Peter A. Steinmeyer

Following what it described as a three year “one-man legal circus,” a Seventh Circuit panel recently affirmed a sanction award of over $440,000 in a trade secret misappropriation case, after finding that the defendant, Raj Shekar, “demonstrated nothing but disrespect, deceit, and flat-out hostility[.]” Teledyne Technologies Incorporated v. Raj Shekar, No. 17-2171, 2018 U.S. App. LEXIS 17153, at *13 (7th Cir. June 25, 2018).

Shekar worked at Teledyne Technologies as a marketing and sales manager from June 2013 until he was fired less than two years later. Following his termination, Teledyne sued him for allegedly stealing trade secrets, among other common law and statutory claims. The district court granted a temporary restraining order and a preliminary injunction, ordering Shekar to turn over all of his electronic devices for inspection. Shekar did not comply with any of the court’s orders, and even produced what the court found to be a “fake” hard drive that appeared “totally blank” and “fresh from the electronics store.” As a result, the district court found Shekar in civil contempt and, when Shekar failed to purge himself of contempt, the district court ultimately issued a default judgment and awarded attorneys’ fees and damages totaling more than $441,000.

The Seventh Circuit found the sanction award appropriate, and acknowledged that the large amount determined was “due solely to Shekar’s decision to drag opposing counsel (not to mention the court) through a disingenuous legal battle rather than comply with the court’s clear order.” The panel found no abuse of discretion in the district court’s calculation of attorney’s fees or in the amount of damages awarded.

In so ruling, the court sent a very strong message that attempting to abuse the judicial system in an effort to stall or prolong litigation may result in costly consequences. Parties who face obstructionist behavior during trade secret litigation may want to consider raising a motion for sanctions when appropriate.

In managing workforces, particularly when addressing employee turnover, employers often find themselves facing issues regarding how best to safeguard their confidential business information and how to protect their relationships with clients and employees. In recent years, the legal landscape underlying these issues has been evolving, as lawmakers and judges grapple with the tension in these matters between protection and free competition.

In this Take 5, we examine recent developments, both in the courts and legislative bodies, concerning trade secrets and employee mobility:

  1. Antitrust Action Against No-Poaching Agreements: The Trump Administration Continues Obama Policy
  2. Drafting “Garden Leave” Clauses in Employment Agreements
  3. Will Insurance Cover a Company Sued in a Trade Secrets Lawsuit?
  4. Defend Trade Secrets Act Developments in 2017
  5. New and Proposed State Statutes and Federal Legislation Limiting Non-Compete Agreements

Read the full Take 5 online or download the PDF.

Of the various types of post-employment restrictions imposed on employees, a restriction on the recruitment of former co-workers (sometimes referred to as a “no-poach” or “anti-raiding” clause) is the type most likely to be enforced by a court. As a result, this is one type of post-employment restriction that is frequently drafted without the careful thought generally put in to traditional non-competes and client non-solicitation clauses.  But in what could be a foreshadowing of closer judicial scrutiny of co-worker non-solicitation clauses nationwide, the Wisconsin Supreme Court recently held that the Wisconsin non-compete statute applies to such clauses, and that the particular clause in question was unenforceable because it was not “reasonably necessary for the protection of the employer.”

Specifically, in Manitowoc Company v. Lanning, 2018 WI 6 (Jan. 19, 2018), the Wisconsin Supreme Court ruled that Wisconsin’s non-compete statute, Wis. Stat. § 103.465, broadly applies to restrictions on competition, including post-employment restrictions on the ability to solicit former co-workers.  In Lanning, the defendant, an engineer and former employee of the plaintiff, resigned and immediately began working for the plaintiff’s direct competitor. Defendant did not have a non-compete agreement but he did sign an employment agreement that included a non-solicitation clause that prohibited him from soliciting or inducing any employees from the plaintiff’s company to join a competitor within the two-year period following his resignation. After joining the competitor, defendant allegedly began to recruit employees to join the competitor company. Plaintiff argued that the defendant’s actions violated the non-solicit provision and sued him. The Wisconsin Supreme Court held that the non-solicitation provision was an unreasonable restraint on trade which failed to meet the statutory requirement that the restriction “be reasonably necessary for the protection of the employer.”

Wis. Stat. § 103.465 sets forth five requirements that must be met for a restrictive covenant to be enforceable. The restraint must: “(1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the employee; and (5) not be contrary to public policy.”

Here, the court looked to several factors when determining that the non-solicit provision was an unreasonable restriction on trade, including the fact that the provision contained no limitation based on the employee’s position, no limitation based on the employee’s “familiarity with or influence over a particular employee,” and no geographical limitation. The company argued that the provision was written to protect the company’s “investment of time and capital involved in recruiting, training and developing its employee base from ‘poaching’ by a ‘former employee who has full awareness of the talent and skill set of said employee base.’” The Court rejected this claim, instead determining that the provision was overbroad and restricted competitors’ access to the labor pool.

This case sends a message to employers that all types of post-employment restrictions on employees, even those which are not traditional non-compete agreements, should be drafted narrowly to protect legitimate business interests of the company, and should be no broader than necessary.

Many businesses progressively fear that their trade secrets and valued business relationships are at risk of attack by competitors – and even by their own employees. Do you know what it takes to protect those critical assets in the ever-changing world of trade secret and non-compete law?

Join Epstein Becker Green attorneys Anthony J. Laura,  Robert D. Goldstein, and Peter A. Steinmeyer on Wednesday, November 30, 2016 at 1:00 p.m. EST for a complimentary, 75-minute webinar hosted by Practical Law.  This webinar offers insights into recent developments and expected trends in the evolving legal landscape of trade secrets and non-competition agreements. This webinar will focus on how to navigate this developing area and effectively protect client relationships and proprietary information. Topics will include:

  • The Defend Trade Secrets (DTSA), including the new federal remedies available to employers and the steps they need to take to fully benefit from them.
  • Newly passed state statutes addressing restrictive covenants, including who can enter into them, industry restrictions, and temporal restrictions.
  • Recent decisions regarding what constitutes adequate consideration for a non-compete.
  • Interesting developments determining choice of law issues, including a new California statute restricting choice of law provisions.
  • Administrative agency developments, including agency enforcement actions cracking down on non-competes.

A short Q&A session will follow.

To register for this webinar, click here.

Moderator: Barbara J. Harris, Senior Legal Editor, Practical Law Labor & Employment

CLE credit is available in multiple states. Please submit inquires to: webinars.practicallaw@thomsonreuters.com.