Workplace Property Rights & Related Interests - Employer suing Employee Flashcards
Section
How does the law go about striking balance of employer and employee rights. In this context most suits in this section are brought by employer after employee leaves. This is an area of very high stakes.
Big Picture
Big Picture questions:
* Balance of competition and employer incentives to maintain own ideas
* Tension here with at-will and non-competition agreements. They seem to be at odds.
* Private ordering plays a central role (non-competition agreements go beyond fiduciary duty and protection of trade secretes)
Four Categories
o Duty of Loyalty (fiduciary duties)
o Trade secrets
o Post-Employment Restraints (restrictive covenants, NCA, Non-solicitation agreements, Confidentiality agreements, Non-Disclosure agreements, Hold-over agreements etc.)
o Inventions & Creative works (inventions created during employees work with employer who owns invention?)
Fiduciary Duties of Current Employees
B. Fiduciary Duties of Current Employees:
o An employee has a duty not to compete with his employer concerning the subject matter of the employment.
* Scope = within employment
* Duration = only while employed
- In general, employee must not (while employed) act contrary to the employer’s interest
- “Duty of Loyalty” Framework:
Employee CANNOT, while employed, act contrary to the employer’s interest
But employees CAN agree to compete upon termination.
But, employees CANNOT, while still employed, go beyond “mere planning and preparation” and act in direct competition with the employer
An employee CAN inform customers that he is leaving, but CANNOT solicit customers.
Private ordering and duty:
* Can agree that employee is allowed to moonlight, or can agree that employee can take corporate opportunity.
Case for Section
Scanwell:
* Scanwell Freight Express STL - office manager arranged w/ direct competitor to open office in
space Scanwell was using.
* Duty of loyalty (implied): generally, an employee must not, while employed, act contrary
to the employer’s interest.
* Employee may agree to compete & plan/prepare to compete.
* But employee may NOT go beyond planning & preparation.
- Status/level w/ employer may dictate the level of duty.
- Remedies = lost profits, maybe punitive damages.
* Burden is on D-employee to show breach of duty didn’t cause loses.
New Employers
a new employer can be liable for aiding and abetting the employee to breach the “duty of loyalty” for his former employer (but the plaintiff must prove the new employer had the requisite knowledge or intent).
* Aiding and abetting generally requires that the new employer provide assistance and encouragement with knowledge that the conduct encouraged will constitute a breach of loyalty.
- A new employer or departing employee’s solicitation of a co-worker employed at-will generally does NOT give rise to an interference claim (because at-will means employee can leave whenever anyway).
- BUT a tortious interference claim can arise if the departing employee or a new employer solicits a worker employed under a contract containing fixed term of employment, or restrictive covenant, or a customer with an existing or prospective service or supply contract.
Faithless Servant Doctrine
– some courts require the employee to give back earned wages earned during the disloyal period.
* i.e. employee may have to disgorge whatever profits were earned while working as a disloyal employee.
* the lost profits sought must be attributable to the disloyal behavior.
NO post-employment protection here. The duty of loyalty ENDS with employment**This is why employers draft Non-Competition Agreements
Post-Employment Restraints on Competition: (Non-Competes/NCAs)
o Non-compete Agreements: non-disclosure (narrow only limit disclosure), non-solicitation (a little broader but only cover solicitation of customers, non-competition (most broad and most used, most controversial, hold-over (applies to patent rights)
a. NCA Two Main Elements:
Legitimate employer interest
(i) Specialized training ( General knowledge/training is NOT enough)
(ii) Trade secrets
(iii) Goodwill/reputation/customer relationships
Reasonableness of Constraint
(i) Type of activity restricted must be REASONABLE
(ii) Scope
(iii) Duration
(iv) Geography
* Must also not be against public policy
*BURDEN IS ON EMPLOYER TO DEMONSTRATE THE LEGITIMATE INTERESTS
**Competition and economic loss alone is NOT enough. Preventing competition is NOT a legitimate interest. A NCA must be supported by something more (this is to strike the balance of competition and protection)
CA DOES NOT enforce NCAs
IL very hostile towards them (Outsource Case)
- Restatement follows a middle ground “reasonableness approach” (most jurisdictions)
(a) Most states fall somewhere in the middle most states follow some version of the restatement approach, which enforces “reasonable non-competes necessary to protect employers’ legitimate interests.”
(b) most jurisdictions there needs to be separate consideration for new written K. - So if employee has first written K with no NCA, but then employer makes employee sign new, second K with NCA need additional consideration. A raise can = consideration (this is not too hard for employers to meet)
CURING OVERLY BROAD NCAs
All or nothing: take it all, or none at all-if any part of the NCA is too broad, the whole NCA is
thrown out.
Blue penciling: delete the parts that are overly broad & enforce the rest.
“No compete for job duties A, B, C, in places X, Y, and Z.”
Partial enforcement: enforce something less than the actual terms.
“No compete for 1,000 miles for 10 years” -> enforce 10 miles for 1 year.
Case for this section
Rem Metals:
– Logan was a welder for Rem Metals and he signed a NCA. Issue was whether Rem Metals stated a legitimate interest. Court said NO
* Court distinguished general training and knowledge from that which imparts information pertaining to a specific business.
* General training and knowledge does NOT support legitimate interest for enforcement of NCA; need “unique and particulairzed skill.”
* Logan was clearly well-qualified before even working for Rem Metals
* Employee “owns” their general knowledge and skill acquired through training and experience.
* Employer can only claim to own very special or particular interests.
Could this have been prevented? Probably not, a fixed term contract would not have worked because courts done enforce specific performance against employee. A raise might have kept Logan there.
Trade Secrets
Trade Secret Elements
* Information must derive INDEPENDENT economic value from not being generally known
(a) Could be formula, pattern, compilation, program, device, method, technique, or process
Trade secret does not provide exclusivity ->if someone derives it on their own, then it is not protected.
* Must be a purposeful effort to maintain the secret
* Must be actual misappropriation in order
Inevitable Disclosure Doctrine:
courts are VERY hesitant to assume that there will be misappropriation
* Need to be direct competitors
* Nearly same position
* Both firms have trade secrets
(a) The vast majority of courts reject the inevitable disclosure doctrine (and even those that accept it tend to limit it)
Trade Secrets
Trade Secret Elements
* Information must derive INDEPENDENT economic value from not being generally known
(a) Could be formula, pattern, compilation, program, device, method, technique, or process
Trade secret does not provide exclusivity ->if someone derives it on their own, then it is not protected.
* Must be a purposeful effort to maintain the secret
* Must be actual misappropriation in order
Inevitable Disclosure Doctrine:
courts are VERY hesitant to assume that there will be misappropriation
* Need to be direct competitors
* Nearly same position
* Both firms have trade secrets
(a) The vast majority of courts reject the inevitable disclosure doctrine (and even those that accept it tend to limit it)
Creative Works
Copyright and Patents
* Employee-Authored Creative Works:
(a) Default Agreement:
(i) Creative work within scope of employment work for hire = EMPLOYER “owns” the creative work
(ii) IC or outside scope of employment EMPLOYEE owns
i. NOTE – Licensing agreement alters default to whatever K terms are
- Employee Inventions:
(a) In patents, there’s a “duty to invent” so EMPLOYER owns
i. NOTE – Assignment clauses alters default
NCA Enforcement Cases
Fiskin:
– In this case the former employer had already secured an injunction. This dispute was about whether the employer could also get monetary remedy.
o Court rejected trade secret claim here.
o But went on to look at NCA and considered monetary remedy
This NCA had selection of remedy.
Employer opted for injunction therefore precluded themselves for the liquidated damages restitution.
Hopper:
Vet sought to leave and open her own practice. Agreed to NCA during employment
o First question was whether consideration was needed. Court said YES, but pay raise that occurred at same time was enough.
o Can NCA be enforced against terminated employees? This court said yes, employee still bound even though terminated (some courts might disagree)
o Reasonableness of scope:
Relationship of customers was at issue here YES reasonable.
Substance of restraint small animals (narrow enough because employee could practice on large animals so was reasonable)
Geography – 5 miles was reasonable.
Court said 3-year term too long remand and said to make it one year.
CTI:
employees hired to expand EDI service. Employees had one-year NCA but left to start their own enterprise using software package. CTI brought trade secretes claims and violation of NCA
o Court said no trade secretes here as information was commonly known.
o Although no trade secrets the court DID enforce the NCA.
This means confidential information of legitimate interests are BRAODER than trade secrets protections. (this is why NCA are frequently used to protect employers)
Court said NCA was reasonable in substantive scope (prohibited activity was limited to a narrow type of software so was not too broad)
No problem with national geographic scope
One-year duration as okay
o Sometimes the three aspects of scope have interplay
Forum Selection Clauses
a. Forum selection clauses are more likely to be enforced and receive greater deference than choice-of-law clauses.
Advanced Bionics:
there is a choice of law clause -> π wants to sue in CA (where new employer is and CA law is much more favorable). But ∆ wants MN.
This is a tortious interference claim.
. Depending on which state hears the case will determine who wins (CA public policy does NOT allow NCA’s). Appears the states had some self interest and genuine regulatory interest.
(d) Keep in mind: k did not contain choice of forum clause (had there been this might have turned out differently) Forum control matters in NCA’s because forums approach these in different way. Risk management perspective choice of forum may be wise Arbitration clause may be an option as well but usually the former employer wants injunction and can’t really get that in arbitration.
Innovations in NCA (Alt to NCAs) (Just Cases):
Heder:
court held that it would NOT treat training repayment provision as NCA because repayment had nothing to do with employee competing or not. Court avoided reasonable analysis because classified it as training repayment provision.
* If the repayment obligation is tied to post-employment competition, courts are likely to view the agreement as an NCA and evaluate its reasonableness under comparable standards.
* “Training repayment agreements” get around the problem when the courts disfavor NCAs and the particular reluctance to recognize training as a protectable interest.
Schuck:
takes different approach than Heder case. Court still does not view the term as a NCA. Court treats this as unenforceable liquidated damages clause b/c employer did not meet burden that the amount sought represented the cost of training.
Liquidated Damages Clause: liquidated damages must fairly be allowed as compensation for the breach if the sum is grossly disproportionate to the loss that may result from breach of contract, the sum is treated as a penalty and NOT enforceable.
** Other Alternatives:**
Garden Leave term -> paying exiting employees to sit out for a period of time
* No hire agreements -> sometimes enforceable
* Deferred compensation -> stock options that do not vest until later in time (deterrent for employees to leave and go elsewhere)
