Non-Compete Agreement Litigation...

Non-Compete Agreement Litigation Strategies Leveraging Trial Techniques, Identifying Causes of Action, Preparing for Defense Theories and Counter-Claims

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WEDNESDAY, MARCH 5, 2014

Presenting a live 90-minute webinar with interactive Q&A

Andrew (Andy) Boling, Partner, Baker & McKenzie, Chicago

Robert E. Byrne, Jr., MartinWren, Charlottesville, Va.

R. Scott Oswald, Managing Principal, The Employment Law Group, Washington, D.C.

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Non-Compete Agreement Litigation Strategies

R. Scott Oswald

The Employment Law Group® Law Firm

Phone: 202.331.2833

Fax: 202.261.2835

[email protected]

www.employmentlawgroup.com

Andrew Boling

Baker & McKenzie LLP

Chicago, Illinois

Phone: 312-861-8076

[email protected]

Robert E. Byrne, Jr.

MartinWren, P.C.

Phone: 434.817.3100

Fax: 434.817.3110

www.martinwrenlaw.com

[email protected]

mailto:[email protected]

http://www.employmentlawgroup.com/


http://www.martinwrenlaw.com


Non-Compete Agreement Pre-Litigation Concerns, Employee’s Initial Analysis

R. Scott Oswald


Phone: 202.331.2833

Fax: 202.261.2835

[email protected]




Hypothetical

•Client works for employer with whom he signed post-employment restrictive covenant

• Covenant includes a non-compete agreement

•Has received a job offer from a second employer

• Working with the same government customer

• Expanded duties

• Different location

•Wants to know whether he can accept the offer and begin work for the new employer

6

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common

terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an

"office" means an office of any such law firm.

© 2014 Baker & McKenzie LLP

Drafting Enforceable Agreements—Employer’s

Perspective

Andrew Boling


Chicago, Illinois

[email protected]

312-861-8076



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The Key Driver to Success: An Enforceable Agreement

‒ Follow the Pyramid Model

Base level of Confidential Information/Trade Secrets/ IP

Assignment for all employees (with modifications as

needed to comply with Section 7 of the NLRA and for R

&D personnel)

Intermediate Level of Targeted Non-Solicitation

Covenants where appropriate

Non-competes for targeted employees at the pyramidion

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Drafting Enforceable Agreements

‒ Include offensive weapons in the contract:

Employee must disclose obligations to prospective

employer

Employee agrees to divulge post-employment conduct

Employee consents to employer contacting any new

employers to confirm compliance

Employee agrees to certify compliance upon request

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Drafting Enforceable Agreements

‒ Preempt cloak and dagger departures

Invite employee to contact employer to discuss whether

a new position will conflict with the agreement

‒ Consider extended notice of termination

‒ Scope the likely battlefield and consider arbitration

‒ Payment during the restricted period

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In Term Considerations

‒ Polish Protectable Interests

‒ Implement and observe a sound Confidential

Information and Trade Secrets protection program

Narrow trumps broad

Appropriate physical security controls

Appropriate electronic controls

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In Term Considerations

‒ Customer Relationships

Address potential state law nuances, i.e. Illinois’

requirement that the customer relationship must be

“near permanent”

Impose appropriate security controls over

marketing plans, customer visit reports, and

business plans

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Hypothetical

•What is the process for advising the client?

• Whether to accept the position

• How/Whether to provide notice to subsequent employer

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Existence of Agreement

•First establish that an agreement exists.

•Basic Contract Considerations:

• Is there a writing?

• Has there been an offer?

• Has there been acceptance?

• Adequate consideration?

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If Agreement Exists, What Defenses Are Available?

•Unenforceable provision?

•First Material Breach?

•Waiver or Estoppel?

•Unclean Hands?

•Economic Loss Doctrine or Source of Duty?

•Intracorporate Immunity Doctrine?

•Merely Planning to Compete in Future? 15

If Agreement Exists, What Defenses Are Available?

•Generally speaking, there are three grounds for invalidating covenants not to compete:

• Unreasonableness

•Overbroad – greater than necessary; prevents indirect competition

• Should be narrowly tailored; position, time, geography

•Ambiguous – if vague, may create in terrorem effect

• Violates Public Policy

•Established state law, i.e., Cal. Bus. & Profs. Code 16000

•Prevent public’s right to choose professional

•Key public player?

• Miscellaneous reasons in some jurisdictions

•Involuntary discharge

•Assignment

•No consideration

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Agreement Language Example: Lack of Position Limitations

•Example language:

• “Employee shall not perform work for, contract with, or accept employment with any Company past or present with whom employee was either directly or indirectly assigned as part of employee’s regular duties”

•Agreement should be tailored to specific positions within companies.

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Agreement Language Example: Improper Time & Geography Restrictions

•Example language:

• “Employee agrees that for a period of five (5) years after the later of the date of termination for any reason, or the date a court of competent jurisdiction enters an order enforcing this provision, employee shall not, within the District of Columbia, the State of Maryland, or the Commonwealth of Virginia . . . .”

•Many considerations here

• Nature of the job

• Nature and size of the industry

• Likelihood of irreparable harm

• Law of jurisdictions will vary

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3 Tiers of Enforcement

•Courts give strongest deference:

• Dissemination of proprietary information

•IntermediateDeference:

• Non-solicitation provisions.

•Least deference:

• Pure non-competition agreements.

•Policy:

• Promoting ability to work and support families

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Non-Compete Agreement Pre-Litigation Concerns, Employee’s Anticipation of Litigation

R. Scott Oswald


Phone: 202.331.2833

Fax: 202.261.2835

[email protected]


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Employee’s Current Posture

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Client’s Goals and Concerns

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Anticipation of Cease & Desist

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Concerns About Being a Defendant

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Case Example A

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Case Example B

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•

26

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common

terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an

"office" means an office of any such law firm.


Litigating Non-Competes: Prosecution Strategies

Andrew Boling


Chicago, Illinois

[email protected]

312-861-8076

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Preparing to Prosecute—Two Track Approach

‒ Track one: Investigation-show and substance

‒ Ask questions before shooting

‒ The art of managing emotions

‒ Interview co-workers

‒ Evaluate electronic and paper footprints

‒ Attempt to interview the ex-employee and/or

‒ Request ex-employee to confirm he is not in breach

‒ Approaching the new employer 28







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Preparing to Prosecute

‒ Track Two: Litigation preparation

‒ Prepare draft complaint and amend as needed

‒ Prepare witnesses and confirm availability

‒ Special considerations for customers

‒ Suppliers and Vendors

‒ Identify the strongest protectable interest

‒ Develop legal theories to align with protectable interest

‒ Retain expert witnesses as needed 29







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Litigation Considerations

‒ Pros and cons of cease and desist letters

‒ Emergency injunctive relief may be mandatory when

trade secrets are in issue

‒ Failure to request injunctive relief can be a failure to take

reasonable secrecy measures

‒ When to add the new employer as a party defendant

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Injunctive Relief

‒ Request must be explicit and focused

‒ Duration tied to elimination of business advantage

‒ Duration as a function of deterrence

‒ Duration measured by the “head-start”

‒ Bonding concerns

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Other Litigation Options

‒ In cases of egregious conduct involving

misappropriation of trade secrets, consider the criminal

option

‒ Economic Espionage – 18 USC §1831

Encompasses actual or attempted trade secret

misappropriations +

knowledge or intent that the offense would benefit a

foreign government, instrumentality or agent

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‒ Theft of Trade Secrets--18 USC §1832

Requires proof information was a trade secret

Defendant intended to convert the trade secret for the

economic benefit of someone other than the owner

Trade secret was related to a product or service used or

intended for use in interstate or foreign commerce

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‒ International Trade Commission is a useful forum

where conduct may be outside the ready jurisdictional

authority of a US court

The ITC has authority to block the importation of products

developed overseas with stolen trade secrets

Procedure is relatively speedy and evidentiary rules are

flexible

Potential negative is limited availability of damages

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TianRui Group Co. v. Int’l Trade Comm’n, 661 F.3d 1322 (Fed.

Cir. 2011):

The ITC issued a blocking order prohibiting the importation of

a product (cast steel railway wheels) developed in China

using stolen US trade secrets.

On appeal, the Federal Circuit held that trade secret

misappropriation occurring abroad is an “unfair method of

competition and unfair act of importation” under Section 337

of the Tariff Act.

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Litigating Non-Competes: Defense Strategies

Robert E. Byrne, Jr. MartinWren, P.C. T.: 434.817.3100 F.: 434.817.3110


[email protected]

http://www.martinwrenlaw.com/

If injunction, employer must satisfy substantive and procedural standards ◦ Employer may seek injunctive relief to protect clients or

employees, safeguard proprietary information, or protect imminent business opportunities

Claim for Damages may be added, especially if employer successful with injunction or if business opportunity threatened

Analyze Relief Sought: Injunction, Damages, or Both?

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Motion to Dismiss (either substantive or procedural)

Motion for a More Definite Statement

Motion to Transfer

Answer

Motion for Summary Judgment

Responsive Pleadings

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Declaratory Judgment

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Forum and Choice of Law

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If non-compete facially defective given current precedent, try motion to dismiss

If agreement or other documents not properly identified, motion for more definite statement

If venue or forum provision, motion to transfer

Savvy employers will seek evidentiary hearing to prove reasonableness in light of their business interests ◦ May need to rely on Answer alone if narrowly tailored

Which Responsive Pleading to File?

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Employer more likely to pursue legal action for damages if contract, customer, or key employees are threatened or lost ◦ New parties ◦ New claims – may involve heightened, aggressive claims –

statutory conspiracy, RICO, punitive damages, etc.

Proving claims will require Employer to prove both causation and damages ◦ Difficult to do ◦ Risky for Employer, creates leverage points for employee Employer needs to disclose proprietary information

Will further damage relationships with customers and partners

Causation and Damages

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Employers don’t want to reveal proprietary information ◦ Need to reveal markups, costs, projections, internal

communications

May have lost work because of bad business practices or negative past performance ◦ Dirty laundry will be aired

Threatens relationships ◦ May be party to joint venture or teaming agreement and need

to disclose proprietary information of a partner

May have made an uncompetitive bid for new work

Why Are Causation and Damages Difficult to Prove?

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“When a noncompete clause is breached, the non-breaching party is entitled to the benefit of the bargain: to ‘put the party injured in the same position, as far as money can do it, as he would have been if the contract had been performed.’” Preferred Sys. Sols., Inc. v. GP Consulting, LLC, 284 Va. 382, 398 (2012). ◦ Employer must prove three elements to recover lost profits: First, that it had billed/charged for the work in question;

Second, that it would have continued to bill/charge for the work in question had it not moved to the competitor; and

Third, the amount the Employer would have made from billing or charging for that work.

Employee has the right to examine the strength of the Employer’s relationship with the former customer and hear the customer’s reason for no longer working with the Employer

Proving Causation in Noncompete Breach

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Damage awards cannot be speculative ◦ Can usually calculate lost profits based on profit history if Employer an

established company

◦ Some states may have new business statute

“Subsequent profits from the benefiting competitors” can be used “as evidence in damages calculations for breach of covenants not to compete, provided that the profits can be sufficiently tied to the injured party.” ◦ But, the “measure of damages for the breach of an anti-competition

clause is the amount that the plaintiff lost by reason of the breach, not the amount of profits made by the defendant.” Trilogy Network Systems, Inc. v. Johnson, 172 P.3d 1119, 1121 (Id. 2007).

Calculating Lost Profits

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Tread lightly – many judges do not like forcing employers, who appear to have been wronged, to disclose past performance and proprietary information to a competitor ◦ Will likely need to do a protective order, possibly attorneys’

eyes only

◦ Narrowly tailor discovery requests to the heart of the dispute

Particularly important if injunction was already granted, as judge could view as a fishing expedition

Pursue Causation and Damages Evidence Through Discovery

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Questions for Panelists

R. Scott Oswald


Phone: 202.331.2833

Fax: 202.261.2835

[email protected]


Andrew Boling


Chicago, Illinois

Phone: 312-861-8076

[email protected]

Robert E. Byrne, Jr.

MartinWren, P.C.

Phone: 434.817.3100

Fax: 434.817.3110


[email protected]




http://www.martinwrenlaw.com


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