Plaintiff Richmond Technologies provided enterprise resource planning software for financial service companies who provide credit card terminals to merchants. The plaintiff entered into a “Teaming Agreement” with Aumtech, which developed software for plaintiff and maintained the resource planning modules for plaintiff’s customers. The agreement contained a confidentiality and non-disclosure agreement, which prohibited Aumtech from disclosing or using confidential information, soliciting plaintiff’s employees for one year, or entering into agreements with plaintiff’s customers for one year following the term of Aumtech’s employment with plaintiff.

Earlier this year, one of plaintiff’s employees, Jennifer Polito, resigned her employment with plaintiff and immediately joined Aumtech as its President. Significantly, she allegedly used three different programs to delete data from her company-issued computer before returning the computer to plaintiff. Aumtech offered the same services to plaintiff’s customers and began to encourage those customers to terminate their contracts with plaintiff and to sign up with Aumtech. Specifically, Ms. Polito allegedly contacted one customer directly and participated in a trade show marketing defendant’s services. Before she left, Ms Polito deleted emails with Aumtech and made it difficult for plaintiff to continue to service their customers. When plaintiff learned of this activity, it canceled its agreement with Aumtech and filed a motion for a temporary restraining order that would (1) compel Aumtech to release source codes to plaintiff; and (2) enjoin Aumtech from competing against plaintiff in violation of the non-disclosure agreement.

In deciding the motion, the court recognized that Cal. Bus. & Profs. Code Sec. 16600 broadly prohibits “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” However, even though the court acknowledged the applicability of this section, the court also recognized that there is a long line of cases in California holding that former employees may not misappropriate the former employer’s trade secrets to unfairly compete with the former employer. Thus, the court determined that non-competition agreements are enforceable when necessary to protect an employer’s trade secrets, either as an exception to the statute, or to enjoin an independent wrong (either a tort or violation of California’s Unfair Competition Law). The court enjoined Aumtech from contacting plaintiff’s customers and utilizing confidential information (the court recognized that customer preferences and specialized requirements may be trade secrets under California law) until a preliminary injunction hearing scheduled for August 1, 2011.

This case highlights that deception and misconduct can be instrumental when considering whether to attempt to enforce a non-competition agreement and to enjoin unfair competition. The fact that the court granted an injunction is not surprising in light of the defendants’ seemingly wrongful conduct and deceptive behavior. This case makes it evident that even in California, the law does not permit unfair competition.

(1) Russell’s new blog, through his new firm (Beck Reed Riden LLP), now under the name, Fair Competition Law.

The new blog, Fair Competition Law, covers the same topics (trade secrets and noncompetes) as the old, but adds other related topics as well. The new topics include all other areas of unfair competition, the Computer Fraud and Abuse Act, privacy and security, trademark, copyright, and business torts.  

(2) Russell’s old blog, through his old firm (Foley & Lardner LLP), still under the same name, the Trade Secret / Noncompete Blog.

If you’ve landed here, thank you!

You now have two choices:

(1)  I have formed a new blog, Fair Competition Law covering the same topics and more through my new firm, Beck Reed Riden LLP.

(2)  The original Trade Secret / Noncompete Blog that I had started in 2009, but which is now run by my former colleagues at Foley & Lardner LLP.

Both are worth the read, if you’re interested in the topic.

Enjoy.

RB

The bill would set up a defined statutory criteria for enforceability of a covenant.  The first requirement is that the employee be a “key” employee or independent contractor.  Sec. 10, para. (a)  While at first blush this might seem a dramatic limitation on these covenants, the definition of “key” includes such things as any employee who has “direct or substantial contact with customers” or who “has knowledge of bona fide trade secrets”.  Sec. 5, para. (d).  Traditionally, there was not likely to be any legitimate business interest in protecting employees without those attributes, so this is not a significant new limitation.  The proposed bill then sets up a required contractual procedure that must be followed prior to any noncompete covenant being agreed to, including notice prior to the first day of employment and a “material” benefit to the employee if the covenant arises and is agreed to thereafter.  Sec. 10, para. (b).  While the notice provision would be new, this substantially tracks some themes in existing law on consideration and fairness.  As noted above, the bill then includes the familiar “legitimate business interest” requirement, undercutting the Sunbelt Rentals opinion.

Where the proposal would have some further clarifying impact is in the “Rebuttable presumptions” section.  For example, the bill includes language that a covenant is presumed unreasonable if the duration of any covenant is beyond one year or the geographic area “extends beyond any region in which the key employee or key independent contractor provided employment or contractor services for the promisee during the one year preceding termination.”  Sec. 15, para. (a)  There is a further presumption that the covenant can only extend to the type of work the employee had performed for the employer in the one year prior to termination.  Id.  Of interest is a uniform statutory presumption on limiting the look-back to one year (stale customer contacts, geographic range, or scope of work is presumptively not protected).  Of course, these are presumptions, and the court would therefore be free to consider enforcement outside the presumptions, if necessary, to once again “protect a legitimate business interest”. Sec. 15, para. (b).

Finally, the proposed bill does attempt to codify a reformation rule in Illinois, but adds that if the court so acts, it may not award damages for breach prior to the reformation of the covenant.  The bill also carves out various situations from its scope, including partnership, confidentiality, and incentive compensation issues.

All in all, HB 4923, if passed, might actually bring some regularity to noncompete law in Illinois, while putting back in place the “legitimate business interests” test that Sunbelt Rentals has now called into question.  In addition, while the bill changes the law at the edges, much of the bill tracks common law that is familiar to Illinois practitioners in this area, and the language of the bill is general enough that it would not likely quell the arguments that generate noncompete disputes (for example, where the court has to decide if the new activity by the ex-employee is competing or not, the language – “extends beyond the nature of the work … provided to the promisee” – does not add much to help along the court’s decision).  More charitably, the proposed bill will not substantially hinder the development of the common law in this area.  That may be the reason it is now in committee (along with the seeming pro-employee tilt) and likely mired there, awaiting further developments.  If passed, though, it would confirm the “legitimate business interest” element, would introduce a few new twists, but overall, in my opinion, would not dramatically change the substantive landscape for Illinois covenants not to compete.

Cases and issues making the headlines*:

 It’s All Fun and Games Until… (April 1)
A man attending the Penny Arcade Expo (PAX) in Boston was reportedly arrested for allegedly stealing the code for a new game that has not yet released.  The code is reported to be valued at $6,000,000.  Story here.

China (April 1)
On January 23, we reported that employees of Australian company Rio Tinto Ltd had been arrested in China on charges of, among other things, trade secret misappropriation.  (Check the In the News… archives.)  Rio Tinto has now reportedly hired Henry Kissenger to assist it following a conviction of one of those employees.   Story here.

EMC Files Two Noncompete/Trade Secret Law Suits This Week (March 19)
Data storage giant EMC Corporation has filed two different law suits this week claiming, among other things, breach of noncompetition agreements, misappropriation of trade secrets, and violation of the Massachusetts unfair competition law (G.L. c. 93A).  Story about one of the lawsuits here and here.

Trade Secret Thief Convicted (March 19)
A former DuPont Co. exmployee reportedly pled guilty to stealing DuPont’s trade secrets and disclosing them to a competitor.  The man, Michael Mitchell was reportedly sentenced by a federal judge in Virginia to 18 months.  Story here (subscription service).

Nuclear Fusion Trade Secret Trial (updated March 16)
General Nanotechnology and certain related parties are reportedly going to trial tomorrow (March 15) in their lawsuit again Lawrence Livermore National Security, LLC and others in California.  According to PR Newswire, the plaintiffs claim, among other things, that the defendants stole trade secrets and breached a nondisclosure agreement when they allegedly used the plaintiffs’ nuclear fusion technology to develop their own product.  Story here and here.

19 Indicted Over Computer Chip Technology Allegedly Taken to Korea (March 14)
Ten employees from Applied Materials, Inc., four from Samsung Electronics, and five from Hynix Semiconductor Inc. have reportedly been indicted in Korea for theft of computer chip technology.  Story here.

Illinois Upholds Forfeiture Clause (March 14)
In a recent decision issued by the Northern District of Illinois (Viad Corp. v. Houghton), the court upheld a forfeiture clause without engaging in a traditional noncompete analysis. 

Wisconsin Continues New Approach to Noncompetes (March 14)
Following the Star Direct case (previously reported by us here), a Wisconsin Appellate Court reversed the trial court on the basis that a forfeiture provision requiring return of certain money expended for employee training could be recovered by the employer – notwithstanding that the noncompete provisions were unenforceable. Decision here. 

Astro-Med, Inc. Collects on Noncompete Case (March 14)
After a favorable jury verdict and then decision from the 1st Circuit last year, Astro-Med reportedly received $1,495,000 in its noncompete lawsuit against a former employee and his new employer. Story here and here.

Philadelphia School District Accused of Violating the CFAA, ECPA, SCA (March 14)
A Philadelphia school district allegedly provided students with laptops equipped with webcams that, unbeknownst to the students, were remotely controlled by the school district. The school district has reportedly been sued under the Computer Fraud & Abuse Act, the Electronic Communications Privacy Act, and the Stored Communications Act, among other things. Story here. 

When Noncompetes Expire… (March 14)
Noncompetition agreements are never unlimited. When they expire, the party who had been restricted is permitted to return to a competitive position. Unless there are additional restrictions (nonsolicitation agreements; no-raid/antipiracy/no-hire agreements; and/or nondisclosure agreements), the returning party is largely uninhibited in his competitive activities.  Apparently, this is the plan of former advertising agency Cummins & Partner, whose noncompete will expire in early 2011. Story here.

Criminal Investigation Halts Trade Secret Lawsuit (March 14)
According to Blooberg.com (here), the Manhattan U.S. Attorney, Preet Bhara, asked the judge in the Starwood Hotels & Resorts Worldwide, Inc./Hilton Hotels Corp. trade secret case to halt the case while the U.S. Attorney investigates.

Attorney General Eric Holder Speaks About Trade Secrets (March 14)
PR Newswire reported that, on February 24, United States Attorney General Eric Holder spoke at the Rio De Janeiro Prosecutor General’s Office about the need to protect intellectual property – including trade secrets. Story here.

Harvard Law Student Sues Google Buzz (March 14)
A law student has reportedly sued Google’s new social networking service, Google Buzz, claiming violations of, among other things, the Computer Fraud and Abuse Act and the Stored Communications Act. Story here and here.

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

A typical forum selection clause is as follows:

Employee agrees that any claim or action relating to or otherwise arising out of this Agreement shall be subject to the exclusive jurisdiction of the state courts of the [State/Commonwealth/District] of ________ or the federal district court for the ______ District of ________ and Employee hereby submits to the exclusive jurisdiction of those courts.

As with most noncompete issues, the law in this area can vary state by state.  Accordingly, it is important to never simply use a form.  You should always check applicable law in your state first.

Massachusetts Noncompete Bill is Reported Out of Committee

Protecting Your Confidential Information While the Noncompete Debate Continues

A small business perspective on non-compete agreements (text and audio)

Mass. non-compete culture to change? (text and video)

Marblehead rep files noncompete bill

Marblehead rep co-sponsors overhaul of non-compete agreements

Swampscott rep co-sponsors overhaul of non-compete agreements

Legislators Hear Testimony on Non-Compete Restrictions

Update on the Massachusetts Noncompete Hearings

Massachusetts Noncompete Bill Set for Hearing

House Bill 1799 An Act relative to Non-compete agreements

In doing some basic “back of the envelope” so-called “research” for a class I teach (Trade Secrets and Restrictive Covenants at Boston University School of Law), I searched Westlaw to see whether my (and others’) suspicion that trade secret/noncompete litigation is on the rise is in fact true – or were we only so steeped in those types of cases that our perspective was too skewed to properly perceive reality.  The answer?  While our perspectives may indeed be skewed, the numbers confirm (in a very – and let me reemphasize - very unscientific way) that trade secret litigation is on the rise.  The chart to the right shows that from 2000 to 2009, the number of reported trade secret and/or noncompete cases more than doubled – from 1010 to 2366 – over the last decade. 

So, how does that relate to the TSN Blog?  The answer is that one of the goals of this blog has been to educate its readers about the issues and how to reverse this trend.  Indeed, that was the (I hope) plain goal of the post, “An Ounce of Prevention… .” 

All of that to say that the trend toward litigating trade secret/noncompete disputes is real and growing.  Accordingly, we urge all of you, our readers, to learn the necessary steps to insulate your trade secrets as much as reasonably possible within your corporate culture, to implement those steps, and to thereby prevent (or at least minimize the effects of) problems before they arise.  Will this eliminate all problems and all litigation?  No.  But, it will put you in the best position to avoid it and, when it can’t be avoided, to respond to it quickly and effectively.

Upon a quick read, it appears that garden leave clauses have been removed.  Otherwise, the bill remains largely the same as the September version of the so-called “compromise bill.”  More to follow after a more thorough review.

Other changes are likely, particularly as we have received some outstanding input from many different people since the bill was initially submitted to committee.

For more information, please contact either of the two state representatives who have been leading the charge – Lori Ehrilich and Will Brownsberger – or me.  (Click on our names for our information.)

Like other companies that have sued former employees and their new employer for engaging in this type of conduct, Aon Risk Services Northeast, Inc. recently commenced a lawsuit and seeks an injunction against three former Aon employees who went to work for Aon’s competitor, Marsh & McLennan Companies, Inc.  The case is Aon Risk Services Northeast, Inc. v. Kornblau, Case No. 10-CV-2244 (March 15, 2010 U.S. District Court S.D. N.Y.)

Aon claims that the former employees, with Marsh’s participation, collectively tried to steal Aon’s trade secrets, poach Aon’s clients, and rob Aon of its key employees so that Aon no longer had brokers with existing relationships with the targeted clients.  Significantly, the complaint alleges that within weeks of the departure of the former employees, Marsh obtained a significant amount of business from Aon clients that transferred their accounts to Marsh.  

What makes this case worthy of mention is that Aon describes in the complaint how the former employees wrongfully downloaded and accessed key computer files.  According to the complaint, a forensic review revealed that in the days and weeks prior to their resignations, the employees accesses, copied, and deleted hundreds of files, and used portable external storage devices on their Aon computers.  One former employee accessed a database 239 times where in the previous one year period, she had accessed the drive only twice.  This evidence is usually damaging and can be compelling to a judge deciding a preliminary injunction motion.  

The Complaint also describes Aon’s efforts to help its employees develop goodwill with their customers in the competitive insurance industry.  It is these relationships that give rise to a claim against the former employees for breach of fiduciary duty – even though only one of the former employees had a signed Employment Agreement with restrictive covenants.  Thus, it is a good example of how a company can assert claims to protect its interests – even in the absence of a signed non-compete or non-solicitation agreement.  

We will monitor the case to see whether the Court grants the requested injunction and will update this post accordingly.