeks to enforce a restrictive covenant against the distributor, dealer, franchisee, or licensee of a trademark or service mark (not associated with the businesses listed above) then the court increases its timeframes and will presume reasonable any restraint of one year or less and shall presume unreasonable any restraint more than three years in duration. On the other hand if the restrictive covenant does specifically deal with an action against the seller of all or part of the assets of a business or professional practice, the shares of a corporation, partnership interest, a limited liability company membership or any equity interests of any other type in a business or professional practice, then the court shall presume reasonable a restraint of three years or less and increases its tolerance for reasonability to a period from three years to more than seven years in duration.

The statute also deals with trade secrets and specifically states that a “post term restrictive covenant predicated upon the protection of trade secrets” is presumed reasonable if the restraints are for five years or less and unreasonable if the restraint is for more than ten years. However, all of those presumptions are rebuttable.

Florida law in this area has many nuances. It is quite possible that your valid, written restrictive covenant was drafted to narrowly protect a line of business or a geographical area in which your company no longer has an interest. In such cases, the courts can consider these facts as a defense even in the face of an argument that future damages could arise.

Getting back to the client whose inquiry prompted this post, his closely held corporation sought both legal protection and peace of mind. After a series of successful hires, all signs so far indicate that the client has achieved an effective and enforceable restraint of trade. Because that client services nearly every county in the State of
Florida, the written restrictive covenant bars the new employees from working for a period of two years in the same line of business in all of those counties. To the extent any of the techniques that the client utilizes and/or developed for its field technicians constitutes a trade secret, the document also restricts the use of that trade secret for a period less than five years. Most critical for enforcement, however, is the fact that the business owner never allows a new sales person or field technician to begin work until he or she executes the restrictive covenant. The business owner even goes one step further, having all prospective employees to whom the restrictive covenant applies initial the section of the restrictive covenant indicating that the prospective employee was given the documents in advance of the employment and had the right to seek his or her own legal counsel prior to executing the restriction. If carefully drafted and thoughtfully implemented, a written restrictive covenant can successfully protect the business owners of small, closely held companies just as well as they can protect mid-sized or large corporations.

This is the point in the blog where I tell you to seek legal advice in the drafting or enforcement of your restrictive covenant. The Burr & Forman legal team has qualified attorneys throughout its footprint with significant experience in these issues.

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!

Eleventh Circuit Confirms Georgia Legislature Wisely Did a “Do Over” on the New Non-Compete Statute

In golf, a hacker who slices his tee shot into the woods will often announce that he’s going to take a “mulligan”, i.e., hit another ball as if the first one never happened. Georgia’s General Assembly took a legislative mulligan in re-enacting its new non-compete statute, and a recent Eleventh Circuit opinion, Becham v. Synthes (U.S.A.), 2012 U.S. App. LEXIS 11225 (11th Cir. 2012), should make the folks under the Gold Dome glad they did.

In 2009, the Georgia General Assembly passed HB 173, which was a bill designed to make non-compete agreements and other post-employment restrictive covenants much easier for employers to enforce. The effectiveness of HB 173 was dependent upon a positive ratification by Georgia voters of a state constitutional amendment authorizing the new law. In November 2010, Georgia voters passed the amendment by a 2-1 margin. Because HB 173 specifically stated that it would become effective the day after ratification of the amendment, legislators, lawyers and employers all assumed that Georgia finally had its new employer-friendly non-compete statute in place as of November 3, 2010.

Shortly after the ratification of the amendment, however, some non-compete attorneys and commentators, including this author, began to have serious concerns about the effectiveness of the new law due to a discrepancy between the effective date of the new law, November 3, 2010, and the effective date of the constitutional amendment, which by law was January 1, 2011 (because the amendment, due to a legislative oversight, did not have a specified effective date).  The analysis was that because the new statute was not constitutionally authorized on the date it became effective, it was unconstitutional and could not be revived by the later effectiveness of the amendment. This author shared the concerns of practitioners with the sponsor of HB 173, Rep. Wendell Willard, and he eventually concluded that the statute needed to be re-passed in the next session in an abundance of caution. (Go here for a discussion between the author and Rep. Willard about the events leading up to re-passage of the bill).

Thus, in 2011, the General Assembly passed a new bill, HB 30 (codified at OCGA §13-8-50 et seq.), that was essentially identical to the 2009 bill. This new statute, however, by its terms only applied to agreements executed on or after the new effective date of May 11, 2011. This left some uncertainty about how Courts would treat non-compete agreements executed during the legislative twilight zone period between the effective dates of the first and second versions of the new non-compete statute. Would courts give any deference to employers who had their employees execute new non-competes in reliance upon the much ballyhooed passage of the new statute?

That question was answered in the negative by the Eleventh Circuit in the recent Becham opinion. In that case, an employer was attempting to enforce a non-compete agreement dated December 1, 2010, after the ratification of the constitutional amendment and the effective date of HB 173, but before the effective date of the corrective 2011 statute. In affirming the grant of summary judgment in favor of the employee-defendant, the Eleventh Circuit held that “HB 173 was unconstitutional and void the moment it went into effect”, thus confirming the analysis of the practitioners who first reached out to the bill sponsor. The effect of that ruling was that the Court applied the much more onerous pre-statute body of Georgia non-compete law, and the plaintiff’s non-compete covenants were held to be unenforceable

BURR POINT:  The Georgia lawmakers’ nimble legislative repair of its previous misstep on the timing of the new non-compete statute means that all’s well that ends well, unless you’re an employer caught in the gap of the effective dates of the two versions of the law.  For Georgia employers, it is now clear that your non-competes must be executed on or after May 11, 2011, in order to take advantage of the more lenient new statute. For more information or help further understanding the changes to Georgia’s non-compete laws, contact a member of Burr & Forman’s Non-Compete and Trade Secrets team.