AMERICAN BAR ASSOCIATION SECTION OF LABOR AND EMPLOYMENT LAW
INTERNATIONAL LABOR LAW COMMITTEE MIDYEAR MEETING
UNITED STATES LAW ON RESTRICTIVE
COVENANTS AND TRADE SECRETS
Presented by
GARY R. SINISCALCO
Istanbul, Turkey
May 9-13, 2010
ORRICK, HERRINGTON & SUTCLIFFE LLP
THE ORRICK BUILDING
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These materials are distributed for informational purposes only and are not intended
nor should be construed as legal advice.
TABLE OF CONTENTS
Page
I.
INTRODUCTION ......................................................................................................... 1
II.
WHAT IS A TRADE SECRET?.................................................................................... 1
A.
B.
III.
IV.
Uniform Trade Secrets Act and the California Definition.................................... 1
1.
Secrecy. .................................................................................................. 3
2.
Reasonable Efforts to Preserve Secrecy................................................... 6
3.
Value Derived From Secrecy. ................................................................. 7
Restatement of Torts and the New York Definition............................................. 8
KEEPING YOUR EMPLOYEES FROM COMPETING OR WORKING FOR
COMPETITORS UPON THEIR DEPARTURE .......................................................... 12
A.
Background. ..................................................................................................... 12
B.
In Most States, Covenants Not to Compete Will Be Enforced If They Are
Necessary to Protect a Legitimate Interest of the Employer. ............................. 13
1.
What Is a “Legitimate Employer Interest”? ........................................... 14
2.
Reasonableness Standard for Enforcement of Covenants Not to
Compete. .............................................................................................. 19
3.
Other Factors Affecting the Reasonableness of Covenants Not to
Compete. .............................................................................................. 20
C.
The Employee Choice Doctrine ........................................................................ 21
D.
Under California Law, Employee Covenants Not to Compete Upon
Termination of Employment Are Void. ............................................................ 23
1.
The California Rule and Its Application. ............................................... 23
2.
California Courts May Enforce Certain Types of Non-Competition
Clauses That Limit, but Don’t Prohibit, Competition ............................ 27
3.
Enforcement of Non-Solicitation Clauses.............................................. 30
PREVENTING DEPARTING EMPLOYEES FROM USING OR DISCLOSING
TRADE SECRETS ...................................................................................................... 35
A.
Background. ..................................................................................................... 35
B.
Sources of Protection for Employers................................................................. 35
1.
Civil Remedies for Trade Secret Misappropriation................................ 35
Restrictive Covenants and Trade Secrets
i
TABLE OF CONTENTS
(continued)
Page
V.
2.
The Inevitable Misappropriation Doctrine May Be Used to Prevent
“Threatened” Misappropriation of Trade Secrets................................... 40
3.
Other Potential Remedies Available to the Employer ............................ 46
4.
Effect of Trade Secret Preemption ........................................................ 50
5.
Criminal Statutes. ................................................................................. 52
6.
Racketeer Influenced Corrupt Organizations Act................................... 56
A PRIMER ON STRATEGY: BEFORE AND AFTER AN EMPLOYEE
LEAVES...................................................................................................................... 56
A.
Drafting: Establishing and Maintaining Secrecy ............................................... 56
1.
B.
VI.
Drafting Issues...................................................................................... 56
What To Do When An Employee Leaves ......................................................... 59
1.
Conduct and Document an Exit Interview ............................................. 60
2.
Search the Departing Employee’s Workspace and Review the
Employee’s Computer........................................................................... 62
3.
If the Risk of Misappropriation is Present, Conduct a Forensic
Analysis of the Employee’s Computer .................................................. 62
4.
Send Follow-Up Letters ........................................................................ 66
5.
Determine The Applicability of Restrictive Covenants and Insist
on Compliance...................................................................................... 66
6.
Monitor the Risk ................................................................................... 67
CONCLUSION............................................................................................................ 67
Restrictive Covenants and Trade Secrets
ii
I.
INTRODUCTION
The protection of trade secrets has become a number one priority for many employers.
To succeed in these extraordinarily competitive times, companies must face the daunting tasks of
creating innovative products and services; developing and maintaining a customer base;
recruiting and maintaining an expert and efficient work force; and keeping all of their
innovations—and all of their customers and employees—from falling into the hands of their
competitors.
These tasks are especially difficult because the most valuable, knowledgeable and highly
skilled employees are also the most mobile. When such employees leave their jobs and move on
to work for a competitor—or to start their own competitive company—they present an
unparalleled risk to their former employer. This risk is further exacerbated by the fact that
sensitive data can be transported with unprecedented ease. A departing employee can export
important documents and company secrets to external storage devices, PDA’s, portable hard
drives, and cell phones in mere seconds. What can an employer do to minimize the damage in
such circumstances? What risks do employers face when they hire their competitor’s employees
and how can they reduce the risk that these hiring decisions will result in litigation? This chapter
will address these commonly asked questions, focusing on the law of California and New York,
as well as review the newly emerging legal theories that are increasingly being used to inhibit
unfair competition by ex-employees, to keep competitors from raiding employees, and to keep
employees from using or disclosing their former employer’s trade secret and confidential and
proprietary information.
II.
WHAT IS A TRADE SECRET?
A key to the success of most employers is the development and use of “trade secrets,”
i.e., information that is known only by the employer and its agents, and that gives the employer a
commercial advantage over its competitors. Trade secrets—which may involve technical
information such as formulas and diagrams, or business information such as customer lists1 and
marketing or strategic plans—often comprise the most valuable portion of an employer’s
intellectual property.
A.
Uniform Trade Secrets Act and the California Definition.
There is no uniform definition of the type of information that constitutes a trade secret. A
majority of the states have adopted the Uniform Trade Secrets Act (some with slight
1
Ohio joined the majority of states to recognize that memorized customer lists can be the basis for a trade secret
violation. Al Minor & Assocs. v. Martin, 117 Ohio St. 3d 58 (Ohio 2008); see also General Reinsurance Corp. v.
Arch Capital Group, Ltd., No. X05CV074011668S, 2007 Conn. Super. LEXIS 2629 (Conn. Super. Ct. Oct. 17,
2007) (the absence of physical or electronic misappropriation was immaterial; misappropriation may occur by more
intangible means like “remembered” information).
Restrictive Covenants and Trade Secrets
1
modification). Under the Act, adopted by California and codified at Cal. Civ. Code §§ 3426 et
seq., a trade secret is defined as:
[I]nformation, including a formula, pattern, compilation, program,
device, method, technique, or process, that:
(1) Derives
independent economic value, actual or potential, from not being
generally known to the public or to other persons who can obtain
economic value from its disclosure or use; and (2) Is the subject of
efforts that are reasonable under the circumstances to maintain its
secrecy.
Cal. Civ. Code § 3426.1(d). Under this definition, virtually any type of information – technical,
business or administrative – is capable of being a trade secret. Many courts have held that
simply labeling or defining a particular piece of information as a trade secret by contract does not
necessarily make it a trade secret if it does not otherwise meet the test. See, e.g., Thompson v.
Impaxx, Inc., 113 Cal. App. 4th 1425, 1430 (Cal. Ct. App. 2003) (“Labeling information as a
trade secret or as confidential information does not conclusively establish that the information
fits this description”); Metro. Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th
853, 860-63 (Cal. 1994); American Paper & Packaging Products, Inc. v. Kirgan, 183 Cal. App.
3d 1318, 1325 (Cal. Ct. App. 1986).2 Nevertheless, a wide variety of information has been found
to be a trade secret. This information includes, but is not limited to, the following:
·
Customer lists: see, e.g., Am. Family Mut. Ins. Co. v. Roth, 485 F.3d 930 (7th
Cir. 2007); Hair Club for Men, LLC v. Elite Solutions Hair Alternatives, Inc.,
No. 2:07-cv-546-GEB-KJM, 2007 U.S. Dist. LEXIS 30167 (E.D. Cal. Apr. 5,
2007); MPW Indus. Servs. v. Pollution Control Sys., No. 2:02-CV-955, 2006
U.S. Dist. LEXIS 9360, *32 (D. Ohio Mar. 9, 2006); Surface Shields v. PolyTak Prot. Sys., No. 02 C 7228, 2003 U.S. Dist. LEXIS 13185, *3 (N.D. Ill.
July 29, 2003); Liveware Publ’g, Inc. v. Best Software, Inc., 252 F. Supp. 2d
74, 85 (D. Del. 2003); Lamorte Burns & Co. v. Walters, 167 N.J. 285, 299300 (N.J. 2001); Home Pride Foods, Inc. v. Johnson, 262 Neb. 701, 709 (Neb.
2001); Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514 (1997); Ivy Mar. Co. v.
C.R. Seasons, Ltd., 907 F. Supp. 547, 556-57 (E.D.N.Y. 1995);
·
Pricing, distribution and marketing plans, market analysis information and
sales data: see Johnson Controls, Inc. v. A.P.T. Critical Sys., 323 F. Supp. 2d
525, 532-33 (S.D.N.Y. 2004); Lucini Italia Co. v. Grappolini, No. 01 C 6405,
2003 WL 1989605 (N.D. Ill. Apr. 24, 2003); Ikon Office Solutions, Inc. v. Am.
Office Prods., Inc., 178 F. Supp. 2d 1154, 1169-1170 (D. Or. 2001); Star Sci.,
2
But cf. Loral Corp. v. Moyes, 174 Cal. App. 3d 268, 275 (Cal. Ct. App. 1985) (“[c]ases suggest that when
permissible solicitation of an employer’s customers is at issue, a contract may prohibit more than the law of the
marketplace otherwise would.”).
Restrictive Covenants and Trade Secrets
2
Inc. v. Carter, 204 F.R.D. 410, 414 (D. Ind. 2001); Union Carbide Corp v.
UGI Corp., 731 F.2d 1186, 1191 (5th Cir. 1984);
·
Drawings and specifications: see Ctr. for Auto Safety v. Nat’l Highway
Traffic Safety Admin., 93 F. Supp. 2d 1, 8-9 (D.D.C. 2000); La Calhène, Inc.
v. Spolyar, 938 F. Supp. 523, 529 (W.D. Wis. 1996); Taco Cabana Int’l, Inc.
v. Two Pesos, Inc., 932 F.2d 1113, 1123 (5th Cir. 1991); Boeing Co. v.
Sierracin Corporation, 43 Wash. App. 288 (Wash. Ct. App. 1986);
·
Information Contained in Unpublished Patent Applications: see QR Spex,
Inc. v. Motorola, Inc., No. CV 03-6284, 2004 U.S. Dist. LEXIS 27378, *15
(C.D. Cal. Oct. 28, 2004) (court recognized that trade secret protection
available until patent application was published); Stutz Motor Car of America,
Inc. v. Reebok Int’l Ltd., 909 F. Supp. 1353 (C.D. Cal. 1995) (same);
·
Chemical formulas: Ctr. for Auto Safety v. Nat’l Highway Traffic Safety
Admin., 93 F. Supp. 2d 1, 8-9 (D.D.C. 2000); Wright Chemical Corp. v.
Johnson, 563 F. Supp. 501 (M.D. La. 1983); Kewanee Oil Co. v. Bicorn
Corp., 416 U.S. 470, 473 (1974).
Indeed, even negative information can satisfy the definition of a trade secret. Learning, after
expending significant time and money, that a certain procedure or technology does not work is a
classic “negative trade secret.” See Morton v. Rank America, Inc., 812 F. Supp. 1062 (C.D. Cal.
1993); see also Metallurgical Industries, Inc. v. Fourteen, Inc., 790 F.2d 1195 (5th Cir. 1986)
(granting trade secret protection to zinc recovery process modifications to unusable furnaces).
Courts consider a variety of factors in determining whether a particular piece of
information satisfies the standard of a trade secret. These factors are described briefly below in
subsections 1 through 3.
1.
Secrecy.
The cardinal requirement of a trade secret is that it be secret. The information should be
known by only those employees and third parties who “need to know” it (and those who know it
should be bound not to disclose it to others, especially the employer’s competitors). See Metro.
Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 863 (Cal. Ct. App. 1994)
(“the information imparted to Metro by KFWB is equally available to anyone contracting with
KFWB”); Courtesy Temporary Serv., Inc. v. Camacho, 222 Cal. App. 3d 1278, 1288 (Cal. Ct.
App. 1990) (noting that employer’s reasonable steps to preserve secrecy of its customer
information included giving “[a]ccess to such customer information ... to [e]mployees only on an
‘as needed basis’ to perform their duties”); Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1522
(Cal. Ct. App. 1997) (reasoning that amount of effort employers expend in protecting
information will be probative of conclusion that information is in fact trade secret).
Restrictive Covenants and Trade Secrets
3
California removed the phrase “not readily ascertainable” altogether from its UTSA
definition of a trade secret. See Cal. Civ. Code § 3426.1(d). Thus, it is not the plaintiff’s burden
to establish that a particular piece of information is “not readily ascertainable;” instead, plaintiff
must establish merely that the information is not publicly known. This point is illustrated by
ABBA Rubber Company v. Seaquist, 235 Cal. App. 3d 1 (Cal. Ct. App. 1991). In ABBA, the
plaintiff claimed trade secret status for its customer and inventory data, and sued the defendant
Seaquist, alleging that former ABBA employees now at Seaquist had taken the information. The
employees, familiar with the identities of ABBA’s customers, denied taking any records from
ABBA, but admitted soliciting business from some ABBA customers. Although the appellate
court overturned the lower court’s preliminary injunction on an unrelated issue (failure to furnish
an adequate undertaking), the court set forth the principle that:
[O]ur Legislature chose to exclude from the definition [of a trade
secret] only that information which the industry already knows, as
opposed to that which the industry could easily discover.
Therefore, under California law, information can be a trade
secret even though it is readily ascertainable, so long as it has not
yet been ascertained by others in the industry. Accordingly, we
decline to follow American Paper & Packaging Products, Inc. v.
Kirgan, supra, to the extent that it suggests that information is not
protectible as a trade secret if it is ‘known or readily
ascertainable.’
Id. at 21 (emphasis added). Still, the ABBA court noted that “the assertion that a matter is readily
ascertainable by proper means remains available as a defense to a claim of misappropriation.”
Id. at 21, fn. 9 (emphasis added). Accordingly, it is the defendant’s burden to establish the
defense of ready ascertainability by proper means.
Applying this definition, California courts will not protect public information that is
easily discoverable by a competitor. However, protection may be afforded to secret information
that is not particularly hard to recreate–if the defendant used the secret (but easily recreated)
information. Compare, e.g., Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034, 1044 (N.D.
Cal. 1990) (customer and temporary employee lists held not trade secrets because customers
were discoverable through public directories and identities of temporary employees were already
on file with competing agencies) with Morlife, 56 Cal. App. 4th at 1522-23 (protecting a
customer list as a trade secret because it was not published in public business directories) and
Courtesy Temporary Service, Inc. v. Camacho, 222 Cal. App. 3d 1278, 1288 (Cal. Ct. App.
1990) (customer lists held trade secret because they included information on billing rates, key
contacts, mark-up rates and specialized requirements not available through public sources).
Restrictive Covenants and Trade Secrets
4
a.
Publicly Known Through Internet Disclosure
In the last decade, courts have had to consider the issue of whether trade secret status is
extinguished when the information is posted on the Internet. Whether such information deserves
protection turns on how the information was obtained by the Internet publisher or user. The rule
that has emerged is that a party who simply downloads misappropriated information from the
Internet will not be liable for misappropriation so long as that party was not involved in the
initial improper acquisition of or posting of the information. However, a misappropriator cannot
free itself from liability simply by making the information available on the Internet and then
arguing that the information is therefore no longer secret. See, e.g., Religious Technology Center
v. Lerma, 908 F. Supp. 1362 (E.D. Va. 1995).
In Religious Technology, a former member of the Church of Scientology posted portions
of the Church’s scriptures on the Internet for two days. The defendant, who did not post the
information on the Internet, but merely downloaded it, was sued by the Church. While the court
found that the Church had taken reasonable measures to preserve the secrecy of its teachings –
thereby permitting trade secret status – it held that the status was lost with respect to defendant
because the defendant committed no wrong by simply looking at the information that was now
publicly available through the simple use of the Internet. The Church’s remedy was against the
former member/misappropriator, not the third party Internet user.
The corollary is neatly illustrated by a later case, again involving the Church of
Scientology. There, the district court reversed an earlier denial of a preliminary injunction when
portions of the Church’s scripture were once again posted on the Internet by the defendant. See
Religious Technology Center v. Netcom On-Line Communication Services, Inc., No. C-9520091, 1997 U.S. Dist. LEXIS 23572 (N.D. Cal. Jan. 3, 1997). In overturning a prior ruling, the
Court held that “[t]he court believes that its statement in its [earlier] order that ‘posting works to
the Internet makes them ‘generally known’ to the relevant people’ is an overly broad
generalization and needs to be revised. The question of when a posting causes the loss of trade
secret status requires a review of the circumstances surrounding the posting. . . including . .
innocent third parties who acquire information off the Internet.” As the party who posted the
information on the Internet was not “innocent,” the court found an injunction appropriate.
Similarly, in DVD Copy Control Ass’n v. McLaughlin, the court enjoined a defendant
from continuing to distribute an encryption program that it had reverse engineered. See DVD
Copy Control Ass’n, Inc. v. McLaughlin, No. CV 786804, 2000 WL 48512 (Cal. Sup. Ct., Jan.
21, 2000). The defendant argued that because he reverse engineered the program, the program
could not be afforded trade secret status. The court rejected this argument, as the defendant’s use
of the program was subject to a “click license” which expressly prohibited him from attempting
to reverse engineer the program. In holding that the public posting of the information did not
extinguish trade secret status, the court stated:
Restrictive Covenants and Trade Secrets
5
The Court is not persuaded that trade secret status should be
deemed destroyed at this stage merely by the posting of the trade
secret on the Internet. To hold otherwise would do nothing less
than encourage misappropriators of trade secrets to post the fruits
of their wrongdoing on the Internet as quickly as possible and as
widely as possibly, thereby destroying a trade secret forever. Such
a holding would not be prudent in this age of the Internet.
Id. (citations omitted). The case eventually reached the California Supreme Court, which
affirmed this basic aspect of the ruling. DVD Copy Control Ass’n, Inc. v. Bunner, 31 Cal. 4th
864 (Cal. 2003).
2.
Reasonable Efforts to Preserve Secrecy.
For information to qualify as a trade secret, the employer must exercise “reasonable
efforts” to preserve its secrecy. Cal. Civ. Code § 3426.1(d)(2). What is reasonable will vary
with the circumstances, but the cases and legislative history do provide guidance. For example,
the Legislative Committee Comment to the Uniform Trade Secrets Act states that employers
need not engage in “extreme and unduly expensive procedures” to protect their trade secrets—
only reasonable efforts. The following are examples of the kinds of procedures California courts
have recognized as reasonable and appropriate.
a.
Require That Employees (and Third Parties) Who Are Given
Access to Trade Secrets Sign Confidentiality Agreements.
One step that employers should take to protect the trade secret status of their confidential
information is to require that employees and third parties who are given access to the information
sign confidentiality agreements. See, e.g., MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511,
521 (9th Cir. 1993) (holding that a requirement that employees sign confidentiality agreements
was enough to demonstrate “reasonable steps” to preserve secrecy). In addition to the typical
non-disclosure and non-use provisions, it is useful to have the employee acknowledge in the
agreement that specified information is in fact confidential, valuable and protected as the trade
secret of the employer. It is also useful to have the employee agree to return all documents upon
termination of employment.
b.
Alert Employees (and Third Parties) with Access to Trade
Secrets Regarding Their Confidential Nature.
A second step for protecting trade secret status is to alert employees and third parties who
are given access to confidential information that the information constitutes a trade secret and
should be kept confidential. See, e.g., Courtesy Temporary Serv., Inc., 222 Cal. App. 3d at 1288
(customer information held trade secret where employees were told of its confidential and
proprietary nature when list was revealed to them). This can be accomplished through personnel
manuals, use of a “confidential” stamp on key documents, reminder memoranda, posted
Restrictive Covenants and Trade Secrets
6
warnings and the like. Obviously, before others can be made aware that information constitutes
a trade secret, the employer must make that determination. A periodic trade secret audit is a very
useful exercise in this regard. Employers should be aware that taking special measures to protect
the confidentiality of some documents may lead courts to deny trade secret protection to other
materials that were not subject to the same special measures. See In re Providian Credit Card
Cases, 96 Cal. App. 4th 292, 308 (Cal. Ct. App. 2002) (where, in the course of business, party
had stamped certain documents “confidential,” court could conclude that party did not deem
documents lacking such a stamp to be trade secrets).
c.
Limit Access to Only Those Employees (and Third Parties)
Who “Need to Know” Trade Secrets to Perform Their Jobs.
A third step that is an important factor in obtaining judicial recognition of trade secrets is
limiting trade secret access to only those employees and third parties who “need to know” the
trade secrets in order to perform their jobs or otherwise successfully carry out their relationships
with the employer. See Courtesy Temporary Serv., Inc., 222 Cal. App. 3d at 1288; Buffets, Inc.
v. Klinke, 73 F.3d 965 (9th Cir. 1996) (reasonable efforts to maintain secrecy include limiting
access to a trade secret on need to know basis). This can be accomplished by use of security
guards, key-lock entries, computer passwords, locked file drawers and the like.
d.
Avoid Public Disclosure of Trade Secret Information Through
Display, Publication, Advertising, Etc.
A fourth step for ensuring trade secret status is to avoid publicly disclosing the trade
secret information, such as through public displays, publications, or advertising. See, e.g., Cal.
Civ. Code § 3426.1, Legislative Committee Comment (“proper means [of acquiring the trade
secret of another person] include ... [o]bservation of the item in public use or on public display”);
Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 988 (S.D. Cal. 1999)
(holding that trade secret status is unavailable where the information could be disclosed in course
of litigation); Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 465-66 (9th
Cir. 1990) (holding that teaching techniques were not trade secrets because they were disclosed
to students); In re Providian Credit Card Cases, 96 Cal. App. 4th at 305-06 (holding that
telemarketing scripts were not trade secrets because they were disclosed to public, albeit in
piecemeal fashion).
3.
Value Derived From Secrecy.
In order to qualify as a trade secret, confidential information must not only be secret, it
must also derive value from not being known to potential or actual competitors. Cal. Civ. Code
§ 3426.1(d)(1). “Value” can often be established by showing the amount of time or money used
to develop the information. See Am. Family Mut. Ins. Co. v. Roth, 485 F.3d 930 (7th Cir. 2007)
(customer information may be protected if it represents an investment on the part of the firm
seeking to protect it—apart from its value in limiting competition); Courtesy Temporary Serv.,
Restrictive Covenants and Trade Secrets
7
Inc., 222 Cal. App. 3d at 1287 (customer list held trade secret because it “was acquired by
lengthy and expensive efforts”); Gable-Leigh, Inc. v. North American Miss, No. CV 01-01019,
2001 WL 521695, *16 (C.D. Cal. Apr. 9, 2001) (“Given the multiple-step process that was
required to distill publicly available information into a list of 900 names, Gable-Leigh’s
customer lists are likely the sort of information that derives independent economic value” from
secrecy); see also Fred’s Stores of Mississippi, Inc. v. M & H Drugs, Inc., 725 So. 2d 902, 909
(Miss. 1998) (same). “Negative information”—i.e., knowledge that a process, strategy or
method does not work—can also be valuable because it can save a competitor time and money in
making a new discovery. See, e.g., Courtesy Temporary Serv., Inc., 222 Cal. App. 3d at 128788; Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1333-34 (9th Cir. 1980);
Morton, 812 F. Supp. at 1073. Generally, the more complicated, detailed or sophisticated the
information, the more likely it will be found to satisfy the “value” requirement.
B.
Restatement of Torts and the New York Definition.
Many states that have not adopted the Uniform Trade Secrets Act, including New York,
(and even some that have) rely on the classic definition of a “trade secret” found in the
Restatement of Torts, which provides that a trade secret includes:
[A]ny formula, pattern, device, or compilation of information
which is used in one’s business, and which gives him an
opportunity to obtain an advantage over competitors who do not
know or use it. It may be a formula for a chemical compound, a
process of manufacturing, treating or preserving materials, a
pattern for a machine or other device, or a list of customers... A
trade secret is a process or device for continuous use in the
operation of the business.
Restatement of Torts § 757 cmt. b (1939); see U.S. Reinsurance Corp. v. Humphreys, 618
N.Y.S.2d 270, 273 (N.Y. App. Div. 1994) (adopting definition of trade secret contained in
Restatement of Torts § 757 cmt. b); Fabkom, Inc. v. R.W. Smith & Assocs., Inc., No. 95 Civ.
4552, 1996 WL 531873, at *6 (S.D.N.Y. Sept. 19, 1996); Faiveley Transport Malmo v. Wabtec
Corp., 559 F.3d 110 (2d Cir. 2009).
A variety of factors are used to determine whether certain information qualifies for
protection as a trade secret or confidential information under the Restatement’s definition. These
factors include:
1.
the extent to which the information is known outside the business;
2.
the extent to which the information is known by the employee and others involved
in the business;
Restrictive Covenants and Trade Secrets
8
3.
the extent of measures taken by the company to guard the secrecy of the
information, compare, e.g., Ecolab, Inc. v. Paolo, 753 F. Supp. 1100 (E.D.N.Y.
1991) (reasonable security measures include disclosure only on need-to-know
basis and use of employee confidentiality agreements); with Gillis Associated
Indus., Inc. v. Cari-All, Inc., 564 N.E.2d 881 (Ill. App. Ct. 1990) (employer did
not reasonably maintain secrecy of customer lists; employer failed to mark
documents, did not have employee entrance or exit interviews to demonstrate to
employees importance of maintaining secrecy of documents, and did not use
employee confidentiality agreements);
4.
the ease or difficulty with which the information could properly be acquired or
duplicated by others;
5.
the amount of effort and money expended by the company in developing the
information; and
6.
the value of the information to the company and its competitors.
Although the weight given to each individual factor varies on a case-by-case basis,
whether the information was “kept secret” is generally regarded as the most significant, since
courts have been more willing to protect information when it is not known in the trade or is
discoverable only though extraordinary efforts. See Geritrex Corp. v. Dermarite Indus., LLC,
910 F. Supp. 955, 961 (S.D.N.Y. 1996); Consolidated Brands, Inc. v. Mondi, 638 F. Supp. 152,
156 (E.D.N.Y. 1986). However, courts have recognized that a trade secret need not be an
isolated idea which is entirely secret. Eagle Comtronics, Inc. v. Pico, Inc., 453 N.Y.S.2d 470
(N.Y. App. Div. 1982). Rather, “a trade secret can exist in a combination of characteristics and
components, each of which, by itself, is in the public domain, but the unified process, design and
operation of which, in unique combination, affords a competitive advantage and is a protectable
secret.” Imperial Chem. Indus., Ltd. v. National Distillers & Chem. Corp., 342 F.2d 737, 742
(2d Cir. 1965); see also Anacomp, Inc. v. Shell Knob Servs., Inc., No. 93 Civ. 4003, 1994 WL
9681, at *8 (S.D.N.Y. Jan. 10, 1994) (“even assuming that the information at issue were in the
public domain, the non-secret nature of the individual components would not prevent the
combination of components from comprising a trade secret”). But see International Paper Co. v.
Suwyn, 966 F. Supp. 246, 257 (S.D.N.Y. 1997) (noting that plaintiff was not entitled to
injunctive relief against defendant, its former executive vice president, because, among other
things, “technology” discussed in its business plan was “commercially available” and could be
purchased from “outside,” plaintiff’s profit margins were available with “reasonable precision”
from outside sources, and plans for producing certain of its products were commonly available in
industry).
Confidentiality does not require absolute secrecy. Rather, the standard of review is one
of reasonable efforts to maintain secrecy. See A.F.A. Tours, Inc. v. Whitchurch, 937 F.2d 82, 89
(2d Cir. 1991) (as long as employer “take[s] appropriate precautions to alert the employee to the
Restrictive Covenants and Trade Secrets
9
need to maintain the confidentiality” of trade secret, employee’s access to such secret
information will not void confidential nature of that information). In determining whether the
information is sufficiently confidential, the courts not only look to the availability of the
information in the market place, but they also consider the manner in which the employer itself
treats the information. The question courts seek to answer is, “Did the employer treat the ‘trade
secret’ information in a manner which most appropriately reflects its relative importance?” In
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475 (1974), the United States Supreme Court
held that a company’s trade secret is not lost if the trade secret is made known to another in
circumstances of confidence and under an implied obligation not to disclose it, including
employees to whom it is necessary to make the trade secret known in order to undertake their
work for the employer/holder of the trade secret.
Some of the more common examples of potential trade secrets include customer lists;
customer pricing and preference information; marketing strategies, revenue projections, and
product and pricing strategies, see DoubleClick, Inc. v. Henderson, No. 116914/97, 1997 WL
731413 (N.Y. Sup. Ct. Nov. 7, 1997); and corporate business and marketing plans, see PepsiCo,
Inc. v. Redmond, 54 F.3d 1262, 1265 (7th Cir. 1995); Kamyr AB v. Kamyr, Inc., No. 91-CV0453, 1992 WL 317529, at *1 (N.D.N.Y. Oct. 30, 1992) (“confidential treatment of information
... includ[es] financial and business records and plans”); Support Sys. Assocs., Inc. v. Tavolacci,
522 N.Y.S.2d 604, 606 (N.Y. App. Div. 1987) (statements of company’s “approach” to business
and recruiting plans constituted trade secrets); Webcraft Techs., Inc. v. McCaw, 674 F. Supp.
1039, 1043 (S.D.N.Y. 1987) (“project specifications and pricing details” held to be trade
secrets); Triangle Sheet Metal Works, Inc. v. Silver, 222 A.2d 220, 225 (Conn. 1966) (financial
details of product costs, pricing and bidding strategies “fully meet the definition of trade
secrets”).
The following checklist, albeit not all-inclusive, provides an employer with some
guidance on maintaining the trade secret status of its trade secrets:
1.
Are employees and third parties with access to trade secrets required to sign
confidentiality agreements?
2.
Are employees and third parties with access to trade secrets alerted to its
confidential and proprietary nature, e.g., through personnel manuals, use of a
“confidential” stamp on key documents, reminder memoranda, posted warnings
and the like?
3.
Is sensitive data kept under lock and key?
4.
Is access to sensitive data limited to those with a particular need for the
information?
5.
Is the information copied, or maintained in an area with a photocopying machine?
Restrictive Covenants and Trade Secrets
10
6.
Are documents containing sensitive data kept by people at their own desks? If so,
is it necessary? Are desks locked and access limited only to those with need?
7.
Are the number of copies of such documents kept to an absolute minimum?
8.
Is the data marked plainly and obviously as “Secret,” “Confidential,” “Restricted
Access” or with some other appropriate term?
9.
If confidential documents are given to certain employees, are they serially
numbered, with a complete record kept by a company official?
10.
Are the documents containing confidential data ever left unattended on desks, in a
lunch room, or in conference rooms where personnel not authorized to see such
information could come in contact with it?
11.
Are visitors, guests and nonessential personnel restricted from areas in which
secret processes or machines are developed, operated, or displayed in a way
which could be considered negligent to a knowledgeable observer?
12.
Are visitors and guests allowed to visit factories or facilities where secret
processes or machines are in use or operation?
13.
Are all visitors, including suppliers, vendors and maintenance persons, required to
sign in, state the nature of their visit, indicate with whom they are visiting and
sign out?
14.
Are special internal procedures in place to verify the service calls of repair and
service personnel, including verifying the service person’s credentials and the
purpose of the visit?
15.
With respect to doors and entryways leading to areas where secret processes are
maintained or performed or where machinery is operated, does the company make
sure that they are kept locked? Are keys issued only to those employees who
need them?
16.
If security and alarm systems are required to protect a secret process effectively,
are they installed? Are security guards used when necessary?
17.
Are all document control systems, such as those described above, periodically
reviewed and revised?
18.
Is disclosure of a substantial portion of trade secret information through display,
publication, or advertising prohibited?
Restrictive Covenants and Trade Secrets
11
19.
III.
Are employees instructed not to discuss secret company projects in the presence
of visitors, especially suppliers and vendors?
KEEPING YOUR EMPLOYEES FROM COMPETING OR WORKING FOR
COMPETITORS UPON THEIR DEPARTURE
A.
Background.
Employers frequently attempt to prevent their employees from competing with them
upon termination of their employment by having them covenant, as part of an employment
agreement, that they will not compete with their employer after their employment ends.
Although many of these disputes end up in federal court under diversity jurisdiction, the
enforceability of such agreements is a matter of state common law and statutory law. Many
states, including New York, follow the general rule that such agreements are enforceable,
provided they are necessary to protect a legitimate interest of the employer and are reasonably
limited in time, geography, and the restrictions they place on the employee in pursuing his or her
profession.
Other states, including California, Montana, North Dakota, and Oklahoma, do not follow
the general rule. For example, California Business & Professions Code section 16600 provides
that “every contract by which anyone is restrained from engaging in a lawful profession, trade or
business of any kind is to that extent void.” California courts have rigorously applied this
provision in the employment context and have routinely invalidated agreements purporting to
preclude employees (expressly or implicitly through penalties) from working for competitors
upon completion of their employment. See, e.g., Metro. Traffic Control, Inc. v. Shadow Traffic
Network, 22 Cal. App. 4th 853, 859 (Cal. Ct. App. 1994); Scott v. Snelling & Snelling, Inc., 732
F. Supp. 1034, 1042 (N.D. Cal. 1990). See also Section III.D.1., infra.
A cautionary caveat is warranted at this point. Our discussion in this chapter aims to
provide merely an overview of the law. Readers should always consult with local practitioners
regarding each state’s laws as this area of the law is especially susceptible to deviations and
variations from state to state.3
3
For example, in Texas, covenants not to compete are governed by the Covenants Not to Compete Act. That Act
includes a requirement that a covenant be “ancillary to or part of otherwise enforceable agreement.” Until late 2006,
Texas Supreme Court precedent held that because an at-will employee can be fired at any time, promises by the
employer to provide confidential information or training to the employee were “illusory,” and therefore at-will
agreements would not be considered “an otherwise enforceable agreement” under the Act. Thus making the noncompete covenants in at will employment agreements void. The Texas Supreme Court in Alex Sheshunoff Mgmt.
Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006) significantly changed the analysis for non-compete clauses in
Texas. The Sheshunoff court modified this rigid application and determined that a non-compete covenant in an atwill employment relationship is enforceable if the employer provides confidential information or training to the
employee at any time during employment in accordance with the promises in its employment contract.
Restrictive Covenants and Trade Secrets
12
Although slightly beyond the scope of this chapter, it is worth mentioning that special
attention should be paid to drafting restrictive covenants for use internationally. This includes
common clauses in restrictive covenants that cover confidentiality, noncompetition,
nonsolicitation of customers, and poaching of employees. Policies on such clauses vary
throughout the world. To limit potential liability, companies should tailor such agreements
based on the geographic location and job level or the responsibilities of the employee.
B.
In Most States, Covenants Not to Compete Will Be Enforced If They Are
Necessary to Protect a Legitimate Interest of the Employer.
Although covenants not to compete are generally disfavored by the courts, in most states
they will be enforced if the covenant not to compete is designed to “protect against ... ‘unfair and
illegal’ conduct” on the part of the former employee and not simply “to insulate the employer
from competition.” American Inst. of Chem. Eng’rs v. Reber-Friel Co., 682 F.2d 382, 386-87
(2d Cir. 1982).4 The prevalent standard is to enforce restrictive covenants to the extent that they
are “reasonable.” See Empire Farm Credit, ACA v. Bailey, 657 N.Y.S.2d 211, 212 (N.Y. App.
Div. 1997). Thus, a covenant not to compete will be enforced only if it restricts the employee’s
ability to compete no more than is reasonably necessary to protect the employer’s legitimate
interests. BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (N.Y. Ct. App. 1999); see also Branson
Ultrasonics Corp. v. Stratman, 921 F. Supp. 909, 913 (D. Conn. 1996) (Connecticut courts will
enforce covenants not to compete as long as they are reasonable and entered into knowingly and
for adequate consideration); Chi. Title Ins. Corp. v. Magnuson, 487 F.3d 985 (6th Cir. 2007)
(Ohio courts will enforce a post-employment restriction on competition as long as it (1) is no
greater than required for protection of the former employer, (2) does not impose undue hardship
on the employee, and (3) is not injurious to the public.).
There are no bright-line rules for drafting enforceable restrictive covenants because
litigation typically arises only after the covenants have been breached and, therefore, the
reasonableness of the covenants is often evaluated with the benefit of hindsight not available at
the time of drafting. Generally, however, courts view non-compete agreements more
sympathetically if, for example, the employer attempts to enforce it against a former long-term
employee that is in possession of trade secrets or highly proprietary information, an employee
going to work for a direct competitor to perform the exact same job functions performed for the
prior employer, or an employee who seeks new employment “across the street” from the former
employer.
4
Many states have enacted legislation regulating restrictive employment covenants. See Ala. Code § 8-1-1 (1984);
Cal. Bus. & Prof. Code §§ 16601-16602 (West 1987); Colo. Rev. Stat. § 8-2-113 (1973); Fla. Stat. Ann. § 542.33
(West 1988); Ga. Code Ann. §§ 13-8-2 to 13-8-2.1 (1990); Haw. Rev. Stat. § 480-4 (1985); La. Rev. Stat. Ann.
§ 23:921 (West 1985); Mass. Gen. Laws ch. 112, §§ 12X, 74D (1984); Mich. Comp. Laws Ann. § 445.774a (West
1990); Mont. Code Ann. § 28-2-703 (1989); N.C. Gen. Stat. § 75-2 (1988); N.D. Cent. Code § 9-08-66 (1987);
Okla. Stat. tit. 15, §§ 217-219 (Supp. 1991); Or. Rev. Stat. § 653.295 (1989); S.D. Codified Laws §§ 53-9-8 to 53-911 (1990); Tex. Bus. & Com. Code § 15.05 (Vernon 1990); Wis. Stat. Ann. § 103.465 (West 1988).
Restrictive Covenants and Trade Secrets
13
Because covenants not to compete are viewed as restraints of trade, they are evaluated
against a standard of reasonableness as opposed to a strict contract construction standard. In
analyzing the enforceability of restrictive covenants, courts balance the legitimate interests of the
employer in protecting its property against the public policy prohibiting restraints of trade.
Therefore, an employee’s promise not to compete is likely to be valid only if the court concludes,
after balancing the hardships, that the employer’s legitimate interests outweigh the hardship to
the employee and likely injury to the public. For example, in Lumex, Inc. v. Highsmith, 919 F.
Supp. 624, 636 (E.D.N.Y. 1996), the court concluded that the covenant at issue contained “fair
and reasonable counterbalancing provisions,” because the former employee was permitted to
work for a competitor, but not on a “competitive product”; the six month duration of the
covenant was a “relatively short time”; and, under the six-month term of the covenant, the
former employer was to continue to receive full salary and benefits payments from his former
employer.
Courts differ in their treatment of overly broad covenants. Some courts hold noncompete agreements totally unenforceable if they are overly broad and unreasonable in scope or
duration. See, e.g., Fields Found., Ltd. v. Christensen, 309 N.W.2d 125 (Wis. Ct. App. 1981).
Some courts choose this approach in order to encourage employers to write more narrowlytailored covenants. See Telxon Corp. v. Hoffman, 720 F. Supp. 657 (N.D. Ill. 1989). In other
jurisdictions, including New York, courts will “blue pencil” invalid portions and enforce the rest;
that is, the courts will sever the unenforceable provisions of the covenant to the extent that they
can do so without destroying the intent of the covenant. See, e.g., BDO Seidman, 93 N.Y.2d at
394. Yet others will modify a covenant by rewriting it so that it is reasonable. See, e.g.,
Ferrofluidics Corp. v. Advanced Vacuum Components, Inc., 968 F.2d 1463 (1st Cir. 1992).
1.
What Is a “Legitimate Employer Interest”?
As a threshold matter, courts require an employer to have a “legitimate interest” before
they will enforce a covenant not to compete. An employer’s generalized wish to be insulated
from competition with ex-employees, even those in whom the employer has invested time,
money, and training, is not sufficient to overcome the competing interests of the employee and
the public in employee mobility and free trade. Because covenants not to compete can
discourage employees from seeking alternative employment if their choices are limited by such a
covenant, these covenants are carefully scrutinized by courts to ensure that a legitimate employer
interest is present.
The existence of a legitimate employer interest is often dispositive because the question
of the covenant’s reasonableness is never even reached when such interest is not implicated.
“Only after determining that a restrictive covenant would serve to protect against such unfair and
illegal conduct, and not merely to insulate the employer from competition, does the
reasonableness of the covenant in terms of its time, space or scope, or the oppressiveness of its
operation become an issue.” American Inst. of Chem. Eng’rs, 682 F.2d at 387 (internal
quotations omitted).
Restrictive Covenants and Trade Secrets
14
Although states differ as to what each deems a legitimate protectable employer interest,
most generally find interests legitimate when necessary to prevent some combination of the
following:
1.
disclosure or use of trade secrets;
2.
disclosure or use of confidential customer information;
3.
customer solicitation; and
4.
special harm to the employer due to the unique nature of the employee’s services.
For example, in Illinois, an employer is deemed not to have a business interest sufficient
to warrant enforcement of a restrictive covenant not to compete absent a showing of trade
secret/confidential information or a near-permanent customer relationship. See, e.g., Rapp Ins.
Agency, Inc. v. Baldree, 597 N.E.2d 936 (Ill. App. Ct. 1992). In New York, by contrast, courts
have found that employers have a protectable interest in their trade secrets, customer lists,
customer relationships and good will of the business, as well as in preventing special harm
because of the uniqueness of the employee’s services. See, e.g., BDO Seidman, 93 N.Y.2d at
392 (“It follows from the foregoing that BDO’s legitimate interest here is protection against
defendant’s competitive use of client relationships which BDO enabled him to acquire through
his performance of accounting services for the firm’s clientele during the course of his
employment”); Empire Farm Credit, ACA, 657 N.Y.S.2d at 212 (“It is now axiomatic that
restrictive covenants ... will be enforced to the extent necessary to prevent the use of trade secrets
or confidential customer information, but only so long as they are reasonable in time and area,
not harmful to the general public and not unreasonably burdensome to the employee.”); see also
Ivy Mar Co. v. C.R. Seasons Ltd., 907 F. Supp. 547, 555 n.7 (E.D.N.Y 1995) (employer has
protectable interest in the goodwill of its business).
a.
Trade Secrets as a “Legitimate Employer Interest.”
It is well settled that the protection of trade secrets is a legitimate employer interest that
justifies the enforcement of a restrictive covenant. See, e.g., BDO Seidman, 93 N.Y.2d at 392.
Thus, a restrictive covenant may be enforced if it is designed to protect any of the employer’s
trade secrets. See section II., supra, for a discussion of the definition of a trade secret under
California and New York law.
b.
Customer Lists as a “Legitimate Employer Interest.”
The vast number of restrictive covenant cases involve an ex-employee’s actual or
threatened use of his former employer’s customer lists. The reason for this is clear: the
importance of customer lists to a company’s success, as well as the high cost of assembling
them, have caused many employers to seek trade secret protection for them if they believe their
lists have been (or might be) misappropriated. Indeed, the United States Supreme Court in
Restrictive Covenants and Trade Secrets
15
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 483 (1974), recognized the importance of
protecting customer lists, stating:
[I]t is hard to see how the public would be benefited by disclosure
of customer lists or advertising campaigns; in fact, keeping such
items secret encourages businesses to initiate new and
individualized plans of operation and constructive competition
results. This, in turn, leads to a greater variety of business
methods than would otherwise be the case if privately developed
marketing and other data were passed illicitly among firms
involved in the same enterprise.
Customer lists will not merit protection, however, if the names of past or prospective
customers are “readily ascertainable” from sources outside the employer’s business, such as
through industry directories. See, e.g., Webcraft Techs., Inc. v. McCaw, 674 F. Supp. 1039
(S.D.N.Y. 1987); Leo Silfen, Inc. v. Cream, 278 N.E.2d 636 (N.Y. 1972). For example, in
Kucker Kraus & Bruh, LLP v. Szold & Brandwen, P.C., N.Y.L.J., Sept. 12, 1997, at 26 col. 1
(N.Y. Sup. Ct. Sept. 11, 1997), the court denied trade secret protection to the plaintiff’s customer
list because all of the plaintiff’s clients, comprised of real estate managing agents, cooperatives,
and condominiums, could be readily ascertained through public tax assessment records, court
records, and office building directories. See also Panther Sys. II, Ltd. v. Panther Computer Sys.,
Inc., 783 F. Supp. 53, 67 (E.D.N.Y. 1991).
Conversely, where customer names are discoverable only through extraordinary efforts,
and the employer’s clientele has been secured over many years through the expenditure of time
and money, the court may confer trade secret status upon a customer list. See, e.g., Subcarrier
Communications, Inc. v. Day, 691 A.2d 876, 880 (N.J. App. Div. 1997) (“[t]here are cases where
customer lists have been protected,” especially where company must obtain its customers at cost
of time, trouble and expense); Tyler Enters. of Elwood, Inc. v. Shafer, 573 N.E.2d 863 (Ill. App.
Ct. 1991). Finally, the more detailed and sophisticated the information contained in customer
list, the more likely that it will be afforded trade secret protection. See, e.g., Health Mgmt., Inc.
v. Hotte, No. 97 Civ. 3267 (E.D.N.Y. Sept. 15, 1997) (affording trade secret protection to
customer list where it contained purchasing preferences of clients; specific volume of business
done with each client; and names of key contact people associated with each client); Royal
Carbo Corp. v. Flameguard, Inc., 645 N.Y.S.2d 18, 19 (N.Y. App. Div. 1996) (noting that
plaintiff’s customer lists, which contained information regarding re-servicing dates and prices
offered to each customer, constituted trade secret information); Giffords Oil Co. v. Wild, 483
N.Y.S.2d 104, 106 (N.Y. App. Div. 1984) (concluding that plaintiffs’ customer list was trade
secret because it contained information “such as fuel oil capacity of customers’ tanks, and the
amount certain customers are willing to pay, which aids plaintiffs in establishing prices and
which could only be achieved through personal solicitation.”).
Restrictive Covenants and Trade Secrets
16
c.
Customer Solicitation as a “Legitimate Employer Interest.”
Generally, in the absence of an express non-solicitation agreement, an ex-employee is
allowed to solicit his former employer’s customers unless the customer list could be considered a
trade secret or there was wrongful conduct by the employee such as taking or copying the
employer’s files or using confidential information. See, e.g., Leo Silfen, Inc., 278 N.E.2d 636;
Amana Express Int’l, Inc. v. Pier-Air Int’l, Ltd., 621 N.Y.S.2d 108, 109 (N.Y. App. Div. 1995).
In BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (N.Y. 1999), the New York Court of
Appeals held that an employer has a legitimate interest in preventing a former employee from
exploiting client relationships that were created and maintained at the employer’s expense.
Moreover, an employee may not solicit the customers of his former employer if the
customers would be unknown to the employee but for information obtained during his prior
employment. McRand, Inc. v. Van Beelen, 486 N.E.2d 1306 (Ill. App. Ct. 1985). Thus, a court
may prevent a former employee from soliciting customers who are not openly engaged in
business in advertised locations or whose availability as patrons cannot readily be ascertained.
American Inst. of Chem. Eng’rs, 682 F.2d at 387. Conversely, where customers are “readily
ascertainable” outside of the former employer’s business as prospective users or consumers of
the former employer’s services or products, and there is no proof of physical appropriation or
copying of confidential data, trade secret protection will not be allowed and solicitation of such
customers is not prohibited. Amana Express Int’l, 621 N.Y.S.2d at 109.
d.
An Employee’s Unique Services as a “Legitimate Employer
Interest.”
In some states, covenants not to compete will be enforceable if the employee’s services
are special, unique, or extraordinary, even though no other protectable interest is involved. See
Lumex, Inc. v. Highsmith, 919 F. Supp. 624, 628 (E.D.N.Y. 1996) (employers have legitimate
interest in being protected “if the former employee’s services are unique or extraordinary”);
Contempo Communications, Inc. v. MJM Creative Servs., Inc., 582 N.Y.S.2d 667, 669 (N.Y.
App. Div. 1992) (concluding that defendants, who were plaintiff’s former project managers,
performed services that were “‘special, unique and extraordinary’ and therefore, [plaintiff was]
entitled to protection”); see also Bradford v. New York Times Co., 501 F.2d 51 (2d Cir. 1974).
To succeed on this basis, an employer must prove that the employee’s services are so significant
that replacement would be impossible or that loss of the services would cause irreparable harm.
It is not enough that the employee excels in his job or that his performance is of high value to the
employer. International Paper Co. v. Suwyn, 966 F. Supp. 246, 259 (S.D.N.Y. 1997) (noting
that defendant’s services, as plaintiff’s former executive vice president, were not “unique”
because within month of his resignation all of his job duties had been reassigned to other
employees); Ivy Mar Co., 907 F. Supp. at 555 n.7; Rich Prods. Corp. v. Parucki, 578 N.Y.S.2d
345 (N.Y. App. Div. 1991) (employee was merely of high value to employer and was not
performing unique or extraordinary services); Kanan, Corbin, Schupak & Aronow, Inc. v. FD
Restrictive Covenants and Trade Secrets
17
Int’l LTD, 797 N.Y.S.2d 883 (N.Y. Sup. Ct. 2005) (holding that investor relations executives are
not “unique” employees). Recently, however, the Second Circuit Court of Appeals held that a
title insurance salesman who maintained unique relationships with his employer’s clients was
unique for purposes of enforcing a post employment non-compete agreement. Ticor Title Ins.
Co. v. Cohen, 173 F.3d 63 (2d Cir. 1999).
Some states, such as New York, find that “where an employee refuses to render services
to an employer in violation of an existing contract, and the services are unique or extraordinary,
an injunction may issue to prevent the employee from furnishing those services to another person
for the duration of the contract.” ABC, Inc. v. Wolf, 52 N.Y.2d 394, 402 (N.Y. 1981) (citation
omitted); see also Arias v. Solis, 754 F. Supp. 290 (E.D.N.Y. 1991). Injunctive relief is available
even if the employee has not specifically promised not to work elsewhere during the term of his
contract; where such a promise was explicitly made, a negative injunction is particularly
appropriate. ABC, Inc., 52 N.Y.2d at 402-03; Arias, 754 F. Supp. at 293-94.
The burden of proving uniqueness of service is significant, as demonstrated by the dearth
of reported cases in which a court has validated covenants not to compete on this basis. Indeed,
several courts have held certain skilled professions, namely insurance agents, hairdressers, and
technicians, not “special” because there is nothing inherently extraordinary or unique in the
functions of these professions. See Cool Insuring Agency, Inc. v. Rogers, 509 N.Y.S.2d 180, 182
(N.Y. App. Div. 1986); Family Affair Haircutters, Inc. v. Detling, 488 N.Y.S.2d 204, 207 (N.Y.
App. Div. 1985); Earthweb, Inc. v. Schlack, 71 F. Supp. 2d 299, 313 (S.D.N.Y. 1999), aff’d in
part and remanded, 205 F.3d 1322 (2d Cir. 2000).
However, in MTV Networks v. Fox Kids Worldwide, Inc., No. 605580/97, 1998 WL
57480 (N.Y. Sup. Ct. Feb. 4, 1998), the court enforced a non-compete provision on the ground
that the employee was a “unique employee with unique skills and knowledge.” In MTV, the
defendant was president of MTV’s newly launched cable network called “TV Land” and was in
charge of Nick-at-Night, a sister network to “TV Land” also owned by MTV. In concluding that
the defendant was unique, the court relied on (1) the defendant’s ”key role” in launching both of
these networks; (2) his position on the “executive team” of Nickelodeon, where he was
responsible for reviewing its operations, budgets and strategic operations; and (3) his
involvement in “developing strategies which led to making Nick-at-Night the top rated cable
network in its time period. Id. at *6. The court also noted that the defendant was “very visibly
involved in relationships with advertisers” and that he was the “public face” of MTVN who
“represented the network at many public functions and in contacts with firms with which MTVN
dealt.” Id.
2.
Reasonableness Standard for Enforcement of Covenants Not to
Compete.
In addition to the legitimate employer interest requirement, the restrictions imposed by
the covenant must be reasonable. A finding of reasonableness is entirely case-specific and varies
Restrictive Covenants and Trade Secrets
18
significantly depending on the jurisdiction. Despite the lack of a concrete rule, the New York
Court of Appeals’ formulation of “reasonableness” is illustrative of the standard: “Such
covenants will be enforced only if reasonably limited temporally and geographically ... and then
only to the extent necessary to protect the employer from unfair competition which stems from
the employee’s use or disclosure of trade secrets or confidential customer lists.” Columbia
Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 N.Y.2d 496, 499 (N.Y. 1977).
The following are guidelines to follow in order to achieve “reasonableness” when
drafting restrictive covenants:
1.
The activities restricted must be related to the protectable interest of the
employee’s prior responsibilities, see, e.g., Scott v. General Iron & Welding Co.,
368 A.2d 111 (Conn. 1976) (covenant restricting managers from obtaining
management position with competing company found reasonable);
2.
The covenant’s duration should correspond to the trade secret’s useful life,
compare Frederick Chusid & Co. v. Marshall Leeman & Co., 326 F. Supp. 1043,
1065 (S.D.N.Y. 1971) (two years enforceable), with Coolidge Co. v. Mokrynski,
472 F. Supp. 459, 463 (S.D.N.Y. 1979) (two years unreasonably long because
confidential information revised twice per year); see also DoubleClick, No.
116914/97, 1997 WL 731413 at *8 (one year injunction was too long given the
speed with which internet advertising industry changes); Earthweb, Inc., 71 F.
Supp. 2d at 313 (one-year covenant too long given dynamic nature of industry, its
lack of geographic borders, and employee’s former position, where employee’s
success was measured by his keeping up with daily changes in internet content);
3.
The covenant should be limited to the geographical area in which the employer’s
goodwill extends, see Innovative Networks, Inc. v. Satellite Airlines Ticketing
Ctrs., Inc., 871 F. Supp. 709, 728 (S.D.N.Y 1995) (covenant preventing former
employee from competing anywhere in continental United States deemed
reasonable in light of former employer’s nationwide business); HBD Inc. v. Ryan,
642 N.Y.S.2d 913, 914 (N.Y. App. Div. 1996) (25-mile radius restriction found
reasonable); Mallory Factor, Inc. v. Schwartz, 536 N.Y.S.2d 752, 754 (N.Y. App.
Div. 1989) (finding that covenant not to solicit former client-contacts for a
competitor, without geographic limitation, was reasonable); Mixing Equip. Co. v.
Philadelphia Gear, Inc., 436 F.2d 1308, 1314 (3d Cir. 1971) (“We further find ...
that the absence of a geographical limitation does not render the [one-year]
covenant unreasonable” under New York law, where court determined that
business was national and that covenant had been signed only by employees
“capable of appreciating the technical information” constituting trade secrets);
Award Incentives, Inc. v. Van Rooyen, 263 F.2d 173 (3d Cir. 1959) (applying
New York law to same effect); Business Intelligence Servs., Inc. v. Hudson, 580
F. Supp. 1068 (S.D.N.Y. 1984) (enforcing restrictive covenant not limited in
Restrictive Covenants and Trade Secrets
19
territory nor in application to trade secrets because plaintiff’s business was
international in scope); Estee Lauder Co. v. Batra, 430 F. Supp. 2d 158, 167
(S.D.N.Y. 2006) (holding that worldwide geographic limitation reasonable given
international scope of Estee Lauder’s business operations and former employee’s
job responsibilities while working for Estee Lauder); Victaulic Co. v. Tieman, 499
F.3d 227 (3d Cir. 2007) (global restrictive covenants are reasonable for global
companies as long as they are consistent with the scope of the employee’s duties);
Quaker Chem. Corp. v. Varga, 509 F. Supp. 2d 469 (E.D. Pa. 2007) (same).
4.
The covenant should be limited to the employer’s customers specifically, or
perhaps only to the small group of customers with whom the employee actually
dealt, see Ivy Mar Co., 907 F. Supp. at 555, 559 (restrictive covenant terms that
prohibited former employee from communicating with former employer’s
“prospective” customers were unreasonable as a matter of law); Webcraft Techs.,
Inc. v. McCaw, 674 F. Supp. 1039, 1047 (S.D.N.Y. 1987) (refusing to enforce
covenant to the extent that it covered “potential” customers with whom the former
employee had no contact); Contempo Communications, Inc., 582 N.Y.S.2d at 669
(concluding that restrictive covenant at issue was reasonable because it precluded
defendants from soliciting those of plaintiff’s clients for whom they had worked
prior to their termination, and not those for whom they had not worked); and
5.
The interest of the public must be evaluated because courts will not enforce a
restrictive covenant which is harmful to the public good.
3.
Other Factors Affecting the Reasonableness of Covenants Not to
Compete.
Additional factors that appear to affect courts’ consideration of whether to enforce a
restrictive covenant (albeit sometimes implicitly or in a less crucial respect) are:
1.
the employee’s ability or inability to find alternative employment and other
hardships to the employee if the covenant is enforced;
2.
the employee’s reasonable understanding of the meaning of the agreement at the
time he or she signed the agreement;
3.
the length of the employee’s employment after signing the agreement (the more
time that has expired, the more likely the covenant will be enforced, because it
shows both adequate consideration for the covenant and adequate time for the
employee to have been exposed to (and to have absorbed) trade secrets);
4.
misrepresentations, concealment, thefts or bad faith by either party (including any
pre-termination competitive activities by the employee, which constitute breaches
of fiduciary duty);
Restrictive Covenants and Trade Secrets
20
5.
the employee’s bargaining power;
6.
any negotiations before the covenant was signed;
7.
the executive or professional nature of the employee’s position (higher-level
employees tend to be more likely to receive trade secrets, to be “unique,” to be
mobile, and to understand contracts they sign);
8.
the employee’s knowledge and experience prior to beginning employment with
the ex-employer (the more experience, the more likely it is that the employee’s
knowledge is his own rather than the employer’s trade secret; on the other hand,
more experience may indicate more mobility);
9.
the ex-employer’s intent in enforcing the contract (focus on trade secrets rather
than beating competition is key);
10.
whether it is industry custom to sign and adhere to restrictive covenants;
11.
whether the ex-employer has treated its employees consistently;
12.
the ex-employer’s inability to find a replacement employee (where “uniqueness”
is the justification for obtaining relief);
13.
the established or long-term nature of the ex-employer’s business;
14.
the number of employees departing to the new employer; and
15.
whether the employee continues to receive a salary from the former employer
during the period that the covenant prohibits the employee from working.
C.
The Employee Choice Doctrine
Some states, including New York, have adopted the “employee choice doctrine,” an
exception to the general rule that disfavors the enforcement of post-employment non-compete
provisions. Under the employee choice doctrine, a post-employment non-compete will not be
subject to the usual reasonableness analysis where it is contingent on an employee’s choice
between receiving a benefit (e.g., restricted stock or stock options under an incentive
compensation plan) and competing and thereby forfeiting the benefit. If the employee has a
genuine choice of whether to leave the employer and engage in competitive activities, then the
employer may penalize the departing employee through forfeiture of the applicable benefits.
In Lucente v. International Business Machines Corporation, 310 F.3d 243 (2d Cir. 2002),
the Second Circuit affirmed the validity of the employee choice doctrine. In Lucente, the
plaintiff was a 30-year employee of IBM who left his position as a senior executive in 1991,
Restrictive Covenants and Trade Secrets
21
when he was allegedly told by the CEO that it would be in his and IBM’s best interests if he
sought employment elsewhere. Lucente was the recipient of substantial award packages, in the
form of restricted stock and stock options under two IBM incentive compensation programs.
Both programs provided that the awards would be forfeited if the employee engaged in postemployment competition with IBM, a determination left to IBM’s sole discretion.
In anticipation of leaving IBM, Lucente secured a job with Northern Telecom and was
assured by IBM that the new position would not be deemed competitive with IBM. Two years
later, Lucente accepted a position with Digital Equipment Corporation. IBM then sent him a
letter informing him that his employment with Digital was “competitive employment” and that
his outstanding stock options and restricted stock awards would be canceled. Id. at 249-50.
Lucente sued, alleging breach of contract and other claims. The district court awarded summary
judgment to Lucente, holding that (1) the employee choice doctrine did not apply because
Lucente did not have a genuine choice whether to leave IBM, and (2) the non-compete
provisions of the incentive compensation plans were unreasonable. Id. at 250-51.
On appeal, the Second Circuit reversed, finding genuine issues of fact as to whether
Lucente was fired or voluntarily left IBM. If Lucente voluntarily left the company, the court
said, then the employee choice doctrine would preclude him from challenging IBM’s forfeiturefor-competition clause. In so holding, the court reaffirmed that the doctrine remains a viable part
of New York law concerning post-employment non-competes. The court also held that three
standards govern the application of the doctrine: (1) the employer must demonstrate a continued
willingness to employ the party who agreed not to compete; (2) the employer cannot invoke the
doctrine when it involuntarily terminates an employee without cause; and (3) the factual
determination whether an employee was involuntarily terminated if generally not appropriate for
summary judgment. Id. at 254-56.
Recently, the Second Circuit certified the following undecided question to the New York
Court of Appeals: “Is the factual determination of whether an employee was voluntarily or
involuntarily terminated under the New York common law employee choice doctrine governed
by the ‘constructive discharge’ test from federal employment discrimination law, and, if not,
what test should courts apply?” Morris v. Schroder Capital Mgmt. Int’l, 445 F.3d 525 (2d Cir.
2006). The Second Circuit answered the first question in the affirmative rendering the second
question academic. Morris v. Schroder Capital Mgmt. Int’l, 481 F.3d 86 (2d Cir. 2007). The
court held that where an employer constructively discharges an employee by intentionally
making the employee’s work environment so intolerable that it compels the employee to leave,
the employee’s choice of preserving his rights under an employment contract by not competing
or losing them by engaging in competition has been taken away. In those instances, an employer
should not be permitted to enforce an unreasonable non-compete clause and simultaneously deny
the employee his benefit under the guise of the employee choice doctrine. The Second Circuit
then affirmed the district court’s dismissal of the employee’s complaint, thereby affirming and
expanding the application of the employee choice doctrine to forfeiture for competition
provisions.
Restrictive Covenants and Trade Secrets
22
D.
Under California Law, Employee Covenants Not to Compete Upon
Termination of Employment Are Void.
1.
The California Rule and Its Application.
California (along with Montana, North Dakota and Oklahoma) does not follow the
general rule that covenants not to compete are valid if they are reasonable in purpose and scope.
California Business & Professions Code section 16600 provides that “[e]xcept as provided in this
chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade
or business of any kind is to that extent void.” California courts have rigorously applied this
provision in the employment context and have routinely invalidated agreements purporting to
preclude employees (either expressly or implicitly through penalties) from working for
competitors upon completion of their employment. See, e.g., Application Group, Inc. v. Hunter
Group, Inc., 61 Cal. App. 4th 881, 895 (Cal. Ct. App. 1998); Metro. Traffic Control, Inc. v.
Shadow Traffic Network, 22 Cal. App. 4th 853, 859-60 (Cal. Ct. App. 1994); Scott v. Snelling &
Snelling, Inc., 732 F. Supp. 1034, 1042-43 (N.D. Cal. 1990). Employee non-compete covenants
are void in California even if they are reasonably limited in time and geographic scope. See
Scott, 732 F. Supp. at 1042-43.
Not only are non-compete covenants void in California, but an employer may be liable in
tort for wrongful termination if it fires an employee who refuses to sign an employment
agreement that contains an unenforceable covenant not to compete. D’Sa v. Playhut, Inc., 85
Cal. App. 4th 927 (Cal. Ct. App. 2000). This rule holds even if the agreement contains a choice
of law or severability provision. Id. at 934. The concern is that the presence of an unenforceable
non-compete covenant in an employment agreement may have an undesirable deterrent effect on
employees who do not know their rights under California law. “[I]t is not likely that [the
defendant’s] employees are sufficiently versed in California’s law of contracts such that they
would know (1) that the covenant not to compete is invalid and therefore not enforceable by [the
defendant] and (2) that they could sign the agreement without fear they would be bound by the
covenant not to compete.” Id.
The California rule embodied in section 16600, however, invalidates only those restraints
that apply after termination of employment. During the term of employment, of course, each
employee owes a common law duty of loyalty to the employer (which may be underscored by a
contract to that effect) precluding the employee from competing with the employer in any way,
whether by soliciting the employer’s customers or employees, by using the employer’s trade
secrets, or otherwise.
a.
The Policy Behind the California Rule.
California has a “strong public policy” against the enforcement of restrictive covenants in
the employment context. Scott, 732 F. Supp. at 1039-40. According to the California Supreme
Court:
Restrictive Covenants and Trade Secrets
23
Every individual possesses as a form of property, the right to
pursue any calling, business or profession he may choose. A
former employee has the right to engage in a competitive business
for himself and to enter into competition with his former employer,
even for the business of those who had formerly been the
customers of his former employer, provided such competition is
fairly and legally conducted.
Continental Car-Na-Var Corp. v. Moseley, 24 Cal. 2d 104, 110 (Cal. 1944). “The interests of
the employee in his own mobility and betterment are deemed paramount to the competitive
business interests of the employers, where neither the employee nor his new employer has
committed any illegal act accompanying the employment change.” Diodes, Inc. v. Franzen, 260
Cal. App. 2d 244, 255 (Cal. Ct. App. 1968).
b.
Choice of Law Provisions Cannot Be Used to Avoid the
California Rule.
Employers cannot avoid the application of the California rule by inserting a choice of law
provision into the employment agreement purporting to select the law of another state to govern
disputes arising out of the agreement. If the term of employment is to be carried out
substantially in California, section 16600 will apply, regardless of any choice of law provision.
See, e.g., Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App. 3d 668, 673 (Cal.
Ct. App. 1971); Scott, 732 F. Supp. at 1039-41.
California’s interest in enforcing Section 16600 is so strong that in Application Group,
Inc. v. Hunter Group, Inc., 61 Cal. App. 4th 881 (Cal. Ct. App. 1998), a California court of
appeal invalidated and refused to enforce an out-of-state non-compete agreement signed by an
out-of-state employee who quit his job and took a new job with a California employer. In other
words, the California court invalidated a non-compete agreement that was unquestionably valid
in the state in which it was entered, just because the employee planned to move to California to
take the new job. Likewise, in Robinson v. Jardine Ins. Brokers Int’l Ltd., 856 F. Supp. 554
(N.D. Cal. 1994), the court issued a preliminary injunction enjoining the defendant (the
plaintiff’s former employer) from enforcing in the United States a temporary restraining order
issued by the English courts that prohibited the plaintiff from doing business with the
defendant’s clients, regardless of who initiated contact, on the ground that the restriction was
invalid under section 16600. As discussed in the following section, however, the court may not
have had the power to issue such an injunction if the temporary restraining order had been issued
by a state court rather than an English court.
The California Supreme Court, however, has since softened somewhat the harsh effect of
this rule in Medtronics, Inc. v. The Superior Court of Los Angeles, 29 Cal. 4th 697 (Cal. 2002).
In Medtronics, the Supreme Court reversed the lower California court’s issuance of a temporary
restraining order which prohibited a former employer in Minnesota from taking any steps to
Restrictive Covenants and Trade Secrets
24
further its Minnesota action against the former Minnesota employee that had moved to
California. The Court held that Section 16600 was not so strong as to constitute an exceptional
circumstance warranting enjoining proceedings that were initiated in Minnesota before the
California had been initiated. The court noted, however, that the employee was free to continue
the California action while the Minnesota action proceeded.
Similarly, the court in Jones v. Humanscale Corp., 130 Cal. App. 4th 401 (Cal. Ct. App.
2005), recognized that a New Jersey arbitrator did not exceed his authority by enforcing a noncompete clause. Here, the parties agreed to arbitrate “any dispute involving the performance,
interpretation of [sic] breach of this agreement or the relationship created hereby,
including…disputes involving…discrimination and other rights and protections afforded by …
law… .” Id. at 409. The agreement further includes a New York choice-of-law provision, and
expressly authorized an arbitrator to modify any part of the noncompetition covenant found
unenforceable. The court opined that none of the cases on which plaintiff attempted to rely,
including Application Group, involved judicial review of an arbitrator’s findings as to the
enforceability of a covenant not to compete in a contract containing a choice-of-law provision
applying the law of another state. Additionally, the court found that the arbitrator’s findings and
decision were not palpably erroneous under California law. For discussion of specific instances
where California courts have enforced non compete clauses that limited, but did not prohibit
competition, see Section III.D.2.a., infra.
In Bennett v. Medtronic, Inc., 285 F.3d 801 (9th Cir. 2002), several employees of a
Tennessee company, Medtronic, sought to ignore the non-competition covenants in their
employment agreements and move to NuVasive, a competing company in California. Medtronic
sued NuVasive in Tennessee state court and, on the same day, the employees sued Medtronic in
California state court. After Medtronic moved the California case to federal court, the
employees sought, and the federal court granted, a temporary restraining order (characterized by
the Ninth Circuit as a preliminary injunction) prohibiting Medtronic from proceeding with the
Tennessee action. The Ninth Circuit held that this order violated the Anti-Injunction Act, 28
U.S.C. § 2283, which prohibits a federal court from enjoining state court proceedings except in
limited circumstances. The court found that “[t]he Act creates a presumption in favor of
permitting parallel actions in state and federal court” and that none of the exceptions applied. Id.
at 805-07. In particular, the court found that the injunction was not “necessary in aid of the
federal court’s jurisdiction.” Id. at 807.
c.
California Courts Will Not Rewrite an Overly Broad
Noncompetition Provision to Make It Valid.
The burden is on the employer to draft a noncompetition provision that will pass muster
under section 16600. California courts will not rewrite an overly broad provision to make it
valid. See Kolani v. Gluska, 64 Cal. App. 4th 402, 408 (Cal. Ct. App. 1998); D’Sa, 85 Cal. App.
Restrictive Covenants and Trade Secrets
25
4th at 934-35;5 but see Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83,
123, 124 n.13 (Cal. 2000) (“overbroad covenants not to compete may be restricted temporally
and geographically,” citing General Paint Corp. v. Seymour, 124 Cal. App. 611, 614-15 (Cal. Ct.
App. 1932), and will be invalidated only upon showing of bad faith). Rewriting a covenant
would undermine the policy underlying section 16600. Kolani, 64 Cal. App. 4th at 408. If
rewriting were permitted:
Employers could insert broad, facially illegal covenants not to
compete in their employment contracts. Many, perhaps most,
employees would honor these clauses without consulting counsel
or challenging the clause in court, thus directly undermining the
statutory policy favoring competition. Employers would have no
disincentive to use the broad, illegal clauses if permitted to retreat
to a narrow, lawful construction in the event of litigation.
Id. For tips on drafting a narrow, enforceable covenant not to use or disclose an employer’s
trade secrets, see Section V.A.1., infra.
2.
California Courts May Enforce Certain Types of Non-Competition
Clauses That Limit, but Don’t Prohibit, Competition.
a.
Covenants by Employees Not to Use or Disclose Their
Employers’ Trade Secrets Are Enforceable in California.
Agreements not to use or disclose the company’s trade secrets during and after the term
of employment or contractual engagement are fully enforceable. See, e.g., Muggill v. The
Reuben H. Donnelley Corp., 62 Cal. 2d 239, 242 (Cal. 1965); American Credit Indemnity Co. v.
Sacks, 213 Cal. App. 3d 622, 633-34 (Cal. Ct. App. 1989). In Morlife, Inc. v. Perry, 56 Cal.
App. 4th 1514 (Cal. Ct. App. 1997), the court affirmed an injunction prohibiting two former
employees from: (1) doing business with any company that switched its business to the
employee’s new business as a result of the employee’s use of the former employer’s trade secret
customer information, and (2) soliciting any business from any entity that did business with the
former employer before the employees stopped working there.
An employer cannot, however, prevent an employee from using or disclosing non-trade
secret information simply by defining the information as a trade secret in the employee’s nondisclosure agreement. See, e.g., American Paper, 183 Cal. App. 3d at 1325 (“An agreement
between employer and employee defining a trade secret may not be decisive in determining
5
For a non-California decision holding a federal court had no obligation to fix a flawed noncompetition agreement,
see Cintas Corp. v. Perry, 517 F.3d 459 (7th Cir. 2008) (finding that “judicial modification of unreasonable or
overbroad non-compete provisions … is discretionary, not mandatory,” and therefore refusing to “blue-pencil” the
agreement to make it enforceable).
Restrictive Covenants and Trade Secrets
26
whether the court will so regard it”). Nevertheless, there are at least two reasons why an
employment agreement that contains a covenant not to use or disclose the employer’s trade
secrets should attempt to define the trade secrets being protected, and with some degree of
specificity (but not in so much detail that unlisted trade secrets will be deemed not to be
protected by the agreement).
First, putting employees (and others) on notice as to what information the employer
considers a trade secret is an important step in the process of establishing a trade secret. Second,
the courts are disinclined to enforce agreements requiring employees to keep confidential
vaguely defined information the company later decides it would like to protect. See generally
Motorola, Inc. v. Fairchild Camera & Instrument Corp., 366 F. Supp. 1173, 1185 (D. Ariz.
1973) (applying California law and refusing to enforce agreements in which employees agreed to
“maintain strictly confidential during [and for two years after] my employment all ... information
of the company ... which is of a confidential or secret nature”).
However the protected information is defined in the agreement, it should be coupled with
an acknowledgment by the employee that the information is owned by the employer, is secret, is
the subject of reasonable efforts by the employer to keep it secret, and has value because of its
secrecy. (These are the standards for establishing under the Uniform Trade Secrets Act that the
information is a trade secret.)
The contract should, of course, provide that the employee will not use or disclose the
information during or after employment, and should expressly provide that the employee’s duties
extend until the information becomes generally known through proper means. It should also
require the return of all notebooks, documents, computer disks and the like upon the termination
of employment.
Further, although not necessary, a non-disclosure agreement is a useful tool for helping to
protect an employer’s trade secrets. While the courts have held in numerous cases that an
employer may prevent an ex-employee from using or disclosing its trade secrets under the tort
theory of trade secret misappropriation even in the absence of a non-disclosure agreement, see,
e.g., Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1522 (Cal. Ct. App. 1997); Klamath-Orleans
Lumber, Inc. v. Miller, 87 Cal. App. 3d 458, 465 (Cal. Ct. App. 1978), such agreements are
useful for many reasons.
First, by notifying the employee of the existence of trade secrets, the employer lessens the
risk of inadvertent disclosure to others, and serves to deter the employee (and his or her new
employer) from using the information. Second, an agreement helps to eliminate disputes and
misunderstandings about the trade secret status of confidential information. Third, as noted
above, a contractual obligation to preserve the secrecy of information is evidence of the
employer’s “reasonable efforts” to maintain the secrecy of its confidential information, and thus
helps to establish its status as a trade secret under the Uniform Trade Secrets Act.
Restrictive Covenants and Trade Secrets
27
b.
Prohibition Against a Limited Subset of Activities
In Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (Cal. 2008), the California Supreme
Court considered and rejected another exception to the general rule that had found support in a
handful of federal court decisions. In those cases, the courts had held that non-competition
agreements that resulted in only a “partial” or “narrow” restraint on an employee’s ability to
work in his or her chosen profession were reasonable and enforceable. In a widely anticipated
decision, Edwards flatly rejected this exception, finding that the state’s strong public policy – as
clearly expressed in California Business and Professions Code Section 16600 – does not permit
such a restraint, even if it is narrow or limited.
In Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (Cal. 2008), the plaintiff challenged
the enforceability of a non-compete agreement he signed when he was hired in 1997 and also
argued that he was wrongfully terminated for refusing to execute a general release of all claims
that arguably would have involved non-waivable statutory claims.
The Non-Compete agreement at issue purported to prohibit plaintiff from (1) performing
similar services for clients he had assisted within 18 months of his departure, (2) soliciting,
within 12 months of his departure, clients that had been serviced by an Andersen office Edwards
had worked at during the 18 months prior to his departure, and (3) soliciting away any of
Andersen’s professional employees for 18 months following his departure. The release was
offered as part of a sale of Arthur Anderson to HSBC. In connection with the sale, Andersen
required Edwards to sign a Termination of Non-Compete agreement containing a general release
of “any and all claims” against Andersen, as well as other terms benefiting Andersen, and in turn
released Edwards from the 1997 non-competition agreement. Concerned that he would be
waiving indemnification rights for potential liability and legal fees related to Andersen’s Enron
troubles, Edwards refused to sign the agreement. As a result, Andersen terminated Edwards and
withdrew his severance benefits. HSBC subsequently withdrew his employment offer.
Edwards sued Andersen for (among other things) interference with prospective economic
advantage, alleging that (1) the 1997 non-competition agreement violated California Business
and Professions Code Section 16600, and (2) that the general “any and all claims” release in the
Termination of Non-Compete agreement ran afoul of California Labor Code sections 2802 and
2804, which render an employee’s indemnification rights nonwaivable. Edwards argued that
requiring him to release indemnification rights to obtain a release from an unlawful noncompetition agreement amounted to “wrongful conduct” sufficient to satisfy the elements of his
interference claim.
The California Supreme Court held that the 1997 Non-Compete agreement was
unenforceable. The Court considered the “narrow restraint” exception that had found support in
a handful of federal court decisions. In those cases, the courts had held that non-competition
agreements that resulted in only a “partial” or “narrow” restraint on an employee’s ability to
work in his or her chosen profession were reasonable and enforceable. The Court flatly rejected
Restrictive Covenants and Trade Secrets
28
this exception, finding that the state’s strong public policy – as clearly expressed in California
Business and Professions Code Section 16600 – did not permit such a restraint, even if it was
narrow or limited.
With respect to the release, however, the Court rejected the lower court’s ruling that
general releases that contain a release of “any and all claims” are invalid. It found it
unreasonable to read such a general release as purporting to release indemnification rights which
are expressly made nonwaivable by statute. To do otherwise would be to interpret the contract
as unlawful, violating basic principles of contract interpretation. Accordingly, the Court found
that the “any and all claims” release was enforceable.
Edwards clarifies and reaffirms California’s longstanding public policy in favor of open
competition and employee mobility, and it rejects non-competition agreements drafted to
comply with the “narrow restraint” exception. The decision leaves intact the other limited
exceptions to the general prohibition on post-employment non-competition agreements (such as
non-compete agreements executed in connection with a sale of a business), and does not affect
an employer’s ability to protect its trade secrets through non-disclosure and non-solicitation
agreements. To the extent that existing non-competition agreements were drafted to comply with
the “narrow restraint” exception, employers should reexamine these agreements, refrain from
attempting to enforce them, and consider replacing them altogether with appropriate and
enforceable agreements.
c.
Other Statutory
Competition
Exceptions
Allowing
Restraints
On
As recognized by the Edwards court, there are statutory exceptions to Section 16600
where parties may enter into enforceable covenants not to compete. These exceptions include
the sale of goodwill or corporate stock of a business, Cal. Bus. & Prof. Code § 16601, or the
dissolution of a partnership, Cal. Bus. & Prof. Code § 16602. Under these statutes, covenants
have been upheld where the defendant arguably only had a limited ability to compete with the
plaintiff. For instance, in Vacco Industries, Inc. v. Van Den Berg, 5 Cal. App. 4th 34 (Cal. Ct.
App. 1992), the court upheld a non-compete agreement that the defendant entered into when he
sold his stock, which totaled only 3% of the outstanding shares, to an acquiring company. The
court found that the “purchaser of a business is entitled to negotiate and enforce an agreement by
the seller(s) of the business imposing a reasonable restriction on competition by the seller(s) on
the theory that such competition would diminish the value of the business which had been
purchased.” Id. at 48.
California courts will not enforce a non-compete covenant in a stock purchase agreement
if it appears that the agreement is merely “a sham devised to circumvent California’s policy
against such agreements as expressed in section 16600.” Hill Medical Corp. v. Wycoff, 86 Cal.
App. 4th 895, 905 (Cal. Ct. App. 2001). “[T]here must be a clear indication that in the sales
transaction, the parties valued or considered goodwill as a component of the sales price, and thus,
Restrictive Covenants and Trade Secrets
29
the share purchasers were entitled to protect themselves from ‘competition from the seller which
competition would have the effect of reducing the value of the property right that was acquired.’”
Id. at 903 (quoting Monogram Indus., Inc. v. Sar Indus., Inc., 64 Cal. App. 3d 692, 701 (Cal. Ct.
App. 1976)). In Hill Medical Corp., for example, the court invalidated a non-compete covenant
that applied when the defendant physician quit his job and sold his shares in the practice back to
the corporation, where there was no evidence that the repurchase price compensated the
defendant for the sale of goodwill. Id. at 906-07.
3.
Enforcement of Non-Solicitation Clauses
a.
What Is “Solicitation”?
Even California courts are willing to enforce narrowly crafted non-solicitation clauses.
The case law, however, does not clearly define “solicitation.” Nonetheless, some guidelines
have emerged regarding the types of conduct that may and may not be enjoined by a nonsolicitation agreement. First, an employee may passively accept business from the former
employer’s clients despite a non-solicitation agreement. See, e.g., Golden State Linen Service,
Inc. v. Vidalin, 69 Cal. App. 3d 1, 8 (Cal. Ct. App. 1977). Second, “merely informing customers
of one’s former employer of a change of employment, without more, is not solicitation.” Aetna
Building Maintenance Co., Inc. v. West, 39 Cal. 2d 198, 204 (Cal. 1952). Note, however, that if
the customers’ identities are trade secrets, merely calling them to announce a change of
employment may be a misappropriation of trade secrets. Moss, Adams & Co. v. Shilling, 179
Cal. App. 3d 124, 128-30 (Cal. Ct. App. 1986).
One court explained that any customer contact that “personally petitions, importunes and
entreats . . . customers to call . . . for information about the better [products or services] [the
departing employee] can provide and for assistance during the . . . transition period . . . is
endeavoring to obtain their business [is] . . . , in a word, solicit[ation].” American Credit
Indemnity Co. v. Sacks, 213 Cal. App. 3d 622, 636 (Cal. Ct. App. 1989) (enjoining employee
where ex-employee’s “announcement letter” said “if you would like to learn more about the
[new employer’s product], I will be happy to discuss it with you when you are ready to review
your ongoing credit insurance needs at renewal time.”); see also Robert L. Cloud & Assocs., Inc.
v. Mikesell, 69 Cal. App. 4th 1141, 1150 (Cal. Ct. App. 1999) (holding similarly); Merrill Lynch,
Pierce, Fenner & Smith Inc. v. Chung, No. CV 01-00659, 2001 WL 283083 (C.D. Cal. Feb. 2,
2001) (personal follow-up phone calls constituted solicitation).
b.
Customer Solicitation
In California, an employee’s covenant not to solicit the employer’s customers after
termination of employment is enforceable to the extent that information regarding those
customers constitutes a trade secret or the solicitation thereof would constitute unfair
competition. See, e.g., Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425 (Cal. Ct. App. 2003);
Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (Cal. Ct. App. 1985); Retirement Group v. Galante,
Restrictive Covenants and Trade Secrets
30
176 Cal. App. 4th 1226 (Cal. Ct. App. 2009). This rule is equally applicable in contracts
between a company and its supplier or contract manufacturer. Companies typically contend in
these contexts that information regarding the identities, addresses and key contact people of
customers, as well as the customers’ peculiar needs, desires and pricing/bidding constraints, are
trade secrets.
This rule is illustrated by Thompson v. Impaxx, where defendant Impaxx purchased
Pac-West Labels in September of 2000, at the time employer of plaintiff Daniel Thompson.
After acquiring Pac-West, Impaxx asked Thompson to sign a covenant which read: “For a period
of one (1) year following the termination of employment, I will not (1) call on, solicit, or take
away any of Pac-West Label’s customers or potential customers with whom I have had any
dealings as a result of my employment by Pac-West Label.” Id. at 1427. After refusing to
execute the contract, Thompson was terminated by Impaxx. Thompson then sued Impaxx
alleging wrongful termination for refusal to sign what he alleged was an unenforceable covenant
not to compete. Impaxx’s motion for judgment on the pleadings, claiming the contract was
enforceable as written, was granted by the trial court. In reversing the decision, the appellate
court repeated the rule that “[a]nti-solicitation covenants are void as unlawful business restraints
except where their enforcement is necessary to protect trade secrets.” Id. at 1429 (emphasis
added, citing Moss, Adams & Co. v. Shilling, 179 Cal. App. 3d 124, 129 (Cal. Ct. App. 1986)).
However, the court held that judgment on the pleadings was inappropriate because the complaint
stated that the customer information at issue was not trade secrets. Id. at 1430 (“the issue of
whether information constitutes a trade secret is a question of fact.”). Had Impaxx established
this customer information constituted a trade secret, its restrictive covenant would be enforced.
In Retirement Group v. Galante, 176 Cal. App. 4th 1226 (Cal. Ct. App. 2009), the court
held that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a
contractual clause purporting to ban a former employee from soliciting former customers to
transfer their business away from the former employer to the employee's new business, but a
court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act and/or
the Unfair Competition Law) by banning the former employee from using trade secret
information to identify existing customers, to facilitate the solicitation of such customers, or to
otherwise unfairly compete with the former employer. It is not the solicitation of the customers,
but is instead the unfair competition or misuse of trade secret information, that may be enjoined.
Id.
Like California, other states that invalidate non-competition agreements, such as
Oklahoma, also harshly construe non-solicitation provisions. See Cardiovascular Surgical
Specialists, Corp. v. Mammana, 61 P.3d 210, 212 (Okla. 2002) (refusing to enforce nonsolicitation clause preventing former surgeon from soliciting, diverting or accepting referrals
from any source for nine months after terminating employment).
Other states have held covenants not to solicit customers are enforceable even if the
agreement is not keyed to trade secrets. In John Jay Esthetic Salon, Inc. v. Woods, 377 So. 2d
Restrictive Covenants and Trade Secrets
31
1363 (La. App. Ct. 1979), the court enforced a non-solicitation provision that prevented a former
employee from soliciting customers from the former employer hair salon for two years. In doing
so, the court held: “An agreement not to engage in competition with the employer is vastly
different from an agreement not to solicit the employer’s customers or employees or to engage in
a business relationship with the employees or contractors.” Id. at 1366.
There is some California authority that appears to follow these other states, i.e.,
upholding covenants not to solicit customers regardless of whether confidential information is
involved. See John F. Matull & Associates, Inc. v. Cloutier, 194 Cal. App. 3d 1049, 1054-55
(Cal. Ct. App. 1987) (enforcing non-solicitation covenant that made no mention of trade secrets,
and stating that, unlike agreements not to compete, agreements “delimiting how . . . employee
can compete” are not automatically invalid under 16600); Golden State Linen Service, Inc. v.
Vidalin, 69 Cal. App. 3d 1, 9 (Cal. Ct. App. 1977) (finding non-solicitation agreement “valid and
enforceable” without even addressing whether the employee’s solicitation involved trade
secrets). The weight of authority in California, however, appears to require trade secrets as a
condition to enforcement of the non-solicitation covenant. See, e.g., Thompson v. Impaxx, Inc.,
113 Cal. App. 4th 1425 (Cal. Ct. App. 2003); Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (Cal.
Ct. App. 1985); Moss, Adams & Co. v. Shilling, 179 Cal. App. 3d 124, 130 (Cal. Ct. App. 1986)
(“Anti-solicitation covenants are void as unlawful business restraints except where their
enforcement is necessary to protect trade secrets”); Gordon Termite Control v. Terrones, 84 Cal.
App. 3d 176, 179 (Cal. Ct. App. 1978) (refusing to enforce non-solicitation covenant where no
trade secrets were used); Fortna v. Martin, 158 Cal. App. 2d 634, 639 (Cal. Ct. App. 1958)
(same).
c.
Competitor Employee Raiding Absent a Non-Solicitation
Clause
It is not uncommon for competitors to recruit or “raid” the employer’s most talented
employees. In fact, the California Supreme Court recently held that “public policy generally
supports a competitor’s right to offer more pay or better terms to another’s employee so long as
the employee is free to leave.” Reeves v. Hanlon, 33 Cal. 4th 1140, 1151-1152 (Cal. 2004).
Under ordinary circumstances, the law does not prohibit competitors, including
former employees who now compete with their former employer, and who did not sign a valid
non-solicitation contract, from soliciting other at-will employees to leave the employer’s
workforce. Metro. Traffic, 22 Cal. App. 4th at 860 (“As a competitor of Metro, absent a showing
of unlawful purpose or means, Shadow is privileged and not liable for inducing Metro’s
employees to leave and move to Shadow”); Hollingsworth Solderless Terminal Co. v. Turley,
622 F.2d 1324, 1337 (9th Cir. 1980) (“Mere solicitation of an employee, under no contract of
employment, to leave and associate with a competing firm is not illegal.”).
As the court stated in Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 255 (Cal. Ct. App.
1968):
Restrictive Covenants and Trade Secrets
32
Even though the relationship between an employer and his
employee is an advantageous one, no actionable wrong is
committed by a competitor who solicits his competitor’s employees
or who hires away one or more of his competitor’s employees who
are not under contract, so long as the inducement to leave is not
accompanied by unlawful action . . . . In the employee situation
the courts are concerned not solely with the interests of the
competing employers, but also with the employee’s interests. The
interests of the employee in his own mobility and betterment are
deemed paramount to the competitive business interests of the
employers, where neither the employee nor his new employer has
committed any illegal act accompanying the employment change.
see also Reeves, 33 Cal. 4th at 1152-1153 (solicitation actionable only if plaintiff proves “that
the defendant engaged in an independently wrongful act that induced an at-will employee to
leave the plaintiff.”)
As this statement makes clear, there are a number of exceptions to the general rule
allowing employee solicitation (the discussion of which is beyond the scope of this chapter),
which give the employer some protection against raiding by former employees and other
competitors.
d.
Competitor Employee Raiding In Light of a Non-Solicitation
Clause
The most common way an employer can prevent raiding by former employees is by
including a non-solicitation covenant in the employment contract. As discussed above, these
covenants typically provide that, during the employment or contractual engagement, and for a
certain period of time thereafter, the employee or contracting company shall not solicit any of the
company’s employees for a competing business or otherwise induce or attempt to induce
employees to leave their employment.
Under California law, a covenant not to solicit an employer’s workforce may be
enforceable, even in the absence of actual trade secret misappropriation, provided that there are
legitimate trade secrets or other legitimate business interests that are protected by the covenant
not to solicit. In Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (Cal. Ct. App. 1985), the plaintiffs
brought suit against a former executive officer claiming that he had breached his termination
agreement by inducing the plaintiffs’ employees to work for the defendant’s subsequent
employer. The termination agreement in Moyes provided in part that, as a condition for various
salary and severance payments, the defendant would “not now or in the future disrupt, damage,
impair or interfere with the business of [the plaintiffs] whether by way of interfering with or
raiding its employees, disrupting its relationships with customers, agents, representatives or
vendors or otherwise.” 174 Cal. App. 3d at 274. The defendant later offered jobs to two key
Restrictive Covenants and Trade Secrets
33
employees of the plaintiffs, and both of these employees eventually went to work for the
defendant’s new employer.
In determining whether the non-interference covenant was enforceable under Section
16600 of the California Business and Professions Code, the court seemed to abandon the notion
that the employer could restrain by contract only that conduct which would have been subject to
judicial restraint under the law of unfair competition and trade secret misappropriation. Instead,
the court applied a rule of reason test to the covenant, stating that “enforceability depends upon
[the covenant’s] reasonableness, evaluated in terms of the employer, the employee, and the
public.” 174 Cal. App. 3d at 279.
In applying the rule of reason, the court found that, when read to last for only one year,
the non-interference covenant was not void under Section 16600. The court explained:
The restriction presumably was sought by plaintiffs in order to
maintain a stable work force and enable the employer to remain in
business. This restriction has the apparent impact of limiting [the
defendant’s] business practices in a small way in order to promote
[the employer’s] business. This non-interference agreement has
no overall negative impact on trade or business.
174 Cal. App. 3d at 280.
The holding in Loral Corp. appears to be inconsistent with dicta in some other California
cases. For example, one court has stated that “[t]he corollary to [the] proposition [that an exemployee cannot be contractually barred from working for the former employer’s competitors] is
that competitors may solicit another’s employees if they do not use unlawful means or engage in
acts of unfair competition.” Metro. Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.
App. 4th 853, 859 (Cal. Ct. App. 1994); see also Latona v. Aetna U.S. Healthcare, Inc., 82 F.
Supp. 2d 1089, 1094-96 (C.D. Cal. 1999) (following Metro. Traffic’s reasoning). “The interests
of the employee in his own mobility and betterment are deemed paramount to the competitive
interests of the employers, where neither the employee nor his new employer has committed any
illegal act accompanying the employment change.” Metro. Traffic, 22 Cal. App. 4th at 860
(quoting Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 255 (Cal. Ct. App. 1968)).
Nevertheless, employers can use Loral Corp. as authority to support a practice of
including covenants not to solicit fellow employees in their employment agreements. Any such
covenants should be reasonably limited in time and scope.
Restrictive Covenants and Trade Secrets
34
IV.
PREVENTING DEPARTING EMPLOYEES FROM USING OR DISCLOSING
TRADE SECRETS
A.
Background.
To develop trade secrets, employers recruit, hire and train highly skilled employees. It is
the most highly skilled employees that are most sought after by competitors, and thus pose the
greatest risk of disclosure and misuse of the employer’s trade secrets. In this section, we provide
an overview of the claims available to employers seeking to protect their trade secrets and
suggest steps employers should take to protect their trade secrets.
B.
Sources of Protection for Employers.
1.
Civil Remedies for Trade Secret Misappropriation.
a.
Basis for Liability.
If an employee learned the employer’s trade secrets and then used or disclosed, or
threatened to use or disclose, the trade secrets without the employer’s consent, the employee may
be liable for “misappropriating” the trade secrets. See Hudson Hotels Corp. v. Choice Hotels
Int’l, 995 F.2d 1173, 1176 (2d Cir. 1993) (to prevail on claim for misappropriation of trade
secrets, New York law requires that plaintiff demonstrate that it possessed trade secrets, and that
defendant used trade secrets in breach of agreement or confidential relationship or duty, or as
result of discovery by wrongful means), abrogated on other grounds, Nadel v. Play-by-Play Toys
& Novelties, Inc., 208 F.3d 368 (2d Cir. 2000); Cal. Civ. Code § 3426.1(b)(2) (misappropriation
includes actual or threatened use or disclosure of trade secret where trade secret was “[a]cquired
under circumstances giving rise to a duty to maintain its secrecy or limit its use”).
The exemployee’s new employer may also be liable for misappropriation. Thola v. Henschell, 140
Wash. App. 70 (Wash. Ct. App. 2007) (appellate court held that a future employer could be
vicariously liable if it knowingly benefited from a future employee’s tortious conduct); see Cal.
Civ. Code § 3426.1(b)(2) (misappropriation may also occur if person “derived [trade secret]
from or through a person who owed a duty to the person seeking relief to maintain its secrecy or
limit its use”). Indeed, a California court recently held that officers, directors, and majority
shareholders of the new employer may be held personally liable for misappropriation if they
knew or had reason to know of the unlawful conduct and thereby implicitly approved of or
consented to it. See PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368 (Cal. Ct. App. 2000). Such
persons may be personally liable even if they did not directly participate in the misappropriation
and, if the misappropriation is continuing, even if the misappropriation initially occurred before
they became an officer, director, or majority shareholder. Id. at 1380-85.
An employee who uses a computer to obtain or send trade secrets without his employer’s
authorization may also be liable, along with the recipient of the information, under the Computer
Fraud and Abuse Act, 18 U.S.C. § 1030, which applies to “[w]hoever . . . intentionally accesses a
computer without authorization or exceeds authorized access, and thereby obtains . . .
Restrictive Covenants and Trade Secrets
35
information from any protected computer if the conduct involved an interstate or foreign
communication . . . .” 18 U.S.C. § 1030(a)(2)(C). Section 1030 is primarily a criminal statute,
but “[a]ny person who suffers damage or loss by reason of a violation of this section may
maintain a civil action against the violator to obtain compensatory damages and injunctive relief
or other equitable relief.” 18 U.S.C. § 1030(g). Although the remedies are cumulative with
those provided by state trade secret law, the statute may provide a basis for filing a trade secret
misappropriation lawsuit in federal court in appropriate cases.
b.
Available Remedies.
An injured employer may obtain monetary damages and/or an injunction to stop the use
or disclosure of the trade secret information as remedies for trade secret misappropriation. See
Cal. Civ. Code §§ 3426.2, 3426.3; Robert L. Cloud & Assocs., Inc. v. Mikesell, 69 Cal. App. 4th
1141, 1149-52 (Cal. Ct. App. 1999) (discussing remedies available under Uniform Trade Secrets
Act); Cacique, Inc. v. Robert Reiser & Co., 169 F.3d 619, 623-24 (9th Cir. 1999) (same).
Injunctive relief may include an injunction compelling affirmative acts, such as the return or
destruction of misappropriated documents and materials. See Cal. Civ. Code § 3426.2(c);
Lumex, Inc. v. Highsmith, 919 F. Supp. 624, 633-34 (E.D.N.Y. 1996) (threatened
misappropriation enjoined).
In New York, a party seeking a preliminary injunction must demonstrate: (1) “either (a) a
likelihood of success on the merits or (b) sufficiently serious questions going to the merits to
make them a fair ground for litigation and a balance of hardships tipping decidedly in the
movant’s favor,” and (2) “irreparable harm in the absence of an injunction.” Faiveley Transport
Malmo v. Wabtec Corp., 559 F.3d 110 (2d Cir. 2009) (quoting County of Nassau, N.Y. v. Leavitt,
524 F.3d 408, 414 (2d Cir. 2008)). A showing of irreparable harm “is the single most important
prerequisite for the issuance of a preliminary injunction.” Id. at 118. To satisfy this requirement,
a plaintiff “must demonstrate that absent a preliminary injunction they will suffer an injury that
is neither remote nor speculative, but actual and imminent, and one that cannot be remedied if a
court waits until the end of trial to resolve the harm.” Grand River Enter. Six Nations, Ltd. v.
Pryor, 481 F.3d 60, 66 (2d Cir. 2007). Where there is an adequate remedy at law, such as an
award of money damages, injunctions are unavailable except in extraordinary circumstances.
Moore v. Consol. Edison Co. of N.Y., 409 F.3d 506, 510 (2d Cir. 2005). The Second Circuit
recently clarified that a presumption of irreparable harm does not necessarily automatically arise
upon the misappropriation of a trade secret. Faiveley, 559 F.3d at 118; see also American
Airlines, Inc. v. ImHof, 620 F. Supp. 2d 574 (S.D.N.Y. 2009). Rather, a rebuttable presumption
may be warranted, according to the court,
in cases where there is a danger that, unless enjoined, a
misappropriator of trade secrets will disseminate those secrets to a
wider audience or otherwise irreparably impair the value of those
secrets. Where a misappropriator seeks only to use those secretswithout further dissemination or irreparable impairment of valueRestrictive Covenants and Trade Secrets
36
in pursuit of profit, no such presumption is warranted because an
award of damages will often provide a complete remedy for such
an injury.
Id. at 118-19. In Faiveley, the defendant corporation used the misappropriated trade secrets
without further dissemination and treated them with the same confidentiality that they gave to
their own proprietary information. Further, there was no evidence in the record that defendant
was likely to irreparably impair plaintiff’s trade secrets by their continued usage. Therefore, the
court found inappropriate the district court’s grant of a preliminary injunction.
In American Airlines, Inc. v. ImHof, American Airlines alleged that a former employee, a
mid-level managing director of sales for the New York region, misappropriated trade secrets and
sought to use them to American’s detriment after joining a rival, Delta Airlines. After citing
Faiveley and rejecting American’s argument that a misappropriation of trade secrets
automatically raises the presumption of irreparable harm, the court addressed whether any of the
documents the employee took before leaving his position with American, or even the information
he remembered could constitute irreparable harm. However, the court found that none of the
alleged misappropriations contained sufficiently confidential information that would likely be
used against American with any material effect. Further, the court noted that any possible
material effect could be compensated by readily attributable damages.
c.
Limitations Periods.
Once there is a reasonable basis for believing misappropriation has occurred, action must
be taken without undue delay. This includes an action for injunctive relief. Static Control
Components, Inc. v. Future Graphics, LLC, No. 1:06CV00730, 2007 U.S. Dist. LEXIS 36474
(D.N.C. May 11, 2007) (injunctive relief not appropriate where employer laid off employee,
employee remained unemployed for months, turned in the former employer’s computer and
documents, and the employer delayed taking legal action for 8-12 weeks after learning that
employee was joining competitor). Under California law, if a trade secret misappropriation
action is not filed within three years after discovery of the misappropriation, the opportunity may
forever be lost. See Cal. Civ. Code § 3426.6 (providing 3-year statute of limitations for trade
secret misappropriation). This apparently will be true even if the misappropriator promises to
stop its illegal activity, initially appears to abide by its promise, and then later resumes the
misappropriation. See Glue-Fold, Inc. v. Slautterback Corp., 82 Cal. App. 4th 1018 (Cal. Ct.
App. 2000) (holding that 3-year statute of limitations under section 3426.6 is not tolled during
period of alleged suspension of misappropriation); see also Forcier v. Microsoft Corp., 123 F.
Supp. 2d 520, 524-28 (N.D. Cal. 2000). Moreover:
Restrictive Covenants and Trade Secrets
37
[W]hen the statute of limitations begins to run on some of a
plaintiff’s trade secrets claims against given defendants, the statute
also begins to run at the same time as to other trade secret claims
against those same defendants, even if there have not yet been any
acts of misappropriation of the other trade secrets, at least when
the plaintiff shared all the trade secrets with the defendants during
the same time period and in connection with the same relationships
and when the trade secrets concern related matters.
Id. at 525-26 (quoting Intermedics, Inc. v. Ventritex, Inc., 822 F. Supp. 634, 657 (N.D. Cal.
1993)). “California law assumes that once a plaintiff knows or should know that a particular
defendant cannot be trusted with one secret, it is unreasonable for that plaintiff simply to assume
that that defendant can be trusted to protect other secrets.” Id. at 1027 (quoting Intermedics, Inc.,
822 F. Supp. at 654); but see Display Research Labs., Inc. v. Telegen Corp., 133 F. Supp. 2d
1170, 1176-77 (N.D. Cal. 2001) (limitations period begins running upon discovery of actual
misappropriation, not discovery of plan to misappropriate). On certification of a question by the
Ninth Circuit Court of Appeals, the California Supreme Court held that a trade secret
infringement claim arises “only once, at the time of the initial misappropriation . . . . Each new
misuse or wrongful disclosure is viewed as augmenting a single claim of continuing
misrepresentation rather than as giving rise to a separate claim.” Cadence Design Sys., Inc. v.
Avant! Corp., 29 Cal. 4th 215 (Cal. 2002). However, California law distinguishes between the
original misappropriator and third parties who were not a part of the original misappropriation,
such as customers who purchased products containing the trade secrets and continue to use them
after learning of the misappropriation. In regard to these third parties, a California appellate
court has recently held that the statute of limitations does not begin to run until trade secret
owner first had reason to suspect that a third party of the original misappropriator had obtained
or used the software knowing, or with reason to know, that it contained the trade secrets.
Cypress Semiconductor Corp. v. Superior Court, 163 Cal. App. 4th 575 (Cal. Ct. App. 2008).
This holding prevents allowing a third party to “merely have to lie low and wait out the clock.”
Thus, to ensure that its trade secrets are protected against future misappropriation, a
company should promptly file a lawsuit against a perceived misappropriator and seek resolution
of the matter in the context of the lawsuit. Alternatively, it may be sufficient to enter into a
written agreement with the misappropriator expressly providing that the statute of limitations is
tolled until the discovery of subsequent misappropriation.
d.
Risks Associated with Civil Discovery.
Employers should be aware, before filing a trade secret misappropriation lawsuit, that
civil litigation entails the risk of further unwanted disclosure of confidential information. Before
commencing discovery, the party alleging misappropriation must identify the misappropriated
trade secrets to its adversary “with reasonable particularity.” Cal. Code of Civ. Proc.
§ 2019.210. Reasonable particularity mandated by section 2019.210 does not mean that the
Restrictive Covenants and Trade Secrets
38
party alleging misappropriation has to define every minute detail of its claimed trade secret at the
outset of the litigation. Brescia v. Angelin, 172 Cal. App. 4th 133, 145 (Cal. Ct. App. 2009).
Nor does it require a discovery referee or trial court to conduct a miniature trial on the merits of a
misappropriation claim before discovery may commence. Id. Rather, it means that the plaintiff
must make some showing that is reasonable, i.e., fair, proper, just and rational, under all of the
circumstances to identify its alleged trade secret in a manner that will allow the trial court to
control the scope of subsequent discovery, protect all parties’ proprietary information, and allow
them a fair opportunity to prepare and present their best case or defense at a trial on the merits.
Id. Where credible experts declare that they are capable of understanding the designation and of
distinguishing the alleged trade secrets from information already known to persons in the field,
the designation should, as a general rule, be considered adequate to permit discovery to
commence. Id. at 146. Section 2019.210 does not require in every case that a trade secret
claimant explain how the alleged trade secret differs from the general knowledge of skilled
persons in the field to which the secret relates. Rather, such an explanation is required only
when, given the nature of the alleged secret or the technological field in which it arises, the
details provided to identify the secret are themselves inadequate to permit the defendant to learn
the boundaries of the secret and investigate defenses or to permit the court to understand the
designation and fashion discovery. Brescia v. Angelin, at 143 (Cal. Ct. App. 2009).
Further disclosures of confidential information are likely to be required as discovery
progresses. While the court can issue a protective order to limit the use and disclosure of
confidential information disclosed through the discovery process, the possibility of inadvertent
disclosures—and even intentional ones—cannot be altogether eliminated.
Trade secret litigation also raises the possibility that a party’s proprietary or trade secret
information will be disclosed to the public. California courts have the authority to seal records
containing such information, but their authority is limited and discretionary. See Cal. Rules of
Ct. 243.1, 243.2. One court has held that, despite these rules, sealing is mandatory in trade secret
misappropriation cases because the Uniform Trade Secrets Act provides that “a court shall
preserve the secrecy of an alleged trade secret” in such cases, see In re Providian Credit Card
Cases, 96 Cal. App. 4th 292, 298-99 (2002) (citing Cal. Civ. Code § 3426.5), but employers
should nevertheless be aware of the risk of disclosure.
2.
The Inevitable Misappropriation Doctrine May Be Used to Prevent
“Threatened” Misappropriation of Trade Secrets.
Consider the following hypothetical situation: An employee with knowledge of his or
her employer’s valuable trade secrets quits to join a competitor. The new job is nearly identical
to the old job. As a result, the former employer believes that the employee will use its trade
secrets in his or her new job, whether the employee intends to or not. Moreover, the former
employer has evidence that the employee is not trustworthy or has engaged in conduct such as
taking its files or other materials belonging to it. In such situations, the employer may be able to
obtain an injunction enjoining the former employee from performing certain functions for the
Restrictive Covenants and Trade Secrets
39
competitor under an emerging legal theory called the “inevitable misappropriation” or
“inevitable disclosure” doctrine.
Employers trying to prevent the misappropriation of their trade secrets before it happens
are faced with two problems: (1) proving the “threat” (because former employees will rarely
admit that they intend to use the company’s trade secrets); and (2) obtaining meaningful relief
(since the typical “don’t use, don’t disclose” injunction will not suffice when misappropriation is
in fact “inevitable”).
Under appropriate circumstances, the inevitable misappropriation doctrine is designed to
address both these problems. It provides both a method of proving the threat of misappropriation
by circumstantial evidence and a remedy designed to prevent the irreparable injury that will
occur if the employee assumes new responsibilities and, inevitably, uses the trade secrets. The
theory can be condensed into a three-part test, whereby the former employer must prove:
1.
The former employee has knowledge of the first employer’s trade secrets.
2.
The employee’s new job duties (and the products or technology the employee is
working on) are so similar or related to those in the former position that it would
be extremely difficult not to rely on or use the first employer’s trade secrets.
3.
The former employee and the new employer cannot be depended upon to avoid
using the trade secret information.
See PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) (preliminary injunction granted
enjoining former employee from assuming certain duties at competitor because it was inevitable
that former employee would rely on plaintiff’s trade secrets).
a.
New York and Most Other States Have Adopted the Inevitable
Misappropriation Doctrine.
In New York, various courts have accepted the inevitable disclosure doctrine on a limited
basis in appropriate circumstances. For example, in DoubleClick, Inc. v. Henderson, No.
116914/97, 1997 WL 731413 (N.Y. Sup. Ct. Nov. 7, 1997), the court enjoined two former highlevel employees of an Internet advertising company from launching their own competitive
venture, or working for any other company in a competitive capacity, for a period of six
months—without even reaching the issue of whether either defendant had breached any express
non-compete or confidentiality agreement with DoubleClick. The court explained that the
central role of the defendants in DoubleClick’s operations “makes it unlikely that they could
‘eradicate [DoubleClick’s] secrets from [their] mind.” Id. at *6 (quoting Lumex, Inc., 919 F.
Supp. at 631). The court also noted that in light of the defendants’ actual acts of
misappropriation, and their “cavalier attitude toward their duties to their former employer,” there
was a reasonable inference that they would continue to use DoubleClick’s trade secret
information in their new positions. Id. Similarly, in Lumex, Inc., 919 F. Supp. at 631, the court
Restrictive Covenants and Trade Secrets
40
granted an injunction preventing a management representative from working with the plaintiff’s
competitor on the grounds that it was inevitable that the former employee would disclose trade
secret and confidential information in his effort to improve his new employer’s products. The
court wrote:
The Plaintiff’s employees testified that “it would be impossible for
Highsmith not to divulge confidential information.” The Court
agrees. The Court finds that ... there not only is a high risk, but it is
inevitable that he will disclose important ... trade secrets and
confidential information in his efforts to improve the Life Circuit
product, and aid his new employer and his own future .... [T]here
[thus exists] a high risk that in the course of working on Life
Circuit or on other Life Fitness business, he will, perhaps,
inadvertently, disclose ... trade secrets ... or even the Cybex future
prototypes. Highsmith was privy to the top secret Cybex product,
business and financial information. He cannot eradicate these
trade secrets from his mind.
Id.; see also Eastern Business Systems, Inc. v. Speciality Business Solutions, LLC, 739 N.Y.S.2d
177 (N.Y. App. Div. 2002) (issuing injunction based on inevitable disclosure doctrine, without
specifically referring to the doctrine); Monovis, Inc. v. Aquino, 905 F. Supp. 1205, 1234
(W.D.N.Y. 1994) (noting that “even assuming the best of good faith, it is doubtful whether
[defendant] could completely divorce his knowledge of the trade secrets”); Business Intelligence
Servs., Inc. v. Hudson, 580 F. Supp. 1068, 1072 (S.D.N.Y. 1984) (inevitable disclosure found by
computer software developer where employee’s new job duties with plaintiff’s competitor were
similar to former position). But see International Paper Co. v. Suwyn, 966 F. Supp. 246, 258-59
(S.D.N.Y. 1997) (refusing to issue injunctive relief under inevitable misappropriation theory
where there was no evidence that defendant would disclose any trade secret information, parties’
industry—wood and building products—is not “highly technical” or “copy cat” or “cloning”
industry, and defendant’s employment at International Paper “was driven by general managerial
expertise as opposed to highly technical, proprietary or secret information”).
In Earthweb, Inc. v. Schlack, 71 F. Supp. 2d 299 (S.D.N.Y. 1999), aff’d in part and
remanded, 205 F.3d 1322 (2d Cir. 2000), the court refused to apply the doctrine of inevitable
disclosure where the defendant-employee had signed a narrow non-compete agreement and the
plaintiff-employer was seeking to enjoin defendant’s post-employment activity beyond those
activities that were prohibited under the non-compete agreement. The court reasoned that the
plaintiff was seeking to have the court “rewrite the parties’ employment agreement under the
rubric of inevitable disclosure and thereby permit [plaintiff] to broaden the sweep of its
restrictive covenant.” Id. at 311. The court rejected the request and refused to allow plaintiff
from “mak[ing] an end-run around the agreement by asserting the doctrine of inevitable
disclosure as an independent basis for relief.” Id.
Restrictive Covenants and Trade Secrets
41
Relying on the decision in Earthweb, the court in Marietta Corporation v. Fairhurst, 754
N.Y.S.2d 62 (N.Y. App. Div. 2003), refused to apply the inevitable disclosure doctrine. In
Marietta, the plaintiff, a supplier of hotel amenities, commenced an action for misappropriation
of trade secrets against its former Vice President for Sales and Marketing after he accepted a
similar position with one of Marietta’s chief competitors. Although the employee was not
subject to any non-compete agreement and although the trial court found no persuasive evidence
that the employee had disclosed any of the plaintiff’s confidential information, the court granted
the plaintiff’s motion for a preliminary injunction, enjoining the employee from working for the
competitor for a period of 11 months from the date of the court’s injunction order. The trial
court relied exclusively on the inevitable disclosure doctrine in issuing the injunction, finding
that the employee “is undeniably in possession of plaintiff’s trade secrets, and it appears
extremely likely that he would use those secrets—if only unconsciously—in carrying out his
duties with [the competitor], to the [plaintiff’s] unfair advantage.” Marietta Corp. v. Fairhurst,
Nos. 37265, RJI No. 2002-0229-M, 2002 WL 31056732, *4 (N.Y. Sup. Ct., Aug. 23, 2002). The
Appellate Division vacated the injunction on appeal, finding no evidence of a breach of the
employee’s confidentiality agreement or that the confidential information at issue constituted
trade secrets. Marietta, 754 N.Y.S.2d at 62. The court further rejected the application of the
inevitable disclosure doctrine and suggested that the inevitable disclosure doctrine had not yet
been adopted by New York State courts. See also Renaissance Technologies Corp. v.
Millennium Partners, LP, 2004 WL 4963292 (N.Y. Sup. Ct. March 19, 2004) (refusing to apply
inevitable disclosure doctrine).
In American Airlines, Inc. v. ImHof, see supra, the court noted that application of the
inevitable disclosure doctrine required consideration of:
(1) the strength of the showing that the former employee once knew
– and still knows – information, that use of which on behalf of a
competitor would damages the former employer, a factor that
includes the issues whether the information in question is highly
technical or specialized scientific data as opposed to perhaps less
valuable and sensitive sales or general business management
information, (2) the degree of similarity between the employee’s
former and newly assumed duties, including whether the newly
assumed duties are to be performed on behalf of a direct
competitor of the former employer, … (3) the presence or absence
of deliberate misappropriation, [and] … [(4)] anything else
pertinent to a particular case.
620 F. Supp. 2d at 582. Considering these factors, the court found no irreparable harm and
therefore denied American’s motion for a preliminary injunction in all respects. First, none of
the documents retained by defendant included any substantive information that if remembered
would be sufficient to create a clear showing of irreparable harm. Next, the court rejected, as
nothing more than vague generalities, American’s assertion that the employee was exposed to an
Restrictive Covenants and Trade Secrets
42
abundance of “other confidential information” that would warrant an injunction, such as
American’s strategies for contacts with certain major financial institutions including information
regarding its program for tiering and tying with J.P. Morgan, American’s practices of “stealth
pricing,” the expiration date of key corporate contracts, specific overseas markets targeted by
American, and the details of American’s relationship with Credit Suisse. Even though the
positions at his former company and new company were substantially similar, American failed to
provide sufficiently detailed information about what the employee may have allegedly known
and why it should be protected as confidential.
Other jurisdictions also have shown an increasing willingness to consider the inevitable
misappropriation doctrine among the panoply of remedies available to the employer seeking to
legitimately protect disclosure of trade secrets. See, e.g., Proctor & Gamble Co. v. Stoneham,
747 N.E.2d 268, 278-80 (Ohio Ct. App. 2000) (“An actual threat of harm exists when an
employee possesses knowledge of an employer’s trade secrets and begins working in a position
that causes him or her to compete directly with the former employer or the product line that the
employee formerly supported.”); Cardinal Freight Carriers, Inc. v. J.B. Hunt Transp. Servs.,
Inc., 987 S.W.2d 642, 646-47 (Ark. 1999) (“evidence and findings are more than sufficient to
show a threatened or inevitable misappropriation of [plaintiff’s] trade secrets”); Merck & Co. v.
Lyon, 941 F. Supp. 1443, 1457-62 (M.D.N.C. 1996) (finding inevitable disclosure doctrine
applicable in absence of noncompetition agreement); La Calhène, Inc. v. Spolyar, 938 F. Supp.
523, 531 (W.D. Wis. 1996) (“[Defendant] has such intimate knowledge of plaintiff’s business
that he could not engage in a competing business, selling to the same customers, without
inevitably relying on his knowledge of plaintiff’s trade secrets”); Neveux v. Webcraft Techs.,
Inc., 921 F. Supp. 1568, 1573 (E.D. Mich. 1996) (refusing to preliminarily enjoin enforcement of
noncompetition agreement where “it would be virtually impossible for plaintiff to service
[certain customer accounts] for [new employer] without using confidential information obtained
as a result of his [prior] employment”); Diversified Fastening Sys., Inc. v. Rogge, 786 F. Supp.
1486, 1492-93 (N.D. Iowa 1991) (court enjoined employee from working for competitor of
former employer because there was threatened disclosure of former employer’s product
development and marketing trade secrets); Ackerman v. Kimball Int’l, Inc., 652 N.E.2d 507, 51011 (Ind. 1995) (affirming injunction enjoining defendant from working for any competitor of his
former employer for one year because threat of misappropriation arose due to defendant’s “predeparture harvesting of [plaintiff’s] proprietary information” and, if misappropriation occurred,
no remedy at law would be adequate).
b.
California Has Rejected the Inevitable Misappropriation
Doctrine.
A California state court recently addressed—and rejected—the inevitable disclosure
doctrine for the first time in a published opinion. See Whyte v. Schlage Lock Co., 101 Cal. App.
4th 1443 (Cal. Ct. App. 2002). In Whyte, the court held that “this doctrine is contrary to
California law and policy because it creates an after-the-fact covenant not to compete restricting
employee mobility.” Id. at 1447. (For a discussion of the presumption under California law that
Restrictive Covenants and Trade Secrets
43
such covenants are invalid, see Section III.D., supra.) Surprisingly, the court did not rely
primarily on California Business & Professions Code section 16600, a statute designed to foster
employee mobility. The court found that the policy embodied therein might be offset by the
conflicting policy in favor of protecting trade secrets. See Whyte, 101 Cal. App. 4th at 1462.
Rather, “[t]he chief ill in the covenant not to compete imposed by the inevitable disclosure
doctrine is its after-the-fact nature: The covenant is imposed after the employment contract is
made and therefore alters the employment relationship without the employee’s consent.” Id. at
1462-63.
The holding in Whyte is consistent with the result in several federal cases that preceded it,
in which the inevitable disclosure doctrine was likewise rejected under California law. See
Globespan, Inc. v. O’Neill, 151 F. Supp. 2d 1229, 1235-36 (C.D. Cal. 2001); Danjaq LLC v.
Sony Corp., 50 U.S.P.Q.2d 1638, 1640 n.1 (C.D. Cal. 1999); Bayer Corp. v. Roche Molecular
Sys., Inc., 72 F. Supp. 2d 1111, 1117-20 (N.D. Cal. 1999); Computer Sciences Corp. v.
Computer Assocs. Int’l, Inc., Nos. CV 98-1374, 98-1440, 1999 WL 675446, *16 (C.D. Cal. Aug.
13, 1999); see also Surgidev Corp. v. Eye Tech., Inc., 648 F. Supp. 661, 679, 695 (D. Minn.
1986), aff’d, 828 F.2d 452 (8th Cir. 1987); Maxxim Med., Inc. v. Michelson, 51 F. Supp. 2d 773,
786 (S.D. Tex.), revd. without reported opn., 182 F.3d 915 (5th Cir. 1999); see also Meissner
Filtration Prods., Inc. v. Harrington, No. B170707, 2004 WL 2189249 (Cal. Ct. App. Sept. 30,
2004) (refusing to apply inevitable disclosure doctrine). The holding in Whyte was also foretold
by the California Supreme Court’s decision to depublish the opinion in Electro Optical Indus.,
Inc. v. White, 76 Cal. App. 4th 653 (Cal. Ct. App. 1999), in which a California appellate court
had adopted the inevitable disclosure doctrine as “rooted in common sense.”
The decision in Whyte does not leave California employers without remedies when a key
employee begins working for a competitor. Much of the evidence that normally would be used
to invoke the inevitable disclosure doctrine may still be used to show “threatened”
misappropriation, for which an injunction may be granted under California’s trade secret statute.
See Cal. Civ. Code § 3426.2(a); see also Whyte, 101 Cal. App. 4th at 1458 (“We emphasize our
decision is not a final adjudication of the issue of actual or threatened misappropriation . . . and
we have serious concerns over evidence in the record . . . .”). In addition, the Whyte opinion
could be read to mean that a contractual provision seeking to implement the inevitable disclosure
doctrine might be enforceable.
A California employer hoping to protect itself against “threatened” misappropriation
must take certain steps immediately after the employee announces an intention to leave. For
example, it is crucial that certain questions be asked of the departing employee regarding his new
job, his knowledge of the ex-employer’s trade secrets, and the like. A carefully planned exit
interview and a quick but thorough factual investigation is vital to the ex-employer’s case. See
Section V.B., infra.
California employers must be careful, however, to avoid bringing specious claims in
subjective bad faith. In FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (Cal. Ct. App.
Restrictive Covenants and Trade Secrets
44
2009), two employees – Parrish and Fitzgibbons – decided to leave FLIR to start their own
company mass producing similar devises as those produced by FLIR. The employees offered
FLIR a noncontrolling interest in the new venture, but FLIR rejected and wished Parrish and
Fitzgibbons success in their new endeavor. Parrish and Fitzgibbons entered into negotiations
with a third party to acquire licensing, technology, and manufacturing facilities to start their
business. Fearful that the new business would undermine FLIR's market, FLIR sued for
injunctive relief and damages. Upon hearing of the lawsuit, the third party terminated business
discussions with Parrish and Fitzgibbons. In August, 2006, Parrish and Fitzgibbons told FLIR
that they were not going forward with their venture. FLIR dismissed the damage causes of
action but proceeded to trial for a permanent injunction. The trial court found no
misappropriation or threatened misappropriation of trade secrets. According to the court, it was
uncontroverted that the employees received no funding for their company, did not start a new
business, had no employees or customers, did not lease a facility or develop technology, and did
not design, produce, sell, or offer to sell competing devises. Because there was no showing of
actual damages, misappropriation, threatened misappropriation, or imminent harm, the court
determined that FLIR filed an objectively specious action for an anticompetitive purpose. The
court also found that FLIR brought the action in bad faith based on a theory of “inevitable
disclosure,” a doctrine not recognized by California courts because it contravenes a strong public
policy of employee mobility. Accordingly, the trial court granted the employees attorney's fees
and costs. The court of appeal affirmed the award of attorney fees and costs, and awarded costs
and attorney fees on appeal to the former employees.
3.
Other Potential Remedies Available to the Employer
a.
Common Law Duty of Loyalty and Law of Unfair
Competition.
In many states, including California and New York, two common law doctrines also
protect an employer from the misappropriation of confidential business information and trade
secrets by an employee: the employee’s duty of loyalty owed to his employer and the law of
unfair competition.
Every employee owes a duty of loyalty to his employer. E.g. Bancroft-Whitney Co. v.
Glen, 64 Cal. 2d 327, 346 n.10 (Cal. 1966) (discussing Restatement (Second) of Agency § 393
cmt. e (1958)); Duane Jones Co. v. Burke, 117 N.E.2d 237 (N.Y. 1954); Fowler v. Varian
Assocs., Inc., 196 Cal. App. 3d 34, 41 (Cal. Ct. App. 1987); Frederick Chusid & Co. v. Marshall
Leeman & Co., 279 F. Supp. 913, 918 (S.D.N.Y. 1968). The duty of loyalty requires that an
employee exercise the utmost good faith and undivided loyalty in the performance of his duties,
and prohibits him from acting in any manner inconsistent with the employer’s interests. See
Maritime Fish Prods., Inc. v. World-Wide Fish Prods., Inc., 474 N.Y.S.2d 281, 285 (N.Y. App.
Div. 1984) (“It is a firmly established principle in the law of this State that [an employee] is
prohibited from acting in any manner inconsistent with his agency or trust and is at all times
Restrictive Covenants and Trade Secrets
45
bound to exercise the utmost good faith and loyalty in the performance of his duties.”) (internal
quotation omitted).
Furthermore, all confidential information an employee acquires by reason of employment
is the property of the employer, and the employee holds it in trust for the employer. The
employee cannot use the confidential information in violation of this trust. Thus, the employee
may not divulge or use confidential business information or trade secrets, or solicit customers
acquired by reason of his employment and exploit them for the benefit of a competitor. “[A]n
employee’s use of an employer’s trade secrets or confidential customer information can be
enjoined even in the absence of a restrictive covenant when such conduct violates a fiduciary
duty owed by the former employee to his former employer.” Churchill Communications Corp.
v. Demyanovich, 668 F. Supp. 207, 211 (S.D.N.Y. 1987) (citations omitted); see also 7th Sense
v. Liu, 631 N.Y.S.2d 835, 836 (N.Y. App. Div. 1995) (enjoining defendant, plaintiffs’ former
officer and director, from competing against plaintiffs because defendant’s resignation “did not
relieve him of his fiduciary obligations or liability for his acts of misappropriation” and because
the defendant “was not entitled to directly and unfairly compete with [plaintiffs] in bad faith for
the very purpose of misappropriating the confidential information pertaining to plaintiffs’
business obtained during his employment”); Arnold’s Ice Cream Co. v. Carlson, 330 F. Supp.
1185, 1188 (E.D.N.Y. 1971) (former employee enjoined from competing against former
employer where court found that such competition constituted breach of duty of loyalty);
Frederick Chusid & Co. v. Marshall Leeman & Co., 326 F. Supp. 1043, 1060-61 (S.D.N.Y.
1971) (court issued injunction barring former employees from inducing current employees to
break contracts with plaintiff because such defendants had breached their relationship of
confidence with plaintiff); Tour & Study, Inc. v. Hepner, 432 N.Y.S.2d 148, 149 (N.Y. App. Div.
1980) (three-year injunction against solicitation of customers held to be proper despite absence
of restrictive covenant).
The duty of loyalty also prohibits a current employee who plans to leave for new
employment from soliciting his co-workers to join him before he departs. In GAB Business
Servs., Inc. v. Lindsey & Newsom Claim Servs., Inc., 83 Cal. App. 4th 409 (Cal. Ct. App. 2000),
a regional vice-president of GAB Business Services, Inc. received a job offer from Lindsey &
Newsom Claim Services. Before leaving GAB, he solicited 17 lower-level employees to join
him at Lindsey. The group left GAB en masse. The court held that any corporate officer who
participates in management of the corporation and exercises discretionary authority owes a
fiduciary duty to the employer. Id. at 419-20. The fiduciary duty ends only when the officer
resigns or is removed from office. Id. at 421. Under these principles, the regional vice-president
owed a fiduciary duty to GAB and could be found to have breached that duty by soliciting his
co-workers to join Lindsey. Id. at 421-24.
The courts also have concluded that a former employee’s improper use of confidential
business information or trade secrets constitutes unfair competition. See Comprehensive
Community Dev. Corp. v. Lehach, 636 N.Y.S.2d 755, 756 (N.Y. App. Div. 1996) (employee
misappropriated patient lists); Rao v. Verde, 635 N.Y.S.2d 660, 661 (N.Y. App. Div. 1995)
Restrictive Covenants and Trade Secrets
46
(prospective buyers continued to use confidential information from plaintiff’s patient list);
Advanced Magnification Instruments, Ltd. v. Minuteman Optical Corp., 522 N.Y.S.2d 287, 290
(N.Y. App. Div. 1987) (employee’s illegal appropriation or copying of employer’s files or
confidential information constitutes unfair competition); Allan Dampf, P.C. v. Bloom, 512
N.Y.S.2d 116, 117 (N.Y. App. Div. 1987) (unfair competition found where employee
misappropriated and exploited customer lists). An unfair competition claim may also be brought
against an employee’s new employer who knowingly reaps the benefits of the employee’s breach
of his or her duty of loyalty to the former employer. See GAB Business Servs., Inc., 83 Cal. App.
4th at 424-25 (employer liable for unfair competition in connection with employee’s solicitation
of co-workers while he was still working for former employer); Design Strategies, Inc. v. Davis,
384 F. Supp. 2d 649 (S.D.N.Y. 2005) (sales manager who diverted contract to competitor and
then took job with competitor breached his duty of loyalty to his original employer and must pay
back his salary for period in which he was working to divert contract).
Reliance on the common law of breach of the duty of loyalty and/or unfair competition
alone does not adequately protect the employer since these doctrines do not prevent an exemployee from competing directly with a former employer. In fact, courts have stated that “[i]t
is fundamental that absent a [non-compete] covenant, ... an employee is free to compete with his
or her former employer unless trade secrets are involved or fraudulent methods are employed.”
Walter Karl, Inc. v. Wood, 528 N.Y.S.2d 94, 97 (N.Y. App. Div. 1988); see also Navigant
Consulting, Inc. v. Wilkinson, 508 F.3d 277 (5th Cir. 2007) (court found liability where
employees procured an office lease for employer while at the same time negotiating a secret deal
to sell the business that would occupy the offices and planning to go to work for the buyer).
Accordingly, the common law does not prevent an employee from seeking a job with a
competing company or prohibit the employee from establishing a competing corporation. As
long as an ex-employee does not use company time, facilities or proprietary secrets to build a
competing business, the common law duties owed to the employer are not violated.
Because the common law only partially offers an employer protection from a former
employee, contractual agreements provide the best (and most comprehensive) protection against
an ex-employee’s customer solicitation and unauthorized use of confidential business
information, trade secrets and inventions.
b.
Tortious Interference with Contractual Relations
By its terms, the general rule allowing competitors to solicit an employer’s
workforce may not apply when the employee being solicited is not an at-will employee, but
instead is employed under an express employment contract for a term of years. A competitor’s
solicitation of an employee with knowledge that he or she is employed under an express contract
may give rise to liability for tortious interference with contractual relations or the tort of inducing
breach of contract. See Dryden v. Tri-Valley Growers, 65 Cal. App. 3d 990, 995 (Cal. Ct. App.
1977); Moye v. Eure, 204 S.E.2d 221, 223 (N.C. Ct. App. 1974) (competition does not mean
“privilege to induce an employee to breach his contract with plaintiff;” however, liability denied
Restrictive Covenants and Trade Secrets
47
because no contract existed); Ryan, Elliot and Co. v. Leggat, McCall & Werner, Inc., 396 N.E.
2d 1009 (Mass. App. Ct. 1979) (recruiting competitor’s employees known to be under a fixed
term employment contract is actionable; liability denied because defendant did not know of
term-nature of contract); Restatement of Torts (Second) § 768; Restatement of Agency (Second)
§ 393, comment e (“An employee is subject to liability if, before or after leaving the
employment, he causes fellow employees to break their contracts with the employer”).
It is worth noting here, however, that absent proof of some independently wrongful act
(such as the misappropriation of a trade secret or the breach of a non-solicit agreement), a
competitor who solicits another company’s at-will employees cannot be liable in California for
tortious interference of contract or prospective economic advantage. E.g., Reeves v. Hanlon, 33
Cal. 4th 1140, 1152-53 (Cal. 2004); Korea Supply Co., v. Lockheed Martin Corp., 29 Cal. 4th
1134, 1158-59 (Cal. 2003). Other states may be more receptive to such claims. See, e.g.,
Reading Radio, Inc. v. Fink, 833 A.2d 199, 212 (Pa. Super. Ct. 2003); Town & Country House &
Home Service, Inc. v. Newberry, 147 N.Y.S.2d 550 (N.Y. 1955).
c.
Common Law Misappropriation
Employers may also find the tort of common law misappropriation an effective method to
prevent the use or disclosure of their proprietary information.
Unlike trade secret
misappropriation, common law misappropriation does not require a plaintiff to prove either
(1) secrecy or (2) independent economic value. Instead, “the elements of a claim for
misappropriation under California law consist of the following: (a) the plaintiff invested
substantial time, skill or money in developing its property; (b) the defendant appropriated and
used the plaintiff’s property at little or no cost to the defendant; (c) the defendant’s appropriation
and use of the plaintiff’s property was without the authorization or consent of the plaintiff; and
(d) the plaintiff can establish that it has been injured by the defendant’s conduct.” United States
Golf Ass’n v. Arroyo Software Corporation, 69 Cal. App. 4th 607, 618 (Cal. Ct. App. 1999)
(citing Balboa Ins. Co. v. Trans Global Equities, 218 Cal. App. 3d 1327, 1342 (Cal. Ct. App.
1990)).
In United States Golf Association, the plaintiff United States Golf Association (“USGA”)
provided software that calculated handicaps for golfers. USGA spent ten years and over $2
million dollars in developing a superior handicap system. In addition, they spent substantial time
and money promoting and advertising their handicap formula and the USGA trademark. The
defendant, Arroyo Software Corporation (“Arroyo”), began marketing a computer software
program for golfers known as “Eagle Trak.” Instead of developing its own handicapping
formula, Arroyo appropriated the USGA handicap system without USGA’s permission and
incorporated the software into its own system. The court held that Arroyo was liable for
common law misappropriation. The court’s analysis turned on whether USGA had been injured.
The court held it had been because consumers were likely to believe the Eagle Trak handicap
system was issuing USGA approved handicaps to them (causing damage to USGA’s reputation).
USGA did not need to prove that the information was secret or derived independent economic
Restrictive Covenants and Trade Secrets
48
value by virtue of being secret. Moreover, the court did not require USGA and Arroyo to be
direct competitors, as many unfair competition torts do.
d.
Antitrust Law
Under certain circumstances, the federal antitrust laws may prohibit an employer from
raiding a competitor’s employees. That is, an employer may have a claim under section 2 of the
Sherman Act if a competitor with monopoly power acquires employees of the employer not for
the purpose of using their talents but for the purpose of denying the employees’ talents to the
employer. See Universal Analytics, Inc. v. MacNeal-Schwendler Corp., 914 F.2d 1256, 1258-59
(9th Cir. 1990). The utility to employers of a claim of predatory hiring may be limited because it
only applies to competitors with monopoly power and because evidence of predatory intent, e.g.,
the competitor’s nonuse of the acquired employee, may be difficult to establish. Id.
4.
Effect of Trade Secret Preemption
Employers seeking remedies for trade secret misappropriation may find relief under the
“common law” unavailable in the future. In the last five years, several courts throughout the
country have issued opinions finding that common law claims are preempted by the state’s
governing trade secrets statute.
Courts have justified preempting claims by reasoning that the state’s version of the
UTSA constitutes comprehensive legislation on the issue that therefore supplants the common
law. See I.E. Assocs. v. Safeco Title Ins. Co., 39 Cal. 3d 281, 285 n.3 (Cal. 1985) (quoting Justus
v. Atchison, 19 Cal. 3d 564, 574-75 (Cal. 1977)). “‘[G]eneral and comprehensive legislation,
where course of conduct, parties, things affected, limitations and exceptions are minutely
described, indicates a legislative intent that the statute should totally supersede and replace the
common law dealing with the subject matter.’” Id. (quoting 2A Sutherland, Statutory
Construction (Sands 4th ed. 1984) § 50.05, pp. 440-41).
In particular, several district courts applying California law have held that “all state law
claims based on the same nucleus of facts as the trade secrets claim are preempted under
California’s UTSA.” Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1034 (N.D. Cal.
2005) (vacated on other grounds); Airdefense, Inc. v. Airtight Networks, Inc., No. C 05-04615,
2006 U.S. Dist. LEXIS 55364, at * 11 (N.D. Cal. July 26, 2006) (claims based on the same
factual allegations as the claim for misappropriation of trade secrets are preempted); Callaway
Golf Co. v. Dunlop Slazenger Group Ams., Inc., 318 F. Supp. 2d 216, 219-20 (D. Del. 2004)
(California UTSA preempts unjust enrichment, conversion, and negligence claims); Ernest
Paper Prods. v. Mobil Chem. Co., No. 95-7918, 1997 U.S. Dist. LEXIS 21781, *21-28 (C.D.
Cal. Dec. 2, 1997) (California UTSA preempts intentional interference with economic relations
and unfair business practices claim under Business & Professions Code § 17200); Convolve, Inc.
v. Compaq Computer Corp., No. 00 CV 5141, 2006 U.S. Dist. LEXIS 13848, at *22-3 (S.D.N.Y.
Mar. 29, 2006) (“the California UTSA, like other UTSAs, preempts all claims based on
Restrictive Covenants and Trade Secrets
49
misappropriation of trade secrets that are not specifically exempted by its § 3426.7(b) savings
clause.”)
District courts in other states have also issued opinions preempting common law claims
for misuse of confidential information. See, e.g., Compuware Corp. v. IBM Corp., No. 02-CV70906, 2003 WL 23212863, *8 (E.D. Mich. Dec. 19, 2003) (preempting tortious interference
claim) (UTSA’s purpose was to “codify all the various common law remedies for theft of ideas”
so that “plaintiffs who believe their ideas were pilfered may resort only to the UTSA”); Bliss
Clearing Niagara, Inc. v. Midwest Brake Bond Co., 270 F. Supp. 2d 943, 946-47 (W.D. Mich.
2003); Auto Channel, Inc. v. Speedvision Network, LLC, 144 F. Supp. 2d 784, 789 (W.D. Ky.
2001) (preempting unfair competition claim under Kentucky UTSA) (allowing a plaintiff to
plead common law theories for information covered by its trade secret claim “would undermine
the uniformity and clarity that motivated the creation and passage of the Uniform Act.”); Penalty
Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284, 1297-98 (11th Cir. 2003) (preempting
conversion claim under Georgia UTSA).
In analyzing whether claims are preempted, some courts have held that “the issue is not
what label the plaintiff puts on their claims. Rather, the court is to look beyond the label and to
the facts being asserted in support of the claims.” Convolve, No. 00 CV 5141, 2006 U.S. Dist.
LEXIS 13848, at *23; Embarcadero Mun. Improvement Dist. v. County of Santa Barbara, 88
Cal. App. 4th 781, 793 (Cal. Ct. App. 2001) (rejecting party’s attempt to avoid statute of
limitations by labeling a cause of action as one for a constructive trust). Courts have held that
“all common law claims that are based on the same conduct which could support a UTSA cause
of action” even if the plaintiff fails to bring, or characterize its claims as, a misappropriation of
trade secrets cause of action. Convolve, No. 00 CV 5141, 2006 U.S. Dist. LEXIS 13848, at *25
(emphasis added). In other words, “if the operative facts are arguably cognizable under the
[UTSA], any common law claim that might have been available on those facts in the past now no
longer exists.” Id. (emphasis added); Bliss Clearing Niagara, 270 F. Supp. 2d at 948.
In AccuImage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941, 953 (N.D. Cal.
2003), the court reviewed the “eleven provisions of the UTSA” before holding that “[t]he
comprehensive structure and breadth of the UTSA provides strong evidence of legislative intent
to supersede claims for common law misappropriation after the enactment of the UTSA.” 260 F.
Supp. 2d at 953. In doing so, the court held that a common law misappropriation claim was
preempted. However, the AccuImage court did not limit its analysis to claims for common law
trade secret misappropriation. Rather, according to that court, all “common law remedies based
on misappropriation of trade secrets are superseded.” Id; see also, K.C. Multi Media v. Bank of
America, 171 Cal. App. 4th 939 (Cal. Ct. App. 2009) (section 3426.7 implicitly preempts
alternative civil remedies based on trade secret misappropriation).
In K.C. Multi Media v. Bank of America, the court addressed whether California's UTSA
(“CUTSA”) should be interpreted narrowly or broadly in favor of preemption. According to
appellants, two views exist on the preemption issue. The first, the broad view, holds that a cause
Restrictive Covenants and Trade Secrets
50
of action is preempted if it is based on the same set of facts as the trade secrets claim. See
Callaway Golf v. Dunlop Slazenger Group Americas, supra, 318 F. Supp. 2d 216, 219-20 (D.
Del. 2004); and Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1034 (N.D. Cal. 2005)
(vacated on other grounds). The second view, the narrow interpretation of preemption followed
in Colorado, Minnesota, and Wisconsin, holds that a common law cause of action can be based
on the same nucleus of facts as the trade secrets claim, so long as it alleges new facts, different
injuries and damages, or a different theory of liability. Powell Products, Inc. v. Marks, supra,
948 F. Supp. 1469 (D. Co. 1996); Micro Display Systems, Inc. v. Axtel, Inc., 699 F. Supp. 202
(D. Minn. 1988); Burbank Grease Services, LLC v. Sokolowski, 717 N.W.2d 781 (Wis. 2006).
Appellants argued that California’s version does not contain broad preemption language, but
rather lists exceptions to preemption. The court, however, disagreed and held that CUTSA’s
“comprehensive structure and breadth” suggests a legislative intent to occupy the field.
Depending on the particular facts pleaded, CUTSA can operate to preempt the specific common
claims – breach of confidence, interference with contract, and unfair competition – asserted in
this case that are based on the same nucleus of facts as a misappropriation of trade secrets claim.
Some courts have held that plaintiffs cannot avoid preemption by labeling the material
allegedly misappropriated as merely “confidential” and not a trade secret. They hold that “the
UTSA’s preemption provision has generally been interpreted to abolish all free-standing
alternative causes of action for theft or misuse of confidential, proprietary, or otherwise secret
information falling short of trade secret status.” Hauck Manufacturing Co. v. Astec Indus., Inc.,
375 F. Supp. 2d 649, 655 (E.D. Tenn. 2004); Bliss Clearing Niagara, 270 F. Supp. 2d at 948-949
(“the disputed status of information as a trade secret does not preclude a court from determining
whether a claim or claims are displaced by the [UTSA].”); Thomas & Betts Corp. v. Panduit
Corp., 108 F. Supp. 2d 968, 972-973 (N.D. Ill. 2000) (holding that breach of fiduciary duty claim
was preempted by the UTSA where the plaintiff simply alleged that the defendant “took,
disclosed and used confidential information” as opposed to trade secrets); Learning Curve Toys,
L.P. v. PlayWood Toys, Inc., No. 94 C 6884, 1999 U.S. Dist LEXIS 11262, at *3 (N.D. Ill. July
20, 1999) (holding that a claim may be displaced by the UTSA even if the information at issue
does not constitute a trade secret); Composite Marine Propellers, Inc. v. Van Der Woude, 962
F.2d 1263, 1265 (7th Cir. 1992) (“[UTSA] has abolished all common law theories of misuse of
[secret] information. Unless defendants misappropriated a trade secret, they did no legal
wrong.”); BioCore, Inc. v. Khosrowshahi, 96 F. Supp. 2d 1221, 1238 (D. Kan. 2000) (“Even if
confidential information can be something less than a trade secret, it must at least be a trade
secret to give its owner a property right in it”).
5.
Criminal Statutes.
a.
Federal Statutes.
Recognizing that domestic and international theft of intellectual property is on the rise
and that such information must be protected to ensure continued investment in research and
development, Congress enacted the Economic Espionage Act of 1996. See 18 U.S.C. §§ 1831 et
Restrictive Covenants and Trade Secrets
51
seq. The Act makes the theft of trade secrets a federal crime and provides severe penalties for
such activity.
Section 1832 targets domestic trade secret theft and prohibits such acts as taking,
copying, downloading, uploading, and possessing, without authorization, a known stolen trade
secret that is related to a product in interstate or foreign commerce. Trade secret theft is
punishable by a fine and up to ten years in prison. On the other hand, § 1831 prohibits the same
acts if they are done on behalf of a foreign government or agent (i.e. economic espionage).
Economic espionage may result in up to a $500,000 fine and 15 years in prison.
Employers are often concerned that the confidentiality of their trade secrets will be
compromised in the course of a criminal investigation or prosecution. Fortunately, there are
safeguards established to protect against the disclosure of a victim company’s trade secrets in
criminal proceedings. The Attorney General can seek an order or take other necessary and
appropriate action to preserve the confidentiality of the trade secrets. 18 U.S.C. § 1835. The
Attorney General may also file a civil action to obtain appropriate injunctive relief against any
violation of the Act. 18 U.S.C. § 1836.
Federal prosecutors have applied the Act in several instances, including cases involving
PPG Industries, Inc. (two individuals pleaded guilty to attempting to sell proprietary information
to a rival), Bristol-Myers Squibb Co. (involving alleged theft of trade secrets relating to a new
shaving system), and Avery Dennison Corp. (involving alleged theft of trade secrets relating to
self-stick postage stamps).
The Computer Fraud and Abuse Act, 18 U.S.C. § 1030, is another source of criminal
penalties for certain types of trade secret misappropriation. It provides that “[w]hoever . . .
intentionally accesses a computer without authorization or exceeds authorized access, and
thereby obtains . . . information from any protected computer if the conduct involved an
interstate or foreign communication . . . shall be punished” as provided in the statute. 18 U.S.C.
§ 1030(a)(2)(C). It was held in one case that the statute applied to the misappropriation of trade
secrets by an employee who used his work computer to obtain his employer’s trade secrets and
email them to a future employer. See Shurgard Storage Centers, Inc. v. Safeguard Self Storage,
Inc., 119 F. Supp. 2d 1121 (W.D. Wash. 2000). Recently, another court has clarified that a
computer fraud claim must show an unauthorized procurement or alteration of information, not
merely misuse or misappropriation. Brett Senior & Assocs. v. Fitzgerald, No. 06-1412, 2007
U.S. Dist. LEXIS 50833 (D. Pa. July 13, 2007) (because employer allowed employee full access
to computers until he left the employer, the employee neither accessed the computer system
without authorization nor exceeded his authorized access). The statute also creates a civil
remedy. See Section IV.B.1.a, supra.
Announcements about recent prosecutions and other useful information about computerrelated crime can be found at www.cybercrime.gov.
Restrictive Covenants and Trade Secrets
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b.
California Statutes.
In California, many district attorneys’ offices are focusing their attention on the
prosecution of high tech crimes, which include trade secret thefts. The unauthorized use or
disclosure of an employer’s trade secrets by either a current or former employee can be
prosecuted under such statutes as California Penal Code sections 499c and 502(c)(2).
Section 499c applies to general acts of trade secret misappropriation. The statute makes
it a crime to steal, use, or copy a trade secret without the authorization of the owner. Cal. Pen.
Code § 499c(b). Violation of the statute is punishable by up to a $5,000 fine and time in either
state prison or county jail. Id. § 499c(c). Indeed, a jail sentence is mandatory if the value of the
stolen trade secrets exceeds a specified amount. See Cal. Pen. Code § 1203.044; People v.
Farell, 28 Cal. 4th 381 (Cal. 2002). Section 499c was amended in 1996 to make it clear that
both technical and non-technical trade secrets are protected by the statute.
Section 502 is targeted toward what are commonly referred to as Computer Crimes.
Today, many of an employer’s trade secrets are maintained in computer data systems. The
legislative intent in enacting section 502 was to expand the degree of protection afforded to
businesses against persons who tamper with, interfere with, or gain unauthorized access to
companies’ computer data and computer systems. See Cal. Pen. Code § 502(a). A current or
former employee who knowingly accesses and without permission takes, copies or makes use of
any data from a computer, computer system or computer network could possibly be in violation
of the statute. See id. § 502(c)(2). However, there is no criminal violation of this section if a
current employee is acting within the scope of his or her lawful employment. See id.
§ 502(h)(1).
As in federal prosecutions, California recognizes the need to protect the confidentiality of
trade secrets in state prosecutions. See Cal. Evid. Code §§ 1060 et seq. To obtain such
protection, the trade secret owner may file a motion for a protective order or the District
Attorney may file such a motion on the owner’s behalf. See id. § 1061(b)(2). Further, the trade
secret owner or the District Attorney on behalf of the owner may file a motion to exclude the
public from any portion of a criminal proceeding in which the trade secret would otherwise be
disclosed to the public. See id. § 1062(a). The moving party must demonstrate that there is a
substantial probability that disclosure of the trade secret would cause serious harm, and the court
must find that there is no overriding public interest in an open proceeding. Id. Motions to
exclude the public are very difficult to obtain and are rarely granted. Under California Evidence
Code section 1063, the District Attorney can request the sealing of articles protected by a
protective order entered pursuant to sections 1060 or 1061.
Although district attorneys’ offices recognize the need to prosecute crimes such as trade
secret thefts, most offices have limited financial and technical resources to pursue these cases.
To overcome these problems, it is not uncommon for employers who are victims of trade secret
thefts to want to offer their resources and expertise to prosecutors. The California Supreme
Restrictive Covenants and Trade Secrets
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Court has recognized that victims of commercial and corporate crimes often assist prosecutions
by collecting and organizing necessary information from internal sources. See People v.
Eubanks, 14 Cal. 4th 580, 598 (Cal. 1996). However, such efforts should not include financial or
expert assistance. If an employer provides technical expertise or financial assistance or
otherwise becomes intricately involved in the investigation and prosecution of a former
employee for trade secret theft, a court could find that the district attorney’s office that accepted
this assistance has a conflict of interest. The district attorney’s office may then be recused from
the case. A recusal would cause a delay and would likely have an impact on the overall
prosecution of the case. The longer a trade secret prosecution is delayed, the harder it is to
ensure that confidentiality is maintained throughout the case.
Finally, the employer should take into consideration that proceeding in the criminal arena
for trade secret theft involves a complete loss of control over the matter. All decisions on how
the case is to be handled will be strictly in the hands of the government prosecutors, the
employee/defendant, and the court.
The first major test of California’s trade secrets theft statutes ended successfully for the
prosecution in May 2001. The defendants—Avant Corp., its CEO, and six other individuals—
were charged under Section 499c with stealing computer code from Cadence Design Systems,
Inc., the individuals’ former employer. After years of legal maneuvering, the defendants entered
no-contest pleas after jury selection had started. The court ordered them to pay a total of $35
million in fines and $195 million in restitution. Four of the individuals were given one- to twoyear jail sentences and the other two were placed on probation. A related civil case is still
pending.
c.
New York Statutes.
Unlike California, New York does not have a penal statute that specifically prohibits the
misappropriation of trade secrets. However, New York does provide some criminal sanction
through the vehicle of property laws. For example, in New York, a person commits larceny
when he or she wrongfully takes property from an owner with the intent to deprive the owner of
the same or to appropriate it to himself or herself or a third person. N.Y. Pen. Law § 155.02.1.
For purposes of trade secrets, the applicable statutes are sections 155.00 and 156.30 of the New
York Penal Law.
New York’s trade secret protection is substantially limited in scope, in that sections
155.00 and 156.30 only protect scientific and technical information. Specifically, section 155.00
prohibits the theft of “secret scientific material.” The statute defines “secret scientific material”
to encompass any document, device or substance that constitutes a scientific or technical process,
invention or formula, which is not intended to be available to anyone other than the person
rightfully in possession or an authorized third party. Id. § 155.00.6. Theft of secret scientific
material is a Class E felony punishable by either up to a $5,000 fine or double the profit of the
crime, and a maximum one-year sentence in prison. Id. § 155.30.
Restrictive Covenants and Trade Secrets
54
Although the language of section 155.00 is somewhat more expansive than covering
purely scientific material, it does not protect purely business information. Thus, the statute does
not protect the majority of business, financial, economic, marketing, or product information. The
statute is largely directed toward the needs of companies with products focusing on scientific
information, such as biotech companies.
Section 156.30 of the New York Penal Law is the analogue of California’s section 502,
specifically targeted to computer crimes. Under this provision, it is a Class E felony to
unlawfully duplicate computer-related material, i.e., computer data or programs, if the economic
value appropriated is greater than $2,500. Id. § 156.30.1. Both sections 155.00 and 156.30
solely prohibit the theft and appropriation of tangible physical substances. Consequently, while
New York does proscribe the unauthorized duplication or reproduction of a trade secret, it does
so only to the extent that the reproduction is embodied in a tangible form.
6.
Racketeer Influenced Corrupt Organizations Act.
In a case that attracted much media attention, General Motors Corporation commenced
an action against Jose Ignacio Lopez de Arriortua (and others) alleging that Lopez (a former
General Motors executive) had had secret communications with representatives of Volkswagen
AG in which he agreed to join Volkswagen and bring with him confidential business plans and
trade secret information. See General Motors Corp. v. Lopez de Arriortua, 948 F. Supp. 670
(E.D. Mich. 1996). General Motors claimed that, among other things, Lopez violated the
Racketeer Influenced Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(c) & 1964(c),
based on allegations of wire fraud, interstate and foreign travel to aid racketeering, and
transportation and receipt of stolen goods. In denying the defendants’ motion to dismiss the
RICO counts, the General Motors court held that General Motors’ complaint alleged a series of
predicate acts (including a telephone call inducing Lopez to steal General Motors’ trade secrets,
the defendants’ receipt and use of stolen documents and trade secrets, and various steps to cover
up the receipt of the stolen documents) which, if proven, would amount to a “pattern of
racketeering” in violation of RICO. General Motors, 948 F. Supp. at 678-79. The case
subsequently settled for $100 million.
V.
A PRIMER ON STRATEGY: BEFORE AND AFTER AN EMPLOYEE LEAVES
A.
Drafting: Establishing and Maintaining Secrecy
1.
Drafting Issues
As discussed, supra, an employer cannot unilaterally define by contract what information
qualifies as a trade secret. See Thompson, 113 Cal. App. 4th at 1430 (“Labeling information as a
trade secret or as confidential information does not conclusively establish that the information
fits this description.”) (citing Morlife, 56 Cal. App. 4th at 1522 (Cal. Ct. App. 1997)). Similarly,
an employer cannot prevent the employee from using or disclosing non-trade secret information
simply by defining the protected information broadly in the non-disclosure agreement. See, e.g.,
Restrictive Covenants and Trade Secrets
55
American Paper, 183 Cal. App. 3d at 1325 (“An agreement between employer and employee
defining a trade secret may not be decisive in determining whether the court will so regard it”).
Nonetheless, for several reasons, the contract should at least attempt to define the trade
secrets, and should provide some detail in doing so (but not so much detail that certain trade
secrets not listed are deemed not to be protected by the agreement). First, putting employees
(and others) on notice as to what information the employer considers a trade secret is an
important step in the process of establishing a trade secret. Second, courts are disinclined to
enforce agreements requiring employees to keep confidential vaguely defined information the
company later decides it would like to protect. See generally Motorola, Inc. v. Fairchild Camera
& Instrument Corp., 366 F. Supp. 1173, 1183 (D. Ariz. 1973) (applying California law and
refusing to enforce agreements in which employees agreed to “maintain strictly confidential
during [and for two years after] my employment all . . . information of the company . . . which is
of a confidential or secret nature”).
However the protected information is defined in the agreement, it should be coupled with
an acknowledgment by the employee that the information is owned by the employer, is secret, is
the subject of reasonable efforts by the employer to keep it secret, and has value because of its
secrecy. (These are, in fact, the standards for establishing, under the Uniform Trade Secrets Act,
that the information is a trade secret.)
The contract should, of course, provide that the employee will not use or disclose the
information during or after employment, and should expressly provide that the employee’s duties
extend until the information becomes generally known through proper means, if not indefinitely.
It should also require the return of all notebooks, documents and related materials upon the
termination of employment.
a.
Require Employees (And Third Parties Who Are Given
Access) To Sign Confidentiality Agreements
Confidentiality agreements are perhaps the most important and easiest way to establish
that the employer has undertaken “reasonable efforts” with respect to its trade secrets. See, e.g.,
MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993), cert. denied, 510 U.S.
1033 (1994) (requiring employees to sign confidentiality agreements is enough to demonstrate
“reasonable steps” to preserve secrecy). These agreements also serve the goal of notifying
employees of their obligations, so that inadvertent violations do not occur.
As discussed above, in addition to the typical non-disclosure and non-use provisions, it is
useful to have the employee acknowledge in the agreement that specified information is in fact
confidential, valuable and protected as the trade secret of the employer. It is also useful to have
the employee agree to return all documents upon termination of employment.
Restrictive Covenants and Trade Secrets
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b.
Draft Separate Non-Compete, Non-Solicitation and NonDisclosure Provisions and Include a Severability Clause
Because non-competition clauses are at risk of being invalidated, employment
agreements should contain separate non-compete, non-solicitation and non-disclosure provisions.
It is also advisable to include a severability clause, which provides that if a provision of the
contract is held invalid, it may be severed so that the remaining provisions of the contract may be
enforced. Similarly, it may be advisable to include a reformation provision, which allows a court
to reform a contract to rewrite offensive restrictions so that they are enforceable. As discussed
below, different states treat severability and reformation clauses differently. Accordingly, an
employer should determine the law of the state in which it is doing business prior to drafting its
employment agreement.
Courts have adopted three general approaches to deal with offensive non-competition
provisions. Under the first approach, the court will void the entire offensive contract provision
even if the contract contains a severability clause. See, e.g., D’Sa v. Playhut, Inc., 85 Cal. App.
4th 927, 934 (Cal. Ct. App. 2000) (despite severability clause, court refused to preserve nonoffensive confidentiality provisions which also contained unlawful non-competition provisions);
Latona v. Aetna United States Healthcare, Inc., 82 F. Supp. 2d 1089, 1097-1098 (C.D. Cal.
1999) (court upheld wrongful termination clause when defendant refused to sign employment
contract with unenforceable non-competition clause, stating “that the unenforceability of the
Agreement cannot be saved by the severability clause”).
The second approach is known as the “blue pencil” rule, whereby the court will “blue
pencil” or strike offensive portions of a non-compete (i.e., overly broad temporal or geographic
limitations) and enforce the remainder of the covenant. Amex Distrib. Co. v. Mascari, 150 Ariz.
510, 515 (Ariz. Ct. App. 1986) (“Arizona will follow the blue-pencil rule adopted by the
Restatement of Contracts”); Rinks v. Courier Dispatch Group, Inc., No. 1:01-CV-0678, 2001
U.S. Dist. LEXIS 4728 (D. Ga. Apr. 11, 2001) (“[U]nder Georgia law, courts may ‘blue pencil’
restrictive covenants to remove offending clauses in a ‘sale of business’ context”); Hamrick v.
Kelley, 260 Ga. 307, 308 (Ga. 1990) (Georgia courts will not, however, use a blue pencil to
correct vagueness in geographic area). For states applying the blue pencil rule, a severability
clause may be advisable. If the offensive covenant cannot be severed, the entire contract may be
invalidated. Zajicek v. Koolvent Metal Awning Corp., 283 F.2d 127, 133 (9th Cir. 1960) (“If this
clause be inseverable, the contract would have been void in its inception.”)
Under the third approach, which appears to be the trend that most states are following,
courts are willing to reform a non-competition clause so that it is enforceable by inserting
reasonable time or geographic restrictions. See Alexander & Alexander, Inc. v. Frank B. Hall &
Co., No. 88-A-1621, 1990 U.S. Dist. LEXIS 21024 (D. Colo. Jan. 31, 1990) (“even where a noncompetition agreement does not contain a reasonable territorial restriction, the court has the
authority to reform it under Colorado law”); Raimonde v. Van Vlerah, 325 N.E.2d 544, 546-547
(Ohio 1975) (collecting authorities for “abandon[ing] the ‘blue pencil’ test in favor of a rule of
Restrictive Covenants and Trade Secrets
57
“reasonableness,” which permits courts” to modify a contract in light of the evidence); see also
Central Adjustment Bureau, Inc. v. Ingram, 678 S.W.2d 28, 36-37 (Tenn. 1984) (same).
Employers should not run the risk of having an entire contract severed when portions of it
would otherwise be enforceable. When such provisions are intertwined and no severability
clause exists, an employer is more likely to find its entire contract invalidated if it finds itself
litigating in a state that regularly invalidates non-competition clauses.
Further, when a departing employee is required to sign a separation agreement upon
conclusion of employment, care should be used in drafting that agreement in order to avoid
invalidating or superseding prior non-compete or confidentiality agreements. Avery Dennison
Corp. v. Naimo, No. 06 C 3390, 2006 U.S. Dist. LEXIS 84204 (D. Ill. Nov. 16, 2006)
(manufacturer lost its right to enforce a noncompetition agreement against a former sales director
when the sales director signed a separation agreement referring to a “full and final” settlement of
all employment matters).
c.
Alert Employees (And Third Parties With Access) To
Existence of Trade Secrets And Remind Them of Confidential
Nature
It is extremely important that the employees or third parties who are given access to trade
secrets understand that this information is to be treated confidentially. See, e.g., Courtesy, 222
Cal. App. 3d at 1288 (customer list held trade secret where employees were told of its
confidential and proprietary nature when list was revealed to them). This can be accomplished
through personnel manuals, use of a “confidential” stamp on key documents, reminder
memoranda, posted warnings and similar methods. Obviously, before the trade secrets can be
highlighted, they need to be identified by the company itself. A periodic trade secret audit is a
very useful exercise in this regard.
d.
Limit Access to Only Those Employees (And Third Parties)
Who “Need to Know” It To Perform Their Jobs
Some courts view “need to know” access as an extremely important component of
“reasonable efforts.” See Courtesy, supra. This can be accomplished through many avenues,
including the use of security guards, key-lock entries, computer passwords and locked file
drawers.
e.
Avoid Public Disclosure of Significant Portion of Information
Through Display, Publication, Advertising and the Like
The sine qua non of trade secret status is, of course, secrecy. See, e.g., Legislative
Committee Comment to UTSA; Self Directed Placement Corp. v. Control Data Corp., 908 F.2d
462 (9th Cir. 1990). As a result, employers must guard against disclosure of their trade secrets.
Restrictive Covenants and Trade Secrets
58
B.
What To Do When An Employee Leaves
This chapter has touched upon the procedures an employer should follow – during the
period in which an individual is employed by it – to minimize the chances of harm after the
employee leaves. Once an employee quits or is asked to leave a company, however, there is
more that can and should be done – especially if the employee may be hired by a competitor.
As soon as an employee decides to quit, or the decision is made to lay off a high-risk
employee, an employer should take affirmative steps to discourage any misuse or disclosure of
confidential information by the exiting employee, and to investigate fully the intentions of the
departing employee with respect to his or her potential new employer. To accomplish both of
these goals, the employer should routinely establish limits on computer and data access for
departing employees, conduct exit interviews, and send follow-up letters when high risk
employees leave. In addition, once the employee begins the new employment, the ex-employer
should monitor the activities or developments by the new employer in order to detect any
misappropriation as soon as possible.
1.
Conduct and Document an Exit Interview
On or before the employee’s last day on the job, the employer should arrange an exit
interview with the employee. The exit interview presents a perfect opportunity to remind the
employee of his or her duty of confidentiality regarding trade secrets, to answer any questions
the employee may have concerning that duty, and to obtain the employee’s agreement to
continue to honor the duty. It also offers an employer an appropriate opportunity to recover all
confidential documents in the employee’s possession, as well as to interrogate the employee
about any confidential information which may still be stored in the employee’s personal
computer (in the office and/or at home) or on disks in the employee’s possession. To accomplish
this specific goal, the interviewer should ask that all company documents, both hard copy and
electronic, be returned. Finally, the exit interview assists the employer in assessing whether the
employee’s potential new employment position will pose threats to the company’s trade secrets.
The exit interview should be conducted by at least one supervisor of the exiting employee
who is familiar with the nature and scope of the employee’s duties and responsibilities for the
company. It may also include a member of the company’s legal staff or outside counsel.
Whoever attends, the interviewers should come prepared with a comprehensive file on the
exiting employee (including a list of the types of trade secret information that the employee had
had access to as a result of his or her job duties) to ensure that the meeting is comprehensive and
productive. At least one of the attendees should be an individual who could testify effectively, if
necessary.
The exit interview should not be adversarial. If the interviewers are too aggressive, the
employee may provide less information and adopt a combative attitude, and the interview may
fail to achieve anything productive.
Restrictive Covenants and Trade Secrets
59
Finally, the employer should always document the exit interview. This documentation
should be in the form of a memorandum, or at least a detailed outline or checklist, describing the
exiting employee’s admissions regarding knowledge of specific trade secrets gained from his
employment with the company, regarding his or her new employment duties, roles and
responsibilities, and regarding his or her duties to the ex-employer. In addition, the document
should provide for an acknowledgement by the employee of both his or her duties and
obligations to maintain the secrecy of the company’s confidential information and that all
company documents, both hard copy and electronic, have been returned. Ideally, the employee
should sign the finished product for verification.
a.
Discovering Sufficient Information About the New Employer
During the exit interview, the employer should try to learn as much as possible about the
employee’s potential new employment. This could be extremely important information if the
employer ultimately seeks an injunction to protect its trade secrets. In addition to conducting
independent research on the new employer, the former employer should ask the employee for
any letters or other documents from the new employer detailing the employee’s new job
responsibilities. It would be extremely helpful for the employer to learn, at a minimum
(1) where the employee will be working; (2) what positions he or she will hold; (3) the general
nature of the projects he or she will be working on, as well as the functions he or she will be
performing; (4) the compensation and bonus incentives offered; and (5) other relevant
information affecting the employee’s departure.
b.
Ensure the Continuous Safety of Confidential Information
An employer should use the exit interview as an opportunity to take affirmative steps to
ensure the safety of its confidential information. The employer should remind the employee of
his or her duty of confidentiality regarding trade secrets and offer to answer any questions the
employee may have concerning that duty. Moreover, the employer should ask that the employee
return all company documents, both hard copy and electronic, and get confirmation that the
employee has done so. This confirmation will be extremely useful later, if it is determined that
the employee has, to the contrary retained company documents and information. In that event,
the employee will be hard-pressed to claim this was merely an oversight.
c.
Determine Whether the Departing Employee Has Ill Will Or a
Motive to Compete Unfairly
If conducted non-adversarially, the exit interview presents an excellent opportunity to
determine whether the departing employee is motivated to hurt the company. It is also an
opportunity for the employee to “vent” and for the employer to understand and address any
issues the departing employee raises. Doing so may significantly reduce the threat of
misappropriation. It may also provide important evidence if an injunction is later sought.
Restrictive Covenants and Trade Secrets
60
2.
Search the Departing Employee’s Workspace and Review the
Employee’s Computer
To ensure that an exiting employee has returned all of a company’s confidential
information upon his/her departure, the company may want co-workers familiar with the
employee’s filing and record-keeping systems, work projects and responsibilities to search the
employee’s workspace and computer files (looking especially at the employee’s recently deleted
computer files, recent downloads, etc.) upon departure. The company should also speak to the
departing employees’ co-workers – they may have seen or heard suspicious things in the last
weeks of the employee’s employment.
If the company has suspicions about the employee, it may decide to check the employee’s
e-mails, voicemails and phone records. Because privacy concerns may be implicated by a
review of these materials, the company should first consult its own policies to ensure that such
reviews are permitted.
3.
If the Risk of Misappropriation is Present, Conduct a Forensic
Analysis of the Employee’s Computer
a.
What Computer Forensic Analysis May Show
Employee-assigned computers 6 often contain a wealth of information about the
employees who use or used them. They may contain personal email communications with a
competitor or others showing that the employee began working for the competitor before leaving
the company. They may show that the employee transmitted confidential company documents to
a competitor or to a personal email account before leaving. They may contain evidence that the
employee had planned to work on the same projects for a competitor, and took steps to sabotage
the company’s work on those projects before leaving. They will almost certainly shed some light
on what the employee was up to before leaving the company, or show that the employee took
steps to delete files from this computer evidence before leaving.
b.
When To Perform Computer Forensic Analysis
If the company has decided to examine forensically a departing employee’s computer, it
is best to create a forensic image or copy of the computer as soon as possible. This will
significantly reduce the risk of accidental or intentional loss of electronic evidence from the
computer (as discussed in greater detail below).
6
This discussion focuses on an individual employee’s workstation computer. A company’s extended network,
databases, email system, and other electronic systems the employee has access to may also contain valuable
information, and similar considerations apply when considering whether and when to investigate those sources of
information.
Restrictive Covenants and Trade Secrets
61
Sometimes employees take steps to destroy electronic evidence on their computers just
before returning them. A pre-departure forensic preservation of the employee’s computer may
contain all of the later-deleted files, showing precisely what the employee tried to delete.7 It is
possible to conduct a forensic preservation with little or no disruption to an existing employee
who is about to depart. An early examination may also provide valuable information for the
company to use during the employee’s exit interview. If, for example, the computer shows that
the employee downloaded or transmitted confidential documents outside the company during the
employee’s last week of work, the exit interview might spend time discussing the confidentiality
of those types of documents and seek confirmation that all such documents have been returned.
Early information will better equip the company to respond to problems as they are occurring,
expose misrepresentations, and obtain valuable evidence if an injunction is later sought.
Even if an early forensic image was previously made, the employee’s computer should be
forensically preserved after it is returned and before it is used by another. Sometimes employees
download or transmit confidential documents or information outside the company just before
returning their computers – i.e. before the employee loses access to the company’s electronic
documents and databases. It is important to capture these final actions on the computer.
c.
Things To Remember When Performing Computer Forensic
Analysis
(1)
Electronic evidence can be easily and inadvertently lost
through computer use
To preserve the volatile electronic evidence residing on a computer, the computer
forensic analysis process starts by creating a forensic image of the computer. Every time a
computer is used there is at least a risk that data on the computer will be inadvertently altered or
destroyed. If someone boots the computer up after the departed employee returns it – but before
it has been forensically preserved – deleted files of interest may be overwritten and rendered
unrecoverable. Creating a forensic image of the computer preserves all evidence on the
computer at the time the image was made.
(2)
Forensic images are special copies that preserve
electronic evidence
A forensic image of a computer is a sector by sector copy of the entire electronic storage
media (computer hard drive) created without altering the original evidence. Often IT or HR
personnel make copies that they mistakenly believe to be complete forensic copies. Without
appropriate care, the processes used to make these copies may cause additional loss of evidence.
7
A computer forensic recovery, after the deletions have occurred, will likely recover some but not all of those files.
The employee deletion process will effectively overwrite previously deleted files that may have otherwise been
recoverable.
Restrictive Covenants and Trade Secrets
62
Counsel or a computer forensic expert should be able to advise you on how to create a proper
forensic image.
Once a forensic image is made, it is possible to recover deleted files, search fragments of
deleted files, and perform additional analysis with no risk 8 of losing the electronic evidence.
Once the image is secure, the original hard drive could (in theory) be used freely without risk of
losing the original data stored on the back-up image. It is safer, however, to leave the original
computer hard drive untouched until you determine that no useful evidence resides on it or that
the evidence will not be needed in court.
(3)
Don’t assume the “wiped” computer no longer contains
useful evidence
Sometimes an employee’s computer will be “wiped” by the Company’s IT personnel and
reassigned to a new user at the company, as part of the employee’s termination process. The
term “wipe” may mean different things, but when used in a typical business setting it does not
usually mean that the computer no longer contains recoverable data. In this situation, or when a
computer has been put back into use after the employee departed, do not assume that it is too late
to obtain evidence using computer forensic analysis. Though it may be more difficult and costly,
sometimes the results are well worth the effort. There is a chance of recovering anything that
showed on the computer screen at one time – even if it was years ago and the computer has been
in use since that time.
(4)
Complete forensic analysis requires input from the
company and investigators
A complete forensic analysis of a computer image requires input from the company and
the investigating team. Disk storage capacity has increased rapidly in recent years, and
computers today often contain huge amounts of information. The computer forensic analysis
process involves sorting the relevant parts out from this mass of data, and attempting to make
those parts understandable and user friendly. It is sometimes useful to compare what is known
or suspected about an employee’s computer use or behavior against any electronic tracks left on
the employee’s computer. An employer might want to provide information from employee files,
witness interviews, timelines, summaries of suspected or possibly wrongful behavior, and/or
examples of documents that may have been taken. Any information that helps target or narrow
the analysis can be useful. Input from the company and investigators may be useful during
forensic sorting processes such as keyword searching, database / internet history review, file use
history review, software use analysis, event log review, and even deletion reconstruction /
8
It is worth noting that the process of creating a forensic image carries with it some risk of drive failure or data loss,
as the hard drive may have to be removed from the computer box for imaging. This said, it is best to create a
forensic image or use other forensically secure methods if the computer information might be relevant to litigation.
Restrictive Covenants and Trade Secrets
63
analysis. The more information the forensic examiner has, the more relevant his or her results
are likely to be.
That said, a company should bear in mind that legal privilege may be waived regarding
the input provided to a testifying forensics expert. Typically counsel is employed to oversee
suspicious departed employee investigations and the associated computer forensic analyses. If
the computer forensic expert later testifies, legal privilege may be waived in whole or part
regarding the materials provided to the expert as part of that investigation.
(5)
Ask questions about the forensic analysis process and
results
Sometimes important information on a computer is overlooked because nobody asked
follow-up questions about the initial forensic analysis. The computer forensics expert must
merge his or her own vast software knowledge with the specific case facts and large repositories
of information found on every computer. With so much information and so many possible
variations of hardware, software and facts involved, it is unlikely that any forensics expert will
know or remember everything required to cull out and interpret all of the useful information
from every computer. The forensic analysis process tends to yield the best results when there is
open communication, common sense questioning, and iterative review. Don’t be afraid to ask
questions, even if you don’t think you know very much about computers.
Some of the lessons above are illustrated by a case we had involving computer forensics
on a drive that a departed employee had wiped. The forensic expert initially reported that the
computer had been wiped clean in such a manner that essentially nothing remained other than the
reinstalled Operating System. The overall report was that the computer was “pretty clean.” Our
team asked when this reinstallation had occurred, and we were informed that the OS installation
files were created almost a year ago (according to the system clock). This was odd, since we
believed the computer had been used during the past year based on other case information.
We probed further, and reviewed the image ourselves. It turned out that on the “second
day” of the OS reinstallation, the user had accessed an Internet page. Some advertisement
graphics from that page for episodes of the “Today Show” were still on the computer. The
computer system clock seemed to tell us that these advertisements had been aired over a year
ago, but we were able to determine (and later prove) that the Today Show episodes on which
they appeared had in fact aired much later–just a few weeks before our examination. In addition,
the OS reinstallation (according to the system clock) was begun exactly one year before it
finished on the second day of the OS reinstallation – which, if correct, would have meant that (1)
the computer had not been used during the employee’s time with the company (when we knew it
had been used), and (2) the OS reinstallation took an entire year to complete. The truth that
emerged, however, was that the defendant computer–user had intentionally and improperly
rolled back the system clock a year to hide the fact that he had wiped the computer, and
destroyed the electronic evidence, after we had demanded that the computer was not to be
Restrictive Covenants and Trade Secrets
64
touched and the evidence was to be preserved. This ultimately was a critical and very powerful
piece of evidence of spoliation in our case.
4.
Send Follow-Up Letters
Once an employee has left a company, and certainly before he/she has started his or her
new job, the company may want to send follow-up letters to both the former employee and the
new employer. The letters should remind the former employee, once again, of his or her duty not
to disclose or misappropriate any of the former employer’s confidential information, and give
notice to the new employer of the employee’s duty of confidentiality. The former employer
should get concrete documentation of the delivery of follow-up letters by using registered mail.
A follow-up letter to the new employer of a former employee should include: (1) a
statement that the new employee has knowledge of certain, specific trade secrets; (2) an
explanation of the continuing obligation that the employee has to maintain confidentiality; (3) an
affirmative statement of the former employer’s rights to the trade secret information; and (4) a
statement that the previous employer intends to vigorously pursue its legal rights with respect to
the trade secrets.
All letters, to be effective, should not merely make threats. Instead, they should seek
answers to important questions and ask for confirmation that the obligations are being met. An
effective letter sets the stage for a temporary restraining order or preliminary injunction, by
putting the burden on the departing employee to demonstrate his or her good faith.
All letters to the new employer must be drafted with caution. A company must make
sure that follow-up letters do not threaten litigation based merely on the fact of changed
employment. Nor should the letters contain any derogatory statements which may give rise to a
defamation claim by the former employee. See Herzog v. A Company, 138 Cal. App. 3d 656
(Cal. Ct. App. 1982).
5.
Determine The Applicability of Restrictive Covenants and Insist on
Compliance
If the employer determines that the employee’s new job responsibilities will entail a
violation of an enforceable restrictive covenant, it should inform the employee at once of its
intention to enforce the covenant. If this notice does not cause the employee to withdraw from
(or to reformulate) his proposed new employment, the employer should contact the new
employer. To avoid litigation and an injunction, the new employer may be willing to limit the
new employee’s duties for a period of time.
In some cases, where there is no way for the employee to be of use to his or her new
employer without using the former employer’s trade secrets, it may be advisable for the former
employer to seek to prevent the employee from doing any work for the new employer under the
inevitable misappropriation doctrine (or a variation thereof), as discussed in Section IV.B.2.,
Restrictive Covenants and Trade Secrets
65
supra. One costly alternative short of litigation is to enter into a consulting contract with the key
employee upon termination of employment. Under the consulting contract, the employer would
be able to prevent the former key employee from working for and divulging information to a
competitor.
6.
Monitor the Risk
Early detection of the disclosure or misappropriation of trade secret information is vital to
protecting the information from further misuse. Therefore, when an employee leaves to work for
a competitor, the former employer should closely monitor any apparent shifts in the competitor’s
activities. The former employer should be particularly mindful of the sudden adoption of new
marketing strategies; new, unanticipated business ventures; or large sales by the new employer to
the former employer’s clients. While it is the company’s sales force or distributors who will
most likely be making these observations, it is important that they pass on these developments to
the legal department so that they can be evaluated in the trade secret context.
VI.
CONCLUSION
In years to come, an employer is likely to find that the “crown jewels” of its intellectual
property portfolio are its trade secrets. As such, employers must continue to protect their trade
secrets by diligently monitoring the activities of their departing employees and their motivations
for leaving. While this chapter has provided an overview of trade secrets law and
summarized different avenues to safeguard against wrongful dissemination of trade secrets, it is
by no means exhaustive. Employers should continue to update their knowledge of the law of
their state to successfully preserve these valuable assets, prevent trade secret theft, and ultimately
prevail in trade secret litigation.
Restrictive Covenants and Trade Secrets
66
TABLE OF AUTHORITIES
Page
FEDERAL CASES
A.F.A. Tours, Inc. v. Whitchurch,
937 F.2d 82 (2d Cir. 1991).................................................................................................... 9
AccuImage Diagnostics Corp. v. Terarecon, Inc.,
260 F. Supp. 2d 941 (N.D. Cal. 2003) ................................................................................. 51
Airdefense, Inc. v. Airtight Networks, Inc.,
No. C 05-04615, 2006 U.S. Dist. LEXIS 55364 (N.D. Cal. July 26, 2006) .......................... 50
Alexander & Alexander, Inc. v. Frank B. Hall & Co.,
No. 88-A-1621, 1990 U.S. Dist. LEXIS 21024 (D. Colo. Jan. 31, 1990) ............................. 58
American Airlines, Inc. v. ImHof,
620 F. Supp. 2d 574 (S.D.N.Y. 2009) ............................................................................37, 43
Am. Family Mut. Ins. Co. v. Roth,
485 F.3d 930 (7th Cir. 2007)............................................................................................. 2, 7
American Inst. of Chem. Eng’rs v. Reber-Friel Co.,
682 F.2d 382 (2d Cir. 1982).....................................................................................13, 15, 17
Anacomp, Inc. v. Shell Knob Servs., Inc.,
No. 93 Civ. 4003, 1994 WL 9681 (S.D.N.Y. Jan. 10, 1994).................................................. 9
Arias v. Solis,
754 F. Supp. 290 (E.D.N.Y. 1991) ...................................................................................... 18
Arnold’s Ice Cream Co. v. Carlson,
330 F. Supp. 1185 (E.D.N.Y. 1971) .................................................................................... 47
Auto Channel, Inc. v. Speedvision Network, LLC,
144 F. Supp. 2d 784 (W.D. Ky. 2001)................................................................................. 50
Avery Dennison Corp. v. Naimo,
No. 06 C 3390, 2006 U.S. Dist. LEXIS 84204 (D. Ill. Nov. 16, 2006)................................. 59
Award Incentives, Inc. v. Van Rooyen,
263 F.2d 173 (3d Cir. 1959)................................................................................................ 20
Restrictive Covenants and Trade Secrets
iii
TABLE OF AUTHORITIES
(continued)
Page
Bayer Corp. v. Roche Molecular Sys., Inc.,
72 F. Supp. 2d 1111 (N.D. Cal. 1999) ................................................................................. 45
Bennett v. Medtronic, Inc.,
285 F.3d 801 (9th Cir. 2002)..........................................................................................25, 26
BioCore, Inc. v. Khosrowshahi,
96 F. Supp. 2d 1221 (D. Kan. 2000).................................................................................... 52
Bliss Clearing Niagara, Inc. v. Midwest Brake Bond Co.,
270 F. Supp. 2d 943 (W.D. Mich. 2003) ..................................................................50, 51, 52
Bradford v. New York Times Co.,
501 F.2d 51 (2d Cir. 1974).................................................................................................. 17
Branson Ultrasonics Corp. v. Stratman,
921 F. Supp. 909 (D. Conn. 1996)....................................................................................... 13
Brett Senior & Assocs. v. Fitzgerald,
No. 06-1412, 2007 U.S. Dist. LEXIS 50833 (D. Pa. July 13, 2007)..................................... 53
Buffets, Inc. v. Klinke,
73 F.3d 965 (9th Cir. 1996)................................................................................................... 7
Business Intelligence Servs., Inc. v. Hudson,
580 F. Supp. 1068 (S.D.N.Y. 1984) ...............................................................................20, 42
Cacique, Inc. v. Robert Reiser & Co.,
169 F.3d 619 (9th Cir. 1999)............................................................................................... 36
Callaway Golf Co. v. Dunlop Slazenger Group Ams., Inc.,
318 F. Supp. 2d 216 (D. Del. 2004) ...............................................................................50, 51
Ctr. for Auto Safety v. Nat’l Highway Traffic Safety Admin.,
93 F. Supp. 2d 1 (D.D.C. 2000) ............................................................................................ 3
Chi. Title Ins. Corp. v. Magnuson,
487 F.3d 985 (6th Cir. 2007)............................................................................................... 13
Restrictive Covenants and Trade Secrets
iv
TABLE OF AUTHORITIES
(continued)
Page
Churchill Communications Corp. v. Demyanovich,
668 F. Supp. 207 (S.D.N.Y. 1987) ...................................................................................... 46
Cintas Corp. v. Perry,
517 F.3d 459 (7th Cir. 2008)............................................................................................... 26
Composite Marine Propellers, Inc. v. Van Der Woude,
962 F.2d 1263 (7th Cir. 1992)............................................................................................. 52
Computer Economics, Inc. v. Gartner Group, Inc.,
50 F. Supp. 2d 980 (S.D. Cal. 1999)...................................................................................... 7
Computer Sciences Corp. v. Computer Assocs. Int’l, Inc.,
Nos. CV 98-1374, 98-1440, 1999 WL 675446 (C.D. Cal. Aug. 13, 1999) ........................... 45
Compuware Corp. v. IBM Corp.,
No. 02-CV-70906, 2003 WL 23212863 (E.D. Mich. Dec. 19, 2003) ................................... 50
Consolidated Brands, Inc. v. Mondi,
638 F. Supp. 152 (E.D.N.Y. 1986) ........................................................................................ 9
Convolve, Inc. v. Compaq Computer Corp.,
No. 00 CV 5141, 2006 U.S. Dist. LEXIS 13848 (S.D.N.Y. Mar. 29, 2006)....................50, 51
Coolidge Co. v. Mokrynski,
472 F. Supp. 459 (S.D.N.Y. 1979) ...................................................................................... 19
County of Nassau, N.Y. v. Leavitt,
524 F.3d 408 (2d Cir. 2008)................................................................................................ 37
Danjaq LLC v. Sony Corp.,
50 U.S.P.Q.2d 1638 (C.D. Cal. 1999) ................................................................................. 44
Design Strategies, Inc. v. Davis,
384 F. Supp. 2d 649 (S.D.N.Y. 2005) ................................................................................. 47
Digital Envoy, Inc. v. Google, Inc.,
370 F. Supp. 2d 1025 (N.D. Cal. 2005) ..........................................................................50, 51
Restrictive Covenants and Trade Secrets
v
TABLE OF AUTHORITIES
(continued)
Page
Display Research Labs., Inc. v. Telegen Corp.,
133 F. Supp. 2d 1170 (N.D. Cal. 2001) ............................................................................... 38
Diversified Fastening Sys., Inc. v. Rogge,
786 F. Supp. 1486 (N.D. Iowa 1991) .................................................................................. 44
Earthweb, Inc. v. Schlack,
71 F. Supp. 2d 299 (S.D.N.Y. 1999), aff’d in part and remanded, 205 F.3d 1322 (2d
Cir. 2000) ................................................................................................................18, 19, 42
Ecolab, Inc. v. Paolo,
753 F. Supp. 1100 (E.D.N.Y. 1991) ...................................................................................... 9
Ernest Paper Prods. v. Mobil Chem. Co.,
No. 95-7918, 1997 U.S. Dist. LEXIS 21781 (C.D. Cal. Dec. 2, 1997)................................. 50
Estee Lauder Co. v. Batra,
430 F. Supp. 2d 158 (S.D.N.Y. 2006) ................................................................................. 20
Fabkom, Inc. v. R.W. Smith & Assocs., Inc.,
No. 95 Civ. 4552, 1996 WL 531873 (S.D.N.Y. Sept. 19, 1996) ............................................ 8
Faiveley Transport Malmo v. Wabtec Corp.
559 F.3d 110 (2d Cir. 2009)............................................................................................ 8, 37
Ferrofluidics Corp. v. Advanced Vacuum Components, Inc.,
968 F.2d 1463 (1st Cir. 1992) ............................................................................................. 14
Forcier v. Microsoft Corp.,
123 F. Supp. 2d 520 (N.D. Cal. 2000) ................................................................................. 38
Frederick Chusid & Co. v. Marshall Leeman & Co.,
326 F. Supp. 1043 (S.D.N.Y. 1971) ...............................................................................19, 47
Frederick Chusid & Co. v. Marshall Leeman & Co.,
279 F. Supp. 913 (S.D.N.Y. 1968) ...................................................................................... 46
General Motors Corp. v. Lopez de Arriortua,
948 F. Supp. 670 (E.D. Mich. 1996) ................................................................................... 56
Restrictive Covenants and Trade Secrets
vi
TABLE OF AUTHORITIES
(continued)
Page
Geritrex Corp. v. Dermarite Indus., LLC,
910 F. Supp. 955 (S.D.N.Y. 1996) ........................................................................................ 9
Globespan, Inc. v. O’Neill,
151 F. Supp. 2d 1229 (C.D. Cal. 2001) ............................................................................... 44
Grand River Enter. Six Nations, Ltd. v. Pryor,
481 F.3d 60 (2d Cir. 2007).................................................................................................. 37
Hair Club for Men, LLC v. Elite Solutions Hair Alternatives, Inc.,
No. 2:07-cv-546-GEB-KJM, 2007 U.S. Dist. LEXIS 30167 (E.D. Cal. Apr. 5, 2007) ........... 2
Hauck Manufacturing Co. v. Astec Indus., Inc.,
375 F. Supp. 2d 649 (E.D. Tenn. 2004)............................................................................... 52
Health Mgmt., Inc. v. Hotte,
No. 97 Civ. 3267 (E.D.N.Y. Sept. 15, 1997) ....................................................................... 16
Hollingsworth Solderless Terminal Co. v. Turley,
622 F.2d 1324 (9th Cir. 1980)......................................................................................... 8, 33
Hudson Hotels Corp. v. Choice Hotels Int’l,
995 F.2d 1173 (2d Cir. 1993), abrogated on other grounds, Nadel v. Play-by-Play
Toys & Novelties, Inc., 208 F.3d 368 (2d Cir. 2000)............................................................ 35
Ikon Office Solutions, Inc. v. Am. Office Prods., Inc.,
178 F. Supp. 2d 1154 (D. Or. 2001) ...................................................................................... 2
Imperial Chem. Indus., Ltd. v. National Distillers & Chem. Corp.,
342 F.2d 737 (2d Cir. 1965).................................................................................................. 9
Innovative Networks, Inc. v. Satellite Airlines Ticketing Ctrs., Inc.,
871 F. Supp. 709 (S.D.N.Y 1995) ....................................................................................... 19
Intermedics, Inc. v. Ventritex, Inc.,
822 F. Supp. 634 (N.D. Cal. 1993)...................................................................................... 38
International Paper Co. v. Suwyn,
966 F. Supp. 246 (S.D.N.Y. 1997) .............................................................................9, 18, 42
Restrictive Covenants and Trade Secrets
vii
TABLE OF AUTHORITIES
(continued)
Page
Ivy Mar. Co. v. C.R. Seasons, Ltd.,
907 F. Supp. 547 (E.D.N.Y. 1995) ....................................................................... 2, 15, 18, 20
Johnson Controls, Inc. v. A.P.T. Critical Sys.,
323 F. Supp. 2d 525 (S.D.N.Y. 2004) ................................................................................... 2
Kamyr AB v. Kamyr, Inc.,
No. 91-CV-0453, 1992 WL 317529 (N.D.N.Y. Oct. 30, 1992)............................................ 10
Kewanee Oil Co. v. Bicorn Corp.,
416 U.S. 470 (1974)...................................................................................................3, 10, 16
La Calhène, Inc. v. Spolyar,
938 F. Supp. 523 (W.D. Wis. 1996) ................................................................................ 3, 44
Latona v. Aetna U.S. Healthcare, Inc.,
82 F. Supp. 2d 1089 (C.D. Cal. 1999) ............................................................................35, 58
Learning Curve Toys, L.P. v. PlayWood Toys, Inc.,
No. 94 C 6884, 1999 U.S. Dist LEXIS 11262 (N.D. Ill. July 20, 1999) ............................... 52
Liveware Publ’g, Inc. v. Best Software, Inc.,
252 F. Supp. 2d 74 (D. Del. 2003) ........................................................................................ 2
Lucente v. International Business Machines Corporation,
310 F.3d 243 (2d Cir. 2002)................................................................................................ 22
Lucini Italia Co. v. Grappolini,
No. 01 C 6405, 2003 WL 1989605 (N.D. Ill. Apr. 24, 2003)................................................. 2
Lumex, Inc. v. Highsmith,
919 F. Supp. 624 (E.D.N.Y. 1996) ............................................................... 14, 17, 36, 41, 42
MAI Sys. Corp. v. Peak Computer, Inc.,
991 F.2d 511 (9th Cir. 1993), cert. denied, 510 U.S. 1033 (1994) ................................... 6, 57
MPW Indus. Servs. v. Pollution Control Sys.,
No. 2:02-CV-955, 2006 U.S. Dist. LEXIS 9360 (D. Ohio Mar. 9, 2006) ............................... 2
Restrictive Covenants and Trade Secrets
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TABLE OF AUTHORITIES
(continued)
Page
Maxxim Med., Inc. v. Michelson,
51 F. Supp. 2d 773 (S.D. Tex.), revd. without reported opn., 182 F.3d 915
(5th Cir. 1999) .................................................................................................................... 45
Merck & Co. v. Lyon,
941 F. Supp. 1443 (M.D.N.C. 1996) ................................................................................... 44
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Chung,
No. CV 01-00659, 2001 WL 283083 (C.D. Cal. Feb. 2, 2001) ............................................ 31
Metallurgical Industries, Inc. v. Fourteen, Inc.,
790 F.2d 1195 (5th Cir. 1986)............................................................................................... 3
Micro Display Systems, Inc. v. Axtel, Inc.,
699 F. Supp. 202 (D. Minn. 1988)....................................................................................... 51
Mixing Equip. Co. v. Philadelphia Gear, Inc.,
436 F.2d 1308 (3d Cir. 1971).............................................................................................. 19
Monovis, Inc. v. Aquino,
905 F. Supp. 1205 (W.D.N.Y. 1994)................................................................................... 42
Moore v. Consol. Edison Co. of N.Y.,
409 F.3d 506 (2d Cir. 2005)................................................................................................ 37
Morris v. Schroder Capital Mgmt. Int’l,
445 F.3d 525 (2d Cir. 2006)................................................................................................ 22
Morris v. Schroder Capital Mgmt. Int’l,
481 F.3d 86 (2d Cir. 2007).................................................................................................. 23
Morton v. Rank America, Inc.,
812 F. Supp. 1062 (C.D. Cal. 1993) .................................................................................. 3, 8
Motorola, Inc. v. Fairchild Camera & Instrument Corp.,
366 F. Supp. 1173 (D. Ariz. 1973) .................................................................................27, 57
Nadel v. Play-by-Play Toys & Novelties, Inc.,
208 F.3d 368 (2d Cir. 2000)................................................................................................ 36
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(continued)
Page
Navigant Consulting, Inc. v. Wilkinson,
508 F.3d 277 (5th Cir. 2007)............................................................................................... 48
Neveux v. Webcraft Techs., Inc.,
921 F. Supp. 1568 (E.D. Mich. 1996).................................................................................. 44
Panther Sys. II, Ltd. v. Panther Computer Sys., Inc.,
783 F. Supp. 53 (E.D.N.Y. 1991)........................................................................................ 16
Penalty Kick Mgmt. Ltd. v. Coca Cola Co.,
318 F.3d 1284 (11th Cir. 2003)........................................................................................... 51
PepsiCo, Inc. v. Redmond,
54 F.3d 1262 (7th Cir. 1995)..........................................................................................10, 41
Powell Products, Inc. v. Marks,
948 F. Supp. 1469 (D. Co. 1996) ........................................................................................ 51
QR Spex, Inc. v. Motorola, Inc.,
No. CV 03-6284, 2004 U.S. Dist. LEXIS 27378 (C.D. Cal. Oct. 28, 2004) ........................... 3
Quaker Chem. Corp. v. Varga,
509 F. Supp. 2d 469 (E.D. Pa. 2007)................................................................................... 20
Religious Technology Center v. Lerma,
908 F. Supp. 1362 (E.D. Va. 1995) ....................................................................................... 5
Religious Technology Center v. Netcom On-Line Communication Services, Inc.,
No. C-95-20091, 1997 U.S. Dist. LEXIS 23572 (N.D. Cal. Jan. 3, 1997).............................. 5
Robinson v. Jardine Ins. Brokers Int’l Ltd.,
856 F. Supp. 554 (N.D. Cal. 1994)...................................................................................... 25
Scott v. Snelling & Snelling, Inc.,
732 F. Supp. 1034 (N.D. Cal. 1990)..................................................................... 4, 12, 23, 24
Self Directed Placement Corp. v. Control Data Corp.,
908 F.2d 462 (9th Cir. 1990)........................................................................................... 7, 59
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Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc.,
119 F. Supp. 2d 1121 (W.D. Wash. 2000)........................................................................... 53
Star Sci., Inc. v. Carter,
204 F.R.D. 410 (D. Ind. 2001) .............................................................................................. 3
Static Control Components, Inc. v. Future Graphics, LLC,
No. 1:06CV00730, 2007 U.S. Dist. LEXIS 36474 (D.N.C. May 11, 2007).......................... 38
Stutz Motor Car of America, Inc. v. Reebok Int’l Ltd.,
909 F. Supp. 1353 (C.D. Cal. 1995) ...................................................................................... 3
Surface Shields v. Poly-Tak Prot. Sys.,
No. 02 C 7228, 2003 U.S. Dist. LEXIS 13185 (N.D. Ill. July 29, 2003) ................................ 2
Surgidev Corp. v. Eye Tech., Inc.,
648 F. Supp. 661 (D. Minn. 1986), aff’d, 828 F.2d 452 (8th Cir. 1987) ............................... 45
Taco Cabana Int’l, Inc. v. Two Pesos, Inc.,
932 F.2d 1113 (5th Cir. 1991)............................................................................................... 3
Telxon Corp. v. Hoffman,
720 F. Supp. 657 (N.D. Ill. 1989)........................................................................................ 14
Thomas & Betts Corp. v. Panduit Corp.,
108 F. Supp. 2d 968 (N.D. Ill. 2000) ................................................................................... 52
Ticor Title Ins. Co. v. Cohen,
173 F.3d 63 (2d Cir. 1999).................................................................................................. 18
Union Carbide Corp v. UGI Corp.,
731 F.2d 1186 (5th Cir. 1984)............................................................................................... 3
Universal Analytics, Inc. v. MacNeal-Schwendler Corp.,
914 F.2d 1256 (9th Cir. 1990)........................................................................................49, 50
Victaulic Co. v. Tieman,
499 F.3d 227 (3d Cir. 2007)................................................................................................ 20
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Webcraft Techs., Inc. v. McCaw,
674 F. Supp. 1039 (S.D.N.Y. 1987) .........................................................................10, 16, 20
Wright Chemical Corp. v. Johnson,
563 F. Supp. 501 (M.D. La. 1983) ........................................................................................ 3
Zajicek v. Koolvent Metal Awning Corp.,
283 F.2d 127 (9th Cir. 1960)............................................................................................... 58
STATE CASES
7th Sense v. Liu,
631 N.Y.S.2d 835 (N.Y. App. Div. 1995) ........................................................................... 46
ABBA Rubber Company v. Seaquist,
235 Cal. App. 3d 1 (Cal. Ct. App. 1991) ............................................................................... 4
ABC, Inc. v. Wolf,
52 N.Y.2d 394 (N.Y. 1981)................................................................................................. 18
Ackerman v. Kimball Int’l, Inc.,
652 N.E.2d 507 (Ind. 1995) ................................................................................................ 44
Advanced Magnification Instruments, Ltd. v. Minuteman Optical Corp.,
522 N.Y.S.2d 287 (N.Y. App. Div. 1987) ........................................................................... 47
Aetna Building Maintenance Co., Inc. v. West,
39 Cal. 2d 198 (Cal. 1952) .................................................................................................. 30
Al Minor & Associates v. Martin,
117 Ohio St. 3d 58 (Ohio 2008) ............................................................................................ 1
Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson,
209 S.W.3d 644 (Tex. 2006) ............................................................................................... 12
Allan Dampf, P.C. v. Bloom,
512 N.Y.S.2d 116 (N.Y. App. Div. 1987) ........................................................................... 47
Amana Express Int’l, Inc. v. Pier-Air Int’l, Ltd.,
621 N.Y.S.2d 108 (N.Y. App. Div. 1995) ........................................................................... 17
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American Credit Indemnity Co. v. Sacks,
213 Cal. App. 3d 622 (Cal. Ct. App. 1989) ....................................................................27, 31
American Paper & Packaging Products, Inc. v. Kirgan,
183 Cal. App. 3d 1318 (Cal. Ct. App. 1986) ..............................................................2, 27, 56
Amex Distrib. Co. v. Mascari,
150 Ariz. 510 (Ariz. Ct. App. 1986).................................................................................... 58
Application Group, Inc. v. Hunter Group, Inc.,
61 Cal. App. 4th 881 (Cal. Ct. App. 1998) .....................................................................23, 24
Armendariz v. Foundation Health Psychcare Servs., Inc.,
24 Cal. 4th 83 (Cal. 2000)................................................................................................... 26
BDO Seidman v. Hirshberg,
93 N.Y.2d 382 (N.Y. Ct. App. 1999) ................................................................. 13, 14, 15, 17
Balboa Ins. Co. v. Trans Global Equities,
218 Cal. App. 3d 1327 (Cal. Ct. App. 1990) ....................................................................... 49
Bancroft-Whitney Co. v. Glen,
64 Cal. 2d 327 (Cal. 1966) .................................................................................................. 46
Brescia v. Angelin,
172 Cal. App. 4th 133, 145 (Cal. Ct. App. 2009)................................................................. 39
Boeing Co. v. Sierracin Corporation,
43 Wash. App. 288 (Wash. Ct. App. 1986) ........................................................................... 3
Burbank Grease Services, LLC v. Sokolowski,
717 N.W.2d 781 (Wis. 2006) .............................................................................................. 51
Cadence Design Sys., Inc. v. Avant! Corp.,
29 Cal. 4th 215 (Cal. 2002)................................................................................................. 38
Cardinal Freight Carriers, Inc. v. J.B. Hunt Transp. Servs., Inc.,
987 S.W.2d 642 (Ark. 1999) ............................................................................................... 44
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Cardiovascular Surgical Specialists, Corp. v. Mammana,
61 P.3d 210 (Okla. 2002) .................................................................................................... 32
Central Adjustment Bureau, Inc. v. Ingram,
678 S.W.2d 28 (Tenn. 1984) ............................................................................................... 58
Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp.,
42 N.Y.2d 496 (N.Y. 1977)................................................................................................. 19
Comprehensive Community Dev. Corp. v. Lehach,
636 N.Y.S.2d 755 (N.Y. App. Div. 1996) ........................................................................... 47
Contempo Communications, Inc. v. MJM Creative Servs., Inc.,
582 N.Y.S.2d 667 (N.Y. App. Div. 1992) ......................................................................17, 20
Continental Car-Na-Var Corp. v. Moseley,
24 Cal. 2d 104 (Cal. 1944) .................................................................................................. 24
Cool Insuring Agency, Inc. v. Rogers,
509 N.Y.S.2d 180 (N.Y. App. Div. 1986) ........................................................................... 18
Courtesy Temporary Serv., Inc. v. Camacho,
222 Cal. App. 3d 1278 (Cal. Ct. App. 1990) .................................................................passim
Cypress Semiconductor Corp. v. Superior Court,
163 Cal. App. 4th 575 (Cal. Ct. App. 2008) ........................................................................ 39
D’Sa v. Playhut, Inc.,
85 Cal. App. 4th 927 (Cal. Ct. App. 2000) ...............................................................23, 26, 58
DVD Copy Control Ass’n, Inc. v. Bunner,
31 Cal. 4th 864 (Cal. 2003)................................................................................................... 6
DVD Copy Control Ass’n, Inc. v. McLaughlin,
No. CV 786804, 2000 WL 48512 (Cal. Sup. Ct., Jan. 21, 2000)........................................ 5, 6
Diodes, Inc. v. Franzen,
260 Cal. App. 2d 244 (Cal. Ct. App. 1968) ..............................................................24, 33, 35
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DoubleClick, Inc. v. Henderson,
No. 116914/97, 1997 WL 731413 (N.Y. Sup. Ct. Nov. 7, 1997) ..............................10, 19, 41
Dryden v. Tri-Valley Growers,
65 Cal. App. 3d 990 (Cal. Ct. App. 1977) ........................................................................... 48
Duane Jones Co. v. Burke,
117 N.E.2d 237 (N.Y. 1954) ............................................................................................... 46
Eagle Comtronics, Inc. v. Pico, Inc.,
453 N.Y.S.2d 470 (N.Y. App. Div. 1982) ............................................................................. 9
Eastern Business Systems, Inc. v. Speciality Business Solutions, LLC,
739 N.Y.S.2d 177 (N.Y. App. Div. 2002) ........................................................................... 42
Edwards v. Arthur Andersen LLP,
44 Cal. 4th 937 (Cal. 2008)................................................................................................. 28
Electro Optical Indus., Inc. v. White,
76 Cal. App. 4th 653 (Cal. Ct. App. 1999) .......................................................................... 45
Embarcadero Mun. Improvement Dist. v. County of Santa Barbara,
88 Cal. App. 4th 781 (Cal. Ct. App. 2001) .......................................................................... 51
Empire Farm Credit, ACA v. Bailey,
657 N.Y.S.2d 211 (N.Y. App. Div. 1997) ......................................................................13, 15
Family Affair Haircutters, Inc. v. Detling,
488 N.Y.S.2d 204 (N.Y. App. Div. 1985) ........................................................................... 18
Fields Found., Ltd. v. Christensen,
309 N.W.2d 125 (Wis. Ct. App. 1981) ................................................................................ 14
FLIR Systems, Inc. v. Parrish,
174 Cal. App. 4th 1270 (Cal. Ct. App. 2009) ...................................................................... 45
Fortna v. Martin,
158 Cal. App. 2d 634 (Cal. Ct. App. 1958) ......................................................................... 33
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Fowler v. Varian Assocs., Inc.,
196 Cal. App. 3d 34 (Cal. Ct. App. 1987) ........................................................................... 46
Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
20 Cal. App. 3d 668 (Cal. Ct. App. 1971) ........................................................................... 24
Fred’s Stores of Mississippi, Inc. v. M & H Drugs, Inc.,
725 So. 2d 902 (Miss. 1998) ................................................................................................. 8
GAB Business Servs., Inc. v. Lindsey & Newsom Claim Servs, Inc.,
83 Cal. App. 4th 409 (Cal. Ct. App. 2000) .......................................................................... 47
Gable-Leigh, Inc. v. North American Miss,
No. CV 01-01019, 2001 WL 521695 (C.D. Cal. Apr. 9, 2001).............................................. 8
General Paint Corp. v. Seymour,
124 Cal. App. 611 (Cal. Ct. App. 1932) .............................................................................. 26
General Reinsurance Corp. v. Arch Capital Group, Ltd.,
No. X05CV074011668S, 2007 Conn. Super. LEXIS 2629 (Conn. Super. Ct. Oct. 17,
2007) .................................................................................................................................... 1
Giffords Oil Co. v. Wild,
483 N.Y.S.2d 104 (N.Y. App. Div. 1984) ........................................................................... 17
Gillis Associated Indus., Inc. v. Cari-All, Inc.,
564 N.E.2d 881 (Ill. App. Ct. 1990) ...................................................................................... 9
Glue-Fold, Inc. v. Slautterback Corp.,
82 Cal. App. 4th 1018 (Cal. Ct. App. 2000) ........................................................................ 38
Golden State Linen Service, Inc. v. Vidalin,
69 Cal. App. 3d 1 (Cal. Ct. App. 1977) ..........................................................................30, 32
Gordon Termite Control v. Terrones,
84 Cal. App. 3d 176 (Cal. Ct. App. 1978) ........................................................................... 33
HBD Inc. v. Ryan,
642 N.Y.S.2d 913 (N.Y. App. Div. 1996) ........................................................................... 19
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Hamrick v. Kelley,
260 Ga. 307 (Ga. 1990)....................................................................................................... 58
Herzog v. A Company,
138 Cal. App. 3d 656 (Cal. Ct. App. 1982) ......................................................................... 66
Hill Medical Corp. v. Wycoff,
86 Cal. App. 4th 895 (Cal. Ct. App. 2001) .......................................................................... 30
Home Pride Foods, Inc. v. Johnson,
262 Neb. 701 (Neb. 2001)..................................................................................................... 2
I.E. Assocs. v. Safeco Title Ins. Co.,
39 Cal. 3d 281 (Cal. 1985) .................................................................................................. 50
John F. Matull & Associates, Inc. v. Cloutier,
194 Cal. App. 3d 1049 (Cal. Ct. App. 1987) ....................................................................... 32
John Jay Esthetic Salon, Inc. v. Woods,
377 So. 2d 1363 (La. App. Ct. 1979)................................................................................... 32
Jones v. Humanscale Corp.,
130 Cal. App. 4th 401 (Cal. Ct. App. 2005) ........................................................................ 25
Justus v. Atchison,
19 Cal. 3d 564 (Cal. 1977) .................................................................................................. 50
Kanan, Corbin, Schupak & Aronow, Inc. v. FD Int’l LTD,
797 N.Y.S.2d 883 (N.Y. Sup. Ct. 2005) .............................................................................. 18
K.C. Multi Media v. Bank of America,
171 Cal. App. 4th 939 (Cal. Ct. App. 2009) ........................................................................ 51
Klamath-Orleans Lumber, Inc. v. Miller,
87 Cal. App. 3d 458 (Cal. Ct. App. 1978) ........................................................................... 28
Kolani v. Gluska,
64 Cal. App. 4th 402 (Cal. Ct. App. 1998) .......................................................................... 26
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Korea Supply Co., v. Lockheed Martin Corp.,
29 Cal. 4th 1134 (Cal. 2003) ............................................................................................... 49
Kucker Kraus & Bruh, LLP v. Szold & Brandwen, P.C.,
N.Y.L.J., Sept. 12, 1997 (N.Y. Sup. Ct. Sept. 11, 1997) ...................................................... 16
Lamorte Burns & Co. v. Walters,
167 N.J. 285 (N.J. 2001) ....................................................................................................... 2
Leo Silfen, Inc. v. Cream,
278 N.E.2d 636 (N.Y. 1972) ..........................................................................................16, 17
Loral Corp. v. Moyes,
174 Cal. App. 3d 268 (Cal. Ct. App. 1985) .................................................... 2, 31, 32, 34, 35
MTV Networks v. Fox Kids Worldwide, Inc.,
No. 605580/97, 1998 WL 57480 (N.Y. Sup. Ct. Feb. 4, 1998) .......................................18, 19
Mallory Factor, Inc. v. Schwartz,
536 N.Y.S.2d 752 (N.Y. App. Div. 1989) ........................................................................... 19
Marietta Corp. v. Fairhurst,
Nos. 37265, RJI No. 2002-0229-M, 2002 WL 31056732 (N.Y. Sup. Ct., Aug. 23,
2002) .................................................................................................................................. 42
Marietta Corporation v. Fairhurst,
754 N.Y.S.2d 62 (N.Y. App. Div. 2003) ........................................................................42, 43
Maritime Fish Prods., Inc. v. World-Wide Fish Prods., Inc.,
474 N.Y.S.2d 281 (N.Y. App. Div. 1984) ........................................................................... 46
McRand, Inc. v. Van Beelen,
486 N.E.2d 1306 (Ill. App. Ct. 1985) .................................................................................. 17
Medtronics, Inc. v. The Superior Court of Los Angeles,
29 Cal. 4th 697 (Cal. 2002)................................................................................................. 25
Meissner Filtration Prods., Inc. v. Harrington,
No. B170707, 2004 WL 2189249 (Cal. Ct. App. Sept. 30, 2004) ........................................ 45
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Metro. Traffic Control, Inc. v. Shadow Traffic Network,
22 Cal. App. 4th 853 (Cal. 1994) ..................................................................................passim
Monogram Indus., Inc. v. Sar Indus., Inc.,
64 Cal. App. 3d 692 (Cal. Ct. App. 1976) ........................................................................... 30
Morlife, Inc. v. Perry,
56 Cal. App. 4th 1514 (1997)........................................................................................passim
Moss, Adams & Co. v. Shilling,
179 Cal. App. 3d 124 (Cal. Ct. App. 1986) ....................................................................31, 32
Moye v. Eure,
204 S.E.2d 221 (N.C. Ct. App. 1974).................................................................................. 48
Muggill v. The Reuben H. Donnelley Corp.,
62 Cal. 2d 239 (Cal. 1965) .................................................................................................. 27
PMC, Inc. v. Kadisha,
78 Cal. App. 4th 1368 (Cal. Ct. App. 2000) ........................................................................ 36
People v. Eubanks,
14 Cal. 4th 580 (Cal. 1996)................................................................................................. 54
People v. Farell,
28 Cal. 4th 381 (Cal. 2002)................................................................................................. 54
Proctor & Gamble Co. v. Stoneham,
747 N.E.2d 268 (Ohio Ct. App. 2000)................................................................................. 43
In re Providian Credit Card Cases,
96 Cal. App. 4th 292 (Cal. Ct. App. 2002) ...................................................................... 7, 40
Raimonde v. Van Vlerah,
325 N.E.2d 544 (Ohio 1975)............................................................................................... 56
Rao v. Verde,
635 N.Y.S.2d 660 (N.Y. App. Div. 1995) ........................................................................... 47
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Rapp Ins. Agency, Inc. v. Baldree,
597 N.E.2d 936 (Ill. App. Ct. 1992) .................................................................................... 15
Reading Radio, Inc. v. Fink,
833 A.2d 199 (Pa. Super. Ct. 2003)..................................................................................... 49
Reeves v. Hanlon,
33 Cal. 4th 1140 (Cal. 2004) ..........................................................................................33, 48
Renaissance Technologies Corp. v. Millennium Partners, LP,
2004 WL 4963292 (N.Y. Sup. Ct. March 19, 2004) ............................................................ 43
Retirement Group v. Galante,
176 Cal. App. 4th 1226 (Cal. Ct. App. 2009) .................................................................31, 32
Rich Prods. Corp. v. Parucki,
578 N.Y.S.2d 345 (N.Y. App. Div. 1991) ........................................................................... 18
Rinks v. Courier Dispatch Group, Inc.,
No. 1:01-CV-0678, 2001 U.S. Dist. LEXIS 4728 (D. Ga. Apr. 11, 2001)............................ 58
Robert L. Cloud & Assocs., Inc. v. Mikesell,
69 Cal. App. 4th 1141 (Cal. Ct. App. 1999) ...................................................................31, 36
Royal Carbo Corp. v. Flameguard, Inc.,
645 N.Y.S.2d 18 (N.Y. App. Div. 1996) ............................................................................. 16
Ryan, Elliot and Co. v. Leggat, McCall & Werner, Inc.,
396 N.E.2d 1009 (Mass. App. Ct. 1979) ............................................................................. 48
Scott v. General Iron & Welding Co.,
368 A.2d 111 (Conn. 1976)................................................................................................. 19
Subcarrier Communications, Inc. v. Day,
691 A.2d 876 (N.J. App. Div. 1997) ................................................................................... 16
Support Sys. Assocs., Inc. v. Tavolacci,
522 N.Y.S.2d 604 (N.Y. App. Div. 1987) ........................................................................... 10
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Thola v. Henschell,
140 Wash. App. 70 (Wash. Ct. App. 2007) ......................................................................... 36
Thompson v. Impaxx, Inc.,
113 Cal. App. 4th 1425 (Cal. Ct. App. 2003) ....................................................... 2, 31, 32, 56
Tour & Study, Inc. v. Hepner,
432 N.Y.S.2d 148 (N.Y. App. Div. 1980) ........................................................................... 47
Town & Country House & Home Service, Inc. v. Newberry,
147 N.Y.S.2d 550 (N.Y. 1955)............................................................................................ 49
Triangle Sheet Metal Works, Inc. v. Silver,
222 A.2d 220 (Conn. 1966)................................................................................................. 10
Tyler Enters. of Elwood, Inc. v. Shafer,
573 N.E.2d 863 (Ill. App. Ct. 1991) .................................................................................... 16
U.S. Reinsurance Corp. v. Humphreys,
618 N.Y.S.2d 270 (N.Y. App. Div. 1994) ............................................................................. 8
United States Golf Ass’n. v. Arroyo Software Corporation,
69 Cal. App. 4th 607 (Cal. Ct. App. 1999) .......................................................................... 49
Vacco Industries, Inc. v. Van Den Berg,
5 Cal. App. 4th 34 (Cal. Ct. App. 1992) .............................................................................. 30
Walter Karl, Inc. v. Wood,
528 N.Y.S.2d 94 (N.Y. App. Div. 1988) ............................................................................. 48
Whyte v. Schlage Lock Co.,
101 Cal. App. 4th 1443 (Cal. Ct. App. 2002) .................................................................44, 45
FEDERAL STATUTES
18 U.S.C.
§ 1030............................................................................................................................36, 53
§ 1030(a)(2)(C)..............................................................................................................36, 53
§ 1030(g) ............................................................................................................................ 36
§ 1831................................................................................................................................. 52
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§ 1832................................................................................................................................. 52
§ 1835................................................................................................................................. 53
§ 1836................................................................................................................................. 53
§ 1962(c) ............................................................................................................................ 56
§ 1964(c) ............................................................................................................................ 56
28 U.S.C. § 2283 ...................................................................................................................... 25
STATE STATUTES
Ala. Code § 8-1-1 (1984).......................................................................................................... 13
Cal. Bus. & Prof. Code
§ 16600.........................................................................................................................passim
§ 16601..........................................................................................................................13, 30
§ 16602..........................................................................................................................13, 30
Cal. Civ. Code
§§ 3426 et seq....................................................................................................................... 2
§ 3426.1................................................................................................................................ 7
§ 3426.1(b)(2)..................................................................................................................... 36
§ 3426.1(d) ....................................................................................................................... 2, 4
§ 3426.1(d)(1)....................................................................................................................... 7
§ 3426.1(d)(2)....................................................................................................................... 6
§ 3426.2.............................................................................................................................. 36
§ 3426.2(a) ......................................................................................................................... 45
§ 3426.2(c) ......................................................................................................................... 36
§ 3426.3.............................................................................................................................. 36
§ 3426.5.............................................................................................................................. 40
§ 3426.6.............................................................................................................................. 38
Cal. Code of Civ. Proc. § 2019.210........................................................................................... 39
Cal. Evid. Code
§§ 1060 et seq..................................................................................................................... 54
§ 1060................................................................................................................................. 54
§ 1061................................................................................................................................. 54
§ 1061(b)(2)........................................................................................................................ 54
§ 1062(a) ............................................................................................................................ 54
§ 1063................................................................................................................................. 54
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Cal. Lab. Code
§ 2802................................................................................................................................. 29
§ 2804................................................................................................................................. 29
Cal. Pen. Code
§ 499c......................................................................................................................53, 54, 55
§ 499c(b) ............................................................................................................................ 53
§ 499c(c) ............................................................................................................................ 54
§ 502 .............................................................................................................................54, 56
§ 502(a) .............................................................................................................................. 54
§ 502(c)(2).....................................................................................................................53, 54
§ 502(h)(1) ......................................................................................................................... 54
§1203.044........................................................................................................................... 54
Cal. Rules of Ct.
243.1 .................................................................................................................................. 40
243.2 .................................................................................................................................. 40
Colo. Rev. Stat. § 8-2-113 (1973) ............................................................................................. 13
Fla. Stat. Ann. § 542.33 (West 1988) ........................................................................................ 13
Ga. Code Ann.
§ 13-8-2 (1990)................................................................................................................... 13
§ 13-8-2.1 (1990)................................................................................................................ 13
Haw. Rev. Stat. § 480-4 (1985)................................................................................................. 13
La. Rev. Stat. Ann. § 23:921 (West 1985)................................................................................. 13
Mass. Gen. Laws ch. 112,
§ 12X (1984) ...................................................................................................................... 13
§ 74D (1984) ...................................................................................................................... 13
Mich. Comp. Laws Ann. § 445.774a (West 1990) .................................................................... 13
Mont. Code Ann. § 28-2-703 (1989)......................................................................................... 13
N.C. Gen. Stat. § 75-2 (1988) ................................................................................................... 13
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N.D. Cent. Code § 9-08-66 (1987)............................................................................................ 13
N.Y. Pen. Law
§ 155.00.........................................................................................................................55, 56
§ 155.00.6........................................................................................................................... 55
§ 155.02.1........................................................................................................................... 55
§ 156.30.........................................................................................................................55, 56
§ 156.30.1........................................................................................................................... 56
Okla. Stat. tit. 15, §§ 217-219 (Supp. 1991) .............................................................................. 13
Or. Rev. Stat. § 653.295 (1989) ................................................................................................ 13
S.D. Codified Laws §§ 53-9-8 to 53-9-11 (1990) ...................................................................... 13
Tex. Bus. & Com. Code § 15.05 (Vernon 1990) ....................................................................... 13
Wis. Stat. Ann. § 103.465 (West 1988)..................................................................................... 13
MISCELLANEOUS
2A Sutherland, Statutory Construction (Sands 4th ed. 1984) § 50.05, pp. 440-41...................... 50
Restatement of Torts § 757 cmt. b (1939) ................................................................................... 8
Restatement of Torts (Second) § 768 ........................................................................................ 48
Restatement (Second) of Agency § 393 cmt. e. (1958).........................................................46, 48
Restrictive Covenants and Trade Secrets
xxiv