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Non-Compete and Trade Secrets Report

Developments in protecting businesses against unfair competition

Half-Billion Dollar Arbitration Award in Trade Secrets Case Affirmed by Minnesota Supreme Court in Trade Secrets Dispute

The Minnesota Supreme Court has affirmed an arbitrator’s eye-popping award of $525 million plus prejudgment interest totaling $96 million and post-award interest in a trade secrets dust up between Seagate Technology, LLC and Western Digital Corporation, et al. Seagate Technology, LLC v. Western Digital Corporation, et al and Sining Mao, No. A12-1994 (Minn. October 8, 2014).  The Court’s decision is replete with lessons about the legal boundaries, risks, and protections for litigants in arbitration. It is notable also for the magnitude of the award which was, in part, the consequence of falsified evidence.

Seagate designs and manufactures hard disk drives for computers. Sining Mao was a senior director for advanced head concepts at Seagate working on technology that involves incorporating tunneling magnetoresistance (“TMR”) in to read heads to improve storage capacity. When he was hired by Seagate, he signed an employment agreement which included a requirement to preserve the confidentiality of trade secrets and to return company documents. The employment agreement contained an arbitration clause which stated, in part, that the “arbitrator may grant injunctions or other relief in such controversy” arising out of the agreement.  Arbitration was subject to the rules of the American Arbitration Association (“AAA”).

Mao left Seagate in September 2006 to join Western Digital, a competitor. Seagate then commenced a district court action seeking injunctive relief and alleging misappropriation of trade secrets related to TMR technology.  Western Digital invoked the arbitration clause of Mao’s employment agreement with Seagate, and the district court stayed the lawsuit pending arbitration.

Things started to go south for Western Digital and Mao argued that three of the alleged trade secrets had been publicly disclosed before Mao left Seagate because they were included in a PowerPoint presentation he gave at a conference.  Seagate argued that Mao had fabricated and inserted additional PowerPoint slides containing the information after the fact to make it appear as if this information had been made public.  The arbitrator found that “[t]he fabrications were obvious. There is no question that Western Digital had to know of the fabrications and yet continued to represent to the Arbitrator that Dr. Mao did in fact insert the disputed slides at the time of the conferences.” The arbitrator found that the fabrication and Western Digital’s complicity was an egregious form of litigation misconduct that warranted severe sanctions.

Specifically, the arbitrator precluded any evidence or defense by Western Digital and Mao disputing the validity of the three trade secrets or any defense to the allegation of misappropriation or use of the three trade secrets, which resulted entry of judgment on liability and monetary damages in the amount of $525 million, calculated based on an unjust enrichment method. Western Digital brought a motion to vacate the award in district court. The district court granted the motion in part, finding that the arbitrator exceeded the scope of his authority under the arbitration agreement.  The Minnesota Court of Appeals reversed the district court on the ground that Western Digital had waived its right to challenge the arbitrator’s ability to issue punitive sanctions by not raising the issue with the arbitrator himself (and because Western Digital had earlier sought sanctions against Seagate in the same matter).

The Minnesota Supreme Court affirmed the Court of Appeals although based on a different analysis. The Supreme Court held that Western Digital did not waive its right to challenge the Arbitrator’s authority under Minnesota statutes regarding arbitrations and requests for vacatur, specifically Minn. Stat. Section 572.19.   The high Court then went on to conclude that the arbitrator did have the authority to impose the disputed sanctions, looking at the employment agreement, AAA arbitration rules, and case law.

The Court noted that:

Some believe that arbitration has benefits, potentially including faster resolution and less expense than the judicial system as well as a higher degree of confidentiality. But the benefits come with costs, including significantly less oversight of decisions, evidentiary and otherwise, and very limited review of the final award. Here, despite the best efforts of experienced appellate counsel to argue otherwise, Mao and Western Digital’s decision to demand arbitration necessarily limited the availability of the protections and advantages of the judicial system.

It is unclear if a district court could have reached the same result as the arbitrator in the Seagate case, but the Minnesota Supreme Court’s decision suggests that arbitrators can have greater discretion than judges.  The case certainly highlights the fact that arbitration may not always be the best forum, depending on which side of the dispute you are on.

California Court Considers Customer Lists, LinkedIn Contacts, in Trade Secrets Case

A federal district court for the Central District of California has issued a detailed decision regarding customer lists and LinkedIn contacts in ruling on cross-motions for summary judgment in the trade secrets dispute captioned Cellular Accessories For Less, Inc. v. Trinitas, LLC,  No. CV 12-06736 DDP, including a surprising ruling that LinkedIn contacts might be considered trade secrets under California law.  The defendant, Trinitas, is a Texas business founded by David Oaks, a former employee of Cellular Accessories, based in California. As an employee of Cellular, Oaks signed an Employment Agreement and a Statement of Confidentiality generally promising not to use or disclose proprietary or confidential information of Cellular.

Oaks’ employment with Cellular was terminated in December of 2010. Shortly before he left, he emailed himself over 900 business contacts in an ACT file as well as certain other business, purchasing and strategic information regarding specific clients. Oaks also “maintained his LinkedIn contact information after his termination.”

Cellular filed suit in California alleging violation of the California Trade Secrets Act (“CUTSA”), along with several common law claims.  Both sides moved for summary judgment.

In analyzing first the ACT customer list, the Court noted that, in California as well as many other states, a customer list “may constitute a protectable trade secret” but “such lists are not automatically trade secrets, because many customer lists contain no information which is not easily discoverable through public sources.”  Where the employer has expended time and effort identifying customers with particular needs or characteristics, the list can be a trade secret. In Trinitas, as is typical in these cases, the defendant alleged that, “anyone can easily get extensive information about Fortune 1000 companies through a standard internet search.” Plaintiff, in response, asserted that “Cellular hires and pays employees who are tasked with cold-calling companies and working their way past the ‘gatekeepers’ to reach the right procurement officer.” Under the evidence provided, the court in Trinitas ruled that a genuine issue of material fact existed as to whether the customer lists could be a trade secret.

Next, the court reached a similar conclusion as to Oaks’ LinkedIn account. Oaks argued that LinkedIn contacts would have been viewable to any other contact he had on LinkedIn. Plaintiff argued that LinkedIn information is only available to the degree the user chooses to share it. Oaks did not provide evidence as to whether his account was publicly viewable.  The Court declined to “take judicial notice of the functions of LinkedIn” and held that a genuine issue of material fact existed as to whether the account was a trade secret without delving further into how LinkedIn operates. There is no indication as to whether Oaks argued that his LinkedIn account was not property of Cellular in the first place.

The ruling is remarkable considering thousands of employees probably terminate employment and maintain LinkedIn accounts every day.  It remains for a future decision, either in this litigation or another, to look at this question more carefully and to clarify whether LinkedIn contacts can ever be considered a trade secret.

The judge in Trinitas also dismissed several common law claims as preempted by CUSTA and dismissed a breach of contract claim for lack of damages. The decision is a useful one for any party engaged in a dispute about customer lists under California law and has garnered attention for its ruling regarding the social media site LinkedIn.

Learning the Hard Way: Non-Competes and Subsequent Agreements

The Georgia Court of Appeals handed down a tough lesson for an employer in Mapei Corporation v. Prosser, A14A0368 (Ga. Ct. App. July 9, 2014).  The Court of Appeals affirmed summary judgment for an employee on the claim he breached his non-compete with his prior employer.  The Court found a subsequent confidentiality agreement signed by the former employee omitted the non-compete covenant that the prior confidentiality agreement contained.  The Court found the subsequent agreement replaced the earlier-entered agreement containing the non-compete covenant because the subsequent confidentiality agreement covered the same subject matter and contained a superseding-agreement clause stating the agreement “totally replaces all prior contract agreements or understandings… about confidential information or any other subject matter contained herein.”

The take away for employers is to always be careful when having employees sign multiple agreements.  If an agreement contains a superseding-agreement clause, or even if it similar in subject matter to a prior agreement, it is important to determine if there are any prior agreements or covenants within other agreements between the employee and employer that the employer would want to preserve.  If so, new agreements can be drafted to maintain or preserve obligations under prior agreements.

While this decision was based on Georgia law, it was decided with the guidance of basic contract principles that many other states follow.  Therefore, employers nationwide should remember this lesson to avoid making the same mistake.

Kentucky High Court Nixes Non-Compete Supported Only By Continued Employment

The Kentucky Supreme Court has held that continued employment alone is not valid consideration for non-compete agreements.  In Charles T. Creech, Inc. v. Brown, 2014 Ky. LEXIS 233 (Ky. 2014), Donald E. Brown was employed by Charles T. Creech, Inc. for over 18 years before he was asked to sign a non-compete agreement in 2006. When the company’s owner presented the agreement to Brown, the owner stated that Brown needed to sign it in order to “get [the owner’s] daughter off our backs,” but no one told Brown that his continued employment was contingent on signing the agreement, and he received no other consideration for signing. The employer argued that Brown’s continued employment was valid consideration for the non-compete agreement, and relied on two cases in which the Kentucky Supreme Court had held continued employment to be valid consideration.  The Kentucky Supreme Court disagreed and distinguished both of those decisions, explaining that in both cases factors other than continued employment were present that constituted consideration.

The court’s decision did not affect the enforceability of non-compete or similar agreements that are entered into in connection with hiring, as an offer of at-will employment is still valid consideration under the court’s decision. The court also indicated that in the case of non-competes that are supported only by the purported consideration of continued employment, certain factors, including but not limited to specialized training, promotions, wage increases, and other post-agreement changes in the employment relationship, as well as “rehire” situations, may render the agreement enforceable. It remains to be seen if the reasoning of the court will also apply to non-solicitation, confidential information, arbitration, and other agreements entered into with employees after hiring.

Employers with Kentucky non-compete and similar agreements should review the enforceability of their agreements in light of the Creech decision.

Pennsylvania Court Enforces Forum Selection Clause in Franchise Non-Compete Against Florida-Based Defendant, and His Non-Signatory Wife

 

 

 

 

 

 

 

 

In yet another example of an increasing willingness to enforce properly-drafted forum selection clauses in non-compete disputes, a federal judge in the Eastern District of Pennsylvania recently denied a motion to dismiss and motion for transfer of venue brought by the former franchisee defendants, a husband and wife. AAMCO Transmissions, Inc. v. Romano, No. 13-5747 (E. D. Penn. Aug. 21, 2014).  The husband, Robert Romano, operated an AAMCO Transmission franchise in Hollywood, Florida starting in 1992. As part of his franchise agreement, Romano signed a non-compete.  AAMCO is based in Pennsylvania and the non-compete included the following forum selection clause:

Franchisee further agrees to the jurisdiction and venue of any proper court of general jurisdiction in wither Pennsylvania County, Pennsylvania, Montgomery County, Pennsylvania or in the county in which AAMCO has its principal place of business. Franchisee more particularly agrees to the jurisdiction and venue of the United States District Court for the Eastern District of Pennsylvania with respect to any proceedings which arise out of or are connected in any way with this Agreement or its performance, and Franchisee specifically agrees not to bring suit against AAMCO in any other jurisdiction or venue.

After being sued in Pennsylvania federal court, Defendants Robert and Linda Romano unleashed a number of attacks on jurisdiction and the choice of venue, including arguments that the court lacked subject matter jurisdiction based on the amount in controversy; that the court lacked personal jurisdiction under the minimum contacts standard; that the forum selection clause was not enforceable as to Linda Romano because she never signed any contracts with Plaintiff AAMCO; that the original franchise agreement had lapsed, and the forum selection clause was no longer in effect because it was not among the sections of the agreement specifically enumerated to survive the termination of the contract; and that, in the alternative, the court should transfer venue under a forum non conveniens basis.  The Court was having none of it and rejected all of these arguments.

With regard to enforcement of the forum selection clause, and the non-compete, against the signatory’s spouse, the Court held that “it is widely accepted that non-signatory third-parties who are closely related to a contractual relationship are bound by forum selection clauses contained in contracts underlying the relevant contractual relationship” and “the law [in Pennsylvania] is adamant that where a husband is enjoined from establishing a second business after covenanting not to compete, a wife should not be allowed to obtain the benefit of the proceeds of said covenant and then defiantly, in her name, establish a like business.”

With regard to the expiration of the agreement containing the forum-selection clause, the court noted, “Courts have upheld the applicability of forum selection clauses even where the termination provision of the contract expressly provides for the survival of certain enumerated provisions but not the forum selection clause.”

The AAMCO decision provides a rich vein of legal discussion to mine when attempting to enforce forum selection clauses contained in restrictive covenant agreements in Pennsylvania, and elsewhere.

Use of Non-Competes Cited as Factor Against Independent Contractor Status

Requiring independent contractors to sign non-competes may contribute to a finding that they were misclassified employees entitled to overtime, according to a decision from the Northern District of Illinois. In Perez v. Super Maid, LLC, No. 11-C-07485 (N.D. Ill. July 14, 2014), the court granted a motion for summary judgment by the U.S. Department of Labor alleging that Super Maid violated the Fair Labor Standards Act (FLSA) by treating its maids as independent contractors. The court entered judgment against the defendants in the amount of $184,505.26 and issued an injunction prohibiting defendants from violating the FLSA in the future.

In analyzing the facts of the case, the Court highlighted the fact that applicants for jobs with Super Maid were required to sign a three-year non-compete prohibiting them from accepting direct employment with any of Super Maid’s customers. The maids were told that this meant they could not work for another maid service. Citing a previous decision also involving the alleged mis-classification of maids, the Court noted that the notion that employers could designate maids as independent contractors – who would normally be free to utilize their skills in an open market – while simultaneously restricting that very ability with a non-compete, had been rejected.  The Court did not rely solely on this issue, and applied a multi-factor test to determine that the maids should be classified as employees, but the decision shows the potential risk involved when requiring independent contractors to sign non-competes.

Restrictive covenants are not necessarily per se prohibited between a company and an independent contractor, depending, of course, on the state law in question and the nature of the relationship.  There may be many circumstances where a contract with restrictions on competition or soliciting clients may be appropriate, and enforceable. But when a large workforce is involved, and the other factors create a close call as to classification, companies should be wary.

 

North Carolina Court of Appeals Directs Trial Court to Rewrite Non-Compete Agreement

Take everything you thought you knew about North Carolina’s “blue pencil” doctrine and scribble it out – well, at least as it pertains to non-compete agreements between parties to the sale of a business.

Historically, North Carolina’s limited “blue pencil” doctrine prohibited a court from “drafting a new contract for the parties” by restricting the court’s ability to modify an overly broad restriction.  At most, the court could strike distinctly separable parts of a restrictive covenant if it found them overbroad – it could not revise or rewrite the covenant.  In Beverage Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC, et al, No. COA 14-185 (August 5, 2014) a divided panel of the North Carolina Court of Appeals may have partly erased this strict adherence to a limited “blue pencil” doctrine.

In Beverage Sys., plaintiff purchased defendant’s business and the parties executed a non-competition agreement which contained a contractual provision that specifically allowed for a court to revise its duration, scope, or geographic area in the event any of them were determined to be overly broad.  Because the geographic area described by the non-compete was not limited to places where defendant had former customers and, thus, not necessary to maintain plaintiff’s customer relationships, the trial court determined the geographic scope was unreasonably overbroad and the agreement unenforceable.  The trial court relied on North Carolina’s long-established limited blue pencil doctrine in support of its refusal to rewrite the non-compete provisions and disregarded the agreement’s express authority purportedly allowing the court to do so.

On appeal, the majority opinion, written by Judge Hunter, reasoned that a trial court’s ability to go beyond the restrictions of the “blue pencil” doctrine in a sale-of-business context makes “good business sense and better protects both a seller’s and purchaser’s interests in the sale of a business.”  The majority relied on Outdoor Lighting Perspectives Franchising, Inc. v. Harders, __ N.C. __ App. __, 747 S.E.2d 256 (2013), for the proposition that North Carolina courts have indicated a willingness to recognize and enforce a revised non-compete agreement.  The court distinguished the Beverage Sys. case from prior cases by stating that the non-competition agreement at issue expressly authorized the court to revise the agreement.  The Court determined that given the fact that non-competes drafted pursuant to the sale of a business are afforded more latitude than those arising out of the employment relationship, the parties were in a relatively equal bargaining position and the trial court should have exercised its power to revise the offending geographic provision to make the agreement enforceable.

It remains to be seen whether this case will be appealed to the North Carolina Supreme Court, which has been somewhat more conservative with regard to the enforcement of non-competition agreements than the Court of Appeals.  It is also unclear whether this same reasoning will be applied to employment agreements containing non-competes which are not entered in connection with the sale of a business.  Regardless, it appears that North Carolina employers may be well served to include a modification provision in their non-competition contracts which expressly authorizes modification by a court of competent jurisdiction so that this argument is available in the event the original covenant is determined to be overbroad.

Texas Court Enforces Two-Year Non-Compete; Suggests Restrictions up to Five Years May be Reasonable

A U.S. District Judge in the Northern District of Texas has issued a preliminary injunction to enforce a non-compete agreement in Brink’s, Inc. v. Patrick, Case No. 3:14-cv-775-B (N.D. Tex., 6/26/14).  The opinion adheres to well-established Texas law principles regarding the reasonableness of the limitations contained in non-compete agreements.

Brink’s provides secure transportation for currency, negotiable instruments, and other valuables.  Robert Greco worked for Brink’s as the Area Director for the Central Region.  He worked out of Brink’s Chicago office (where he had previously been Branch Manager), but had responsibility over operations in several Midwest states and Texas.

Around the time Brink’s promoted Greco to Area Director, Greco signed a Confidentiality and Non-Competition Agreement.  Greco agreed not to “provide or perform services similar to those provided or performed by the Company within the Territory (as defined below) for any Competing Business” for a period of two years after the termination of his employment.  The Agreement defined “Territory” as:

[T]he geographic area serviced by the Company office(s) to which I was last assigned or if my employment in such office(s) was for a period of less than two (2) years, the geographic area serviced by each Company office(s) to which I was assigned within the two (2) years preceding the termination of my employment with the Company.

Greco resigned as Area Director to perform similar duties in the Chicago area for one of Brink’s main competitors.  Brink’s filed suit and requested a preliminary injunction restricting Greco from performing services for the competitor that were similar to those he provided Brink’s in the territories he worked for Brink’s.

When evaluating the reasonableness of the limitations in the Agreement, the Court relied on multiple “rules of thumb” under Texas law to conclude that Brink’s was likely to succeed on the merits.  First, the Court held that the geographical restriction was likely reasonable because it was limited to the same territories where Greco worked for Brink’s.  Second, the Court held that the scope of activity restriction was likely reasonable because it was not an industry-wide ban, but only prevented Greco from working for competitors in a role that was similar to his role at Brink’s.  Third, the Court found that the two-year restriction was not an obstacle to a preliminary injunction because “Texas courts have generally upheld non-compete periods ranging from two to five years as reasonable.”   The opinion is particularly noteworthy for this latter statement, which is generalization of Texas law that many would debate.  Employers seeking to enforce agreements with non-compete periods lasting two years or more will certainly want to keep this opinion in mind.

The opinion underscores the importance of narrowly drafted non-compete agreements.  The Court emphasized that the Agreement did not prevent Greco from competing outside of certain geographical areas or from working for a competitor in a role that was different from his role at Brink’s.  The Court’s analysis of reasonableness of the geographic limitation and the scope of activity to be restricted comports with how Texas courts typically evaluate the reasonableness of a non-compete agreement.

NLRB Holds Employee Termination Pursuant to an Unlawful Confidentiality Policy is Lawful

Jackson Lewis has posted an analysis of the National Labor Relations Board’s latest decision in Flex Frac Logistics, LLC, 360 NLRB No. 120 (2014). In this decision, the Board determined that it was lawful to discharge an employee for violating  a confidentialty policy which the Board separately found was unlawfully overbroad under Section 7 of the National Labor Relations Act.

As the authors indicate:

Therefore, even if an employer’s policy or rule is found to violate the NLRA, all is not lost. That policy or rule still may be enforced, even to the point of discipline or discharge, as long as the conduct to which the enforcement is directed does not implicate Section 7 rights.

 

 

Louisiana Court of Appeals Holds Non-Compete Was Triggered When Employment Agreement Expired, Not When Actual Employment Ended

The Louisiana Court of Appeals, First Circuit, recently affirmed a lower court’s denial of a preliminary injunction to enforce a covenant not to compete in Gulf Industries, Inc. v. Boylan (La. App. 1 Cir. June 6, 2014). The case demonstrates continued careful scrutiny by Louisiana courts of non-compete agreements.

Gulf Industries provides highway safety, highway construction, and other related services.  The plaintiff, Boylan, worked his way up within the company to the position of Senior Vice President of Operations and was responsible for maintaining good client relationships with state and local transportation officials, as well as private contractors and suppliers.

In 2009, Boylan signed a one year employment agreement that contained a non-compete provision that was to extend for two years beyond the date Boylan’s last services rendered on behalf of Gulf.  The term of the employment agreement was August 1, 2009 to July 31, 2010.  Boylan continued to work for Gulf after July 31, 2010 and up until his resignation on August 31, 2012.  His last date of employment was September 18, 2012.  A week later, Boylan began competing with Gulf Industries through a new business he and others formed.

Gulf Industries filed suit asserting that Boylan was in violation of his agreement not to compete with the company for two years “beyond the date of Mr. Boylan’s last services rendered on behalf of Gulf.”  Despite the language of the contract, the Court of Appeals affirmed the lower court’s holding that the two-year period began at the conclusion of the employment period identified in the agreement (July 31, 2010) rather than Mr. Boylan’s last date of employment (September 18, 2012).

In its holding, the court noted:

[a]fter a common-sense reading of the employment agreement, we find that its employment period was not extended beyond the original termination date. While Mr. Boylan continued to work for Gulf after July 31, 2010, he no long worked under the terms of the employment agreement and was an at-will employee. When the employment period under the employment agreement terminated on July 31, 2010, Mr. Boylan then became subject to its non-compete clause for two years. The effective period of the non-compete clause ended on July 31, 2012.

The court rejected the employer’s argument that the agreement had been extended when Boylan initialed an exhibit that listed the parishes where the non-compete clause would be effective on March 8, 2011.  The court noted that Boylan testified at the preliminary injunction hearing that his initialing of the exhibit was because it had not been presented to him when he originally signed the agreement in 2009 but that he was not agreeing to extend the terms of the employment period with his initials.

The case highlights the dangers of incorporating a non-compete agreement with a formal employment contract with a defined term.