Georgia Supreme Court Rejects Inevitable Disclosure Doctrine

By Todd Van Dyke on

The inevitable disclosure doctrine is a common law doctrine that has been used by some courts to prevent a former employee from working for a competitor, even in the absence of a non-compete, because the former employee’s new job duties would inevitably require him to rely upon, use or disclose his former employer’s trade secrets.  This doctrine, however, remains the subject of considerable debate. Recently, the Georgia Supreme Court joined the debate in Holton v. Physician Oncology Services, LP, 2013 Ga. LEXIS 414 (May 6, 2013) and rejected the doctrine.

Background

Michael Holton was the vice president and chief operating officer of Physician Oncology Services, LP.  In that position and later as president, he was responsible for overseeing the operations of seven facilities. Physician Oncology eventually merged with Vantage Oncology, LLC (“Vantage”) and Holton was terminated several months later. He accepted employment with a competitor, Ambulatory Services of America, Inc. (“Ambulatory”).

Vantage immediately sought a temporary restraining order and then an interlocutory injunction, claiming that Holton was violating his non-compete agreement and, independent of that agreement, claiming that Holton would inevitably disclose and use trade secrets in his new position. The company sought an injunction to prohibit Holton from serving in an executive capacity for Ambulatory for at least twelve months.

There was no evidence that Holton had shared any of Vantage Oncology’s trade secrets or had shown an intent to do so. There was also no evidence that Holton had any documents in his possession related to the company’s trade secrets. Moreover, Holton’s attorney stated at oral argument that all company electronic documents had been permanently deleted from Holton’s computer.

Nonetheless, the trial court held that the likelihood of disclosure of information in Holton’s memory was a sufficient basis for finding of inevitable disclosure. As a result, the trial court enjoined Holton from working for Ambulatory in any executive capacity for twelve months. Holton appealed the trial court’s ruling, arguing that Georgia had not adopted the inevitable disclosure doctrine.

Supreme Court Ruling

The Georgia Supreme Court agreed with Holton and reversed.  The Court surveyed case law in other states and noted that the states were “inconsistent about whether the doctrine is recognized in their particular state and if [so], whether it is a separate claim, as Vantage alleged in this case, or instead evidence to support an element of a claim of threatened misappropriation.” Without explaining the rationale for its holding, the Court held that, “the inevitable disclosure doctrine is not an independent claim under which a trial court may enjoin an employee for working for an employer or disclosing trade secrets.”

Lessons Learned

Two lessons can be learned from Holton. First, if an employer wants to prevent an employee in Georgia from potentially working for a competitor, it should implement a non-compete.

Second, it remains unclear whether the inevitable disclosure doctrine – though not an independent claim under Georgia law – could still serve as the basis for the remedy of an injunction in the case of threatened misappropriation of a trade secret, considering that the Georgia Uniform Trade Secrets Act expressly provides that a court may enjoin the threatened misappropriation of a trade secret. The Court in Holton stated that it “decline[d] to address today whether the inevitable disclosure doctrine may be applied to support a claim for the threatened misappropriation of trade secrets.”

 

Texas Employers Gain Statutory Protection for Trade Secret Information

By A. Robert Fischer, Clifford R. Atlas and Conrad S. Kee on

Texas has joined 47 other states and the District of Columbia in adopting the Uniform Trade Secrets Act. Jackson Lewis has posted an article on its website describing the new law which will go into effect on September 1, 2014. Now, only Massachusetts and New York have yet to pass some form of the Uniform Trade Secrets Act.

Bill in New Jersey Legislature Would Invalidate Restrictive Covenants

By Clifford R. Atlas on

An article recently posted on the Jackson Lewis website describes a bill introduced in the New Jersey State Assembly that would invalidate non-compete, non-disclosure, and non-solicitation agreements for former employees who are eligible for unemployment benefits.  A similar proposal is under consideration in Maryland. We will continue to monitor this topic.

Missouri Cases Illustrate Enforceability of Well-Drafted Non-Competition Agreements

By Conrad S. Kee on

Shawn Kee and Jessica Liss write on the Jackson Lewis website about two recent cases interpreting Missouri law on non-competes, Whelan Security v. Kennebrew, 379 S.W.3d 835 (Mo. 2012) and TLC Vision (USA) Corp. v. Freeman, 2012 WL 5398671 (E.D. Mo. Nov. 2, 2012).

Unfair Competition Claim Based on Copyright Infringement Preempted by Copyright Act

By Dylan B. Carp on

A federal court in California has held that a state law claim that a competitor engaged in unfair competition by creating infringing work after hiring former employees who stole proprietary information is preempted by the federal Copyright Act. Metabyte, Inc. v. NVidia Corp., et al., Case No. 12-0044 SC (N.D. Cal. April 22, 2013.

Metabyte employed individuals to develop computer code for 3D stereoscopic technology software, which is designed to enable a three-dimensional display by presenting images separately to the left and right eye through specialized eyeglasses that a viewer wears to look at a computer screen.  The employees had access to Metabyte’s source code and were bound by employee confidentiality agreements that prohibited them from disclosing Metabyte’s confidential information and required them to return all of Metabyte’s property in their possession upon leaving its employ.  The employees resigned and went to NVidia, a competitor.  Metabyte alleged that when they left, the employees copied its computer code and then took it to NVidia, who used it to create copies of Metabyte software and derivative works.  Metabyte sued NVidia for copyright infringement, unfair competition, trade secret misappropriation, and other causes of action. NVidia moved to dismiss the unfair competition claim on the ground it was preempted by the Copyright Act.  NVidia did not move to dismiss the trade secret misappropriation claim.  The court agreed with NVidia’s copyright preemption argument, and accordingly dismissed the unfair competition claim.

The court noted that state law causes of action are preempted under the Copyright Act if two elements are present:  (1) the rights that a plaintiff asserts under state law must be rights that are equivalent to those protected by the Copyright Act, and (2) the work involved must fall within the subject matter of the Copyright Act.  The court held both elements were satisfied.  The court reasoned the sole allegation underlying Metabyte’s unfair competition claim was that “NVidia created and sold products…that [were] substantially similar to the Metabyte Software and that included Plaintiff’s proprietary information by way of direct copies and derivative works, acquired through the Individual Defendants’ alleged theft and copying of Metabyte Software.”  However, “[r]eproduction of copyrighted works, preparation of derivative works, and distribution of copies to the public are all rights granted under the Copyright Act.”  As a result, the unfair competition claim was dismissed.

This decision is a reminder that employers should give careful thought to the causes of action they plead against competitors or former employees who have committed wrongdoing.  In an analogous context, a California court has held that an unfair competition claim is preempted by the Uniform Trade Secrets Act when the alleged wrongdoing consists of trade secret misappropriation. K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., (2009) 171 Cal. App.4th 939.  Employers should analyze potential preemption issues before seeking relief under unfair competition or other state common law causes of action, to avoid wasted time and resources on motions to dismiss preempted claims.

Plaintiff in Dispute over LinkedIn Account gets “Zero” Damages

By John A. Snyder on

Plaintiff pro se Linda Eagle, the former president of banking education company Edcomm, Inc. ended up empty handed even though she prevailed on the merits of her claims of invasion of privacy by misappropriation of identity in her federal lawsuit filed over the alleged hijacking of her LinkedIn account by her former employer following the termination of her employment.

As indicated in our prior blog post, Edcomm was acquired by another company and subsequently terminated Eagle, along with other key executives. Eagle then sued Edcomm for allegedly taking control of her LinkedIn account, blocking her from accessing it, and replacing some information on her LinkedIn page with information about the new CEO, Sandi Morgan.  Eagle claimed that, by re-populating the profile with information relating to the new executive under a URL that included Eagle’s name, the company created confusion with Eagle’s roughly 4,000 contacts and misappropriated her identity for the company’s gain.

On March 12, 2013, U.S. District Judge Ronald Buckwalter ruled that while Edcomm was liable for three state law claims of (1) unauthorized use of name in violation of 42 Pa.C.S. Section 8316, (2) invasion of privacy by misappropriation of identity, and (3) misappropriation of publicity. Various other claims by Eagle and counterclaims by Edcomm were dismissed. Eagle v. Morgan, No. 11-403 (E. D. Pa. March 12, 2013).

In finding for Eagle on her claim of of unauthorized use of name, the court found that she presented sufficient testimony that the name of the “triple doctorate-holder” Laura Eagle had commercial value given her investment in developing a reputation in the banking education industry. Moreover, Edcomm used the name without her consent for commercial or advertising purposes. Similarly, Eagle also established invasion of privacy by misappropriation of identity because, by updating her LinkedIn account with the newely appointed  interim CEO’s information, Edcomm ensured that someone searching for Eagle on LinkedIn would be directed to a page with information about Morgan and Edcomm. Finally, Judge Buckwalter determined that the claim for misappropriation of publicity was legitimate on the grounds that, by blocking Eagle from accessing her LinkedIn account and then altering it with Morgan’s information, instead of merely creating a new account for Morgan, Edcomm deprived Eagle of the commercial benefit of her name.

The court, however, found that Eagle had failed to show she was entitled to compensatory damages with a “fair degree of probability.” Specifically, the court found that Eagle could not point to a specific business deal she lost out on due to her temporary lack of access to her LinkedIn contacts. In addition, at trial, Eagle did not call any employee of Edcomm or anyone else with personal knowledge who could provide evidence of the defendants’ state of mind to support her claims of malice or reckless indifference relating to the use of the LinkedIn account. The district court therefore held that Eagle was not entitled to punitive damages.  There is no indication that Eagle sought injunctive relief and indeed, according to the record, was only deprived of full access to her account from June 20, 2011 to October 7, 2011.

The decision in Eagle highlights that the ownership of social media accounts and attendant issues are becoming increasingly prominent in litigation. The case law in this area is rapidly evolving. In addition, this lawsuit should serve as a reminder for companies to consider developing social media policies and agreements detailing who owns social media accounts and who has what rights to access social media accounts post-employment.

 

 

The Georgia Restrictive Covenants Act – Two Years Later

By Todd Van Dyke on

As previously reported in a legal alert issued by Jackson Lewis on May 12, 2011, Georgia Governor Nathan Deal signed the Georgia Restrictive Covenants Act into law almost two years ago, on May 11, 2011.  Since that time, many employers have required employees to sign new covenants that comply with the law.

The Georgia Restrictive Covenants Act, O.C.G.A. § 13-8-50 et seq., drastically overhauled Georgia law in this area and set forth clear boundaries on who can and cannot be required to sign a non-compete or non-solicitation agreement, what length of time is considered to be reasonable restriction, and other requirements for an enforceable non-compete.

There have been only a few cases so far interpreting the new law.

In PointeNorth Insurance Group v. Zander, 2011 U.S. Dist. LEXIS 113413 (N.D. Ga. Sept. 30, 2011), Judge Richard Story was asked to enforce a non-solicitation covenant that purported to prohibit a former employee, Zander, from soliciting or accepting business from clients. Such a covenant would have been completely unenforceable under Georgia’s old non-compete law. Under the new law, however, Judge Story enjoined Zander from soliciting any of PointeNorth’s customers with whom she had contact during her employment.

Next, in Becham v. Sythes USA, 482 Fed. Appx. 387 (11th Cir. June 4, 2012), the Eleventh Circuit Court of Appeals cleared up some confusion and held that the first version of Georgia’s new non-compete law, which was passed in 2009 and ratified by voters in 201o during the general election, was unconstitutional. As a result, the second version of the law, which went into effect on May 11, 2011, is controlling.  Only restrictive covenants signed on or after that date are governed by the new law.

Finally,  in Cone v. Marietta Recycling Corporation (Fulton County Superior Court, Civil Action No. 2012-CV-223811, March 26, 2013), a former employee had signed certain restrictive covenants before Georgia’s new law went into effect, which would mean the old law applied. The former employee, however, also signed a severance agreement after the new law became effective. The severance agreement stated that it superseded all prior agreements, except for the restrictive covenants which would remain in effect.  The former employer argued that this language in the severance agreement brought the covenants under the new law.  In a March 26, 2013 Order, Judge Alford Demsey disagreed. He held, “there is only one way [Marietta Recycling] could have taken advantage of the May 11, 2011 change in Georgia’s law to secure enforceable restrictive covenants against Cone [the former employee] – requiring Cone to execute on or after May 11, 2011, a new contract with new restrictive covenants having a new effective date.” As a result, the old law applied.

Cone is an unpublished decision from one state trial court judge and, as such, is not binding on any other courts. It remains to be seen whether other judges will adopt the same reasoning.  In the meantime, Cone reminds employers that they should be careful to thoughtfully address this issue when they draft severance agreements for employees who signed restrictive covenant agreements before May 11, 2011.

There are many more questions about the new law that remain to be answered by the courts. For example, what type of blue-penciling of covenants is permitted? Will employee non-solicitation covenants be governed by the new law or the old common law? We will continue to monitor the case law and provide timely updates on our blog.

Nebraska Court Addresses Meaning of “Solicitation” in Non-Compete Agreement

By Kenneth M. Wentz on

A Federal Court in Nebraska issued a preliminary injunction enforcing an employee non-compete agreement in a case that explains, for the first time, what a Nebraska court may consider “solicitation.”  The case, Farm Credit Services of America v. Opp, No. 8:12-cv-382 (D. Neb. 2013), involved a crop insurance salesman, Opp, who signed a non-compete agreement at the beginning of his employment. The employer, FCSA, provided crop insurance sales training, helped Opp satisfy licensing and continuing education requirements, and assigned him a set of policies to service. FCSA also helped Opp develop customers by providing him leads and financial support to entertain customers. Opp was eventually terminated in May 2012.

Following his termination, former customers contacted him with complaints about FCSA and questions about their policies and why he was no longer working for FCSA. Opp referred them to FCSA.  Within months after his termination, Opp incorporated his own crop insurance sales company as the president, owner, and sole crop insurance salesperson.  Opp published advertisements for his new company and as a result, some of his former customers asked him to transfer their business away from FCSA. Opp accepted business from certain customers after they signed a declaration stating, among other things, that they were soliciting Opp “of [their] own free will and that Mr. Mark Opp did not directly solicit [their] business.” With only one exception, all of the former customers were those with whom he did business and had personal contact while employed by FCSA.

FCSA sued Opp for breaching his non-compete agreement. The non-compete agreement prohibited Opp from “directly or indirectly” selling, soliciting, directing, managing or otherwise having any involvement whatsoever in the sale, marketing or solicitation of any customer of FCSA with whom the employee actually did business and had personal contact while employed by FCSA. The court found the non-compete to be valid  under Nebraska law because it only went so far as to prohibit contact with customers with whom Opp did business and had personal contact. Opp claimed that he did not breach the agreement because he did not directly solicit any of the customers with whom he had done business during his employment – rather they sought him out. Opp submitted the declarations from those customers to show that they had solicited him. The court found that Opp solicited the transferred customers’ business by publishing advertisements  that induced them to request transfers to his new company. The court deemed any argument about whether the advertisements were “direct” or “indirect” solicitation to be irrelevant because the agreement prohibited Opp from engaging in either type of solicitation.  Opp also argued that the transferred customers would have left FCSA anyway. The court rejected that argument as well, because the customers did not leave FCSA for some other company, they left for Opp’s new company due to the goodwill established by Opp’s employment.

Because reported decisions in Nebraska on non-compete agreements are rare, the case is a helpful guide to Nebraska law in this area, as well as an example of how the term “solicitation” might be interpreted in other jurisdictions. The two main takeaways from this case are:

  • Employers should make sure Nebraska non-competes comply with that state’s law and go no further than to prohibit a former employee from soliciting customers with whom he or she actually did business and had personal contact during his or her employment; and
  • General advertisements and continued inquiries from customers with whom a former employee did business and had personal contact may constitute “solicitation” and therefore constitute a breach of a non-solicitation agreement, even if the customer claims he or she was not directly solicited by the former employee.

 

Another New York Federal Court Narrowly Construes the Federal Computer Fraud and Abuse Act

By Ravindra K. Shaw on

When an executive search firm bought the goodwill and other assets of a similar firm and learned that the individual sellers took client lists and diverted business in violation of their non-compete agreements, it terminated the sellers’ employment and sued them and other third-party defendants for violating the Computer Fraud and Abuse Act (“CFAA”) as well as for fraud, breach of contract, tortious interference with contract, tortious interference with business relations, and an accounting.  A New York federal court’s decision to dismiss the former employer’s  CFAA claim in JBCHoldings NY, LLC v. Pakter, Civil Action No. 12 Civ. 7555 (S.D.N.Y. Mar. 20, 2013) continues a trend of district courts in the Second Circuit adopting a narrow reading of this statute.

The court held that when an employee who has been granted access to an employer’s computer misuses that access, either by violating the employer’s  terms of use or by breaching a duty of loyalty to the employer, the employee does not “exceed authorized access” or act “without authorization” as those terms are are defined in the CFAA.  Federal appellate courts are currently split on whether those terms should be interpreted broadly or narrowly.  The First, Fifth, Seventh, and Eleventh Circuits have adopted a broad construction and allowed CFAA claims alleging that en employee misused employer information that he or she was otherwise permitted to access.  The New York court chose to follow the Fourth and Ninth Circuits and other district courts in the Second Circuit, which have held that the statute does not reach the mere misuse of employer information or violations of company use policies.  The court found that the statute is concerned with the actions of employees who lack permitted access, not the actions of employees who exceed a permitted use of employer information.  Under this narrow reading, the CFAA does not prohibit the actions of employees who have permission to access certain information and proceed to use the information for an improper purpose.  The court noted that state law contract and tort claims were already available to address such misappropriation by faithless employees.

In reviewing the former employee’s complaint, the court found that absent allegations that the individual sellers lacked access to the computers that were used to take client lists or lacked authority to access electronic information that was used to set up a competing business, the former employer had no CFAA claim against the individual sellers.  The court also partially dismissed the former employer’s Lanham Act and tortious interference with business relations claims and dismissed fraud and tortious interference with contract claims.  Although pared down, the lawsuit will proceed against most of the defendants under various theories, including breach of contract.

The decision serves as a cautionary reminder that CFAA claims against employees who misuse employer information have been met with mixed success in federal courts.

Protecting Trade Secrets with a Mobile Workforce and Telecommuters

By Clifford R. Atlas on

Regardless of where one stands philosophically on the merits of working from a physical office where greater collegiality can be fostered, versus working from home where personal efficiency and convenience can be maximized, the fact is that most companies have some employees who work from home, and nearly all companies have employees who work remotely from time to time, especially with the use of tablets and smart phones.  And, in this increasingly mobile world, employers must continuously review policies to protect their confidential business information.

Here are a few tips:

* Published policies help make it clear that the employer’s business information, regardless of where it is located, is confidential and should not be used or disclosed other than for purposes of performing work for the employer. State-of-the-art policies should now address Bring Your Own Device (BYOD) guidelines, use of social media, employee monitoring and protection of private data as was well as standard protection of trade secrets and confidential information.  In a BOYD environment, the employer should emphasize that its business information does not lose protection just because it might reside on the employee’s device. Alternatively, certain categories of employees might be instructed to use only company-issued devices for work purposes.

* In addition to general policies, individual non-disclosure agreements addressing the permitted and prohibited use and disclosure of the employer’s business information should be considered for those employees who regularly work out of the office.  Working remotely is a privilege which carries with it obligations and responsibilities for the employee which should be memorialized.

* Employees who work remotely often are provided VPN or similar access to files and data on the employer’s otherwise secure server.  Protocols should be put in place to make sure that the access is secure and encrypted, if appropriate. Human Resources and in-house counsel need to team with the I.T. department on these issues. The employer should know if an employee is using a company-issued laptop or his or her own computer, or email, and monitor compliance. For example, an employee who regularly sends company files from her g-mail account should be warned about co-mingling work data and personal emails.

* Terminating employees who work from home should be handled with extra care, especially employees who work in another county. Last December, the Second Circuit Court of Appeals reversed the dismissal of a lawsuit for lack of jurisdiction by a MacDermid, Inc., a Connecticut company, against a former employee who worked from her home in Canada. After becoming aware of her pending termination, the employee allegedly accessed company servers in Connecticut and downloaded confidential and proprietary information to her personal email account. MacDermid, Inc. v. Deiter, 702 F.3d 725 (2nd Cir. 2012).  The case suggests that in certain circumstances employers might cut off access before terminating an employee and, in most cases, should consider requiring the employee to make an account of company property and sign a document confirming that he has not retained any company data.

Whether or not an employer requires personal appearance in the office, it seems clear that employees will work remotely, at least time to time, and today’s mobile workforce makes protection of trade secrets and company data more challenging than ever.

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