1

Using Non-compete Agreements to Protect Trade

Secrets

Victoria A. CundiffPaul, Hastings, Janofsky & Walker LLP

New York, New York

22

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

3

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

4

Is it reasonable not to consider post-relationship

restraints?

4

5

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

6

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

7

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

8

• 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

9

“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)

11

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

12

• 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)

15

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

16

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 employmentNon-compete agreements

should be just one part of the protection system

18

Colorado is in the vanguard

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

18

19

Examples of new legislation (pending or

enacted)• Oregon• Idaho• Illinois• Georgia• Massachusetts

–Also industry-specific legislation in CT and NY

19

20

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

22

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

23

Practice pointers: litigating non-competes

Choice of law considerationsFormal requirementsText of agreement; definitionsAbility to reform--plaintiff or

courtScope of restraint

needed/soughtTailoring relief to the specific

breach 23

24

Litigation trends with or without non-compete

agreementsRegardless 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

2525

1. Presumptions

Conventional mantra:

A trade secret, “once lost, is

gone forever”

2626

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)

2727

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

2828

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)

2929

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

30

• Illinois proposed statute–Requires specificity in court orders

–Requires early identification/specification of trade secrets

– Imposes deadline for amending specification

–Attorneys fees30

3131

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

3232

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

33

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

33

3434

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

Agreements

3535

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

3636

Practice Pointer

An “enforceable agreement” is not always enforceable

The factual details always matter and must be thoughtfully developed and presented

3737

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

38

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

3939

“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)

4040

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

4141

Possible Equitable Remedies

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

4242

Activity Restraints–Delay start (lead time)–Phased activities –Non-solicit/customer restraint but not full non-compete

–Remedies outside of courtAssignment of patent or other

property (may need contract)????

4343

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

44

Practice pointer

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

44

4545

5. Additional Remedies?

• Computer Fraud & Abuse Act–Not a substitute for trade secret/contractual remedies

–Can be an important supplement

46

Practice pointers

Contracts can be drafted to increase availability of CFAA remediesState vs. federal court Follow specific pleading

requirements and plead recoverable damages

46

4747

KEY TAKEAWAYS

Non-compete agreements contracts can help--but comply with formalities and remember courts will weigh conflicting policiesNon-compete agreements

should be part of an overall policy to protect trade secrets

48

Know the presumptions—but prove the factsTrade secrets need to be

identified clearly—to those granted access, to defendants, and to the CourtInjunctive relief must be

carefully tailored; there is room for nuance, flexibility, and creativity

48

4949

Damages must be calibrated to the lossCourts and legislatures

are becoming increasingly active in this area of law

Keep track of jurisdiction-specific developmentsBe informed by—and

shape-- larger trends

5050

Questions?

Victoria A. CundiffPaul, Hastings, Janofsky &

Walker LLP(212) 318-6030

victoriacundiff@paulhastings.com