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

Settled Illinois law regarding the requirements for an enforceable post-employment non-competition agreement were discarded by a September 23 opinion of the Illinois Appellate Court (4th District) which would make any non-compete enforceable so long as its duration and scope are reasonable even in the absence of a long-standing customer relationship or access to confidential information.

In Sunbelt Rentals, Inc. v. Ehlers, No. 4-09-0290 (4th Dist.), the Illinois Fourth District Appellate Court (one of five appellate courts in Illinois) rejected decades of state-wide appellate court precedent applying the so-called "Legitimate Interest Test,"  by holding that an employer need not establish a legitimate interest (either long-standing customer relationship or confidential information) to enforce a post-employment non-compete.

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Cases and issues making the headlines*:

Mass Defections Frowned Upon (September 30)
It’s no surprise that courts frown upon coordinated mass resignations, timed to enable the group of departing employees to take the maximum advantage of the disruption caused by their departure.  And, yet, people still do it.  The latest here (paid service).

Be Careful Who You Get Into Bed With(September 30)
Companies share trade secrets in a variety of contexts: joint ventures, mergers, acquisitions, consulting relationships, and others.  Sometimes, however, after obtaining access, one party decides to use the secrets for its own purposes, often times competitive with the other party.  Law360 has reported on a recently-filed case alleging just that.  Story here (paid service).

When Noncompetes Expire… (September 22)
While most companies view noncompetition agreements as preventing their former employees from working for competitors, the risk – especially with well-heeled executives who have sold their business – is not so limited.  According to the Miami Herald, after selling his prior HMO, entrepreneur Mike Fernandez is planning to start another HMO at the expiration of his 5 year noncompete.  Story here.

CEOs and Trade Secrets (September 19)
The former chairman and CEO of Joost was sued for allegedly using trade secrets obtained by him while CEO and which enabled him to participate in acquisition of Skype.  Story here and here.

Malvertising and the Computer Fraud and Abuse Act (September 19)
Microsoft has filed a lawsuit alleging that certain companies hid malicious code in what appeared to be harmless online advertisements.  Microsoft claims that this and related conduct constitutes, among other things, a violation of the Computer Fraud and Abuse Act.  Story here and on Microsoft’s blog as “Bad Ad: Going After The Malvertising Threat.”

More Allegations of Chinese Nationals’ Theft of Trade Secrets (September 19)
DuPont reportedly sued a Chinese research scientist for misappropriating trade secrets for use in developing competitive products in China.  Story here.

More on California Court’s Take on the Computer Fraud and Abuse Act (September 19)
Below (“Employee Access to Computers and the Computer Fraud and Abuse Act”), we noted the recent 9^th Circuit’s recent ruling on whether employee’s “disloyal” access to his employer’s computer can violate the Computer Abuse and Abuse Act.  Here are more stories:  On Wired.com: “Court: Disloyal Computing Is Not Illegal” and on ars technical: “Disloyal employees are not hackers, says court.”

Trade Secrets Meet Public Records Act (September 17)
The Ohio Supreme Court has ruled that standardized tests are trade secrets, and therefore exempt from disclosure under the public records act.  Story here.

Noncompetes in the Financial Services Industry Are Alive and Well (September 17)
Lest you hear that noncompetes are no longer used in the financial services industry, don’t believe it.  Here’s the latest case to roll through the system:here.

Computer Fraud and Abuse Act Used Against Labor Union (September 17)
After allegedly being inundated with emails and telephone calls, a company has sued the labor union it claims orchestrated the infiltration of emails and calls, claiming that the conduct violates, among other things, the Computer Fraud and Abuse Act.  Story here and here.

Employee Access to Computers and the Computer Fraud and Abuse Act (September 17)
In the continuing development of the law governing whether an employee’s access of his employer’s computer for improper purposes is “unauthorized access” to the computer prohibited by the Computer Fraud and Abuse Act, the 9^th Circuit holds that it is not.  Story here.

Customer-Based Restrictions Substitute for Geographic Limit (September 17)
A Texas court was persuaded that restrictions in a noncompete agreement on which customers a former employee may solicit was a sufficient substitute for otherwise-required geographic limitations.  Story here.

It’s All Fun and Games Until… (September 17)
Two game development companies are in a dispute concerning whether one company’s employees defected to the other with trade secrets.  Story here.

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

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In a recent decision, LVRC Holdings LLC v. Brekka (9^th Cir.), a federal court upheld the dismissal of an employer's case against its former employee, Christopher Brekka, and his consulting businesses, alleging that he violated the Computer Fraud and Abuse Act (CFAA).  The company alleged that Brekka illegally accessed its computer "without authorization" during employment and after his employment terminated.  The court found Brekka did not access a computer "without authorization" when he emailed documents to himself, nor could the company prove that he accessed the company's internal website after he left the company.

The facts were largely undisputed - the company operates a residential treatment center for recovering drug addicts, and it hired Brekka to assist with marketing and interacting with its email and website provider.  At the time he was hired, Brekka owned and operated consulting businesses that provided referrals for rehabilitation services to potential patients.  While Brekka was employed by LVRC, he was provided a user name and a password so he could access company information, including information about LVRC's website and statistics about website usage.  Prior to leaving the company, Brekka emailed himself a number of LVRC documents, including patient admissions reports, LVRC's marketing budget, meeting notes, and a master admissions report that included the names of past and current patients.  Additionally, after he left the company, the company learned that someone had accessed its website using Brekka's log-in information. 

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On October 7, the Massachusetts legislature's Joint Committee on Labor and Workforce Development will conduct a hearing on the two noncompete bills sponsored, respectively, by Representatives Lori Ehrlich and Will Brownsberger. While those two bills are technically before the Committee, there is a third bill that reflects a joint effort by the two legislators, which is likely to be the focus of the hearing. The representatives initially made a draft available for public comment in July. Since then, there have been many meetings, emails, and other communications providing input on the draft. We have made an effort to consider them all in drafting the revisions to the July version. We also made an effort to structure the bill in as straightforward a manner as possible, given the complicated nature of the issues and the many interests to be balanced. As before, we have striven to achieve an appropriate balance of protections and incentives to both employers and employees, and make it easier for both sides to predict the outcome of any potential dispute, thereby reducing the need to resort to the courts for resolution of such disputes. The current draft (including changes through September 28) is available here.

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Last week, Foley & Lardner held the first of its five-part web series.  The topic was a spotlight on the Computer Fraud and Abuse Act.  The speakers were Eileen Ridley and Chad Fuller.  And, the program was very well received.  The presentation and materials are available under event materials here. 

• Part two will be October 15: Do You Know It When You See It? Trade Secret Audits to Identify the Company's Protectable Confidential Information.  
• Part three will be on November 12:  Are the Crown Jewels in an Unlocked Safe? Best Practices for Ensuring That Trade Secrets are Not Readily Ascertainable By Proper Means or By Departing Employees. 
• Part four will be on December 10:  Can the Toothpaste Be Put Back in the Tube? Preliminary Injunctions and Other Methods to Stop Trade Secret Misappropriation and Violation of Noncompetes. 
• Part five will be on January 21:  Enforcing and Litigating Across Borders, Including Through ADR.

Although the series forms an integrated course, addressing trade secret protection from start to finish, each part is a stand-alone presentation that can be viewed in isolation.  For more information please click here or visit Foley.com.  To register, click here.

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While state laws vary with regard to what will constitute a trade secret, most states have adopted the Uniform Trade Secret Act (UTSA), which provides the following definition:

"'Trade secret' means information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Those states that have not adopted the UTSA generally apply a similar concept. In sum, a trade secret has three essential components: (1) information; (2) value; and (3) secrecy.

While this sounds simple enough, the difficulty arises when trying to apply the definition. Let's take an example. Is a customer list a trade secret? Some say yes. Some say no. Both may be right.

Certainly, a customer list is information. Indeed, it fits squarely within one of the enumerated types: a compilation.

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When an employment relationship terminates -- regardless of who instigated the termination -- both employer and employee should consider the potential issues that could arise if the employee goes into competition with the employer.  The employer needs to minimize the risk that the departing employee will take its customers or trade secrets, while the employee needs to minimize the risk that her old employer will attempt to block her new employment.  The following are steps that each party should consider.

Employees.  To protect her future employment, a departing employee should not take any company information or property -- regardless of how insignificant it may seem.   Nor should she do anything that makes it look like she took something.  Downloading a bunch of material from the company's computer and then deleting it is one sure way to raise suspicion -- even if it was as innocent as transferring personal photos and contact information.  It looks even worse if the material so taken is work-related.  The employee may have simply wanted a keepsake of that project he spent so much time on, but from the employer's perspective it looks like theft.  Employees need to remember that the work they did belongs to the employer, and to leave it all behind.

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Certain recognized voices in the venture capital (VC) community have become increasingly vocal in their call for the abandonment of noncompete agreements in Massachusetts. Noncompetes are agreements that impose post-employment restrictions on a former employee's ability to compete with its prior employer. These VCs believe that noncompete agreements stifle an employee's mobility and innovation and, therefore, VC interest and investment. In support of their position, they point to the relative success of Silicon Valley's tech industry as compared with Boston's 128 high-tech corridor. They believe that Silicon Valley's comparative success is directly related to the fact that California prohibits noncompete agreements, while Massachusetts permits them. They contend, therefore, that by banning noncompetes, Massachusetts could reinvigorate VC investment and resultant innovation.Right or wrong, the VCs were able to garner support in a variety of sectors, including within the Massachusetts Legislature. In the past few months, however, the legislative approach has shifted direction. A new bill, which we at Foley were asked to write, would make the following changes to the law:

• Noncompete agreements would be required to be in writing and provided to the employee two weeks in advance (if possible) of employment or its effective date. 
• A noncompete entered into during the term of employment would require reasonably adequate consideration (value) beyond simply being permitted to continue to work for the company.
• Noncompete agreements would be limited to a term of one year, except for garden leave clauses (i.e., noncompete agreements for which the employer pays the employee during the post-employment restricted period), which can last for up to two years.
• Presumptions of reasonableness and enforceability arise for noncompete agreements that are limited in certain specified respects such as durations of no more than six months.
• Employees earning less than $50,000 would be exempt from noncompetes. Employees earning between $50,000 and $100,000 would be exempt, unless the noncompete is designed to protect trade secrets and/or confidential information.
• Employees would be entitled to their legal fees in certain instances.

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We are pleased to announce a free five part web series entitled, "Trade Secrets and Noncompete Agreements: What You Need to Know."  The series covers the topics below.  For more information please click here or visit Foley.com.  To register, click here. 
 

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