Florida sign Businesses seeking injunctive relief to enforce non-competition agreements in Florida might be required to show the confidential information they seek to protect is neither unnecessary nor outdated, according to a recent ruling in Transunion Risk and Alternative Data Solutions, Inc. v. Challa, 2016 U.S. Dist. LEXIS 166346, Case No. 9:15-cv-91049 (S.D. Fla. March 23, 2016).  The defendant/former employee in that litigation testified that he would not use his extensive knowledge of the plaintiff/former employer’s confidential business information to perform his new job with a competitor.  Despite the court’s acknowledgement of a legal presumption that the plaintiff would be irreparably injured by the defendant’s employment with a competitor, the defendant was able to avoid a preliminary injunction with his own self-serving testimony about his job duties. This was also despite the court’s specific finding that the former employer “has a substantial likelihood of success on the merits of its claim for breach of the Agreement.”  The court ruled that the presumption of irreparable harm was rebuttable and that the defendant presented sufficient evidence to rebut the presumption.

In testimony at the preliminary injunction hearing, the defendant explained the nature of his new position, the publicly available information that he utilized to perform his new job functions, and the reasons why he did not need the plaintiff’s confidential information in his new position. The court also pointed out that 14 months had passed since the defendant last had access to the plaintiff’s confidential information and that both parties agreed that the data fusion industry in which they worked was rapidly evolving. As a result, the court denied plaintiff’s motion for a preliminary injunction.

The court further noted that ‘[t]o succeed on the merits of its claim, [the former employer] must also establish damages resulting from the breach.” The court then questioned whether the former employer would be able to do so “in light of the findings and conclusions” reached by the court in denying the preliminary injunction.

Employers seeking to enforce non-competes should proactively gather and be prepared to present evidence in hearings seeking preliminary injunctive relief to show that a former employee’s new position will necessarily entail utilization of the employer’s valuable confidential information. Based on Transunion, companies face an uphill battle if they request injunctive relief to prevent employment by a competitor which might be seen as only to preserve the confidentiality of unnecessary or outdated information.

A recent unpublished decision of the United States District Court, Eastern District of Pennsylvania, highlights the importance for employers to review carefully their agreements containing restrictive covenants to ensure they do not unintentionally limit the available avenues for relief.

In Healthcare Servs. Grp., Inc. v. Fay, 2015 BL 33694 (Oct. 14, 2015), Healthcare sued two former employees (and their new employer) for violation of their non-compete agreements, misappropriation of  trade secrets, and  tortious interference.  The District Court granted Healthcare’s motion for a preliminary injunction in May 2013.  The two former employees appealed, and the Third Circuit affirmed in February 2015, sending the matter back to the District Court for further proceedings.  The case remained in the District Court without further action until a telephone conference with the court in July 2015.  In August 2015, the two former employees moved to compel arbitration of Healthcare’s claims pursuant to the arbitration provision of the employment agreement at issue. The arbitration provision stated in relevant part:

Any dispute that in any way relates to the Plan or this Stock Option Agreement … shall be submitted to mandatory and binding arbitration … The decision of the arbitrator shall be final and binding on both parties … Notwithstanding the foregoing, the Company may seek temporary and/or preliminary injunctive relief against Employee … in an appropriate state or federal court with jurisdiction over the matter before initiating arbitration.

Healthcare opposed the employees’ motion to compel arbitration.  Healthcare did not argue the arbitration provision was invalid; after all, it had drafted the agreement in the first instance. Rather, Healthcare argued that it would be prejudiced by arbitration now, more than two years after it commenced the action in the District Court.

The court granted the motion to compel arbitration, reasoning that the provision was valid, and Healthcare suffered no prejudice.  Although more than two years had elapsed since the commencement of the action, nothing substantive had occurred in the matter beyond the  preliminary injunction application and appeal.  The court further reasoned that arbitration could not have commenced anyway until after the appeal was ruled upon, which process concluded in February 2015.  The Court also noted that Healthcare allowed the matter to lay dormant from that point until August 2015.

It is not unusual to see an arbitration clause in an employment agreement which permits the employer to seek a temporary restraining order or preliminary injunction in court.  In certain situations, there may be legitimate business reasons why an employer would want proceedings in a non-compete matter, beyond the initial preliminary injunction application, decided by an arbitrator. For example, the employer may prefer the confidentiality associated with arbitration as well as potentially more limited discovery and lower litigation costs.  However, there often are equally or more compelling reasons to keep restrictive covenant proceedings in court, before a judge.  For example, broader discovery may be needed to effectively prosecute the case.  In addition, the need for exigent relief often is better addressed by emergent applications to a judge than the likely slower process of arbitration.

Here, even if Healthcare had been denied preliminary injunction relief, it may have preferred to keep the matter before a judge to be able to renew the application on a fuller discovery record.  With the preliminary injunction granted, Healthcare likely preferred to have the same judge from whom it received a favorable ruling determine an application for a permanent injunction.  Despite Healthcare’s desire to keep the matter in the district court (for these or perhaps other reasons), it was hamstrung by the language of its own agreement, which did not exclude restrictive covenant matters in their entirety from arbitration.

For these reasons, employers should review their agreements containing restrictive covenants to make sure the language concerning arbitration of claims is consistent with their needs.

The saga of “What consideration is adequate?” in Illinois continues. What has become clear is that federal courts are more forgiving than Illinois state courts on this issue.

On March 10, 2016, Judge Gettleman of the federal court in Chicago issued a ruling on this issue in R.J. O’Brien & Associates, LLC v. Williamson, Case No. 14 C 2715.  In this case, defendant Williamson signed two agreements when he was hired in 2012 in which he promised that, for a period of time after his employment with plaintiff R.J. O’Brien & Associates (“R.J.”) ended, he would not solicit R.J.’s employees or customers.  One year later, Williamson quit abruptly and, within a week, was soliciting his former colleagues, with the hope that they would bring their business with them to R.J.  One of them did just that.

R.J. sued Williamson for damages—not for injunctive relief—for its loss of the employee he solicited and who took her customer accounts to Williamson’s new employer. Williamson ultimately moved for summary judgment, claiming that because Williamson had not been employed for two years after he signed the agreement (he quit after one year) there was inadequate consideration for the restrictions and, therefore, they were invalid.  In asserting this argument, he relied on the now (in?)famous 2013 decision by the Illinois Appellate Court in Fifield v. Premier Dealer Services, Inc., and subsequent Illinois state court decisions following Fifield. The court in Fifield held that, absent additional consideration (i.e., more than hiring the person or simply allowing them to stay employed), a restrictive covenant agreement would not be enforceable unless the employer employed the individual for at least two years after signing the restrictive covenant agreement.

This argument was not the silver bullet Williamson likely thought it would be. R.J. brought its lawsuit in federal court, not state court.  And in the federal courts in Illinois, prior to R.J.’s filing of its suit against Williamson, four of the five federal court cases involving Fifield’s supposed “bright-line” rule of two years’ continued employment rejected that rule and, instead, favored a case-by-case analysis of all factors bearing on the issue of consideration (such as compensation, termination-related terms, etc.).  Judge Gettleman, in R.J. O’Brien & Associates, became the fifth federal judge to reject the two-years’ employment bright-line rule.  Judge Gettleman also noted that he was influenced by the fact that Williamson had voluntarily resigned (this was of no moment to the Illinois court in Fifield, remember); R.J. had honored its obligations to Williamson during his employment; and R.J. had taken measures that benefited Williamson and which could have put R.J. at risk of liability should Williamson violate certain rules regulating R.J.’s business—all of which reflected adequate consideration for the restrictive covenants.

The R.J. O’Brien & Associates decision, when added to the prior four federal court decisions rejecting Fifield’s bright-line rule, has a simple statement to make to employers in Illinois:  If an employee departs in less than two years after signing a restrictive covenant agreement, the employer should seek to enforce that agreement in federal court, if federal jurisdiction can be attained.

googledocsWhether Google Docs, Dropbox, or some other file sharing system, employees, especially millennials and other digital natives, are increasingly likely to set up personal cloud-based document sharing and storage accounts for work purposes, usually with well-meaning intentions, such as convenience and flexibility. Sometimes this is done with explicit company approval, sometimes it is done with tacit awareness by middle management, and often the employer is unaware of this activity.

When an employee quits or is terminated, however, that account, and the business documents it contains, may be locked away in an inaccessible bubble. Worse, the employee could access trade secrets and other information stored in the cloud to unfairly compete. For example, in 2012, the computer gaming company Zynga sued a former employee for uploading trade secrets onto the employee’s personal Dropbox account before leaving to work for a competitor. At a minimum, it may take time to recover the information or obtain the user name and password from the former employee.  Storage of proprietary information, especially personally identifiable information (PII) on personal cloud accounts also increases the risk of a company data breach if the information is hacked.  Finally, allowing business documents to be stored outside of the system can also create headaches when enacting a litigation hold or responding to electronic discovery requests in litigation. What should employers be doing now, to address this trend?

Institute Written Policies Regarding Use of Cloud-Based Storage Accounts

Companies should consider issuing clear policies on the use of personal cloud-based accounts for work purposes, before the litigation storm clouds gather. The most straightforward approach, utilized by many employers, is a strict prohibition on use of personal accounts to store any company-related information.  Another option for smaller companies who rely on cloud-based computing or storage for cost reasons or flexibility is to select a secure system controlled by the employer with a requirement that employees record user name and passwords for all accounts with the company, and have them acknowledge that the password and user name are property of the company. (A similar policy is important for company social media accounts like Twitter, Facebook, and LinkedIn)  A written policy may merely dissuade use of secret cloud storage accounts and not completely eliminate problems in this area, but a clear directive also allows an employer to show a court that a former employee was violating company protocol and may hasten recovery of documents if the employee is uncooperative in returning the information. More importantly, the lack of a policy addressing cloud-based storage accounts could be used to show that the company failed to take reasonable measures to protect the confidentiality of its trade secrets, which could lead to a loss of legal protection.

Address Recovery of Any Stored Files When an Employee Departs

The task of recovering company property from terminated employees has become greatly complicated by the use of Google Docs, DropBox and similar applications. Employees are also increasingly likely to send documents to their cloud-based email accounts such as Gmail.com for offsite use.  HR professionals should ask departing employees the direct question of whether they have ever stored company documents on the cloud.  If so, a company representative may need to insist on personally witnessing the former employee delete the items from her account, including the “trash” file.  The company may want to first retain a copy of what was sent or stored as evidence if there is a concern about unfair competition or possible litigation.  Pursuant to the maxim of “trust but verify”, forensic searches of the departing worker’s computer are critical if there is any suggestion of competitive intent.

Incorporate Cloud-Based Storage Accounts in Your Litigation Strategy

Litigators need to tailor discovery to address these cloudy issues as well. An employee sued for breach of non-compete may state under oath that he has not “taken” any information or documents from the company, only to have it revealed later that he had been storing customer information on a spread sheet on Google Docs for the past four years while employed, and that he continued to have access to the information after he left. Did he “take” the documents or did he just know where they were parked? Interrogatories should ask about any information stored on the cloud or accessible to the former employee, not just information in the employee’s “possession.”

One thing is for sure, employers need to get their corporate head out of the clouds, because employee use of personal cloud-based document management is only increasing.

Jackson Lewis attorneys Peter R. Bulmer, A. Robert Fischer, Michael S. Kantor, and David E. Renner have prepared a detailed update on the firm’s website on the status of a bill in Congress which would create a federal trade secrets law, known as the Defend Trade Secrets Act.  Stay tuned for further developments!

 

 

A California court recently upheld an employer’s right to condition free training on continued employmentin the matter of USS-POSCO Industries v. Case, No. A140457 (Jan. 26, 2016). The defendant/appellant in the litigation, USS POSCO Industries (“UPI”) had originally hired Case as an entry-level Laborer and Side Trim Operator. UPI faced a shortage of skilled Maintenance Technical Electrical (“MTE”) workers. To address this shortage, via a memorandum of understanding with the pertinent union, UPI established a program to train a number of current employees to qualify them as MTEs. The program required 135 weeks of instruction, 90 weeks of on the job training and 45 weeks of classroom work. UPI estimated it cost over $46,000 per employee. During the program, UPI also paid the participant’s regular wages. If a participant successfully completed the program and then passed UPI’s MTE test, he would be assigned to an MTE vacancy. Participation was voluntary, but each participant had to agree that, if he voluntarily left UPI’s employment within 30 months after completion, he would reimburse UPI $30,000 of the expense of his training, less $1,000 per month of subsequent service at UPI.

Case voluntarily enrolled and completed the program. Two months later, he resigned and went to work for another employer. When he failed to pay his $28,000 reimbursement obligation, UPI sued. The trial court ruled in favor of UPI, and the court of appeal affirmed. On appeal, Case contended the reimbursement agreement was an invalid restraint on employment under Bus. and Prof. Code section 16600, which provides in relevant part, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The court had little difficulty rejecting his argument, however.

The court reasoned that Case’s participation in the program was voluntary, the money he agreed to pay was for advanced educational costs, and he was not restrained from leaving UPI and working anywhere else, which he in fact did. As the court explained, “repayment of the fronted costs of a voluntarily undertaken educational program, the benefits of which transcend any specific employment and are readily transportable, is not a restraint on employment.” The court distinguished two precedents: one voiding a claw back of an employee’s pension rights if he chose to compete, the other voiding a liquidated damages provision that amounted to a price for choosing to compete.

The takeaway: despite California’s well-known public policy against non-compete agreements, employers may require an employee to repay the costs of voluntary educational benefits should the employee choose to leave within a reasonably defined time period, and compete, after receiving the benefit.

The Jackson Lewis Affirmative Action Compliance & OFCCP Defense Practice Group has written about an important new proposal which would bar certain employers from using confidentiality agreements that restrict employees or subcontractors from reporting waste, fraud or abuse to the government.  This is the latest in a series of new and proposed requirements imposed on government contactors and, once enacted, would require covered employers to review and modify existing contracts for compliance.

 

Cliff Atlas, a principal with Jackson Lewis, will be participating in a webinar on January 20, 2016 on the topic of “Insider Threat: Employee Mobility and Trade Secrets” on the IP Chat Channel sponsored by the Intellectual Property Owners Association.  www.ipo.org/IPChatChannel. The webinar is open to all. The registration fee is $130, with academic and government discounts available.
UPCOMING WEBINAR Design Patent Damages: The Law As It Is Today Thurs Jan 28 — EARN CLE

and gain insight

by viewing earlier webinars

 

They are available at

www.ipo.org/IPChatChannel CLE available in many states.

FRAND Damages: Comparing the Four Leading Cases, Including CSIRO ITC and the Federal Circuit: Clearcorrect and Suprema

CBM Review: Taking Stock of the Case Law w/Judge Michael Tierney USPTO’s After Final Consideration Program: How to Reach Allowance New Rules of Federal Civil Procedure: Best Practices in  Patent Litigation Patent Prosecution  After Akamai 

Definite Change:

Nautilus Gains Some Traction

Advance Conflict Waivers:

How to Avoid

Unpleasant Surprises

 

New Litigation Strategies

After Akamai:

Fact Pattern Hypotheticals in Joint Infringement 

 

Amgen v. Sandoz: 

What Now?

3D Printing for Patent Lawyers: Repair, Reconstruction, Exhaustion

 

 

Int’l Patent Prosecution: Best Practices Inducement and Willfulness after Commil 

Privity  and Real-Part-in Interest/ Estoppel at the PTAB       

 

Patent Prosecution with an Eye to the PTAB Antitrust and IP in China Design-Arounds: Strategy for the ITC and District Courts Safeguarding GUIs: Best Practices Using Multiple Layers of IP

  IP5 Dossier:

A New Era in Global Patent Prosecution? 

Ex Parte Reexamination: New Tactics, Old Tool Negotiating NDAs Between Suppliers and Customers    Export Controls: Understanding and Managing the Risks Privilege: Thorny Issues involving Foreign Lawyers and Patent Agents

Consumer Surveys 

in Patent Litigation 

        

For a list of additional archived webinars, 

please visit

www.ipo.org/IPChatChannel 
IPO IP Chat Channel WebinarInsider Threat: Employee Mobility and Trade SecretsWednesday January 20

  2 PM ET  

Litigation against former insiders accounts for a significant portion of all trade secret cases. Yet these disputes are difficult to win. Our panel will discuss best practices for safeguarding trade secret and other confidential corporate information from appropriation by employees, as well as contractors, and consultants.

War stories from a litigator will highlight how not meeting this high bar will cause a plaintiff’s case to fail. An employment law specialist will discuss emerging issues in non-compete agreements, such as the need to give current employees a bonus or profit-sharing consideration in exchange for signing a tougher non-compete. In-house counsel of a global technology company will give advice for surviving in a world without non-competes. Finally, the panel will consider the flip side of the issue: best practices for avoiding a lawsuit when hiring an employee from a competitor.

 

PANELISTS 

 

Clifford Atlas is a Principal in the New York office of Jackson Lewis, which specializes in employment law. He is the co-leader of its Non-Competes and Protection Against Unfair Competition Practice Group. He develops and drafts employment contracts and restrictive covenant agreements, and prosecutes and defends actions involving breach of non-competition and non-solicitation agreements and misappropriation of confidential information. Buckmaster de Wolf is General Counsel of GE Global Research, based in Niskayuna, NY. He is responsible for the trade secret policies and procedures for more than 3,500 GE scientists who work in seven facilities worldwide in fields ranging from computing to metallurgy. Buck was formerly GE’s Senior Counsel Litigation & Legal Policy, focusing on IP litigation.  Prior to joining GE, he was a partner in the San Francisco office of Howrey. 

   

 

Randy Kay is a partner and litigator at Jones Day in San Diego. He

focuses his practice on trade secret and patent disputes, concentrating on representing technology, telecom, biotech, and medical device companies. He is co-editor/author of Trade Secret Litigation and Protection in California (State Bar of California, 2014).
Intellectual Property Owners Association’s      one-hour webinars on current topics in IP, hosted by Pamela Sherrid, former editor of IP Law & Business magazine  REGISTRATION FEE$130 per user per webinarAcademic and government discount available

through written request to [email protected]

 

To register, please click to

www.ipo.org/IPChatChannel

 

Continuing Legal Education Credit (CLE) is available. IPO is applying for CLE in a limited number of states. Visit www.ipo.org/IPChatChannel for current CLE information.

2016Jackson Lewis has prepared an end-of-the-year review of four non-compete and confidentiality issues to watch in 2016 on its website.

Clifford R. Atlas, co-chair of the firm’s non-compete and unfair competition practice group, and attorney Puja Gupta from the firm’s Baltimore office, identify four developments to keep an eye on next year:

1. Enforceability of choice of law and choice of forum clauses may be questioned;

2. Adequacy of consideration in exchange for non-compete agreements with current employees is under increasing scrutiny;

3. SEC enforcement activity; and

4. The circuit split on the scope of the Computer Fraud and Abuse Act.

Click on the link above to see their analysis!

computerClifford R. Atlas and Ravindra K. Shaw of Jackson Lewis’s New York office have written on the firm’s website about a recent decision from the Second Circuit Court of Appeals applying the narrow definition of “exceeds authorized access” under the Computer Fraud and Abuse Act.  The case is United States v. Valle, 2015 U.S. App. LEXIS 21028 (2d Cir. Dec. 3, 2015).

The authors note that with a growing split in the circuits on this issue, “the likelihood of U.S. Supreme Court review increases.”