1. Texas Supreme Court Decision: Can Money Serve as Consideration for a Non-Compete?

In April of 2010, the Texas Supreme Court agreed to review an appellate court decision that will require the Court to answer the following question: Can money serve as consideration for a non-compete?  In Marsh USA v. Cook, a high level employee received stock options in exchange for a signing a non-compete.  After the employee left, the employer attempted to enforce his restrictive covenants and failed.  Why?  In simple terms, Texas has a statute governing non-compete agreements.  The statute says restrictive covenants must be ancillary to an otherwise enforceable agreement at the time the agreement is made, and the otherwise enforceable agreement must give rise to the need for protection.  What does that mean?  It seems a lot of courts and lawyers in Texas have been asking the same question.  For example, suppose an employer promises to provide an employee with confidential customer information, but requires the employee to agree not to solicit clients.  Various Texas cases find this to satisfy statutory requirements.  The employer has made “an otherwise enforceable agreement” – an agreement in which it obligates itself to provide the employee with confidential information – and at the time the agreement is made, the employee executes a restrictive covenant that is ancillary to the "otherwise enforceable agreement" which gives rise to the need for protection.  In Marsh USA, the employee argued that providing stock options did not give rise to a need for a restrictive covenant.  In response, Marsh argued that such a holding is hostile to economic development and that employers should be able to protect goodwill that exists in the form of customers relationships.  The Texas Supreme Court accepted the case in early April 2010.  Perhaps a decision will be issued in 2011.

2. California Clarity on Trade Secrets Exception  

In 2008, the California Supreme Court addressed the ‘narrow restraint’ exception to enforcement of non-competes in California.  Specifically, in Edwards v. Arthur Andersen LLP, the California Supreme Court rejected the argument that California’s statutory proscription on non-competes only applies to restraints that totally prohibit an employee from engaging in his or her profession.  Prior to Edwards, some courts held that a restrictive covenant was permitted if it contained a mere limitation on an employee’s ability to compete.  The Court expressly stopped short of addressing the validity of what it termed the “so-called trade secret exception” in which California courts permit contractual restrictions that are “necessary to protect an employers’ trade secrets.”  Look for California appellate courts to address this ongoing issue in 2011.

3. Computer Fraud & Abuse Act: A Split Among the Circuits

In recent years, there has been an ongoing debate within the judiciary over whether the federal Computer Fraud & Abuse Act applies in the context of a faithless employee. Namely, some federal courts question whether the CFAA applies to a faithless employee’s misappropriation of his or her employer’s confidential information or trade secrets by means of the employer’s computer, to which the employee had authorized access as a result of his or her employment.  On this legal issue, there is a continuum of interpretations of the CFAA within the federal judiciary.  Some district and appellate courts hold that the CFAA gives employers a federal cause of action against their disloyal departing employees, in what has been perceived as a pro-employer interpretation.  On the other end of this continuum are what would appear to be employee-favorable opinions holding that the CFAA does not create such a right in employers.  As the federal circuits line up on each side of this issue, it is reasonable to assume the issue will be pressed on appeal at some point.  2011 seems as good of a time as any to do so.

4. Non-Compete Legislation to Resurface in Massachusetts 

Much was written about the non-compete bill working its way through the Massachusetts legislature in 2010.  In March of 2010, the bill was favorably reported out of committee and, on May 25, 2010, it was submitted to the Judiciary Committee for its consideration. Later in the year, it was attached to an economic development bill, and then removed.  Look for the bill to be reintroduced in 2011.

5. Social Media Issues Gain Traction 

In a sobering reminder that online social media is changing the way many companies do business in unforeseen ways, a federal court shot down an employer's trade secret claim in 2010 based largely upon the availability of information via the internet.  In Sasqua Group, Inc. v. Courtney, a magistrate judge for the United States District Court for the Eastern District of New York held that although an employer's customer list may have been a trade secret years ago, "the exponential proliferation of information made available through full-blown use of the Internet [presents] a different story."  The district court subsequently adopted and approved the magistrate's lengthy and detailed opinion.  Others have debated the extent to which non-solicitation agreements and other restrictive covenants apply to conduct undertaken by employees through online social media, such as post-employment communications with clients through sites such as LinkedIn.  As online social media spreads in popularity and usage, look for more and more courts (and commentators) to address this interesting issue.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or subscribe to this blog's RSS feed.
 

Protecting a company's non-compete and trade secret interests can be a daunting task.  There are so many things to consider.  Here's a list of ten things to keep in mind and some resources to help you take action. 

1. Implementing a Trade Secrets Protection Program – Protecting your trade secrets cannot be left to afterthought.  Companies are well advised to implement a trade secrets protection program.  If you don’t know where to start, consider conducting an audit of your company’s confidential information.

2. Drafting Non-Competition Agreements --  Many employers with offices or employees located in multiple states use the same non-compete/confidentiality agreement in each state in which they do business. Typically, the form of the non-compete/confidentiality agreement originated in the employer’s home state, and the employer went on to use this same agreement wherever the employer does business. However, these employers may find out too late that a non-compete/confidentiality agreement enforceable in their home state may not be enforceable in another state.

3. Online Social Networking Policies -- Chances are that one-quarter to perhaps as much as one-half of your workforce (or more if your workforce is younger) are regular users of social networking websites.  Any business that does not have a social networking policy or does not train its employees on the do’s and don’ts of social networking may have a critical security gap in the protection of its trade secrets.  A recent case suggests that LinkedIn can present a threat to your trade secrets.  If you have expectations concerning the manner in which your employees may or may not use LinkedIn, it is wise to address these concerns upfront through contracts and written policies.

4. Can Your Lawyer Keep a (Trade) Secret? -- Ensuring that your trade secrets are kept secret is not a new requirement.  Internal controls on use and dissemination of confidential information may not be entirely sufficient.  Businesses need to recognize that risks sometimes involve the handling of their data by third parties specifically entrusted for that purpose, such as their attorneys.  Remote storage of client data presents several concerns including unauthorized access to confidential client information by a vendor’s employees or by hackers, a failure to adequately back up data, or insufficient data encryption. 

5. Can Litigation Place Trade Secrets at Risk? --  The last place you might expect your trade secrets to be at risk of disclosure is in a court action intended to protect them, but courts around the country have held that plaintiffs alleging trade secret misappropriation must identify the secrets at issue with specificity. So what is a plaintiff to do if it wishes to minimize disclosure of its trade secrets during litigation while maximizing its ability to discover what information may have been taken by the defendants?  Click here.

6. Open Source – Hidden Exposure --  Open source code is computer code that is publicly available on the internet for use by anyone.  Typically, in order to copy open source code from the internet, a party must agree to the terms of a “click” or similar pop-up license.  Although there are hundreds of different open source code licenses, many require that the user of the code must make publicly available any subsequent use of the code.  In other words, if your software programs are built using open source code, it may be more difficult to claim trade secrecy for such programs.

7. Taking Control of Litigation Budgets in Non-Compete Cases -- Litigation budgets can be difficult to prepare under the best of circumstances.  Budgeting for non-compete litigation, with its unpredictable nature and often front-loaded cost structure, is even more difficult.  Although many factors are outside the control of parties and their counsel when it comes to litigation costs, the litigation strategy you choose can have a particularly significant impact on your budget in a non-compete case.  Moreover, given the fast pace of non-compete litigation, there is an increased need to continually reassess your budget early on as developments unfold.

8. Handling Employee Defections -- When employees leave to join a competitor, you can often be taken by surprise.  In order to secure your confidential information and customer relationships, rapid action may be required.  Consider these ten tips for responding to employee defections.

9. Advising Recruits -- Just as employers must be prepared to respond to employee defections, they must be prepared to advise their incoming recruits on what not to do when resigning from a former employer.  Here are ten things to keep in mind.

10. Mergers and Acquisitions -- Good mergers can turn bad without attention to employee retention -- be sure to carefully analyze the existence and enforceability of non-competes signed by key employees early in the process.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

In a sobering reminder that online social media is changing the way many companies do business in unforeseen ways, a federal court recently shot down an employer's trade secret claim based largely upon the availability of information via the internet.  In Sasqua Group, Inc. v. Courtney, a magistrate judge for the United States District Court for the Eastern District of New York held that although an employer's customer list may have been a trade secret years ago, "the exponential proliferation of information made available through full-blown use of the Internet [presents] a different story."  The district court subsequently adopted and approved the magistrate's lengthy and detailed opinion.

Sasqua Group is an executive search consulting firm specializing in the recruitment and placement of professionals for the financial services industry.  When it parted ways with a former recruiter named Lori Courtney, Sasqua sought an injunction to preclude Courtney from misappropriating its trade secrets.  According to Sasqua, Courtney had access to its customer database prior to her departure, and the database was the "lifeblood" of its business.  The database contained client contact information, individual candidate profiles, contact hiring preferences, employment backgrounds, descriptions of previous interactions with clients, resumes and other information.  From Sasqua's viewpoint, the database was highly proprietary.  Courtney had a different perspective, and the Court agreed.

Courtney testified that "virtually all personnel in the capital markets industry...have their contact information on Bloomberg, LinkedIn, Facebook or other publicly available databases."  During the hearing, Courtney was asked what she would do "if she had amnesia tomorrow, lost her blackberry" and "needed to identify" decision makers and prospective clients.  Her answer resonated with the court: she would use the internet and the vast amount of information available on it, which she claimed she could find through a five-minute search.  Courtney explained that she could start with LinkedIn "because people put their whole profile on LinkedIn."  She explained that if she wanted to find the decisionmaker at a particular company, she could simply enter the name of the company in the search box.  Seconds later, she would have a list of employees, their positions, current title, prior jobs, undergraduate school, dates of attendance, experience, objectives, and even contact information.  If she wanted more information, she could do a search on Google and she would have thousands of search results, many of which pointed to news stories recounting companies' hiring plans.  The court concluded that the information publicly available "exceeded the amount and level of detail contained in the Sasqua database."  The clients, their contact information, and other data was readily accessible.

Does this mean that employers seeking trade secret status for customer lists and related information should throw up their hands and surrender?  No.  This case presents a textbook example of what not to do if an employer regards its client information as confidential.  For starters, Sasqua did not require Courtney to sign a confidentiality or nonsolicitation agreement.  Nor did it take reasonable measures to protect the database in question.  Its computers were not password protected; all employees had free access to the database, including at work and remotely from home.  The database did not contain legends designating confidential information embedded within its pages to remind employees that the information was confidential.  The database was shared with potential business partners without restriction.  Firewalls and security software were not installed.  As the court stated, "Sasqua failed to take even basic steps to protect the secrecy of the information contained in its database."

The "takeaway" from this case is not that social media and the proliferation of information via the internet will undermine protection of customer lists and related information.  Rather, the lesson is that employers need to be vigorous in the efforts to keep their secrets secret.  A copy of the magistrate judge's opinion and the district court's confirmation is available in pdf format at the bottom of this post.  As always, please feel free to share your comments, thoughts and questions in the comment section below.

Sasqua Group Magistrate's Report & Recommendation.pdf (202.46 kb)

Sasqua Group Order Adopting Magistrate's R&R.pdf (11.84 kb)

A sales manager has signed a contract with his employer agreeing that client lists are confidential and agreeing not to solicit clients for a period of six months after the end of his employment.  Shortly after resigning to join a competitor, the sales manager updates his LinkedIn profile to reflect that he has changed jobs and is now working for the competitor.  The profile update is broadcasted by LinkedIn to the sales manager’s contacts, which includes dozens of the clients he serviced at his previous employer.  Has the sales manager breached his contract?  Arguments can be made on both sides.

The former employer will argue that its customer list is confidential and that the sales manager obtained his knowledge of the clients’ identities by virtue of his employment.  The employer will note that even novices on LinkedIn understand that the service will notify contacts of a user’s profile updates.  After all, why bother updating your profile if you don't intend to share this information with others? And many, though admittedly not all, courts have held that contacting former clients regarding a change in employment constitutes a solicitation.  See e.g., Merrill Lynch v. Schultz, 2001 WL 1681973, *3 (D.D.C. 2001) (noting that “such initiated, targeted contact is tantamount to solicitation because there is no reason to believe that a customer on the receiving end of such a [communication] does not assume that the [employee] wishes for him to transfer his account.”).

The sales manager will undoubtedly take a different view.  He will argue that he didn’t take any records or other information with him when he left, and that the identity of his former employer’s clients has always been publicly available to anyone who wanted to look at the sales manager’s LinkedIn contacts.  He will also note that he did not initiate contact with clients.  Rather, all he did was update his profile to reflect a change in employment and sat back providing clients – or anyone else for that matter – with the option to contact him.

So who is right?  As with any non-compete case, the answer may vary on a case by case basis and require a close examination of the contract language and the surrounding facts and circumstances.  A court is likely to ask the following questions (among others):  Does the contract specify that client information (such as client identities, names, addresses, and other contact information) is confidential?  Did the former employer actually treat such information as confidential?  What is the wording of the non-solicitation agreement? 

Because the enforceability of a restrictive covenant is highly discretionary in many states, employers who seek to preclude employees from contacting clients via LinkedIn may take steps ahead of time to eliminate any confusion.  Such steps may include any or all of the following:

1. Draft non-solicitation agreements that:

• expressly preclude employees from contacting clients to notify them of the employee’s change in employment;
• specify that communications made through an online social networking website such as LinkedIn, Facebook, etc. constitute a violation of the contract.

2.  Draft confidentiality agreements that:

• expressly define confidential information to include client identities and contact information;
• unambiguously state that confidential information may not be used or disclosed for any purpose other than on behalf of the employer, including through social media.

3. Include a social media paragraph in non-competes that specifically addresses the use of computers and social media.  The paragraph should state that:

• It is not intended to limit the scope of the confidentiality and non-solicitation covenants;
• Employees may only use the employer’s computer systems (e.g., computers, internet, servers, internal e-mail, external e-mail, World Wide Web access, etc.) for business purposes only.  Recognizing the rigid – perhaps impractical nature of this restriction – the agreement may provide that incidental personal use of computer systems is permitted, but state that such usage shall not violate the terms contained the confidentiality and non-solicitation provisions; 
• All e-mail and internet usage is subject to monitoring and that access to any website on the Internet must be for legitimate business only;
• The Employer may choose to block access to certain sites on the Internet at its discretion, and that available access to a site does not constitute approval to use or access that site by the employer.
• The employee is not permitted to have a webpage or website on the Internet for business purposes through a provider without prior written approval from the employer.  This includes social networking sites like Linked-In for business purposes.  The employee should agree that mentioning his or her affiliation or employment with the employer on these types of sites without prior written approval of the content by the employer is not permitted.  If the employee is permitted to connect with clients via LinkedIn, they should be required to set their settings so that other users cannot see their contacts. 
• The employee agrees that the use of text messages, e-mails, IM’s, and/or other communications via Blackberry or other wireless service/devices not routed through the employer’s systems is not permitted for business communications with Clients;
• The employee agrees that participation in chat rooms or other online forums for business purposes is not permitted, and that the employee will not direct Clients to chat rooms, blog sites, or other social networking sites which contain information prohibited by the employer or applicable regulatory authorities;
• The employee agrees that he or she will not discuss the employer, its business relationships, its managers and employees, its customers or its products/services in any chat room or other online forum without prior express written permission from the employer’s management;
• The employee agrees that the restrictions outlined above apply to his or her use of any computer (within or outside of the employer) for any business purpose.

In short, businesses that do not address social networking through their contracts and written policies may find that they have a critical security gap in the protection of their trade secrets and customer relationships. 

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.