Using Non-compete Agreements to Protect Trade Secrets

1. Using Non-compete Agreements to Protect Trade Secrets Victoria A. Cundiff Paul, Hastings, Janofsky & Walker LLP New York, New York 1

2. 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 2

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

10. 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

13. 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)

14. 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

17. Advise the employee of agreement before, during, and after employment • Non-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

21. 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 considerations • Formal requirements • Text of agreement; definitions • Ability to reform--plaintiff or court • Scope of restraint needed/sought • Tailoring relief to the specific breach 23

24. Litigation trends with or without non-compete agreements • Regardless 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

25. 1. Presumptions Conventional mantra: A trade secret, “once lost, is gone forever” 25

26. 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) 26

27. 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 27

28. 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) 28

29. 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 29

30. Illinois proposed statute • Requires specificity in court orders • Requires early identification/specification of trade secrets • Imposes deadline for amending specification • Attorneys fees 30

31. 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 31

32. 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 32

33. “Changing teams at halftime” language, without more, will not win the day 33

34. The Need to Prove Actual Risk is not Just an Issue for those Lacking Non-compete Agreements 34

35. 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 35

36. Practice Pointer • An “enforceable agreement” is not always enforceable • The factual details always matter and must be thoughtfully developed and presented 36

37. 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 37

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

39. “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) 39

40. 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 40

41. Possible Equitable Remedies • Verification techniques • Forensic imaging • Independent monitor • Certification • “Time sheets” 41

42. Activity Restraints • Delay start (lead time) • Phased activities • Non-solicit/customer restraint but not full non-compete • Remedies outside of court • Assignment of patent or other property (may need contract) • ???? 42

43. 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 43

44. Practice pointer • Need to show causation • Apportionment • Royalties vs. other calculations 44

45. 5. Additional Remedies? • Computer Fraud & Abuse Act • Not a substitute for trade secret/contractual remedies • Can be an important supplement 45

46. Practice pointers • Contracts can be drafted to increase availability of CFAA remedies • State vs. federal court • Follow specific pleading requirements and plead recoverable damages 46

47. KEY TAKEAWAYS • Non-compete agreements contracts can help--but comply with formalities and remember courts will weigh conflicting policies • Non-compete agreements should be part of an overall policy to protect trade secrets 47

48. Know the presumptions—but prove the facts • Trade secrets need to be identified clearly—to those granted access, to defendants, and to the Court • Injunctive relief must be carefully tailored; there is room for nuance, flexibility, and creativity 48

49. Damages must be calibrated to the loss • Courts and legislatures are becoming increasingly active in this area of law • Keep track of jurisdiction-specific developments • Be informed by—and shape-- larger trends 49

50. Questions? Victoria A. Cundiff Paul, Hastings, Janofsky & Walker LLP (212) 318-6030 • victoriacundiff@paulhastings.com 50