Are you doing enough to protect your trade secrets from theft in the cloud?

Do your employees use Dropbox (or Google Drive, or Box, or iCloud, etc.) to store work documents? The appeal of these cloud services is easy to see. Because they provide the ability to store electronic files and access them across multiple devices linked to the same account (i.e., one’s office PC, home computer, iPhone, and iPad), they have exponentially increased the work-life balance of employees who need to work beyond the traditional 9-5. With that benefit, however, comes significant risk to employers.

You may think Dropbox and other cloud services don’t present a risk. After you, your employees are loyal and trustworthy. But, it only takes one layoff to turn a loyal employee into a desperate job seeker looking to provide value to turn a prospective employer into a new job. In that instance, the trade secret cat is out of the bag, and you are spending, and spending, and spending, to try to wrangle it back in.

I’ve seen two cases in which a company alleged that an employee absconded with trade secrets or other confidential information by storing them remotely on a cloud service.

• In a lawsuit filed last week, Lyft accused its former COO of snatching thousands of sensitive documents when he left to work for its chief competitor, Uber. The mode of theft? The downloading of emails and documents to his personal Dropbox account in the months leading up to his defection.
• Last year, Zynga settled a lawsuit it had filed against a former manager whom it alleged had used Dropbox to steal its trade secrets upon leaving for a rival startup.

What can an employer do to minimize risk of trade-secret misappropriation or other breach of confidentiality, short of filing expensive and protracted litigation? Consider these 8 steps, courtesy of the ABA Section of Litigation’s Intellectual Property Committee:

1. Limit access to trade-secrets on a need-to-know basis. The fewer people with access to trade secrets, the more likely the information will remain secret.
2. Limit access to cloud-based solutions on company computers and prohibit any use of personal cloud solutions for company materials. Consider installing software to limit access to any cloud solutions that are not approved by the company.
3. Implement policies and train employees about the use (or non-use) of cloud solutions and, more generally, about the protection of confidential information. Employee handbooks, new-employee orientations, posted company policies, and annual employee training sessions all provide opportunities to address these issues.
4. Monitor when files are accessed or downloaded, and by whom. This will allow the company to take immediate action in the event it discovers suspicious activity.
5. Require employees to sign NDAs. All employees should sign NDAs prohibiting them from taking or using company information for any purpose other than their work for the company. These obligations should extend beyond termination.
6. Conduct exit interviews. This will allow the company to explore whether the employee retained any confidential information and to instruct him or her that any such information should be immediately returned or destroyed.
7. Collect and secure computers used by terminated employees. By examining the computer of a former employee, a company can often determine if any information was taken before the employee’s departure and what that information was.
8. Label or name files containing trade secrets as “Confidential” or “Trade Secret.” While this probably will not prevent unauthorized use or access, it may help a company to persuade a court that any misappropriated information still qualifies for trade-secret protection. This is because confidentiality labels help show that the company took reasonable steps to maintain secrecy by notifying the employee as to the sensitivity of the information.

You cannot absolutely protect against the use of the cloud by your employees. All an employee has to do is email a file to a personal email account, and your control over that file is gone. Implementing these 8 measures, however, will place your business in the best position possible to limit your risk, and secure against theft of sensitive information by exiting or otherwise disgruntled employees.

Two all-beef patties, special sauce … and a noncompete?

While the law of noncompete agreements is state-specific, generally you need three things to enforce such an agreement: reasonableness as to the duration of the agreement, reasonableness as to its geographical scope, and reasonableness as to the interest the employer is attempting to protect. So, what’s so special about a fast-food worker that merits the protection of a non-competition agreement? That’s the question an Illinois federal court is going to answer in Brunner v. Jimmy John’s Enterprises, Inc.

According to The Huffington Post, a Jimmy John’s franchise in Niles, Illinois, requires all of its employees to sign a Confidentiality and Non-Competition Agreement as a condition of employment. The agreement prohibits the employee, for two years following employment at Jimmy John’s, from working at any business within three miles of any Jimmy John’s that derives at least 10% of its revenue from sandwiches

Employee covenants and agrees that, during his or her employment with the Employer and for a period of two (2) years after … he or she will not have any direct or indirect interest in or perform services for … any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches and which is located with three (3) miles of either [the Jimmy John’s location in question] or any such other Jimmy John’s Sandwich Shop.

It’s one thing to bind your managers and other high-level employees to a noncompetition agreement. It’s another to require the same of your low-level sandwich makers and cash-register operators. The lower down the food chain you move, the harder it becomes to enforce these agreements. If these employees received specialized training, or if the employer was protecting customer goodwill, the employer would have a better chance in enforcement. But we’re talking about sandwiches. What’s the legitimate business interest this employer is trying to protect?

Employers, use some discretion and common sense. Narrowly tailor your noncompete agreements to the specific interests you are trying to protect. And, if you don’t have such an interest, forego the agreement altogether for that employee or group of employees. Otherwise, you will spend gaggles of money attempting to enforce an unenforceable agreement.

Apparently, an employee doesn’t need to sign a noncompete for an employer to enforce it

I’ve always thought that for an employer to enforce a non-competition agreement against an employee, the employee actually had to sign the agreement. Two recent cases, however, suggest otherwise.

In Newell Rubbermaid Inc.v. Storm (3/27/14), a Delaware Chancery Court enforced a “clickwrap agreement”—that is, the employee only received an electronic copy of an equity compensation agreement, which included a non-competition agreement buried within. Instead of signing the agreement, she clicked an “Accept” button on a pop-up on her computer monitor. According to the court:

Newell’s method of seeking Storm’s agreement to the post-employment restrictive covenants, although certainly not the model of transparency and openness with its employees,  was not an improper form of contract formation…. Storm admits that she clicked the checkbox next to which were the words “I have read and agree to the terms of the Grant Agreement.” This functions as an admission that she had the opportunity to review the agreement (even if she now states she did not read it despite her representation that she did) upon which Newell was entitled to rely. Her actions of clicking the checkbox and “Accept” button were manifestations of assent…. It is not determinative that the 2013 Agreements were part of a lengthy scrolling pop-up. Storm’s failure to review fully the terms (on a 10-page readily accessible agreement) to which she assented also does not invalidate her assent.

In PharMerica Corp. v. McElyea (5/19/14), an Ohio federal court went one step further, and enforced a non-competition agreement that the employee had never signed at all. Shortly before resigning to work for a direct competitor, McElyae, a salesperson, copied all of her PharMerica files—including client lists, pricing information, and contracts—from her PharMerica-owned computer to a thumb drive. Under those circumstances, the court had no problem enjoining the employee from working for the competitor, even though she had never signed the non-competition agreement PharMerica presented to her.

Defendants also argued that unless Plaintiff can prove a non-compete agreement exists, the Court may not enter an injunction unless McElyea has already disclosed trade secrets. But some Ohio courts do permit injunctions in the absence of a non-compete agreement and without a prior instance of disclosure when “the former employee possessed timely, sensitive, strategic, and/or technical information that, if it was proved, posed a serious threat to his former employer’s business or a specific segment thereof.” The Court finds that PharMerica has shown its confidential information, if disclosed, would pose a serious threat to its business.

Often, non-compete cases are more about the equities than the law—did the employee act in a way that makes it unfair for he or she to compete against a former employer. As these cases illustrate, when an employee acts egregiously (takes a whole bunch of stock as consideration for a non-compete, or steals a whole bunch of documents on her way out the door), courts are willing to overlook things like as whether a non-compete was conventionally, or even actually, signed.

Why you need employee-invention and IP agreements

Taco Bell is defending claims by two former interns that they invented the Doritos taco nearly 20 years ago. They now want to be paid part of its billions dollars in sales. (ABC News)

The pair and their former employer will likely end up in court over who invented what, and when.

My question is whether Taco Bell required the interns to sign an “inventions” agreement. If they did, then even if the intern’s story is true, they will have little legal leg on which to stand.

A typical employee inventions agreement accomplishes the following:

• It defines that all rights to any inventions, innovations, developments, designs, etc., related to the employer’s business, and conceived, made, or developed by the employee while working for the employer, belongs to the employer and not the employee.

• It includes a promise that the employee will execute any documents necessary for the employer to perfect its ownership interest in any such inventions, etc.

• It provides the employee the opportunity to list, for exclusion, any patents held, or inventions, etc., conceived prior to employment, or for specific assignment to the employer for consideration paid.

These agreements are usually part of a larger confidentiality agreement, or non-competition agreement, but also can be standalone. The point is to avoid any dispute over who created what. If you provide employees the opportunity to list existing ideas and inventions, and to promise that anything they invent while working for you is yours, and not theirs, then nobody should go loco if one of their ideas hits it big, and the employer keeps it.

Does inevitable disclosure protect your company’s trade secrets? It depends.

The most straightforward manner in which to prevent a former employee from jumping ship to one of your competitors is to have the employee sign a non-competition agreement. Absent a written agreement by an employee not to compete, however, are you out of luck if you want to stop an key employee with knowledge of sensitive corporate information from competing? The answer depends on what state you are in, and, more specifically, that state’s view of the inevitable disclosure doctrine.

The inevitable disclosure doctrine is an off-shoot of PepsiCo, Inc. v. Redmond (7th Cir. 1995), which upheld a preliminary injunction against a former Pepsi general manager that prevented him working for Quaker Oats (the manufacturer of Gatorade). What makes the case unique and important is that Redmond never had a non-compete with Pepsi. Instead, the court upheld the injunction because Redmond had detailed and comprehensive knowledge of Pepsi’s trade secrets, such that it was inevitable that he would disclose Pepsi’s trade secrets to Quaker Oats through his employment in a substantially similar position.

In the nearly 20 years since the PepsiCo decision, courts have debated the applicability of the inevitable disclosure doctrine to stop an employee, without a non-competition agreement but with knowledge of trade secrets, to work for a competitor in a similar capacity.

In sum, the issue boils down to whether your state’s trade-secrets law prohibits threatened misappropriation of trade secrets in addition to actual misappropriation.

• Thus, in Lumenate Technologies, LP v. Integrated Data Storage, LLC (N.D. Ill. 11/11/13), the court permitted the plaintiff to make an inevitable disclosure argument based on the Illinois Trade Secrets Act’s prohibition against the threatened misappropriation of trade secrets.

• Meanwhile, in Exal Corp. v. Roeslein & Associates, Inc. (N.D. Ohio 12/27/13), the court dismissed the plaintiff’s claim under Ohio’s trade secret act. The court pointed out that Ohio’s statute specifically prohibits “actual or threatened misappropriation,” a threat means something more than mere speculation. The former employer must put forth evidence of a demonstrable risk of misappropriation. In Exal, this showing was lacking.

The lesson from this post isn’t really the differences in the application of the inevitable disclosure doctrine. Instead, consider this post a lesson on the importance of written agreements. If you have a written non-competition agreement, you need not worry about threatened versus actual misappropriation. More specifically, if you have employees who are privy to sensitive information, or who otherwise present a serious risk of competition, require a non-competition agreement as a condition of their employment. Otherwise, you are taking a huge risk with your trade secrets and other confidential information.

Does social media change the meaning of “solicitation?” (redux)

Earlier this year, I asked the following question: “Does social media change the meaning of solicitation?” I concluded that absent a contract directly defining social media connections as a “solicitation,” “passive” social media activities, such as “continuing an already existing online relationship via social media” will not violate a non-solicitation agreement.

In my earlier post, I was discussing whether maintaining already existing Facebook friends violated a non-solicitation agreement. Yesterday, the National Law Journal brought us the next evolution of this issue: whether a LinkedIn profile update alerting connections about a new job constitutes a “solicitation of business” in violation of a non-compete agreement. According to the order issued by a Massachusetts trial court judge in KNF&T Inc. v. Muller [pdf], the answer is no.  

In that case, Charlotte Muller’s former employer claims that she violated the no-solicitation covenants in her non-competition agreement by posting her new position on her LinkedIn profile, which, in turn, notified her hundreds of contacts of her job change. Her old company claimed, “To the extent this notification has been sent to current KNF&T clients, this notification constitutes a solicitation of business in direct violation of her non-competition agreement.”

The trial judge addressed the LinkedIn issue in a footnote in his order denying the company’s request for a preliminary injunction:

The same reasoning applies to the evidence that Muller currently has a Linkedln profile disclosing her current employer, title, and contact information, and counting among her “Skills & Expertise” such things as “Internet Recruiting,” “Temporary Staffing,” “Staffing Services,” and “Recruiting.” There is no more specific mention of any of KNF&T’s “Fields of Placement” than this. So long as Muller has not and does not, prior to April 12, 2014, solicit or accept business in the Fields of Placement for herself or others (including her new employer), she will not have violated the covenant not to compete.

In other words, the company’s own agreement doomed its argument that the LinkedIn update constituted a breach.

How do you protect your company if you want to include social media announcements of a new job as violations of a non-solicitation agreement? Draft the agreement accordingly:

“Solicitation” includes, but is not limited to, offering to make, accepting an offer to make, or continuing an already existing online relationship via a Social Media Site, or updating an account or profile on a Social Media site to communicate to, publicize to, or otherwise advise online connections or relationships about a new position of employment with an employer other than the Employer to this Agreement. “Social Media Site” means all means of communicating or posting information or content of any sort on the Internet, including to your own or someone else’s web log or blog, journal or diary, personal web site, social networking or affinity web site, web bulletin board or a chat room, in addition to any other form of electronic communication.

We’ve yet to see a case in which a judge has been asked to uphold such an agreement. It should go without saying, though, that you have a much better chance of enforcement with the language than without. More importantly, however, this case illustrates that social media is not creating new laws, but is merely creating new applications of existing laws to an evolving communication and technology tool.

A hypnotic tale about choice of law and non-compete agreements

Choice of law is one of the most important, and, often, most ignored decisions you can making in drafting a non-competition agreement. Lifestyle Improvement Centers, LLC v. East Bay Health, LLC (S.D. Ohio 10/7/13), illustrates how the choice of which state’s law will govern the contact can govern the enforceability of the restrictive covenant.

Patrick Porter owned Positive Changes Hypnosis Centers, a successful hypnosis-therapy center, which included a network of franchises. In 2003, Porter sold the business to an Ohio-based company, Lifestyle Improvement Centers. Years later, while running a competing California-based self-improvement company called East Bay Health, Lifestyle reached out to the Porters for help with a struggling Positive Changes franchise in California. Ultimately, the Porters acquired the struggling Positive Changes franchise from Lifestyle. The Porters’ company, East Bay, entered both a franchise agreement and a non-compete agreement with Lifestyle.

The Porters spent a year trying to turn around the Positive Changes franchise location, ultimately concluding it was a lost cause. The Porters shut down the franchise and converted it into The Smart Body Institute, operated through their East Bay Health company. When the Smart Body Institute entered the hypnotherapy business, Lifestyle sued under the non-compete agreement, which stated that Ohio law governed the parties’ relationship.

The Porters and East Bay argued that because California law forbids non-compete agreements, it violates the law and public policy of the state in which their business is located to enforce a non-compete agreement under a competing state’s law. The Ohio federal court hearing the dispute agreed, concluding that despite the Ohio choice of law provision, California law applied. Thus, an Ohio company, with an Ohio choice of law contract, in an Ohio court, could not enforce its non-compete agreement.

In this case, the court ignored the parties’ choice of law because of the strength of the public policy of the state in which the competing business was located. Yet, this case illustrates a larger point. Choice of law can be outcome determinative in non-compete cases. Because state law governs the enforceability of non-compete agreements, there are 50 different possible sets of rules for your contract. The set that you choose could determine your case. For example, Ohio enforces non-compete agreements based on their overall reasonableness. California, on the other hand, has decided that its public policy renders most non-compete agreements per se unenforceable. Do not ignore the selection of the controlling law in your non-competition agreements. Otherwise, you could be missing a golden opportunity to dictate the terms of the agreement’s interpretation, and, ultimately, its enforceability.

Private eyes, they’re watching you…

No one likes the idea of a workplace in which managers keep a constant eye on employees. Workers find it creepy, and it’s not as if ambitious managers clawed their way up the ladder just to snoop on their underlings all day. Still, much of the surveillance now takes place electronically—in theory, freeing bosses to focus on other matters while monitoring software keeps everyone in line. So office spying isn’t going away.

So says this article on Businessweek.com, which nevertheless concludes that “electronic surveillance in the workplace is strikingly effective,” citing a survey [pdf] jointly conducted by professors at Washington University, BYU, and MIT.

I’m pretty sure, however, the type of workplace surveillance noted in a lawsuit filed by the EEOC falls on the creepy side of the line, as opposed to the effective. From the EEOC’s press release:

According to the EEOC’s lawsuit, between March and July 2010, Davis Typewriter Company’s operations manager commandeered the company’s security camera system to stream hours of footage of former employee Tracey Kelley’s breasts and body onto his office computer.

Surveillance and privacy have been hot topics of discussion of late. How you handle these issues in your workplace will depend, in large part, on how you want your employees to perceive  you as an employer—as a partner in trust, or as a distrustful watchdog.

Rather than watching everyone, the more prudent course of action is only to watch when an employee gives you a reason to do so. Do you have reason to believe an employee is stealing from you? Then watch that employee. Do you think an employee is fraudulently using FMLA leave? Then watch that employees. Do you believe an employee is leaking secrets to a competitor? Then watch that employee.

To watch everyone, however, without reason, leads to “distrust, conformity, and mediocrity,” three traits to which you should not want your employees to strive, and which will not help you run a successful business.

How to draft an enforceable noncompete agreement in 5 steps

According to the Wall Street Journal, litigation over noncompete agreements is rising:

More employers are requiring their new workers to sign “noncompete” agreements, which they say are needed to prevent insiders from taking trade secrets, business relationships or customer data to competing firms when they leave.… 

The number of published U.S. court decisions involving noncompete agreements rose 61% since 2002, to 760 cases last year…. Since most cases are settled out of court and most opinions aren’t reported, that tally is likely low.

Yet, having an employee sign a noncompete agreement and being able to enforce that agreement against that employee are two completely different animals. In today’s job market, courts have become increasingly skeptical of agreements that limit an employee’s ability to find employment.

Thus, what steps can you take to maximize your ability to enforce the agreements that your employees sign? Here are 5 practical steps.

1. Pick the right type of covenant. What type of competition are you trying to protect? Are you trying to protect your company’s most guarded secrets from you biggest competitors, or are you trying to prevent a salesperson from cherry picking your customers? If all you need is an agreement prohibiting an employee from soliciting customers, clients, or vendors, then limit the agreement to protect that interest. Putting it another way, if all you need is a no-solicitation agreement to protect your legitimate interests, then only require such an agreement as a condition of employment. Do not cast too wide a net, or a court will either narrow it for you, or, worse, toss out the entire out to sea.

2. Know your jurisdiction. Different states have different laws pertaining to the enforceability of noncompete agreements. California, for example, will only enforce such agreements in very limited circumstances, while Ohio will enforce any agreement reasonable in time, geographical scope, and the legitimate interest you seek to protect. Picking the right state’s law to apply to your agreement could make the difference between and enforceable contract and a worthless piece of paper.

3. Provide consideration. An employee must receive something of value in exchange for giving up the right to compete. If the covenant is signed at the beginning of employment, the hiring itself usually meets this requirement. For current employees, though, what qualifies as “value” varies from state to state. In Ohio, for example, a keeping an at-will employee employed is enough. Other states, however, require something of monetary value, such as a raise, bonus, or extra vacation days.

4. Enforce, enforce, enforce. Do not be selective in enforcing your contracts. Suppose Employee A and Employee B are subject to the same noncompete covenants. Employee A quits and works for a competitor, and you ignore it. If Employee B does the same, but you sue to enforce that noncompete, you will have a hard time proving the legitimacy of the business interest you are seeking to protect in light of the fact that you chose to ignore the same as to Employee A.

5. Ask for help. The Internet is a wonderful tool. A wealth of information is a world away. In the click of a mouse you can learn who led the National League in stolen bases in 1971 (it’s Lou Brock), or you can find examples of noncompete agreements. Be wary, though, of using these examples in your business without first having your counsel vet them. As noted above, laws vary from state to state. They also change from year to year as new statutes are passed, old statutes are amended, and court pass judgment on various legal issues. No matter the quality of the appearance of the form you locate or the trustworthiness of site on which you find it, you have no idea when it was drafted, which state’s law under which it was drafted to comply, or if counsel ever reviewed it. There is nothing wrong with a little DIY legal work on the Internet. There is a lot wrong, however, with all your legal work being DIY. If you don’t want to pay your lawyer to start from scratch, at least let him or her review your forms and offer an opinion on their viability in your specific jurisdiction.

These five steps aren’t the only considerations in drafting a strong, enforceable noncompete agreement. But, they are a good foundation to placing you in the best position to protect your business from an employee trying to work for a competitor.

Does social media change the meaning of “solicitation?”

Consider the following scenario. Your company uses sales representatives to sell its products. To protect your company’s relationship with its other employees, you require all sales reps to sign a no-solicitation agreement as a condition of their employment. Under the agreement reps cannot “directly or indirectly solicit, entice, persuade or induce any … employee … of the Company … to terminate or refrain from renewing or extending his or her employment, association or membership with the Company … or to become employed by or enter into a contractual relationship” with the employee executing the no-solicitation agreement.

If an employee connects with co-workers on Facebook or any other social network, and then leaves your company, has he violated the no-solicitation agreement by maintaining the connections?

According to the court in Pre-Paid Legal Services, Inc. v. Cahill (E.D. Okla. 1/22/13), the answer is, “No.”

In this case, PPLSI complains that Facebook posts that tout generally the benefits of Nerium as a product and Defendant's professional satisfaction with Nerium constitute solicitations presumably because some of Defendant's Facebook “friends” are also PPLSI sales associates and may view Defendant’s posts….

PPLSI has not shown any intent on Defendant’s part to solicit current PPLSI associates…. There was no evidence presented that Defendant’s Facebook posts have resulted in the departure of a single PPLSI associate, nor was there any evidence indicating that Defendant is targeting PPLSI sales associates by posting directly on their walls or through private messaging.

In other words, because the employer could not demonstrate any intent on the part of the departed employee to solicit other employees via Facebook, the mere fact that they are Facebook friends is not enough to violate the no-solicitation covenant. Presumably, the same logic would hold true if the no-solicitation covenant applied to customers instead of employees.

One case does not equal dogma (although Cahill did discuss and agree with another similar case from an Indiana appellate court). These cases are highly fact specific and depend as much on the court's perception of the parties’ equities as they do on the language of the challenged agreements.

If, however, you are concerned about ex-employees using Facebook, Twitter, LinkedIn, and other social networks to lure employees or customers, why not include language in your no-solicitation agreement to cover such a possibility?

“Solicitation” includes, but is not limited to, offering to make, accepting an offer to make, or continuing an already existing online relationship via a Social Media Site. “Social Media Site” means all means of communicating or posting information or content of any sort on the Internet, including to your own or someone else’s web log or blog, journal or diary, personal web site, social networking or affinity web site, web bulletin board or a chat room, in addition to any other form of electronic communication.

By defining “solicitation” to include passive social media connections and activities, you are at least putting yourself into a position to have a court consider shutting down an ex-employee for maintaining online relationships.

Laughing out the door: half of employees admit to stealing corporate data

Do you worry about the information, data, and other property your employees are taking with them after a resignation or termination? If you believe the results of a recent survey conducted by Symantec, if you’re not worried, you should be.

According to the survey, half of employees who left or lost their jobs in the last 12 months kept confidential corporate data, and 40 percent plan to use it in their new jobs. The results are jarring:

• 62 percent of employees believe that it is acceptable to transfer work documents to personal computers, tablets, smartphones, or into the cloud, and most never delete the data they’ve moved.
• 56 percent see nothing wrong with using a competitor’s trade secrets.
• Given the example of a software developer who develops source code for a company, 44 percent believe the employee has some ownership in the work and inventions.
• 51 percent think it is acceptable to take corporate data because their company does not strictly enforce policies.

Based on these results, Symantec makes the following three recommendations for companies hoping to shore up their data:

• Employee education: Organizations need to let their employees know that taking confidential information is wrong. IP theft awareness should be integral to security awareness training.

• Enforce non-disclosure agreements (NDAs): In almost half of insider theft cases, the organization had IP agreements with the employee, which indicates the existence of a policy alone—without employee comprehension and effective enforcement—is ineffective¹. Include stronger, more specific language in employment agreements and ensure exit interviews include focused conversations around employees' continued responsibility to protect confidential information and return all company information and property (wherever stored). Make sure employees are aware that policy violations will be enforced and that theft of company information will have negative consequences to them and their future employer.

• Monitoring technology: Implement a data protection policy that monitors inappropriate access and use of IP and automatically notifies employees of violations, which increases security awareness and deters theft.

Of these three, the enforcement of agreements and other legal rights against the theft of confidential information and other corporate data is the most effective. Companies do not like litigation—it’s expensive, time consuming, and uncertain. Yet, when your intellectual and other property is involved, you have no choice. There exists no greater deterrent to copycat misconduct in the future than putting a thief through the legal wringer. Your employees will know that your agreements have teeth and that you will go to mat to enforce them. The hopeful result is that they will think twice about walking out the door with even a promotional pamphlet, keeping your corporate information and other property secure.

Be careful what you bring upon yourself when suing an ex-employee

Last week—in Quicken Loans,Inc. (1/8/13) [pdf]—an NLRB administrative law judge invalidated the confidentiality and non-disparagement provisions in an employment agreement between Quicken Loans an an ex-mortgage banker, Lydia Garza. This decision continues the NLRB’s march towards the overly broad expansion of the definition of protected concerted activity. Molly DiBianca, at her Delaware Employment Law Blog, sums up the decision thusly:

Admittedly, the ALJ's conclusion that an employer is not free to contract with its highly compensated professional employees that those individuals will not disparage their employer or steal its confidential and proprietary information is a bit depressing. But keep in mind the remedy, friends. Having found that the provisions violated the NLRA, the remedy ordered by the ALJ was that the provisions be revised. Or, if the employer didn't want to go to the trouble of reprinting new agreements for all of its highly compensated brokers, it could simply provide a single-page addendum, notifying those highly paid employees that the two provisions were rescinded.

I want to focus on another business lesson from the decision—why the employee filed the case in the first place. Here’s the ALJ’s summary of the charging party’s motivation for filing the charge with the NLRB.

Garza testified that shortly after she left the Respondent’s employ, she and five other former employees of the Respondent were sued by the Respondent for an alleged violation of the no contact/no raiding and the non-compete provisions of the Agreement.

I’m fairly certain that Garza never even thought filing a challenge to her employment agreement with the NLRB until she got sued and had to hire a lawyer, who, in turn, reviewed the agreement and saw an opening.

If you are going to sue an employee, current or former, make sure you do your diligence of your own potential liabilities. If you uncover something that can come back and bite you, make sure it is a claim with which you can live. Depending on what you unearth, leaving well enough alone with your employee may be the most prudent course of action.

What skeletons are you unearthing by suing an ex-employee?

Before you bring suit against an ex-employee, you might want to consider whether their exist any skeletons in your employment closet that could come back to haunt you in the litigation. Case in point—Automotive Support Group, LLC v. Hightower [pdf], decided yesterday by the 6th Circuit.

Automotive Support Group sued two ex-employees for breaching the non-competition provisions in their employment agreements. One of the sued employees, Don Ray McGowan, counterclaimed in the lawsuit for unpaid wages and severance owed under his employment agreement.

The appellate court affirmed the trial court’s dismissal of the company’s claims. It also affirmed the trial court’s judgment for McGowan on his unpaid wage and severance claims. How much did the employee win? $70,501.31—$750 in unpaid wages (trebled under the applicable South Carolina wage payment statute), $2,500 in severance pay, and $65,751.31 in attorneys’ fees. Add to that $70,000 whatever the company paid its own lawyers to litigate this case.

There are two lessons for employers that leap to mind:

1. Unclean hands. Non-competition cases are often decided on equitable bases. In addition to money damages, you are likely asking a court to award you an injunction enforcing the agreement and precluding the employee from working for a competitor. To obtain an injunction, however, one must have what is called “clean hands.” Clean hands means that the party seeking an injunction has not acted inequitably or unfairly toward the party it is seeking to enjoin. Refusing to pay wages raises the possibility of a court refusing to issue an injunction because of your unclean hands. The better practice: pay the wages (you owe them anyway), and then file suit.

2. Sometimes you get what you ask for. Would McGowan have started a lawsuit over $3,250? Probably not. Once he was sued, did have anything to lose by raising those issues as a counterclaim? Again, probably not. If you are going to bring a lawsuit against an ex-employee, make certain that you are not creating an environment to incent that individual to file a claim that otherwise might stay buried and never see the light of day.

On second thought, go ahead and enforce those noncompetes in mergers

Typically, a decision from the Supreme Court establishes the rule of law going forward on the issue specific to that case. Acordia of Ohio, L.L.C. v. Fishel (10/11/12) [pdf], however, is not your typical case. When the pro-business Ohio Chamber of Commerce and the pro-plaintiff Ohio Employment Lawyers’ Association join together on an issue, something is up.

In Acordia I, decided earlier this year, the Ohio Supreme Court held that if a noncompetition agreement does not provide for its transfer to successor and assigns, the company’s merger with another entity terminates the agreement. That decision, however, was not the end. The losing party filed a motion for reconsideration, supported by a whole bunch of business groups (including the aforementioned Ohio Chamber of Commerce and the Ohio Employment Lawyers’ Association).

Last week, the Supremes issued its decision reversing course:

Employee noncompete agreements transfer by operation of law to the surviving company after merger. The language in Acordia I stating that the L.L.C. could not enforce the employees’ noncompete agreements as if it had stepped into the original contracting company’s shoes or that the agreements must contain “successors and assigns” language in order for the L.L.C. to enforce the agreements was erroneous. We hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into the shoes of the original contracting companies, provided that the noncompete agreements are reasonable under the circumstances of this case.

You can now return to your regularly scheduled noncompetition agreements.

Do your employees know what “loyalty” means?

In almost all states (Ohio included) all employees owe their employer a “duty of loyalty,” which, in the words of one court, means “a duty to act in the utmost good faith and loyalty toward his [or her] employer.” According to another court, “[A]n … employee is prohibited from acting in a manner inconsistent with his … employment and is bound to exercise the utmost good faith and loyalty in performance of his obligations.” Examples of employee misconduct that courts have found to be in breach of this duty of loyalty include acting in competition against one’s employer, giving away company property, using company funds as one’s own, taking bribes or kickbacks, and reaping secret profits.

A story I read yesterday serves as a good reminder that employees owe a responsibility to those who sign their paychecks not only to avoid breaches of this duty of loyalty, but also to avoid placing themselves in circumstances that could call their loyalty into question. While appearing on a local sports radio station yesterday, Philadelphia Eagles running back LeSean McCoy said the following about the replacement referees working in place of the locked-out regular officials: “One of the refs was talking about his fantasy team, like ‘McCoy, come on, I need you for my fantasy.’”

It is highly doubtful, even laughable, that an NFL referee would change a call to help his fantasy football team. Yet, this official exercised very poor judgment in cracking this joke. Employees must avoid even the appearance of a breach of their loyalty to their employer. Should this official lose his job or suffer some other discipline for this lapse in judgment? Probably not. Should the NFL talk to him and remind him of the importance of these issues? Absolutely.

Do your employees understand this issue? When you conduct training of your employees, you might want to consider tossing a discussion of these concepts into the materials.

Time to re-read your non-competition agreements; Ohio Supreme Court issues ruling on enforceability by successors

Acordia of Ohio, L.L.C. v. Fishel [pdf], decided last week by the Ohio Supreme Court, is a pretty straight-forward case. In this case, four ex-employees claimed that Acordia could not enforce their non-competition agreements. They argued that the under the plain language of their covenants, the agreements were limited to the predecessor employer, and that there were no allowances in the agreements for a successor entity such as Acordia, which had acquired the original employer.

The Supreme Court agreed:

The agreements defined the “Company” only as “Frederick Rauh & Company,” the predecessor employer. Because the agreements did not extend the definition of “Company” to include successor entities, Acordia could not enforce them. Simply, the agreements lacked any language that specifically assigned rights to the new company….

The noncompete agreements between the employees and their original employers specified that they applied only to the specific companies that had originally hired each employee. Because the agreements made no provision for the continuation of the agreement upon any acquisition of the original company by another company, the agreements are not enforceable by the L.L.C. according to the agreements’ original terms past the two-year noncompete period agreed to by the employees and their original employers.

In other words, if have any current non-competition agreements that operate under Ohio law, you need to review them to ensure that they allow for successor entities. Otherwise, even a simple change in corporate structure could render your agreement unenforceable.

Going forward, non-competition agreements should:

1. Define “employer” to include the current entity, in addition to any successors and assigns.
2. Include a specific clause in the agreement, which provides that all rights in the agreement flow to “successors and assigns,” which are entitled to enforce the agreement against the employee.

Luckily for employers, Ohio law provides that continued employment is sufficient consideration to support a non-competition agreement. In other words, you should be contacting your counsel to review all non-competition agreements for compliance with the Acordia case, and redrafting and reissuing to employees where necessary.

Terminated CFO illustrates the confidentiality risks social media pose

According to a recent survey by Intel (h/t: Lifehacker), 85% of American adults share information about themselves online, while 90% think others are sharing too much. Maybe the former CFO of Francesca’s Holdings Corp., Gene Morphis, should have heeded the latter and shared less about his company’s inner workings.

On Monday, Francesca’s announced that it fired Morphis for improperly communicating company information through social media. A quick review of Morphis’s Twitter feed and (very public) Facebook Wall offers some possible suspects.

Maybe it was this tweet:

Or maybe it was this one:

Or maybe this one:

Or, maybe it was this Facebook post:

Or, maybe it was this one:

Social media presents a real risk of corporate breaches of confidentiality. It is easy to tell your employees, “Think before you click.” (Hey, that’s a catchy title for a book.) Yet, 76% of the Inc. 500 lack a social media policy for their employees, and 73% of all employers conduct no social media training. If you aren’t educating your employees about the risks and benefits of social media, both in and out of the workplace, you are not only missing a golden opportunity, but you also leaving yourself exposed to breaches of confidentiality such as that which befell Francesca’s. These issues are not going away.

Businesses that ignore the possibility that their employees can divulge trade secrets and other confidential and proprietary information via Twitter, Facebook, and other social media do so at their own peril. Did Morphis’s disclosure harm his ex-employer? Probably not. But, the company’s swift and decisive reaction to any breach of confidentiality will make it easier down the road for it to protect its confidential information when it really matters. Mark my words. The day will come when a court will invalidate a corporate trade secret because of a lax social media policy.

As an aside, I’m leading off tomorrow’s NLRB Region 8 Labor Law Conference [pdf], discussing social media policies and protected concerted activity. NLRB Acting General Counsel Lafe Solomon is the lunch speaker. I am very interested to hear his thoughts on how employers can balance their right to limit disclosures of confidential information against his perception that social media policies that prohibit such disclosures violate the NLRA.

Disturbing study about the (mis)use of employers’ confidential information

Here’s the good news: According to a recent survey conducted by FileTrek, 79% of Americans believe that removing confidential files from the office is grounds for termination. Here’s the bad news: 90% think that employees do it anyway. What is the most popular method of removing information? Exporting it to a USB drive.

Some more scary numbers? How about the answers to the question, “When is it acceptable to remove confidential company information out of the office?”

• 48% — When boss says it’s okay
• 32% — To finish a late night project from home
• 30% — To work over the weekend or while on vacation
• 16% — When the confidential information about themselves
• 2% — When it can be brought back to the office before the boss knows it was gone
• 2% — To show something to family or friends who promise to keep it confidential
• 40% — Never

According to Dale Quayle, CEO of FileTrek, “Today’s workforce believes information is an asset to be shared…. It’s critical for today’s management teams to be more IP aware to ensure data security.”

Where does this IP awareness start? With a clear set of policies and agreements that prioritize the confidentiality of your information and data. You need to set the expectation in your organization that you take confidentiality seriously, and those that do not should not expect to remain employed. You also need to be prepared to enforce that confidentiality with litigation when necessary. Otherwise, the agreements may not be worth the paper on which they are printed.

[Hat tip: Huffington Post]

Who owns social media accounts? (part 2)

Last Monday, I asked the following question: “What happens to an employee’s social media account when the employee leaves a company?” The very next day, a California federal court began to sketch the outline of an answer.

PhoneDog v. Kravitz (N.D. Calif. 11/8/11) [pdf] concerns the ownership of a corporate Twitter account. Noah Kravitz worked for PhoneDog as a product reviewer and video blogger. In that role, PhoneDog provided him use of a Twitter account—@PhoneDog_Noah—to disseminate information and promote PhoneDog’s services on its behalf. When Kravitz resigned his employment, PhoneDog requested that he relinquish use of the Twitter Account. Instead, Kravitz changed the account’s name to @noahkravitz, continuing to use it. PhoneDog filed suit, claiming, among other things, that by refusing to relinquish control of the Twitter account, Kravitz stole its trade secrets and other proprietary and confidential information.

In seeking dismissal of the lawsuit, Kravitz argued that PhoneDog cannot establish any damages because it cannot establish ownership over the Twitter account. According to Kravitz: “To date, the industry precedent has been that absent an agreement prohibiting any employee from doing so, after an employee leaves an employer, they are free to change their Twitter handle.” (emphasis added). The court disagreed, and is permitting the claims alleging misappropriation of trade secrets and conversion of property to proceed to discovery.

Despite the employer’s (at least temporary) victory, why take a risk that an employee can challenge ownership rights to a social media account? If you have employees using corporate-branded or other official social media accounts, require them to sign an agreement as a condition of their employment that says the following:

1. The company, and not the employee, owns the social media account.
2. All social media accounts, including login information and passwords, must be relinquished at the end of employment.

Anything else places these issues in the uncertain hands of a judge or a jury.

Who owns social media accounts—the employer or employee?

What happens to an employee’s social media account when the employee leaves a company? One British court has answered this question by ordering a former employee of a recruiting firm to turn over his LinkedIn contacts to his former employer.

The answer to this question is not nearly as cut and dry as this one case may make it seem. Ownership of social media usernames, pages, and relationships depends on the nature of the employment, the nature of relationship, and the ownership of the account. Thus, for example, an employee hired to manage a business’s social media will have much less of claim over these relations than will an employee who uses social media to foster personal relationships with co-workers, customers, and vendors. Salespeople—who might use LinkedIn to manage business contacts, or Facebook and Twitter to promote their companies and products—present a much grayer issue.

Because shades of gray lead to unpredictability, you should plan for these uncertainties by reaching agreements with your employees—up front and in a social media policy—on how social media ownership will be handled at the end of employment.

[Hat tip: Forbes]