Non Compete Agreements

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					Using Non-compete Agreements to
      Protect Trade Secrets



          Victoria A. Cundiff
Paul, Hastings, Janofsky & Walker LLP
        New York, New York

                                   1
       Trade Secrets Law is Becoming
            Increasingly Important
• Economic concerns--trade secrets
  protection is not free, but may have
  lower up-front costs
• Uncertainty of protection for some
  intellectual assets under other
  regimes


                                         2
   Trade secrets owners must
  disclose secrets to “insiders”
• But most misappropriation occurs
  at the hands of former insiders
  – Former employees
  – Former business partners
  – Former potential business
    partners

                                     3
Is it reasonable not to consider
  post-relationship restraints?




                               4
Post-relationship restraints raise
 non-i.p. policy considerations
• Restraints on trade disfavored
• Employee mobility favored
• Impact on innovation?
   – Silicon Valley vs. Route 128




                                    5
  Resolution of policy issues is
      jurisdiction specific
• Jurisdictions vary widely
  – California: no post-employment
    restraints except as permitted by
    statute
  – Florida: restraints permitted to
    protect trade secrets and
    business relationships; statute
    builds in presumptions            6
          Colorado Model
• Statute: Colo. Rev. Stat. 8-2-113
• Non-compete agreements void
  except to protect against unfair
  competition
  – through misuse of trade secrets,
    or
  – by former executive and
    managerial employees and their
    staffs                             7
• Statute applies to non-solicitation
  agreements as well as true non-
  compete agreements, Amtel Corp.
  v. Vitesse Semiconductor Corp., 30
  P. 3d 789 (Colo. App. 2001)




                                    8
 “For the protection of trade
          secrets”
• Saying it does not make it so:
  employer cannot use claim of
  “trade secret protection” as a
  subterfuge to prevent otherwise
  legitimate competition
• “Trade secrets” must satisfy
  CUTSA test
                                    9
• Does this suggest need for
  standalone trade secrets
  agreement? See Haggard v.
  Synthes Spine, 2009 U.S. Dist.
  LEXIS 54818 (D. Colo. June 12,
  2009)
  In tech world the “executive
staff” exception may also apply

 – “Plain meaning” applies, so
   covers mid-level manager with
   decision-making autonomy, DISH
   Network Corp. v. Altomari, 2009
   Colo. App. LEXIS 1178 (Colo. Ct.
   App. June 25, 2009)
                                 11
• Note that “professional staff”
  generally includes legal,
  engineering, scientific and medical
  personnel, Boulder Medical Ctr. v.
  Moore, 651 P. 2d 464 (Colo. App.
  1982)


                                    12
        Two Step Process

• Is there a protectable interest?

• Is the restraint narrowly tailored to
  protect that interest? Mgm’t
  Recruiters of Boulder v. Miller, 762
  P. 2d 763 (Colo. Ct. App. 1988)
  If agreement meets statutory
             tests
• Presumption of irreparable harm
  likely applies
   – But stay tuned for the rest of the
     story
   – See , e.g., Xantrex Technology v.
   Advanced Energy Industries, Inc.,
   2008 WL 2185882 (D. Colo.
   2008)
  Practice pointers: Drafting

 What does the employee do?
 Will/did the employee have
access to trade secrets?
 To meet “trade secrets
exception,” agreement must be
geared to protection of trade
secrets
                                15
 Provide consideration for the
agreement, Lucht’s Concrete
Pumping, Inc. v. Horner, 2009 WL
1621306 (Colo. Ct. App. June 11,
2009) (unpublished)(continued
employment is not sufficient since
employers and employees do not
have equal bargaining power)

                                     16
 Advise the employee of
agreement before, during, and after
employment
 Non-compete agreements should
be just one part of the protection
system
   Colorado is in the vanguard

• Courts and legislatures throughout
  the country are focusing on policy
  challenges posed by non-compete
  agreements




                                   18
     Examples of new legislation
        (pending or enacted)
•   Oregon
•   Idaho
•   Illinois
•   Georgia
•   Massachusetts
     – Also industry-specific legislation
       in CT and NY
                                            19
         Common themes

• Restraints are disfavored
• Increasing emphasis on “leveling
  bargaining power” by limiting non-
  competes to high level employees
  or requiring special compensation
• Scope of restraint to be narrowly
  tailored
                                   20
• Early notification of non-compete
  agreements is increasingly required
• Increasing emphasis on protecting
  information, not simply
  relationships
   Remember: Need for post-
  relationship restraints is not
confined to employment context
• Joint ventures and other business
  relationships
• Supply relationships
• Proposed business relationships
  that never took effect
   – Significant damages awards

                                      22
Practice pointers: litigating non-
           competes
 Choice of law considerations
 Formal requirements
 Text of agreement; definitions
 Ability to reform--plaintiff or court
 Scope of restraint needed/sought
 Tailoring relief to the specific
breach
                                     23
Litigation trends with or without
   non-compete agreements
 Regardless of jurisdiction, and
regardless of whether there is a
contractual post-relationship
restraint, the same issues
underlying much recent
consideration of non-competes will
be important in litigating trade
secrets cases
                                    24
         1. Presumptions


      Conventional mantra:

A trade secret, “once lost, is gone
              forever”



                                      25
But when is a trade secret truly at
      risk of being “lost”?
 • Faiveley Transport Malmo
   AB v. Wabtec Corp. , 559
   F. 3d 110 (2d Cir. 2009)




                                      26
        Practice pointer

 Present evidence that trade secret
is at risk of further disclosure or
show why damages from use will
be peculiarly difficult to remedy or
calculate
     Presumptions--contractual or
   legal--may then apply
                                  27
          Practice pointer
  Bad acts and wrongful taking may
give rise to a presumption of
irreparable harm See, e.g.,
Xantrex
  But not always. See, e.g.,
 American Airlines v. Imhof, 2009
 U.S. Dist. LEXIS 46750
 (S.D.N.Y. June 3, 2009)
                                 28
 2. The need to identify trade secrets
          at an early stage

• California rule (2019.210(d)) is not
  only good practice but is
  increasingly the law across the
  U.S.
• “Phasing” issues


                                         29
• Illinois proposed statute
   – Requires specificity in court
     orders
   – Requires early
     identification/specification of
     trade secrets
   – Imposes deadline for amending
     specification
   – Attorneys fees
                                       30
   Practice pointer: nationwide
 Focus on identification issues
early
   But Brescia v. Angelin, 172 Cal.
  App. 4th 133 (2009), rev. denied,
  points out that standard for
  extent of detail required to satisfy
  obligations may vary with facts

                                         31
     3. The Risk of Loss is not
“Inevitable” Just Because the Trade
       Secrets Owner Fears It
 • When attempting to protect trade
   secrets by limiting post-receipt
   competition, the trade secrets
   owner must present evidence to
   show why disclosure will be
   inevitable absent the restraint


                                  32
• “Changing teams at halftime”
  language, without more, will not
  win the day




                                     33
The Need to Prove Actual Risk is not
Just an Issue for those Lacking Non-
        compete Agreements




                                   34
            Examples

• Cases involving non-compete
  agreements:
  – IBM v. Papermaster, 2008 U.S.
    Dist. LEXIS 95516 (S.D.N.Y.
    Nov. 21, 2008)
  – IBM v. Johnson, 2009 WL
    1850316 (S.D.N.Y. June 26,
    2009), aff’d 2009 WL 3416154    35
         Practice Pointer

 An “enforceable agreement” is
not always enforceable
   The factual details always
  matter and must be thoughtfully
  developed and presented



                                    36
The Need for Proof is Heightened
 Where there is no Non-compete
          Agreement

– Doctrine is “an exceedingly
  narrow path through judicially
  disfavored territory” and requires
  a “very strong showing” of actual
  risk


                                   37
But, upon proper factual showing,
broad relief can be granted even
      without an agreement

– Samsung Telecommunications
  America, LLC v. Ogle, No. 09-
  09210 (Dallas Co. Dist. Ct. July
  23, 2009)



                                     38
 “Inevitable Disclosure” is not just an
Issue when Employees Change Jobs

• Business to business context
  – Industrial Insulation Group, LLC
    v. Sproule, 2009 WL 211077
    (S.D. Tex. Jan. 28, 2009)



                                       39
        Practice Pointer

 “Inevitable Disclosure” remedy is
“equitable” and need not be “all or
nothing”
   Courts may grant range of
  remedies, including non-
  disclosure/non-use order, non-
  solicitation order, or non-compete
  order
                                   40
Possible Equitable Remedies

Verification techniques
• Forensic imaging
• Independent monitor
• Certification
• “Time sheets”

                              41
 Activity Restraints
– Delay start (lead time)
– Phased activities
– Non-solicit/customer restraint but
  not full non-compete
– Remedies outside of court
 Assignment of patent or other
property (may need contract)
 ????
                                       42
            4. Damages

• Significant awards
  – largest awards tend to involve
    former insiders
  – contracts help establish “knew or
    should have known” information
    was not available for unrestricted
    use
                                     43
     Practice pointer

 Need to show causation
• Apportionment
• Royalties vs. other calculations




                                 44
    5. Additional Remedies?
• Computer Fraud & Abuse Act
  – Not a substitute for trade
    secret/contractual remedies
  – Can be an important supplement




                                 45
     Practice pointers

  Contracts can be drafted to
increase availability of CFAA
remedies
  State vs. federal court
  Follow specific pleading
requirements and plead
recoverable damages
                                46
      KEY TAKEAWAYS

 Non-compete agreements
contracts can help--but comply with
formalities and remember courts
will weigh conflicting policies
 Non-compete agreements should
be part of an overall policy to
protect trade secrets
                                 47
  Know the presumptions—but prove
the facts
  Trade secrets need to be identified
clearly—to those granted access, to
defendants, and to the Court
  Injunctive relief must be carefully
tailored; there is room for nuance,
flexibility, and creativity


                                   48
 Damages must be calibrated to
the loss
 Courts and legislatures are
becoming increasingly active in this
area of law
    Keep track of jurisdiction-
  specific developments
    Be informed by—and shape--
  larger trends
                                  49
           Questions?




           Victoria A. Cundiff
Paul, Hastings, Janofsky & Walker LLP
            (212) 318-6030
   victoriacundiff@paulhastings.com

                                        50

				
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