When a company believes that an employee has breached a non-compete agreement by going to work for a competitor, one remedy it can seek is a preliminary injunction. A preliminary injunction is meant to preserve the status quo in a case pending a trial on the merits. In the context of non-compete litigation, this means that an employer can file a lawsuit and quickly obtain an order barring its competitor from hiring the employee.
Getting such an injunction isn’t so easy, however, as shown by an Illinois federal court’s recent decision in Cortz, Inc. v. Doheny Enterprises, Inc.
Owners of stolen trade secrets now have another weapon in their arsenal.
Last month, President Obama signed the Defend Trade Secrets Act (the DTSA), which creates a new cause of action in federal court for the misappropriation of trade secrets. The DTSA does not preempt state laws governing misappropriation of trade secrets, so employers and other trade secret owners may now bring actions under the DTSA and applicable state laws. See 18 U.S.C. § 1838.
Federal prosecutors recently indicted David Colletti, a former VP of marketing with MillerCoors LLC, on charges relating to a scheme to embezzle $7 million from the beer brewing giant. Mr. Colletti, a thirty-year veteran of the company, allegedly broke bad by conspiring with others to defraud the company through fictitious invoices for promotional and other events that were never held. According to Law 360, MillerCoors sued its former marketing executive for $13.3 million last year in an effort to recover for the alleged fraud. Prosecutors claim that Mr. Colletti and his co-conspirators used the proceeds to purchase collectible firearms, golf and hunting trips, and—perhaps inspired by Pink Floyd—even bought an arena football team.
Nanoventions Holdings is a Georgia company that designs and manufactures microstructure technology used to prevent the counterfeiting of such things as currency, driver’s licenses, and event tickets. In 2011, $2 million went missing, and an investigation revealed that that its CFO, Steve Daniels, allegedly forged checks and converted funds to his own use as owner of a company called BIW Enterprises. In an interesting twist, BIW is engaged in the business of growing and distributing marijuana in California. According to Courthouse News Service, the company is suing Mr. Daniels for compensatory, treble and punitive damages under Georgia RICO statutes, and related causes of action. If the allegations are true, one might find a historical equivalent to these events in the 1920s, when the president of the Loft Candy Company stole thousands of dollars to buy Pepsi-Cola out of bankruptcy. Loft Candy ended up owning Pepsi on the basis that it was a stolen corporate opportunity. If Georgia shared Colorado’s stance on marijuana legalization, would the court award ownership of the pot business to Nanoventions? Oh what a difference a century makes.
Who doesn’t love the year-end countdown? We’re here to offer you one of our own – our most-read posts in 2014 about executive disputes. The posts run the gamut from A (Alex Rodriguez) to Z, or at least to W (Walgreen). They cover subjects from sanctified (Buddhists and the Bible) to sultry (pornographic materials found in an executive’s email). Later this week, we’ll bring you a look at what to expect in 2015.
Without further ado, let the countdown begin!
8. The Basics: Dodd-Frank v. Sarbanes-Oxley
This post is an oldie but a goodie. It includes a handy PDF chart that breaks down the differences in the Dodd-Frank and Sarbanes-Oxley whistleblower laws. Each of these laws continues to be a hot-button issue for plaintiffs and employers.
7. When Employment Relationships Break Bad
America may have bidden adieu to Walter White and his pals on Breaking Bad, but employment relationships continue to spin off in some very unpleasant ways. Such was the case with Stephen Marty Ward, who ended up in federal prison after he threatened his employer with disclosure of its trade secrets, as we covered in this post.
Companies prize their formulas for best-selling products like nothing else. Visitors to the World of Coca-Cola can visit the vault holding the soda syrup recipe. And KFC’s fried chicken seasoning method has been described as one of its most valuable assets.
NuScience Corporation makes the skin product CELLFOOD, which it describes as an “oxygen and nutrient supplement” using “proprietary water-splitting technology.” And as recounted by the California Court of Appeal in a recent opinion, NuScience has fought hard to keep the CELLFOOD formula secret. The California court’s decision addressed an unusual spinoff of NuScience’s trade secret battle: a malicious prosecution complaint filed by a former employee, David McKinney, who alleged that NuScience wrongfully brought a prior racketeering and misappropriation case against him. See McKinney v. NuScience Corp., No. B240831 c/w B244074 (Cal. Ct. App. 2013).
According to the court, most of NuScience’s trade secret troubles involved the Henkel family – father John and sons Michael and Robert – who found a copy of the CELLFOOD formula after it had been purchased by NuScience. After discovering the formula, the Henkels then repeatedly sought to sell it to other buyers, get money from NuScience to hand it over, or sell a competing product. NuScience won federal court injunctions against the Henkels, but Michael and Robert didn’t stop their efforts. And after NuScience fired McKinney, its vice president of sales and marketing, the Henkels got him involved in their efforts to discredit NuScience and use the formula. NuScience then filed its racketeering lawsuit against McKinney and Robert Henkel, alleging that the two engaged in a conspiracy to disparage CELLFOOD and violate the federal judgment against Robert. NuScience eventually dismissed that case without prejudice, asserting that it did so because Robert was threatening to disclose the CELLFOOD formula.
McKinney then filed a malicious prosecution lawsuit based on NuScience’s decision to voluntarily give up the case. However, NuScience quickly moved to strike his lawsuit based on California’s anti-SLAPP statute (Cal. Code Civ. Proc., § 425.16).
Do you want to know a secret?
Do you promise not to tell?
With all due respect to the Beatles – and the full lyrics of their 1963 hit are here – perhaps they weren't asking the most important questions to ask about secrets. Maybe the more important, or at least existential question is: is the secret really a secret at all? And how exactly do you tell?
The Fifth Circuit Court of Appeals confronted that issue last week in Heil Trailer v. Kula, et al. The question came up in a suit brought by Heil – which makes tractor-trailers – against three of its former employees and their new employer, Troxell. We’ve written often about confidentiality agreements between employers and employees, and the issues those agreements can raise when an employee goes to work for the competitor down the street. But we don’t see too many opinions about whether the trade secret or other protected information is really “secret-worthy,” although our friends in the federal government sector seem to have it down to a whole system.
In a decision last week, Judge Ewing Werlein Jr. of the U.S. District Court for the Southern District of Texas addressed the question of whether an employer had successfully alleged a claim under the Computer Fraud and Abuse Act (“CFAA”), such that the employer could properly bring its numerous claims against former employees and their companies in federal court. He ruled that the employer had properly pleaded the CFAA claim, and that as a result, the court had subject matter jurisdiction over the case. Beta Technology, Inc. v. Meyers, Civ. No. H-13-1282, 2013 WL 5602930 (S.D. Tex. Oct. 10, 2013).
Before we get into the substance of the decision, some background is in order. Subject matter jurisdiction is an important issue for federal judges. If there’s no basis for subject matter jurisdiction, a case doesn’t belong in federal court. First-year civil procedure students learn this rule from the venerable decision in Capron v. Van Noorden, in which the Supreme Court allowed a plaintiff to obtain reversal of a final judgment because he hadn’t properly alleged that the court below had subject matter jurisdiction over his claim.
The two main categories for federal jurisdiction in non-criminal cases are diversity jurisdiction and federal question jurisdiction. Diversity jurisdiction, as defined in 28 U.S.C. § 1332, permits the federal courts to hear disputes between citizens of different states – i.e., “diverse” citizens – so long as more than $75,000 is at stake. Federal question jurisdiction, which is defined in 28 U.S.C. § 1331, allows the federal courts to address “all civil actions arising under the Constitution, laws, or treaties of the United States.” And under 28 U.S.C. § 1367, once the court has jurisdiction to hear one claim, it can hear any other claims that form “part of the same case or controversy,” even when those claims drag additional parties into the mix.
A recent decision by a federal court in Alexandria, Virginia, illustrates an important point about the trade secrets laws that is often missed: you can be liable even if you merely took your former company’s trade secrets (such as by downloading them onto your thumb drive) but did not use them or disclose them to anyone else. That’s what a company executive in the Alexandria case allegedly did, and the court allowed her former employer’s claim that she violated the Virginia Uniform Trade Secrets Act (the VUTSA) (which parallels many states’ trade secrets laws) to go forward.
When Yu-Hsing Tu worked at pharmaceutical company UCB Manufacturing, he signed a strict confidentiality agreement. In the agreement, Tu promised that he would never disclose any of UCB's “secret or confidential information,” including a laundry list of items such as “designs, formulas, processes, . . . techniques, know how, improvements, [and] inventions.” Tu's work was important to UCB: he helped formulate its cough syrup products, including Delsym, and had significant knowledge of its “Pennkinetic system” for controlled release of cough medication in liquid form.
In 2001, Tu left UCB and started working for his friend Ketan Mehta at Tris Pharma. Soon after, Tu and Tris Pharma began formulating generic versions of UCB’s cough syrups. Six years later, Tris's competitive products were on the market, and UCB lost a lot of market share.
UCB immediately went to court and sued Tu and Tris for misappropriation of trade secrets, breach of contract, and unfair competition. It asked for a preliminary injunction -- a court order early in the lawsuit that would require Tris to stop using its trade secrets until the merits were finally decided. After a five-day hearing focused on the misappropriation claim, the trial judge denied the injunction, maintaining the status quo for Tris.
Shortly after that win, Tu and Tris took the offensive in the litigation, moving for summary judgment. At that point, UCB made a decision that would end up costing it later on: it voluntarily gave up its claim for misappropriation of trade secrets. The trial court then granted Tu and Tris’s motion for summary judgment on the other claims, relying on its finding during the preliminary injunction phase that Tu and Mehta were credible when they testified that they didn’t misuse UCB’s confidential info. UCB appealed.
It’s unseasonably cool here in Washington, DC, where most of our Suits by Suits editors toil. News about the latest in disputes between employers and executives, however, is always in season. Here are the latest headlines:
Non-competes – those contractual agreements that, when enforceable (and enforced) can keep an executive from leaving one job for a job with a competitor – are frequent topics here at Suits-by-Suits, almost as common as the Brood II cicadas were supposed to be here in our home base of Washington, D.C.
So, a story on non-competes is not unique for us, but this one has a twist. It raises an unusual enforcement question: does a non-compete have to be included in both an offer letter and an employment agreement, or is including it in the agreement alone – and conditioning the offer of employment on signing that agreement – enough to make it enforceable?
Last week, the Pennsylvania Supreme Court held that it’s the final employment agreement that matters, and if the non-compete clause is in the final agreement, then it doesn’t matter if the clause was in the offer letter or not.
Today we're going to look at a federal statute that is increasingly becoming central to disputes between outgoing executives and their former employers -- a statute originally designed to prohibit computer "hacking."
Now, if you’re anything like me, when you hear the word “hacking,” you probably envision Matthew Broderick using a dial-up modem to break into his high school’s computer and change his grades. (In fact, Broderick pulled this same trick twice in the 1980s; first in WarGames and then again in Ferris Bueller’s Day Off.) Indeed, if you asked the average person to define “hacking,” they would probably come up with something like WarGames; that is, they would consider hacking to be breaking into a computer or network to which you were not given permission to access, in order to do something nefarious, like changing your grades or starting World War III.
It probably comes as no surprise that after those blockbuster movies (and some real-life events, too), Congress enacted a statute to prohibit “hacking” back in the heyday of the 1980s. That statute – the Computer Fraud and Abuse Act (“CFAA”) – is still the law today, and is codified at 18 U.S.C. §§ 1030.
But what you might not know is that in many areas of the country, there's a court-interpreted disconnect between the CFAA’s definition of hacking and Matthew Broderick. That disconnect, in turn, has become a very real issue today for departing executives and their employers. For example, if you’ve been fired and you delete files off of your laptop before returning it, you may be civilly and even criminally liable under the CFAA in some jurisdictions. (International Airport Centers, LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006). (Less relevant – but more salacious – is the Justice Department’s efforts to prosecute a mom under the CFAA for lying about her age on MySpace.) United States v. Drew, 259 F.R.D. 449 (C.D. Calif. 2009).
It all depends on how the courts in your area interpret the CFAA. Read on....
In Part 1 of this series, we relayed the case of Pamela Hill, an engineer with the Virginia Department of Transportation. Hill was passed over for promotion. Another applicant, a man, who has less experience than Hill and doesn’t have a college degree like she has, got the job. VDOT’s only reason for the decision is that the man did better in the interview.
Hill sued VDOT, alleging sexual discrimination in violation of Title VII of the Civil Rights Act. VDOT moved for summary judgment – an early resolution in its favor – and at the end of this post, I’ll tell you if Hill won or not.
Engineer Milos Milosevic may have thought that he and Schlumberger Technology Corporation were like oil and water when he recently left Schlumberger, which provides services to the oil and gas industry, to work for Halliburton Company, a direct competitor. On Friday, a Texas state court said not so fast, and issued a temporary restraining order (or TRO) against Dr. Milosevic that prohibits him from starting his new job at Halliburton. The court also ordered Dr. Milosevic to “restrain from using or disclosing [Schlumberger’s] trade secrets,” and to “immediately return” any of Schlumberger’s documents or other property. Schlumberger requested the TRO at the outset of a lawsuit that it filed against Dr. Milosevic for breach of a non-compete contract and misappropriation of trade secrets.
In last week’s Inbox, we briefly discussed the dispute between rival insurers Aon and Alliant Insurance Services, Inc.; that lawsuit centers around Aon’s allegations that Alliant raided Aon’s top executives in violation of those employees' covenants not to compete contained within their employment agreements with Aon. That dispute is currently being fought via two parallel lawsuits brought in two different states, New York and California.
Ordinarily, the plaintiff is “master of his or her complaint,” meaning that even if a lawsuit could be brought in multiple jurisdictions, courts will typically defer to the forum chosen by the plaintiff. When parties have claims against each other but prefer different states, this doctrine often results in a so-called “race to the courthouse” in which the first party to file “wins” his or her chosen forum. The “first filed” complaint – the “winner,” if you will, then typically moves to either stay or dismiss the second-filed parallel jurisdiction in the “loser’s” state, and the “loser’s” court almost always complies. This may not be high-minded justice, but it is routine.
Or so we thought.
For two centuries, intellectual property disputes between employees and employers were guided by a relatively simple principle: if you did something “in the workplace” – and you didn’t specifically bargain with your employer to keep it – then what you did was “on the clock” and that work product belongs to your employer.
If you’re a business professional or a lawyer reading this blog, chances are that notion seems awfully quaint right about now. You know that smartphones are ubiquitous in our respective professions, and business gets done 24 hours a day, seven days a week. That important client email gets answered at midnight on a Saturday from your basement – not at 9 am the next Monday from your office.
Whether our brave new wireless world is a mixed blessing is probably beyond the scope of this blog. But one of the things we have noted is that the increasing commingling of the “workplace” with “personal” space is blazing new trails in previously settled areas of the law. We look at another recent development in this area in context after the jump.
That’s the question presented by a recent lawsuit filed by Sergei Aleynikov, a computer programmer who was a Vice President at Goldman Sachs responsible for code relating to Goldman’s high frequency trading business (more on “HFT” here) before he left to work for a hedge fund – allegedly bringing Goldman’s “secret sauce” code with him. We’ve observed before that contractual rights to indemnification can sometimes lead to head-scratching results, but, depending on the outcome, this case may take the cake. Plus, it nicely illustrates key concepts about indemnification (our focus today) and advancement (our focus later this week).
News in suits by suits for you to ponder once you’ve tired of reading about replacement refs and bacon:
We’ve previously written about the disputes that can arise when an employee leaves a job to start a competing company, such as claims that the employee has misappropriated trade secrets or breached confidentiality provisions. Sometimes the employers win these cases. And sometimes, they lose in a big way – as the American Chemical Society (ACS) found out in a case that went all the way to the Ohio Supreme Court. Am. Chem. Soc’y v. Leadscope, Inc., Slip Opinion No. 2012-Ohio-4193. That court's recent decision serves as a caution to employers: if you don’t have reliable evidence that anything’s been stolen, but you sue your employees’ new business anyway, you can end up on the wrong end of a large verdict.
Many of the cases we talk about here on Suits by Suits are breach of contract cases brought by executives against their former employers. Sometimes, however, the employer turns the tables, bringing an action against a former executive for breaching its confidences. When that happens, the executive can find himself owing the company a lot of money, rather than the other way around.
We cover a broad range of issues that arise in employment disputes. Occasionally, we also spotlight other topics of relevant legal interest, ranging from health care to white-collar defense to sports, just to keep things interesting.
Led by Jason Knott and Andrew Goldfarb, and featuring attorneys with deep knowledge and expertise in their fields, Suits by Suits seeks to engage its readers on these relevant and often complicated topics. Comments and special requests are welcome and invited. Before reading, please view the disclaimer.