Lessons from Game of Thrones on an employee’s duty of loyalty #spoileralert

If you haven’t yet watched this week’s episode of Game of Thrones, consider yourself warned. There are spoilers below. Turn back now if you don’t want to be spoiled.

How to recover a stolen computer from an ex-employee in seven easy steps

As many as 60% of employees who are laid-off, fired, or quit admit to stealing company data. Sometimes, they download information on their way out the door. Sometimes they email information to a personal email account. And sometimes they simply fail to return a company laptop or other device that contains the data. In the latter case, it costs an average of $50,000 for an employer to replace a stolen computer, with 80% of that cost coming from the recovery of sensitive, confidential, and proprietary information.

When you put this data together, it becomes increasingly apparent that businesses must take proactive steps to protect their technology and data.

Bad employment policies lead to new legislation

All the way back in October 2014, I wrote about an Illinois Jimmy John's franchisee that had required all of its employees to sign a Non-Compete Agreement as a condition of employment. 

I was not kind to this employer:

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.… [W]e're talking about sandwiches. What's the legitimate business interest this employer is trying to protect?

Yet, in the nearly half-decade since, employers have not heeded my advice. And, when employers fail, legislatures sometimes step in to fix.

Non-solicitation agreements are not a license to steal an employee's already existing customers

Hall v. Edgewood Partners Ins. Center (6th Cir. 12/14/18) [pdf] asks a question that we see arise often in litigation with former employees over restrictive covenants—can an employer limit an employee's access to customers, clients, or other contacts that the employee had prior to the employment.

Or, to put it another way, who owns an employee's pre-existing book of business, the employee or the employer?

What’s the worst employee exit you’ve ever seen?

There is a right way to quit a job, and a wrong way to quit a job.

Last week, a Twitter employee demonstrated the worst of the latter.

Apple employee gaffe illustrates risk posed by YouTube videos in protection of trade secrets

An Apple employee lost his job this week after his daughter, Brooke Amelia Peterson, posted a YouTube video of her dad’s brand new, unreleased iPhone X.

ReCode has the details:

Peterson posted a five-minute video of a September day in Silicon Valley, which mostly included shopping for makeup and clothing. Harmless, and not unlike other YouTube videos posted by teenagers. 

But then, in the video, she visits her father on Apple’s campus in Cupertino for what seems like dinner. As they munch on pizzas in the company’s cafeteria, Peterson’s dad hands her his iPhone X to test. That’s when YouTube viewers got about 45 seconds of footage of Peterson scrolling through various screens on the new design and showing off its camera.

Does a LinkedIn request violate a non-solicitation agreement?

In Bankers Life and Casualty Company v. American Senior Benefits (Ill. Ct. App. 8/7/17), Bankers Life sued a former sales manager, Gregory Gelineau, for violating the following non-solicitation agreement after he jumped ship to American Senior Benefits, a competitor:

During the term of this Contract and for 24 months thereafter, within the territory regularly serviced by the Manager’s branch sales office, the Manager shall not, personally or through the efforts of others, induce or attempt to induce: 

(a) any agent, branch sales manager, field vice president, employee, consultant, or other similar representative of the Company to curtail, resign, or sever a relationship with the company; [or]

(b) any agent, branch sales manager, field vice president or employee of the Company to contract with or sell insurance business with any company not affiliated with the company. 

Is your non-compete agreement killing a fly with a sledgehammer?

At least half of my legal practice is serving as outside labor-and-employment counsel for small to midsize businesses. And, increasingly, much of that practice is consumed with drafting post-employment covenants, sending cease-and-desist letters to employees who are in violation of said covenants, or filing lawsuits to enforce said covenants; or, conversely, advising a business whether it can hire an employee with a non-compete agreement, responding to cease-and-desist letters, or defending a lawsuit seeking to enforce said covenants.

The White House challenges states to reform non-compete agreements

This week, the White House announced a call to action to reform non-compete agreements [pdf]. Instead of proposing sweeping federal legislation, it is asking each state to pass non-compete reforms. This call to action comes on the heels of a joint White House/Treasury Department report [pdf] issued this past spring addressing the use, issues, and state responses to non-competition agreements.

President signs the Defend Trade Secrets Act of 2016—what employers need to know

Yesterday, President Obama signed into law the Defend Trade Secrets Act of 2016. It creates a uniform, federal standard for the protection of corporate trade secrets.

What do employers need to know about this new law?

Language matters when drafting restrictive covenants

Consider the following language in a non-solicitation agreement:

Neither PARTY will directly solicit for employment a current or former employee of the other PARTY who has performed any work in connection with this AGREEMENT. This provision will remain in effect during the term of the SERVICES and for one (1) year from the date of said former employee’s separation of employment from P&G or CONTRACTOR.… Further it is acknowledged that simply hiring an employee of the other PARTY is not a restricted activity in the absence of an improper solicitation as described above.

Don’t call the whole thing off when negotiating IP rights with employees

Tomaydo-Tomahhdo is a local sandwich shop, and a purveyor of damn fine paninis and wraps. As for litigation, let’s say its lunches are way better. It sued one of its former chefs, claiming that he stole its book of recipes to open a competing catering business. Ultimately, the restaurant lost its lawsuit, which it had framed as a copyright infringement claim. The court concluded [pdf] that there is nothing original in a compilation of sandwich recipes that copyright law protects.

What could this employer have done differently to protect its intellectual property. It could have gotten in it in writing from the employee.

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.