Trade Secret / Noncompete Blog

In the coming weeks, we will be updating the look of our blog.  The new look will be similiar to Foley & Lardner LLP’s other blog (see/click on image to the right).  No, the name will NOT change.  Nor will the URL change.  You guessed it - everything will remain the same except the look.  And, of course, yes, we will continue to bring you all the same content. 

So, keep your eyes open for the change!

John (Jack) S. Lord, Jr.
Partner
Foley & Lardner LLP
Orlando

Almost $1 Million in damages awarded by a trial court in Tennessee in favor of an employer against a single former employee was recently upheld by a state court of appeals.  The Hamilton-Ryker Group, LLC v. Keymon, No. W2008-00936-COA-R3-CV (Tenn. Ct. Appl. Jan. 28, 2010).  Besides the lessons the case teaches to naughty employees who may endeavor to compete or solicit in violation of an employment agreement, and thereby damage their employers, it also provides some guidance on best litigation practices in bringing such claims, guidance for employers on how to protect confidential and “trade secret” information and even drafting practices for practitioners for agreements containing restrictive covenants.

The employer, The Hamilton-Ryker Group (“H-R”), employed Tammy Keymon for about 14 years.  She had an Employment Agreement with noncompete, nonsolicitation and confidentiality provisions.  In the summer of 2004, H-R reorganized jobs within the company, eliminating Keymon’s particular position.  Because H-R wanted to retain her, it offered Keymon a new position with the same salary and, per H-R, a decreased travel schedule.  Keymon felt the new position would require more travel, and she rejected it.  H-R and Keymon then agreed that she would be temporarily laid off for a ninety-day period, during which time H-R would try to find a position for her; and if not, they would discuss a possible permanent layoff.

Here’s the naughty part:  The ninety-day period was to begin on Monday, July 12, 2004, so Keymon’s last day of work was Friday, July 9.  On the morning of Saturday, July 10, Keymon called the owner of one of H-R’s main clients – for whom Keymon supervised the H-R employees who worked on the client’s needs and also for whom Keymon was the main point of contact – and told the client’s owner that H-R had laid her off.  In that phone call, Keymon and the client’s owner agreed that Keymon would take over doing all the work that H-R had been doing for the client.  Several hours later that same day, Keymon emailed fifty-six documents from her H-R work email address to her personal email address.  The documents included the client’s production schedules, a profit-loss analysis for completed projects and invoices for recent projects.  On July 16, Keymon began billing H-R’s client, and sixteen days after Keymon emailed the documents to her personal account, the client informed H-R that it had “decided to pursue another avenue for” its needs.  Keymon eventually hired employees to assist her with the client’s work, including some H-R employees who had worked on the client’s work for H-R, under Keymon’s direction when she worked at H-R.

The appeals court noted several times in its opinion that Keymon began to collect unemployment benefits for her layoff from H-R during the time period in which she was billing H-R’s now former client for the services she performed for the client.

At the end of the ninety-day period, Keymon and H-R – shockingly – did not reach an agreement for Keymon to return to H-R.  They therefore agreed to sever the employment relationship, and Keymon signed a severance agreement.  For consideration of $6,000 to be paid in installments, Keymon released all claims against H-R and agreed to cooperate in any investigation into a breach of any employment agreements.

H-R became aware that Keymon was doing work for its former client, and on November 11, 2004, H-R’s lawyer sent her a letter asking that she cooperate with its investigation into a breach of an employment agreement.  The letter sought many documents from Keymon.  Keymon produced some of the requested documents but not all; and she also sent a check to H-R for the amount of the first installment paid to her for severance.  H-R soon after filed suit against Keymon, alleging breach of her noncompete, nonsolicitation and confidentiality covenants in her Employment Agreement and violation of the state Uniform Trade Secrets Act.  It is worth noting that the appeals court – as many courts in many jurisdictions do – conflated the noncompete and nonsolicitation covenants – referring to them singularly in its opinion as “the noncompete agreement.”

By the date of the bench trial in the case, Keymon had billed H-R’s former client $1,450,388 for the work she and her new employees did for the client.

At trial, H-R elicited testimony from its witnesses about the steps the company took to keep its information confidential:  a company server protected by a firewall to prevent outside access to the information; requiring employees to execute confidentiality and restrictive covenant agreements; and policies allowing employees to access only certain information needed to complete the employee’s own job.  All entities that wish to enforce confidentiality and restrictive covenant agreements need to consider implementing similar protections.

When Keymon testified at trial she said she emailed the H-R documents to her personal email account in order to create billing invoices for H-R.  None of the reviewing courts ever bought this story.  She also stated that the work she did for the client on her own was different in nature from the work she did for the client while she worked for H-R.

At the conclusion of the trial, the judge ruled that H-R was liable to Keymon for $6,000 on her counterclaim for breach of the severance agreement.  The judge further ruled that the restrictive covenants in the employment agreement were enforceable, despite a lack of a geographic restriction; that the information Keymon downloaded from the H-R system and emailed to her home computer constituted trade secrets information; that Keymon improperly competed with and solicited from H-R; and that she willfully and maliciously took the trade secrets.  The trial judge awarded H-R about $948,000, with actual damages of about $477,000 being doubled as “exemplary damages” under the Uniform Trade Secrets Act.  Keymon appealed.

The appeals court found, despite the fact that the restrictive covenants in the agreement were not limited in geographic scope, they were still reasonable.  The court followed a line of reasoning used by courts in several states in its holding:  “In some cases, however, a restriction against soliciting the employer’s customers can in effect substitute for a geographic limitation, by stating the impermissible actions of the employees by other means.”  In other words, in certain jurisdictions, failing to specify a geographic scope for a restrictive covenant may not be fatal – perhaps even in states that refuse to follow the “blue pencil” doctrine – if the covenants at least specify the customers whom the employee is prohibited from soliciting.

As a best practice in drafting agreements, a practitioner should provide geographic limitations; but often they are not practically definable.  In such instances, the drafter will want to define as specifically as possible the customers or other class of persons or entities with whom contact is prohibited.  Such drafting will increase the likelihood that a court will find the agreement reasonable and enforceable.

The appeals court also upheld the trial court finding that the confidential information that Keymon emailed to herself from her H-R email address constituted trade secrets.  The court described the history of common law trade secrets claims in Tennessee prior to the passage in 2000 of Tennessee’s Trade Secrets Act, which preempted any prior inconsistent and conflicting law in the state regarding the misappropriation of trade secrets.  The court noted that the Tennessee law adopted definitions from the Uniform Trade Secrets Act, and it also readily in its opinion adopted holdings from other jurisdictions, noting the Tennessee legislature’s instruction to courts to enforce the law consistent with other states enacting it.

Keymon argued on appeal that she could have gotten the information she emailed to herself in the fifty-six documents, from the client itself, so it was not trade secrets.  The court rejected Keymon’s argument, holding that even if she could have acquired parts of the information directly from the client, and “[e]ven if Keymon could have obtained ‘individual pieces of information’ by other means, the integration and aggregation of it may be deemed confidential or a trade secret.”  The court noted that the speed with which Keymon used the information to compete against H-R, only six days, demonstrated its independent economic value.

The appeals court next rejected Keymon’s argument that exemplary damages under the Trade Secrets Act were inappropriate.  As mentioned, the Tennessee court relied on trade secrets cases from other jurisdictions in making certain rulings.  Citing cases from Montana, Minnesota and Rhode Island, the court held that “[w]e are persuaded by these cases that the standard for exemplary damages under the Trade Secrets Act should be interpreted differently from the traditional standard for punitive damages so as not to require a finding of ‘hatred, ill will or spite.’”  Drawing from the facts the trial court judge used to award exemplary (double) damages, the appeals court ruled that Keymon’s actions warranted such damages:  the day after her last work day she contacted the client’s owner and solicited business; she then immediately emailed herself H-R’s trade secrets; “while drawing unemployment compensation and accepting severance payments, Keymon was surreptitiously utilizing [H-R]’s trade secret information to purloin [its client’s] business, even utilizing [H-R] employees to do so.  We must conclude that this conduct amounts to willful and malicious misappropriations under the Trade Secrets Act.”

Finally, the appeals court rejected Keymon’s claim that the trial court had been incorrect in awarding damages to H-R for lost profits for the four-year period between her last day working at H-R and the trial dates, claiming that it was too speculative to conclude that H-R would have provided services to the client during this four-year period of time.  The appeals court held that because the Trade Secrets Act allows for damages for not only actual loss but also for “unjust enrichment” damages, the trial court reasonably calculated that Keymon was unjustly enriched during this four-year period.  Therefore, the damages award was upheld.

The naughty employee in this case lost at trial and appeal.  The employer was able to prevail in large part due to the way it protected its confidential and trade secret information; the way it specifically defined in its employment agreement which particular clients the employee could not solicit; the way it required its employee in its severance agreement to cooperate with any violations of any employment agreements; and its ability to point out to the courts other “bad acts” by the employee, such as drawing unemployment while simultaneously competing with her former employer and earning money from that employer’s own client.  The case contains good lessons for employers and practitioners in jurisdictions around the country.

Before we get too far into 2010, let’s take stock of the most important developments in trade secrets and noncompete law in 2009. Whether they represent a new trend or a reinforcement of existing law, these developments had a big impacted in this area of practice last year and likely will continue to during this year.

10. A splitting headache: Courts continue to disagree over the meaning of “unauthorized access” under CFAA. In the absence of a federal civil trade secrets act (see #9), the Computer Fraud and Abuse Act (“CFAA”) has become the avenue of choice to federal court for companies victimized by disloyal employees’ digital misconduct. The principal civil remedies under CFAA require that the defendant have accessed a protected computer without authorization or by exceeding authorized access. Yet federal courts cannot agree on whether a disloyal employee, who otherwise was permitted to use the employer’s computer system, violates the CFAA by downloading or destroying digitally stored trade secrets and other sensitive employer information to further the disloyal purpose. In 2006, the Seventh Circuit handed down Int’l Airport Centers, L.L.C. v. Citrin, 440 F.3d 418 (7th Cir. 2006), which held that an employee is stripped of access as far as the CFAA is concerned when the employee acts contrary to the employer’s interest. In 2009, the Ninth Circuit weighed in with LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), which held that a person does not violate the CFAA when the person has permission to use the computer even if that use was contrary to the interests of the person’s employer. This split needs to be resolved soon because clients need another webinar or update on this topic like a hole in the head.
9. Federalization of trade secret protection? Trade secrets are the only major type of intellectual property law governed primarily by state law. Previous attempts to achieve uniformity, including adoption (with some variation) of the Uniform Trade Secrets Act by 46 states has not eliminated the need for trade secret owners to learn (or pay for their lawyers to teach them) the legal idiosyncrasies of each state in which the owner would like to do business. In light of the increased (and possibly growing; see # 8 below) reliance on trade secret protection, will a serious effort to enact a federal trade secrets act emerge in 2010?
8. Bilski v. Kappos: This closely-watched patent case was argued to the Supreme Court in November, 2009 and is awaiting a decision. Even though it is a patent case, everybody should be watching it because the decision could impact the patentability of all business methods and other processes, which probably explains why more than 70 amicus briefs were submitted. A decision significantly limiting the patentability of methods and processes could increase reliance on trade secret protection
7. Right without a remedy? Blockowitz v. Williams, No. 09-C-3955 (N.D. Ill. Dec. 12, 2009), also does not directly involve trade secrets; instead, it is a case under the federal Communications Deceny Act case. Nonetheless, it could be a big problem for trade secrets owners who find their secrets posted on the internet. In this case, defendants posted defamatory statements to several web sites, including one called Ripoff Report. Defendants defaulted, and the court entered a default judgment in plaintiffs’ favor, as well as an injunction requiring take down of the offending posts. The defendants could not be found, however, and Ripoff Report refused to voluntarily remove the posts at issue. So the plaintiffs filed a motion under Fed. R. Civ. P. 65(d), which extends injunctions to “nonparties who act with the named party,” to enforce the injunction against Ripoff Report. The court, however, found that that there was no evidence that the web site had acted in concert with the defendants. Thus, the plaintiffs were left with no ability to have the comments adjudged to be defamatory removed from the internet.
6. Increase in trade secrets theft. Although hard numbers are difficult to come by, the combination of tough economic times and the increased portability of electronically stored trade secrets appears to have lead to an increase in trade secrets theft by people who have left their previous employer, whether involuntarily or not. In turn, companies increasingly are turning to trade secret misappropriation claims (and CFAA claims, see #10), particularly in states like California in which post-employment noncompetes essentially cannot be enforced. Since the economy appears to be improving slowly at best, this trend may well continue.
5. Noncompetes, Part I: Statehouse efforts to “reform” noncompetes. In 2009, legislatures in at least 3 states were at work to change the law regarding enforceability of noncompetes. It should come as no surprise in this area where unpredictability reigns that this proposed “reform” took different approaches. In Massachusetts, venture capitalists looking for ways to help Boston’s 128 high-tech corridor emulate the success of Silicon Valley in California where noncompetes are effectively unenforceable pressed the Legislature to enact an outright ban of noncompetes. A competing bill was proposed, and the pending “compromise” bill would not prohibit noncompetes, but would limit their use, such as by requiring that an employee receive additional compensation beyond being permitted to continue to work for entering into a noncompete while employed, limiting noncompete terms to one year, and exempting employees earning less than $75,000 per year from noncompetes. Oregon recently adopted similar changes. In contrast, Georgia is considering strengthening its noncompete laws to permit greater enforcement of noncompetes.
4. Noncompetes, Part II: judicial enforcement of noncompetes harder to predict: For decades, the law in Illinois was pretty clear as to the enforceability of post-employment noncompetes ancillary to an employment agreement. To enforce one that is reasonable in scope and duration, an employer needed to demonstrate a legitimate interest, either in the form of a long-standing customer relationship or protection of confidential information. In Sunbelt Rentals, Inc. v. Ehlers, 915 N.E.2d 862 (Ill. App. Ct. 2009), however, the Illinois Fourth District Appellate Court cast aside that precedent in holding that only reasonable duration and territory terms are needed to enforce a noncompete in Illinois. While it is far from clear whether the other four appellate districts in Illinois will choose to reconsider their precedent in light of Sunbelt Rentals, this decision clearly injects additional uncertainty into an arena in which it already was difficult to predict whether a particular noncompete would be enforced. Moreover, the decision may provide an incentive for employers to seek enforcement of noncompetes, and possibly to expand the types of employees from whom they seek noncompetes to those that typically do not come into contact with customers or confidential information.
3. Noncompetes, Part III: Is there life after the noncompete? Lots of factors have conspired to make post-employment noncompete agreements harder to enforce, among them legislative efforts to limit noncompetes and judicial reluctance to deny a person an actual employment opportunity in a dismal job market. As a result, companies have begun supplementing noncompetes with other types of restrictive covenants. These include, among others: (1) “garden leave clauses” in which an employee is compensated during the period when competitive activities are restricted; (2) forfeiture (or pay) for competition agreements in which an employee forfeits certain benefits (or pays his former employer) for engaging in competition with the former employer; (3) non-disclosure and confidentiality agreements; (4) assignment clauses for inventions disclosed post-employment but conceived during the course of the previous employment; and (5) agreements not to solicit customers or employees of the former employer. While each of these provisions restrict post-employment conduct, they do not directly prevent taking a job with a competitor and thus may be more likely to be enforced. For a fuller discussion, see here an excellent article by my partner Russell Beck.
2. California Dreamin’: California courts used 2009 to remind everyone that there are many obstacles in that state to enforcing trade secret protection in cases involving mobile employees, and that trying to enforce a noncompete—even one involving trade secrets—may be a fool’s errand. FLIR Sys., Inc. v. Parrish, 95 Cal. Rptr. 3d 307, (Cal. Ct. App. 2009), which not only denied the requested injunction but awarded over $1.6 million in fees for pursuing injunctive relief in bad faith, teaches that it is not enough that a former employee had access to your trade secrets and now has gone to work for an actual or potential competitor: you must have a sound basis for asserting that misuse of the trade secrets is actually threatened. Perlan Therapeutics v. Superior Court of San Diego Cty, 101 Cal. Rptr. 3d 211(Cal. Ct. App. 2009), is a reminder that plaintiffs suing in state court there for trade secrets misappropriation have to describe the alleged trade secrets with reasonable particularity—not evasiveness—before being permitted to conduct discovery. The Retirement Group, Inc. v. Galante, 98 Cal. Rptr. 3d 585 (Cal. Ct. App. 2009), reminds that even if one succeeds in obtaining a preliminary injunction barring an ex-employee from one’s trade secrets, one should not overreach by trying to leverage that success into a broader prohibition against soliciting one’s customers when the identity of each of those customers is not itself a trade secret. In Galante, the plaintiff persuaded the trial court to enter a broader injunction, but the appellate court reversed because of what it characterized as the injunction’s overbreadth.
1. The more things change, the more they stay the same: Everyone knows that to protect your trade secrets, you’ve got to take reasonable steps to keep them secret. So why do companies persist in failing to plug leaks in their trade secret protection programs? Southwest Stainless, LP v. Sappington, 582 F.3d 1176 (10th Cir. 2009), is a case in point. It involves a common scenario: a group of employees, in this case senior sales staff, left the plaintiff to join a rival metals manufacturer. After the rival began winning business from the plaintiff’s customers, the plaintiff sued, claiming (among other things) misappropriation of trade secrets, including bid prices. The district court found misappropriation, but the Tenth Circuit (applying Oklahoma law) reversed. The Tenth Circuit had no trouble concluding that pricing could constitute trade secrets. However, it also held that the plaintiff simply had not done enough to keep its pricing, including prices in submitted bids, confidential. According to the court, the plaintiff’s biggest problem was that it submitted the bid to the customer without any restriction on the customer’s ability to disseminate it. That holding is as good a reminder as any as we head into the new year (and decade): although you have to be mindful of developments in trade secrets law, you can’t lose sight of the basics.