Trade Secret / Noncompete : Business, Employment, Intellectual Property, and Litigation Attorneys Focused on Trade Secret/Noncompete Issues

Cases and issues making the headlines*:

Computer Fraud and Abuse Act Not Violated by Exceeding Access of Terms of Use (August 30)
The United States District Court for the Middle District of Californiarejected application of the Computer and Abuse Act  in the so-called "cyberbullying case."  The court held that exceeding a website's terms of use does not constitute exceeding authority for purposes of a criminal cause of action under the statute.  Story (with a link to the court's decision) here.

Noncompetes Beverly Hills Style (August 23)
Internet advertising company Hydra LLC of Beverly Hills is reportedly in the middle of an internal rift that has divided the company.  Reports indicate that claims of breach of noncompete obligations have been met with claims of corporate waste, which have in turn been met with claims of defamation.  Story at Los Angeles Business Journal, Internet Execs Failed to Click.

Competitor's Alleged Use of False Emails Leads to Lawsuit (August 22)
Affiliated Computer Services, Inc. (AFC) brought a federal lawsuit against competitor Duncan Solutions, Inc., alleging that Duncan Solutions created dozens of false email accounts by which it was able to access AFC's computers, divert emails intended for other people, and misappropriate trade secrets and other confidential business information.  The lawsuit makes claims under the Computer Fraud and Abuse Act (18 U.S.C. § 1030), the Stored Wire and Electronic Communications and Transactional Records Access Act (18 U.S.C. § 2701), and the Federal Wiretapping Act (18 U.S.C. § 2511).  Story here.

The First Amendment vs. Trade Secret Protection (August 21)
The Pittsburgh Post-Gazette was sued in West Virginia by generic drugmaker Mylan Inc.  The suit claims (among other things) that the newspaper misappropriated trade secrets concerning manufacturing and quality control processes.  Although not discussed in the story (here), the case will likely turn on the relationship between the First Amendment rights held by the newspaper and the law of trade secret protection.

Public Information and Customer Lists Can Be Trade Secrets (updated August 21)
The 10th Circuit (analyzing Colorado law, which is similar in relevant part to the majority of states) held that a compilation of information, each, component part of which is publically available, can be a trade secret.  The court also held that customer lists can be trade secrets.  The case is Hertz v. Luzenac Group, and is discussed here (paid service) and here.  The California Court of Appeal explains (also consistent with the prevailing view) that courts are reluctant to protect "naked" customer lists (i.e., those lists that contain merely names and addresses) as opposed to those that contain the particular needs and characteristics of the customer.  The case is The Retirement Group v. Galante.

No Noncompete, No Problem (Updated August 20)
While noncompete agreements are verboten in California, some companies have reportedly managed to find a way to obtain some of the benefits of such agreements:  an unspoken agreement to not poach each other's employees.  Story here, here, and here (new).

The Value of Trade Secrets (August 17)
Cumberland Pharmaceuticals Inc., which had its IPO last week, relies on trade secrets (rather than patents) to protect its technology.  Story here.

Social Network Site Tagged with Lawsuit (updated August 15)
The social network site Tagged.com was sued in California.  The case asserts that Tagged harvested emails in violation of, among other things, the Computer Fraud and Abuse Act.  Story here, here, and here.

Massachusetts Noncompete Debate - Scott Kirsner's Latest (August 14)
People fall on all sides of the current debate about whether and, if so, how to change Massachusetts's noncompete laws.  Boston Globe columnist and blogger, Scott Kirsner, strongly supports Massachusetts following the California model of prohibiting employee noncompete agreements.  Mr. Kirsner's latest posting is here.

Twitter’s Tweets Silenced  (August 6)
For those who may have been wondering what was happening with Twitter today, the answer is that it was allegedly shut down this morning by a DDoS hacker attack.  (Story here and here.)  Computer Fraud and Abuse Act lawsuit next?

Huron Consulting’s Battle with Sonnenschein, Nath & Rosenthal (August 4)
In June, Huron Consulting sued several former employees for (among other things) allegedly breaching their noncompete and non-solicitation agreements and law firm, Sonnenschein, Nath & Rosenthal, for allegedly tortiously interfering with those contracts.  The battle has heated up this month with assertions by the defendants of wrongdoing by Huron and arguments that the agreements are unenforceable under Illinios law.  Story here.

Big Brother vs. the Computer Fraud and Abuse Act (updated August 3)
A putative class action lawsuit has been filed by two named plaintiffs against Amazon.com alleging that Amazon wrongfully deleted (remotely) from the plaintiffs’ Kindles (e-book readers) copies of books that Amazon had sold to them.  Filed in the United States District Court for the Western District of Washington at Seattle, the case is Gawronski v. Amazon.com, Inc. According to the complaint, Amazon deleted the books because, after selling them, it discovered that it did not have the proper authorization from the copyright owner.  The complaint alleges that Amazon’s remote access into the plaintiffs’ Kindles was unauthorized, and as such, violates (among other things) the Computer Fraud and Abuse Act, 18 U.S.C. § 1030.  The complaint (paragraph 4) provides the following colorful analogy:

And consider noted New York Times technology writer, David Pogue’s description of Amazon’s conduct: “[I]t’s like Barnes & Noble sneaking into our homes in the middle of the night, taking some books that we’ve been reading off our nightstands, and leaving us a check on the coffee table.”

Although things like this have allegedly happened before, the irony here is that one of the books is George Orwell’s 1984.

Additional information (including a discussion of impact on one of the plaintiffs, who had made notations (now allegedly useless) throughout the book for purposes of a student thesis) is available at My Amazon Kindle Ate My Homework; WSJ Blog post, Lawsuit: Amazon Ate My Homework; and the L.A. Times Business Technology story, Highlights from the ‘1984′ lawsuit against Amazon.  PC Magazine has also posted a story (which includes Amazon’s response): Kindle Users Sue Amazon Over Deleted Orwell Book.

The Intersection of Trade Secrets and Freedom of Information (August 1)
Requests to the federal government for “public records” are made through a request under the Freedom of Information Act.  Requests to state governments are typically made through state analogues.  There is little dispute that trade secrets are exempt from disclosure under these acts.  Rather, the dispute generally concerns whether the particular information (typically required to be filed with the government) qualifies as a trade secret.  See for example Fox’s efforts to obtain bail-out documents here.

Trade Secret Theft: Rising Risks (August 1)
USA Today report on the rise and risks of trade secret theft here.

BoA Sues Departing Employees (Missouri) (August 1)
Bank of America reportedly sued five former employees for breaching their noncompete agreements by joining competitior UMB Financial Corp. and soliciting their former clients.  Story here.

Smith & Nephew Sues Competitor (Tennessee) (August 1)
Smith & Nephew, Inc. has reportedly sued a former sales person and his new employer, Osteologic, Inc., for violating the employee’s noncompete agreement.  Story here.

More Noncompetes Expiring… (August 1)
With his noncompete having recently expired, the founder of Hotels.com has launched GetARoom.com.  The method used by the new website for getting a good rate on a hotel: a phone call!  What’s the world coming to?!  Story here.

Cybercrime Prosecutions (August 1)
NPR’s take on cybercrime prosecution after the first cybercrime indictment, twenty years ago, here.

*For earlier stories, go to the In the News (archives) page.

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I was asked by reporter/blogger Scott Kirsner - one of the moving forces behind the effort to ban noncompetes in Massachusetts, who I now count among my friends in the quest to find a fair and predictable noncompete framework in Massachusetts - to post a blog explaining how lawyers have dealt with noncompete agreements in their own profession.  The answer is that there is an ethical rule (Rule 5.6 of the Rules of Professional Conduct) adopted in most states that prohibits from lawyers from restricting their ability to practice law (i.e., to sign noncompete agreements).  The rationale for the rule has nothing to do with the lawyer's interests, however; it has to do with client choice.  Specifically, the profession has made the determination that the public's interest in having its unfettered choice of counsel supersedes any private otherwise legitimate business interest that any individual lawyer or law firm may have in enforcing a noncompete.

While the public policy reasons behind this decision are obvious, what may not be so obvious is the underlying need (or not) for lawyer noncompetes. If lawyer noncompetes were permissible, what legitimate business interest would be served?  Lawyers don't offer a product, and the service that they provide is assistance with the laws; there is nothing secret about that.  As such, lawyers (with limited exceptions) possess no trade secrets or confidential information of their employer; rather, they possess trade secrets and confidential information of their clients.  The client's information is protected just the same regardless of what law firm the lawyer works for.  Indeed, to the extent that the client's information would be placed at risk if the lawyer were to join a particular law firm, the lawyer would be prohibited from joining that firm.   (This is dealt with in lawyer conflict of interest rules.)

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To be enforceable, noncompete agreements must, among other things, serve a "legitimate business interest."  What is a legitimate business interest?  Most states recognize trade secrets, other confidential business information, and customer goodwill as legitimate business interests that may properly be protected.  (See Back to the Basics... Terms of Art.)  This is not to say there is not overlap, however, and that's the key:  There is overlap.  

So, what does that mean and why is it significant?  The California Court of Appeal recently issued a decision The Retirement Group v. Galante that explains it.  But first some background...

Two things are important to know about California.  First, California does not permit employee noncompete agreements except (possibly) to protect trade secrets - although the California Court of Appeal had something to say about that too.  (More on that another time.)  Second, California (which is not unique in this regard) treats nonsolicitation agreements as noncompete agreements.  Therefore, in California, they generally will not be enforced, while in other states, they will be analyzed in the same fashion as traditional noncompete agreements are analyzed.  (The scrutiny applied, however, is typically a bit lower, as nonsolicitation agreements do not impede individual choice of employment to the same extent as the outright ban of a noncompete agreement.)

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In trade secret disputes, a company seeking to prevent a former employee from going to work for a competitor (or creating a new company that will be a competitor) often invokes the so-called doctrine of "inevitable disclosure."  In essence, an inevitable disclosure claim rests on the premise that because of the nature of the industry, the competitive positions of the former and current employers, the similarity of the employee's position with the former and current employers, and various other factors, it is inevitable that the employee will use the trade secrets of the former employer in his/her new position "unless [he] possesse[s] an uncanny ability to compartmentalize information."  PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995).  

Inevitable disclosure claims are not new.  Reported cases go back at least to the mid-1960s.  See, e.g., Allis-Chalmers Mfg. Co. v. Cont'l Aviation & Eng'g Corp., 255 F. Supp. 645, 654 (E.D. Mich. 1966) (finding an "inevitable and imminent danger" that engineer would disclose pump design to competitor, and "virtual impossibility" that he could work for competitor without disclosing trade secrets, as sufficient to justify injunction against working on pump product line for competitor).  

The doctrine gained new momentum, however, under the Uniform Trade Secrets Act ("UTSA"), which expressly protects against "threatened" as well as actual misappropriation.  The leading case applying the inevitable disclosure doctrine under the UTSA is PepsiCo.  In that case, PepsiCo and Quaker (Snapple) were competitors in the "New Age" drink business, and the defendant, Redmond, was a high-ranking marketing executive with PepsiCo who left to take a similar position with Quaker.  The lower court found, and it was not challenged on appeal, that strategic plans, pricing architecture, and marketing agreements with retailers were "trade secrets."  The court concluded that where the executive would be making strategic decisions for a direct competitor, it is inevitable that his decisions would be informed by his prior employer's trade secrets of this nature.  Based on that reasoning, the court enjoined the executive from accepting a position with the competitor for six months.   

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Sometimes as a discussion progresses, the details become obscured or lost altogether.  The discussions about noncompete agreements are no exception.  So, below are some definitions with which people should be familiar:

Common Types of Agreements:

• Restrictive covenant:  An agreement that limits a party's ability to perform similar work.  Generally, people think of the limits as applying after the parties' relationship ends, but typically the restrictions apply during the term of the contract as well.  (The reason for the post-contract focus is that the parties' interests are more likely to diverge at that point.)
• Noncompete agreement (also known as "noncompetition agreements"):  A type of restrictive covenant in which the applicable limitation precludes a party from providing services to a competitor of the other party.  These agreements can arise in many contexts (sale of a business, independent contractor agreements, partnerships, etc.), but most often arise in the employment context.  (Those that arise in the employment context are commonly referred to as "employee noncompete agreements.")
• Garden leave clause:  a type of employee noncompete agreement for which the employer compensates the employee while the employee is restricted from competitive activities.  There are two types: one in which employment continues during the restricted period (essentially the employee is required to provide a minimum amount of notice of resignation); one in which the employment terminates and the restrictive period begins.  For more on the garden leave clause, see Christi Adams' post, Garden Leaves.
• Forfeiture-for-competition agreement:  a form of employee noncompete agreement by which an employee forfeits certain benefits if he engages in activities that are competitive with his former employer.
• Compensation-for-competition agreement:  a form of employee noncompete agreement by which an employee pays his former employer (sometimes a percentage of the revenues from the competitive activities) if he engages in activities that are competitive with his former employer.  (This agreement can be viewed as a form of forfeiture-for-competition agreement, insofar as the employee forfeits some of the compensation for competitive activities.)
• Forfeiture agreement:  an agreement by which an employee forfeits benefits when his employment terminates - regardless of whether he engages in competitive activities.
• Nondisclosure/confidentiality agreement:  an agreement by which an employee agrees not to use or disclose an employer's confidential information.
• Nonsolicitation agreement:  an greement by which an employee agrees not to solicit - and, if well drafted, not to accept - business from the employer's customers.
• Antipiracy agreement:  an agreement by which an employee agrees not to solicit - and, if well drafted, not to hire - the employer's employees.
• No-hire agreement:  a type of antipiracy agreement by which a party agrees not to hire the other party's employees.
• Invention assignment agreement:  an agreement by which an employee assigns to the employer any potential inventions conceived of during employment.  (Typically, the inventions are only those that somehow relate to the work of the employer.)

For more information on these agreements, see, Beyond the noncompete. 

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