February 2013 was an active month in the world of non-competes and trade secrets, and if we read the tea leaves, it looks like things are only going to get busier.  Before I recap some of February's highlights and direct you to some of the best resources out there on the web, let's briefly discuss one reason I think non-compete issues are likely to be pushed to the forefront over the coming months and year -- Warren Buffet.  Warren Buffet?  That's right, Warren Buffet, and people like him.

It was widely reported in February that Warren Buffet's Berkshire Hathaway teamed up with 3G Capital Management to acquire H.J. Heinz.  Buffett said Berkshire is contributing "something between" $12 and $13 billion to the deal.  Of greater interest, however, Buffet said that Berkshire is sitting on another $47 billion in cash and he joked, "I'm ready for another elephant. Please, if you see any walking by, just call me."  What does this have to do with non-competes and trade secrets?  A lot.  Over the past few years with all of the economic and political uncertainty, a lot of private equity has built up and remained on the sidelines, but like Warren Buffet's $47 billion, that cash is sitting there waiting for the right elephant to walk by.  But private equity investors aren't foolish.  After investment committees decide to pursue a target acquisition candidate and deal professionals succesfully submit an offer to the seller, it is time to get the lawyers involed in the due diligence phase. Due diligence includes more than just validating management's stated operational and financial figures. Due diligence is the point at which it is critical to determine who has a non-compete and who does not.  Just as important, the agreements need to be examined to ensure they are appropriately tailored to protect the target company's legitimate interests, and to ensure they will remain enforceable after the acquisition.  If key employees lack restrictive covenants, due diligence is the time to address the issues.  Then, of course, someday, if and/or when employees leave, litigation becomes a distinct possibility. In short, mergers and acquisitions precipitate non-compete and trade secret contracting and litigation.  Without a doubt,  the month of February told us this issue is going to be hot well into the 2010's.  

What else did we learn in February?  Let's look around the web.

• Forum selection clauses were a hot button issue in February.  We saw that they may be enforced even if they require employees to fly over 8,000 miles just to appear in Court. Robert Milligan does a great job dissecting an opinion from the U.S. Eastern District of Missouri and credibly wonders what one has to prove in Missouri in order to demonstrate that a forum selection clause satisfies the judicially required "gravely incovenient" standard to invalidate such a clause.
• Jonathan Pollard reminded us that the race to the courthouse does not always work in California when a forum selection clause suggests that the lawsuit should proceed elsewhere, even if the new employer was not a party to the contract containing the forum selection clause.
•  The Obama Administration announced its five point initiative, "Strategy on Mitigating the Theft of U.S. Trade Secrets," to combat the threat imposed by international trade secret misappropriation.  Care to know what it says, what's good about it, and what's not?  John Marsh does a great job laying it out in his bog, The Trade Secret Litigator.
• Want to know what's happening with pending non-compete legislation?  Check out what Kenneth Vanko has to say about Michigan's proposed statute.
• While we are talking about statutes, Russell Beck can fill you in on the status of things in Massachusetts where the legislature is making another run at non-compete legislation this term.

Finally, for those of you who have taken my advice to pay a visit to the blogs written by John Marsh, Russell Beck and Kenneth Vanko, I'm sure you share my opinion they are top notch.  If you enjoy them as much as I do, consider listening to one of their podcasts.

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.

As January draws to a close, we figured it seemed like a good time to take stock of where things stand in the world of non-competes and trade secrtets.  So we've paused to look around the blogosphere to see what's been happening and what's on the horizon.

 • Much has been written about the ongoing battle between Aon Risk Services and Alliant Insurance Services stemming from an alleged raid, which has spawn lawsuits on both ends of the continent.  David Clark provides a good summary on Epstein Becker's blog while Kenneth Vanko weighs in on the thorny venue issues that arise when parties file preemptive strike actions.

• Maryland is contemplating passage of a statute that would preclude enforcement of a "non-competition covenant" if an employee applies for and is deemed eligible for unemployment benefits.  The problem is the statute, in its current form, does not define "non-competition covenant" and will motivate more employers to contest more unemployment claims.  Some legislators need to think first, and legislate second.

• The suicide of Aaron Swartz, a well-known coder, entrepreneur, and political activist, has resulted in increased scrutiny of the federal Computer Fraud and Abuse Act, renewing debate over whether the law should be amended to narrow its scope.  There is no greater resource of material on this subject than John Marsh's Trade Secret Litigator Blog. 

• Have you heard the clamor that confidentiality contracts may run afoul of the National Labor Relations Act?  Lauri Rasnick tackles a recent decision from an NLRB administrative law judge and offers some practical and useful advice here.

• Ever wonder whether non-compete and trade secret litigation is on the rise?  Russell Beck of Beck Reed Riden asked and answered the same question in his Trade Secret and Non-Compete Survey.

• Have you ever wondered what the difference is between a works-for-hire and inventions assignment clause in an assignment clause in an employment agreement?  Thought leader Janette Levey Frisch dissects this topic and offers helpful tips on her blog The Emplawyerologist. 

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips, and he received his mediation training from the Center for Dispute Settlement in Washington, D.C.  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.

After 113 days, the NHL lockout ended with the NHL and its players association reporting that they have reached a tentative deal.  Although they say that a lot of i's need to be dotted and t's need to be crossed, it looks as if North America's hockey fans will get to watch hockey again this winter. 

By all accounts, federal mediator Scot Beckenbaugh, played a significant role in helping the parties break their stalemate, and it only took him six weeks to do it!  That's right.  On the 72nd day of the lockout, the NHL and its players association agreed to mediation in an effort to break their stalemate.  By that point, the parties had seen millions of dollars in revenue go down the drain.  In fact, the NHL is rumored to have thought the lockout would never get this far because the difference in the parties' positions reportedly translated to the amount of money the players lost after being locked out for eight games.  Now, three months into the hockey season, it appears that hockey's 82 game season will be reduced to 48 or 50 games at best.

What has been the toll?  The players lost their livelihood in the interim.  The NHL's image has been tarnished, and it remains to be seen whether fans will return to a sport that has enjoyed a surge in popularity over the last few years.  In addition, the relationship between the players and the owners has been strained to say the least. 

What does all of this have to do with mediating non-compete disputes?  Probably not much.  But as a hockey fan and non-compete mediator, let me attempt to draw a correlation.

The dispute between the NHL and its players lasted 72 days before a mediator got involved.  It took another 41 days for the mediator to bring the parties to an agreement in principle.  During that time, the mediator faced a mountain of obstacles, some of which are present in every dispute, and some of which arise when parties to a hardened dispute fail to get a mediator involved early on. 

First, when the mediator arrived on the scene, the parties already had lost a lot of money.  Second, their emotions began to shape their negotiations sometimes resulting in offers that were more about punishing the other side than about addressing the offeror's interest.  Third, the longer the dispute dragged on, the more the resolution became hostage to negotiating conventions rooted in the ritual of exchanging offers and counteroffers (more on this below).  Fourth, the owners made a severe miscalculation.  They incorrectly believed that the players would fold quickly because they stood to lose more the longer the lockout lasted. Fifth, each side suffered from principal/agent problems.  The players wondered whether Gary Bettman truly had the support of the owners, and the owners likewise second guessed whether the players' trust in Donald Fehr would continue.

And there you have it.  The lockout lasted as long as it did in large part due to emotions, each side's desire to punish the other, mounting sunk costs, a mistaken belief that negotiations must always adhere to an offer/counteroffer process instead of mutual problem solving, clashing personalties not trusted by either side, and initial miscalculations which exacerbated all of the problems discussed above.

Enter the mediator.  It is hard to envy a mediator who had to step into the middle of this mess after parties had become entrenched both in their positions and processes.  But it is easy to see how a mediator's involvement from the outset could have shortened the life -- and therefore the expense -- of this dispute.

First, what is a mediator's job?  To help the parties negotiate an agreement?  Well, sort of.  A mediator's task is to help the parties determine whether an agreement as possible, and if so, to help them achieve that agreement.  But not just any agreement.  The agreement must be durable, and it must be mutually acceptable to the parties.

Second, much has been written about whether mediators should be facilitative or evaluative.  Facilitative mediators help the parties reach an acceptable resolution by listening to everyone and helping them analyze the issues and explore options.  A facilitative mediator does not recommend a solution, but he or she may share his or her opinion.

In contrast, an evaluative  mediator behaves more like a judge in a settlement conference by exploring weaknesses in each side's arguments and emphasizing each side's alternative to a negotiated resolution.

So is one approach better than the other? Or perhaps a combination of both? Just as a carpenter seeking to attach two pieces of wood may realize that he can do so by using a hammer and a nail, a screwdriver and a screw, velcro, glue, tape, or any other number of adhesives, a good mediator too must be open to using all of the available tools at his or her disposal.  A good mediator brings to the table an independent perspective. Not just a perspective independent on the merits, but independent in terms of the path to a successful resolution.  A good mediator sees potential solutions where parties see conflict.  And this is where we see the lessons that non-compete and trade secret disputants may take away from the NHL lockout negotiations.

First, just as the lockout got expensive fast, so too can non-compete and trade secret litigation.  Of course, all litigation can be expensive, but non-compete and trade secret disputes have all of the hallmarks of litigation compressed into a short, expedited, emotionally driven timeframe.  Consequently, the parties may quickly reach the conclusion that they have sunk too much investment into the litigation to settle.  With each dollar spent, the range of acceptable solutions short of litigation tends to shrink.

Second, emotions often run high in non-compete and trade secret disputes.  Plaintiffs often feel betrayed, and their perspective may be colored as much by a desire to punish as it is by a desire to be made whole.  Defendants feel that their livelihoods are on the line, and they see plaintiffs as overreaching.  

Third, mediators can bring creative solutions to the table that are tailored to meet the interests of the respective parties.  This is particularly true in these types of cases because courts have wide discretion to fashion equitable remedies.  Parties can be equally creative in mediation.

Fourth, mediators with subject matter expertise are essential.  The NHL and its players association chose Beckenbaugh to serve as their mediator for a reason.  During the 2004-2005 NHL lockout, he served as their mediator.  Consequently, he had a heightened familiarity with the issues between the parties.  Using a mediator with significant experience in non-compete and trade secret litigation is essential.  These cases are often like snowflakes.  Although they appear to be similar upon quick review, no two cases are alike.  The outcome of each case is driven by a panoply of factors ranging from the judge assigned to the case, the applicable state law, and the individual facts and circumstances.  Moreover, the path to resolution can vary significantly just as courts have wide discretion to determine the procedures to be used (e.g., whether a motion for injunctive relief will be resolved on the papers or after presentation of live testimony; whether expedited discovery will be permitted; etc.).  It is essential that the parties choose a mediator who has significant experience in non-compete and trade secret litigation so that the mediator can quickly and incisively cut through the issues.  It will also ensure that the mediator can help to craft and propose enforceable and creative non-monetary solutions to the extent appropriate.

In short, mediating a non-compete and trade secret dispute is different than mediatiing general commercial disputes.  Early involvement by a mediator experienced in such cases can go a long way toward saving parties time, money and anxiety.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips, and he received his mediation training from the Center for Dispute Settlement in Washington, D.C.  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.

Mediation Information.pdf (1.24 mb)

A recent opinion stemming from a lawsuit between two competitors in the medical device industry reminds us of the old adage “be careful what you wish for.”  In Howmedica Osteonics Corp. v. Zimmer, Inc., the plaintiff seemed to get what it desired – a broad injunction against its competitor.  Unfortunately, that injunction came with some likely unforeseen and unpleasant consequences when the Third Circuit Court of Appeals found that the injunction was overly broad, thus placing Howmedica’s $6 million bond at risk. 

The lawsuit between Howmedica and Zimmer, competitors who manufacture and sell spine-related medical devices, was sparked when a number of Howmedica’s sales representatives resigned to join Zimmer.  Zimmer apparently sought to increase its market presence in Las Vegas and Arizona and hired sales representatives from Howmedica who were already accustomed to selling medical devices in that region. 

After Zimmer hired the sales representatives, Howmedica sued Zimmer claiming, among other things, that the representatives had breached employment agreements with the company.  As frequently happens in these cases, Howmedica moved for an injunction claiming that it would be irreparably harmed if Zimmer and the sales representatives were not prohibited from engaging in certain conduct.  

The New Jersey District Court was persuaded by Howmedica’s arguments and entered injunctive relief against the individuals and Zimmer to enforce their employment agreements.  The District Court’s Order generally followed the relief requested by Howmedica in its application for an injunction. 

Zimmer filed an immediate appeal of the injunction, compelling Howmedica to secure the broad relief it won through the injunction entered at the trial court level with a bond.  In what may be counterintuitive, the party obtaining an injunction is frequently required to post a bond in order to help compensate defendants if the injunction is later overturned.  The bond may act as a check on the type of relief sought by plaintiffs in injunction cases because all or a portion of the bond may be forfeited if the relief that was requested and granted is later overturned. 

In this case, on appeal, the Third Circuit concluded that the injunction entered by the District Court was overbroad in certain respects and modified it to make it less restrictive.  When the injunction was modified, the defendants asked the District Court to recover on the bond on the grounds that they were wrongfully restrained by the preliminary injunction and should be entitled to damages as a result.  This put the District Court in the uncomfortable position of having to potentially punish the same party that it had previously rewarded. 

The District Court delayed a decision on the bond by ruling that the defendants would have to prevail in the lawsuit before attempting to collect on the bond.  The Court found that vacating certain portions of the injunction was not the same as a final decision on the merits.  Accordingly, the Court concluded that the motion was premature and the defendants were not entitled to damages against the injunction bond.

This case is a reminder that requests for injunctive relief should be carefully considered because relief that goes beyond the contract, or that is otherwise overly broad, can subject a plaintiff to liability on the bond posted in support of the injunction.  In this case, the language in the order proposed by the plaintiff went beyond the scope of the contract and the defendants’ legal obligations (according to the Third Circuit).  While securing broad injunctive relief against former employees can be invaluable to protecting a company’s business, care should be taken to carefully craft language that does not expose the company to liability.

This recent case also serves as a reminder that the medical device industry is a hotbed for noncompete litigation, and companies in this industry should consider whether they are adequately protected with well-written and enforceable restrictive covenants and confidentiality agreements.  Companies should also consult counsel and work with new hires to ensure that they comply with enforceable restrictive covenant provisions in order to mitigate any risks associated with the hire.

Susan Guerette is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips.  Susan has litigated departing broker matters for nearly fifteen years.  To follow Ms. Guerette on LinkedIn, click here.

Howmedica v. Zimmer.pdf (299.95 kb)

Yahoo! recently named longtime Google executive, Marissa Mayer, as its new CEO.  Since the announcement, Twitter has been aflutter with comments about how this could happen.  One Tweeter remarked: “Whoa. Either Marissa Mayer didn't have a non-compete or no one at Google thinks Yahoo qualifies as competition.”  Another tweet speculates that she must have at least signed a confidentiality agreement. 

These Tweeters are not alone in their curiosity.  Over the past twenty-four hours I have been asked many questions by friends and family alike about this move.  Here's my take.

Didn’t she have a non-compete?  Probably not.  Of course, I can’t say for sure as I am not privy to her employment arrangements with Google, but my strong guess is that she does not have a non-compete that facially forbids her from accepting employment with a competitor.  Such an agreement would be unenforceable in California where section 16600 of the Business and Professions Code prohibits non-compete agreements, except in limited circumstances that do not apply here.  That being said, she most likely executed some sort of confidentiality agreement along the way, and she has a statutory obligation not to misappropriate Google’s trade secrets.  (For more on the difference between non-competes, confidentiality agreements, and trade secrets, click here).

Can Google stop her from going to Yahoo!?  That's a tough one.  The odds makers in Vegas would surely bet against it for multiple reasons.  As noted above, Mayer likely does not have a non-compete agreement, and if she does, it likely runs afoul of California law.  Moreover, California courts have unequivocally rejected the inevitable disclosure doctrine, a judicial doctrine by which courts will stop an ex-employee from working for a competitor if the employee's new job will inevitably lead to the disclosure of the former employer's trade secrets.  See Whyte v. Schlage Lock Company, 101 Cal.App.4th 1443 (2002).  If you ask Google, I am sure they believe that Mayer cannot possibly assume her new role at Yahoo! without inevitably drawing upon her knowledge of Google's trade secrets.  Hewlett-Packard surely felt this way when its former CEO Mark Hurd left to assume control at Oracle. 

Despite California's rejection of the inevitable disclosure doctrine, a careful read of California case law suggests the issue may not be as clear cut as it seems.  In Whyte v. Schlage, the court emphasized that it was considering (and rejecting) the inevitable disclosure doctrine “as an alternative to proof of actual or threatened misappropriation [pursuant to the California Uniform Trade Secrets Act]….”  Implicit in the appellate court’s opinion is that under California law, there is a difference between “threatened misappropriation” under the CUTSA, on the one hand, and inevitable disclosure, on the other hand.  The lower court could have found a threatened misappropriation and issued relief pursuant to the CUTSA.  So there seems to be a legitimate question as to what remedy a California court can employ to enjoin threatened misappropriation.  Safe money bets that Google's lawyers have already analyzed this issue and identified it as a possible grounds for future litigation if they uncover any conduct suggesting that Mayer intends to utilize her knowledge of Google's trade secrets. 

Should Google be concerned?  Absolutely.  On the outside, Google has been calm and collected (at least, so far).  Google's CEO graciously commented that Mayer made many contributions to Google and that her talents will be missed.  Of course, this statement is not at all inconsistent with future litigation.  But, yes, Google should be concerned.  In addition to losing an extremely talented and long tenured employee, that same employee has walked straight across the proverbial street to the top of one of Google's fiercist competitors, and she has done so with a head full of knowledge about the secrets to Google's success.  To make matters worse, Mayer is widely regarded as charismatic and inspiring.  Surely, numerous Google employees will be reaching out to see if she has any interest in hiring them.

If Google can’t stop her from going to Yahoo!, what can Google do?  For starters, Google will take a long hard look at the California Uniform Trade Secrets Act and the numerous cases interpreting and applying the statute.  Any legal action by Google is certain to include a claim for threatened misappropriation described above.  Next, Google will have to consider claims for unfair competition, breach of duty of loyalty, civil conspiracy, and possibly a claim under the Computer Fraud & Abuse Act (although a CFAA claim seems unlikely unless Mayer did something unbefitting the level of intellect widely attributed to her).  (For a melange of posts discussing the CFAA, click here.)

Did her looks play a role in her career success? (Yes, someone actually asked me this ridiculous question!)  Gimme a break!  Despite the litany of idiotic articles denominating Mayer as a "sexy geek," the reality is that she is an incredibly intelligent and talented woman.  If you doubt it, listen to her talk about her work and her career.  She graduated with honors from Stanford University with a B.S. in symbolic systems and an M.S. in computer science.  She joined Google as its twentieth employee in 1999, turning down more than a dozen offers from other companies.  In my humble opinion, her meteoric rise is attributable to her passion for her work.  Of equal importance is her vision.  Like other successful executives, Mayer believes that her work can change the world.  She may be right.  I wrote this article with the assistance of products from Google that Mayer helped to design.  Surely, she can thank Google for her success, but Google owes her a measure of gratitude as well.  That gratitude may not be readily apparent, however, in court papers should Google decide to file suit.  Stayed tuned.  We haven't heard the last of Marissa Mayer. 

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

Every day businesses across the country merge and consolidate their operations.  If your business acquires or merges with  another business, consider these issues when drafting the agreements to make sure that you will get the benefit of your bargain.

 1. Require a non-compete agreement: First and foremost, you’ll want to prevent the owners of the acquired business from competing with you by requiring restrictive covenants.  Without a restrictive covenant, the former owners can simply set up shop and compete with you immediately after selling you their company.  In drafting the restrictive covenants, consider not only what type of restrictions will protect you, but also what the courts will find enforceable.  In general, the prevailing test for enforceability in the sale of business context is reasonableness.  For example, if the business operated nationwide, then courts will be more likely to find that a nationwide provision prohibiting competition is reasonable.  However, if the company operated in a more limited area, then it may be unreasonable to demand a nationwide restriction and you may want to be more circumspect in the extent of the restriction.  Either way, it is advisable to include language in the agreement indicating that the company operated in a certain geographic area and that the seller acknowledges that a restriction covering that area is reasonable and necessary.

2. Be specific: When drafting the noncompete portion of the deal you should carefully define the prohibited activity.  Consider how the seller could hurt your business in the future and make sure that you draft the noncompete agreement to prevent activities that would enable the seller to resume activities that would harm the company.  This is normally done by delineating prohibited activities, which should include the seller not only acting as an employee in a competing business but also being affiliated with, controlling or having an interest in any competing business. 

3. Address key employees:  Are any of the principals of the business you’re buying going to continue on as employees?  If so then you will want to have two different agreements: one for the sale of the business and an employment agreement for key individuals.  Make sure that the provisions in these agreements begin to run from the right dates.  The purchase agreement should include restrictive covenants that begin to run from the closing date and the restrictions in the employment agreement should begin to run from the date that the employee’s employment terminates.  This will ensure that you are protected even if the noncompete associated with the sale of the business has long expired when the key employee resigns.  (See Non-competes in Fixed Term Agreements: Special Care Required).

4. Indetify value:  Don’t forget where the value of the deal lies.  While you will likely want the sellers and upper management to sign restrictive covenants, consider whether the company would lose a lot of its value if other employees left after the sale.  It may be that the real value of the company is in its sales force or research and development employees.  If so, consider having those employees sign restrictive covenants in connection with the purchase of the company.  In some cases, it might even make sense to offer those employees incentives to sign the restrictive covenants instead of jumping ship.

5. Include an agreement not to recruit employees:  Do the principals of the prior business have relationships with other employees?  If so, you may want to also include provisions in their employment agreements providing that they will not solicit, recruit or even hire other employees for a period of time after their employment ends.   If the benefit of the deal includes the employees, you don’t want the seller to act as a pied pier and lead these valuable employees away.

6. Address assignability:  Who will have the right to enforce the restrictive covenants in the future?  You may think that this should not matter to you but the restrictive covenants are important assets of your business, and you need to make sure that you will obtain the value of those assets if you decide to sell your business someday.  Therefore, any successor companies must be able to enforce the covenants and protect the business.  Add language indicating that the agreement is automatically assigned to a successor upon merger or acquisition to increase the likelihood that it will be enforceable.  (See Employee Retention & Attrition in Mergers/Acquisitions)

7. Don’t undermine your protectable interests:  Make sure that other aspects of your deal do not undermine the enforceability of your restrictive covenants.  For example, restrictive covenants in the sale of a business context are generally enforceable to protect good will.  It would undercut the claim that you needed protection of goodwill if your term sheet indicated that the value of the goodwill being purchased was zero. 

8. Make sure agreements are between the appropriate parties: What is the structure of the deal?  You will want to consider the structure because this can affect how the agreements are constructed.  For example, if the company being purchased will be merged into the buyer, then make sure that the employment agreements are between the individuals and the purchaser.  However, if the company will remain a separately existing entity, then those agreements should be with that company. 

9. Protect confidential information:  Don’t forget to protect confidential information and trade secrets.  In many sales, the information being purchased is a key element, but how to protect that information is not carefully considered.  This is surprising given that the misuse or disclosure of that information can do a lot of damage.  Make sure that the sale agreement provides that confidential information and trade secrets will not be “used or disclosed” after the sale.  Also make sure that you broadly define the confidential information that adds value to the business, but do not be gratuitously overbroad.

10. Draft agreements with teeth:  Finally, make sure that your agreements have teeth.  If the seller violates the restrictive covenants and you have to take steps to enforce his or her obligations, make sure that you have included an attorney’s fees provision so that the seller will have to pay the fees and costs that you had to incur in bringing litigation to stop competitive activities.  Also include terms providing that the seller agrees to injunctive relief – essentially a court order requiring that the competitive activity cease – if the provisions of the agreements are violated or there is a reasonable belief that they have been or will be violated.  This will help ensure that you do not have to pay more money to get the benefit of your deal.

Purchasing another business can be a great way to increase your market share, consolidate resources or buy out the competition.  However, you should consider these issues when crafting your deal so that you obtain all of the benefits of your new purchase.  For additional issues to keep in mind when drafting restrictive covenants, see Top Ten Things to Consider When Drafting a Non-compete Agreement.

Susan Guerette is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips.  Susan has litigated departing broker matters for nearly fifteen years.  To follow Ms. Guerette on LinkedIn, click here.

In a recent decision, the Supreme Court of New Jersey considered whether an employer has an independent duty to inquire into the source or ownership of a newly hired employee’s customer list.  Surprisingly, the answer is “no.” 

The case, Thomas Fox v. Millman, involves a sales representative, Jean Millman, who previously worked for Target Industries, an industrial plastic bag company.  Millman signed a confidentiality agreement when she began working for Target.  She was subsequently fired because Target’s CEO believed that she was disparaging the company and selling products on behalf of Target’s competitors.  Four days later, Millman began working for Polymer Packing Inc., which was also engaged in the industrial plastic bag industry.

When Polymer hired Millman, it asked her whether she was subject to any confidentiality agreements or non-compete clauses.  Millman assured Polymer that she was not.  Millman also provided Polymer with a customer list and implied that she had generated the list on her own over the years.  The list did not identify Target, nor did it bear any indication that it was not Millman’s own list.  Polymer knew, however, that Millman had previously worked for Target and that Target was the only other plastics company for which Millman had ever worked.  Polymer required all of its employees, including Millman, to sign a confidentiality agreement and admitted that it generally considered customer information to be proprietary.  But Polymer did not do anything to verify Millman’s representation that she was not subject to any confidentiality agreement or non-compete clause.  After joining Polymer, Millman generated substantial sales on behalf of Polymer to former Target customers.

Three and a half years later, Target sued Polymer, asserting claims for misappropriation of proprietary and confidential information, tortious interference with business relations and prospective economic advantage, unfair competition, and conversion.  The trial court dismissed Target’s claims, concluding that Polymer had no way of knowing that Millman’s customer list did not belong to her.  The Appellate Division affirmed.  On appeal, the Supreme Court of New Jersey refused to impose an affirmative duty on Polymer to undertake an independent inquiry into the source of the customer list in Millman’s possession.

The opinion, devoted primarily to a discussion of whether the doctrine of laches was properly applied to the case (the court found that it was not and reversed and remanded on that basis), rather tersely stated the Court’s conclusion that there was “no ground on which to impose a duty of independent inquiry upon an employer, like Polymer, faced with an otherwise unremarkable representation by a prospective employee, like Millman, that a list of contacts is her own.” 

Whether you are the employer whose former employee has recently joined a competitor company or the hiring employer who is bringing a new employee on board, the Fox v. Millman case does not clearly specify what is required.  (See fellow blogger John Marsh's thoughts on the case.)

Employers should take steps to protect their trade secrets and protect them vigorously.  (See Top Ten Things To Do When an Employee Resigns to Join a Competitor).  Notably, it took Target three and a half years to initiate legal action against Polymer.  Target apparently had been involved in litigation involving its former CEO and needed Millman to assist with that litigation.  As part of its defense that Target had unfairly delayed in pursuing its claims, Polymer argued that Target made a conscious and strategic decision not to pursue litigation against Polymer because it wanted to ensure it had Millman’s assistance, to the unfair prejudice of Polymer.  Although the Supreme Court ultimately did not affirm the application of laches, Target made a risky and expensive decision when it decided to wait to bring suit against Polymer.

Furthermore, employers should exercise reasonable diligence when hiring any individual – but particularly an individual who has previously been employed in the same industry, by a known competitor, and who is in possession of information that the employer itself would consider to be proprietary.  (See Top Ten Mistakes Made by Departing Employees). The New Jersey trial and appellate courts uniformly agreed that Polymer did not have an independent duty to inquire into the source of Millman’s customer list.  Still, hiring employers should not think that this gives them free license to ignore “unremarkable” clues that an employee may be, in fact, be subject to post-employment restrictions by their former employers.  In fact, Polymer is still not in the clear – after more than eight years of litigation, it is now heading back to trial. 

Everybody in the modern workforce is involved in social media in one way or another.  Think about it.  Even if your company does not utilize social media (which is becoming less and less likely), it is almost certain that your company’s employees do.

Whether or not your company has a policy regarding social media is another matter.  As is recommended, more than half of all employers now have formal social media policies in place. Sometimes these policies are simple, and state only that employees are not to engage in social media activities (i.e., surfing Facebook) while on company time. Other policies are more comprehensive, and dictate what employees may or may not say about their employer, or reveal about their employer, via social media.  It is the latter type of policy that has some employers running afoul of the National Labor Relations Board (the “Board”).

Trade Secrets, Social Media, and the Board

The problem arises when a company’s policy dictates that employees may not communicate, via social media, confidential or proprietary company information.

As a refresher, the Board is the federal agency that enforces the National Labor Relations Act, or “NLRA.”  The NLRA grants nearly all private-sector employees (regardless of whether they are unionized or non-unionized) the right to act together to improve their wages or working conditions.
More specifically, the Board protects the rights of employees to engage in “concerted activity,” which is when two or more employees take action for their mutual aid or protection regarding terms and conditions of employment.  A single employee may also engage in protected concerted activity if he or she is acting on the authority of other employees, bringing group complaints to the employer’s attention, trying to induce group action, or seeking to prepare for group action.

From the Board’s website, some examples of protected concerted activities are:

• Two or more employees addressing their employer about improving their pay;
• Two or more employees discussing work-related issues beyond pay, such as safety concerns, with each other; and
• An employee speaking to an employer on behalf of one or more co-workers about improving workplace conditions.

Amazingly, the Board has taken the position that many social media policies, which are (in part) intended to protect company trade secrets and confidential information from dissemination via social media, could be interpreted as prohibiting employees from discussing and disclosing information regarding their own conditions of employment, as well as the conditions of employment of employees other than themselves – activities that are  protected by Section 7 of the NLRA.

Board’s Third Report on Social Media

The Board restates this position via its most recent effort to clarify its stance on social media. On May 30, 2012, the Board’s Acting General Counsel Lafe Solomon released a third Report summarizing seven different cases involving employers’ social media policies, confidentiality, privacy, protection of employer information, and intellectual property.

In the first six policies reviewed, the Report concludes that at least some of the provisions in the employers' policies and rules are overbroad, and therefore unlawful under the NLRA. Only one social media policy out of seven included in the Report is found to be entirely lawful.

As pointed out by various blogs and legal experts, the Report contradicts itself in dictating what policy verbiage violates the NLRA.  For example, the Board finds (on page 8 of the Report) that a social media policy prohibiting employees from disseminating “[Employer] Secret, Confidential or Attorney-Client Privileged information” is lawful.  In comparison, the Report finds the following policies to be in violation of the NLRA:

• “Don’t release confidential guest, team member or company information…” (p. 4).
• “Make sure someone needs to know. You should never share confidential information with another team member unless they have a need to know the information to do their job.” (p. 5).
• “[D]o not reveal non-public company information on any public site.” (p. 7). 
• “[E]mployees [are prohibited] from posting information regarding the Employer that could be deemed ‘material non-public information’ or ‘confidential or proprietary.’” (p. 13).

How to Protect Trade Secrets While Keeping a Lawful Social Media Policy

So how can an employer draft a social media policy that protects its confidential, proprietary, and trade secret information, while simultaneously complying with the NLRA?  Notably, the Report does find one policy entirely lawful.  Why was it lawful?  According to the Board, the policy:

• Clarifies and restricts its scope by including examples of clearly illegal or unprotected conduct;
• Provides sufficient examples of prohibited conduct so that employees cannot reasonably interpret the policy to prohibit Section 7 activity;
• Specifically requires employees to maintain the confidentiality of the Employer’s trade secrets and private and confidential information (because employees have no protected right to disclose trade secrets); and
• Provides sufficient examples of prohibited disclosures (i.e., information regarding the development of systems, processes, products, know-how, technology, internal reports, procedures, or other internal business-related communications) for employees to understand that the policy does not prohibit communications about working conditions.
(A copy of the lawful policy is attached to the Report on page 22.)

To summarize, the Board seems to have a problem with ambiguous, all-encompassing policies that, while drafted with the lawful intention of protecting trade secret or otherwise protected information, could be interpreted as prohibiting employees from engaging in concerted activity. 

Thus, if drafting a social media policy, it should be specific, use numerous examples, keep a narrow scope, and make it abundantly clear to employees what is being prohibited and why.  It would also be wise to utilize direct quotes from the policies included in the Report that the Board found to be lawful.

Small business owners understandably may be reluctant to use non-compete agreements for many reasons.  The desire to divert precious resources to paying an attorney to prepare a contract is hardly appealing.  Similarly, businesses may feel that such agreements are unnecessary because they have few employees.  But as Ben Franklin once wisely advised, an ounce of prevention is worth a pound of cure. 

The term “non-compete agreement” technically refers to a contract that preclude a person from engaging in certain acts of competition for a prescribed period of time within a prescribed geographic area.  In common usage, however, the term often is used more broadly to refer to any contract by which someone has any type of competitive restrictions, including non-solicit, non-recruit, non-disclosure and confidentiality agreements.  Simply put, non-competes come in all shapes and sizes, but the reasons small business owners should use one or more of these covenants are equally diverse.

1. Enhance the value of your company if you think you may sell someday – If you think someday you may wish to sell your business, it is important to protect the value of your company by requiring employees to sign restrictive covenants.  When someone purchases a business, they want to know that they will get what they pay for.  If they believe key employees with access to customers and relationships may not stay on board after a merger or acquisition, they may balk at the price or even walk away.  You may think that you can always sign employees up to a non-compete later, but such afterthought covenants present their own challenges.  You can protect the value of your company and its assets by using appropriately tailored non-compete agreements.

2. Qualify for trade secret protection – Generally speaking, any valuable business information that you try to keep secret from competitors is subject to trade secret protection.  But to state the obvious, to be a trade secret, the information must in fact be secret.  When determining whether information should be entitled to trade secret protection, courts look at many factors including the extent to which the owner of the secret took reasonable steps to preserve its secrecy.  A widely recognized precaution includes requiring employees to agree not to use or disclose confidential information.  In addition, if customer information is a trade secret, a covenant not to solicit customers (i.e., a non-solicitation agreement) may well be appropriate.

3. Protect your customer relationships –Small businesses tend to place client relationships in the hands of fewer employees.  Consequently, when an employee resigns, the client relationship may walk out the door with the employee.  Just as importantly, you may need time to rebuild your clients’ confidence and to show that your other employees are equally capable of serving their interests.  Clients are the lifeblood of any business; but this is particularly true for small businesses.  A small business simply cannot afford to lose its clients. 

4. Enhance client confidence – Would you do business with a company if you felt your personal financial information was at risk?  Of course not.  Your clients feel the same way.  If your clients entrust their personal or business information to you, they want to know that your employees are not going to take it when they leave.  Requiring employees to sign restrictions on their use and disclosure of confidential information is a good way to make your clients confident that their data is safe in your hands.

5. Protect your investment in training – Training employees is a worthwhile expense, and the training resources you provide may even help you to attract talented employees.  But steps should be taken to prevent your competitors from swooping in to hire your employees after you invest the time and expense to train them.  For this reason, courts commonly recognize that employers have a legitimate interest in protecting their investments in specialized training.

6. Clarify expectations with employees – Do your employees realize that you expect them to leave behind the information you entrusted to them if they decide to move on to a new job?  Do they understand that the relationships you paid them to cultivate and maintain belong to you?  The best time to clarify expectations with your employees is before a dispute arises.  Doing so may influence a departing employee’s conduct and provide you with the leverage you need to protect your company.

7. Shape ground rules for potential litigation – Litigation against departing employees can be expensive, but when your business is on the line, you may have little choice but to protect your interests through legal action.  Although no contract can eliminate the expense associated with litigation, careful forethought can help to minimize your costs.  Restrictive covenants are a perfect opportunity to reach agreement with employees about some of the ground rules that will apply if litigation becomes necessary, such as whether you are entitled to recover attorneys’ fees and costs if you prevail, whether lawsuits should be filed in a local forum, and whether you are entitled to certain remedies such as an injunction or liquidated damages.

8. Deter competitors from hiring your employees –  Deterring competitors from hiring your employees is not a sufficient fact in and of itself to warrant the imposition of a restrictive covenant.  In fact, courts will not enforce restrictive covenants if they serve no purpose other than to restrict competition.  But assuming you have a legitimate purpose for requiring employees to sign such agreements – such as a need to protect confidential information or customer relationships – sending a message to your competitors that you are prepared to protect these interests is a nice side effect.

In short, there are advantages to using non-compete agreements that may not be apparent until it is too late.  Small business owners should think about protecting their business in advance.  Please let me know your thoughts in the comment section below.

This blog has previously covered the arrest, prosecution and trial of Sergey Aleynikov, the former employee and computer programmer of the Goldman Sachs Group accused and convicted of misappropriating computer source code from Goldman.  After being convicted by a federal jury, Aleynikov was sentenced to eight years in prison. 

The most recent turn of events in Aleynikov’s case, however, suggest that the most interesting aspects of this case are yet to be determined.  In the past few days, Aleynikov’s case took not one, but two surprising turns.  On February 16, 2012 -- one day after it heard oral argument on appeal -- the Second Circuit issued an order that reversed Aleynikov’s conviction and directed the district court to enter a judgment of acquittal.  One day after that, an apparently free man, Aleynikov was dealt an unusual hand by the same appellate judges who freed him: the Second Circuit rescinded the order that freed and acquitted Aleynikov and issued a second order which confirmed Aleynikov’s freedom but did not direct the trial court to enter a judgment of acquittal. 

These events beg the question of whose nights would be worse: the prisoner who dreams of acquittal or the recently freed man who tosses and turns over why a court took the trouble to reverse his conviction but decide acquittal was not appropriate?  For those not drawn to the drama of the Aleynikov case, the greater intrigue probably lies in the appellate court’s forthcoming opinion in support of its two orders.  There has been comprehensive coverage of these two orders in the mass media, and the attention is deserved.  But the real story lies in how the appellate court reached its decisions to reverse the jury’s conviction and its own decision just one day earlier that Aleynikov’s acquittal was the appropriate step.  In the Second Circuit’s opinion we might also gain insight into the future of the Economic Espionage Act, at a time when employee defection and trade secrets cases increasingly involve the unauthorized use of employer-issued computers, electronic devices and electronically stored information and assets.  And only then will Aleynikov know how he should feel about his Valentine from the Second Circuit.
 
Copies of the February 16 and 17, 2012 orders issued by the U.S. Court of Appeals for the Second Circuit appear below in .pdf format.
 
Brent Cossrow is a partner of Fisher & Phillips, and a member of the firm’s Employee Defection & Trade Secrets Practice Group.  Mr. Cossrow's practice focuses on e-discovery and other electronically stored information issues.  As always, please feel free to share your thoughts and questions in the comment space below.  Mr. Cossrow has written previously about the Aleynikov case in this blog, Risk Management Magazine (.pdf copy below) and has been interviewed about the case as well.  

Aleynikov Appeal Documents.PDF (74.61 kb)