In This Issue

1. California Court Decision Encourages Quick Action to Protect Trade Secrets
   
   
2. Courts Split Over Whether to Extend Duration of Injunctive Relief as Penalty for Noncompliance
   
   
3. Recent Cases Demonstrate Interrelationship Between a Covenant Not to Compete and the Doctrine of Inevitable Disclosure
   
   
4. New York Court Grants TRO Enforcing Garden Leave
   

A. California Court Decision Encourages Quick Action to Protect Trade Secrets

In Cypress Semiconductor Corp. v. Superior Court (2008) 163 Cal.App.4th 575, the California Court of Appeal held that a company’s delay in seeking legal protection for its trade secrets could bar its claims. A former employee of Silvaco Data Systems (Silvaco) went to work for Circuit Systems, Inc. (CSI) and, during his employment with CSI, incorporated Silvaco’s computer source code into computer software marketed and sold by CSI to its customers. Two years later, Silvaco sued CSI and the former employee, but did not take any action against CSI’s customers. Silvaco settled its claims against CSI and its former employee and, after judgment was entered against CSI, notified CSI customers that CSI’s computer software contained misappropriated trade secrets. Four years after filing its lawsuit against CSI and the former employee, Silvaco filed a lawsuit against Cypress Semiconductor (Cypress), a CSI customer, claiming that Cypress continued to use the CSI software with the misappropriated trade secrets. Cypress defended the lawsuit by claiming that the statute of limitations on Silvaco’s claims had expired.

On a petition for a writ of mandate directing the trial court to vacate its order granting Silvaco’s motion in limine to exclude Cypress’s evidence regarding its statute of limitation defense, the court concluded that there was not enough factual evidence to decide in either party’s favor on this issue. Silvaco argued the statute of limitations began to run when the CSI customers had notice of misappropriation, not when Silvaco should have first suspected CSI’s customers possessed its trade secrets. The court rejected Silvaco’s argument and concluded that, under California’s Uniform Trade Secrets Act, the clock begins to run on a company’s claim for misappropriation of trade secrets against a third party not involved in the original misappropriation when the company knows or has reason to know that the third-party customer possesses the misappropriated trade secrets.

TIP: Companies are encouraged to act quickly to protect trade secrets against all parties who they know or suspect of misappropriation.

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B. Courts Split Over Whether to Extend Duration of Injunctive Relief as Penalty for Noncompliance

Many covenants not to compete restrict an employee’s right to work for certain competitors by proscribing such behavior over a period of time measured from the employee’s termination. Such language creates a problem when the employer seeks to enforce such a covenant against an employee who has not complied with the covenant for a certain period of time. By the time injunctive relief issues, much or all of the contractual period of the covenant not to compete may have elapsed, leaving courts to decide whether to reset the clock in order to provide the plaintiff corporation with the equivalent of a full period of compliance. Recent decisions have split over this question. In Homan, Inc. v. A1 AG Servs., L.L.C., 175 Ohio App.3d 51 (Ohio App. 3 Dist., 2008), the court found that the time period on a covenant not to compete had not expired, but rather should be extended in light of the defendant’s noncompliance with the restriction over several months. Another Ohio case, Penzone, Inc. v. Koster, 2008 WL 256547 (Ohio App. 10 Dist., 2008), similarly held that that the duration of injunctive relief should extend for three months beyond the period provided in the covenant at issue in order to reflect the employee’s three months of noncompliance. By contrast, in Stenstrom Petroleum Services Group, Inc. v. Mesch, 375 Ill.App.3d 1077 (Ill.App. 2 Dist., 2007), the court rejected the plaintiff’s argument that the duration of injunctive relief should be increased to offset the defendant’s noncompliance with a covenant not to compete. The court distinguished another Illinois case, Prairie Eye Center, Ltd. v. Butler, 329 Ill.App.3d 293, (2002), based on the fact that the covenant not to compete expressly provided for such a penalty.

TIP: Where permitted by law, consider including in any restrictive covenant a penalty for noncompliance that includes extension of the covenant. 

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C. Recent Cases Demonstrate Interrelationship Between a Covenant Not to Compete and the Doctrine of Inevitable Disclosure

The doctrine of inevitable disclosure provides that potential rather than actual disclosure is actionable where: (1) the employee’s former and current employers are direct competitors, (2) the employee’s new position is so substantially similar to his former position that he cannot fulfill his new responsibilities without using confidential information from his former employer, and (3) the trade secrets at issue are highly valuable to both employers. Some have termed this doctrine an “ex post facto covenant not to compete” due to the similar protections these two legal devices provide. While some courts have applied the doctrine of inevitable disclosure in the absence of or in addition to an express covenant not to compete, recent decisions show that the interrelationship between the doctrine and a contractual restrictive covenant continues to vary by jurisdiction.

In Nelson Tree Service, Inc. v. Gray, 978 So.2d 198 (Fla.App. 1 Dist., 2008), a Florida court applied Ohio law to claims concerning a noncompete agreement. Reversing the denial of injunctive relief below, the court cited the trial court’s failure to consider whether the defendant was in possession of trade secrets. The court traced this requirement to an Ohio doctrine it characterized as inevitable disclosure in all but name, noting that Ohio courts have held that an actual threat of harm exists when an employee possesses knowledge of an employer’s trade secrets and obtains a position in direct competition with the former employer. The court thus held that under Ohio law, the doctrine of inevitable disclosure may be considered in determining whether injunctive relief would be appropriate with respect to a noncompete agreement.

In Aetna, Inc. v. Fluegel, Case No. CV074033345S, 2008 WL 544504 (Conn.Super. Feb. 7, 2008) a Connecticut court considered whether to issue a permanent injunction under the Connecticut Uniform Trade Secrets Act on a theory of inevitable disclosure. The opinion noted that in Connecticut, this doctrine had in fact been applied exclusively to situations in which a covenant not to compete had been negotiated. While not ruling out the possibility that Connecticut courts could choose to extend the doctrine beyond those circumstances, the court stressed the lack of an express covenant in denying relief to the plaintiff, Aetna. The court noted in particular that it was Aetna’s explicit policy not to obtain covenants not to compete and that Aetna had denied this particular employee’s request for an employment agreement. For the Connecticut court, the plaintiff’s failure to obtain an express covenant not to compete was an important factor in its decision not to apply the doctrine of inevitable disclosure. The court also noted that Aetna and the new employer were not direct competitors, nor were the trade secrets at issue highly valuable to the new employer.

TIP: Depending on the law applicable in the jurisdiction, employers may want to incorporate the concept of inevitable disclosure into their restrictive covenants.

D. New York Court Grants TRO Enforcing Garden Leave

A New York trial court recently enforced a stipulated temporary restraining order between Thomas Weisel Partners Group Inc. (TWP) and the former Managing Director and Head of TWP’s Healthcare Banking Group (Director). The Court’s order enforces the 90-day “garden leave” provision in the Director’s employment contract, preventing him from providing services to other entities.

In April 2008, the Director, along with three other TWP Managing Directors, submitted their resignations and announced they were joining Stanford Financial Group, a competitor of TWP. According to TWP’s petition for temporary restraining order, the Director’s employment agreement specifically provided that he or TWP could only terminate his employment by giving 90 days prior written notice of termination and that TWP could elect to place him on paid leave for the 90-day period. TWP argued that this 90-day so-called “garden leave” policy provided an orderly transition of work and responsibilities in connection with departures from the firm. TWP claimed that the Director’s sudden departure from the firm, along with three of the four other Managing Directors from the Healthcare Banking Group, caused and continues to cause significant harm to TWP by depriving TWP of “the opportunity to plan and effectuate an orderly transition, which in turn is negatively impacting its relationships with its clients and substantially disrupting the operations of the Healthcare Banking Group.”

TIP: Garden leaves can be a useful tool to provide for an orderly transition of responsibilities when a key employee resigns.

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If you have questions about items that appeared in this bulletin, or would like to learn more about any of these topics, please contact one of the Labor & Employment Relations partners listed here:

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