Ok, maybe they are only interesting to a non-compete geek like me.

For the hard-core non-compete geeks out there, a new article by University of Washington Law Professor Kate O’Neill entitled (cue the Clash song) “Should I Stay or Should I Go?  Covenants Not to Compete in a Down Economy: A Proposal for Better Advocacy and Better Judicial Opinions” may be of interest.

Hat Tip:  Workplace Prof Blog

Big news this week in the world of non-compete agreements and medical technology.  Judge M. Michael Monahan in Ramsey County has enjoined Joe McCullough, a former high-ranking executive of St. Jude Medical, from moving across town to rival Medtronic.   The judge’s analysis of the issues is very thorough, and the opinion provides a good template for how to think about these cases.

As the judge himself noted in his 15-page Opinion, this is not a “run-of-the-mill” employment dispute.  McCullough was employed by St. Jude for 16 years, and reached the highest levels of the company’s management, reporting directly to the company’s President-CEO.  In that role, he had access to “a significant quantity of high quality St. Jude confidential information.”   As the judge aptly summarized, McCullough’s “professional life was spent at the heart of St. Jude’s worldwide activities, second in importance and access only to [the CEO].” 

While it was unclear to the judge whether McCullough resigned or was fired from St. Jude (“Evidently in modern corporate parlance, “terminate”, “resign” and “retire” are synonyms, leaving the casual onlooker at a loss to know what actually occurred”), it was undisputed that McCullough formally terminated his relationship with St. Jude in May 2010, and accepted a written offer from Medtronic 52 days later.  Among the agreements he signed with Medtronic was a document called “Ethical Wall: Detailed Restrictions”.  While Medtronic and McCullough undoubtedly viewed this as an effort to protect St. Jude’s confidential information, the judge was not convinced:  “These documents evidence an attention to linguistic detail more commonly encountered in tax legislation or SEC filings rather than in employment contracts.  They are at the apex of the drafters’ art.  More to the point, the documents are evidence that both [McCullough] and Medtronic recognized that they were embarking upon a relationship that was laden with serious legal and ethical problems.”  Once St. Jude was informed by Medtronic of its decision to hire McCullough as its International General Manager”, this lawsuit quickly followed. 

St. Jude’s arguments in favor of enjoining McCullough from working at Medtronic were standard ones:  Medtronic is its direct competitor, McCullough had access to most if not all of its sensitive confidential information, and the only sensible way to protect such information was through a one-year prohibition on employment with Medtronic.  McCullough (who was represented as an individual in this matter by lawyers who frequently represent Medtronic in this type of case) also raised familiar arguments in defense:  the agreement was unenforceable for lack of consideration, and because it lacked any geographic, product or customer limitation; McCullough’s Ethical Wall with Medtronic was sufficient to protect St. Jude’s legitimate interests; and the Agreement was obtained by fraud. 

The Court properly analyzed St. Jude’s request for a temporary restraining order under the five factors established by the Minnesota Supreme Court in its decision in Dahlberg Brothers, Inc. v. Ford Motor Co.    In particular: 

1. The nature of the relationship between the parties supports entry of an injunction given McCullough’s high-level position at St. Jude.
2. The relative harm to St. Jude was greater than that to McCullough because McCullough will continued to be paid by Medtronic even if he is enjoined from working there, whereas St. Jude’s confidential information could be compromised forever.
3. St. Jude was likely to succeed on the merits of its claims against McCullough.
4. Public policy – the right of employers to safeguard their confidential information – weighs in St. Jude’s favor.
5. There is no particular judicial burden in granting St. Jude’s request.  

The most important of the Dahlberg factors is, of course, the third: the likelihood of success on the merits.  It was here that the Court was able to consider each of McCullough’s arguments in detail.  On the consideration issue, McCullough had argued that there was no consideration for the agreement because he signed it after beginning in his position as Group Vice President, and under Minnesota law such a “mid-stream” agreement must be supported by additional consideration because continued employment alone is not enough.  The Court, however, rejected this argument, finding that there was no evidence that the agreement was backdated as McCullough had claimed, and that he had received additional benefits for signing the agreement.  

In regard to irreparable harm, McCullough argued that St. Jude would not be harmed because of the extensive protective provisions (i.e. Ethical Wall) in his Employment Agreement with Medtronic.   The Court was not convinced that the “product-by-product or country-by-country” approach incorporated in the agreement would product St. Jude’s confidential information when McCullough had worldwide responsibilities for all St. Jude products, present and future.    The judge also suggested that Medtronic’s “third-party beneficiary approach” to protecting St. Jude’s confidential information would not work “in the real world”; presumably an allusion to his earlier observation that the two companies are “well known to the global legal community for their energetic mutual litigation.” 

Finally, the Court considered the reasonableness of St. Jude’s proposed restriction.  He was not troubled by the fact that the agreement contained no geographic or product limitation given the nature of St. Jude’s business and McCullough’s place in that business.   He also found that a one-year restriction was “conservative” and “more than reasonable” (and pointed out that Medtronic imposes a two-year limitation on some of its employees.)    The judge did not give St. Jude everything that it wanted however; finding that McCullough’s active participation in St. Jude’s business (and therefore his access to St. Jude confidential information) had ended in October 2009, he started the one-year clock ticking from that date, rather than from the May 2010 resignation date that St. Jude had sought. 

In the end, Judge Monahan did a very fine job of analyzing the facts of this particular case under Minnesota law.  He broke no new legal ground, and reached a decision which appears to be correct under the facts as related in his opinion.

A new decision by a Federal District Court judge in Minneapolis indicates that it will be more difficult for employers to file lawsuits alleging trade secret misappropriation against former employees.

Hot Stuff Foods claimed that one of its former executives, Dornbach, secretly entered into business relationships with its customers before he resigned from the company, and that he also downloaded and copied its confidential pricing and business planning information from his work computer.  As a result, Hot Stuff sued Dornbach.   In response, Dornbach brought a Rule 12 motion to dismiss claiming that, in light of two recent Supreme Court’s decisions, Hot Stuff’s complaint failed to contain sufficient factual specificity.

One of Hot Stuff’s claims was that Dornbach had misappropriated its confidential trade secrets when he copied information from his work computer.    Dornbach argued that Hot Stuff failed to plead sufficient facts suggesting the existence of a trade secret because Hot Stuff had alleged only generally that Dornbach had access to confidential information concerning its business plans, pricing, margins and sales strategies, and that the company had not set forth specific information that this information met the definition of a trade secret; i.e. that it had independent economic value, was not readily ascertainable by others, and that Hot Stuff took reasonable efforts to maintain its secrecy.

The Court agreed with Dornbach that it is not enough for a party simply to claim, without specifics, that its data is confidential, and that Hot Stuff’s non-specific and conclusory statements were not enough to establish that the copied information met the definition of a trade secret.   Instead, a party must set forth specific facts showing that the information meets the definition of a trade secret.

This case should remind both companies and their lawyers that it will be harder for them to have their day in court when alleging trade secret misappropriation, and that they must be prepared to allege specific facts showing why their information deserves protection.

For those of you interested in the inevitable disclosure doctrine and the ability to enjoin a former employee from accepting employment with a new company under the Uniform Trade Secrets Act, don’t miss the Third Circuit’s lengthy opinion in Bimbo v. Botticelli, in which it affirms the lower court’s decision to enjoin an executive from jumping from Bimbo Bakeries to its competitor, Hostess, because of the likelihood that he would disclose Bimbo’s trade secrets in his new position.  

And you can add this to your list of really pathetic explanations for incriminating conduct:  “Botticella admitted to copying [highly confidential and sensitive] files periodically from his laptop to external devices during his final weeks at Bimbo, but maintained that he had done so only to practice his computer skills in preparation for his new position at Hostess.”  Right.

Madeleine Baran at Minnesota Public Radio has an interesting story about the use of non-competes in the health care profession.  (Disclosure: I was interviewed for the piece).  A mother has two children with severe mental health problems.  For the past year, her 8-year-old and 10-year-old daughters had been receiving services from a mental health worker who helped the girls learn how to adjust to school and reduce behaviors like bedwetting and self-injury. After years of chaos and struggle, the mother believed that her children had finally found an adult they could trust.

But two months ago, the family’s mental health worker changed employers.  Because she had signed a non-compete agreement with the agency she was leaving, she was not allowed to continue seeing any of her clients for one year.  The agency that she left would not allow an exception for the two children.

Non-compete agreements are commonly used – and enforced - in the health care profession in Minnesota.  In some states, courts have refused to enforce them on public policy grounds; i.e. patients should be able to chose their health care provider.  That issue has not been resolved yet here in Minnesota, though. 

Perhaps medicine is really just a business like any other?

Here is a link to a good article by two lawyers from Atlanta, Benjamin Flink and Anne Andrews, on how to protect your confidential information and customer relationships in this age of data mobility.  While it mostly focuses on Georgia law, the article provides some good practical suggestions/reminders, including using confidentiality agreements with employees; instituting good computer use policies; restricting access to sensitive information; conducting inventories for departing employees; and instituting remote access policies.

I will be speaking on this exact topic with Gary Eidelman from Saul Ewing in Baltimore at the Upper Midwest Employment Law Institute next Monday.  Come and learn more!

First, some background.   Astro-Med and Nihon Kohden are rivals in the highly competitive life sciences equipment market.  In October 2006, Nihon Kohden hired away Kevin Plant, a valuable Astro-Med employee. When first hired at Astro-Med in 2002, Plant signed an employee agreement that contained non-competition and non-disclosure provisions. Relying in large part on those provisions, in December 2006, Astro-Med filed suit against Plant alleging breach of contract and misappropriation of trade secrets. Astro-Med later added a third claim of unfair competition against Plant and joined Nihon Kohden as a defendant, against whom it alleged claims of tortious interference and misappropriation of trade secrets.

In April 7, 2008, a jury returned a verdict against Nihon Kohden and Plant,  awarding $375,800 in damages in favor of Astro-Med. Following the verdict, on July 25, 2008, the district court awarded exemplary damages against Nihon Kohden and Plant in the amount of $560,000, added an award of attorney’s fees and costs, and imposed a sanction pursuant to Federal Rule of Civil Procedure 37. All told, the judgment against Nihon Kohden and Plant equals $1,159,823.60.  Nihon Kohden and Plant appealed, but the Court of Appeals rejected their arguments and upheld the jury verdict.

There are, from my point of view, two interesting holdings in this case.  The first is that the Court was willing to enforce Astro-Med’s non-competition agreement even after finding that its territorial restriction (which was basically the entire world) was overbroad.  In other words, the court used the “blue pencil” doctrine to judicially revise the non-compete and make it enforceable.

The second interesting point is the inherent burden the defendants in these types of cases sometimes face.   The jury apparently concluded that the reason Nihon Kohden hired Plant was to obtain access to his intimate knowledge of Astro-Med’s business.  “It is a logical inference that a competitor who hires away a rival’s valued employee with access to inside information has done so in order to use that inside information to compete with the rival, and it is an equally logical inference that once Plant became a Nihon Kohden employee, he sought to justify its hiring decision by revealing and using the information Nihon Kohden had bargained for.”

On appeal, Plant argued that he had not misappropriated any trade secrets because Nihon Kohden never used any of them.  The Court held that  misappropriation includes disclosure of a trade secret by one who acquired it while under a duty to maintain its secrecy and the acquisition of a trade secret by one who knows that it was acquired by breach of a duty to maintain secrecy.   “Contrary to defendants’ assertion, Astro-Med need not have shown that either Plant or Nihon Kohden “used” Astro-Med’s trade secrets; disclosure or acquisition is sufficient to constitute misappropriation.” 

The bottom line is that both courts and juries are willing to conclude that where there is smoke, there is fire.  If a defendant had the means and the motive to misappropriate trade secrets, that will probably be enough to justify a finding of actual misappropriation, and the large damages awards that can flow from that.