After more than three years of litigation and two rounds of extensive discovery, in Calendar Research LLC v. StubHub, Inc., et al., 2:17-cv-04062-SVW-SS, the United States District Court for the Central District of California dismissed almost all the remaining claims against StubHub and the other defendants.  In doing so, the Court confirmed that in California, specific identifiable trade secrets are required and general industry knowledge and “know how” is insufficient for trade secret protection.

The individual defendants founded and/or worked for a startup named Calaborate that developed a group scheduling mobile application named Klutch.   The Calaborate founder unsuccessfully attempted to sell the company and Klutch to StubHub Inc., among others, and thereafter he and the other individual defendants became StubHub independent contractors.   Plaintiff Title Calendar Research LLC purchased Calaborate in a foreclosure sale.  The lawsuit for breach of the Defend Trade Secrets Act (DTSA) and Computer Fraud and Abuse Act (CFAA), as well as state law claims (which were stayed), followed.

In an earlier order, the Court granted partial summary judgment for StubHub and its then parent eBay, Inc. on the DTSA claim, concluding the corporate defendants had not misappropriated the Klutch source code and that the source code was not a protectable trade secret.   The Court noted that the order did not preclude Plaintiff from asserting that defendants misappropriated non–code trade secrets.

Defendants thereafter moved for summary judgment and Plaintiff asserted the individual defendants’ “know how” and “learnings” acquired at Calaborate were protectable trade secrets, and introduced expert testimony to attempt to distinguish the alleged trade secrets from matters already known to persons in the field.  In opposition, Plaintiff identified four distinct trade secret categories:  (1) Virality Capabilities; (2) UI/UX and Design; (3) Venue Focus; and (4) Integration of Third-Party Apps.   The Court did not buy it, noting that Plaintiff’s expert addressed Virality Capabilities in his report but made little to no mention of the other categories.  Describing the report and the expert’s supplemental declaration as “creating a circuitous path of unexplained jargon,” the Court concluded Plaintiff’s expert failed to show what specific techniques and “know how” actually constitute the Virality Capabilities trade secret, and that Plaintiff’s expert testimony failed to elevate these nebulous concepts to protectable trade secrets.  The Court further concluded Plaintiff failed to provide non-speculative evidence that the alleged trade secrets ever existed, and granted summary judgment on all DTSA claims.

Plaintiff asserted the individual defendants violated the CFAA because they stored Calaborate’s intellectual property on their personal devices and cloud accounts while employed at Calaborate, failed to delete or return the information upon termination in violation of their employment agreements, and therefore accessed the computers without authorization.   The Court rejected this argument, noting that similar “use restriction” arguments have been consistently rejected by the Ninth Circuit and that Plaintiff provided no evidence the individual defendants were not entitled to access or back up confidential information in the first place.  The Court agreed with Plaintiff that there was a factual dispute whether one defendant accessed his Calaborate email once after leaving the company and before the master password was turned over, and denied the motion as to the CFAA claim against that defendant.  Plaintiff will be permitted to proceed on that claim but the recoverable damages are limited to the forensic investigation costs related to the remaining defendant’s alleged unlawful access, which would likely be a de minimis amount.

The Court set the case for a jury trial on this remaining issue for July 7, 2020.   The Plaintiff still has its state law trade secret and breach of contract claims, which the Court did not specifically address.

This case is another example of the tension between trade secret claims and employee mobility, and more specifically the California courts’ reluctance to allow employers to weaponize vague trade secret claims against employee mobility.

We’re pleased to present the 2020 update to “Hiring from a Competitor: Practical Tips to Minimize Litigation Risk,” published by Thomson Reuters Practical Law.

Following is an excerpt – see below to download the full version:

In most industries, competition is not limited to battles over customers and clients, but also includes efforts to recruit, employ, and retain the most productive and talented workforce. In fact, many employers consider their employees to be their most valuable assets and vigorously work to prevent competitors from taking those assets. For that reason, litigation between competitors arising out of the recruitment of employees has become increasingly common. When a hiring employer becomes embroiled in such a dispute, the time and expense necessary to defend itself can easily outweigh the benefits of hiring the employee.

Fortunately, there are a number of steps a hiring employer can take to minimize the risk of litigation when recruiting employees from a competitor. This Note provides a number of practical suggestions for recruiting individuals from a competitor and significantly lowering the litigation risk for various associated claims. …

Click here to download the full Practice Note in PDF format.

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On April 27, 2020, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s decision to grant a preliminary injunction preventing a real estate agent from working for a competitor, because her non-compete, attached to a grant of restrictive stock units, was likely enforceable despite the agent’s forfeiture of the company stock.

The employee in this case worked for Martha Turner Sotheby’s International Realty (“Martha Turner”) in Houston, Texas for over four years. Approximately nine months before her resignation, Martha Turner’s parent company Realogy Holdings Corporation (“Realogy”) notified the employee that she was selected to participate in the company’s stock option program through an equity grant, in recognition of her accomplishments.  The grant was in the form of restricted stock units, which gave her the opportunity to receive shares of the parent company’s common stock upon vesting of the award after a three-year period.

Among the documents accompanying the equity grants was a Restrictive Covenants Agreement (“RCA”), which the employee executed electronically. The RCA required the employee to acknowledge that she had access to, and knowledge of, “’Confidential Information,’ the disclosure of which ‘could place the Company at a serious competitive disadvantage and could do serious damage” to Realogy’s business.  The RCA further outlined that the employee received good and valuable consideration for the restrictive covenants contained in the agreement, including (a) the right to acquire and own securities, and (b) her continued employment with Realogy.  Among the restrictive covenants by which she agreed to be bound was a non-competition provision, which prohibited the employee, for one year after termination and within fifteen miles of any branch where she worked, from performing services for a commercial or residential real estate brokerage business providing the same or similar services as she did at Martha Turner, and which is likely to result in the use or disclosure of Confidential Information.

In February 2019, the employee resigned from Martha Turner and accepted employment with Urban Compass, Inc. and Compass RE Texas, LLC (collectively “Compass”).  Pursuant to the terms of the stock option program, the employee’s resignation forfeited her right to vest any part of her equity grant.  Realogy subsequently filed a lawsuit with the U.S. District Court for the Southern District of Texas seeking injunctive relief, based on the terms of the RCA.  After a hearing, the district court ruled in favor of Realogy, issuing a preliminary injunction enforcing the restrictive covenants outlined in the RCA.

On appeal, the employee argued that the non-competition provision in the RCA is unenforceable under Texas law, because it is not supported by sufficient consideration.  Specifically, since the stock units and continued employment were the consideration outlined in the RCA, the employee argued that the restricted stock was “illusory” consideration for the non-competition provision, because the units were unvested, and had to be forfeited upon her resignation.  The employee also argued that her “continued employment,” does not constitute valid consideration for a restrictive covenant under Texas law.

Citing Alex Shushunoff Management Services, L.P. v. Johnson, the Fifth Circuit found that Realogy’s implied promise to provide the employee with confidential information constitutes valid consideration for the non-competition provision. The three-member panel determined that the district court correctly found that Realogy furnishing the employee with confidential information and her promise not to disclose that information make the non-competition provision she executed as part of that agreement enforceable, even if Realogy did not make an express promise to provide the employee with confidential information.

This decision further highlights the importance of including a confidentiality provision in restrictive covenant agreements in Texas, and specifically outlining the promise to provide the employee with confidential information as all or part of the consideration for the restrictive covenants by which the employee agrees to be bound.

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Citing Nebraska’s fundamental public policy, the U.S. Court of Appeals for the Third Circuit recently affirmed a District Court’s refusal to enforce a Delaware choice of law clause in a non-compete agreement signed by a Nebraska employee.

Delaware law is generally favorable to enforcing non-compete restrictions.  Hundreds of thousands of new corporate entities (corporations, LLCs, LPs, LLCs, etc.) are created in Delaware every year, and the First State is home to more than two-thirds of the Fortune 500 and 80 percent of all firms that go public.[1] Many of these Delaware entities are headquartered in, and have operations in, states with less favorable non-compete law than Delaware.  Choosing Delaware law to govern non-compete restrictions thus seems like a bullet-proof strategy for side-stepping unfavorable state law and enforcing non-compete restrictions.  However, a Delaware choice of law clause does not guarantee enforcement.

As we recently reported, incorporation (or formation) in Delaware is a legally sufficient basis for choosing Delaware law to govern non-compete restrictions – even if the employer is headquartered in another state and the employee works in another state.[2] Stated differently, and in terms of the Restatement (Second) of Conflicts of Laws (“Restatement”), incorporation or formation in Delaware by itself creates a “substantial relationship” with Delaware.  Restatement § 187(2)(a).

But that does not end the choice of law inquiry.  A Delaware choice of law clause will not be enforced if application of Delaware law is “[1] contrary to a fundamental public policy of a state which [2] has a materially greater interest than the chosen state in determination of the particular issue and which [3] would be applicable law in the absence of an effective choice of law by the parties.”  Restatement § 187(2)(b).  In the situation we’re discussing – i.e., the only connection to Delaware is the employer’s incorporation or formation there – the state where the employee works will have a materially greater interest in the dispute than Delaware, and would be the applicable law in the absence of the choice of law clause.  Validity of the Delaware choice of law clause thus rises or falls on whether Delaware law is contrary to a public policy of the state in which the employee works.

In Cabela’s LLC v. Higby, 362 F. Supp. 3d 208 (D. Del. 2019), the court had to decide the validity of a Delaware choice of law provision where the employee lived and worked in Nebraska.  Nebraska non-compete law is more restrictive than Delaware law.  The court explained that Nebraska non-competes may “restrain competition by improper and unfair methods, but may not constrain ordinary competition,” while in Delaware “[a]n agreement prohibiting ordinary competition is enforced so long as it is not oppressive to an employee.”  Id. at 217-18 (citations omitted).  The court found that the non-compete at issue restrained ordinary competition, and was therefore unenforceable under Nebraska law, but would be enforceable under Delaware law.  The court therefore held that “the application of Delaware law would be contrary to a fundamental policy of Nebraska,” and refused to enforce the Delaware choice of law clause.  Id. at 219.

The mere fact that an agreement is enforceable in one state but not another is not necessarily dispositive of the contrary-to-a-fundamental-policy issue.  However, the Third Circuit recently affirmed the district court’s decision.  In doing so the Third Circuit specifically refused the employer’s request to certify the question to the Delaware Supreme Court, noting that “we do not find the law to be unsettled on this point.”  Cabela’s LLC v. Higby, 2020 WL 1867922, at *1 n.8 (3d Cir. April 14, 2020).[3]

Practitioners, particularly those who advise their corporate colleagues on mergers and acquisitions, often review employment agreements that contain Delaware choice of law provisions.  These practitioners are entirely correct in telling their corporate colleagues and clients that Delaware non-compete law is generally favorable to the employer.  However, the careful practitioner will also add that enforceability may ultimately depend on where the employee works.

[1] https://corp.delaware.gov/stats/

[2] https://www.tradesecretsandemployeemobility.com/2020/04/articles/non-compete-agreements/first-circuit-massachusetts-employee-must-abide-by-a-restrictive-covenant-governed-by-a-delaware-choice-of-law-clause-the-more-things-change-the-more-they-stay-the-same-part-ii/

[3] https://www2.ca3.uscourts.gov/opinarch/191423np.pdf

Joining many other states that in recent years have enacted laws regarding physician non-competition agreements, Indiana recently enacted a statute that will place restrictions on such agreements which are originally entered into on or after July 1, 2020.

Under Pub. L. No. 93-2020 (to be codified in part as Ind. Code § 25-22.5-5.5) (2020), which will take effect on July 1, 2020, for a non-compete to be enforceable against a physician licensed in Indiana, the agreement must contain the following provisions:

  1. A provision that requires the employer of the physician to provide the physician with a copy of any notice that (A) concerns the physician’s departure from the employer, and (B) was sent to any patient seen or treated by the physician during the two year period preceding the end of the physician’s employment or contract.
  2. A provision that requires the physician’s employer to, in good faith, provide the physician’s last known or current contact and location information to a patient who (A) requests such information and (B) was sent to any patient seen or treated by the physician during the two year period preceding the end of the physician’s employment or contract.
  3. A provision that provides the physician with (A) access to or (B) copies of any medical record associated with a patient described above upon receipt of the patient’s consent.
  4. A provision that provides the physician with the option to purchase a complete and final release from the terms of the non-compete at a reasonable price.
  5. A provision that prohibits the providing of patient medical records to a requesting physician in a format that materially differs from the format used to create or store the medical record during the routine or ordinary course of business, unless mutually agreed otherwise.

As is clear from these requirements, preserving a patient’s right to choose a physician, including by continuing to be seen or treated by a physician departing from a particular practice, was an important factor considered by Indiana legislators.  Also, given that Indiana law rarely allows for judicial modification of restrictive covenants, this new statute will be onerous for practices/employers who do not pay close attention to drafting their non-compete agreements.

A recent decision issued by the U.S. District Court for the Northern District of California, San Jose Division, presents a stark example of what can result when a defendant accused of trade secret misappropriation is careless in preserving electronically stored information (“ESI”) relevant to the lawsuit.

Silicon Valley-based autonomous car startup WeRide Corp. and WeRide Inc. (collectively, “WeRide”) sued rival self-driving car company AllRide.AI Inc. (“AllRide”), along with two of its former executives and AllRide’s related companies, asserting claims for misappropriation under the federal Defendant Trade Secrets Act and the California Uniform Trade Secrets Code, along with numerous other claims.  WeRide secured a preliminary injunction from the Court, directing AllRide not to use or disclose WeRide’s confidential information and trade secrets, and specifically directing defendants not to destroy evidence.

Discovery showed that the defendants did not heed the Court’s injunction, instead engaging in what the Court called a “staggering” amount of spoliation, much of which AllRide conceded.  The spoliation included:

  • Failure to disable a 90-day automatic deletion of emails in AllRide’s computer system;
  • Destruction of email accounts assigned to or used by the individual defendants;
  • Destruction of the source code alleged to have been stolen; and
  • Wiping clean one laptop and deleting files from another laptop.

Evaluating defendants’ actions under Federal Rules of Civil Procedure 37(b) and 37(e), the Court issued terminating sanctions against AllRide and the individual defendants, striking their answers and entering defaults against them, and holding that they must pay WeRide’s attorneys’ fees relating to discovery and motion practice regarding the spoliation.

Although an extreme example, this decision serves as a reminder of the importance of preserving ESI, even when litigation is a possibility.

When Massachusetts enacted the Massachusetts Noncompetition Agreement Act (“MNCA”) in mid-2018, some commentators suggested that the statute reflected an anti-employer tilt in public policy. But, we advised  that sophisticated employers advised by knowledgeable counsel could navigate the restrictions set forth in the MNCA.  As reported here, the May 2019 decision from the District of Massachusetts in Nuvasive Inc. v. Day and Richard, 19-cv-10800 (D. Mass. May 29, 2019) (Nuvasive I) supported our initial reading of the MNCA.   The First Circuit’s April 8, 2020 decision in Nuvasive, Inc. v. Day, No. 19-1611 (1st Cir. April 8, 2020) (Nuvasive II), which upheld the District Court’s decision, provides further evidence that Massachusetts courts will still enforce contractual choice of law provisions when considering requests to enforce certain restrictive covenants in employment contracts.  Indeed, in Nuvasive II, the First Circuit concluded that the MNCA, by its terms, does not apply to non-solicitation agreements, and that the Massachusetts employee, Day, had not demonstrated a legal basis for the District Court to ignore the Delaware choice of law clause in his employment agreement.

Nuvasive II, like Nuvasive I, presented the question of whether an employer incorporated in Delaware could enforce a non-solicitation agreement, which was governed by Delaware law, against a former employee, who was a Massachusetts resident.  Massachusetts law, like the law of most states, generally requires courts to enforce a contractual choice of law provisions.  Nonetheless, in Nuvasive II, the former employee argued that the District Court erred in enforcing a Delaware choice of law clause because: (1) Delaware had no “substantial relationship” to the parties or the transaction; and (2) Delaware law was contrary to the fundamental policy of Massachusetts.  The First Circuit, like the District Court, rejected both arguments.

The First Circuit summarily rejected the employee’s argument that the choice of law clause was unenforceable because Delaware lacked the requisite relationship to the contract and the parties.  The Court noted that the employer was incorporated in Delaware and held that this was a sufficient basis on which to apply Delaware law to the restrictive covenant.  Indeed, the First Circuit emphasized that the Restatement of Contracts generally recognizes the validity of choice of law clauses that require application of the law of the state where one of the parties resides or maintains its principal place of business.   Thus, Nuvasive II recognizes the employer’s right to include a choice of law clause that requires application of the law of the state where it is incorporated or maintains its principal place of business.

Similarly, the First Circuit did not linger too long over the employee’s argument that the application of Delaware law would be contrary to the fundamental public policy of Massachusetts.   Citing the Massachusetts Supreme Court’s 2020 opinion in Automile Holdings, LLC v. McGovern, 136 N.E. 1207, 1271 n. 15, (Mass. 2020), the Court quickly concluded the MNCA was not applicable to the dispute at all, because it does not apply to agreements executed before October 1, 2018 and because it “does not apply to non-solicitation agreements.”   Further, the Court concluded that Massachusetts’ material change doctrine, which requires new restrictive covenants to be executed with each material change in an employment relationship, did not bar the application of Delaware law to the parties’ dispute.  In reaching this conclusion, the First Circuit defined the types of events that qualified as “material changes” as employer-initiated changes to the employment relationship, such as pay cuts, demotions, and material breaches of an employment contract by the employer.   Notably, the First Circuit rejected the contention that “an employee’s own choice to terminate” his employment by accepting a different position with his employer could be “a ‘qualifying’ change under Massachusetts’ ‘material change’ doctrine.”   Thus, as we initially predicted, the enactment of the MNCA does not bar out of state employers from enforcing reasonable restrictive covenants against Massachusetts employees.

The First Circuit expressly declined to consider whether either the MNCA or the material change doctrine embodied a “fundamental policy” of Massachusetts, because it found that the application of Delaware law did not violate either the MNCA or the material change doctrine.  Thus, out-of-state employers can expect Massachusetts employees seeking to avoid restrictive covenants governed by the laws of other states to continue to argue that the MNCA or the material change doctrine reflect fundamental policies of Massachusetts, which invalidate choice of law clauses.   Accordingly, out-of-state employers with Massachusetts employees should review the guidance in Nuvasive I and Nuvasive II and consult counsel when drafting restrictive covenants in employment contracts with Massachusetts employees.

For any attorney about to rush into New York State court to seek an injunction or temporary relief with regard to a violation of a non-compete or other restrictive covenant, or with regard to misappropriation of trade secrets, think again about venue.

By Administrative Order, dated March 22, 2020, Chief Administrative Judge Lawrence Marks has decreed that until further notice, New York State courts are accepting no filings unless the filings concern an emergency matter (as defined in the Order’s Exhibit A).  Neither restrictive covenant nor trade secret matters count as “emergencies.”

This Order thus effectively bars the initiation of non-compete or trade secret matters for its duration (and any filings in such actions that are pending) in New York state court.  If called upon to initiate action in New York on such a matter (including seeking temporary/injunctive relief), counsel must look to federal court in New York, or other potential state (or federal) venues.  If diversity jurisdiction does not exist, consider a claim under the Defend Trade Secrets Act or other federal statute to secure federal question jurisdiction.

The Administrative Order was issued in conjunction with the Executive Order issued by Governor Andrew Cuomo on March 20, 2020, which tolls deadlines until April 19, 2020.

On January 9, 2020, the Federal Trade Commission (“FTC”) held a public workshop in Washington, DC to examine whether there is a sufficient legal basis and empirical economic support to promulgate a Commission rule that would restrict the use of non-compete clauses in employment contracts.  At the conclusion of the workshop, the FTC solicited public comments from interested parties on various issues, including business justifications for non-competes, effect of non-competes on labor-market participants and efficacy of state law for addressing harms arising from non-competes.

On March 12, 2020, attorneys general from seventeen states (including California, Illinois, New York and Washington), Puerto Rico and the District of Columbia (the “AGs”) submitted extensive comments to the FTC.  The AGs take the position that non-competes harm workers by suppressing wages and degrading non-wage benefits, and harm consumers by reducing business’ access to skilled and unskilled labor and by reducing innovation. The AGs find the usual justifications for non-competes (to protect trade secrets and investments in training workers) unpersuasive, and note that non-competes–particularly for low wage workers–usually are not freely bargained for.

Declaring their support for “federal rulemaking that is consistent with our ability to pursue enforcement and legislative priorities to the benefit of workers and consumers,” the AGs also ask that the FTC work with AGs to tackle abusive use of non-competes through enforcement actions, further study, issuance of guidelines, and educational initiatives.

In the coming weeks, the FTC will be evaluating the AGs’ comments, as well as comments from many other groups and individuals, as it decides what further actions, if any, it will take with regard to non-competes.  Stay tuned.

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