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Enforcing RestrictiveCovenants in aMultistate BusinessLabor & Employment EducationalWebinar Series

Susan M. DiMickele, PartnerSquire Sanders (US) LLP

Labor & EmploymentSusan.DiMickele@squiresanders.com

+1.614.365.2842

Jeffrey J. Wedel, PartnerSquire Sanders (US) LLP

Labor & EmploymentJeffrey.Wedel@squiresanders.com

+1.216.479.8767

Ryan A. Sobel, Senior AssociateSquire Sanders (US) LLP

Labor & EmploymentRyan.Sobel@squiresanders.com

+1.216.479.8489

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Before Litigation: Get Your Ducks in a Row

This litigation can be Pandora’s Box

• Avoid knee-jerk reactions

Not all departing employees may be in violation

Evaluate the situation based on upon real harm to business

Presumably non-competes are used strategically, not for everyone

If you elect to proceed, consider the following…

• First: Stop the bleeding as much as you can

Secure/limit access to employee’s company-issued electronic devices,networks, email

If a current employee, put on administrative leave while investigatingwhat s/he’s been doing – strict admonition of no customer/employeecontact

Get people in place to secure customer relationships

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Get Your Ducks in a Row cont.

• Second: Find out what is really going on

Identify your issues (trade secrets, non-compete, etc.), and identifysupporting facts (copied files, solicitation of customers, etc.)

If you have to go to the Court, you’ll want to “show,” not “tell”

– Judge may view employee at a disadvantage, and injunctive relief asextraordinary—you want compelling evidence, not argument

– A TRO can set the tone for the rest of litigation—it’s a must-win

Consider utilizing a computer forensics company, and quickly

– What are you dealing with? What’s been taken, who’s/what’s at risk?

– Is there a smoking gun?

– Minimizes/eliminates the need for customer involvement

» Involving a customer in litigation can negatively impact the relationship—themore evidence you can obtain, the less the need to involve customers directly

– Internal IT vs. External Forensic Specialists

» The latter are more expensive, but tend to be more sophisticated and capable—it might be worth the investment

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Get Your Ducks in a Row cont.

• Third: Weigh your options – is litigation the right course?

Litigation ramps up quickly and is costly—you’re put to your proofswithin weeks—so determine the right course before you set out

Litigation can have unintended consequences

– Negatively impact customer relationships

– Negatively impact standing within industry, with customers or partners

– Invalidation of a non-compete can impact multiple employees

– Ties up personnel and resources, impacts business operations

– This is as much a business decision as it is a legal decision

On the other hand…

– Failure to act to protect trade secrets or enforce non-competes canundercut legal basis for future protection

– Employees may take notice that a coworker’s activities went unchallenged

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Get Your Ducks in a Row cont.

Embark on litigation for the right reasons, not as a bullying tool

– Are you really harmed by an employee’s departure?

– If s/he was a marginal employee, what makes you think s/he’ll be a threatwith a competitor?

Are there alternatives to litigation that can protect your interests?

– Cease and desist letter

» Pros

– Could avoid expensive litigation if new employer wasn’t aware ofrestrictive covenant

– Opens a dialogue to resolution

– Sets up tortious interference claim

– Puts employee/new employer on notice to preserve discovery

» Cons

– “Pound salt” response more likely

– Could trigger a race to the courthouse for a declaratory judgment action ina different forum – impact forum selection clause

– Potential for tortious interference claim, public policy violation in certainjurisdictions

– Negotiated resolution

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Bringing Suit: Fast & Furious

Enforcement litigation overview:

1. Temporary Restraining Order

2. Expedited Discovery

3. Preliminary Injunction

4. Additional Discovery

5. Permanent Injunction/Damages

The TRO is a must-win:

• If you can’t get an ex parte TRO, how likely are you to get apreliminary injunction in the face of opposition?

• Sets the tone for litigation/settlement discussions

The real battles are the TRO/preliminary injunction:

• Not likely to win permanent injunction otherwise

• Outcome of TRO/preliminary injunction hearing drives potentialresolution

• Can occur within two weeks of one another

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Filing Suit

Forum: Choose wisely…

• File suit in the most favorable forum that bears arelationship to the employment or activity

• Use choice-of-law/forum-selection provisions wherepossible, but…

Forum selection clause unenforceable if the product ofoverreaching, if against public policy, or if unreasonable oroverly burdensome

Choice-of-law provision unenforceable if chosen state lackssubstantial relationship, or application of its law is contrary tostate with materially greater interest

Courts can reach different conclusions as to enforceability onsimilar facts

Wrong forum in state court can result in dismissal—in federalcourt you will simply get transferred

You can find yourself in a jurisdiction you didn’t intend

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Filing Suit cont.

Forum: Choose wisely (cont.)…

• Avoid California at all costs

Non-competes/non-solicitations are unenforceable

– Cal. Business and Professions Code Sec. 16600

– Edwards v. Arthur Anderson, 44 Cal. 4th 937 (2008)

Can’t restrain competition/solicitation to protectmisappropriated trade secrets

– The Retirement Group, Inc. v. Galante, 176 Cal. App. 4th 1226 (2009)

– You can get an injunction to prevent further use of trade secrets

Can face liability if efforts to implement or enforceresult in employee’s job loss

– D’Sa v. Playhut, Inc., 85 Cal. App. 4th 927 (2000)

Choice-of-law/forum-selection provisions areunenforceable

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Filing Suit cont.

Forum: Choose wisely… (cont.)

• Know your state…

Some states regulate this area by statute, others by common law–stay on top of recent changes…

– New Hampshire: New law (HB 1270) effective July 14, 2012, makes non-compete/non-piracy agreements unenforceable if not presented toemployee before or at time of offer or change in position.

– Georgia: New law (O.C.G.A. § 13-8-51 et seq.) effective May 11, 2011,makes restrictive covenants enforceable if reasonable.

– Texas: Supreme court ruling makes enforcement under Tex. Bus. & Com.Code § 15.50(a) easier, by expanding scope of acceptable consideration.Marsh USA Inc. v. Cook, 354 SW 3d 764 (Tex. 2011).

– Update choice-of-law/forum agreements, and support with consideration

Is it a “blue pencil” state?

Be aware of your potential bench

• Ohio is generally a favorable forum

Restrictive covenants are enforceable if reasonable

Blue pencil state

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Filing Suit cont.

Other considerations:

• Go after the new employer?

Tortious interference

– Business relationships

– Employment relationship

– Contractual relationship

Anti-trust/fair competition claims

Pros

– Protect interests/relationships as much as possible

– “Deep pocket” if there’s a case for money damages

– Party to injunction rather than simply on notice

– Discovery easier to obtain against a party

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Filing Suit cont.

Other considerations cont.:

Cons

– May not have come to employee’s defense but forbeing sued

– Brings additional resources into fight

– Added expense

– Is there jurisdiction?

– Draw customers into dispute?

– Negative consequences within businesscommunity?

• Criminal issues?

Be careful: can’t use threat of criminal prosecutionas leverage in civil litigation

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Enforcement Procedure

Federal Civil Rule 65:

• TRO (may be ex parte)

Verified Complaint or Affidavit

– Include separate motion or application

– Also include:

» Proposed TRO stating reasons, terms, activity restrained

» Motion for appointment of special process server

» Motion for expedited discovery

Reasonable effort to notify defendant or counsel

Effective for 14 days, unless extended by Court foranother 14 days, or for longer time with defendant’sconsent

May be dissolved upon defendant’s motion and 2-days’notice

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Enforcement Procedure

Federal Civil Rule 65 cont.

• Preliminary Injunction

Must be upon motion (serve with TRO application) and hearing

Requires notice to adverse party prior to hearing

Opportunity for expedited discovery prior to hearing

Hearing is a mini-trial which must be held at earliest possible time

• Permanent Injunction

Adjudicated as a trial after full discovery

Adjudicated with any claims for money damages

• Most states have similar procedure, with some time differences

E.g., Ohio follows federal rule (Ohio Civ. R. 65); California: court musthold preliminary injunction hearing within 15 days of TRO, or 22 daysif for good cause (Code Civ. Pro. 527)

Check your forum’s civil and local rules!!! Courts are sticklers onTRO/preliminary injunction rules.

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Discovery

Move for expedited discovery

• Ask for:

Depositions on short notice

Shortened response times for written discovery

Have discovery prepared and served simultaneously

Include proposed order

• Serve with the TRO

Choose appropriate methods for expediteddiscovery

• Document requests and depositions

• Possibly requests for admissions and subpoenas

Be cognizant of out-of-state subpoena procedures—can be time-consuming and no way to expedite, so get the ball rolling

• Interrogatories may be a waste of time

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Discovery cont.

Electronic/forensic discovery

• Worth the $ – even the CIA Director is careless with email

Can retrieve “deleted” files, email (including web-based)

Can determine what has been copied or downloaded

Can detect other suspicious activities or patterns

Can avoid entangling customers directly

• Get a reputable/experienced computer forensic service

Your internal IT person may not have the tools or knowledge to findwhat you need

Need a quick turnaround

May need to be a witness, so experience counts

• Target your forensics

Personal laptop, desktop, tablet, and smart phone

External flash drives, hard drives, and other media storage devices

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Proving Your Case

Basic elements of proof

• Substantial likelihood of success on merits

• Irreparable injury

• No unjustifiable third-party harm

• Serves public interest

• Translation: get evidence of solicitation or misappropriation

Resist temptation to be as broad as possible – focus on actualor threatened harm

– S/he “might” be soliciting or using trade secrets notcompelling enough

– Courts skeptical of the “inevitable disclosure” theory

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Proving Your Case

Courts are skeptical of broad geographic restrictions based on“global economy” – focus on established customerrelationships involving employee or actual sales territory

– “While the Court appreciates that a national or even international covenantmight be possible given the global economy, the lack of any geographicrestriction whatsoever must be highly scrutinized because it has the effectof entirely prohibiting an employee from earning a living in the industry inwhich the employee is experienced.” Chart Indus. v. Spagnoletti, No. 1:12CV 2354, 2012 U.S. Dist. LEXIS 140102 (N.D. Ohio Sept. 28, 2012)

Specific proofs

• Efforts to cultivate/protect relationships and trade secrets

Time/expense, internal policies and procedures, etc.

• Defendant’s access to customers or trade secrets

• Direct or circumstantial evidence of breaching activities

• How this is going to hurt your business

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Proving Your Case cont.

Some categories of witnesses…

• Company representative

• Witnesses who can establish efforts to protect information

• Witness to activities

• Defendant and any co-conspirators

• IT/Computer Forensics expert

• Valuation expert (if seeking money damages)

Trade secrets and customer relationships

Goodwill

Note: tread carefully—an ability to monetize damages can cut againstthe need for injunctive relief

• Customers (???)

This can blow-up in your face very easily

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So You Won—Now What?

If settling, push for consent decree/order

• Enforcement remedy is contempt rather than action for breach

• Have judge retain jurisdiction over enforcement

Enforcing orders in other jurisdictions

• Full Faith & Credit clause generally requires states to honor oneanother’s orders

Article IV, Sec. 1: “Full Faith and Credit shall be given in each State to the publicActs, Records, and judicial Proceedings of every other State. And the Congressmay by general Laws prescribe the Manner in which such Acts, Records andProceedings shall be proved, and the Effect thereof.”

• Technically, California must honor injunctive order issued by anotherstate, unless: (1) jurisdictional defect of sister state; (2) pending appealin sister state; (3) stay of enforcement by sister state; (4) obtained byfraud; (5) judgment satisfied; or (6) motion to vacate in sister state.(Code of Civil Procedure 1913)

Don’t be surprised if California judge refuses enforcement anyway

• Most states require commencing original action to enforce judgment ofsister state – check your forum’s statutes/rules

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So You Won—Now What? cont.

Global enforcement issues

• Most states have mechanism for seeking enforcement of foreignorders, but enforcement not guaranteed

• European laws can both help and hinder efforts at enforcementof U.S. orders overseas

What if enjoined activity continues?

• “Motion to Show Cause” why defendant should not be held incontempt

File in the former case with the judge who had presided over it

– Include affidavit and documentary evidence

Judges do not like their orders being disobeyed – you likely will get a swifthearing

• Do not waste time seeking another injunction

You already have one – don’t cede that point

Opens up possibility that judge will deny it – crazier things have happened

Motion to Show Cause protects your interests and places burden on defendant

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Questions?

Susan M. DiMickele, PartnerSquire Sanders (US) LLP

Labor & EmploymentSusan.DiMickele@squiresanders.com

+1.614.365.2842

Jeffrey J. Wedel, PartnerSquire Sanders (US) LLP

Labor & EmploymentJeffrey.Wedel@squiresanders.com

+1.216.479.8767

Ryan A. Sobel, Senior AssociateSquire Sanders (US) LLP

Labor & EmploymentRyan.Sobel@squiresanders.com

+1.216.479.8489

22

Credit Information

• For those you who require CLE, HRCI or CPD please notethe following states have been approved, California andOhio; as well as Arizona, New York, and New Jerseythrough state reciprocity rules. If you require credit in ajurisdiction not pre-approved we can still apply to get youcredit.

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