Georgia Court of Appeals Confirms Non-Solicitation of Employees Covenant Need Not Have Geographic or Material Contact Language

As previously noted in Jackson Lewis’ Non-Compete & Trade Secrets Report, Georgia adopted legislation governing restrictive covenant agreements entered into on or after May 11, 2011. This law, however, does not address employee non-solicitation (i.e., anti-pirating) covenants, leaving courts to apply common law to such restrictions.  Georgia common law can be confusing and even contradictory on certain issues, such as whether an anti-pirating covenant must be limited to a specific geographic territory or to employees with whom the covenanting employee had contact.  The Georgia Court of Appeals for the Fourth Division addressed both issues in a recent decision, CMGRP, Inc. v. Gallant, No. A17A1168 (Ga. Ct. App. Oct. 4, 2017).

Gallant began working for a unit of CMGRP in October 2008.  On October 7, 2008, she executed an employment agreement prohibiting her from “recruiting or hiring any employee of [CMGRP] for a period of one year following her resignation.” Notably, this anti-pirating covenant was not limited to a particular geographic territory or to employees of CMGRP with whom Gallant had any contact or relationship.

The trial court initially rejected the anti-pirating covenant because it was not limited to employees with whom Gallant had established relationships at CMGRP.  The Court of Appeals reversed the trial court’s order, however, based on prior holdings in which it “repeatedly upheld employee non-recruitment provisions that were not limited to employees with whom the former employee had an established relationship.”  Notably, the Court acknowledged a seemingly contradictory decision in which it criticized a non-solicitation covenant for prohibiting the solicitation of employees with whom the employee had no prior contact. The Court explained that the matter at issue in that case was actually a separate non-compete covenant, and its discussion of the non-solicitation covenant was merely “dicta” that “lack[ed] the force of an adjudication.”

In addition to challenging the anti-pirating covenant’s application to employees with whom she had no established relationship, Gallant also argued the pirating covenant was unenforceable because it lacked a geographic territory.  Though she ultimately abandoned that argument, the Court of Appeals found it “worth noting that this Court has upheld employee non-recruitment provisions that lacked a geographic limitation.”

This is a pro-employer decision, as the Court was clear that an anti-pirating covenant need not be limited to a particular geographic territory or to employees with whom the soliciting employee had material contact.  Moreover, because Georgia’s recent restrictive covenant legislation does not apply to anti-pirating covenants, the Gallant decision is instructive in all cases involving such covenants, regardless of the date of the agreement.  Employers should be aware, however, that other courts of appeals in Georgia have issued conflicting holdings, and those courts are not bound by the ruling in Gallant.  For assistance in drafting legally enforceable restrictive covenant agreements, please contact a member of Jackson Lewis’s Non-Competes Practice Group.

Continued Employment Isn’t Always Sufficient – Minnesota Requires Additional Consideration For Non-Compete With Current Employee

The Minnesota federal district court recently refused to enforce a non-compete agreement, in part, because the employer failed to establish that the agreement was supported by valuable consideration.  The decision, issued on October 6, 2017 in Mid-America Business Systems, v. Sanderson et. al., Case No. 17-3876, serves as an important reminder that, in Minnesota, there can be no shortcuts with restrictive covenant agreements.   New employees must be presented with the non-compete agreement before accepting an offer of employment.  Further, existing employees must receive something of additional value, beyond continued employment, as consideration.

By way of background, Mid-America Business Systems (“Mid-America”) claimed in its TRO request that it hired Kevin Sanderson as a temporary employee, subject to an “unwritten” probationary period. Mid-America did not require Sanderson to sign a restrictive covenant agreement when it first hired him.  Months later, however, Mid-America allegedly converted Sanderson to a permanent position and required him to sign a non-compete.   Mid-America stated that in consideration for signing the agreement, it increased Sanderson’s pay, provided him additional training, and gave him access to confidential information.  In response, Sanderson denied that any increases in pay, training or access to information were tied to a non-compete, and further denied knowledge of any probationary period.

In rejecting the TRO request, the court concluded that Mid-America failed to prove the agreement was supported by adequate consideration. Importantly, the court agreed that increases in status, pay, and/or training could constitute adequate consideration for a post-hire non-compete.  However, it found that Mid-America failed to demonstrate that it informed Sanderson of the alleged probationary period, or of any connection between the agreement and the alleged additional consideration.   Therefore, for purposes of awarding injunctive relief, the court deemed the non-compete to be unenforceable.

For employers operating in Minnesota, the takeaway from this decision is that courts will look carefully for proof of adequate consideration before enforcing a non-compete agreement. In particular, when asking an existing employee to sign a non-compete, employers must offer additional consideration beyond continued employment, and must ensure that the employee understands the terms of agreement.  The absence of clear documentation seemed to be a critical factor in this case.  Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in making your company’s non-compete agreements stick.

Virginia Uniform Trade Secrets Act Prohibits Improper Acquisition of Trade Secrets, Regardless of Subsequent Use

Misappropriation of trade secrets claims can sometimes be difficult to sustain. While evidence of the taking of a trade secret may be available, evidence of its subsequent use may not.  In Integrated Global Services, Inc. v. Michael Mayo, Case No. 3:17cv563, by decision issued on September 13, 2017, the federal court for the Eastern District of Virginia entered a preliminary injunction against a former employee, after concluding that he had likely misappropriated the company’s trade secrets in violation of the Virginia Uniform Trade Secrets Act (“VUTSA”).  The opinion is particularly notable for its conclusion that the mere acquisition of a trade secret by improper means constituted an unlawful misappropriation under the VUTSA, regardless of whether the defendant actually used the trade secrets or disclosed them to third parties.

The former employee, Michael Mayo, held a management position with Integrated Global Services, Inc. (“IGS”) until his involuntary termination on June 21, 2017. In that role, Mayo evaluated work proposals; assisted in the development of project estimates, bids and proposals; and interacted extensively with customers.  Those activities allegedly afforded Mayo access to IGS’ “technical, engineering, sales, customer, budget, manpower, and cost and pricing information.”  IGS took various measures to ensure the confidentiality of that information, including limiting accessibility to only employees who needed the information to perform their jobs, as well as requiring those employees to sign detailed confidentiality agreements.

For nearly one month after his termination, IGS claims Mayo ignored repeated requests for the return of his company-issued laptop and phone. Further, when IGS finally received the property, it allegedly discovered that Mayo “wiped” his phone of company data in the days following his termination, as well as copied and deleted numerous files of highly sensitive information from the laptop.  IGS also allegedly learned that Mayo was going to work for a competitor and had been in discussions with competitors prior to returning the laptop and phone.  IGS quickly filed suit under the VUTSA and moved for a preliminary injunction, requiring the immediate return of any IGS documents and strict compliance with the terms of his Confidentiality Agreement.

The Uniform Trade Secrets Act is a model statute for the protection of trade secret information that has been adopted, to varying degrees, by 48 states and the District of Columbia. Virginia’s version, the VUTSA, defines a prohibited “misappropriation” as “[a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means” or “[d]isclosure or use of a trade secret of another without express or implied consent by a person who … [u]sed improper means to acquire knowledge of the trade secret.”

In granting IGS’ request for a preliminary injunction, the court held that IGS established a likelihood of success on its VUTSA claim by submitting credible evidence that Mayo (1) copied electronic trade secret data from his company-issued laptop to an external memory device, and (2) used “improper means” to do so (by copying the data after his termination date, despite knowing that his actions were prohibited by the Confidentiality Agreement). Importantly, the court specifically held that the statutory definition of “misappropriation” did not require IGS to prove that Mayo had actually used the copied data files against IGS.

When a company learns that a former employee has left with valuable trade secret information, there is often an immediate need to secure the information before any material damage has been done.  The above decision demonstrates that in Virginia at least, companies can pursue enforcement actions against the former employee without having to wait for damage or threatened damage to occur.  Please contact a member of Jackson Lewis’s Non-Competes Practice Group for further assistance in protecting your company’s trade secrets.

Federal Court Warns Companies – If You Don’t Protect Your Trade Secrets, Neither Will We

In 2016 Congress passed the Defend Trade Secrets Act, creating a federal cause of action for the theft of trade secrets. For a plaintiff attempting to prove that the information at issue is a trade secret, there is a tendency to focus only on the information itself, rather than the manner in which the plaintiff maintained such information. However, as explained by the federal court for the Eastern District of New York, in an Order dated October 3, 2017 in the matter of Art and Cook, Inc. v. Haber, No. 17-cv-1634, the courts will not protect proprietary information whose confidentiality the plaintiff failed to take reasonable steps to preserve.

On January 13, 2017, Art and Cook, Inc. (“A&C”) terminated Abraham Haber, an employee of nearly five years, after allegedly making a startling discovery. While conducting an audit of Haber’s work computer, the company claimed it discovered that Haber transferred valuable proprietary information to his personal email account.  The material transferred included logos, banding/marketing strategies, and sales projections for two product lines that were set for launch, as well as the contact information of 72 retailers to whom the company hoped to sell its products. Moreover, shortly after A&C terminated Haber, a supplier of some of the company’s products reported that Haber was seeking to establish his own supply line for products similar to those supplied to A&C.

Recognizing the significant damage that Haber would cause to its business if his alleged efforts were successful, A&C quickly filed suit under the federal Defend Trade Secrets Act (“DTSA”), moving for an emergency temporary restraining order and preliminary injunction. Although a TRO issued, the court subsequently determined that the retailer lists were composed entirely of information “generally known in [A&C’s] industry.” In ruling on A&C’s preliminary injunction request, the court noted that the product designs and branding/marketing strategies “are the sort of business information that the DTSA was designed to protect: they derive independent economic value from not being generally known.”  There was one catch, however; A&C did not do enough to keep that information a secret.

Under the DTSA, it is unlawful to misappropriate a “trade secret” that is related to a product or service used in, or intended for use in, interstate or foreign commerce. Not surprisingly, whether a company’s business information qualifies as a protected “trade secret” depends largely on the nature of the information; as the DTSA explains, the information at issue must “derive[] independent economic value … from not being generally known … [or] readily ascertainable … [to] another person who can obtain economic value from the disclosure or use of the information[.]”  However, equally important is how the owner of the information treats it.  Simply put, “the owner [must have] taken reasonable measures to keep such information secret.”

In the instant case, A&C demonstrated that it took certain steps to protect its business information, including by password-protecting its server and folders, and contracting a third-party security company to protect its servers from outside hacking. Additionally, the company’s President testified that he spoke to Haber on many occasions about confidentiality.  However, A&C ultimately could not overcome the consequences of the steps it failed to take.  Specifically, the company did not require Haber to sign a non-compete.  Further, the company did not even ask him to sign a non-disclosure agreement until approximately three years after he was hired.  Even after Haber refused A&C’s request that he sign the non-disclosure agreement, the company continued to employ him for two more years and took no steps during that time to limit his access to its sensitive proprietary information. While the court conceded that A&C had a potentially winnable argument that the measures it took were sufficient to confer DTSA protection, it could not conclude that he was likely to succeed on the argument, as required for the issuance of an injunction.

One would be hard-pressed to argue that Haber would not have realized the information he allegedly took was proprietary and highly valuable, and that the taking was unauthorized. Indeed, the court expressly agreed that A&C’s product designs and branding/marketing strategies bore all of the hallmarks of protectable trade secret information.  The problem, at least from the court’s perspective, was that A&C did not treat them accordingly.

This ruling represents a stark warning to companies: if you do not protect your trade secrets, neither will the courts.   To ensure that you are taking the appropriate steps to safeguard your trade secrets and confer protection in the courts, please contact a member of Jackson Lewis’s Non-Competes Practice Group.

Referral Sources Can Be A Protectable Interest Under Florida Law

In Florida, non-competition and other restrictive covenant agreements are enforceable to the extent they are tailored to protect a legitimate business interest. On September 14, 2017, the Florida Supreme Court held that a company’s relationships with business referral sources may constitute a protectable business interest – White v. Mederi Caretenders Visiting Services of Southeast Fla., No. SC16-28, and Americare Home Therapy, Inc. v. Hiles, No. SC16-400. Importantly, the Court stressed that its decision is highly fact-specific and depends on the role of referrals in particular industries and companies in question.

In a majority of business situations, the solicitation of new business involves direct communication between business representatives and their potential customers or clients. However, in certain industries, businesses are largely or even exclusively reliant on third party referrals. Home health care (“HCC”) providers, for instance, obtain new patients by way of referrals from those patients’ treating physicians.

Instead of competing over patients, HHC providers generally dedicate the bulk of their business development efforts toward the development of relationships with patient referral sources. However, as noted in the recent Florida Supreme Court decision, HHC providers and other types of businesses have historically run into trouble enforcing non-compete and non-solicitation agreements that restrict competition over referral sources, as opposed to actual customers, clients or patients.

Restrictive covenant agreements in Florida are governed by Florida Statute Section 542.335, which provides that restraints on competition are enforceable to the extent that they protect a “legitimate business interest.” The statute goes on to provide a non-inclusive list of “legitimate business interests,” one of which is described as “substantial relationships with specific prospective or existing customers, patients, or clients.”

Notably, the Florida non-compete statute does not list referral relationships as a legitimate business interest. Further, conferring protected status to such referral relationships might seem to conflict with the statute’s express protection of relationships with “specific prospective or existing customers, patients, or clients.” In this regard, referral sources, by their very nature, are relied upon for customers, patients or clients whose identities are not yet known.

Despite acknowledging the above concerns, the Florida Supreme Court ultimately held that such factors do not preclude the designation of referral sources as protectable legitimate business interests.  First, the Court pointed out that the statutory list of legitimate business interests is expressly non-inclusive.  Second, the Court concluded that “[a]ttempting to protect identifiable referral sources is distinct from claiming an interest in an unidentified patient base.”

Central to the Court’s holding was the unique nature of the HHC business model. As the Court explained, HHCs “are dependent upon referrals to obtain patients as HHCs do not directly solicit patients.  In fact, a physician signing a treatment order can be a condition precedent to receiving home health services, similar to a prescription…  Therefore, for an HHC to obtain a specific prospective or existing patient…, it must first develop a referral source to supply the patient.”  In other words, referral relationships are “crucial business interests” for an HHC, and, therefore, are consistent with “the legitimate business interests listed in the statute.”

Importantly, the Court was careful to emphasize that the determination of protected status for referral relationships is “heavily industry- and context-specific.” Therefore, employers should proceed cautiously before attempting to restrict former employees from competing for referral sources.  For example, employers should consider the manner in which they rely on referral sources for business opportunities; the degree to which they rely on those referral sources; the contractual or other relationship with the referral sources themselves; and the investments made to develop and retain referral relationships.  As always, please contact the member of Jackson Lewis’ Non-Competes Practice Group for further assistance in assessing these issues relating to referral relationships.

Kansas Decision Highlights The Perils Of Overreach In Restrictive Covenant Agreements

In a recent decision examining Kansas non-compete law, the United States District Court for the District of Kansas partially granted a company’s motion to enjoin its former employee’s violations of the non-compete and customer non-solicitation provisions of his employment agreement. The decision, in the matter of Servi Tech, Inc. v. Olson, highlights a number of key issues that Kansas employers should consider when fashioning restrictive covenant agreements.

 

Olson’s Obligations to Service-Tech

On August 21, 2014, Servi-Tech, which provides agricultural crop consulting services to commercial and individual clients, hired Dillan Olson as one of its consultants. In addition to assuming responsibility for 10 existing Servi-Tech clients at the inception of his employment, Olson acquired 8 additional clients through his own efforts, 5 of whom were family members, friends, acquaintances and/or long-time business contacts.

As a mandatory condition of his employment, Olson signed an Employment Agreement that, among other things, prohibited him, for two years following his termination of employment, from:

  • engaging in a competing business within 50 miles of any Servi-Tech customer that he serviced during the two years preceding his termination; and
  • soliciting, servicing, or otherwise diverting the same customers on behalf of a competing business.

The Agreement also included a tolling provision, which stated that the 2-year restrictive period “shall be deemed to begin running on the date of the entry of the court order granting SERVI-TECH injunctive relief[,]” and “shall be tolled during any time [Olson] violates” the applicable restrictive covenant(s) and/or court-issued injunction.

Servi-Tech terminated Olson’s employment on September 30, 2016 (for reasons not specified in the Court’s decision). Less than two months later, Olson established a competing business within the 50-mile restricted territory and diverted the business of the 5 personal contacts he brought to Servi-Tech.  Servi-Tech responded by suing Olson for breach of the employment agreement and requested a preliminary injunction to prevent continued breaches during the pendency of the lawsuit.

The Court’s Decision is a Mixed Bag

Like many states, Kansas does not have a statute of general applicability to restrictive covenants, but courts will permit and enforce such restraints to the extent they protect a legitimate business interest. Here, the Court determined that Servi-Tech’s investment in specialized crop consulting and agronomy training for Olson, as well as its development of customer contacts and customer relationships through Olson, constituted legitimate business interests that justified reasonable non-compete and non-solicitation provisions.

The court also endorsed the 2-year duration of both the non-compete and non-solicitation provisions, noting that a 2-year restraint is “common” in Kansas non-compete cases. On the other hand, the Court labeled the tolling provision as “most uncommon” as well as unreasonable, particularly in light of the employer’s failure to file suit for about 7 months after learning of Olson’s competitive activities.  Importantly, the Court also found the 50-mile geographic scope of the non-compete provision to be overly broad, writing that it was “unrelated to the protection of Servi-Tech’s business interests” and served only to insulate Servi-Tech from ordinary competition.

In light of the above findings, the Court denied Servi-Tech’s motion for injunction as to the non-compete provision. On the other hand, the Court granted the injunction with respect to the customer non-solicitation provision, even with respect to Olson’s family members and long-time personal contacts.  Finally, the Court held that the non-solicitation provision’s 2-year restraint should run from Olson’s date of separation from Servi-Tech rather than from the date of the injunction order, essentially striking down the tolling provision in the agreement.

Takeaways

By refusing to enforce the non-compete provision altogether, despite suggesting that it was valid to a more limited extent, the Court’s decision is seemingly at odds with the general willingness of Kansas courts to limit the scope of restrictive covenants rather than strike them down entirely. While preserving the employee’s right to compete generally, the Court’s extension of the customer non-solicitation provision to the employee’s personal friends and family members is remarkable, and seemingly at odds with established law in other states.

In sum, this decision serves as a reminder that employers in Kansas (and elsewhere) should take care to tailor their agreements to meet the realities of their businesses and the unique circumstances of the employees affected, to ensure that any restraints on competition are no broader than necessary to protect the employer’s legitimate business interests. Please contact the member of Jackson Lewis’s Non-Competes Practice Group with whom you work for assistance in preparing restrictive covenant agreements that will be enforceable under the laws of your applicable state.

Nevada’s All-New Non-Compete Statute

nevadaOnce again, Nevada has re-written the landscape the law regarding enforcement of post-employment non-competition agreements.  Please see the article posted on our website, written by Elayna J. Youchah and Joshua A. Sliker of our Las Vegas office.  They analyze Assembly Bill 276, amending Chapter 613 of the Nevada Revised Statutes, signed into law by Governor Brian Sandoval on June 3, 2017.

The full article can be found here: http://www.jacksonlewis.com/publication/new-law-brings-changes-nevada-s-non-compete-law.

And, for further background, please see this post from last summer:  Nevada Confirms Its Restrictive Covenant Law, But Rejects Blue Penciling.

Members of Jackson Lewis’s Non-Competes Practice Group are prepared to help Nevada employers and anyone else with Nevada-based employees navigate this new law.

 

Nebraska Court Enforces Forum Selection Clause

NebraskaNebraska’s legal history on the enforceability of non-compete agreements is usually a surprise for employers who view Nebraska as pro-business.  Nebraska courts routinely invalidate employee non-compete agreements that venture beyond restricting the employee from doing business with and soliciting customers with whom that employee did business and had personal contact. If there is a non-compete component to the agreement, or if the non-solicitation applies to all customers, Nebraska courts typically invalidate the entire agreement.  Companies using a one-size-fits-all agreement for their Nebraska employees are routinely victimized by this surprise. The reaction is typically a scramble to litigate in a venue outside the Cornhusker state.

The reverse is also true. In a recent case, six former employees received cease and desist letters threatening litigation over non-compete agreement violations. Those employees and their new employer selected Nebraska as their venue – likely with knowledge a Nebraska court could invalidate the agreement.

In that case, Consolidated Infrastructure Group, Inc., et al.  v. USIC, the former and current employer had a litigious history. Upon receiving cease and desist letters, six former employees and the new employer knew litigation was likely. Of the six, one was a Nebraska resident who lived and worked in Nebraska and two were Iowa residents who worked in Nebraska. The remaining three former employees did not allege they worked in Nebraska, nor were they Nebraska residents.  The six, likely recognizing that a Nebraska court may invalidate the non-compete agreement with their former employer, filed a declaratory judgment lawsuit in Nebraska federal court. The six asked the court to declare their agreements void and enjoin their former employer from future litigation relating to the restrictive covenant agreements.  Almost simultaneously, the former employer filed a lawsuit against the individuals and their new employer in Indiana, the choice of law and forum in the non-compete agreements at issue.

The former employer moved to transfer venue of the Nebraska lawsuit to Indiana based on lack of personal jurisdiction and the venue selection clause in the agreements.  The Nebraska court denied the motion to dismiss for lack of personal jurisdiction, finding that the former employer had sufficient minimum contacts.  However, the court enforced the choice of venue clause in the agreement and granted the motion to transfer venue to Indiana. In enforcing the forum selection clause, the court also found the plaintiffs did not demonstrate the clause is unconscionable, the result of fraud, or that the agreements were not freely negotiated.

By securing a transfer of the case, the former employer likely saved its agreements from an expected finding of unenforceability by the Nebraska court.

The immediate takeaways from this case for employers are:

  • Ensure the non-compete agreement is enforceable for the state in which the employee works.  In this manner, there should be no surprises as to enforceability if the Company needs to file a lawsuit, or needs to defend against a declaratory judgment action.

 

  • A valid forum selection clause in any agreement, including non-compete agreements, coupled with a choice of law provision, may help save the agreement. Choice of forum and choice of law provisions may not always be enforced, but in some cases, like this one, it could mean all the difference.

The case is CIG Inc. et al. v. USIC et al., Civil Action No. 8:16 cv 472 (D. Neb. May 18, 2017).

State and Federal Trade Secrets Claims Upheld By Northern District of Illinois

2000px-Seal_of_Illinois_svgA May 11, 2017 decision by Judge Chang, in the Northern District of Illinois, found misappropriation alleged under the Defend Trade Secrets Act (DTSA) and the Illinois Trade Secrets Act (ITSA), in a case where the employee downloaded files while still employed.  Denying the Defendant’s Motion to Dismiss a Third Amended Complaint, the Court examined the key pleading elements of: (1) trade secret, (2) misappropriation, and (3) acquisition or use, as defined under both the Illinois Trade Secrets Act and the Defend Trade Secrets Act.  To survive a motion to dismiss under the ITSA and DTSA, a plaintiff must get over all three of these hurdles.

The Plaintiff contended that its former Head of Quality Control, Manish Desai, copied confidential data onto a portable data drive before taking up a new job at Plaintiff’s competitor, Nidec. Plaintiff further alleged that Nidec, a direct competitor, used and continues to make use of the secrets that Desai downloaded.  Defendant moved to dismiss the trade secrets claims arguing that there was nothing unlawful about Desai copying the files while he was still Plaintiff’s employee and that there is no plausible allegation that Nidec has used the trade secrets contained on the thumb drive. The Court found that Plaintiff easily cleared the first element by sufficiently alleging the existence of trade secrets.

The second hurdle – misappropriation – required closer examination. Desai argued that because Plaintiff alleged he downloaded Plaintiff’s trade secrets while he was still employed, he did not “misappropriate” the trade secrets, because he had authorization at the time he downloaded the files. The Court rejected this argument and instead agreed with Plaintiff, who cited the definition of “improper means” from the trade secret statutes and argued that the employee’s actions qualified as a “breach or inducement of a breach of a confidential relationship or other duty to maintain secrecy or limit use.”  This confidential relationship and duty to maintain secrecy was established via the nondisclosure clause contained in the employment agreement with Plaintiff.

Having established misappropriation, Plaintiff still faced the “acquisition or use” barrier. Without evidence of actual use, this can be difficult hurdle for a plaintiff.  To ease the leap over this last hurdle, the Court pointed to the inevitable disclosure doctrine. “Inevitable disclosure” allows a plaintiff to “prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995).  This, too has three elements courts must consider. “inevitable disclosure is established by examining “(1) the level of competition between the former employer and the new employer; (2) whether the employee’s position with the new employer is comparable to the position he held with the former employer; and (3) the actions the new employer has taken to prevent the former employee from using or disclosing trade secrets of the former employer.” Saban v. Caremark Rx, L.L.C., 780 F. Supp. 2d 700, 734-35 (N.D. Ill. 2011). The Court agreed that Plaintiff’s allegations were sufficient to meet the first two elements and then gave a pass to Plaintiff noting that the third element could not necessarily be known at the pleading stage and would have to wait for discovery.

The key lesson for employers here is that having the signed employment agreement with the nondisclosure clause created a duty – one which was alleged violated – and, which, provided the basis for meeting both the ITSA and DTSA’s misappropriation definition. The case is Molon Motor v. Nidec Motor (ND Ill.), Case No. 16-cv-03545, May 17, 2017.

 

Texas Pre-Suit Discovery – Obligations Under Unusual Procedure Clarified

2000px-Texas_flag_map_svgAlthough most employers are very familiar with the usual discovery process of litigation, they may not be as familiar with the Texas Rules of Civil Procedure’s Rule 202, which concerns pre-suit depositions. Rule 202 can be used, for example, by an employer who wants to learn more about a former employee’s activities before commencing a non-compete or trade secrets lawsuit.  Texas employers should be familiar with the availability of Rule 202 depositions, as well as with how to oppose an inadequately supported 202 petition, and how to use it effectively when needed.

Rule 202 allows a person to “petition the court for an order authorizing the taking of a deposition on oral examination or on written questions:

  • To perpetuate or obtain the person’s own testimony or that of any other person for use in an anticipated suit; or
  • to investigate a potential claim or suit.”

Tex. R. Civ. P. 202.1.

In doing so, a person must file a “verified petition” stating the subject matter of the anticipated action and the petitioner’s interest therein. Tex. R. Civ. P. 202.2.  The court “must” grant the petition and order the deposition to be taken if it finds that:

  • allowing the petitioner to take the requested deposition may prevent a failure or delay of justice in an anticipated suit; or
  • the likely benefit of allowing the petitioner to take the requested deposition to investigate a potential claim outweighs the burden or expense of the procedure.

Tex. R. Civ. P. 202.4(a).

A recent decision from the Tenth District Court of Appeals of Texas in Waco provides appellate authority regarding the required evidentiary support for a Rule 202 petition. In In re Pickrell, No. 10-17-00091-CV (Tex. App. 10th Dist. 4/19/17), 2017 BL 129282, the Tenth District Court of Appeals found that a verified petition and the attorney’s arguments were insufficient to support a Rule 202 petition and, therefore, the trial court abused its discretion in ordering a Rule 202 deposition. The bottom line of that portion of the decision is that Texas practitioners should go to be prepared to present witness testimony at hearings regarding Rule 202 petitions.

An additional, important ruling in Pickrell is that the trial court abused its discretion in ordering the production of documents.  While the statute is silent about document production, many Texas practitioners include document requests with requests for permission to take Rule 202 depositions, and with notices regarding such depositions. Pickrell provides appellate authority opposing that practice, finding that Rule 202 does not provide for such document discovery nor imply that it might be available.  2017 BL 129282 at *4.

Jackson Lewis attorneys are available to answer inquiries regarding pre-suit discovery and other questions regarding the Texas Rules of Civil Procedure.

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