A "Referral Source List" as Trade Secret

In a noteworthy, but dated, decision from July 2013, Judge Daniel on the federal district court bench ruled that an employer had failed to prove that a "referral source list" was a trade secret. Accordingly, in Continental Credit Corp v. Dragovich, Judge Daniel held that the employee's noncompete was not enforceable and denied employer's motion for preliminary injunction.

During his employment, the employee maintained a "referral source list" which contained the names and contact information of potential business contacts along with personal notes about recent contacts, telephone calls and meetings. The employer claimed that this list was a trade secret and sought to enjoin the employee from contacting and working with its customers and referral sources or for working for a direct competitor for one year pursuant to the employee's noncompete agreement.

Judge Daniel found, however, that the "source list" contained little more than vague information about potential leads, telephone calls and meetings that may or may not occurred. He noted that a representative of employee's new employer "credibly testifed" that the list could be recreated in a few days from information available to the public. As a result, Judge Daniel found that the employer had failed to meet its burden of proving that the list was a trade secret.

There is an important takeaway from the case. It's easy for employers to claim that information is a trade secret. At a hearing, however, the employer has the burden of showing that the alleged trade secret is secret and has value. That burden can be difficult to sustain. Employers need to consider what evidence can be used to show the value and the secrecy of its trade secrets. Employees need to consider what evidence can be used to show that the alleged secrets really are publicly available. 

 

 

The Importance of Venue Selection and Choice of Law Provisions

A recent case, H&R Block v. Taxes Latino Americanos LLC, demonstrates the importance of venue selection and choice of law provisions. 

Taxes Latino was a Colorado company that offered tax preparation services at five locations in Colorado, including an office on East Colfax in Aurora. In 2012, Taxes Latino sold the business to H&R Block. Pursuant to the purchase agreement, Taxes Latino and its principals agreed not to compete with H&R Block anywhere within a 50 mile radius of the five Colorado offices. In addition, the parties consented to personal jurisdiction in Missouri, agreed that Missouri would be the location of any lawsuit and agreed that Missouri law would govern any dispute.

H&R Block subsequently concluded that Taxes Latino had breached the noncompete and on February 5, 2014 it sent a cease and desist letter to Taxes Latino and its principals advising them that it intended to file a lawsuit if they remained in breach of their noncompete obligations. The lawsuit was filed in the federal district court for the western district of Missouri on February 10. A hearing was held on February 14 on H&R Block's motion for preliminary injunction. On February 19, the court issued its order granting H&R Block's motion for preliminary injunction.  

The court's order is noteworthy for several reasons.

First, the court didn't hesitate in finding that Taxes Latino and its principals had waived any objection to personal jurisdiction in Misssouri. The opinion doesn't describe any contact between Taxes Latino and Missouri and it's possible that the only connection was the purchase contract for the business.

Second, the court didn't hesitate to enforce the forum selection clause that called for the action to be filed in Missouri. Nor did the court hesitate in enforcing the Missouri choice of law provision. 

Third, the court wasn't troubled by the fact that it was enjoining conduct in another state. The defendants were enjoined from engaging in competitive activity within 50 miles of the five Colorado locations. There may be times when there are issues about the geographic reach of an injunction but those issues were not considered. 

The case is yet another example of the importance of the venue selection and choice of law provisions often included in noncompete agreeements. Within a few days after the lawsuit was filed, defendants were compelled to travel to another state and defend claims that were to be decided under another's state's laws. 

New Forum Selection Ruling from the Supreme Court

Location, location and location. That's true with noncompete cases just as it is with real estate. 

Employees typically want to stay in Colorado. They want a Colorado court to apply Colorado law to their noncompete. Employees want to avoid the stress and expense of hiring counsel in another state. Employees hope to have the court apply Colorado law which disfavors the enforcement of noncompete cases. And employees hope that Colorado judges will be sympathetic to a hard-working Colorado employee rather than a large, out of state company.

Many employers, on the other hand, seek to have any noncompete dispute heard in another state with less sympathetic rules about the enforcement of noncompetes. In addition, employers frequently have employees in many states. They want all noncompete cases involving their employees to be resolved in one place. That helps ensure a more uniform resolution of the cases.

To ensure that they control where any noncompete case is litigated, employers include forum selection clauses in the noncompete agreements. These clauses recite that a state other than Colorado will be the exclusive venue for any dispute arising out of the agreement. In response to these clauses, employees have filed declaratory judgment actions in Colorado in which they seek a ruling that their noncompete is not enforceable. By filing first, these employees seek to avoid the forum selection clause in their noncompete.

A recent Supreme Court decision may limit this tactic by employees. In a December 3, 2013 ruling, Atlantic Marine Construction Co..  v. United States District Court, the Supreme Court ruled that forum selection clauses should be enforced "in all but the most unusual cases." The choice by the party defying the forum selection clause should receive no weight. Arguments about the parties' convenience should not be considered. 

In light of this decision, employees need to be careful when they agree to a noncompete agreement that sets venue in a location outside of Colorado. Employers need to consider whether they should include a forum selection clause in their noncompetes. 

 

Social Media's Impact on Non-compete cases in Colorado - Part Two

Non-solicitation clauses present a good example of the difficult issues raised by social media.   

Many employees, particularly salesmen, sign non-solicitation agreements. Those agreements often say nothing more than that the employee may not solicit the company's customers for a designated period. (Other agreements bar the employee from performing any work for the company's customers after the termination of the employee's employment, but these more restrictive agreements aren't the focus of this blog.) Absent additional facts or more specific language, these narrow non-solicitation agreements often are construed to prohibit only the initiation of contact with the company's customers. 

Before the Internet and social media, these narrow non-solicits often meant that the employee couldn't make a direct personal appeal (e.g.a phone call) to the company's customers. An employee could, however, announce his association generally with his new employer. The company's customers then could initiate contact with the former employee, and the former employee arguably could serve the customer without violating his narrow nonsolicit. 

Social media adds a new layer of complexity to these cases. Once an employee leaves a company, for example, he may post an announcement on his LinkedIn page that tells all his contacts about his new position. The employee's contacts may include many of the customers that he served for his former employer. If the employee is clever, he may, before he leaves, expand his contacts to include all of the company's customers that he knows. Even if the employee doesn't intend to mask his intentions with social media, he may give notice to many customers when he changes the biographical information about his employment on LinkedIn.  

Upset employers have argued that former employees have violated their non-solicitation agreements by making announcement in LinkedIn that are directed, in part, to contacts who are the company's customers. Employees, on the other hand, have insisted that an announcement on social media, like LinkedIn, really isn't the same as a phone call.  

To our knowledge, there haven't been any cases in Colorado about whether a LinkedIn posting or something similar would result in a violation of a simple non-solicit agreement. In other states, courts generally have been skeptical of employers' arguments that these postings alone constitute a violation of non-solicit agreements. Of course, the resolution of all these cases depends on the language in the non-solicit and the employee's conduct. But courts generally seemed to want more than a LinkedIn posting before they find that a violation of a simple non-solicitation agreement has occurred.

To be sure, employers will be motivated to draft new language that clarifies the nature of the restrictions imposed by a non-solicit on an employee's use of social media. Any new language would, however, need to comply with Colorado's Facebook Law and the underlying purpose of the noncompete statute.  

Social Media's Impact on Noncompete Cases in Colorado -- Part One

Only a few published decisions have addressed the impact of social media on noncompetes and those decisions have come from states other than Colorado. There is little doubt, however, that social media will play a role in many noncompete disputes in the future. 

The existence of trade secrets is a key to many noncompete cases, because companies often rely on the existence of trade secrets to enforce noncompetes. Social media may play a role in these cases, because social media may show that information isn't really secret.

Companies often claim, for example, that their customer list is a "trade secret". As information generally has become more readily available, however, it has become more difficult for employers to prove that any list of customers truly is a secret. The internet and electronic compilations of companies make it easier to determine the customers or potential customers for many companies. At a minimum, social media should make it more difficult for employers to prove that any list is a secret.

Postings on social media also may cause a company's customer list to lose its status as a trade secret. Many employees, particularly sales employees, now use Linked In and make "connections" with customers they serve. Linked In has various privacy settings, which allow a user to control whether his connections can "see" all of the users' other connections. If employees join Linked In, link to all of their customers and allow their connections to see their other connections, the company may struggle to show that the identity of its customers really is a trade secret. 

Colorado's new Facebook Law may complicate an employer's efforts to monitor an employee's social media activity. Under the new law, an employer can't compel an employee to disclose his passwords to social media accounts. Nor may an employer compel an employee to add someone to an employee's list of contacts. As a result, an employer may not know whether an employee has disclosed the identity of its customers to his other friends or connections. 

On Linked In, users also have the option of creating and updating their profile on the site. Not surprisingly, employees are eager to describe themselves in the best light possible. In doing so, employees may include information in their profile which the company considers a trade secret. One the profile is published, the disclosed information may lose its status as a trade secret, because it is no longer secret. 

 

Protecting Social Media Passwords in Colorado

Hello. I've been busy for many months and have not made any new blog entries. Recently, however, there have been several signficant developments in the non-compete world. To begin the discussion again, I want to take a step back and look at some of the developments during the past year.

Last Spring, Colorado joined an increasing number of states and adopted legislation limiting access to employees' social media passwords. Effective May 11, 2013, employers "may not suggest, request, or require" an employee or job applicant to disclose any password for social media accounts. Nor may employers compel an employee or applicant to add  anyone to the employee's list of contacts associated with the account. This is Colorado's "Facebook Law".

For the time being, "social media accounts" probably was intended to mean Facebook or Linked-In. Linked-In particularly is used by many employees, who create a network of the contacts developed during their career. For a salesman, the relationship with these "contacts" is invaluable.

Colorado's new law does not prevent an employer from conducting an investigation to ensure compliance with securities laws. Nor does the new law prevent an employer from investigating an employee's electronic communications if the employer has information that there has been "unauthorized downloading" of an "employer's proprietary information". 

An employee's remedy for any violation of the new law is limited. When the law was proposed, it included a private right of action that allowed an employee to sue for any violation of the law. The court had the discretion to grant injunctive relief and award compensatory damages and attorneys fees. These remedies were lost during the legislative process. Under the law as adopted, an employee may only file a complaint with the Colorado Department of Labor and Employment. The Department is charged with investigating the complaint and may impose a penalty of $1,000 for a first offense and not more than $5,000 for subsequent offenses. Such a penalty would be small consolation for an employee who was a victim of an overzealous employer.

Since the adoption of the new law, the Department of Labor has initiated a ruling proceeding to adopt regulations. It has also published a website (www.colorado.gov/cdle/socialmedia) where you can find a "Fact Sheet" and a form for making a complaint to the Department. The Department has said that its approach to the law may evolve as new developments occur. 

The Department's draft regulations provide additional guidance for employees and employers. These regulations clarify that an employer may not discharge or discipline an employee for refusing to disclose passwords for social media accounts. Or for refusing to add the employer to the list of an employee's contacts. Under these regulations, anonymous complaints may not be filed with the Department. 

Social media accounts have the potential to play an increasingly important role in non-compete or non-solicit cases. With a social media account, a former employee has the opportunity to tell all of his contacts about his new job by pushing a button and changing his profile. Additional posts will examine these issues.  

 

Searching Employee Computers

When an employee quits, many employers hire computer forensic experts to create an image of the hard drive in any computer used by the employee. That image is then searched for evidence of improper conduct. The employer can look at the employees' emails on the company email system, for example, and see if the employee was improperly soliciting customers for his new employer.

To the surprise of many employees, these experts also can recover emails sent on an employee's password protected, private email account when the email is sent from a company computer.   Employees often believe that they have privacy rights and that these rights should preclude their employers from reviewing their private emails. Employers, on the other hand, claim that their policies grant them the right to review anything on their computers. 

Colorado courts have not provided any guidance about when and how an employer can search  computers and electronic devices. In a 2010 decision with national implications, however, the New Jersey Supreme Court generally recognized that employers had the right to search a former employee's computer.

In Stengart v. Loving Care Agency,  the employee used her company issued  laptop to access her personal, password protected email account on Yahoo and sent emails to her lawyer about her situation at work. After the employee left, the employer created an image of the hard drive on the laptop and was able to retrieve the contents of the emails that the employee had sent to her lawyer. The employee's counsel later learned about these recovered emails and demanded that they be returned. Employer's counsel declined to return the emails and denied that the emails were protected by the attorney client privilege. 

The New Jersey Supreme Court held that the employee had not waived her attorney client privilege for the communications because the employee had a reasonable expectation of privacy in sending the emails. There are important public policy concerns underlying the attorney client privilege and those concerns drove the court's decision. The court concluded that the privilege would not be waived even if the employer's had a policy that banned all personal computer use and provided unambiguous notice that the employer could retrieve an employee's communications so long as the communications were sent on a password protected account.

More importantly, however, the court approved the practice of enlisting consultants to create a forensic image of computers and other electronic devices. In creating such an image, the New Jersey court concluded that the employer was "legitimately attempting to preserve evidence". Most  employee emails or communications will not be protected by a privilege. The implication in Loving is that an employer is free to search for, and recreate, non-privileged emails even if they are sent on a private, password protected account. 

The Loving holding is, of course, limited to the facts presented. Different decisions might result depending on an employer's electronic communications policies or unique state privacy laws. Nonetheless, the lesson for employees is clear. You should assume that your employer can review any email sent on a company computer even if the emails is sent on a password protected, private account. Certain communications might be privileged but most communications will not be.    

Award of Attorneys Fees Affirmed in New Colorado Court of Appeals Decision

An award of over $72,000 in fees and costs against a former employee was affirmed by the February 17 Colorado Court of Appeals decision, Saturn Systems v. Delbert J. Militare. The decision demonstrates the risks presented by a fee shifting provision in a noncompete agreement.  

After an employee had been terminated by Saturn, he used his relationship with a client to obtain a password to Saturn’s confidential database. With this password, the former employee was able to access and review confidential information. After the close of evidence, the former employee stipulated to the injunctive relief requested. The trial court then found the former employee liable for misappropriation and breach of the nondisclosure and nonsolicitation provisions of his agreement with Saturn. Only $525 in damages were awarded, but the trial court also awarded Saturn over $72,000 in fees and costs under a fee shifting provision. In a lengthy decision, the Court of Appeals affirmed the trial court’s rulings and granted Saturn’s request for attorney fees and costs incurred on appeal.

The Court of Appeals rejected the former employee’s arguments that there was insufficient evidence to support the misappropriation despite the former employee’s argument that no evidence was presented about the exact data allegedly misappropriated. Many courts have recognized, as the Court of Appeals acknowledged, that a plaintiff must identify the trade secret supposedly misappropriated. General allegations about trade secrets typically are not enough. Nonetheless, the Court of Appeals ruled that the “dynamic nature of the information” made it unnecessary for Saturn to identify the confidential information. The court’s ruling may have been guided by its perception that it would have been technologically difficult for Saturn to identify the exact information misappropriated because the information was maintained electronically and continually updated.

 

The former employee also argued that the nonsolictation provision was void. This argument was rejected because the restriction on the employee was limited to specific customers and because  Saturn included the nonsolicitation clause “within a single confidentiality provision”. These factors allowed the court to distinguish a prior decision which had declined to enforce a noncompete, at least in part, because the nonsolicitation clause was included in a different paragraph from the nondisclosure provision.

 

In an interesting twist, the former employee argued that Saturn had not proven any damages because the $525 awarded was not recoverable under Colorado law. The $525 represented the cost of Saturn’s computer investigation prior to the commencement of litigation. This argument had important implications because damages are an element of any claim for breach of contract. If the $525 awarded was not “damages”, then any fee award might be questioned. The Court of Appeals found, however, that the $525 represented “actual damages as a matter of law”.

Antitrust challenge to no hire clause rejected

No hire or no switching clauses are agreements between companies under which one or more companies agree not to hire employees of another company.

No hire clauses are common in a variety of situations. If a company is seeking to be acquired, for example, it may want to showcase its best or key employees to the potential purchaser. If the acquisition doesn't occur, however, the seller may be concerned that the potential purchaser will seek to hire its best employees. No hire clauses are also used when one company provides temporary employees to another company.  The supplier of the temporary workers will seek a no hire agreement from its customer to prevent its customer from directly hiring the temporary workers.

In a case, Haines v. VeriMed Healthcare Network, decided earlier this year by the federal district court in Missouri, the court dismissed an employee's antitrust challenge to a no hire clause. Haines was a doctor who supplied "written content for publication on medical websites" to VeriMed. VeriMed didn't publish the content itself, but instead acted as a middleman and sold the "written content" to others who published the content on websites. Haines also developed a relationship with THCN which actually published content. THCN had an agreement with VeriMed, however, under which it agreed not to hire VeriMed's contractors unless it paid VeriMed an agreed upon amount. When THCN learned that Haines was a VeriMed contractor, it terminated its relationship with Haines.

Haines filed suit against VeriMed and alleged that the no hire agreement was a violation of federal and state antitrust laws. After acknowledging that courts have found no hire clauses to violate or potentially violate antitrust laws, the court ruled that Haines's agreement was not the kind of no hire provision which violated antitrust laws. The no hire clause, according to the court, did not violate antitrust laws because it was limited in specific ways that narrowly tailored the agreement to protect VeriMed's legitimate business interests.

Antitrust challenges to no hire clauses have had mixed success depending on the facts of the  cases. Challenges have also been made based on state non-compete statutes, including a successful challenge in Wisconsin in 2002. We are not aware of any Colorado appellate decisions on no hire or no switching clauses. Depending on the nature and scope of the no hire provision, there is reason to think that a successful challenge could be brought in Colorado. In evaluating the nature of any challenge presented, the remedies available need to be considered.

Top employment law blogs

We pleased to let you know that the Colorado Non-Compete Law Blog was included on the Delaware Employment Law Blog's annual list of the hundred best employment law blogs.

We've included the Delaware Employment Law Blog on our Relevant Blogs section in the left hand margin. The list of the best employment law blogs was included in a November 4 entry -- we've been slow to acknowledge our inclusion. The Delaware Law Blog is a great resource for anyone interested in employment law issues.