united states law on restrictive covenants...

AMERICAN BAR ASSOCIATION SECTION OF LABOR AND EMPLOYMENT LAW

INTERNATIONAL LABOR LAW COMMITTEE MIDYEAR MEETING

UNITED STATES LAW ON RESTRICTIVE COVENANTS AND TRADE SECRETS

Presented by

GARY R. SINISCALCO

I s tanbul , TurkeyMay 9 -13, 2010

ORRICK, HERRINGTON & SUTCLIFFE LLP

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TABLE OF CONTENTS

Page

Restrictive Covenants and Trade Secrets i

I. INTRODUCTION ......................................................................................................... 1II. WHAT IS A TRADE SECRET?.................................................................................... 1

A. Uniform Trade Secrets Act and the California Definition.................................... 11. Secrecy. .................................................................................................. 3

2. Reasonable Efforts to Preserve Secrecy................................................... 63. Value Derived From Secrecy. ................................................................. 7

B. Restatement of Torts and the New York Definition............................................. 8III. KEEPING YOUR EMPLOYEES FROM COMPETING OR WORKING FOR

COMPETITORS UPON THEIR DEPARTURE .......................................................... 12A. Background. ..................................................................................................... 12

B. In Most States, Covenants Not to Compete Will Be Enforced If They Are Necessary to Protect a Legitimate Interest of the Employer. ............................. 13

1. What Is a “Legitimate Employer Interest”? ........................................... 142. Reasonableness Standard for Enforcement of Covenants Not to

Compete. .............................................................................................. 193. Other Factors Affecting the Reasonableness of Covenants Not to

Compete. .............................................................................................. 20C. The Employee Choice Doctrine ........................................................................ 21

D. Under California Law, Employee Covenants Not to Compete Upon Termination of Employment Are Void. ............................................................ 23

1. The California Rule and Its Application. ............................................... 232. California Courts May Enforce Certain Types of Non-Competition

Clauses That Limit, but Don’t Prohibit, Competition ............................ 273. Enforcement of Non-Solicitation Clauses.............................................. 30

IV. PREVENTING DEPARTING EMPLOYEES FROM USING OR DISCLOSING TRADE SECRETS...................................................................................................... 35

A. Background. ..................................................................................................... 35B. Sources of Protection for Employers................................................................. 35

1. Civil Remedies for Trade Secret Misappropriation................................ 35

TABLE OF CONTENTS(continued)

Page

Restrictive Covenants and Trade Secrets ii

2. The Inevitable Misappropriation Doctrine May Be Used to Prevent “Threatened” Misappropriation of Trade Secrets................................... 40

3. Other Potential Remedies Available to the Employer ............................ 464. Effect of Trade Secret Preemption ........................................................ 50

5. Criminal Statutes. ................................................................................. 526. Racketeer Influenced Corrupt Organizations Act................................... 56

V. A PRIMER ON STRATEGY: BEFORE AND AFTER AN EMPLOYEE LEAVES...................................................................................................................... 56

A. Drafting: Establishing and Maintaining Secrecy ............................................... 561. Drafting Issues...................................................................................... 56

B. What To Do When An Employee Leaves ......................................................... 591. Conduct and Document an Exit Interview ............................................. 60

2. Search the Departing Employee’s Workspace and Review the Employee’s Computer........................................................................... 62

3. If the Risk of Misappropriation is Present, Conduct a Forensic Analysis of the Employee’s Computer .................................................. 62

4. Send Follow-Up Letters ........................................................................ 665. Determine The Applicability of Restrictive Covenants and Insist

on Compliance...................................................................................... 666. Monitor the Risk ................................................................................... 67

VI. CONCLUSION............................................................................................................ 67

Restrictive Covenants and Trade Secrets1

I. INTRODUCTION

The protection of trade secrets has become a number one priority for many employers. To succeed in these extraordinarily competitive times, companies must face the daunting tasks of creating innovative products and services; developing and maintaining a customer base; recruiting and maintaining an expert and efficient work force; and keeping all of their innovations—and all of their customers and employees—from falling into the hands of their competitors.

These tasks are especially difficult because the most valuable, knowledgeable and highly skilled employees are also the most mobile. When such employees leave their jobs and move on to work for a competitor—or to start their own competitive company—they present an unparalleled risk to their former employer. This risk is further exacerbated by the fact that sensitive data can be transported with unprecedented ease. A departing employee can export important documents and company secrets to external storage devices, PDA’s, portable hard drives, and cell phones in mere seconds. What can an employer do to minimize the damage in such circumstances? What risks do employers face when they hire their competitor’s employees and how can they reduce the risk that these hiring decisions will result in litigation? This chapter will address these commonly asked questions, focusing on the law of California and New York, as well as review the newly emerging legal theories that are increasingly being used to inhibit unfair competition by ex-employees, to keep competitors from raiding employees, and to keep employees from using or disclosing their former employer’s trade secret and confidential and proprietary information.

II. WHAT IS A TRADE SECRET?

A key to the success of most employers is the development and use of “trade secrets,” i.e., information that is known only by the employer and its agents, and that gives the employer a commercial advantage over its competitors. Trade secrets—which may involve technical information such as formulas and diagrams, or business information such as customer lists1 and marketing or strategic plans—often comprise the most valuable portion of an employer’s intellectual property.

A. Uniform Trade Secrets Act and the California Definition.

There is no uniform definition of the type of information that constitutes a trade secret. A majority of the states have adopted the Uniform Trade Secrets Act (some with slight

1 Ohio joined the majority of states to recognize that memorized customer lists can be the basis for a trade secret violation. Al Minor & Assocs. v. Martin, 117 Ohio St. 3d 58 (Ohio 2008); see also General Reinsurance Corp. v. Arch Capital Group, Ltd., No. X05CV074011668S, 2007 Conn. Super. LEXIS 2629 (Conn. Super. Ct. Oct. 17, 2007) (the absence of physical or electronic misappropriation was immaterial; misappropriation may occur by more intangible means like “remembered” information).


modification). Under the Act, adopted by California and codified at Cal. Civ. Code §§ 3426 et seq., a trade secret is defined as:

[I]nformation, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Cal. Civ. Code § 3426.1(d). Under this definition, virtually any type of information – technical, business or administrative – is capable of being a trade secret. Many courts have held that simply labeling or defining a particular piece of information as a trade secret by contract does not necessarily make it a trade secret if it does not otherwise meet the test. See, e.g., Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425, 1430 (Cal. Ct. App. 2003) (“Labeling information as a trade secret or as confidential information does not conclusively establish that the information fits this description”); Metro. Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 860-63 (Cal. 1994); American Paper & Packaging Products, Inc. v. Kirgan, 183 Cal. App. 3d 1318, 1325 (Cal. Ct. App. 1986).2 Nevertheless, a wide variety of information has been found to be a trade secret. This information includes, but is not limited to, the following:

• Customer lists: see, e.g., Am. Family Mut. Ins. Co. v. Roth, 485 F.3d 930 (7th Cir. 2007); Hair Club for Men, LLC v. Elite Solutions Hair Alternatives, Inc.,No. 2:07-cv-546-GEB-KJM, 2007 U.S. Dist. LEXIS 30167 (E.D. Cal. Apr. 5, 2007); MPW Indus. Servs. v. Pollution Control Sys., No. 2:02-CV-955, 2006 U.S. Dist. LEXIS 9360, *32 (D. Ohio Mar. 9, 2006); Surface Shields v. Poly-Tak Prot. Sys., No. 02 C 7228, 2003 U.S. Dist. LEXIS 13185, *3 (N.D. Ill. July 29, 2003); Liveware Publ’g, Inc. v. Best Software, Inc., 252 F. Supp. 2d 74, 85 (D. Del. 2003); Lamorte Burns & Co. v. Walters, 167 N.J. 285, 299-300 (N.J. 2001); Home Pride Foods, Inc. v. Johnson, 262 Neb. 701, 709 (Neb. 2001); Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514 (1997); Ivy Mar. Co. v. C.R. Seasons, Ltd., 907 F. Supp. 547, 556-57 (E.D.N.Y. 1995);

• Pricing, distribution and marketing plans, market analysis information and sales data: see Johnson Controls, Inc. v. A.P.T. Critical Sys., 323 F. Supp. 2d 525, 532-33 (S.D.N.Y. 2004); Lucini Italia Co. v. Grappolini, No. 01 C 6405, 2003 WL 1989605 (N.D. Ill. Apr. 24, 2003); Ikon Office Solutions, Inc. v. Am. Office Prods., Inc., 178 F. Supp. 2d 1154, 1169-1170 (D. Or. 2001); Star Sci.,

2 But cf. Loral Corp. v. Moyes, 174 Cal. App. 3d 268, 275 (Cal. Ct. App. 1985) (“[c]ases suggest that when permissible solicitation of an employer’s customers is at issue, a contract may prohibit more than the law of the marketplace otherwise would.”).


Inc. v. Carter, 204 F.R.D. 410, 414 (D. Ind. 2001); Union Carbide Corp v. UGI Corp., 731 F.2d 1186, 1191 (5th Cir. 1984);

• Drawings and specifications: see Ctr. for Auto Safety v. Nat’l Highway Traffic Safety Admin., 93 F. Supp. 2d 1, 8-9 (D.D.C. 2000); La Calhène, Inc. v. Spolyar, 938 F. Supp. 523, 529 (W.D. Wis. 1996); Taco Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1123 (5th Cir. 1991); Boeing Co. v. Sierracin Corporation, 43 Wash. App. 288 (Wash. Ct. App. 1986);

• Information Contained in Unpublished Patent Applications: see QR Spex, Inc. v. Motorola, Inc., No. CV 03-6284, 2004 U.S. Dist. LEXIS 27378, *15 (C.D. Cal. Oct. 28, 2004) (court recognized that trade secret protection available until patent application was published); Stutz Motor Car of America, Inc. v. Reebok Int’l Ltd., 909 F. Supp. 1353 (C.D. Cal. 1995) (same);

• Chemical formulas: Ctr. for Auto Safety v. Nat’l Highway Traffic Safety Admin., 93 F. Supp. 2d 1, 8-9 (D.D.C. 2000); Wright Chemical Corp. v. Johnson, 563 F. Supp. 501 (M.D. La. 1983); Kewanee Oil Co. v. Bicorn Corp., 416 U.S. 470, 473 (1974).

Indeed, even negative information can satisfy the definition of a trade secret. Learning, after expending significant time and money, that a certain procedure or technology does not work is a classic “negative trade secret.” See Morton v. Rank America, Inc., 812 F. Supp. 1062 (C.D. Cal. 1993); see also Metallurgical Industries, Inc. v. Fourteen, Inc., 790 F.2d 1195 (5th Cir. 1986) (granting trade secret protection to zinc recovery process modifications to unusable furnaces).

Courts consider a variety of factors in determining whether a particular piece of information satisfies the standard of a trade secret. These factors are described briefly below in subsections 1 through 3.

1. Secrecy.

The cardinal requirement of a trade secret is that it be secret. The information should be known by only those employees and third parties who “need to know” it (and those who know it should be bound not to disclose it to others, especially the employer’s competitors). See Metro. Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 863 (Cal. Ct. App. 1994) (“the information imparted to Metro by KFWB is equally available to anyone contracting with KFWB”); Courtesy Temporary Serv., Inc. v. Camacho, 222 Cal. App. 3d 1278, 1288 (Cal. Ct. App. 1990) (noting that employer’s reasonable steps to preserve secrecy of its customer information included giving “[a]ccess to such customer information ... to [e]mployees only on an ‘as needed basis’ to perform their duties”); Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1522 (Cal. Ct. App. 1997) (reasoning that amount of effort employers expend in protecting information will be probative of conclusion that information is in fact trade secret).


California removed the phrase “not readily ascertainable” altogether from its UTSA definition of a trade secret. See Cal. Civ. Code § 3426.1(d). Thus, it is not the plaintiff’s burden to establish that a particular piece of information is “not readily ascertainable;” instead, plaintiff must establish merely that the information is not publicly known. This point is illustrated by ABBA Rubber Company v. Seaquist, 235 Cal. App. 3d 1 (Cal. Ct. App. 1991). In ABBA, the plaintiff claimed trade secret status for its customer and inventory data, and sued the defendant Seaquist, alleging that former ABBA employees now at Seaquist had taken the information. The employees, familiar with the identities of ABBA’s customers, denied taking any records from ABBA, but admitted soliciting business from some ABBA customers. Although the appellate court overturned the lower court’s preliminary injunction on an unrelated issue (failure to furnish an adequate undertaking), the court set forth the principle that:

[O]ur Legislature chose to exclude from the definition [of a trade secret] only that information which the industry already knows, as opposed to that which the industry could easily discover. Therefore, under California law, information can be a trade secret even though it is readily ascertainable, so long as it has not yet been ascertained by others in the industry. Accordingly, we decline to follow American Paper & Packaging Products, Inc. v. Kirgan, supra, to the extent that it suggests that information is not protectible as a trade secret if it is ‘known or readily ascertainable.’

Id. at 21 (emphasis added). Still, the ABBA court noted that “the assertion that a matter is readily ascertainable by proper means remains available as a defense to a claim of misappropriation.” Id. at 21, fn. 9 (emphasis added). Accordingly, it is the defendant’s burden to establish the defense of ready ascertainability by proper means.

Applying this definition, California courts will not protect public information that is easily discoverable by a competitor. However, protection may be afforded to secret information that is not particularly hard to recreate–if the defendant used the secret (but easily recreated) information. Compare, e.g., Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034, 1044 (N.D. Cal. 1990) (customer and temporary employee lists held not trade secrets because customers were discoverable through public directories and identities of temporary employees were already on file with competing agencies) with Morlife, 56 Cal. App. 4th at 1522-23 (protecting a customer list as a trade secret because it was not published in public business directories) and Courtesy Temporary Service, Inc. v. Camacho, 222 Cal. App. 3d 1278, 1288 (Cal. Ct. App. 1990) (customer lists held trade secret because they included information on billing rates, key contacts, mark-up rates and specialized requirements not available through public sources).


a. Publicly Known Through Internet Disclosure

In the last decade, courts have had to consider the issue of whether trade secret status is extinguished when the information is posted on the Internet. Whether such information deserves protection turns on how the information was obtained by the Internet publisher or user. The rule that has emerged is that a party who simply downloads misappropriated information from the Internet will not be liable for misappropriation so long as that party was not involved in the initial improper acquisition of or posting of the information. However, a misappropriator cannot free itself from liability simply by making the information available on the Internet and then arguing that the information is therefore no longer secret. See, e.g., Religious Technology Center v. Lerma, 908 F. Supp. 1362 (E.D. Va. 1995).

In Religious Technology, a former member of the Church of Scientology posted portions of the Church’s scriptures on the Internet for two days. The defendant, who did not post the information on the Internet, but merely downloaded it, was sued by the Church. While the court found that the Church had taken reasonable measures to preserve the secrecy of its teachings –thereby permitting trade secret status – it held that the status was lost with respect to defendant because the defendant committed no wrong by simply looking at the information that was now publicly available through the simple use of the Internet. The Church’s remedy was against the former member/misappropriator, not the third party Internet user.

The corollary is neatly illustrated by a later case, again involving the Church of Scientology. There, the district court reversed an earlier denial of a preliminary injunction when portions of the Church’s scripture were once again posted on the Internet by the defendant. See Religious Technology Center v. Netcom On-Line Communication Services, Inc., No. C-95-20091, 1997 U.S. Dist. LEXIS 23572 (N.D. Cal. Jan. 3, 1997). In overturning a prior ruling, the Court held that “[t]he court believes that its statement in its [earlier] order that ‘posting works to the Internet makes them ‘generally known’ to the relevant people’ is an overly broad generalization and needs to be revised. The question of when a posting causes the loss of trade secret status requires a review of the circumstances surrounding the posting. . . including . . innocent third parties who acquire information off the Internet.” As the party who posted the information on the Internet was not “innocent,” the court found an injunction appropriate.

Similarly, in DVD Copy Control Ass’n v. McLaughlin, the court enjoined a defendant from continuing to distribute an encryption program that it had reverse engineered. See DVD Copy Control Ass’n, Inc. v. McLaughlin, No. CV 786804, 2000 WL 48512 (Cal. Sup. Ct., Jan. 21, 2000). The defendant argued that because he reverse engineered the program, the program could not be afforded trade secret status. The court rejected this argument, as the defendant’s use of the program was subject to a “click license” which expressly prohibited him from attempting to reverse engineer the program. In holding that the public posting of the information did not extinguish trade secret status, the court stated:


The Court is not persuaded that trade secret status should be deemed destroyed at this stage merely by the posting of the trade secret on the Internet. To hold otherwise would do nothing less than encourage misappropriators of trade secrets to post the fruits of their wrongdoing on the Internet as quickly as possible and as widely as possibly, thereby destroying a trade secret forever. Such a holding would not be prudent in this age of the Internet.

Id. (citations omitted). The case eventually reached the California Supreme Court, which affirmed this basic aspect of the ruling. DVD Copy Control Ass’n, Inc. v. Bunner, 31 Cal. 4th 864 (Cal. 2003).

2. Reasonable Efforts to Preserve Secrecy.

For information to qualify as a trade secret, the employer must exercise “reasonable efforts” to preserve its secrecy. Cal. Civ. Code § 3426.1(d)(2). What is reasonable will vary with the circumstances, but the cases and legislative history do provide guidance. For example, the Legislative Committee Comment to the Uniform Trade Secrets Act states that employers need not engage in “extreme and unduly expensive procedures” to protect their trade secrets—only reasonable efforts. The following are examples of the kinds of procedures California courts have recognized as reasonable and appropriate.

a. Require That Employees (and Third Parties) Who Are Given Access to Trade Secrets Sign Confidentiality Agreements.

One step that employers should take to protect the trade secret status of their confidential information is to require that employees and third parties who are given access to the information sign confidentiality agreements. See, e.g., MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 521 (9th Cir. 1993) (holding that a requirement that employees sign confidentiality agreements was enough to demonstrate “reasonable steps” to preserve secrecy). In addition to the typical non-disclosure and non-use provisions, it is useful to have the employee acknowledge in the agreement that specified information is in fact confidential, valuable and protected as the trade secret of the employer. It is also useful to have the employee agree to return all documents upon termination of employment.

b. Alert Employees (and Third Parties) with Access to Trade Secrets Regarding Their Confidential Nature.

A second step for protecting trade secret status is to alert employees and third parties who are given access to confidential information that the information constitutes a trade secret and should be kept confidential. See, e.g., Courtesy Temporary Serv., Inc., 222 Cal. App. 3d at 1288 (customer information held trade secret where employees were told of its confidential and proprietary nature when list was revealed to them). This can be accomplished through personnel manuals, use of a “confidential” stamp on key documents, reminder memoranda, posted


warnings and the like. Obviously, before others can be made aware that information constitutes a trade secret, the employer must make that determination. A periodic trade secret audit is a very useful exercise in this regard. Employers should be aware that taking special measures to protect the confidentiality of some documents may lead courts to deny trade secret protection to other materials that were not subject to the same special measures. See In re Providian Credit Card Cases, 96 Cal. App. 4th 292, 308 (Cal. Ct. App. 2002) (where, in the course of business, party had stamped certain documents “confidential,” court could conclude that party did not deem documents lacking such a stamp to be trade secrets).

c. Limit Access to Only Those Employees (and Third Parties) Who “Need to Know” Trade Secrets to Perform Their Jobs.

A third step that is an important factor in obtaining judicial recognition of trade secrets is limiting trade secret access to only those employees and third parties who “need to know” the trade secrets in order to perform their jobs or otherwise successfully carry out their relationships with the employer. See Courtesy Temporary Serv., Inc., 222 Cal. App. 3d at 1288; Buffets, Inc. v. Klinke, 73 F.3d 965 (9th Cir. 1996) (reasonable efforts to maintain secrecy include limiting access to a trade secret on need to know basis). This can be accomplished by use of security guards, key-lock entries, computer passwords, locked file drawers and the like.

d. Avoid Public Disclosure of Trade Secret Information Through Display, Publication, Advertising, Etc.

A fourth step for ensuring trade secret status is to avoid publicly disclosing the trade secret information, such as through public displays, publications, or advertising. See, e.g., Cal. Civ. Code § 3426.1, Legislative Committee Comment (“proper means [of acquiring the trade secret of another person] include ... [o]bservation of the item in public use or on public display”); Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 988 (S.D. Cal. 1999) (holding that trade secret status is unavailable where the information could be disclosed in course of litigation); Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 465-66 (9th Cir. 1990) (holding that teaching techniques were not trade secrets because they were disclosed to students); In re Providian Credit Card Cases, 96 Cal. App. 4th at 305-06 (holding that telemarketing scripts were not trade secrets because they were disclosed to public, albeit in piecemeal fashion).

3. Value Derived From Secrecy.

In order to qualify as a trade secret, confidential information must not only be secret, it must also derive value from not being known to potential or actual competitors. Cal. Civ. Code § 3426.1(d)(1). “Value” can often be established by showing the amount of time or money used to develop the information. See Am. Family Mut. Ins. Co. v. Roth, 485 F.3d 930 (7th Cir. 2007) (customer information may be protected if it represents an investment on the part of the firm seeking to protect it—apart from its value in limiting competition); Courtesy Temporary Serv.,


Inc., 222 Cal. App. 3d at 1287 (customer list held trade secret because it “was acquired by lengthy and expensive efforts”); Gable-Leigh, Inc. v. North American Miss, No. CV 01-01019, 2001 WL 521695, *16 (C.D. Cal. Apr. 9, 2001) (“Given the multiple-step process that was required to distill publicly available information into a list of 900 names, Gable-Leigh’s customer lists are likely the sort of information that derives independent economic value” from secrecy); see also Fred’s Stores of Mississippi, Inc. v. M & H Drugs, Inc., 725 So. 2d 902, 909 (Miss. 1998) (same). “Negative information”—i.e., knowledge that a process, strategy or method does not work—can also be valuable because it can save a competitor time and money in making a new discovery. See, e.g., Courtesy Temporary Serv., Inc., 222 Cal. App. 3d at 1287-88; Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1333-34 (9th Cir. 1980);Morton, 812 F. Supp. at 1073. Generally, the more complicated, detailed or sophisticated the information, the more likely it will be found to satisfy the “value” requirement.

B. Restatement of Torts and the New York Definition.

Many states that have not adopted the Uniform Trade Secrets Act, including New York, (and even some that have) rely on the classic definition of a “trade secret” found in the Restatement of Torts, which provides that a trade secret includes:

[A]ny formula, pattern, device, or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers... A trade secret is a process or device for continuous use in the operation of the business.

Restatement of Torts § 757 cmt. b (1939); see U.S. Reinsurance Corp. v. Humphreys, 618 N.Y.S.2d 270, 273 (N.Y. App. Div. 1994) (adopting definition of trade secret contained in Restatement of Torts § 757 cmt. b); Fabkom, Inc. v. R.W. Smith & Assocs., Inc., No. 95 Civ. 4552, 1996 WL 531873, at *6 (S.D.N.Y. Sept. 19, 1996); Faiveley Transport Malmo v. Wabtec Corp., 559 F.3d 110 (2d Cir. 2009).

A variety of factors are used to determine whether certain information qualifies for protection as a trade secret or confidential information under the Restatement’s definition. These factors include:

1. the extent to which the information is known outside the business;

2. the extent to which the information is known by the employee and others involved in the business;


3. the extent of measures taken by the company to guard the secrecy of the information, compare, e.g., Ecolab, Inc. v. Paolo, 753 F. Supp. 1100 (E.D.N.Y. 1991) (reasonable security measures include disclosure only on need-to-know basis and use of employee confidentiality agreements); with Gillis Associated Indus., Inc. v. Cari-All, Inc., 564 N.E.2d 881 (Ill. App. Ct. 1990) (employer did not reasonably maintain secrecy of customer lists; employer failed to mark documents, did not have employee entrance or exit interviews to demonstrate to employees importance of maintaining secrecy of documents, and did not use employee confidentiality agreements);

4. the ease or difficulty with which the information could properly be acquired or duplicated by others;

5. the amount of effort and money expended by the company in developing the information; and

6. the value of the information to the company and its competitors.

Although the weight given to each individual factor varies on a case-by-case basis, whether the information was “kept secret” is generally regarded as the most significant, since courts have been more willing to protect information when it is not known in the trade or is discoverable only though extraordinary efforts. See Geritrex Corp. v. Dermarite Indus., LLC, 910 F. Supp. 955, 961 (S.D.N.Y. 1996); Consolidated Brands, Inc. v. Mondi, 638 F. Supp. 152, 156 (E.D.N.Y. 1986). However, courts have recognized that a trade secret need not be an isolated idea which is entirely secret. Eagle Comtronics, Inc. v. Pico, Inc., 453 N.Y.S.2d 470 (N.Y. App. Div. 1982). Rather, “a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage and is a protectable secret.” Imperial Chem. Indus., Ltd. v. National Distillers & Chem. Corp., 342 F.2d 737, 742 (2d Cir. 1965); see also Anacomp, Inc. v. Shell Knob Servs., Inc., No. 93 Civ. 4003, 1994 WL 9681, at *8 (S.D.N.Y. Jan. 10, 1994) (“even assuming that the information at issue were in the public domain, the non-secret nature of the individual components would not prevent the combination of components from comprising a trade secret”). But see International Paper Co. v. Suwyn, 966 F. Supp. 246, 257 (S.D.N.Y. 1997) (noting that plaintiff was not entitled to injunctive relief against defendant, its former executive vice president, because, among other things, “technology” discussed in its business plan was “commercially available” and could be purchased from “outside,” plaintiff’s profit margins were available with “reasonable precision” from outside sources, and plans for producing certain of its products were commonly available in industry).

Confidentiality does not require absolute secrecy. Rather, the standard of review is one of reasonable efforts to maintain secrecy. See A.F.A. Tours, Inc. v. Whitchurch, 937 F.2d 82, 89 (2d Cir. 1991) (as long as employer “take[s] appropriate precautions to alert the employee to the


need to maintain the confidentiality” of trade secret, employee’s access to such secret information will not void confidential nature of that information). In determining whether the information is sufficiently confidential, the courts not only look to the availability of the information in the market place, but they also consider the manner in which the employer itself treats the information. The question courts seek to answer is, “Did the employer treat the ‘trade secret’ information in a manner which most appropriately reflects its relative importance?” In Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475 (1974), the United States Supreme Court held that a company’s trade secret is not lost if the trade secret is made known to another in circumstances of confidence and under an implied obligation not to disclose it, including employees to whom it is necessary to make the trade secret known in order to undertake their work for the employer/holder of the trade secret.

Some of the more common examples of potential trade secrets include customer lists; customer pricing and preference information; marketing strategies, revenue projections, and product and pricing strategies, see DoubleClick, Inc. v. Henderson, No. 116914/97, 1997 WL 731413 (N.Y. Sup. Ct. Nov. 7, 1997); and corporate business and marketing plans, see PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1265 (7th Cir. 1995); Kamyr AB v. Kamyr, Inc., No. 91-CV-0453, 1992 WL 317529, at *1 (N.D.N.Y. Oct. 30, 1992) (“confidential treatment of information ... includ[es] financial and business records and plans”); Support Sys. Assocs., Inc. v. Tavolacci, 522 N.Y.S.2d 604, 606 (N.Y. App. Div. 1987) (statements of company’s “approach” to business and recruiting plans constituted trade secrets); Webcraft Techs., Inc. v. McCaw, 674 F. Supp. 1039, 1043 (S.D.N.Y. 1987) (“project specifications and pricing details” held to be trade secrets); Triangle Sheet Metal Works, Inc. v. Silver, 222 A.2d 220, 225 (Conn. 1966) (financial details of product costs, pricing and bidding strategies “fully meet the definition of trade secrets”).

The following checklist, albeit not all-inclusive, provides an employer with some guidance on maintaining the trade secret status of its trade secrets:

1. Are employees and third parties with access to trade secrets required to sign confidentiality agreements?

2. Are employees and third parties with access to trade secrets alerted to its confidential and proprietary nature, e.g., through personnel manuals, use of a “confidential” stamp on key documents, reminder memoranda, posted warnings and the like?

3. Is sensitive data kept under lock and key?

4. Is access to sensitive data limited to those with a particular need for the information?

5. Is the information copied, or maintained in an area with a photocopying machine?


6. Are documents containing sensitive data kept by people at their own desks? If so, is it necessary? Are desks locked and access limited only to those with need?

7. Are the number of copies of such documents kept to an absolute minimum?

8. Is the data marked plainly and obviously as “Secret,” “Confidential,” “Restricted Access” or with some other appropriate term?

9. If confidential documents are given to certain employees, are they serially numbered, with a complete record kept by a company official?

10. Are the documents containing confidential data ever left unattended on desks, in a lunch room, or in conference rooms where personnel not authorized to see such information could come in contact with it?

11. Are visitors, guests and nonessential personnel restricted from areas in which secret processes or machines are developed, operated, or displayed in a way which could be considered negligent to a knowledgeable observer?

12. Are visitors and guests allowed to visit factories or facilities where secret processes or machines are in use or operation?

13. Are all visitors, including suppliers, vendors and maintenance persons, required to sign in, state the nature of their visit, indicate with whom they are visiting and sign out?

14. Are special internal procedures in place to verify the service calls of repair and service personnel, including verifying the service person’s credentials and the purpose of the visit?

15. With respect to doors and entryways leading to areas where secret processes are maintained or performed or where machinery is operated, does the company make sure that they are kept locked? Are keys issued only to those employees who need them?

16. If security and alarm systems are required to protect a secret process effectively, are they installed? Are security guards used when necessary?

17. Are all document control systems, such as those described above, periodically reviewed and revised?

18. Is disclosure of a substantial portion of trade secret information through display, publication, or advertising prohibited?


19. Are employees instructed not to discuss secret company projects in the presence of visitors, especially suppliers and vendors?

III. KEEPING YOUR EMPLOYEES FROM COMPETING OR WORKING FOR COMPETITORS UPON THEIR DEPARTURE

A. Background.

Employers frequently attempt to prevent their employees from competing with them upon termination of their employment by having them covenant, as part of an employment agreement, that they will not compete with their employer after their employment ends. Although many of these disputes end up in federal court under diversity jurisdiction, the enforceability of such agreements is a matter of state common law and statutory law. Many states, including New York, follow the general rule that such agreements are enforceable, provided they are necessary to protect a legitimate interest of the employer and are reasonably limited in time, geography, and the restrictions they place on the employee in pursuing his or her profession.

Other states, including California, Montana, North Dakota, and Oklahoma, do not follow the general rule. For example, California Business & Professions Code section 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” California courts have rigorously applied this provision in the employment context and have routinely invalidated agreements purporting to preclude employees (expressly or implicitly through penalties) from working for competitors upon completion of their employment. See, e.g., Metro. Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 859 (Cal. Ct. App. 1994); Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034, 1042 (N.D. Cal. 1990). See also Section III.D.1., infra.

A cautionary caveat is warranted at this point. Our discussion in this chapter aims to provide merely an overview of the law. Readers should always consult with local practitioners regarding each state’s laws as this area of the law is especially susceptible to deviations and variations from state to state.3

3 For example, in Texas, covenants not to compete are governed by the Covenants Not to Compete Act. That Act includes a requirement that a covenant be “ancillary to or part of otherwise enforceable agreement.” Until late 2006, Texas Supreme Court precedent held that because an at-will employee can be fired at any time, promises by the employer to provide confidential information or training to the employee were “illusory,” and therefore at-will agreements would not be considered “an otherwise enforceable agreement” under the Act. Thus making the non-compete covenants in at will employment agreements void. The Texas Supreme Court in Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006) significantly changed the analysis for non-compete clauses in Texas. The Sheshunoff court modified this rigid application and determined that a non-compete covenant in an at-will employment relationship is enforceable if the employer provides confidential information or training to the employee at any time during employment in accordance with the promises in its employment contract.


Although slightly beyond the scope of this chapter, it is worth mentioning that special attention should be paid to drafting restrictive covenants for use internationally. This includes common clauses in restrictive covenants that cover confidentiality, noncompetition, nonsolicitation of customers, and poaching of employees. Policies on such clauses vary throughout the world. To limit potential liability, companies should tailor such agreements based on the geographic location and job level or the responsibilities of the employee.

B. In Most States, Covenants Not to Compete Will Be Enforced If They Are Necessary to Protect a Legitimate Interest of the Employer.

Although covenants not to compete are generally disfavored by the courts, in most states they will be enforced if the covenant not to compete is designed to “protect against ... ‘unfair and illegal’ conduct” on the part of the former employee and not simply “to insulate the employer from competition.” American Inst. of Chem. Eng’rs v. Reber-Friel Co., 682 F.2d 382, 386-87 (2d Cir. 1982).4 The prevalent standard is to enforce restrictive covenants to the extent that they are “reasonable.” See Empire Farm Credit, ACA v. Bailey, 657 N.Y.S.2d 211, 212 (N.Y. App. Div. 1997). Thus, a covenant not to compete will be enforced only if it restricts the employee’s ability to compete no more than is reasonably necessary to protect the employer’s legitimate interests. BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (N.Y. Ct. App. 1999); see also Branson Ultrasonics Corp. v. Stratman, 921 F. Supp. 909, 913 (D. Conn. 1996) (Connecticut courts will enforce covenants not to compete as long as they are reasonable and entered into knowingly and for adequate consideration); Chi. Title Ins. Corp. v. Magnuson, 487 F.3d 985 (6th Cir. 2007) (Ohio courts will enforce a post-employment restriction on competition as long as it (1) is no greater than required for protection of the former employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.).

There are no bright-line rules for drafting enforceable restrictive covenants because litigation typically arises only after the covenants have been breached and, therefore, the reasonableness of the covenants is often evaluated with the benefit of hindsight not available at the time of drafting. Generally, however, courts view non-compete agreements more sympathetically if, for example, the employer attempts to enforce it against a former long-term employee that is in possession of trade secrets or highly proprietary information, an employee going to work for a direct competitor to perform the exact same job functions performed for the prior employer, or an employee who seeks new employment “across the street” from the former employer.

4 Many states have enacted legislation regulating restrictive employment covenants. See Ala. Code § 8-1-1 (1984); Cal. Bus. & Prof. Code §§ 16601-16602 (West 1987); Colo. Rev. Stat. § 8-2-113 (1973); Fla. Stat. Ann. § 542.33 (West 1988); Ga. Code Ann. §§ 13-8-2 to 13-8-2.1 (1990); Haw. Rev. Stat. § 480-4 (1985); La. Rev. Stat. Ann. § 23:921 (West 1985); Mass. Gen. Laws ch. 112, §§ 12X, 74D (1984); Mich. Comp. Laws Ann. § 445.774a (West 1990); Mont. Code Ann. § 28-2-703 (1989); N.C. Gen. Stat. § 75-2 (1988); N.D. Cent. Code § 9-08-66 (1987); Okla. Stat. tit. 15, §§ 217-219 (Supp. 1991); Or. Rev. Stat. § 653.295 (1989); S.D. Codified Laws §§ 53-9-8 to 53-9-11 (1990); Tex. Bus. & Com. Code § 15.05 (Vernon 1990); Wis. Stat. Ann. § 103.465 (West 1988).


Because covenants not to compete are viewed as restraints of trade, they are evaluated against a standard of reasonableness as opposed to a strict contract construction standard. In analyzing the enforceability of restrictive covenants, courts balance the legitimate interests of the employer in protecting its property against the public policy prohibiting restraints of trade. Therefore, an employee’s promise not to compete is likely to be valid only if the court concludes, after balancing the hardships, that the employer’s legitimate interests outweigh the hardship to the employee and likely injury to the public. For example, in Lumex, Inc. v. Highsmith, 919 F. Supp. 624, 636 (E.D.N.Y. 1996), the court concluded that the covenant at issue contained “fair and reasonable counterbalancing provisions,” because the former employee was permitted to work for a competitor, but not on a “competitive product”; the six month duration of the covenant was a “relatively short time”; and, under the six-month term of the covenant, the former employer was to continue to receive full salary and benefits payments from his former employer.

Courts differ in their treatment of overly broad covenants. Some courts hold non-compete agreements totally unenforceable if they are overly broad and unreasonable in scope or duration. See, e.g., Fields Found., Ltd. v. Christensen, 309 N.W.2d 125 (Wis. Ct. App. 1981). Some courts choose this approach in order to encourage employers to write more narrowly-tailored covenants. See Telxon Corp. v. Hoffman, 720 F. Supp. 657 (N.D. Ill. 1989). In other jurisdictions, including New York, courts will “blue pencil” invalid portions and enforce the rest; that is, the courts will sever the unenforceable provisions of the covenant to the extent that they can do so without destroying the intent of the covenant. See, e.g., BDO Seidman, 93 N.Y.2d at 394. Yet others will modify a covenant by rewriting it so that it is reasonable. See, e.g., Ferrofluidics Corp. v. Advanced Vacuum Components, Inc., 968 F.2d 1463 (1st Cir. 1992).

1. What Is a “Legitimate Employer Interest”?

As a threshold matter, courts require an employer to have a “legitimate interest” before they will enforce a covenant not to compete. An employer’s generalized wish to be insulated from competition with ex-employees, even those in whom the employer has invested time, money, and training, is not sufficient to overcome the competing interests of the employee and the public in employee mobility and free trade. Because covenants not to compete can discourage employees from seeking alternative employment if their choices are limited by such a covenant, these covenants are carefully scrutinized by courts to ensure that a legitimate employer interest is present.

The existence of a legitimate employer interest is often dispositive because the question of the covenant’s reasonableness is never even reached when such interest is not implicated. “Only after determining that a restrictive covenant would serve to protect against such unfair and illegal conduct, and not merely to insulate the employer from competition, does the reasonableness of the covenant in terms of its time, space or scope, or the oppressiveness of its operation become an issue.” American Inst. of Chem. Eng’rs, 682 F.2d at 387 (internal quotations omitted).


Although states differ as to what each deems a legitimate protectable employer interest, most generally find interests legitimate when necessary to prevent some combination of the following:

1. disclosure or use of trade secrets;

2. disclosure or use of confidential customer information;

3. customer solicitation; and

4. special harm to the employer due to the unique nature of the employee’s services.

For example, in Illinois, an employer is deemed not to have a business interest sufficient to warrant enforcement of a restrictive covenant not to compete absent a showing of trade secret/confidential information or a near-permanent customer relationship. See, e.g., Rapp Ins. Agency, Inc. v. Baldree, 597 N.E.2d 936 (Ill. App. Ct. 1992). In New York, by contrast, courts have found that employers have a protectable interest in their trade secrets, customer lists, customer relationships and good will of the business, as well as in preventing special harm because of the uniqueness of the employee’s services. See, e.g., BDO Seidman, 93 N.Y.2d at 392 (“It follows from the foregoing that BDO’s legitimate interest here is protection against defendant’s competitive use of client relationships which BDO enabled him to acquire through his performance of accounting services for the firm’s clientele during the course of his employment”); Empire Farm Credit, ACA, 657 N.Y.S.2d at 212 (“It is now axiomatic that restrictive covenants ... will be enforced to the extent necessary to prevent the use of trade secrets or confidential customer information, but only so long as they are reasonable in time and area, not harmful to the general public and not unreasonably burdensome to the employee.”); see also Ivy Mar Co. v. C.R. Seasons Ltd., 907 F. Supp. 547, 555 n.7 (E.D.N.Y 1995) (employer has protectable interest in the goodwill of its business).

a. Trade Secrets as a “Legitimate Employer Interest.”

It is well settled that the protection of trade secrets is a legitimate employer interest that justifies the enforcement of a restrictive covenant. See, e.g., BDO Seidman, 93 N.Y.2d at 392. Thus, a restrictive covenant may be enforced if it is designed to protect any of the employer’s trade secrets. See section II., supra, for a discussion of the definition of a trade secret under California and New York law.

b. Customer Lists as a “Legitimate Employer Interest.”

The vast number of restrictive covenant cases involve an ex-employee’s actual or threatened use of his former employer’s customer lists. The reason for this is clear: the importance of customer lists to a company’s success, as well as the high cost of assembling them, have caused many employers to seek trade secret protection for them if they believe their lists have been (or might be) misappropriated. Indeed, the United States Supreme Court in


Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 483 (1974), recognized the importance of protecting customer lists, stating:

[I]t is hard to see how the public would be benefited by disclosure of customer lists or advertising campaigns; in fact, keeping such items secret encourages businesses to initiate new and individualized plans of operation and constructive competition results. This, in turn, leads to a greater variety of business methods than would otherwise be the case if privately developed marketing and other data were passed illicitly among firms involved in the same enterprise.

Customer lists will not merit protection, however, if the names of past or prospective customers are “readily ascertainable” from sources outside the employer’s business, such as through industry directories. See, e.g., Webcraft Techs., Inc. v. McCaw, 674 F. Supp. 1039 (S.D.N.Y. 1987); Leo Silfen, Inc. v. Cream, 278 N.E.2d 636 (N.Y. 1972). For example, in Kucker Kraus & Bruh, LLP v. Szold & Brandwen, P.C., N.Y.L.J., Sept. 12, 1997, at 26 col. 1 (N.Y. Sup. Ct. Sept. 11, 1997), the court denied trade secret protection to the plaintiff’s customer list because all of the plaintiff’s clients, comprised of real estate managing agents, cooperatives, and condominiums, could be readily ascertained through public tax assessment records, court records, and office building directories. See also Panther Sys. II, Ltd. v. Panther Computer Sys., Inc., 783 F. Supp. 53, 67 (E.D.N.Y. 1991).

Conversely, where customer names are discoverable only through extraordinary efforts, and the employer’s clientele has been secured over many years through the expenditure of time and money, the court may confer trade secret status upon a customer list. See, e.g., Subcarrier Communications, Inc. v. Day, 691 A.2d 876, 880 (N.J. App. Div. 1997) (“[t]here are cases where customer lists have been protected,” especially where company must obtain its customers at cost of time, trouble and expense); Tyler Enters. of Elwood, Inc. v. Shafer, 573 N.E.2d 863 (Ill. App. Ct. 1991). Finally, the more detailed and sophisticated the information contained in customer list, the more likely that it will be afforded trade secret protection. See, e.g., Health Mgmt., Inc. v. Hotte, No. 97 Civ. 3267 (E.D.N.Y. Sept. 15, 1997) (affording trade secret protection to customer list where it contained purchasing preferences of clients; specific volume of business done with each client; and names of key contact people associated with each client); Royal Carbo Corp. v. Flameguard, Inc., 645 N.Y.S.2d 18, 19 (N.Y. App. Div. 1996) (noting that plaintiff’s customer lists, which contained information regarding re-servicing dates and prices offered to each customer, constituted trade secret information); Giffords Oil Co. v. Wild, 483 N.Y.S.2d 104, 106 (N.Y. App. Div. 1984) (concluding that plaintiffs’ customer list was trade secret because it contained information “such as fuel oil capacity of customers’ tanks, and the amount certain customers are willing to pay, which aids plaintiffs in establishing prices and which could only be achieved through personal solicitation.”).


c. Customer Solicitation as a “Legitimate Employer Interest.”

Generally, in the absence of an express non-solicitation agreement, an ex-employee is allowed to solicit his former employer’s customers unless the customer list could be considered a trade secret or there was wrongful conduct by the employee such as taking or copying the employer’s files or using confidential information. See, e.g., Leo Silfen, Inc., 278 N.E.2d 636; Amana Express Int’l, Inc. v. Pier-Air Int’l, Ltd., 621 N.Y.S.2d 108, 109 (N.Y. App. Div. 1995).

In BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (N.Y. 1999), the New York Court of Appeals held that an employer has a legitimate interest in preventing a former employee from exploiting client relationships that were created and maintained at the employer’s expense.

Moreover, an employee may not solicit the customers of his former employer if the customers would be unknown to the employee but for information obtained during his prior employment. McRand, Inc. v. Van Beelen, 486 N.E.2d 1306 (Ill. App. Ct. 1985). Thus, a court may prevent a former employee from soliciting customers who are not openly engaged in business in advertised locations or whose availability as patrons cannot readily be ascertained. American Inst. of Chem. Eng’rs, 682 F.2d at 387. Conversely, where customers are “readily ascertainable” outside of the former employer’s business as prospective users or consumers of the former employer’s services or products, and there is no proof of physical appropriation or copying of confidential data, trade secret protection will not be allowed and solicitation of such customers is not prohibited. Amana Express Int’l, 621 N.Y.S.2d at 109.

d. An Employee’s Unique Services as a “Legitimate Employer Interest.”

In some states, covenants not to compete will be enforceable if the employee’s services are special, unique, or extraordinary, even though no other protectable interest is involved. See Lumex, Inc. v. Highsmith, 919 F. Supp. 624, 628 (E.D.N.Y. 1996) (employers have legitimate interest in being protected “if the former employee’s services are unique or extraordinary”); Contempo Communications, Inc. v. MJM Creative Servs., Inc., 582 N.Y.S.2d 667, 669 (N.Y. App. Div. 1992) (concluding that defendants, who were plaintiff’s former project managers, performed services that were “‘special, unique and extraordinary’ and therefore, [plaintiff was] entitled to protection”); see also Bradford v. New York Times Co., 501 F.2d 51 (2d Cir. 1974). To succeed on this basis, an employer must prove that the employee’s services are so significant that replacement would be impossible or that loss of the services would cause irreparable harm. It is not enough that the employee excels in his job or that his performance is of high value to the employer. International Paper Co. v. Suwyn, 966 F. Supp. 246, 259 (S.D.N.Y. 1997) (noting that defendant’s services, as plaintiff’s former executive vice president, were not “unique” because within month of his resignation all of his job duties had been reassigned to other employees); Ivy Mar Co., 907 F. Supp. at 555 n.7; Rich Prods. Corp. v. Parucki, 578 N.Y.S.2d 345 (N.Y. App. Div. 1991) (employee was merely of high value to employer and was not performing unique or extraordinary services); Kanan, Corbin, Schupak & Aronow, Inc. v. FD


Int’l LTD, 797 N.Y.S.2d 883 (N.Y. Sup. Ct. 2005) (holding that investor relations executives are not “unique” employees). Recently, however, the Second Circuit Court of Appeals held that a title insurance salesman who maintained unique relationships with his employer’s clients was unique for purposes of enforcing a post employment non-compete agreement. Ticor Title Ins. Co. v. Cohen, 173 F.3d 63 (2d Cir. 1999).

Some states, such as New York, find that “where an employee refuses to render services to an employer in violation of an existing contract, and the services are unique or extraordinary, an injunction may issue to prevent the employee from furnishing those services to another person for the duration of the contract.” ABC, Inc. v. Wolf, 52 N.Y.2d 394, 402 (N.Y. 1981) (citation omitted); see also Arias v. Solis, 754 F. Supp. 290 (E.D.N.Y. 1991). Injunctive relief is available even if the employee has not specifically promised not to work elsewhere during the term of his contract; where such a promise was explicitly made, a negative injunction is particularly appropriate. ABC, Inc., 52 N.Y.2d at 402-03; Arias, 754 F. Supp. at 293-94.

The burden of proving uniqueness of service is significant, as demonstrated by the dearth of reported cases in which a court has validated covenants not to compete on this basis. Indeed, several courts have held certain skilled professions, namely insurance agents, hairdressers, and technicians, not “special” because there is nothing inherently extraordinary or unique in the functions of these professions. See Cool Insuring Agency, Inc. v. Rogers, 509 N.Y.S.2d 180, 182 (N.Y. App. Div. 1986); Family Affair Haircutters, Inc. v. Detling, 488 N.Y.S.2d 204, 207 (N.Y. App. Div. 1985); Earthweb, Inc. v. Schlack, 71 F. Supp. 2d 299, 313 (S.D.N.Y. 1999), aff’d in part and remanded, 205 F.3d 1322 (2d Cir. 2000).

However, in MTV Networks v. Fox Kids Worldwide, Inc., No. 605580/97, 1998 WL 57480 (N.Y. Sup. Ct. Feb. 4, 1998), the court enforced a non-compete provision on the ground that the employee was a “unique employee with unique skills and knowledge.” In MTV, the defendant was president of MTV’s newly launched cable network called “TV Land” and was in charge of Nick-at-Night, a sister network to “TV Land” also owned by MTV. In concluding that the defendant was unique, the court relied on (1) the defendant’s ”key role” in launching both of these networks; (2) his position on the “executive team” of Nickelodeon, where he was responsible for reviewing its operations, budgets and strategic operations; and (3) his involvement in “developing strategies which led to making Nick-at-Night the top rated cable network in its time period. Id. at *6. The court also noted that the defendant was “very visibly involved in relationships with advertisers” and that he was the “public face” of MTVN who “represented the network at many public functions and in contacts with firms with which MTVN dealt.” Id.

2. Reasonableness Standard for Enforcement of Covenants Not to Compete.

In addition to the legitimate employer interest requirement, the restrictions imposed by the covenant must be reasonable. A finding of reasonableness is entirely case-specific and varies


significantly depending on the jurisdiction. Despite the lack of a concrete rule, the New York Court of Appeals’ formulation of “reasonableness” is illustrative of the standard: “Such covenants will be enforced only if reasonably limited temporally and geographically ... and then only to the extent necessary to protect the employer from unfair competition which stems from the employee’s use or disclosure of trade secrets or confidential customer lists.” Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 N.Y.2d 496, 499 (N.Y. 1977).

The following are guidelines to follow in order to achieve “reasonableness” when drafting restrictive covenants:

1. The activities restricted must be related to the protectable interest of the employee’s prior responsibilities, see, e.g., Scott v. General Iron & Welding Co., 368 A.2d 111 (Conn. 1976) (covenant restricting managers from obtaining management position with competing company found reasonable);

2. The covenant’s duration should correspond to the trade secret’s useful life, compare Frederick Chusid & Co. v. Marshall Leeman & Co., 326 F. Supp. 1043, 1065 (S.D.N.Y. 1971) (two years enforceable), with Coolidge Co. v. Mokrynski, 472 F. Supp. 459, 463 (S.D.N.Y. 1979) (two years unreasonably long because confidential information revised twice per year); see also DoubleClick, No. 116914/97, 1997 WL 731413 at *8 (one year injunction was too long given the speed with which internet advertising industry changes); Earthweb, Inc., 71 F. Supp. 2d at 313 (one-year covenant too long given dynamic nature of industry, its lack of geographic borders, and employee’s former position, where employee’s success was measured by his keeping up with daily changes in internet content);

3. The covenant should be limited to the geographical area in which the employer’s goodwill extends, see Innovative Networks, Inc. v. Satellite Airlines Ticketing Ctrs., Inc., 871 F. Supp. 709, 728 (S.D.N.Y 1995) (covenant preventing former employee from competing anywhere in continental United States deemed reasonable in light of former employer’s nationwide business); HBD Inc. v. Ryan, 642 N.Y.S.2d 913, 914 (N.Y. App. Div. 1996) (25-mile radius restriction found reasonable); Mallory Factor, Inc. v. Schwartz, 536 N.Y.S.2d 752, 754 (N.Y. App. Div. 1989) (finding that covenant not to solicit former client-contacts for a competitor, without geographic limitation, was reasonable); Mixing Equip. Co. v. Philadelphia Gear, Inc., 436 F.2d 1308, 1314 (3d Cir. 1971) (“We further find ... that the absence of a geographical limitation does not render the [one-year] covenant unreasonable” under New York law, where court determined that business was national and that covenant had been signed only by employees “capable of appreciating the technical information” constituting trade secrets); Award Incentives, Inc. v. Van Rooyen, 263 F.2d 173 (3d Cir. 1959) (applying New York law to same effect); Business Intelligence Servs., Inc. v. Hudson, 580 F. Supp. 1068 (S.D.N.Y. 1984) (enforcing restrictive covenant not limited in


territory nor in application to trade secrets because plaintiff’s business was international in scope); Estee Lauder Co. v. Batra, 430 F. Supp. 2d 158, 167 (S.D.N.Y. 2006) (holding that worldwide geographic limitation reasonable given international scope of Estee Lauder’s business operations and former employee’s job responsibilities while working for Estee Lauder); Victaulic Co. v. Tieman, 499 F.3d 227 (3d Cir. 2007) (global restrictive covenants are reasonable for global companies as long as they are consistent with the scope of the employee’s duties); Quaker Chem. Corp. v. Varga, 509 F. Supp. 2d 469 (E.D. Pa. 2007) (same).

4. The covenant should be limited to the employer’s customers specifically, or perhaps only to the small group of customers with whom the employee actually dealt, see Ivy Mar Co., 907 F. Supp. at 555, 559 (restrictive covenant terms that prohibited former employee from communicating with former employer’s “prospective” customers were unreasonable as a matter of law); Webcraft Techs., Inc. v. McCaw, 674 F. Supp. 1039, 1047 (S.D.N.Y. 1987) (refusing to enforce covenant to the extent that it covered “potential” customers with whom the former employee had no contact); Contempo Communications, Inc., 582 N.Y.S.2d at 669 (concluding that restrictive covenant at issue was reasonable because it precluded defendants from soliciting those of plaintiff’s clients for whom they had worked prior to their termination, and not those for whom they had not worked); and

5. The interest of the public must be evaluated because courts will not enforce a restrictive covenant which is harmful to the public good.

3. Other Factors Affecting the Reasonableness of Covenants Not to Compete.

Additional factors that appear to affect courts’ consideration of whether to enforce a restrictive covenant (albeit sometimes implicitly or in a less crucial respect) are:

1. the employee’s ability or inability to find alternative employment and other hardships to the employee if the covenant is enforced;

2. the employee’s reasonable understanding of the meaning of the agreement at the time he or she signed the agreement;

3. the length of the employee’s employment after signing the agreement (the more time that has expired, the more likely the covenant will be enforced, because it shows both adequate consideration for the covenant and adequate time for the employee to have been exposed to (and to have absorbed) trade secrets);

4. misrepresentations, concealment, thefts or bad faith by either party (including any pre-termination competitive activities by the employee, which constitute breaches of fiduciary duty);


5. the employee’s bargaining power;

6. any negotiations before the covenant was signed;

7. the executive or professional nature of the employee’s position (higher-level employees tend to be more likely to receive trade secrets, to be “unique,” to be mobile, and to understand contracts they sign);

8. the employee’s knowledge and experience prior to beginning employment with the ex-employer (the more experience, the more likely it is that the employee’s knowledge is his own rather than the employer’s trade secret; on the other hand, more experience may indicate more mobility);

9. the ex-employer’s intent in enforcing the contract (focus on trade secrets rather than beating competition is key);

10. whether it is industry custom to sign and adhere to restrictive covenants;

11. whether the ex-employer has treated its employees consistently;

12. the ex-employer’s inability to find a replacement employee (where “uniqueness” is the justification for obtaining relief);

13. the established or long-term nature of the ex-employer’s business;

14. the number of employees departing to the new employer; and

15. whether the employee continues to receive a salary from the former employer during the period that the covenant prohibits the employee from working.

C. The Employee Choice Doctrine

Some states, including New York, have adopted the “employee choice doctrine,” an exception to the general rule that disfavors the enforcement of post-employment non-compete provisions. Under the employee choice doctrine, a post-employment non-compete will not be subject to the usual reasonableness analysis where it is contingent on an employee’s choice between receiving a benefit (e.g., restricted stock or stock options under an incentive compensation plan) and competing and thereby forfeiting the benefit. If the employee has a genuine choice of whether to leave the employer and engage in competitive activities, then the employer may penalize the departing employee through forfeiture of the applicable benefits.

In Lucente v. International Business Machines Corporation, 310 F.3d 243 (2d Cir. 2002), the Second Circuit affirmed the validity of the employee choice doctrine. In Lucente, the plaintiff was a 30-year employee of IBM who left his position as a senior executive in 1991,


when he was allegedly told by the CEO that it would be in his and IBM’s best interests if he sought employment elsewhere. Lucente was the recipient of substantial award packages, in the form of restricted stock and stock options under two IBM incentive compensation programs. Both programs provided that the awards would be forfeited if the employee engaged in post-employment competition with IBM, a determination left to IBM’s sole discretion.

In anticipation of leaving IBM, Lucente secured a job with Northern Telecom and was assured by IBM that the new position would not be deemed competitive with IBM. Two years later, Lucente accepted a position with Digital Equipment Corporation. IBM then sent him a letter informing him that his employment with Digital was “competitive employment” and that his outstanding stock options and restricted stock awards would be canceled. Id. at 249-50. Lucente sued, alleging breach of contract and other claims. The district court awarded summary judgment to Lucente, holding that (1) the employee choice doctrine did not apply because Lucente did not have a genuine choice whether to leave IBM, and (2) the non-compete provisions of the incentive compensation plans were unreasonable. Id. at 250-51.

On appeal, the Second Circuit reversed, finding genuine issues of fact as to whether Lucente was fired or voluntarily left IBM. If Lucente voluntarily left the company, the court said, then the employee choice doctrine would preclude him from challenging IBM’s forfeiture-for-competition clause. In so holding, the court reaffirmed that the doctrine remains a viable part of New York law concerning post-employment non-competes. The court also held that three standards govern the application of the doctrine: (1) the employer must demonstrate a continued willingness to employ the party who agreed not to compete; (2) the employer cannot invoke the doctrine when it involuntarily terminates an employee without cause; and (3) the factual determination whether an employee was involuntarily terminated if generally not appropriate for summary judgment. Id. at 254-56.

Recently, the Second Circuit certified the following undecided question to the New York Court of Appeals: “Is the factual determination of whether an employee was voluntarily or involuntarily terminated under the New York common law employee choice doctrine governed by the ‘constructive discharge’ test from federal employment discrimination law, and, if not, what test should courts apply?” Morris v. Schroder Capital Mgmt. Int’l, 445 F.3d 525 (2d Cir. 2006). The Second Circuit answered the first question in the affirmative rendering the second question academic. Morris v. Schroder Capital Mgmt. Int’l, 481 F.3d 86 (2d Cir. 2007). The court held that where an employer constructively discharges an employee by intentionally making the employee’s work environment so intolerable that it compels the employee to leave, the employee’s choice of preserving his rights under an employment contract by not competing or losing them by engaging in competition has been taken away. In those instances, an employer should not be permitted to enforce an unreasonable non-compete clause and simultaneously deny the employee his benefit under the guise of the employee choice doctrine. The Second Circuit then affirmed the district court’s dismissal of the employee’s complaint, thereby affirming and expanding the application of the employee choice doctrine to forfeiture for competition provisions.


D. Under California Law, Employee Covenants Not to Compete Upon Termination of Employment Are Void.

1. The California Rule and Its Application.

California (along with Montana, North Dakota and Oklahoma) does not follow the general rule that covenants not to compete are valid if they are reasonable in purpose and scope. California Business & Professions Code section 16600 provides that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” California courts have rigorously applied this provision in the employment context and have routinely invalidated agreements purporting to preclude employees (either expressly or implicitly through penalties) from working for competitors upon completion of their employment. See, e.g., Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App. 4th 881, 895 (Cal. Ct. App. 1998); Metro. Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 859-60 (Cal. Ct. App. 1994); Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034, 1042-43 (N.D. Cal. 1990). Employee non-compete covenants are void in California even if they are reasonably limited in time and geographic scope. See Scott, 732 F. Supp. at 1042-43.

Not only are non-compete covenants void in California, but an employer may be liable in tort for wrongful termination if it fires an employee who refuses to sign an employment agreement that contains an unenforceable covenant not to compete. D’Sa v. Playhut, Inc., 85 Cal. App. 4th 927 (Cal. Ct. App. 2000). This rule holds even if the agreement contains a choice of law or severability provision. Id. at 934. The concern is that the presence of an unenforceable non-compete covenant in an employment agreement may have an undesirable deterrent effect on employees who do not know their rights under California law. “[I]t is not likely that [the defendant’s] employees are sufficiently versed in California’s law of contracts such that they would know (1) that the covenant not to compete is invalid and therefore not enforceable by [the defendant] and (2) that they could sign the agreement without fear they would be bound by the covenant not to compete.” Id.

The California rule embodied in section 16600, however, invalidates only those restraints that apply after termination of employment. During the term of employment, of course, each employee owes a common law duty of loyalty to the employer (which may be underscored by a contract to that effect) precluding the employee from competing with the employer in any way, whether by soliciting the employer’s customers or employees, by using the employer’s trade secrets, or otherwise.

a. The Policy Behind the California Rule.

California has a “strong public policy” against the enforcement of restrictive covenants in the employment context. Scott, 732 F. Supp. at 1039-40. According to the California Supreme Court:


Every individual possesses as a form of property, the right to pursue any calling, business or profession he may choose. A former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of those who had formerly been the customers of his former employer, provided such competition is fairly and legally conducted.

Continental Car-Na-Var Corp. v. Moseley, 24 Cal. 2d 104, 110 (Cal. 1944). “The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.” Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 255 (Cal. Ct. App. 1968).

b. Choice of Law Provisions Cannot Be Used to Avoid the California Rule.

Employers cannot avoid the application of the California rule by inserting a choice of law provision into the employment agreement purporting to select the law of another state to govern disputes arising out of the agreement. If the term of employment is to be carried out substantially in California, section 16600 will apply, regardless of any choice of law provision. See, e.g., Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App. 3d 668, 673 (Cal. Ct. App. 1971); Scott, 732 F. Supp. at 1039-41.

California’s interest in enforcing Section 16600 is so strong that in Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App. 4th 881 (Cal. Ct. App. 1998), a California court of appeal invalidated and refused to enforce an out-of-state non-compete agreement signed by an out-of-state employee who quit his job and took a new job with a California employer. In other words, the California court invalidated a non-compete agreement that was unquestionably valid in the state in which it was entered, just because the employee planned to move to California to take the new job. Likewise, in Robinson v. Jardine Ins. Brokers Int’l Ltd., 856 F. Supp. 554 (N.D. Cal. 1994), the court issued a preliminary injunction enjoining the defendant (the plaintiff’s former employer) from enforcing in the United States a temporary restraining order issued by the English courts that prohibited the plaintiff from doing business with the defendant’s clients, regardless of who initiated contact, on the ground that the restriction was invalid under section 16600. As discussed in the following section, however, the court may not have had the power to issue such an injunction if the temporary restraining order had been issued by a state court rather than an English court.

The California Supreme Court, however, has since softened somewhat the harsh effect of this rule in Medtronics, Inc. v. The Superior Court of Los Angeles, 29 Cal. 4th 697 (Cal. 2002). In Medtronics, the Supreme Court reversed the lower California court’s issuance of a temporary restraining order which prohibited a former employer in Minnesota from taking any steps to


further its Minnesota action against the former Minnesota employee that had moved to California. The Court held that Section 16600 was not so strong as to constitute an exceptional circumstance warranting enjoining proceedings that were initiated in Minnesota before the California had been initiated. The court noted, however, that the employee was free to continue the California action while the Minnesota action proceeded.

Similarly, the court in Jones v. Humanscale Corp., 130 Cal. App. 4th 401 (Cal. Ct. App. 2005), recognized that a New Jersey arbitrator did not exceed his authority by enforcing a non-compete clause. Here, the parties agreed to arbitrate “any dispute involving the performance, interpretation of [sic] breach of this agreement or the relationship created hereby, including…disputes involving…discrimination and other rights and protections afforded by … law… .” Id. at 409. The agreement further includes a New York choice-of-law provision, and expressly authorized an arbitrator to modify any part of the noncompetition covenant found unenforceable. The court opined that none of the cases on which plaintiff attempted to rely, including Application Group, involved judicial review of an arbitrator’s findings as to the enforceability of a covenant not to compete in a contract containing a choice-of-law provision applying the law of another state. Additionally, the court found that the arbitrator’s findings and decision were not palpably erroneous under California law. For discussion of specific instances where California courts have enforced non compete clauses that limited, but did not prohibit competition, see Section III.D.2.a., infra.

In Bennett v. Medtronic, Inc., 285 F.3d 801 (9th Cir. 2002), several employees of a Tennessee company, Medtronic, sought to ignore the non-competition covenants in their employment agreements and move to NuVasive, a competing company in California. Medtronic sued NuVasive in Tennessee state court and, on the same day, the employees sued Medtronic in California state court. After Medtronic moved the California case to federal court, the employees sought, and the federal court granted, a temporary restraining order (characterized by the Ninth Circuit as a preliminary injunction) prohibiting Medtronic from proceeding with the Tennessee action. The Ninth Circuit held that this order violated the Anti-Injunction Act, 28 U.S.C. § 2283, which prohibits a federal court from enjoining state court proceedings except in limited circumstances. The court found that “[t]he Act creates a presumption in favor of permitting parallel actions in state and federal court” and that none of the exceptions applied. Id. at 805-07. In particular, the court found that the injunction was not “necessary in aid of the federal court’s jurisdiction.” Id. at 807.

c. California Courts Will Not Rewrite an Overly Broad Noncompetition Provision to Make It Valid.

The burden is on the employer to draft a noncompetition provision that will pass muster under section 16600. California courts will not rewrite an overly broad provision to make it valid. See Kolani v. Gluska, 64 Cal. App. 4th 402, 408 (Cal. Ct. App. 1998); D’Sa, 85 Cal. App.


4th at 934-35;5 but see Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83, 123, 124 n.13 (Cal. 2000) (“overbroad covenants not to compete may be restricted temporally and geographically,” citing General Paint Corp. v. Seymour, 124 Cal. App. 611, 614-15 (Cal. Ct. App. 1932), and will be invalidated only upon showing of bad faith). Rewriting a covenant would undermine the policy underlying section 16600. Kolani, 64 Cal. App. 4th at 408. If rewriting were permitted:

Employers could insert broad, facially illegal covenants not to compete in their employment contracts. Many, perhaps most, employees would honor these clauses without consulting counsel or challenging the clause in court, thus directly undermining the statutory policy favoring competition. Employers would have no disincentive to use the broad, illegal clauses if permitted to retreat to a narrow, lawful construction in the event of litigation.

Id. For tips on drafting a narrow, enforceable covenant not to use or disclose an employer’s trade secrets, see Section V.A.1., infra.

2. California Courts May Enforce Certain Types of Non-Competition Clauses That Limit, but Don’t Prohibit, Competition.

a. Covenants by Employees Not to Use or Disclose Their Employers’ Trade Secrets Are Enforceable in California.

Agreements not to use or disclose the company’s trade secrets during and after the term of employment or contractual engagement are fully enforceable. See, e.g., Muggill v. The Reuben H. Donnelley Corp., 62 Cal. 2d 239, 242 (Cal. 1965); American Credit Indemnity Co. v. Sacks, 213 Cal. App. 3d 622, 633-34 (Cal. Ct. App. 1989). In Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514 (Cal. Ct. App. 1997), the court affirmed an injunction prohibiting two former employees from: (1) doing business with any company that switched its business to the employee’s new business as a result of the employee’s use of the former employer’s trade secret customer information, and (2) soliciting any business from any entity that did business with the former employer before the employees stopped working there.

An employer cannot, however, prevent an employee from using or disclosing non-trade secret information simply by defining the information as a trade secret in the employee’s non-disclosure agreement. See, e.g., American Paper, 183 Cal. App. 3d at 1325 (“An agreement between employer and employee defining a trade secret may not be decisive in determining

5 For a non-California decision holding a federal court had no obligation to fix a flawed noncompetition agreement, see Cintas Corp. v. Perry, 517 F.3d 459 (7th Cir. 2008) (finding that “judicial modification of unreasonable or overbroad non-compete provisions … is discretionary, not mandatory,” and therefore refusing to “blue-pencil” the agreement to make it enforceable).


whether the court will so regard it”). Nevertheless, there are at least two reasons why an employment agreement that contains a covenant not to use or disclose the employer’s trade secrets should attempt to define the trade secrets being protected, and with some degree of specificity (but not in so much detail that unlisted trade secrets will be deemed not to be protected by the agreement).

First, putting employees (and others) on notice as to what information the employer considers a trade secret is an important step in the process of establishing a trade secret. Second, the courts are disinclined to enforce agreements requiring employees to keep confidential vaguely defined information the company later decides it would like to protect. See generally Motorola, Inc. v. Fairchild Camera & Instrument Corp., 366 F. Supp. 1173, 1185 (D. Ariz. 1973) (applying California law and refusing to enforce agreements in which employees agreed to “maintain strictly confidential during [and for two years after] my employment all ... information of the company ... which is of a confidential or secret nature”).

However the protected information is defined in the agreement, it should be coupled with an acknowledgment by the employee that the information is owned by the employer, is secret, is the subject of reasonable efforts by the employer to keep it secret, and has value because of its secrecy. (These are the standards for establishing under the Uniform Trade Secrets Act that the information is a trade secret.)

The contract should, of course, provide that the employee will not use or disclose the information during or after employment, and should expressly provide that the employee’s duties extend until the information becomes generally known through proper means. It should also require the return of all notebooks, documents, computer disks and the like upon the termination of employment.

Further, although not necessary, a non-disclosure agreement is a useful tool for helping to protect an employer’s trade secrets. While the courts have held in numerous cases that an employer may prevent an ex-employee from using or disclosing its trade secrets under the tort theory of trade secret misappropriation even in the absence of a non-disclosure agreement, see, e.g., Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1522 (Cal. Ct. App. 1997); Klamath-Orleans Lumber, Inc. v. Miller, 87 Cal. App. 3d 458, 465 (Cal. Ct. App. 1978), such agreements are useful for many reasons.

First, by notifying the employee of the existence of trade secrets, the employer lessens the risk of inadvertent disclosure to others, and serves to deter the employee (and his or her new employer) from using the information. Second, an agreement helps to eliminate disputes and misunderstandings about the trade secret status of confidential information. Third, as noted above, a contractual obligation to preserve the secrecy of information is evidence of the employer’s “reasonable efforts” to maintain the secrecy of its confidential information, and thus helps to establish its status as a trade secret under the Uniform Trade Secrets Act.


b. Prohibition Against a Limited Subset of Activities

In Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (Cal. 2008), the California Supreme Court considered and rejected another exception to the general rule that had found support in a handful of federal court decisions. In those cases, the courts had held that non-competition agreements that resulted in only a “partial” or “narrow” restraint on an employee’s ability to work in his or her chosen profession were reasonable and enforceable. In a widely anticipated decision, Edwards flatly rejected this exception, finding that the state’s strong public policy – as clearly expressed in California Business and Professions Code Section 16600 – does not permit such a restraint, even if it is narrow or limited.

In Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (Cal. 2008), the plaintiff challenged the enforceability of a non-compete agreement he signed when he was hired in 1997 and also argued that he was wrongfully terminated for refusing to execute a general release of all claims that arguably would have involved non-waivable statutory claims.

The Non-Compete agreement at issue purported to prohibit plaintiff from (1) performing similar services for clients he had assisted within 18 months of his departure, (2) soliciting, within 12 months of his departure, clients that had been serviced by an Andersen office Edwards had worked at during the 18 months prior to his departure, and (3) soliciting away any of Andersen’s professional employees for 18 months following his departure. The release was offered as part of a sale of Arthur Anderson to HSBC. In connection with the sale, Andersen required Edwards to sign a Termination of Non-Compete agreement containing a general release of “any and all claims” against Andersen, as well as other terms benefiting Andersen, and in turn released Edwards from the 1997 non-competition agreement. Concerned that he would be waiving indemnification rights for potential liability and legal fees related to Andersen’s Enron troubles, Edwards refused to sign the agreement. As a result, Andersen terminated Edwards and withdrew his severance benefits. HSBC subsequently withdrew his employment offer.

Edwards sued Andersen for (among other things) interference with prospective economic advantage, alleging that (1) the 1997 non-competition agreement violated California Business and Professions Code Section 16600, and (2) that the general “any and all claims” release in the Termination of Non-Compete agreement ran afoul of California Labor Code sections 2802 and 2804, which render an employee’s indemnification rights nonwaivable. Edwards argued that requiring him to release indemnification rights to obtain a release from an unlawful non-competition agreement amounted to “wrongful conduct” sufficient to satisfy the elements of his interference claim.

The California Supreme Court held that the 1997 Non-Compete agreement was unenforceable. The Court considered the “narrow restraint” exception that had found support in a handful of federal court decisions. In those cases, the courts had held that non-competition agreements that resulted in only a “partial” or “narrow” restraint on an employee’s ability to work in his or her chosen profession were reasonable and enforceable. The Court flatly rejected


this exception, finding that the state’s strong public policy – as clearly expressed in California Business and Professions Code Section 16600 – did not permit such a restraint, even if it was narrow or limited.

With respect to the release, however, the Court rejected the lower court’s ruling that general releases that contain a release of “any and all claims” are invalid. It found it unreasonable to read such a general release as purporting to release indemnification rights which are expressly made nonwaivable by statute. To do otherwise would be to interpret the contract as unlawful, violating basic principles of contract interpretation. Accordingly, the Court found that the “any and all claims” release was enforceable.

Edwards clarifies and reaffirms California’s longstanding public policy in favor of open competition and employee mobility, and it rejects non-competition agreements drafted to comply with the “narrow restraint” exception. The decision leaves intact the other limited exceptions to the general prohibition on post-employment non-competition agreements (such as non-compete agreements executed in connection with a sale of a business), and does not affect an employer’s ability to protect its trade secrets through non-disclosure and non-solicitation agreements. To the extent that existing non-competition agreements were drafted to comply with the “narrow restraint” exception, employers should reexamine these agreements, refrain from attempting to enforce them, and consider replacing them altogether with appropriate and enforceable agreements.

c. Other Statutory Exceptions Allowing Restraints On Competition

As recognized by the Edwards court, there are statutory exceptions to Section 16600 where parties may enter into enforceable covenants not to compete. These exceptions include the sale of goodwill or corporate stock of a business, Cal. Bus. & Prof. Code § 16601, or the dissolution of a partnership, Cal. Bus. & Prof. Code § 16602. Under these statutes, covenants have been upheld where the defendant arguably only had a limited ability to compete with the plaintiff. For instance, in Vacco Industries, Inc. v. Van Den Berg, 5 Cal. App. 4th 34 (Cal. Ct. App. 1992), the court upheld a non-compete agreement that the defendant entered into when he sold his stock, which totaled only 3% of the outstanding shares, to an acquiring company. The court found that the “purchaser of a business is entitled to negotiate and enforce an agreement by the seller(s) of the business imposing a reasonable restriction on competition by the seller(s) on the theory that such competition would diminish the value of the business which had been purchased.” Id. at 48.

California courts will not enforce a non-compete covenant in a stock purchase agreement if it appears that the agreement is merely “a sham devised to circumvent California’s policy against such agreements as expressed in section 16600.” Hill Medical Corp. v. Wycoff, 86 Cal. App. 4th 895, 905 (Cal. Ct. App. 2001). “[T]here must be a clear indication that in the sales transaction, the parties valued or considered goodwill as a component of the sales price, and thus,


the share purchasers were entitled to protect themselves from ‘competition from the seller which competition would have the effect of reducing the value of the property right that was acquired.’” Id. at 903 (quoting Monogram Indus., Inc. v. Sar Indus., Inc., 64 Cal. App. 3d 692, 701 (Cal. Ct. App. 1976)). In Hill Medical Corp., for example, the court invalidated a non-compete covenant that applied when the defendant physician quit his job and sold his shares in the practice back to the corporation, where there was no evidence that the repurchase price compensated the defendant for the sale of goodwill. Id. at 906-07.

3. Enforcement of Non-Solicitation Clauses

a. What Is “Solicitation”?

Even California courts are willing to enforce narrowly crafted non-solicitation clauses. The case law, however, does not clearly define “solicitation.” Nonetheless, some guidelines have emerged regarding the types of conduct that may and may not be enjoined by a non-solicitation agreement. First, an employee may passively accept business from the former employer’s clients despite a non-solicitation agreement. See, e.g., Golden State Linen Service, Inc. v. Vidalin, 69 Cal. App. 3d 1, 8 (Cal. Ct. App. 1977). Second, “merely informing customers of one’s former employer of a change of employment, without more, is not solicitation.” Aetna Building Maintenance Co., Inc. v. West, 39 Cal. 2d 198, 204 (Cal. 1952). Note, however, that if the customers’ identities are trade secrets, merely calling them to announce a change of employment may be a misappropriation of trade secrets. Moss, Adams & Co. v. Shilling, 179 Cal. App. 3d 124, 128-30 (Cal. Ct. App. 1986).

One court explained that any customer contact that “personally petitions, importunes and entreats . . . customers to call . . . for information about the better [products or services] [the departing employee] can provide and for assistance during the . . . transition period . . . is endeavoring to obtain their business [is] . . . , in a word, solicit[ation].” American Credit Indemnity Co. v. Sacks, 213 Cal. App. 3d 622, 636 (Cal. Ct. App. 1989) (enjoining employee where ex-employee’s “announcement letter” said “if you would like to learn more about the [new employer’s product], I will be happy to discuss it with you when you are ready to review your ongoing credit insurance needs at renewal time.”); see also Robert L. Cloud & Assocs., Inc. v. Mikesell, 69 Cal. App. 4th 1141, 1150 (Cal. Ct. App. 1999) (holding similarly); Merrill Lynch, Pierce, Fenner & Smith Inc. v. Chung, No. CV 01-00659, 2001 WL 283083 (C.D. Cal. Feb. 2, 2001) (personal follow-up phone calls constituted solicitation).

b. Customer Solicitation

In California, an employee’s covenant not to solicit the employer’s customers after termination of employment is enforceable to the extent that information regarding those customers constitutes a trade secret or the solicitation thereof would constitute unfair competition. See, e.g., Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425 (Cal. Ct. App. 2003); Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (Cal. Ct. App. 1985); Retirement Group v. Galante,


176 Cal. App. 4th 1226 (Cal. Ct. App. 2009). This rule is equally applicable in contracts between a company and its supplier or contract manufacturer. Companies typically contend in these contexts that information regarding the identities, addresses and key contact people of customers, as well as the customers’ peculiar needs, desires and pricing/bidding constraints, are trade secrets.

This rule is illustrated by Thompson v. Impaxx, where defendant Impaxx purchased Pac-West Labels in September of 2000, at the time employer of plaintiff Daniel Thompson. After acquiring Pac-West, Impaxx asked Thompson to sign a covenant which read: “For a period of one (1) year following the termination of employment, I will not (1) call on, solicit, or take away any of Pac-West Label’s customers or potential customers with whom I have had any dealings as a result of my employment by Pac-West Label.” Id. at 1427. After refusing to execute the contract, Thompson was terminated by Impaxx. Thompson then sued Impaxx alleging wrongful termination for refusal to sign what he alleged was an unenforceable covenant not to compete. Impaxx’s motion for judgment on the pleadings, claiming the contract was enforceable as written, was granted by the trial court. In reversing the decision, the appellate court repeated the rule that “[a]nti-solicitation covenants are void as unlawful business restraints except where their enforcement is necessary to protect trade secrets.” Id. at 1429 (emphasis added, citing Moss, Adams & Co. v. Shilling, 179 Cal. App. 3d 124, 129 (Cal. Ct. App. 1986)). However, the court held that judgment on the pleadings was inappropriate because the complaint stated that the customer information at issue was not trade secrets. Id. at 1430 (“the issue of whether information constitutes a trade secret is a question of fact.”). Had Impaxx established this customer information constituted a trade secret, its restrictive covenant would be enforced.

In Retirement Group v. Galante, 176 Cal. App. 4th 1226 (Cal. Ct. App. 2009), the court held that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee's new business, but a court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act and/or the Unfair Competition Law) by banning the former employee from using trade secret information to identify existing customers, to facilitate the solicitation of such customers, or to otherwise unfairly compete with the former employer. It is not the solicitation of the customers, but is instead the unfair competition or misuse of trade secret information, that may be enjoined. Id.

Like California, other states that invalidate non-competition agreements, such as Oklahoma, also harshly construe non-solicitation provisions. See Cardiovascular Surgical Specialists, Corp. v. Mammana, 61 P.3d 210, 212 (Okla. 2002) (refusing to enforce non-solicitation clause preventing former surgeon from soliciting, diverting or accepting referrals from any source for nine months after terminating employment).

Other states have held covenants not to solicit customers are enforceable even if the agreement is not keyed to trade secrets. In John Jay Esthetic Salon, Inc. v. Woods, 377 So. 2d


1363 (La. App. Ct. 1979), the court enforced a non-solicitation provision that prevented a former employee from soliciting customers from the former employer hair salon for two years. In doing so, the court held: “An agreement not to engage in competition with the employer is vastly different from an agreement not to solicit the employer’s customers or employees or to engage in a business relationship with the employees or contractors.” Id. at 1366.

There is some California authority that appears to follow these other states, i.e., upholding covenants not to solicit customers regardless of whether confidential information is involved. See John F. Matull & Associates, Inc. v. Cloutier, 194 Cal. App. 3d 1049, 1054-55 (Cal. Ct. App. 1987) (enforcing non-solicitation covenant that made no mention of trade secrets, and stating that, unlike agreements not to compete, agreements “delimiting how . . . employee can compete” are not automatically invalid under 16600); Golden State Linen Service, Inc. v. Vidalin, 69 Cal. App. 3d 1, 9 (Cal. Ct. App. 1977) (finding non-solicitation agreement “valid and enforceable” without even addressing whether the employee’s solicitation involved trade secrets). The weight of authority in California, however, appears to require trade secrets as a condition to enforcement of the non-solicitation covenant. See, e.g., Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425 (Cal. Ct. App. 2003); Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (Cal. Ct. App. 1985); Moss, Adams & Co. v. Shilling, 179 Cal. App. 3d 124, 130 (Cal. Ct. App. 1986) (“Anti-solicitation covenants are void as unlawful business restraints except where their enforcement is necessary to protect trade secrets”); Gordon Termite Control v. Terrones, 84 Cal. App. 3d 176, 179 (Cal. Ct. App. 1978) (refusing to enforce non-solicitation covenant where no trade secrets were used); Fortna v. Martin, 158 Cal. App. 2d 634, 639 (Cal. Ct. App. 1958) (same).

c. Competitor Employee Raiding Absent a Non-Solicitation Clause

It is not uncommon for competitors to recruit or “raid” the employer’s most talented employees. In fact, the California Supreme Court recently held that “public policy generally supports a competitor’s right to offer more pay or better terms to another’s employee so long as the employee is free to leave.” Reeves v. Hanlon, 33 Cal. 4th 1140, 1151-1152 (Cal. 2004).

Under ordinary circumstances, the law does not prohibit competitors, including former employees who now compete with their former employer, and who did not sign a valid non-solicitation contract, from soliciting other at-will employees to leave the employer’s workforce. Metro. Traffic, 22 Cal. App. 4th at 860 (“As a competitor of Metro, absent a showing of unlawful purpose or means, Shadow is privileged and not liable for inducing Metro’s employees to leave and move to Shadow”); Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1337 (9th Cir. 1980) (“Mere solicitation of an employee, under no contract of employment, to leave and associate with a competing firm is not illegal.”).

As the court stated in Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 255 (Cal. Ct. App. 1968):


Even though the relationship between an employer and his employee is an advantageous one, no actionable wrong is committed by a competitor who solicits his competitor’s employees or who hires away one or more of his competitor’s employees who are not under contract, so long as the inducement to leave is not accompanied by unlawful action . . . . In the employee situation the courts are concerned not solely with the interests of the competing employers, but also with the employee’s interests. The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.

see also Reeves, 33 Cal. 4th at 1152-1153 (solicitation actionable only if plaintiff proves “that the defendant engaged in an independently wrongful act that induced an at-will employee to leave the plaintiff.”)

As this statement makes clear, there are a number of exceptions to the general rule allowing employee solicitation (the discussion of which is beyond the scope of this chapter), which give the employer some protection against raiding by former employees and other competitors.

d. Competitor Employee Raiding In Light of a Non-Solicitation Clause

The most common way an employer can prevent raiding by former employees is by including a non-solicitation covenant in the employment contract. As discussed above, these covenants typically provide that, during the employment or contractual engagement, and for a certain period of time thereafter, the employee or contracting company shall not solicit any of the company’s employees for a competing business or otherwise induce or attempt to induce employees to leave their employment.

Under California law, a covenant not to solicit an employer’s workforce may be enforceable, even in the absence of actual trade secret misappropriation, provided that there are legitimate trade secrets or other legitimate business interests that are protected by the covenant not to solicit. In Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (Cal. Ct. App. 1985), the plaintiffs brought suit against a former executive officer claiming that he had breached his termination agreement by inducing the plaintiffs’ employees to work for the defendant’s subsequent employer. The termination agreement in Moyes provided in part that, as a condition for various salary and severance payments, the defendant would “not now or in the future disrupt, damage, impair or interfere with the business of [the plaintiffs] whether by way of interfering with or raiding its employees, disrupting its relationships with customers, agents, representatives or vendors or otherwise.” 174 Cal. App. 3d at 274. The defendant later offered jobs to two key


employees of the plaintiffs, and both of these employees eventually went to work for the defendant’s new employer.

In determining whether the non-interference covenant was enforceable under Section 16600 of the California Business and Professions Code, the court seemed to abandon the notion that the employer could restrain by contract only that conduct which would have been subject to judicial restraint under the law of unfair competition and trade secret misappropriation. Instead, the court applied a rule of reason test to the covenant, stating that “enforceability depends upon [the covenant’s] reasonableness, evaluated in terms of the employer, the employee, and the public.” 174 Cal. App. 3d at 279.

In applying the rule of reason, the court found that, when read to last for only one year, the non-interference covenant was not void under Section 16600. The court explained:

The restriction presumably was sought by plaintiffs in order to maintain a stable work force and enable the employer to remain in business. This restriction has the apparent impact of limiting [the defendant’s] business practices in a small way in order to promote [the employer’s] business. This non-interference agreement has no overall negative impact on trade or business.

174 Cal. App. 3d at 280.

The holding in Loral Corp. appears to be inconsistent with dicta in some other California cases. For example, one court has stated that “[t]he corollary to [the] proposition [that an ex-employee cannot be contractually barred from working for the former employer’s competitors] is that competitors may solicit another’s employees if they do not use unlawful means or engage in acts of unfair competition.” Metro. Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 859 (Cal. Ct. App. 1994); see also Latona v. Aetna U.S. Healthcare, Inc., 82 F. Supp. 2d 1089, 1094-96 (C.D. Cal. 1999) (following Metro. Traffic’s reasoning). “The interests of the employee in his own mobility and betterment are deemed paramount to the competitive interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.” Metro. Traffic, 22 Cal. App. 4th at 860 (quoting Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 255 (Cal. Ct. App. 1968)).

Nevertheless, employers can use Loral Corp. as authority to support a practice of including covenants not to solicit fellow employees in their employment agreements. Any such covenants should be reasonably limited in time and scope.


IV. PREVENTING DEPARTING EMPLOYEES FROM USING OR DISCLOSING TRADE SECRETS

A. Background.

To develop trade secrets, employers recruit, hire and train highly skilled employees. It is the most highly skilled employees that are most sought after by competitors, and thus pose the greatest risk of disclosure and misuse of the employer’s trade secrets. In this section, we provide an overview of the claims available to employers seeking to protect their trade secrets and suggest steps employers should take to protect their trade secrets.

B. Sources of Protection for Employers.

1. Civil Remedies for Trade Secret Misappropriation.

a. Basis for Liability.

If an employee learned the employer’s trade secrets and then used or disclosed, or threatened to use or disclose, the trade secrets without the employer’s consent, the employee may be liable for “misappropriating” the trade secrets. See Hudson Hotels Corp. v. Choice Hotels Int’l, 995 F.2d 1173, 1176 (2d Cir. 1993) (to prevail on claim for misappropriation of trade secrets, New York law requires that plaintiff demonstrate that it possessed trade secrets, and that defendant used trade secrets in breach of agreement or confidential relationship or duty, or as result of discovery by wrongful means), abrogated on other grounds, Nadel v. Play-by-Play Toys & Novelties, Inc., 208 F.3d 368 (2d Cir. 2000); Cal. Civ. Code § 3426.1(b)(2) (misappropriation includes actual or threatened use or disclosure of trade secret where trade secret was “[a]cquired under circumstances giving rise to a duty to maintain its secrecy or limit its use”). The ex-employee’s new employer may also be liable for misappropriation. Thola v. Henschell, 140 Wash. App. 70 (Wash. Ct. App. 2007) (appellate court held that a future employer could be vicariously liable if it knowingly benefited from a future employee’s tortious conduct); see Cal. Civ. Code § 3426.1(b)(2) (misappropriation may also occur if person “derived [trade secret] from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use”). Indeed, a California court recently held that officers, directors, and majority shareholders of the new employer may be held personally liable for misappropriation if they knew or had reason to know of the unlawful conduct and thereby implicitly approved of or consented to it. See PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368 (Cal. Ct. App. 2000). Such persons may be personally liable even if they did not directly participate in the misappropriation and, if the misappropriation is continuing, even if the misappropriation initially occurred before they became an officer, director, or majority shareholder. Id. at 1380-85.

An employee who uses a computer to obtain or send trade secrets without his employer’s authorization may also be liable, along with the recipient of the information, under the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, which applies to “[w]hoever . . . intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains . . .


information from any protected computer if the conduct involved an interstate or foreign communication . . . .” 18 U.S.C. § 1030(a)(2)(C). Section 1030 is primarily a criminal statute, but “[a]ny person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief.” 18 U.S.C. § 1030(g). Although the remedies are cumulative with those provided by state trade secret law, the statute may provide a basis for filing a trade secret misappropriation lawsuit in federal court in appropriate cases.

b. Available Remedies.

An injured employer may obtain monetary damages and/or an injunction to stop the use or disclosure of the trade secret information as remedies for trade secret misappropriation. SeeCal. Civ. Code §§ 3426.2, 3426.3; Robert L. Cloud & Assocs., Inc. v. Mikesell, 69 Cal. App. 4th 1141, 1149-52 (Cal. Ct. App. 1999) (discussing remedies available under Uniform Trade Secrets Act); Cacique, Inc. v. Robert Reiser & Co., 169 F.3d 619, 623-24 (9th Cir. 1999) (same). Injunctive relief may include an injunction compelling affirmative acts, such as the return or destruction of misappropriated documents and materials. See Cal. Civ. Code § 3426.2(c); Lumex, Inc. v. Highsmith, 919 F. Supp. 624, 633-34 (E.D.N.Y. 1996) (threatened misappropriation enjoined).

In New York, a party seeking a preliminary injunction must demonstrate: (1) “either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant’s favor,” and (2) “irreparable harm in the absence of an injunction.” Faiveley Transport Malmo v. Wabtec Corp., 559 F.3d 110 (2d Cir. 2009) (quoting County of Nassau, N.Y. v. Leavitt, 524 F.3d 408, 414 (2d Cir. 2008)). A showing of irreparable harm “is the single most important prerequisite for the issuance of a preliminary injunction.” Id. at 118. To satisfy this requirement, a plaintiff “must demonstrate that absent a preliminary injunction they will suffer an injury that is neither remote nor speculative, but actual and imminent, and one that cannot be remedied if a court waits until the end of trial to resolve the harm.” Grand River Enter. Six Nations, Ltd. v. Pryor, 481 F.3d 60, 66 (2d Cir. 2007). Where there is an adequate remedy at law, such as an award of money damages, injunctions are unavailable except in extraordinary circumstances. Moore v. Consol. Edison Co. of N.Y., 409 F.3d 506, 510 (2d Cir. 2005). The Second Circuit recently clarified that a presumption of irreparable harm does not necessarily automatically arise upon the misappropriation of a trade secret. Faiveley, 559 F.3d at 118; see also American Airlines, Inc. v. ImHof, 620 F. Supp. 2d 574 (S.D.N.Y. 2009). Rather, a rebuttable presumption may be warranted, according to the court,

in cases where there is a danger that, unless enjoined, a misappropriator of trade secrets will disseminate those secrets to a wider audience or otherwise irreparably impair the value of those secrets. Where a misappropriator seeks only to use those secrets-without further dissemination or irreparable impairment of value-


in pursuit of profit, no such presumption is warranted because an award of damages will often provide a complete remedy for such an injury.

Id. at 118-19. In Faiveley, the defendant corporation used the misappropriated trade secrets without further dissemination and treated them with the same confidentiality that they gave to their own proprietary information. Further, there was no evidence in the record that defendant was likely to irreparably impair plaintiff’s trade secrets by their continued usage. Therefore, the court found inappropriate the district court’s grant of a preliminary injunction.

In American Airlines, Inc. v. ImHof, American Airlines alleged that a former employee, a mid-level managing director of sales for the New York region, misappropriated trade secrets and sought to use them to American’s detriment after joining a rival, Delta Airlines. After citing Faiveley and rejecting American’s argument that a misappropriation of trade secrets automatically raises the presumption of irreparable harm, the court addressed whether any of the documents the employee took before leaving his position with American, or even the information he remembered could constitute irreparable harm. However, the court found that none of the alleged misappropriations contained sufficiently confidential information that would likely be used against American with any material effect. Further, the court noted that any possible material effect could be compensated by readily attributable damages.

c. Limitations Periods.

Once there is a reasonable basis for believing misappropriation has occurred, action must be taken without undue delay. This includes an action for injunctive relief. Static Control Components, Inc. v. Future Graphics, LLC, No. 1:06CV00730, 2007 U.S. Dist. LEXIS 36474 (D.N.C. May 11, 2007) (injunctive relief not appropriate where employer laid off employee, employee remained unemployed for months, turned in the former employer’s computer and documents, and the employer delayed taking legal action for 8-12 weeks after learning that employee was joining competitor). Under California law, if a trade secret misappropriation action is not filed within three years after discovery of the misappropriation, the opportunity may forever be lost. See Cal. Civ. Code § 3426.6 (providing 3-year statute of limitations for trade secret misappropriation). This apparently will be true even if the misappropriator promises to stop its illegal activity, initially appears to abide by its promise, and then later resumes the misappropriation. See Glue-Fold, Inc. v. Slautterback Corp., 82 Cal. App. 4th 1018 (Cal. Ct. App. 2000) (holding that 3-year statute of limitations under section 3426.6 is not tolled during period of alleged suspension of misappropriation); see also Forcier v. Microsoft Corp., 123 F. Supp. 2d 520, 524-28 (N.D. Cal. 2000). Moreover:


[W]hen the statute of limitations begins to run on some of a plaintiff’s trade secrets claims against given defendants, the statute also begins to run at the same time as to other trade secret claims against those same defendants, even if there have not yet been any acts of misappropriation of the other trade secrets, at least when the plaintiff shared all the trade secrets with the defendants during the same time period and in connection with the same relationships and when the trade secrets concern related matters.

Id. at 525-26 (quoting Intermedics, Inc. v. Ventritex, Inc., 822 F. Supp. 634, 657 (N.D. Cal. 1993)). “California law assumes that once a plaintiff knows or should know that a particular defendant cannot be trusted with one secret, it is unreasonable for that plaintiff simply to assume that that defendant can be trusted to protect other secrets.” Id. at 1027 (quoting Intermedics, Inc., 822 F. Supp. at 654); but see Display Research Labs., Inc. v. Telegen Corp., 133 F. Supp. 2d 1170, 1176-77 (N.D. Cal. 2001) (limitations period begins running upon discovery of actual misappropriation, not discovery of plan to misappropriate). On certification of a question by the Ninth Circuit Court of Appeals, the California Supreme Court held that a trade secret infringement claim arises “only once, at the time of the initial misappropriation . . . . Each new misuse or wrongful disclosure is viewed as augmenting a single claim of continuing misrepresentation rather than as giving rise to a separate claim.” Cadence Design Sys., Inc. v. Avant! Corp., 29 Cal. 4th 215 (Cal. 2002). However, California law distinguishes between the original misappropriator and third parties who were not a part of the original misappropriation, such as customers who purchased products containing the trade secrets and continue to use them after learning of the misappropriation. In regard to these third parties, a California appellate court has recently held that the statute of limitations does not begin to run until trade secret owner first had reason to suspect that a third party of the original misappropriator had obtained or used the software knowing, or with reason to know, that it contained the trade secrets. Cypress Semiconductor Corp. v. Superior Court, 163 Cal. App. 4th 575 (Cal. Ct. App. 2008). This holding prevents allowing a third party to “merely have to lie low and wait out the clock.”

Thus, to ensure that its trade secrets are protected against future misappropriation, a company should promptly file a lawsuit against a perceived misappropriator and seek resolution of the matter in the context of the lawsuit. Alternatively, it may be sufficient to enter into a written agreement with the misappropriator expressly providing that the statute of limitations is tolled until the discovery of subsequent misappropriation.

d. Risks Associated with Civil Discovery.

Employers should be aware, before filing a trade secret misappropriation lawsuit, that civil litigation entails the risk of further unwanted disclosure of confidential information. Before commencing discovery, the party alleging misappropriation must identify the misappropriated trade secrets to its adversary “with reasonable particularity.” Cal. Code of Civ. Proc. § 2019.210. Reasonable particularity mandated by section 2019.210 does not mean that the


party alleging misappropriation has to define every minute detail of its claimed trade secret at the outset of the litigation. Brescia v. Angelin, 172 Cal. App. 4th 133, 145 (Cal. Ct. App. 2009). Nor does it require a discovery referee or trial court to conduct a miniature trial on the merits of a misappropriation claim before discovery may commence. Id. Rather, it means that the plaintiff must make some showing that is reasonable, i.e., fair, proper, just and rational, under all of the circumstances to identify its alleged trade secret in a manner that will allow the trial court to control the scope of subsequent discovery, protect all parties’ proprietary information, and allow them a fair opportunity to prepare and present their best case or defense at a trial on the merits. Id. Where credible experts declare that they are capable of understanding the designation and of distinguishing the alleged trade secrets from information already known to persons in the field, the designation should, as a general rule, be considered adequate to permit discovery to commence. Id. at 146. Section 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates. Rather, such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. Brescia v. Angelin, at 143 (Cal. Ct. App. 2009).

Further disclosures of confidential information are likely to be required as discovery progresses. While the court can issue a protective order to limit the use and disclosure of confidential information disclosed through the discovery process, the possibility of inadvertent disclosures—and even intentional ones—cannot be altogether eliminated.

Trade secret litigation also raises the possibility that a party’s proprietary or trade secret information will be disclosed to the public. California courts have the authority to seal records containing such information, but their authority is limited and discretionary. See Cal. Rules of Ct. 243.1, 243.2. One court has held that, despite these rules, sealing is mandatory in trade secret misappropriation cases because the Uniform Trade Secrets Act provides that “a court shall preserve the secrecy of an alleged trade secret” in such cases, see In re Providian Credit Card Cases, 96 Cal. App. 4th 292, 298-99 (2002) (citing Cal. Civ. Code § 3426.5), but employers should nevertheless be aware of the risk of disclosure.

2. The Inevitable Misappropriation Doctrine May Be Used to Prevent “Threatened” Misappropriation of Trade Secrets.

Consider the following hypothetical situation: An employee with knowledge of his or her employer’s valuable trade secrets quits to join a competitor. The new job is nearly identical to the old job. As a result, the former employer believes that the employee will use its trade secrets in his or her new job, whether the employee intends to or not. Moreover, the former employer has evidence that the employee is not trustworthy or has engaged in conduct such as taking its files or other materials belonging to it. In such situations, the employer may be able to obtain an injunction enjoining the former employee from performing certain functions for the


competitor under an emerging legal theory called the “inevitable misappropriation” or “inevitable disclosure” doctrine.

Employers trying to prevent the misappropriation of their trade secrets before it happens are faced with two problems: (1) proving the “threat” (because former employees will rarely admit that they intend to use the company’s trade secrets); and (2) obtaining meaningful relief (since the typical “don’t use, don’t disclose” injunction will not suffice when misappropriation is in fact “inevitable”).

Under appropriate circumstances, the inevitable misappropriation doctrine is designed to address both these problems. It provides both a method of proving the threat of misappropriation by circumstantial evidence and a remedy designed to prevent the irreparable injury that will occur if the employee assumes new responsibilities and, inevitably, uses the trade secrets. The theory can be condensed into a three-part test, whereby the former employer must prove:

1. The former employee has knowledge of the first employer’s trade secrets.

2. The employee’s new job duties (and the products or technology the employee is working on) are so similar or related to those in the former position that it would be extremely difficult not to rely on or use the first employer’s trade secrets.

3. The former employee and the new employer cannot be depended upon to avoid using the trade secret information.

See PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) (preliminary injunction granted enjoining former employee from assuming certain duties at competitor because it was inevitable that former employee would rely on plaintiff’s trade secrets).

a. New York and Most Other States Have Adopted the Inevitable Misappropriation Doctrine.

In New York, various courts have accepted the inevitable disclosure doctrine on a limited basis in appropriate circumstances. For example, in DoubleClick, Inc. v. Henderson, No. 116914/97, 1997 WL 731413 (N.Y. Sup. Ct. Nov. 7, 1997), the court enjoined two former high-level employees of an Internet advertising company from launching their own competitive venture, or working for any other company in a competitive capacity, for a period of six months—without even reaching the issue of whether either defendant had breached any express non-compete or confidentiality agreement with DoubleClick. The court explained that the central role of the defendants in DoubleClick’s operations “makes it unlikely that they could ‘eradicate [DoubleClick’s] secrets from [their] mind.” Id. at *6 (quoting Lumex, Inc., 919 F. Supp. at 631). The court also noted that in light of the defendants’ actual acts of misappropriation, and their “cavalier attitude toward their duties to their former employer,” there was a reasonable inference that they would continue to use DoubleClick’s trade secret information in their new positions. Id. Similarly, in Lumex, Inc., 919 F. Supp. at 631, the court


granted an injunction preventing a management representative from working with the plaintiff’s competitor on the grounds that it was inevitable that the former employee would disclose trade secret and confidential information in his effort to improve his new employer’s products. The court wrote:

The Plaintiff’s employees testified that “it would be impossible for Highsmith not to divulge confidential information.” The Court agrees. The Court finds that ... there not only is a high risk, but it is inevitable that he will disclose important ... trade secrets and confidential information in his efforts to improve the Life Circuit product, and aid his new employer and his own future .... [T]here [thus exists] a high risk that in the course of working on Life Circuit or on other Life Fitness business, he will, perhaps, inadvertently, disclose ... trade secrets ... or even the Cybex future prototypes. Highsmith was privy to the top secret Cybex product, business and financial information. He cannot eradicate these trade secrets from his mind.

Id.; see also Eastern Business Systems, Inc. v. Speciality Business Solutions, LLC, 739 N.Y.S.2d 177 (N.Y. App. Div. 2002) (issuing injunction based on inevitable disclosure doctrine, without specifically referring to the doctrine); Monovis, Inc. v. Aquino, 905 F. Supp. 1205, 1234 (W.D.N.Y. 1994) (noting that “even assuming the best of good faith, it is doubtful whether [defendant] could completely divorce his knowledge of the trade secrets”); Business Intelligence Servs., Inc. v. Hudson, 580 F. Supp. 1068, 1072 (S.D.N.Y. 1984) (inevitable disclosure found by computer software developer where employee’s new job duties with plaintiff’s competitor were similar to former position). But see International Paper Co. v. Suwyn, 966 F. Supp. 246, 258-59 (S.D.N.Y. 1997) (refusing to issue injunctive relief under inevitable misappropriation theory where there was no evidence that defendant would disclose any trade secret information, parties’ industry—wood and building products—is not “highly technical” or “copy cat” or “cloning” industry, and defendant’s employment at International Paper “was driven by general managerial expertise as opposed to highly technical, proprietary or secret information”).

In Earthweb, Inc. v. Schlack, 71 F. Supp. 2d 299 (S.D.N.Y. 1999), aff’d in part and remanded, 205 F.3d 1322 (2d Cir. 2000), the court refused to apply the doctrine of inevitable disclosure where the defendant-employee had signed a narrow non-compete agreement and the plaintiff-employer was seeking to enjoin defendant’s post-employment activity beyond those activities that were prohibited under the non-compete agreement. The court reasoned that the plaintiff was seeking to have the court “rewrite the parties’ employment agreement under the rubric of inevitable disclosure and thereby permit [plaintiff] to broaden the sweep of its restrictive covenant.” Id. at 311. The court rejected the request and refused to allow plaintiff from “mak[ing] an end-run around the agreement by asserting the doctrine of inevitable disclosure as an independent basis for relief.” Id.


Relying on the decision in Earthweb, the court in Marietta Corporation v. Fairhurst, 754 N.Y.S.2d 62 (N.Y. App. Div. 2003), refused to apply the inevitable disclosure doctrine. In Marietta, the plaintiff, a supplier of hotel amenities, commenced an action for misappropriation of trade secrets against its former Vice President for Sales and Marketing after he accepted a similar position with one of Marietta’s chief competitors. Although the employee was not subject to any non-compete agreement and although the trial court found no persuasive evidence that the employee had disclosed any of the plaintiff’s confidential information, the court granted the plaintiff’s motion for a preliminary injunction, enjoining the employee from working for the competitor for a period of 11 months from the date of the court’s injunction order. The trial court relied exclusively on the inevitable disclosure doctrine in issuing the injunction, finding that the employee “is undeniably in possession of plaintiff’s trade secrets, and it appears extremely likely that he would use those secrets—if only unconsciously—in carrying out his duties with [the competitor], to the [plaintiff’s] unfair advantage.” Marietta Corp. v. Fairhurst,Nos. 37265, RJI No. 2002-0229-M, 2002 WL 31056732, *4 (N.Y. Sup. Ct., Aug. 23, 2002). The Appellate Division vacated the injunction on appeal, finding no evidence of a breach of the employee’s confidentiality agreement or that the confidential information at issue constituted trade secrets. Marietta, 754 N.Y.S.2d at 62. The court further rejected the application of the inevitable disclosure doctrine and suggested that the inevitable disclosure doctrine had not yet been adopted by New York State courts. See also Renaissance Technologies Corp. v. Millennium Partners, LP, 2004 WL 4963292 (N.Y. Sup. Ct. March 19, 2004) (refusing to apply inevitable disclosure doctrine).

In American Airlines, Inc. v. ImHof, see supra, the court noted that application of the inevitable disclosure doctrine required consideration of:

(1) the strength of the showing that the former employee once knew – and still knows – information, that use of which on behalf of a competitor would damages the former employer, a factor that includes the issues whether the information in question is highly technical or specialized scientific data as opposed to perhaps less valuable and sensitive sales or general business management information, (2) the degree of similarity between the employee’s former and newly assumed duties, including whether the newly assumed duties are to be performed on behalf of a direct competitor of the former employer, … (3) the presence or absence of deliberate misappropriation, [and] … [(4)] anything else pertinent to a particular case.

620 F. Supp. 2d at 582. Considering these factors, the court found no irreparable harm and therefore denied American’s motion for a preliminary injunction in all respects. First, none of the documents retained by defendant included any substantive information that if remembered would be sufficient to create a clear showing of irreparable harm. Next, the court rejected, asnothing more than vague generalities, American’s assertion that the employee was exposed to an


abundance of “other confidential information” that would warrant an injunction, such as American’s strategies for contacts with certain major financial institutions including information regarding its program for tiering and tying with J.P. Morgan, American’s practices of “stealth pricing,” the expiration date of key corporate contracts, specific overseas markets targeted by American, and the details of American’s relationship with Credit Suisse. Even though the positions at his former company and new company were substantially similar, American failed to provide sufficiently detailed information about what the employee may have allegedly known and why it should be protected as confidential.

Other jurisdictions also have shown an increasing willingness to consider the inevitable misappropriation doctrine among the panoply of remedies available to the employer seeking to legitimately protect disclosure of trade secrets. See, e.g., Proctor & Gamble Co. v. Stoneham, 747 N.E.2d 268, 278-80 (Ohio Ct. App. 2000) (“An actual threat of harm exists when an employee possesses knowledge of an employer’s trade secrets and begins working in a position that causes him or her to compete directly with the former employer or the product line that the employee formerly supported.”); Cardinal Freight Carriers, Inc. v. J.B. Hunt Transp. Servs., Inc., 987 S.W.2d 642, 646-47 (Ark. 1999) (“evidence and findings are more than sufficient to show a threatened or inevitable misappropriation of [plaintiff’s] trade secrets”); Merck & Co. v. Lyon, 941 F. Supp. 1443, 1457-62 (M.D.N.C. 1996) (finding inevitable disclosure doctrine applicable in absence of noncompetition agreement); La Calhène, Inc. v. Spolyar, 938 F. Supp. 523, 531 (W.D. Wis. 1996) (“[Defendant] has such intimate knowledge of plaintiff’s business that he could not engage in a competing business, selling to the same customers, without inevitably relying on his knowledge of plaintiff’s trade secrets”); Neveux v. Webcraft Techs., Inc., 921 F. Supp. 1568, 1573 (E.D. Mich. 1996) (refusing to preliminarily enjoin enforcement of noncompetition agreement where “it would be virtually impossible for plaintiff to service [certain customer accounts] for [new employer] without using confidential information obtained as a result of his [prior] employment”); Diversified Fastening Sys., Inc. v. Rogge, 786 F. Supp. 1486, 1492-93 (N.D. Iowa 1991) (court enjoined employee from working for competitor of former employer because there was threatened disclosure of former employer’s product development and marketing trade secrets); Ackerman v. Kimball Int’l, Inc., 652 N.E.2d 507, 510-11 (Ind. 1995) (affirming injunction enjoining defendant from working for any competitor of his former employer for one year because threat of misappropriation arose due to defendant’s “pre-departure harvesting of [plaintiff’s] proprietary information” and, if misappropriation occurred, no remedy at law would be adequate).

b. California Has Rejected the Inevitable Misappropriation Doctrine.

A California state court recently addressed—and rejected—the inevitable disclosure doctrine for the first time in a published opinion. See Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443 (Cal. Ct. App. 2002). In Whyte, the court held that “this doctrine is contrary to California law and policy because it creates an after-the-fact covenant not to compete restricting employee mobility.” Id. at 1447. (For a discussion of the presumption under California law that


such covenants are invalid, see Section III.D., supra.) Surprisingly, the court did not rely primarily on California Business & Professions Code section 16600, a statute designed to foster employee mobility. The court found that the policy embodied therein might be offset by the conflicting policy in favor of protecting trade secrets. See Whyte, 101 Cal. App. 4th at 1462. Rather, “[t]he chief ill in the covenant not to compete imposed by the inevitable disclosure doctrine is its after-the-fact nature: The covenant is imposed after the employment contract is made and therefore alters the employment relationship without the employee’s consent.” Id. at 1462-63.

The holding in Whyte is consistent with the result in several federal cases that preceded it, in which the inevitable disclosure doctrine was likewise rejected under California law. SeeGlobespan, Inc. v. O’Neill, 151 F. Supp. 2d 1229, 1235-36 (C.D. Cal. 2001); Danjaq LLC v. Sony Corp., 50 U.S.P.Q.2d 1638, 1640 n.1 (C.D. Cal. 1999); Bayer Corp. v. Roche Molecular Sys., Inc., 72 F. Supp. 2d 1111, 1117-20 (N.D. Cal. 1999); Computer Sciences Corp. v. Computer Assocs. Int’l, Inc., Nos. CV 98-1374, 98-1440, 1999 WL 675446, *16 (C.D. Cal. Aug. 13, 1999); see also Surgidev Corp. v. Eye Tech., Inc., 648 F. Supp. 661, 679, 695 (D. Minn. 1986), aff’d, 828 F.2d 452 (8th Cir. 1987); Maxxim Med., Inc. v. Michelson, 51 F. Supp. 2d 773, 786 (S.D. Tex.), revd. without reported opn., 182 F.3d 915 (5th Cir. 1999); see also Meissner Filtration Prods., Inc. v. Harrington, No. B170707, 2004 WL 2189249 (Cal. Ct. App. Sept. 30, 2004) (refusing to apply inevitable disclosure doctrine). The holding in Whyte was also foretold by the California Supreme Court’s decision to depublish the opinion in Electro Optical Indus., Inc. v. White, 76 Cal. App. 4th 653 (Cal. Ct. App. 1999), in which a California appellate court had adopted the inevitable disclosure doctrine as “rooted in common sense.”

The decision in Whyte does not leave California employers without remedies when a key employee begins working for a competitor. Much of the evidence that normally would be used to invoke the inevitable disclosure doctrine may still be used to show “threatened” misappropriation, for which an injunction may be granted under California’s trade secret statute. See Cal. Civ. Code § 3426.2(a); see also Whyte, 101 Cal. App. 4th at 1458 (“We emphasize our decision is not a final adjudication of the issue of actual or threatened misappropriation . . . and we have serious concerns over evidence in the record . . . .”). In addition, the Whyte opinion could be read to mean that a contractual provision seeking to implement the inevitable disclosure doctrine might be enforceable.

A California employer hoping to protect itself against “threatened” misappropriation must take certain steps immediately after the employee announces an intention to leave. For example, it is crucial that certain questions be asked of the departing employee regarding his new job, his knowledge of the ex-employer’s trade secrets, and the like. A carefully planned exit interview and a quick but thorough factual investigation is vital to the ex-employer’s case. SeeSection V.B., infra.

California employers must be careful, however, to avoid bringing specious claims in subjective bad faith. In FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (Cal. Ct. App.


2009), two employees – Parrish and Fitzgibbons – decided to leave FLIR to start their own company mass producing similar devises as those produced by FLIR. The employees offered FLIR a noncontrolling interest in the new venture, but FLIR rejected and wished Parrish and Fitzgibbons success in their new endeavor. Parrish and Fitzgibbons entered into negotiations with a third party to acquire licensing, technology, and manufacturing facilities to start their business. Fearful that the new business would undermine FLIR's market, FLIR sued for injunctive relief and damages. Upon hearing of the lawsuit, the third party terminated business discussions with Parrish and Fitzgibbons. In August, 2006, Parrish and Fitzgibbons told FLIR that they were not going forward with their venture. FLIR dismissed the damage causes of action but proceeded to trial for a permanent injunction. The trial court found no misappropriation or threatened misappropriation of trade secrets. According to the court, it was uncontroverted that the employees received no funding for their company, did not start a new business, had no employees or customers, did not lease a facility or develop technology, and did not design, produce, sell, or offer to sell competing devises. Because there was no showing of actual damages, misappropriation, threatened misappropriation, or imminent harm, the court determined that FLIR filed an objectively specious action for an anticompetitive purpose. The court also found that FLIR brought the action in bad faith based on a theory of “inevitable disclosure,” a doctrine not recognized by California courts because it contravenes a strong public policy of employee mobility. Accordingly, the trial court granted the employees attorney's fees and costs. The court of appeal affirmed the award of attorney fees and costs, and awarded costs and attorney fees on appeal to the former employees.

3. Other Potential Remedies Available to the Employer

a. Common Law Duty of Loyalty and Law of Unfair Competition.

In many states, including California and New York, two common law doctrines also protect an employer from the misappropriation of confidential business information and trade secrets by an employee: the employee’s duty of loyalty owed to his employer and the law of unfair competition.

Every employee owes a duty of loyalty to his employer. E.g. Bancroft-Whitney Co. v. Glen, 64 Cal. 2d 327, 346 n.10 (Cal. 1966) (discussing Restatement (Second) of Agency § 393 cmt. e (1958)); Duane Jones Co. v. Burke, 117 N.E.2d 237 (N.Y. 1954); Fowler v. Varian Assocs., Inc., 196 Cal. App. 3d 34, 41 (Cal. Ct. App. 1987); Frederick Chusid & Co. v. Marshall Leeman & Co., 279 F. Supp. 913, 918 (S.D.N.Y. 1968). The duty of loyalty requires that an employee exercise the utmost good faith and undivided loyalty in the performance of his duties, and prohibits him from acting in any manner inconsistent with the employer’s interests. SeeMaritime Fish Prods., Inc. v. World-Wide Fish Prods., Inc., 474 N.Y.S.2d 281, 285 (N.Y. App. Div. 1984) (“It is a firmly established principle in the law of this State that [an employee] is prohibited from acting in any manner inconsistent with his agency or trust and is at all times


bound to exercise the utmost good faith and loyalty in the performance of his duties.”) (internal quotation omitted).

Furthermore, all confidential information an employee acquires by reason of employment is the property of the employer, and the employee holds it in trust for the employer. The employee cannot use the confidential information in violation of this trust. Thus, the employee may not divulge or use confidential business information or trade secrets, or solicit customers acquired by reason of his employment and exploit them for the benefit of a competitor. “[A]n employee’s use of an employer’s trade secrets or confidential customer information can be enjoined even in the absence of a restrictive covenant when such conduct violates a fiduciary duty owed by the former employee to his former employer.” Churchill Communications Corp. v. Demyanovich, 668 F. Supp. 207, 211 (S.D.N.Y. 1987) (citations omitted); see also 7th Sense v. Liu, 631 N.Y.S.2d 835, 836 (N.Y. App. Div. 1995) (enjoining defendant, plaintiffs’ former officer and director, from competing against plaintiffs because defendant’s resignation “did not relieve him of his fiduciary obligations or liability for his acts of misappropriation” and because the defendant “was not entitled to directly and unfairly compete with [plaintiffs] in bad faith for the very purpose of misappropriating the confidential information pertaining to plaintiffs’ business obtained during his employment”); Arnold’s Ice Cream Co. v. Carlson, 330 F. Supp. 1185, 1188 (E.D.N.Y. 1971) (former employee enjoined from competing against former employer where court found that such competition constituted breach of duty of loyalty); Frederick Chusid & Co. v. Marshall Leeman & Co., 326 F. Supp. 1043, 1060-61 (S.D.N.Y. 1971) (court issued injunction barring former employees from inducing current employees to break contracts with plaintiff because such defendants had breached their relationship of confidence with plaintiff); Tour & Study, Inc. v. Hepner, 432 N.Y.S.2d 148, 149 (N.Y. App. Div. 1980) (three-year injunction against solicitation of customers held to be proper despite absence of restrictive covenant).

The duty of loyalty also prohibits a current employee who plans to leave for new employment from soliciting his co-workers to join him before he departs. In GAB Business Servs., Inc. v. Lindsey & Newsom Claim Servs., Inc., 83 Cal. App. 4th 409 (Cal. Ct. App. 2000), a regional vice-president of GAB Business Services, Inc. received a job offer from Lindsey & Newsom Claim Services. Before leaving GAB, he solicited 17 lower-level employees to join him at Lindsey. The group left GAB en masse. The court held that any corporate officer who participates in management of the corporation and exercises discretionary authority owes a fiduciary duty to the employer. Id. at 419-20. The fiduciary duty ends only when the officer resigns or is removed from office. Id. at 421. Under these principles, the regional vice-president owed a fiduciary duty to GAB and could be found to have breached that duty by soliciting his co-workers to join Lindsey. Id. at 421-24.

The courts also have concluded that a former employee’s improper use of confidential business information or trade secrets constitutes unfair competition. See Comprehensive Community Dev. Corp. v. Lehach, 636 N.Y.S.2d 755, 756 (N.Y. App. Div. 1996) (employee misappropriated patient lists); Rao v. Verde, 635 N.Y.S.2d 660, 661 (N.Y. App. Div. 1995)


(prospective buyers continued to use confidential information from plaintiff’s patient list); Advanced Magnification Instruments, Ltd. v. Minuteman Optical Corp., 522 N.Y.S.2d 287, 290 (N.Y. App. Div. 1987) (employee’s illegal appropriation or copying of employer’s files or confidential information constitutes unfair competition); Allan Dampf, P.C. v. Bloom, 512 N.Y.S.2d 116, 117 (N.Y. App. Div. 1987) (unfair competition found where employee misappropriated and exploited customer lists). An unfair competition claim may also be brought against an employee’s new employer who knowingly reaps the benefits of the employee’s breach of his or her duty of loyalty to the former employer. See GAB Business Servs., Inc., 83 Cal. App. 4th at 424-25 (employer liable for unfair competition in connection with employee’s solicitation of co-workers while he was still working for former employer); Design Strategies, Inc. v. Davis, 384 F. Supp. 2d 649 (S.D.N.Y. 2005) (sales manager who diverted contract to competitor and then took job with competitor breached his duty of loyalty to his original employer and must pay back his salary for period in which he was working to divert contract).

Reliance on the common law of breach of the duty of loyalty and/or unfair competition alone does not adequately protect the employer since these doctrines do not prevent an ex-employee from competing directly with a former employer. In fact, courts have stated that “[i]t is fundamental that absent a [non-compete] covenant, ... an employee is free to compete with his or her former employer unless trade secrets are involved or fraudulent methods are employed.” Walter Karl, Inc. v. Wood, 528 N.Y.S.2d 94, 97 (N.Y. App. Div. 1988); see also Navigant Consulting, Inc. v. Wilkinson, 508 F.3d 277 (5th Cir. 2007) (court found liability where employees procured an office lease for employer while at the same time negotiating a secret deal to sell the business that would occupy the offices and planning to go to work for the buyer). Accordingly, the common law does not prevent an employee from seeking a job with a competing company or prohibit the employee from establishing a competing corporation. As long as an ex-employee does not use company time, facilities or proprietary secrets to build a competing business, the common law duties owed to the employer are not violated.

Because the common law only partially offers an employer protection from a former employee, contractual agreements provide the best (and most comprehensive) protection against an ex-employee’s customer solicitation and unauthorized use of confidential business information, trade secrets and inventions.

b. Tortious Interference with Contractual Relations

By its terms, the general rule allowing competitors to solicit an employer’s workforce may not apply when the employee being solicited is not an at-will employee, but instead is employed under an express employment contract for a term of years. A competitor’s solicitation of an employee with knowledge that he or she is employed under an express contract may give rise to liability for tortious interference with contractual relations or the tort of inducing breach of contract. See Dryden v. Tri-Valley Growers, 65 Cal. App. 3d 990, 995 (Cal. Ct. App. 1977); Moye v. Eure, 204 S.E.2d 221, 223 (N.C. Ct. App. 1974) (competition does not mean “privilege to induce an employee to breach his contract with plaintiff;” however, liability denied


because no contract existed); Ryan, Elliot and Co. v. Leggat, McCall & Werner, Inc., 396 N.E. 2d 1009 (Mass. App. Ct. 1979) (recruiting competitor’s employees known to be under a fixed term employment contract is actionable; liability denied because defendant did not know of term-nature of contract); Restatement of Torts (Second) § 768; Restatement of Agency (Second) § 393, comment e (“An employee is subject to liability if, before or after leaving the employment, he causes fellow employees to break their contracts with the employer”).

It is worth noting here, however, that absent proof of some independently wrongful act (such as the misappropriation of a trade secret or the breach of a non-solicit agreement), a competitor who solicits another company’s at-will employees cannot be liable in California for tortious interference of contract or prospective economic advantage. E.g., Reeves v. Hanlon, 33 Cal. 4th 1140, 1152-53 (Cal. 2004); Korea Supply Co., v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1158-59 (Cal. 2003). Other states may be more receptive to such claims. See, e.g., Reading Radio, Inc. v. Fink, 833 A.2d 199, 212 (Pa. Super. Ct. 2003); Town & Country House & Home Service, Inc. v. Newberry, 147 N.Y.S.2d 550 (N.Y. 1955).

c. Common Law Misappropriation

Employers may also find the tort of common law misappropriation an effective method to prevent the use or disclosure of their proprietary information. Unlike trade secret misappropriation, common law misappropriation does not require a plaintiff to prove either (1) secrecy or (2) independent economic value. Instead, “the elements of a claim for misappropriation under California law consist of the following: (a) the plaintiff invested substantial time, skill or money in developing its property; (b) the defendant appropriated and used the plaintiff’s property at little or no cost to the defendant; (c) the defendant’s appropriation and use of the plaintiff’s property was without the authorization or consent of the plaintiff; and (d) the plaintiff can establish that it has been injured by the defendant’s conduct.” United States Golf Ass’n v. Arroyo Software Corporation, 69 Cal. App. 4th 607, 618 (Cal. Ct. App. 1999) (citing Balboa Ins. Co. v. Trans Global Equities, 218 Cal. App. 3d 1327, 1342 (Cal. Ct. App. 1990)).

In United States Golf Association, the plaintiff United States Golf Association (“USGA”) provided software that calculated handicaps for golfers. USGA spent ten years and over $2 million dollars in developing a superior handicap system. In addition, they spent substantial time and money promoting and advertising their handicap formula and the USGA trademark. The defendant, Arroyo Software Corporation (“Arroyo”), began marketing a computer software program for golfers known as “Eagle Trak.” Instead of developing its own handicapping formula, Arroyo appropriated the USGA handicap system without USGA’s permission and incorporated the software into its own system. The court held that Arroyo was liable for common law misappropriation. The court’s analysis turned on whether USGA had been injured. The court held it had been because consumers were likely to believe the Eagle Trak handicap system was issuing USGA approved handicaps to them (causing damage to USGA’s reputation). USGA did not need to prove that the information was secret or derived independent economic


value by virtue of being secret. Moreover, the court did not require USGA and Arroyo to be direct competitors, as many unfair competition torts do.

d. Antitrust Law

Under certain circumstances, the federal antitrust laws may prohibit an employer from raiding a competitor’s employees. That is, an employer may have a claim under section 2 of the Sherman Act if a competitor with monopoly power acquires employees of the employer not for the purpose of using their talents but for the purpose of denying the employees’ talents to the employer. See Universal Analytics, Inc. v. MacNeal-Schwendler Corp., 914 F.2d 1256, 1258-59 (9th Cir. 1990). The utility to employers of a claim of predatory hiring may be limited because it only applies to competitors with monopoly power and because evidence of predatory intent, e.g., the competitor’s nonuse of the acquired employee, may be difficult to establish. Id.

4. Effect of Trade Secret Preemption

Employers seeking remedies for trade secret misappropriation may find relief under the “common law” unavailable in the future. In the last five years, several courts throughout the country have issued opinions finding that common law claims are preempted by the state’s governing trade secrets statute.

Courts have justified preempting claims by reasoning that the state’s version of the UTSA constitutes comprehensive legislation on the issue that therefore supplants the common law. See I.E. Assocs. v. Safeco Title Ins. Co., 39 Cal. 3d 281, 285 n.3 (Cal. 1985) (quoting Justus v. Atchison, 19 Cal. 3d 564, 574-75 (Cal. 1977)). “‘[G]eneral and comprehensive legislation, where course of conduct, parties, things affected, limitations and exceptions are minutely described, indicates a legislative intent that the statute should totally supersede and replace the common law dealing with the subject matter.’” Id. (quoting 2A Sutherland, Statutory Construction (Sands 4th ed. 1984) § 50.05, pp. 440-41).

In particular, several district courts applying California law have held that “all state law claims based on the same nucleus of facts as the trade secrets claim are preempted under California’s UTSA.” Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1034 (N.D. Cal. 2005) (vacated on other grounds); Airdefense, Inc. v. Airtight Networks, Inc., No. C 05-04615, 2006 U.S. Dist. LEXIS 55364, at * 11 (N.D. Cal. July 26, 2006) (claims based on the same factual allegations as the claim for misappropriation of trade secrets are preempted); Callaway Golf Co. v. Dunlop Slazenger Group Ams., Inc., 318 F. Supp. 2d 216, 219-20 (D. Del. 2004) (California UTSA preempts unjust enrichment, conversion, and negligence claims); Ernest Paper Prods. v. Mobil Chem. Co., No. 95-7918, 1997 U.S. Dist. LEXIS 21781, *21-28 (C.D. Cal. Dec. 2, 1997) (California UTSA preempts intentional interference with economic relations and unfair business practices claim under Business & Professions Code § 17200); Convolve, Inc. v. Compaq Computer Corp., No. 00 CV 5141, 2006 U.S. Dist. LEXIS 13848, at *22-3 (S.D.N.Y. Mar. 29, 2006) (“the California UTSA, like other UTSAs, preempts all claims based on


misappropriation of trade secrets that are not specifically exempted by its § 3426.7(b) savings clause.”)

District courts in other states have also issued opinions preempting common law claims for misuse of confidential information. See, e.g., Compuware Corp. v. IBM Corp., No. 02-CV-70906, 2003 WL 23212863, *8 (E.D. Mich. Dec. 19, 2003) (preempting tortious interference claim) (UTSA’s purpose was to “codify all the various common law remedies for theft of ideas” so that “plaintiffs who believe their ideas were pilfered may resort only to the UTSA”); BlissClearing Niagara, Inc. v. Midwest Brake Bond Co., 270 F. Supp. 2d 943, 946-47 (W.D. Mich. 2003); Auto Channel, Inc. v. Speedvision Network, LLC, 144 F. Supp. 2d 784, 789 (W.D. Ky.2001) (preempting unfair competition claim under Kentucky UTSA) (allowing a plaintiff to plead common law theories for information covered by its trade secret claim “would undermine the uniformity and clarity that motivated the creation and passage of the Uniform Act.”); Penalty Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284, 1297-98 (11th Cir. 2003) (preempting conversion claim under Georgia UTSA).

In analyzing whether claims are preempted, some courts have held that “the issue is not what label the plaintiff puts on their claims. Rather, the court is to look beyond the label and to the facts being asserted in support of the claims.” Convolve, No. 00 CV 5141, 2006 U.S. Dist. LEXIS 13848, at *23; Embarcadero Mun. Improvement Dist. v. County of Santa Barbara, 88 Cal. App. 4th 781, 793 (Cal. Ct. App. 2001) (rejecting party’s attempt to avoid statute of limitations by labeling a cause of action as one for a constructive trust). Courts have held that “all common law claims that are based on the same conduct which could support a UTSA cause of action” even if the plaintiff fails to bring, or characterize its claims as, a misappropriation of trade secrets cause of action. Convolve, No. 00 CV 5141, 2006 U.S. Dist. LEXIS 13848, at *25 (emphasis added). In other words, “if the operative facts are arguably cognizable under the [UTSA], any common law claim that might have been available on those facts in the past now no longer exists.” Id. (emphasis added); Bliss Clearing Niagara, 270 F. Supp. 2d at 948.

In AccuImage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941, 953 (N.D. Cal. 2003), the court reviewed the “eleven provisions of the UTSA” before holding that “[t]he comprehensive structure and breadth of the UTSA provides strong evidence of legislative intent to supersede claims for common law misappropriation after the enactment of the UTSA.” 260 F. Supp. 2d at 953. In doing so, the court held that a common law misappropriation claim was preempted. However, the AccuImage court did not limit its analysis to claims for common law trade secret misappropriation. Rather, according to that court, all “common law remedies based on misappropriation of trade secrets are superseded.” Id; see also, K.C. Multi Media v. Bank of America, 171 Cal. App. 4th 939 (Cal. Ct. App. 2009) (section 3426.7 implicitly preempts alternative civil remedies based on trade secret misappropriation).

In K.C. Multi Media v. Bank of America, the court addressed whether California's UTSA (“CUTSA”) should be interpreted narrowly or broadly in favor of preemption. According to appellants, two views exist on the preemption issue. The first, the broad view, holds that a cause


of action is preempted if it is based on the same set of facts as the trade secrets claim. See Callaway Golf v. Dunlop Slazenger Group Americas, supra, 318 F. Supp. 2d 216, 219-20 (D. Del. 2004); and Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1034 (N.D. Cal. 2005) (vacated on other grounds). The second view, the narrow interpretation of preemption followed in Colorado, Minnesota, and Wisconsin, holds that a common law cause of action can be based on the same nucleus of facts as the trade secrets claim, so long as it alleges new facts, different injuries and damages, or a different theory of liability. Powell Products, Inc. v. Marks, supra, 948 F. Supp. 1469 (D. Co. 1996); Micro Display Systems, Inc. v. Axtel, Inc., 699 F. Supp. 202 (D. Minn. 1988); Burbank Grease Services, LLC v. Sokolowski, 717 N.W.2d 781 (Wis. 2006). Appellants argued that California’s version does not contain broad preemption language, but rather lists exceptions to preemption. The court, however, disagreed and held that CUTSA’s “comprehensive structure and breadth” suggests a legislative intent to occupy the field. Depending on the particular facts pleaded, CUTSA can operate to preempt the specific common claims – breach of confidence, interference with contract, and unfair competition – asserted in this case that are based on the same nucleus of facts as a misappropriation of trade secrets claim.

Some courts have held that plaintiffs cannot avoid preemption by labeling the material allegedly misappropriated as merely “confidential” and not a trade secret. They hold that “the UTSA’s preemption provision has generally been interpreted to abolish all free-standing alternative causes of action for theft or misuse of confidential, proprietary, or otherwise secret information falling short of trade secret status.” Hauck Manufacturing Co. v. Astec Indus., Inc., 375 F. Supp. 2d 649, 655 (E.D. Tenn. 2004); Bliss Clearing Niagara, 270 F. Supp. 2d at 948-949 (“the disputed status of information as a trade secret does not preclude a court from determining whether a claim or claims are displaced by the [UTSA].”); Thomas & Betts Corp. v. Panduit Corp., 108 F. Supp. 2d 968, 972-973 (N.D. Ill. 2000) (holding that breach of fiduciary duty claim was preempted by the UTSA where the plaintiff simply alleged that the defendant “took, disclosed and used confidential information” as opposed to trade secrets); Learning Curve Toys, L.P. v. PlayWood Toys, Inc., No. 94 C 6884, 1999 U.S. Dist LEXIS 11262, at *3 (N.D. Ill. July 20, 1999) (holding that a claim may be displaced by the UTSA even if the information at issue does not constitute a trade secret); Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1265 (7th Cir. 1992) (“[UTSA] has abolished all common law theories of misuse of [secret] information. Unless defendants misappropriated a trade secret, they did no legal wrong.”); BioCore, Inc. v. Khosrowshahi, 96 F. Supp. 2d 1221, 1238 (D. Kan. 2000) (“Even if confidential information can be something less than a trade secret, it must at least be a trade secret to give its owner a property right in it”).

5. Criminal Statutes.

a. Federal Statutes.

Recognizing that domestic and international theft of intellectual property is on the rise and that such information must be protected to ensure continued investment in research and development, Congress enacted the Economic Espionage Act of 1996. See 18 U.S.C. §§ 1831 et


seq. The Act makes the theft of trade secrets a federal crime and provides severe penalties for such activity.

Section 1832 targets domestic trade secret theft and prohibits such acts as taking, copying, downloading, uploading, and possessing, without authorization, a known stolen trade secret that is related to a product in interstate or foreign commerce. Trade secret theft is punishable by a fine and up to ten years in prison. On the other hand, § 1831 prohibits the same acts if they are done on behalf of a foreign government or agent (i.e. economic espionage). Economic espionage may result in up to a $500,000 fine and 15 years in prison.

Employers are often concerned that the confidentiality of their trade secrets will be compromised in the course of a criminal investigation or prosecution. Fortunately, there are safeguards established to protect against the disclosure of a victim company’s trade secrets in criminal proceedings. The Attorney General can seek an order or take other necessary and appropriate action to preserve the confidentiality of the trade secrets. 18 U.S.C. § 1835. The Attorney General may also file a civil action to obtain appropriate injunctive relief against any violation of the Act. 18 U.S.C. § 1836.

Federal prosecutors have applied the Act in several instances, including cases involving PPG Industries, Inc. (two individuals pleaded guilty to attempting to sell proprietary information to a rival), Bristol-Myers Squibb Co. (involving alleged theft of trade secrets relating to a new shaving system), and Avery Dennison Corp. (involving alleged theft of trade secrets relating to self-stick postage stamps).

The Computer Fraud and Abuse Act, 18 U.S.C. § 1030, is another source of criminal penalties for certain types of trade secret misappropriation. It provides that “[w]hoever . . . intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains . . . information from any protected computer if the conduct involved an interstate or foreign communication . . . shall be punished” as provided in the statute. 18 U.S.C. § 1030(a)(2)(C). It was held in one case that the statute applied to the misappropriation of trade secrets by an employee who used his work computer to obtain his employer’s trade secrets and email them to a future employer. See Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc., 119 F. Supp. 2d 1121 (W.D. Wash. 2000). Recently, another court has clarified that a computer fraud claim must show an unauthorized procurement or alteration of information, not merely misuse or misappropriation. Brett Senior & Assocs. v. Fitzgerald, No. 06-1412, 2007 U.S. Dist. LEXIS 50833 (D. Pa. July 13, 2007) (because employer allowed employee full access to computers until he left the employer, the employee neither accessed the computer system without authorization nor exceeded his authorized access). The statute also creates a civil remedy. See Section IV.B.1.a, supra.

Announcements about recent prosecutions and other useful information about computer-related crime can be found at www.cybercrime.gov.

www.cybercrime.gov.


b. California Statutes.

In California, many district attorneys’ offices are focusing their attention on the prosecution of high tech crimes, which include trade secret thefts. The unauthorized use or disclosure of an employer’s trade secrets by either a current or former employee can be prosecuted under such statutes as California Penal Code sections 499c and 502(c)(2).

Section 499c applies to general acts of trade secret misappropriation. The statute makes it a crime to steal, use, or copy a trade secret without the authorization of the owner. Cal. Pen. Code § 499c(b). Violation of the statute is punishable by up to a $5,000 fine and time in either state prison or county jail. Id. § 499c(c). Indeed, a jail sentence is mandatory if the value of the stolen trade secrets exceeds a specified amount. See Cal. Pen. Code § 1203.044; People v. Farell, 28 Cal. 4th 381 (Cal. 2002). Section 499c was amended in 1996 to make it clear that both technical and non-technical trade secrets are protected by the statute.

Section 502 is targeted toward what are commonly referred to as Computer Crimes. Today, many of an employer’s trade secrets are maintained in computer data systems. The legislative intent in enacting section 502 was to expand the degree of protection afforded to businesses against persons who tamper with, interfere with, or gain unauthorized access to companies’ computer data and computer systems. See Cal. Pen. Code § 502(a). A current or former employee who knowingly accesses and without permission takes, copies or makes use of any data from a computer, computer system or computer network could possibly be in violation of the statute. See id. § 502(c)(2). However, there is no criminal violation of this section if a current employee is acting within the scope of his or her lawful employment. See id. § 502(h)(1).

As in federal prosecutions, California recognizes the need to protect the confidentiality of trade secrets in state prosecutions. See Cal. Evid. Code §§ 1060 et seq. To obtain such protection, the trade secret owner may file a motion for a protective order or the District Attorney may file such a motion on the owner’s behalf. See id. § 1061(b)(2). Further, the trade secret owner or the District Attorney on behalf of the owner may file a motion to exclude the public from any portion of a criminal proceeding in which the trade secret would otherwise be disclosed to the public. See id. § 1062(a). The moving party must demonstrate that there is a substantial probability that disclosure of the trade secret would cause serious harm, and the court must find that there is no overriding public interest in an open proceeding. Id. Motions to exclude the public are very difficult to obtain and are rarely granted. Under California Evidence Code section 1063, the District Attorney can request the sealing of articles protected by a protective order entered pursuant to sections 1060 or 1061.

Although district attorneys’ offices recognize the need to prosecute crimes such as trade secret thefts, most offices have limited financial and technical resources to pursue these cases. To overcome these problems, it is not uncommon for employers who are victims of trade secret thefts to want to offer their resources and expertise to prosecutors. The California Supreme


Court has recognized that victims of commercial and corporate crimes often assist prosecutions by collecting and organizing necessary information from internal sources. See People v. Eubanks, 14 Cal. 4th 580, 598 (Cal. 1996). However, such efforts should not include financial or expert assistance. If an employer provides technical expertise or financial assistance or otherwise becomes intricately involved in the investigation and prosecution of a former employee for trade secret theft, a court could find that the district attorney’s office that accepted this assistance has a conflict of interest. The district attorney’s office may then be recused from the case. A recusal would cause a delay and would likely have an impact on the overall prosecution of the case. The longer a trade secret prosecution is delayed, the harder it is to ensure that confidentiality is maintained throughout the case.

Finally, the employer should take into consideration that proceeding in the criminal arena for trade secret theft involves a complete loss of control over the matter. All decisions on how the case is to be handled will be strictly in the hands of the government prosecutors, the employee/defendant, and the court.

The first major test of California’s trade secrets theft statutes ended successfully for the prosecution in May 2001. The defendants—Avant Corp., its CEO, and six other individuals—were charged under Section 499c with stealing computer code from Cadence Design Systems, Inc., the individuals’ former employer. After years of legal maneuvering, the defendants entered no-contest pleas after jury selection had started. The court ordered them to pay a total of $35 million in fines and $195 million in restitution. Four of the individuals were given one- to two-year jail sentences and the other two were placed on probation. A related civil case is still pending.

c. New York Statutes.

Unlike California, New York does not have a penal statute that specifically prohibits the misappropriation of trade secrets. However, New York does provide some criminal sanction through the vehicle of property laws. For example, in New York, a person commits larceny when he or she wrongfully takes property from an owner with the intent to deprive the owner of the same or to appropriate it to himself or herself or a third person. N.Y. Pen. Law § 155.02.1. For purposes of trade secrets, the applicable statutes are sections 155.00 and 156.30 of the New York Penal Law.

New York’s trade secret protection is substantially limited in scope, in that sections 155.00 and 156.30 only protect scientific and technical information. Specifically, section 155.00 prohibits the theft of “secret scientific material.” The statute defines “secret scientific material” to encompass any document, device or substance that constitutes a scientific or technical process, invention or formula, which is not intended to be available to anyone other than the person rightfully in possession or an authorized third party. Id. § 155.00.6. Theft of secret scientific material is a Class E felony punishable by either up to a $5,000 fine or double the profit of the crime, and a maximum one-year sentence in prison. Id. § 155.30.


Although the language of section 155.00 is somewhat more expansive than covering purely scientific material, it does not protect purely business information. Thus, the statute doesnot protect the majority of business, financial, economic, marketing, or product information. The statute is largely directed toward the needs of companies with products focusing on scientific information, such as biotech companies.

Section 156.30 of the New York Penal Law is the analogue of California’s section 502, specifically targeted to computer crimes. Under this provision, it is a Class E felony to unlawfully duplicate computer-related material, i.e., computer data or programs, if the economic value appropriated is greater than $2,500. Id. § 156.30.1. Both sections 155.00 and 156.30 solely prohibit the theft and appropriation of tangible physical substances. Consequently, while New York does proscribe the unauthorized duplication or reproduction of a trade secret, it does so only to the extent that the reproduction is embodied in a tangible form.

6. Racketeer Influenced Corrupt Organizations Act.

In a case that attracted much media attention, General Motors Corporation commenced an action against Jose Ignacio Lopez de Arriortua (and others) alleging that Lopez (a former General Motors executive) had had secret communications with representatives of Volkswagen AG in which he agreed to join Volkswagen and bring with him confidential business plans and trade secret information. See General Motors Corp. v. Lopez de Arriortua, 948 F. Supp. 670 (E.D. Mich. 1996). General Motors claimed that, among other things, Lopez violated the Racketeer Influenced Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(c) & 1964(c), based on allegations of wire fraud, interstate and foreign travel to aid racketeering, and transportation and receipt of stolen goods. In denying the defendants’ motion to dismiss the RICO counts, the General Motors court held that General Motors’ complaint alleged a series of predicate acts (including a telephone call inducing Lopez to steal General Motors’ trade secrets, the defendants’ receipt and use of stolen documents and trade secrets, and various steps to cover up the receipt of the stolen documents) which, if proven, would amount to a “pattern of racketeering” in violation of RICO. General Motors, 948 F. Supp. at 678-79. The case subsequently settled for $100 million.

V. A PRIMER ON STRATEGY: BEFORE AND AFTER AN EMPLOYEE LEAVES

A. Drafting: Establishing and Maintaining Secrecy

1. Drafting Issues

As discussed, supra, an employer cannot unilaterally define by contract what information qualifies as a trade secret. See Thompson, 113 Cal. App. 4th at 1430 (“Labeling information as a trade secret or as confidential information does not conclusively establish that the information fits this description.”) (citing Morlife, 56 Cal. App. 4th at 1522 (Cal. Ct. App. 1997)). Similarly, an employer cannot prevent the employee from using or disclosing non-trade secret information simply by defining the protected information broadly in the non-disclosure agreement. See, e.g.,


American Paper, 183 Cal. App. 3d at 1325 (“An agreement between employer and employee defining a trade secret may not be decisive in determining whether the court will so regard it”).

Nonetheless, for several reasons, the contract should at least attempt to define the trade secrets, and should provide some detail in doing so (but not so much detail that certain trade secrets not listed are deemed not to be protected by the agreement). First, putting employees (and others) on notice as to what information the employer considers a trade secret is an important step in the process of establishing a trade secret. Second, courts are disinclined to enforce agreements requiring employees to keep confidential vaguely defined information the company later decides it would like to protect. See generally Motorola, Inc. v. Fairchild Camera & Instrument Corp., 366 F. Supp. 1173, 1183 (D. Ariz. 1973) (applying California law and refusing to enforce agreements in which employees agreed to “maintain strictly confidential during [and for two years after] my employment all . . . information of the company . . . which is of a confidential or secret nature”).

However the protected information is defined in the agreement, it should be coupled with an acknowledgment by the employee that the information is owned by the employer, is secret, is the subject of reasonable efforts by the employer to keep it secret, and has value because of its secrecy. (These are, in fact, the standards for establishing, under the Uniform Trade Secrets Act, that the information is a trade secret.)

The contract should, of course, provide that the employee will not use or disclose the information during or after employment, and should expressly provide that the employee’s duties extend until the information becomes generally known through proper means, if not indefinitely. It should also require the return of all notebooks, documents and related materials upon the termination of employment.

a. Require Employees (And Third Parties Who Are Given Access) To Sign Confidentiality Agreements

Confidentiality agreements are perhaps the most important and easiest way to establish that the employer has undertaken “reasonable efforts” with respect to its trade secrets. See, e.g., MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993), cert. denied, 510 U.S. 1033 (1994) (requiring employees to sign confidentiality agreements is enough to demonstrate “reasonable steps” to preserve secrecy). These agreements also serve the goal of notifying employees of their obligations, so that inadvertent violations do not occur.

As discussed above, in addition to the typical non-disclosure and non-use provisions, it is useful to have the employee acknowledge in the agreement that specified information is in fact confidential, valuable and protected as the trade secret of the employer. It is also useful to have the employee agree to return all documents upon termination of employment.


b. Draft Separate Non-Compete, Non-Solicitation and Non-Disclosure Provisions and Include a Severability Clause

Because non-competition clauses are at risk of being invalidated, employment agreements should contain separate non-compete, non-solicitation and non-disclosure provisions. It is also advisable to include a severability clause, which provides that if a provision of the contract is held invalid, it may be severed so that the remaining provisions of the contract may be enforced. Similarly, it may be advisable to include a reformation provision, which allows a court to reform a contract to rewrite offensive restrictions so that they are enforceable. As discussed below, different states treat severability and reformation clauses differently. Accordingly, an employer should determine the law of the state in which it is doing business prior to drafting its employment agreement.

Courts have adopted three general approaches to deal with offensive non-competition provisions. Under the first approach, the court will void the entire offensive contract provision even if the contract contains a severability clause. See, e.g., D’Sa v. Playhut, Inc., 85 Cal. App. 4th 927, 934 (Cal. Ct. App. 2000) (despite severability clause, court refused to preserve non-offensive confidentiality provisions which also contained unlawful non-competition provisions); Latona v. Aetna United States Healthcare, Inc., 82 F. Supp. 2d 1089, 1097-1098 (C.D. Cal. 1999) (court upheld wrongful termination clause when defendant refused to sign employment contract with unenforceable non-competition clause, stating “that the unenforceability of the Agreement cannot be saved by the severability clause”).

The second approach is known as the “blue pencil” rule, whereby the court will “blue pencil” or strike offensive portions of a non-compete (i.e., overly broad temporal or geographic limitations) and enforce the remainder of the covenant. Amex Distrib. Co. v. Mascari, 150 Ariz. 510, 515 (Ariz. Ct. App. 1986) (“Arizona will follow the blue-pencil rule adopted by the Restatement of Contracts”); Rinks v. Courier Dispatch Group, Inc., No. 1:01-CV-0678, 2001 U.S. Dist. LEXIS 4728 (D. Ga. Apr. 11, 2001) (“[U]nder Georgia law, courts may ‘blue pencil’ restrictive covenants to remove offending clauses in a ‘sale of business’ context”); Hamrick v. Kelley, 260 Ga. 307, 308 (Ga. 1990) (Georgia courts will not, however, use a blue pencil to correct vagueness in geographic area). For states applying the blue pencil rule, a severability clause may be advisable. If the offensive covenant cannot be severed, the entire contract may be invalidated. Zajicek v. Koolvent Metal Awning Corp., 283 F.2d 127, 133 (9th Cir. 1960) (“If this clause be inseverable, the contract would have been void in its inception.”)

Under the third approach, which appears to be the trend that most states are following, courts are willing to reform a non-competition clause so that it is enforceable by inserting reasonable time or geographic restrictions. See Alexander & Alexander, Inc. v. Frank B. Hall & Co., No. 88-A-1621, 1990 U.S. Dist. LEXIS 21024 (D. Colo. Jan. 31, 1990) (“even where a non-competition agreement does not contain a reasonable territorial restriction, the court has the authority to reform it under Colorado law”); Raimonde v. Van Vlerah, 325 N.E.2d 544, 546-547 (Ohio 1975) (collecting authorities for “abandon[ing] the ‘blue pencil’ test in favor of a rule of


“reasonableness,” which permits courts” to modify a contract in light of the evidence); see also Central Adjustment Bureau, Inc. v. Ingram, 678 S.W.2d 28, 36-37 (Tenn. 1984) (same).

Employers should not run the risk of having an entire contract severed when portions of it would otherwise be enforceable. When such provisions are intertwined and no severability clause exists, an employer is more likely to find its entire contract invalidated if it finds itself litigating in a state that regularly invalidates non-competition clauses.

Further, when a departing employee is required to sign a separation agreement upon conclusion of employment, care should be used in drafting that agreement in order to avoid invalidating or superseding prior non-compete or confidentiality agreements. Avery Dennison Corp. v. Naimo, No. 06 C 3390, 2006 U.S. Dist. LEXIS 84204 (D. Ill. Nov. 16, 2006) (manufacturer lost its right to enforce a noncompetition agreement against a former sales director when the sales director signed a separation agreement referring to a “full and final” settlement of all employment matters).

c. Alert Employees (And Third Parties With Access) To Existence of Trade Secrets And Remind Them of Confidential Nature

It is extremely important that the employees or third parties who are given access to trade secrets understand that this information is to be treated confidentially. See, e.g., Courtesy, 222 Cal. App. 3d at 1288 (customer list held trade secret where employees were told of its confidential and proprietary nature when list was revealed to them). This can be accomplished through personnel manuals, use of a “confidential” stamp on key documents, reminder memoranda, posted warnings and similar methods. Obviously, before the trade secrets can be highlighted, they need to be identified by the company itself. A periodic trade secret audit is a very useful exercise in this regard.

d. Limit Access to Only Those Employees (And Third Parties) Who “Need to Know” It To Perform Their Jobs

Some courts view “need to know” access as an extremely important component of “reasonable efforts.” See Courtesy, supra. This can be accomplished through many avenues, including the use of security guards, key-lock entries, computer passwords and locked file drawers.

e. Avoid Public Disclosure of Significant Portion of Information Through Display, Publication, Advertising and the Like

The sine qua non of trade secret status is, of course, secrecy. See, e.g., Legislative Committee Comment to UTSA; Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462 (9th Cir. 1990). As a result, employers must guard against disclosure of their trade secrets.


B. What To Do When An Employee Leaves

This chapter has touched upon the procedures an employer should follow – during the period in which an individual is employed by it – to minimize the chances of harm after the employee leaves. Once an employee quits or is asked to leave a company, however, there is more that can and should be done – especially if the employee may be hired by a competitor.

As soon as an employee decides to quit, or the decision is made to lay off a high-risk employee, an employer should take affirmative steps to discourage any misuse or disclosure of confidential information by the exiting employee, and to investigate fully the intentions of the departing employee with respect to his or her potential new employer. To accomplish both of these goals, the employer should routinely establish limits on computer and data access for departing employees, conduct exit interviews, and send follow-up letters when high risk employees leave. In addition, once the employee begins the new employment, the ex-employer should monitor the activities or developments by the new employer in order to detect any misappropriation as soon as possible.

1. Conduct and Document an Exit Interview

On or before the employee’s last day on the job, the employer should arrange an exit interview with the employee. The exit interview presents a perfect opportunity to remind the employee of his or her duty of confidentiality regarding trade secrets, to answer any questions the employee may have concerning that duty, and to obtain the employee’s agreement to continue to honor the duty. It also offers an employer an appropriate opportunity to recover all confidential documents in the employee’s possession, as well as to interrogate the employee about any confidential information which may still be stored in the employee’s personal computer (in the office and/or at home) or on disks in the employee’s possession. To accomplish this specific goal, the interviewer should ask that all company documents, both hard copy and electronic, be returned. Finally, the exit interview assists the employer in assessing whether the employee’s potential new employment position will pose threats to the company’s trade secrets.

The exit interview should be conducted by at least one supervisor of the exiting employee who is familiar with the nature and scope of the employee’s duties and responsibilities for the company. It may also include a member of the company’s legal staff or outside counsel. Whoever attends, the interviewers should come prepared with a comprehensive file on the exiting employee (including a list of the types of trade secret information that the employee had had access to as a result of his or her job duties) to ensure that the meeting is comprehensive and productive. At least one of the attendees should be an individual who could testify effectively, if necessary.

The exit interview should not be adversarial. If the interviewers are too aggressive, the employee may provide less information and adopt a combative attitude, and the interview may fail to achieve anything productive.


Finally, the employer should always document the exit interview. This documentation should be in the form of a memorandum, or at least a detailed outline or checklist, describing the exiting employee’s admissions regarding knowledge of specific trade secrets gained from his employment with the company, regarding his or her new employment duties, roles and responsibilities, and regarding his or her duties to the ex-employer. In addition, the document should provide for an acknowledgement by the employee of both his or her duties and obligations to maintain the secrecy of the company’s confidential information and that all company documents, both hard copy and electronic, have been returned. Ideally, the employee should sign the finished product for verification.

a. Discovering Sufficient Information About the New Employer

During the exit interview, the employer should try to learn as much as possible about the employee’s potential new employment. This could be extremely important information if the employer ultimately seeks an injunction to protect its trade secrets. In addition to conducting independent research on the new employer, the former employer should ask the employee for any letters or other documents from the new employer detailing the employee’s new job responsibilities. It would be extremely helpful for the employer to learn, at a minimum (1) where the employee will be working; (2) what positions he or she will hold; (3) the general nature of the projects he or she will be working on, as well as the functions he or she will be performing; (4) the compensation and bonus incentives offered; and (5) other relevant information affecting the employee’s departure.

b. Ensure the Continuous Safety of Confidential Information

An employer should use the exit interview as an opportunity to take affirmative steps to ensure the safety of its confidential information. The employer should remind the employee of his or her duty of confidentiality regarding trade secrets and offer to answer any questions the employee may have concerning that duty. Moreover, the employer should ask that the employee return all company documents, both hard copy and electronic, and get confirmation that the employee has done so. This confirmation will be extremely useful later, if it is determined that the employee has, to the contrary retained company documents and information. In that event, the employee will be hard-pressed to claim this was merely an oversight.

c. Determine Whether the Departing Employee Has Ill Will Or a Motive to Compete Unfairly

If conducted non-adversarially, the exit interview presents an excellent opportunity to determine whether the departing employee is motivated to hurt the company. It is also an opportunity for the employee to “vent” and for the employer to understand and address any issues the departing employee raises. Doing so may significantly reduce the threat of misappropriation. It may also provide important evidence if an injunction is later sought.


2. Search the Departing Employee’s Workspace and Review the Employee’s Computer

To ensure that an exiting employee has returned all of a company’s confidential information upon his/her departure, the company may want co-workers familiar with the employee’s filing and record-keeping systems, work projects and responsibilities to search the employee’s workspace and computer files (looking especially at the employee’s recently deleted computer files, recent downloads, etc.) upon departure. The company should also speak to the departing employees’ co-workers – they may have seen or heard suspicious things in the last weeks of the employee’s employment.

If the company has suspicions about the employee, it may decide to check the employee’s e-mails, voicemails and phone records. Because privacy concerns may be implicated by a review of these materials, the company should first consult its own policies to ensure that such reviews are permitted.

3. If the Risk of Misappropriation is Present, Conduct a Forensic Analysis of the Employee’s Computer

a. What Computer Forensic Analysis May Show

Employee-assigned computers 6 often contain a wealth of information about the employees who use or used them. They may contain personal email communications with a competitor or others showing that the employee began working for the competitor before leaving the company. They may show that the employee transmitted confidential company documents to a competitor or to a personal email account before leaving. They may contain evidence that the employee had planned to work on the same projects for a competitor, and took steps to sabotage the company’s work on those projects before leaving. They will almost certainly shed some light on what the employee was up to before leaving the company, or show that the employee took steps to delete files from this computer evidence before leaving.

b. When To Perform Computer Forensic Analysis

If the company has decided to examine forensically a departing employee’s computer, it is best to create a forensic image or copy of the computer as soon as possible. This will significantly reduce the risk of accidental or intentional loss of electronic evidence from the computer (as discussed in greater detail below).

6 This discussion focuses on an individual employee’s workstation computer. A company’s extended network, databases, email system, and other electronic systems the employee has access to may also contain valuable information, and similar considerations apply when considering whether and when to investigate those sources of information.


Sometimes employees take steps to destroy electronic evidence on their computers just before returning them. A pre-departure forensic preservation of the employee’s computer may contain all of the later-deleted files, showing precisely what the employee tried to delete.7 It is possible to conduct a forensic preservation with little or no disruption to an existing employee who is about to depart. An early examination may also provide valuable information for the company to use during the employee’s exit interview. If, for example, the computer shows that the employee downloaded or transmitted confidential documents outside the company during the employee’s last week of work, the exit interview might spend time discussing the confidentiality of those types of documents and seek confirmation that all such documents have been returned. Early information will better equip the company to respond to problems as they are occurring, expose misrepresentations, and obtain valuable evidence if an injunction is later sought.

Even if an early forensic image was previously made, the employee’s computer should be forensically preserved after it is returned and before it is used by another. Sometimes employees download or transmit confidential documents or information outside the company just before returning their computers – i.e. before the employee loses access to the company’s electronic documents and databases. It is important to capture these final actions on the computer.

c. Things To Remember When Performing Computer ForensicAnalysis

(1) Electronic evidence can be easily and inadvertently lost through computer use

To preserve the volatile electronic evidence residing on a computer, the computer forensic analysis process starts by creating a forensic image of the computer. Every time a computer is used there is at least a risk that data on the computer will be inadvertently altered or destroyed. If someone boots the computer up after the departed employee returns it – but before it has been forensically preserved – deleted files of interest may be overwritten and rendered unrecoverable. Creating a forensic image of the computer preserves all evidence on the computer at the time the image was made.

(2) Forensic images are special copies that preserve electronic evidence

A forensic image of a computer is a sector by sector copy of the entire electronic storage media (computer hard drive) created without altering the original evidence. Often IT or HR personnel make copies that they mistakenly believe to be complete forensic copies. Without appropriate care, the processes used to make these copies may cause additional loss of evidence.

7 A computer forensic recovery, after the deletions have occurred, will likely recover some but not all of those files. The employee deletion process will effectively overwrite previously deleted files that may have otherwise been recoverable.


Counsel or a computer forensic expert should be able to advise you on how to create a proper forensic image.

Once a forensic image is made, it is possible to recover deleted files, search fragments of deleted files, and perform additional analysis with no risk8 of losing the electronic evidence. Once the image is secure, the original hard drive could (in theory) be used freely without risk of losing the original data stored on the back-up image. It is safer, however, to leave the original computer hard drive untouched until you determine that no useful evidence resides on it or that the evidence will not be needed in court.

(3) Don’t assume the “wiped” computer no longer contains useful evidence

Sometimes an employee’s computer will be “wiped” by the Company’s IT personnel and reassigned to a new user at the company, as part of the employee’s termination process. The term “wipe” may mean different things, but when used in a typical business setting it does not usually mean that the computer no longer contains recoverable data. In this situation, or when a computer has been put back into use after the employee departed, do not assume that it is too late to obtain evidence using computer forensic analysis. Though it may be more difficult and costly, sometimes the results are well worth the effort. There is a chance of recovering anything that showed on the computer screen at one time – even if it was years ago and the computer has been in use since that time.

(4) Complete forensic analysis requires input from the company and investigators

A complete forensic analysis of a computer image requires input from the company and the investigating team. Disk storage capacity has increased rapidly in recent years, and computers today often contain huge amounts of information. The computer forensic analysis process involves sorting the relevant parts out from this mass of data, and attempting to make those parts understandable and user friendly. It is sometimes useful to compare what is known or suspected about an employee’s computer use or behavior against any electronic tracks left on the employee’s computer. An employer might want to provide information from employee files, witness interviews, timelines, summaries of suspected or possibly wrongful behavior, and/or examples of documents that may have been taken. Any information that helps target or narrow the analysis can be useful. Input from the company and investigators may be useful during forensic sorting processes such as keyword searching, database / internet history review, file use history review, software use analysis, event log review, and even deletion reconstruction /

8 It is worth noting that the process of creating a forensic image carries with it some risk of drive failure or data loss, as the hard drive may have to be removed from the computer box for imaging. This said, it is best to create a forensic image or use other forensically secure methods if the computer information might be relevant to litigation.


analysis. The more information the forensic examiner has, the more relevant his or her results are likely to be.

That said, a company should bear in mind that legal privilege may be waived regarding the input provided to a testifying forensics expert. Typically counsel is employed to oversee suspicious departed employee investigations and the associated computer forensic analyses. If the computer forensic expert later testifies, legal privilege may be waived in whole or part regarding the materials provided to the expert as part of that investigation.

(5) Ask questions about the forensic analysis process and results

Sometimes important information on a computer is overlooked because nobody asked follow-up questions about the initial forensic analysis. The computer forensics expert must merge his or her own vast software knowledge with the specific case facts and large repositories of information found on every computer. With so much information and so many possible variations of hardware, software and facts involved, it is unlikely that any forensics expert will know or remember everything required to cull out and interpret all of the useful information from every computer. The forensic analysis process tends to yield the best results when there is open communication, common sense questioning, and iterative review. Don’t be afraid to ask questions, even if you don’t think you know very much about computers.

Some of the lessons above are illustrated by a case we had involving computer forensics on a drive that a departed employee had wiped. The forensic expert initially reported that the computer had been wiped clean in such a manner that essentially nothing remained other than the reinstalled Operating System. The overall report was that the computer was “pretty clean.” Our team asked when this reinstallation had occurred, and we were informed that the OS installation files were created almost a year ago (according to the system clock). This was odd, since we believed the computer had been used during the past year based on other case information.

We probed further, and reviewed the image ourselves. It turned out that on the “second day” of the OS reinstallation, the user had accessed an Internet page. Some advertisement graphics from that page for episodes of the “Today Show” were still on the computer. The computer system clock seemed to tell us that these advertisements had been aired over a year ago, but we were able to determine (and later prove) that the Today Show episodes on which they appeared had in fact aired much later–just a few weeks before our examination. In addition, the OS reinstallation (according to the system clock) was begun exactly one year before it finished on the second day of the OS reinstallation – which, if correct, would have meant that (1) the computer had not been used during the employee’s time with the company (when we knew it had been used), and (2) the OS reinstallation took an entire year to complete. The truth that emerged, however, was that the defendant computer–user had intentionally and improperly rolled back the system clock a year to hide the fact that he had wiped the computer, and destroyed the electronic evidence, after we had demanded that the computer was not to be


touched and the evidence was to be preserved. This ultimately was a critical and very powerful piece of evidence of spoliation in our case.

4. Send Follow-Up Letters

Once an employee has left a company, and certainly before he/she has started his or her new job, the company may want to send follow-up letters to both the former employee and the new employer. The letters should remind the former employee, once again, of his or her duty not to disclose or misappropriate any of the former employer’s confidential information, and give notice to the new employer of the employee’s duty of confidentiality. The former employer should get concrete documentation of the delivery of follow-up letters by using registered mail.

A follow-up letter to the new employer of a former employee should include: (1) a statement that the new employee has knowledge of certain, specific trade secrets; (2) an explanation of the continuing obligation that the employee has to maintain confidentiality; (3) an affirmative statement of the former employer’s rights to the trade secret information; and (4) a statement that the previous employer intends to vigorously pursue its legal rights with respect to the trade secrets.

All letters, to be effective, should not merely make threats. Instead, they should seek answers to important questions and ask for confirmation that the obligations are being met. An effective letter sets the stage for a temporary restraining order or preliminary injunction, by putting the burden on the departing employee to demonstrate his or her good faith.

All letters to the new employer must be drafted with caution. A company must make sure that follow-up letters do not threaten litigation based merely on the fact of changed employment. Nor should the letters contain any derogatory statements which may give rise to a defamation claim by the former employee. See Herzog v. A Company, 138 Cal. App. 3d 656 (Cal. Ct. App. 1982).

5. Determine The Applicability of Restrictive Covenants and Insist on Compliance

If the employer determines that the employee’s new job responsibilities will entail a violation of an enforceable restrictive covenant, it should inform the employee at once of its intention to enforce the covenant. If this notice does not cause the employee to withdraw from (or to reformulate) his proposed new employment, the employer should contact the new employer. To avoid litigation and an injunction, the new employer may be willing to limit the new employee’s duties for a period of time.

In some cases, where there is no way for the employee to be of use to his or her new employer without using the former employer’s trade secrets, it may be advisable for the former employer to seek to prevent the employee from doing any work for the new employer under the inevitable misappropriation doctrine (or a variation thereof), as discussed in Section IV.B.2.,


supra. One costly alternative short of litigation is to enter into a consulting contract with the key employee upon termination of employment. Under the consulting contract, the employer would be able to prevent the former key employee from working for and divulging information to a competitor.

6. Monitor the Risk

Early detection of the disclosure or misappropriation of trade secret information is vital to protecting the information from further misuse. Therefore, when an employee leaves to work for a competitor, the former employer should closely monitor any apparent shifts in the competitor’s activities. The former employer should be particularly mindful of the sudden adoption of new marketing strategies; new, unanticipated business ventures; or large sales by the new employer to the former employer’s clients. While it is the company’s sales force or distributors who will most likely be making these observations, it is important that they pass on these developments to the legal department so that they can be evaluated in the trade secret context.

VI. CONCLUSION

In years to come, an employer is likely to find that the “crown jewels” of its intellectual property portfolio are its trade secrets. As such, employers must continue to protect their trade secrets by diligently monitoring the activities of their departing employees and their motivations for leaving. While this chapter has provided an overview of trade secrets law and summarized different avenues to safeguard against wrongful dissemination of trade secrets, it is by no means exhaustive. Employers should continue to update their knowledge of the law of their state to successfully preserve these valuable assets, prevent trade secret theft, and ultimately prevail in trade secret litigation.

TABLE OF AUTHORITIES

Page

Restrictive Covenants and Trade Secrets iii

FEDERAL CASES

A.F.A. Tours, Inc. v. Whitchurch,937 F.2d 82 (2d Cir. 1991).................................................................................................... 9

AccuImage Diagnostics Corp. v. Terarecon, Inc.,260 F. Supp. 2d 941 (N.D. Cal. 2003) ................................................................................. 51

Airdefense, Inc. v. Airtight Networks, Inc.,No. C 05-04615, 2006 U.S. Dist. LEXIS 55364 (N.D. Cal. July 26, 2006) .......................... 50

Alexander & Alexander, Inc. v. Frank B. Hall & Co.,No. 88-A-1621, 1990 U.S. Dist. LEXIS 21024 (D. Colo. Jan. 31, 1990) ............................. 58

American Airlines, Inc. v. ImHof,620 F. Supp. 2d 574 (S.D.N.Y. 2009) ............................................................................37, 43

Am. Family Mut. Ins. Co. v. Roth,485 F.3d 930 (7th Cir. 2007)............................................................................................. 2, 7

American Inst. of Chem. Eng’rs v. Reber-Friel Co.,682 F.2d 382 (2d Cir. 1982).....................................................................................13, 15, 17

Anacomp, Inc. v. Shell Knob Servs., Inc.,No. 93 Civ. 4003, 1994 WL 9681 (S.D.N.Y. Jan. 10, 1994).................................................. 9

Arias v. Solis,754 F. Supp. 290 (E.D.N.Y. 1991) ...................................................................................... 18

Arnold’s Ice Cream Co. v. Carlson,330 F. Supp. 1185 (E.D.N.Y. 1971) .................................................................................... 47

Auto Channel, Inc. v. Speedvision Network, LLC,144 F. Supp. 2d 784 (W.D. Ky. 2001)................................................................................. 50

Avery Dennison Corp. v. Naimo,No. 06 C 3390, 2006 U.S. Dist. LEXIS 84204 (D. Ill. Nov. 16, 2006)................................. 59

Award Incentives, Inc. v. Van Rooyen,263 F.2d 173 (3d Cir. 1959)................................................................................................ 20

TABLE OF AUTHORITIES(continued)

Page

Restrictive Covenants and Trade Secrets iv

Bayer Corp. v. Roche Molecular Sys., Inc.,72 F. Supp. 2d 1111 (N.D. Cal. 1999) ................................................................................. 45

Bennett v. Medtronic, Inc.,285 F.3d 801 (9th Cir. 2002)..........................................................................................25, 26

BioCore, Inc. v. Khosrowshahi,96 F. Supp. 2d 1221 (D. Kan. 2000).................................................................................... 52

Bliss Clearing Niagara, Inc. v. Midwest Brake Bond Co.,270 F. Supp. 2d 943 (W.D. Mich. 2003) ..................................................................50, 51, 52

Bradford v. New York Times Co.,501 F.2d 51 (2d Cir. 1974).................................................................................................. 17

Branson Ultrasonics Corp. v. Stratman,921 F. Supp. 909 (D. Conn. 1996)....................................................................................... 13

Brett Senior & Assocs. v. Fitzgerald,No. 06-1412, 2007 U.S. Dist. LEXIS 50833 (D. Pa. July 13, 2007)..................................... 53

Buffets, Inc. v. Klinke,73 F.3d 965 (9th Cir. 1996)................................................................................................... 7

Business Intelligence Servs., Inc. v. Hudson,580 F. Supp. 1068 (S.D.N.Y. 1984) ...............................................................................20, 42

Cacique, Inc. v. Robert Reiser & Co.,169 F.3d 619 (9th Cir. 1999)............................................................................................... 36

Callaway Golf Co. v. Dunlop Slazenger Group Ams., Inc.,318 F. Supp. 2d 216 (D. Del. 2004) ...............................................................................50, 51

Ctr. for Auto Safety v. Nat’l Highway Traffic Safety Admin.,93 F. Supp. 2d 1 (D.D.C. 2000) ............................................................................................ 3

Chi. Title Ins. Corp. v. Magnuson,487 F.3d 985 (6th Cir. 2007)............................................................................................... 13


Page

Restrictive Covenants and Trade Secrets v

Churchill Communications Corp. v. Demyanovich,668 F. Supp. 207 (S.D.N.Y. 1987) ...................................................................................... 46

Cintas Corp. v. Perry,517 F.3d 459 (7th Cir. 2008)............................................................................................... 26

Composite Marine Propellers, Inc. v. Van Der Woude,962 F.2d 1263 (7th Cir. 1992)............................................................................................. 52

Computer Economics, Inc. v. Gartner Group, Inc.,50 F. Supp. 2d 980 (S.D. Cal. 1999)...................................................................................... 7

Computer Sciences Corp. v. Computer Assocs. Int’l, Inc., Nos. CV 98-1374, 98-1440, 1999 WL 675446 (C.D. Cal. Aug. 13, 1999) ........................... 45

Compuware Corp. v. IBM Corp.,No. 02-CV-70906, 2003 WL 23212863 (E.D. Mich. Dec. 19, 2003) ................................... 50

Consolidated Brands, Inc. v. Mondi,638 F. Supp. 152 (E.D.N.Y. 1986) ........................................................................................ 9

Convolve, Inc. v. Compaq Computer Corp., No. 00 CV 5141, 2006 U.S. Dist. LEXIS 13848 (S.D.N.Y. Mar. 29, 2006)....................50, 51

Coolidge Co. v. Mokrynski,472 F. Supp. 459 (S.D.N.Y. 1979) ...................................................................................... 19

County of Nassau, N.Y. v. Leavitt,524 F.3d 408 (2d Cir. 2008)................................................................................................ 37

Danjaq LLC v. Sony Corp.,50 U.S.P.Q.2d 1638 (C.D. Cal. 1999) ................................................................................. 44

Design Strategies, Inc. v. Davis,384 F. Supp. 2d 649 (S.D.N.Y. 2005) ................................................................................. 47

Digital Envoy, Inc. v. Google, Inc.,370 F. Supp. 2d 1025 (N.D. Cal. 2005) ..........................................................................50, 51


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Restrictive Covenants and Trade Secrets vi

Display Research Labs., Inc. v. Telegen Corp.,133 F. Supp. 2d 1170 (N.D. Cal. 2001) ............................................................................... 38

Diversified Fastening Sys., Inc. v. Rogge,786 F. Supp. 1486 (N.D. Iowa 1991) .................................................................................. 44

Earthweb, Inc. v. Schlack,71 F. Supp. 2d 299 (S.D.N.Y. 1999), aff’d in part and remanded, 205 F.3d 1322 (2d Cir. 2000) ................................................................................................................18, 19, 42

Ecolab, Inc. v. Paolo,753 F. Supp. 1100 (E.D.N.Y. 1991) ...................................................................................... 9

Ernest Paper Prods. v. Mobil Chem. Co.,No. 95-7918, 1997 U.S. Dist. LEXIS 21781 (C.D. Cal. Dec. 2, 1997)................................. 50

Estee Lauder Co. v. Batra,430 F. Supp. 2d 158 (S.D.N.Y. 2006) ................................................................................. 20

Fabkom, Inc. v. R.W. Smith & Assocs., Inc., No. 95 Civ. 4552, 1996 WL 531873 (S.D.N.Y. Sept. 19, 1996) ............................................ 8

Faiveley Transport Malmo v. Wabtec Corp.559 F.3d 110 (2d Cir. 2009)............................................................................................ 8, 37

Ferrofluidics Corp. v. Advanced Vacuum Components, Inc.,968 F.2d 1463 (1st Cir. 1992) ............................................................................................. 14

Forcier v. Microsoft Corp.,123 F. Supp. 2d 520 (N.D. Cal. 2000) ................................................................................. 38

Frederick Chusid & Co. v. Marshall Leeman & Co.,326 F. Supp. 1043 (S.D.N.Y. 1971) ...............................................................................19, 47

Frederick Chusid & Co. v. Marshall Leeman & Co.,279 F. Supp. 913 (S.D.N.Y. 1968) ...................................................................................... 46

General Motors Corp. v. Lopez de Arriortua,948 F. Supp. 670 (E.D. Mich. 1996) ................................................................................... 56


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Restrictive Covenants and Trade Secrets vii

Geritrex Corp. v. Dermarite Indus., LLC,910 F. Supp. 955 (S.D.N.Y. 1996) ........................................................................................ 9

Globespan, Inc. v. O’Neill,151 F. Supp. 2d 1229 (C.D. Cal. 2001) ............................................................................... 44

Grand River Enter. Six Nations, Ltd. v. Pryor, 481 F.3d 60 (2d Cir. 2007).................................................................................................. 37

Hair Club for Men, LLC v. Elite Solutions Hair Alternatives, Inc.,No. 2:07-cv-546-GEB-KJM, 2007 U.S. Dist. LEXIS 30167 (E.D. Cal. Apr. 5, 2007) ........... 2

Hauck Manufacturing Co. v. Astec Indus., Inc.,375 F. Supp. 2d 649 (E.D. Tenn. 2004)............................................................................... 52

Health Mgmt., Inc. v. Hotte,No. 97 Civ. 3267 (E.D.N.Y. Sept. 15, 1997) ....................................................................... 16

Hollingsworth Solderless Terminal Co. v. Turley,622 F.2d 1324 (9th Cir. 1980)......................................................................................... 8, 33

Hudson Hotels Corp. v. Choice Hotels Int’l,995 F.2d 1173 (2d Cir. 1993), abrogated on other grounds, Nadel v. Play-by-Play Toys & Novelties, Inc., 208 F.3d 368 (2d Cir. 2000)............................................................ 35

Ikon Office Solutions, Inc. v. Am. Office Prods., Inc.,178 F. Supp. 2d 1154 (D. Or. 2001) ...................................................................................... 2

Imperial Chem. Indus., Ltd. v. National Distillers & Chem. Corp.,342 F.2d 737 (2d Cir. 1965).................................................................................................. 9

Innovative Networks, Inc. v. Satellite Airlines Ticketing Ctrs., Inc.,871 F. Supp. 709 (S.D.N.Y 1995) ....................................................................................... 19

Intermedics, Inc. v. Ventritex, Inc.,822 F. Supp. 634 (N.D. Cal. 1993)...................................................................................... 38

International Paper Co. v. Suwyn,966 F. Supp. 246 (S.D.N.Y. 1997) .............................................................................9, 18, 42


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Restrictive Covenants and Trade Secrets viii

Ivy Mar. Co. v. C.R. Seasons, Ltd.,907 F. Supp. 547 (E.D.N.Y. 1995) .......................................................................2, 15, 18, 20

Johnson Controls, Inc. v. A.P.T. Critical Sys.,323 F. Supp. 2d 525 (S.D.N.Y. 2004) ................................................................................... 2

Kamyr AB v. Kamyr, Inc.,No. 91-CV-0453, 1992 WL 317529 (N.D.N.Y. Oct. 30, 1992)............................................ 10

Kewanee Oil Co. v. Bicorn Corp.,416 U.S. 470 (1974)...................................................................................................3, 10, 16

La Calhène, Inc. v. Spolyar,938 F. Supp. 523 (W.D. Wis. 1996) ................................................................................ 3, 44

Latona v. Aetna U.S. Healthcare, Inc.,82 F. Supp. 2d 1089 (C.D. Cal. 1999) ............................................................................35, 58

Learning Curve Toys, L.P. v. PlayWood Toys, Inc.,No. 94 C 6884, 1999 U.S. Dist LEXIS 11262 (N.D. Ill. July 20, 1999) ............................... 52

Liveware Publ’g, Inc. v. Best Software, Inc.,252 F. Supp. 2d 74 (D. Del. 2003) ........................................................................................ 2

Lucente v. International Business Machines Corporation,310 F.3d 243 (2d Cir. 2002)................................................................................................ 22

Lucini Italia Co. v. Grappolini,No. 01 C 6405, 2003 WL 1989605 (N.D. Ill. Apr. 24, 2003)................................................. 2

Lumex, Inc. v. Highsmith,919 F. Supp. 624 (E.D.N.Y. 1996) ............................................................... 14, 17, 36, 41, 42

MAI Sys. Corp. v. Peak Computer, Inc.,991 F.2d 511 (9th Cir. 1993), cert. denied, 510 U.S. 1033 (1994) ................................... 6, 57

MPW Indus. Servs. v. Pollution Control Sys.,No. 2:02-CV-955, 2006 U.S. Dist. LEXIS 9360 (D. Ohio Mar. 9, 2006) ............................... 2


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Restrictive Covenants and Trade Secrets ix

Maxxim Med., Inc. v. Michelson,51 F. Supp. 2d 773 (S.D. Tex.), revd. without reported opn., 182 F.3d 915 (5th Cir. 1999) .................................................................................................................... 45

Merck & Co. v. Lyon,941 F. Supp. 1443 (M.D.N.C. 1996) ................................................................................... 44

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Chung, No. CV 01-00659, 2001 WL 283083 (C.D. Cal. Feb. 2, 2001) ............................................ 31

Metallurgical Industries, Inc. v. Fourteen, Inc.,790 F.2d 1195 (5th Cir. 1986)............................................................................................... 3

Micro Display Systems, Inc. v. Axtel, Inc.,699 F. Supp. 202 (D. Minn. 1988)....................................................................................... 51

Mixing Equip. Co. v. Philadelphia Gear, Inc.,436 F.2d 1308 (3d Cir. 1971).............................................................................................. 19

Monovis, Inc. v. Aquino,905 F. Supp. 1205 (W.D.N.Y. 1994)................................................................................... 42

Moore v. Consol. Edison Co. of N.Y.,409 F.3d 506 (2d Cir. 2005)................................................................................................ 37

Morris v. Schroder Capital Mgmt. Int’l,445 F.3d 525 (2d Cir. 2006)................................................................................................ 22

Morris v. Schroder Capital Mgmt. Int’l,481 F.3d 86 (2d Cir. 2007).................................................................................................. 23

Morton v. Rank America, Inc.,812 F. Supp. 1062 (C.D. Cal. 1993) .................................................................................. 3, 8

Motorola, Inc. v. Fairchild Camera & Instrument Corp.,366 F. Supp. 1173 (D. Ariz. 1973) .................................................................................27, 57

Nadel v. Play-by-Play Toys & Novelties, Inc.,208 F.3d 368 (2d Cir. 2000)................................................................................................ 36


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Restrictive Covenants and Trade Secrets x

Navigant Consulting, Inc. v. Wilkinson,508 F.3d 277 (5th Cir. 2007)............................................................................................... 48

Neveux v. Webcraft Techs., Inc.,921 F. Supp. 1568 (E.D. Mich. 1996).................................................................................. 44

Panther Sys. II, Ltd. v. Panther Computer Sys., Inc.,783 F. Supp. 53 (E.D.N.Y. 1991)........................................................................................ 16

Penalty Kick Mgmt. Ltd. v. Coca Cola Co.,318 F.3d 1284 (11th Cir. 2003)........................................................................................... 51

PepsiCo, Inc. v. Redmond,54 F.3d 1262 (7th Cir. 1995)..........................................................................................10, 41

Powell Products, Inc. v. Marks,948 F. Supp. 1469 (D. Co. 1996) ........................................................................................ 51

QR Spex, Inc. v. Motorola, Inc., No. CV 03-6284, 2004 U.S. Dist. LEXIS 27378 (C.D. Cal. Oct. 28, 2004) ........................... 3

Quaker Chem. Corp. v. Varga,509 F. Supp. 2d 469 (E.D. Pa. 2007)................................................................................... 20

Religious Technology Center v. Lerma,908 F. Supp. 1362 (E.D. Va. 1995) ....................................................................................... 5

Religious Technology Center v. Netcom On-Line Communication Services, Inc.,No. C-95-20091, 1997 U.S. Dist. LEXIS 23572 (N.D. Cal. Jan. 3, 1997).............................. 5

Robinson v. Jardine Ins. Brokers Int’l Ltd.,856 F. Supp. 554 (N.D. Cal. 1994)...................................................................................... 25

Scott v. Snelling & Snelling, Inc.,732 F. Supp. 1034 (N.D. Cal. 1990).....................................................................4, 12, 23, 24

Self Directed Placement Corp. v. Control Data Corp.,908 F.2d 462 (9th Cir. 1990)........................................................................................... 7, 59


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Restrictive Covenants and Trade Secrets xi

Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc.,119 F. Supp. 2d 1121 (W.D. Wash. 2000)........................................................................... 53

Star Sci., Inc. v. Carter,204 F.R.D. 410 (D. Ind. 2001) .............................................................................................. 3

Static Control Components, Inc. v. Future Graphics, LLC,No. 1:06CV00730, 2007 U.S. Dist. LEXIS 36474 (D.N.C. May 11, 2007).......................... 38

Stutz Motor Car of America, Inc. v. Reebok Int’l Ltd.,909 F. Supp. 1353 (C.D. Cal. 1995) ...................................................................................... 3

Surface Shields v. Poly-Tak Prot. Sys.,No. 02 C 7228, 2003 U.S. Dist. LEXIS 13185 (N.D. Ill. July 29, 2003) ................................ 2

Surgidev Corp. v. Eye Tech., Inc.,648 F. Supp. 661 (D. Minn. 1986), aff’d, 828 F.2d 452 (8th Cir. 1987) ............................... 45

Taco Cabana Int’l, Inc. v. Two Pesos, Inc.,932 F.2d 1113 (5th Cir. 1991)............................................................................................... 3

Telxon Corp. v. Hoffman,720 F. Supp. 657 (N.D. Ill. 1989)........................................................................................ 14

Thomas & Betts Corp. v. Panduit Corp.,108 F. Supp. 2d 968 (N.D. Ill. 2000) ................................................................................... 52

Ticor Title Ins. Co. v. Cohen,173 F.3d 63 (2d Cir. 1999).................................................................................................. 18

Union Carbide Corp v. UGI Corp.,731 F.2d 1186 (5th Cir. 1984)............................................................................................... 3

Universal Analytics, Inc. v. MacNeal-Schwendler Corp.,914 F.2d 1256 (9th Cir. 1990)........................................................................................49, 50

Victaulic Co. v. Tieman,499 F.3d 227 (3d Cir. 2007)................................................................................................ 20


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Restrictive Covenants and Trade Secrets xii

Webcraft Techs., Inc. v. McCaw,674 F. Supp. 1039 (S.D.N.Y. 1987) .........................................................................10, 16, 20

Wright Chemical Corp. v. Johnson,563 F. Supp. 501 (M.D. La. 1983) ........................................................................................ 3

Zajicek v. Koolvent Metal Awning Corp.,283 F.2d 127 (9th Cir. 1960)............................................................................................... 58

STATE CASES

7th Sense v. Liu,631 N.Y.S.2d 835 (N.Y. App. Div. 1995) ........................................................................... 46

ABBA Rubber Company v. Seaquist,235 Cal. App. 3d 1 (Cal. Ct. App. 1991) ............................................................................... 4

ABC, Inc. v. Wolf,52 N.Y.2d 394 (N.Y. 1981)................................................................................................. 18

Ackerman v. Kimball Int’l, Inc.,652 N.E.2d 507 (Ind. 1995) ................................................................................................ 44

Advanced Magnification Instruments, Ltd. v. Minuteman Optical Corp.,522 N.Y.S.2d 287 (N.Y. App. Div. 1987) ........................................................................... 47

Aetna Building Maintenance Co., Inc. v. West,39 Cal. 2d 198 (Cal. 1952) .................................................................................................. 30

Al Minor & Associates v. Martin,117 Ohio St. 3d 58 (Ohio 2008) ............................................................................................ 1

Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson,209 S.W.3d 644 (Tex. 2006) ............................................................................................... 12

Allan Dampf, P.C. v. Bloom, 512 N.Y.S.2d 116 (N.Y. App. Div. 1987) ........................................................................... 47

Amana Express Int’l, Inc. v. Pier-Air Int’l, Ltd.,621 N.Y.S.2d 108 (N.Y. App. Div. 1995) ........................................................................... 17


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Restrictive Covenants and Trade Secrets xiii

American Credit Indemnity Co. v. Sacks,213 Cal. App. 3d 622 (Cal. Ct. App. 1989) ....................................................................27, 31

American Paper & Packaging Products, Inc. v. Kirgan,183 Cal. App. 3d 1318 (Cal. Ct. App. 1986) ..............................................................2, 27, 56

Amex Distrib. Co. v. Mascari,150 Ariz. 510 (Ariz. Ct. App. 1986).................................................................................... 58

Application Group, Inc. v. Hunter Group, Inc.,61 Cal. App. 4th 881 (Cal. Ct. App. 1998) .....................................................................23, 24

Armendariz v. Foundation Health Psychcare Servs., Inc.,24 Cal. 4th 83 (Cal. 2000)................................................................................................... 26

BDO Seidman v. Hirshberg,93 N.Y.2d 382 (N.Y. Ct. App. 1999) ................................................................. 13, 14, 15, 17

Balboa Ins. Co. v. Trans Global Equities,218 Cal. App. 3d 1327 (Cal. Ct. App. 1990) ....................................................................... 49

Bancroft-Whitney Co. v. Glen,64 Cal. 2d 327 (Cal. 1966) .................................................................................................. 46

Brescia v. Angelin,172 Cal. App. 4th 133, 145 (Cal. Ct. App. 2009)................................................................. 39

Boeing Co. v. Sierracin Corporation,43 Wash. App. 288 (Wash. Ct. App. 1986) ........................................................................... 3

Burbank Grease Services, LLC v. Sokolowski,717 N.W.2d 781 (Wis. 2006) .............................................................................................. 51

Cadence Design Sys., Inc. v. Avant! Corp.,29 Cal. 4th 215 (Cal. 2002)................................................................................................. 38

Cardinal Freight Carriers, Inc. v. J.B. Hunt Transp. Servs., Inc.,987 S.W.2d 642 (Ark. 1999) ............................................................................................... 44


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Restrictive Covenants and Trade Secrets xiv

Cardiovascular Surgical Specialists, Corp. v. Mammana,61 P.3d 210 (Okla. 2002) .................................................................................................... 32

Central Adjustment Bureau, Inc. v. Ingram,678 S.W.2d 28 (Tenn. 1984) ............................................................................................... 58

Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp.,42 N.Y.2d 496 (N.Y. 1977)................................................................................................. 19

Comprehensive Community Dev. Corp. v. Lehach,636 N.Y.S.2d 755 (N.Y. App. Div. 1996) ........................................................................... 47

Contempo Communications, Inc. v. MJM Creative Servs., Inc.,582 N.Y.S.2d 667 (N.Y. App. Div. 1992) ......................................................................17, 20

Continental Car-Na-Var Corp. v. Moseley,24 Cal. 2d 104 (Cal. 1944) .................................................................................................. 24

Cool Insuring Agency, Inc. v. Rogers,509 N.Y.S.2d 180 (N.Y. App. Div. 1986) ........................................................................... 18

Courtesy Temporary Serv., Inc. v. Camacho,222 Cal. App. 3d 1278 (Cal. Ct. App. 1990) .................................................................passim

Cypress Semiconductor Corp. v. Superior Court,163 Cal. App. 4th 575 (Cal. Ct. App. 2008) ........................................................................ 39

D’Sa v. Playhut, Inc.,85 Cal. App. 4th 927 (Cal. Ct. App. 2000) ...............................................................23, 26, 58

DVD Copy Control Ass’n, Inc. v. Bunner,31 Cal. 4th 864 (Cal. 2003)................................................................................................... 6

DVD Copy Control Ass’n, Inc. v. McLaughlin, No. CV 786804, 2000 WL 48512 (Cal. Sup. Ct., Jan. 21, 2000)........................................ 5, 6

Diodes, Inc. v. Franzen,260 Cal. App. 2d 244 (Cal. Ct. App. 1968) ..............................................................24, 33, 35


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Restrictive Covenants and Trade Secrets xv

DoubleClick, Inc. v. Henderson,No. 116914/97, 1997 WL 731413 (N.Y. Sup. Ct. Nov. 7, 1997) ..............................10, 19, 41

Dryden v. Tri-Valley Growers,65 Cal. App. 3d 990 (Cal. Ct. App. 1977) ........................................................................... 48

Duane Jones Co. v. Burke,117 N.E.2d 237 (N.Y. 1954) ............................................................................................... 46

Eagle Comtronics, Inc. v. Pico, Inc.,453 N.Y.S.2d 470 (N.Y. App. Div. 1982) ............................................................................. 9

Eastern Business Systems, Inc. v. Speciality Business Solutions, LLC,739 N.Y.S.2d 177 (N.Y. App. Div. 2002) ........................................................................... 42

Edwards v. Arthur Andersen LLP,44 Cal. 4th 937 (Cal. 2008)................................................................................................. 28

Electro Optical Indus., Inc. v. White,76 Cal. App. 4th 653 (Cal. Ct. App. 1999) .......................................................................... 45

Embarcadero Mun. Improvement Dist. v. County of Santa Barbara,88 Cal. App. 4th 781 (Cal. Ct. App. 2001) .......................................................................... 51

Empire Farm Credit, ACA v. Bailey,657 N.Y.S.2d 211 (N.Y. App. Div. 1997) ......................................................................13, 15

Family Affair Haircutters, Inc. v. Detling,488 N.Y.S.2d 204 (N.Y. App. Div. 1985) ........................................................................... 18

Fields Found., Ltd. v. Christensen,309 N.W.2d 125 (Wis. Ct. App. 1981) ................................................................................ 14

FLIR Systems, Inc. v. Parrish,174 Cal. App. 4th 1270 (Cal. Ct. App. 2009) ...................................................................... 45

Fortna v. Martin,158 Cal. App. 2d 634 (Cal. Ct. App. 1958) ......................................................................... 33


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Restrictive Covenants and Trade Secrets xvi

Fowler v. Varian Assocs., Inc.,196 Cal. App. 3d 34 (Cal. Ct. App. 1987) ........................................................................... 46

Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,20 Cal. App. 3d 668 (Cal. Ct. App. 1971) ........................................................................... 24

Fred’s Stores of Mississippi, Inc. v. M & H Drugs, Inc.,725 So. 2d 902 (Miss. 1998) ................................................................................................. 8

GAB Business Servs., Inc. v. Lindsey & Newsom Claim Servs, Inc.,83 Cal. App. 4th 409 (Cal. Ct. App. 2000) .......................................................................... 47

Gable-Leigh, Inc. v. North American Miss, No. CV 01-01019, 2001 WL 521695 (C.D. Cal. Apr. 9, 2001).............................................. 8

General Paint Corp. v. Seymour,124 Cal. App. 611 (Cal. Ct. App. 1932) .............................................................................. 26

General Reinsurance Corp. v. Arch Capital Group, Ltd.,No. X05CV074011668S, 2007 Conn. Super. LEXIS 2629 (Conn. Super. Ct. Oct. 17, 2007) .................................................................................................................................... 1

Giffords Oil Co. v. Wild,483 N.Y.S.2d 104 (N.Y. App. Div. 1984) ........................................................................... 17

Gillis Associated Indus., Inc. v. Cari-All, Inc.,564 N.E.2d 881 (Ill. App. Ct. 1990) ...................................................................................... 9

Glue-Fold, Inc. v. Slautterback Corp.,82 Cal. App. 4th 1018 (Cal. Ct. App. 2000) ........................................................................ 38

Golden State Linen Service, Inc. v. Vidalin,69 Cal. App. 3d 1 (Cal. Ct. App. 1977) ..........................................................................30, 32

Gordon Termite Control v. Terrones,84 Cal. App. 3d 176 (Cal. Ct. App. 1978) ........................................................................... 33

HBD Inc. v. Ryan,642 N.Y.S.2d 913 (N.Y. App. Div. 1996) ........................................................................... 19


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Restrictive Covenants and Trade Secrets xvii

Hamrick v. Kelley,260 Ga. 307 (Ga. 1990)....................................................................................................... 58

Herzog v. A Company,138 Cal. App. 3d 656 (Cal. Ct. App. 1982) ......................................................................... 66

Hill Medical Corp. v. Wycoff,86 Cal. App. 4th 895 (Cal. Ct. App. 2001) .......................................................................... 30

Home Pride Foods, Inc. v. Johnson,262 Neb. 701 (Neb. 2001)..................................................................................................... 2

I.E. Assocs. v. Safeco Title Ins. Co.,39 Cal. 3d 281 (Cal. 1985) .................................................................................................. 50

John F. Matull & Associates, Inc. v. Cloutier,194 Cal. App. 3d 1049 (Cal. Ct. App. 1987) ....................................................................... 32

John Jay Esthetic Salon, Inc. v. Woods,377 So. 2d 1363 (La. App. Ct. 1979)................................................................................... 32

Jones v. Humanscale Corp.,130 Cal. App. 4th 401 (Cal. Ct. App. 2005) ........................................................................ 25

Justus v. Atchison,19 Cal. 3d 564 (Cal. 1977) .................................................................................................. 50

Kanan, Corbin, Schupak & Aronow, Inc. v. FD Int’l LTD,797 N.Y.S.2d 883 (N.Y. Sup. Ct. 2005) .............................................................................. 18

K.C. Multi Media v. Bank of America,171 Cal. App. 4th 939 (Cal. Ct. App. 2009) ........................................................................ 51

Klamath-Orleans Lumber, Inc. v. Miller,87 Cal. App. 3d 458 (Cal. Ct. App. 1978) ........................................................................... 28

Kolani v. Gluska,64 Cal. App. 4th 402 (Cal. Ct. App. 1998) .......................................................................... 26


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Restrictive Covenants and Trade Secrets xviii

Korea Supply Co., v. Lockheed Martin Corp.,29 Cal. 4th 1134 (Cal. 2003) ............................................................................................... 49

Kucker Kraus & Bruh, LLP v. Szold & Brandwen, P.C., N.Y.L.J., Sept. 12, 1997 (N.Y. Sup. Ct. Sept. 11, 1997) ...................................................... 16

Lamorte Burns & Co. v. Walters,167 N.J. 285 (N.J. 2001) ....................................................................................................... 2

Leo Silfen, Inc. v. Cream,278 N.E.2d 636 (N.Y. 1972) ..........................................................................................16, 17

Loral Corp. v. Moyes,174 Cal. App. 3d 268 (Cal. Ct. App. 1985) .................................................... 2, 31, 32, 34, 35

MTV Networks v. Fox Kids Worldwide, Inc.,No. 605580/97, 1998 WL 57480 (N.Y. Sup. Ct. Feb. 4, 1998) .......................................18, 19

Mallory Factor, Inc. v. Schwartz,536 N.Y.S.2d 752 (N.Y. App. Div. 1989) ........................................................................... 19

Marietta Corp. v. Fairhurst,Nos. 37265, RJI No. 2002-0229-M, 2002 WL 31056732 (N.Y. Sup. Ct., Aug. 23, 2002) .................................................................................................................................. 42

Marietta Corporation v. Fairhurst,754 N.Y.S.2d 62 (N.Y. App. Div. 2003) ........................................................................42, 43

Maritime Fish Prods., Inc. v. World-Wide Fish Prods., Inc.,474 N.Y.S.2d 281 (N.Y. App. Div. 1984) ........................................................................... 46

McRand, Inc. v. Van Beelen,486 N.E.2d 1306 (Ill. App. Ct. 1985) .................................................................................. 17

Medtronics, Inc. v. The Superior Court of Los Angeles,29 Cal. 4th 697 (Cal. 2002)................................................................................................. 25

Meissner Filtration Prods., Inc. v. Harrington,No. B170707, 2004 WL 2189249 (Cal. Ct. App. Sept. 30, 2004) ........................................ 45


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Restrictive Covenants and Trade Secrets xix

Metro. Traffic Control, Inc. v. Shadow Traffic Network,22 Cal. App. 4th 853 (Cal. 1994) ..................................................................................passim

Monogram Indus., Inc. v. Sar Indus., Inc.,64 Cal. App. 3d 692 (Cal. Ct. App. 1976) ........................................................................... 30

Morlife, Inc. v. Perry,56 Cal. App. 4th 1514 (1997)........................................................................................passim

Moss, Adams & Co. v. Shilling,179 Cal. App. 3d 124 (Cal. Ct. App. 1986) ....................................................................31, 32

Moye v. Eure,204 S.E.2d 221 (N.C. Ct. App. 1974).................................................................................. 48

Muggill v. The Reuben H. Donnelley Corp.,62 Cal. 2d 239 (Cal. 1965) .................................................................................................. 27

PMC, Inc. v. Kadisha,78 Cal. App. 4th 1368 (Cal. Ct. App. 2000) ........................................................................ 36

People v. Eubanks,14 Cal. 4th 580 (Cal. 1996)................................................................................................. 54

People v. Farell,28 Cal. 4th 381 (Cal. 2002)................................................................................................. 54

Proctor & Gamble Co. v. Stoneham,747 N.E.2d 268 (Ohio Ct. App. 2000)................................................................................. 43

In re Providian Credit Card Cases,96 Cal. App. 4th 292 (Cal. Ct. App. 2002) ...................................................................... 7, 40

Raimonde v. Van Vlerah,325 N.E.2d 544 (Ohio 1975)............................................................................................... 56

Rao v. Verde,635 N.Y.S.2d 660 (N.Y. App. Div. 1995) ........................................................................... 47


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Restrictive Covenants and Trade Secrets xx

Rapp Ins. Agency, Inc. v. Baldree,597 N.E.2d 936 (Ill. App. Ct. 1992) .................................................................................... 15

Reading Radio, Inc. v. Fink,833 A.2d 199 (Pa. Super. Ct. 2003)..................................................................................... 49

Reeves v. Hanlon,33 Cal. 4th 1140 (Cal. 2004) ..........................................................................................33, 48

Renaissance Technologies Corp. v. Millennium Partners, LP,2004 WL 4963292 (N.Y. Sup. Ct. March 19, 2004) ............................................................ 43

Retirement Group v. Galante,176 Cal. App. 4th 1226 (Cal. Ct. App. 2009) .................................................................31, 32

Rich Prods. Corp. v. Parucki,578 N.Y.S.2d 345 (N.Y. App. Div. 1991) ........................................................................... 18

Rinks v. Courier Dispatch Group, Inc.,No. 1:01-CV-0678, 2001 U.S. Dist. LEXIS 4728 (D. Ga. Apr. 11, 2001)............................ 58

Robert L. Cloud & Assocs., Inc. v. Mikesell,69 Cal. App. 4th 1141 (Cal. Ct. App. 1999) ...................................................................31, 36

Royal Carbo Corp. v. Flameguard, Inc.,645 N.Y.S.2d 18 (N.Y. App. Div. 1996) ............................................................................. 16

Ryan, Elliot and Co. v. Leggat, McCall & Werner, Inc.,396 N.E.2d 1009 (Mass. App. Ct. 1979) ............................................................................. 48

Scott v. General Iron & Welding Co.,368 A.2d 111 (Conn. 1976)................................................................................................. 19

Subcarrier Communications, Inc. v. Day,691 A.2d 876 (N.J. App. Div. 1997) ................................................................................... 16

Support Sys. Assocs., Inc. v. Tavolacci,522 N.Y.S.2d 604 (N.Y. App. Div. 1987) ........................................................................... 10


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Thola v. Henschell,140 Wash. App. 70 (Wash. Ct. App. 2007) ......................................................................... 36

Thompson v. Impaxx, Inc.,113 Cal. App. 4th 1425 (Cal. Ct. App. 2003) .......................................................2, 31, 32, 56

Tour & Study, Inc. v. Hepner,432 N.Y.S.2d 148 (N.Y. App. Div. 1980) ........................................................................... 47

Town & Country House & Home Service, Inc. v. Newberry,147 N.Y.S.2d 550 (N.Y. 1955)............................................................................................ 49

Triangle Sheet Metal Works, Inc. v. Silver,222 A.2d 220 (Conn. 1966)................................................................................................. 10

Tyler Enters. of Elwood, Inc. v. Shafer,573 N.E.2d 863 (Ill. App. Ct. 1991) .................................................................................... 16

U.S. Reinsurance Corp. v. Humphreys,618 N.Y.S.2d 270 (N.Y. App. Div. 1994) ............................................................................. 8

United States Golf Ass’n. v. Arroyo Software Corporation,69 Cal. App. 4th 607 (Cal. Ct. App. 1999) .......................................................................... 49

Vacco Industries, Inc. v. Van Den Berg,5 Cal. App. 4th 34 (Cal. Ct. App. 1992) .............................................................................. 30

Walter Karl, Inc. v. Wood,528 N.Y.S.2d 94 (N.Y. App. Div. 1988) ............................................................................. 48

Whyte v. Schlage Lock Co.,101 Cal. App. 4th 1443 (Cal. Ct. App. 2002) .................................................................44, 45

FEDERAL STATUTES

18 U.S.C. § 1030............................................................................................................................36, 53§ 1030(a)(2)(C)..............................................................................................................36, 53§ 1030(g) ............................................................................................................................ 36§ 1831................................................................................................................................. 52


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§ 1832................................................................................................................................. 52§ 1835................................................................................................................................. 53§ 1836................................................................................................................................. 53§ 1962(c) ............................................................................................................................ 56§ 1964(c) ............................................................................................................................ 56

28 U.S.C. § 2283 ...................................................................................................................... 25

STATE STATUTES

Ala. Code § 8-1-1 (1984).......................................................................................................... 13

Cal. Bus. & Prof. Code § 16600.........................................................................................................................passim§ 16601..........................................................................................................................13, 30§ 16602..........................................................................................................................13, 30

Cal. Civ. Code §§ 3426 et seq....................................................................................................................... 2§ 3426.1................................................................................................................................ 7§ 3426.1(b)(2)..................................................................................................................... 36§ 3426.1(d) ....................................................................................................................... 2, 4§ 3426.1(d)(1)....................................................................................................................... 7§ 3426.1(d)(2)....................................................................................................................... 6§ 3426.2.............................................................................................................................. 36§ 3426.2(a) ......................................................................................................................... 45§ 3426.2(c) ......................................................................................................................... 36§ 3426.3.............................................................................................................................. 36§ 3426.5.............................................................................................................................. 40§ 3426.6.............................................................................................................................. 38

Cal. Code of Civ. Proc. § 2019.210........................................................................................... 39

Cal. Evid. Code§§ 1060 et seq..................................................................................................................... 54§ 1060................................................................................................................................. 54§ 1061................................................................................................................................. 54§ 1061(b)(2)........................................................................................................................ 54§ 1062(a) ............................................................................................................................ 54§ 1063................................................................................................................................. 54


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Restrictive Covenants and Trade Secrets xxiii

Cal. Lab. Code

§ 2802................................................................................................................................. 29§ 2804................................................................................................................................. 29

Cal. Pen. Code § 499c......................................................................................................................53, 54, 55§ 499c(b) ............................................................................................................................ 53§ 499c(c) ............................................................................................................................ 54§ 502 .............................................................................................................................54, 56§ 502(a) .............................................................................................................................. 54§ 502(c)(2).....................................................................................................................53, 54§ 502(h)(1) ......................................................................................................................... 54§1203.044........................................................................................................................... 54

Cal. Rules of Ct.243.1 .................................................................................................................................. 40243.2 .................................................................................................................................. 40

Colo. Rev. Stat. § 8-2-113 (1973) ............................................................................................. 13

Fla. Stat. Ann. § 542.33 (West 1988) ........................................................................................ 13

Ga. Code Ann. § 13-8-2 (1990)................................................................................................................... 13§ 13-8-2.1 (1990)................................................................................................................ 13

Haw. Rev. Stat. § 480-4 (1985)................................................................................................. 13

La. Rev. Stat. Ann. § 23:921 (West 1985)................................................................................. 13

Mass. Gen. Laws ch. 112, § 12X (1984) ...................................................................................................................... 13§ 74D (1984) ...................................................................................................................... 13

Mich. Comp. Laws Ann. § 445.774a (West 1990) .................................................................... 13

Mont. Code Ann. § 28-2-703 (1989)......................................................................................... 13

N.C. Gen. Stat. § 75-2 (1988) ................................................................................................... 13


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N.D. Cent. Code § 9-08-66 (1987)............................................................................................ 13

N.Y. Pen. Law § 155.00.........................................................................................................................55, 56§ 155.00.6........................................................................................................................... 55§ 155.02.1........................................................................................................................... 55§ 156.30.........................................................................................................................55, 56§ 156.30.1........................................................................................................................... 56

Okla. Stat. tit. 15, §§ 217-219 (Supp. 1991) .............................................................................. 13

Or. Rev. Stat. § 653.295 (1989) ................................................................................................ 13

S.D. Codified Laws §§ 53-9-8 to 53-9-11 (1990) ...................................................................... 13

Tex. Bus. & Com. Code § 15.05 (Vernon 1990) ....................................................................... 13

Wis. Stat. Ann. § 103.465 (West 1988)..................................................................................... 13

MISCELLANEOUS

2A Sutherland, Statutory Construction (Sands 4th ed. 1984) § 50.05, pp. 440-41...................... 50

Restatement of Torts § 757 cmt. b (1939) ................................................................................... 8

Restatement of Torts (Second) § 768 ........................................................................................ 48

Restatement (Second) of Agency § 393 cmt. e. (1958).........................................................46, 48

united states law on restrictive covenants...

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