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January 29, 2014

Survey of Chancery Court Cases Shows Most Litigants Obtain Expedited Relief

A recent survey conducted by several of my colleagues demonstrates the speed in which litigants can obtain preliminary relief from the Court of Chancery. The survey included a sampling and analysis of approximately 200 cases between 2009 and 2011, in which the court ruled upon a motion for temporary restraining order or a motion for preliminary injunction. The results reflect the frequency and speed at which the court has granted injunctive relief in recent years:

  • For cases in which the court ruled on a motion for temporary restraining order, the court granted the motion 58 percent of the time. On average, the court granted the motion 7 days after its filing.
  • For cases in which the court ruled on a motion for preliminary injunction, the court granted the motion 30 percent of the time. On average, the court granted the motion 26 days after its filing.
  • The survey also looked at cases from the sample that involved trade secret claims and in which the court ruled on a motion for temporary restraining order or preliminary injunction. In those cases, the court granted the motion for temporary restraining order 88 percent of the time and granted the motion for preliminary injunction 75 percent of the time.

Based on these statistics, there seems to be little doubt that the court will order injunctive relief on an expedited basis in cases where circumstances require expedition, including those involving noncompete agreements and misappropriation of trade secret.

A copy of the full article drafted by my colleagues and published by BNA can be obtained on the Young Conaway Stargatt & Taylor website.

March 16, 2012

Settlement Discussions Not An Excuse for Delayed TRO Application To Enforce Noncompete

One of the most critical points in the enforcement of a noncompete is when a company first learns that a former employee may be engaging in unfair competition.  Indeed, the steps taken by the company in the first few days can often determine whether it will be successful in limiting the amount of harm done.

In many case, the company will act quickly and seek emergency injunctive relief to stop imminent irreparable harm to its business.  In other cases, the company may try to resolve the dispute with the competitor by engaging in settlement discussions at the outset.  The benefit of the latter strategy, of course, is that a business resolution is often preferable to the expense and uncertainty of litigation. 

But companies that chose the settlement route need to be aware that the passage of time can compromise their ability to get relief from a court should discussions break down, particularly if it needs an emergency injunction.  In a recent Chancery Court hearing on an application for a temporary restraining order, the court was quick to point out plaintiff’s apparent four month delay after learning of the defendants activities before seeking the TRO.  The plaintiff responded that the delay was due in part to its efforts to work out a standstill agreement with the defendants.  As noted in the transcript excerpt below, the court was not sympathetic to this argument:

You can't have a problem in November and come running in here [in March], you know, two days after you file your papers, and say all of a sudden you need a TRO. We don't operate like that. 

And the fact that you tried to … negotiate a standstill, that's great, but if you think that your rights are really being harmed to the extent that you say they are, you have to go on a parallel path to get some judicial relief. You haven't moved fast enough, and I'm not giving you a TRO.

Prompt action is the keystone for any company needing to enforce a noncompete agreement.  Even if those efforts involve an attempt to settle the matter, the company is well advised not to delay seeking emergency judicial relief that may be necessary to prevent ongoing irreparable harm.  By dual tracking enforcement efforts with settlement talks, companies can not only avoid prejudicing their legal rights, but can use the specter of an impending injunction hearing to foster an even quicker resolution of the dispute.

February 17, 2012

Protecting Trade Secrets In Delaware

Employers frequently confront the problem of theft or misappropriation of trade secrets and confidential, proprietary information by departing employees. While employers have an arsenal of legal weapons at their disposal to protect their most valuable business assets, it is critical that they take proactive steps to protect against the disclosure of important business information and prevent unfair competition. From a practical standpoint, failure to implement basic security measures makes it easier for an unethical employee or competitor to misappropriate confidential business information. From a legal perspective, absent efforts to preserve the secrecy of such information and avoid unfair competition, a court is unlikely to respond favorably to an employer request for relief.Delaware

Trade Secret Protection

Delaware, like most states, has enacted the "Uniform Trade Secrets Act" providing employers with legal protection for trade secret information even in the absence of contractual agreements with employees. While many people may believe that "trade secret" status is only afforded to scientific data such as the formula for Coke, in reality, trade secret protection is available for a much broader array of information. The statutory definition for a trade secret is "information" that "derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means, by other persons who can obtain economic value from its disclosure or use." To be protected by the statute, the information must be "the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Trade secret protection is available to business information other than scientific data such as formulas and chemical compounds. The Uniform Trade Secrets Act specifically extends protection to a "compilation," "program," "method," "technique," or "process" that has independent economic value to a company arising from its secrecy.

Customer lists may be subject to trade secret protection if the employer expended substantial resources and time in developing information that is not generally known to the public or competitors. Further, even if the customer list itself is not trade secret, information the employer compiled as part of its marketing efforts may be protected. For example, the courts have found that a "rankings report" kept by company sales representatives concerning the amount of sales to clients and ranking the company's customers by sales volume is sensitive financial information that may be subject to trade secret protection. Likewise, while an idea such as linking a savings program to an affinity group may not be a trade secret, the means by which such a program is implemented may be.

Even if business information does not meet the definition of a "trade secret," it still may be confidential, proprietary information subject to other legal protections.

Computer Fraud Act

Employers have a potentially powerful weapon to combat improper access and misappropriation of electronic data and information stored on a computer. We are all familiar with cases in which an unethical employee downloads company electronic information to a thumb drive for later use and/or sends such information via email to his or her personal computer in preparation for leaving employment and competing with their employer. The federal Computer Fraud and Abuse Act ("CFAA") may be used to hold employees liable both civilly and criminally for such misconduct. Although the CFAA was originally passed to target computer "hackers", not disloyal employees, some courts have applied the statute to employee misconduct. The CFAA also has criminal provisions. For example, former news anchor, Larry Mendete, plead guilty under the CFAA to intentionally accessing the private email account of his former co-anchor, Alycia Lane.

Delaware has a state counterpart to the CFAA.  The Misuse of Computer System Information Statute, 11 Del. C. § 935 et seq., makes it a crime to knowingly access a computer system without authorization. The statute prohibits not only the unauthorized copy and disclosure of electronic data, but the knowing deletion of data from a computer system.  The statute also has a civil component to this law which allows an aggrieved party to bring an action in the Delaware Court of Chancery for injunctive relief, restitution, treble damages, and attorneys' fees.  For more information see our earlier blog post on this statute.

Common Law Claims

There are many other legal claims that the company may assert to protect its business assets if an employee improperly uses or discloses its confidential, proprietary, or trade secret information. Employees who are given access to such information may be treated as fiduciaries with a duty of loyalty to protect it from disclosure during their employment. A competitor who knowingly participates in improper disclosure may be charged with "aiding or abetting" a breach of fiduciary duty or illegally participating in a civil conspiracy. In addition, a competitor who unfairly competes through the acquisition and intended use of such information may be sued for tortious inference with contract or business relations.

Contractual Protections

Aside from statutory and common law protections, there are contractual safeguards available to help employers stop the inappropriate disclosure of the business information and prevent unfair competition. At a minimum, all employers should consider requiring key employees who have access to confidential, proprietary, and trade secret information to sign Confidentiality and Non-Disclosure Agreements. A company may legally require employees who have access to confidential, proprietary information to sign such an agreement. If drafted properly, such agreements have "teeth" when enforcement action is necessary. Confidentiality agreements may provide not only for emergency injunctive relief, but also for an award of damages from the improper disclosure of company information. Importantly, in appropriate circumstances, Delaware courts will enforce a provision in a confidentiality agreement providing that an individual who violates its terms is subject to paying the company's attorneys' fees and costs in bringing enforcement action.

For certain classes of employees, employers should consider broader contractual protections beyond a simple confidentiality agreement. Employees in sales and marketing or high-level management positions may be in a position to seriously damage the company's business if they leave to work for a competitor. A non-competition agreement or restrictive covenant is valid and enforceable in Delaware so long as the agreement is not overly broad and is necessary to protect the company's legitimate economic interests.

Delaware courts will generally enforce a non-competition agreement that is reasonable in geographic and temporal scope. The non-competition agreement must contain a geographic restriction tied to the areas where the company does business and where the employee works to establish that the Company has a legitimate business interest in restricting competition in those locations. Delaware courts, like most courts throughout the United States, also require that the restriction against competition have a reasonable time limit. Typically, a Delaware court will find a two-year restriction to be reasonable.

Since enforcement of a non-competition agreement prohibits an employee from working in a specified field in competition with his or her former employer, courts are careful to balance the equities. The court will consider the employer's reasonable business needs versus the impact of the enforcement of such agreements on an individual's ability to earn a livelihood. Upon a showing of a need for such relief, however, courts will enforce non-competition agreements and may even issue an order prohibiting a former employee from working for a competitor.

An alternative to a non-competition agreement is a "non-solicitation" agreement. Non-solicitation agreements are narrower than non-competition agreements. A non-solicitation agreement restricts a former employee from soliciting a company's clients or customers. Like a non-competition agreement, a non-solicitation agreement must include a reasonable time limit. Instead of a geographic limitation, however, a non-solicitation agreement may restrict an employee from solicitation or business dealings with certain customers such as those with whom the employee had direct contact or about whom the employee received confidential information. Non-solicitation clauses may also include potential customers or prospects. Of course, as with other contractual provisions, careful drafting is necessary to ensure the enforceability of such contractual restraints.

In appropriate cases, employers may include confidentiality, non-competition, and non-solicitation clauses in the same agreement. As a rule of thumb, the need for such protections and the likelihood of successful enforcement increases with the amount of access an employee has to valuable business information and his or her level in the organization. In addition, employee misconduct, such as misappropriation of a customer list or other sensitive information, increases the likelihood that a court will award relief to the employer.

Posted by Barry M. Willoughby
October 5, 2011

Chancery Court Decision Provides Insight Into Drafting Enforceable Forum Selection Clauses

The Delaware Court of Chancery is nationally respected for its consistent and conscientious decisions in cases involving complex business issues. As a result, many legal practitioners recommend that contracting parties include a forum selection clause requiring that any disputes arising from a given contract be heard by a court of competent jurisdiction in the State of Delaware, including the Court of Chancery. A recent case in the Delaware Court of Chancery provides insight into the effective enforcement of a forum-selection clause.Delaware

In the daintily-named case of ASDC Holdings, LLC v. The Richard J. Malouf 2008 All Smiles Grantor Retained Annuity Trust, two parties entered into an agreement regarding the sale of equity in a Texas business. The agreement contained both an arbitration and a Delaware forum-selection clause which provided that any actions “with respect to any claim or cause of action arising under or relating to this Agreement” must be brought in a Delaware state or federal court with jurisdiction.

After the deal was executed, both parties became unhappy and sought legal relief: Plaintiff initiated an arbitration proceeding, and Defendant brought suit in a Texas court. Plaintiff thereafter filed papers in the Delaware Court of Chancery, seeking a preliminary injunction to prohibit the Texas action from moving forward in violation of the forum-selection clause.

The first question before the Court was whether it had jurisdiction to grant a preliminary injunction. The Court of Chancery is a court of limited jurisdiction—it does not have jurisdiction where there is an adequate remedy at law for the damages alleged. Defendant asserted that Plaintiff had an adequate remedy at law because it could assert the forum selection clause as an affirmative defense in the Texas action. Rejecting this argument, the Court held that where the underlying forum-selection clause is valid and broad enough to arguably reach the underlying claims, litigating the applicability of the forum-selection clause in another state deprives the parties of the benefit bargained for and does not constitute an adequate remedy at law.

Having established that it had jurisdiction, the Court moved on to address the Plaintiffs’ Motion for Preliminary Injunction. In order to obtain a Preliminary Injunction, the moving party must show (1) a reasonable probability of success on the merits, (2) an imminent threat of irreparable injury, and (3) that the balance of the equities favors the issuance of the requested relief. Defendant raised several arguments as to Plaintiff’s probability of success. First, it argued that several defendants in the Texas action are not signatories of the contract at issue, and therefore may not invoke the forum selection clause. The Court noted that, as wholly-owned subsidiaries, officers, and directors of the contract signatory, the third-party defendants are closely related to the signatories and may invoke the clause. Regarding the remainder of Defendant’s contentions, the Court concluded that the forum-selection clause was broad enough to give rise to a colorable argument that all of the claims raised in the Texas action fall within the scope of the clause.

As to the second element of Plaintiff’s claim, the Court held that proceeding on a claim in an unwarranted forum constitutes irreparable harm. Finally, the Court concluded that the balance of the equities favored Plaintiff, although the Court did not elaborate.

The Court’s opinion raised two key points to drafting a forum selection clause that may be successfully enforced through a Motion for Preliminary Injunction. First, the forum selection clause at issue must be valid. This means that the clause must permit claims to be brought in the appropriate Delaware Court.  A clause requiring that any claim be brought in the Court of Chancery, regardless of whether the Court has subject matter jurisdiction, may not be enforceable. 

Second, the clause should be drafted as broadly as possible, to ensure that any claims raised in a foreign jurisdiction will be governed by the clause, and subject to dismissal under the forum-selection clause. If the causes of action are not arguably within the ambit of the forum-selection clause, the party seeking to enforce it may not be entitled to a preliminary injunction. The language used by the parties in this case—governing “any claim or cause of action arising under or relating to this Agreement”—was found to be sufficiently broad enough to cover the claims at issue.

September 27, 2011

Court Denies Preliminary Injunction Based on Insufficient Record

While the Court of Chancery will frequently enjoin parties from engaging in unfair competitive activities, the standard for obtaining preliminary injunctive relief remains high.  It is important for parties seeking injunctive relief to be able to provide the court with specific, admissible evidence of unfair competitive activities.  Generalized allegations normally will be insufficient to allow the court to grant relief. Take for example a recent case involving the purchaser of a company’s assets who sought to enforce a noncompete against one of the company’s former employees.

In that case, Geovesi Holdings, Ltd. purchased certain assets of Earthwater Global, LLC as part of a court-ordered liquidation. The purchased assets include “all employment, non-disclosure agreements and  confidentiality agreements entered into by [EW Global].”  Following the sale, Geovesi filed suit in Chancery Court against one of EW Global’s former employees, Robert Bisson, to enforce noncompete and non-solicitation covenants in his employment agreement.  There also was pending litigation between Bisson and Geovesi in Virginia and an arbitration proceeding.

As evidence of Bisson’s competitive activities, Geovesi relied exclusively on allegations in Bisson’s Virginia pleadings that he competed with Geovesi.  The Court noted that while these generalized allegations are admissible evidence of competition, they did not provide a sufficient evidentiary foundation to support injunctive relief.

The Court also found that Geovesi’s allegations that Bisson wrongfully solicited its employees was too general to support injunctive relief.  As evidence, Geovesi had pointed to names mentioned on Bisson’s website and made generalized allegations about other solicitation efforts.  Bisson, on the other hand, responded with an affidavit explaining the names listed on his website and denying any prohibited solicitations.  The Court found that on the present record it could not predict with any degree of confidence how this issue would be resolved at trial, making it inappropriate to issue injunctive relief.

Genovesi Holdings Ltd v. Bisson, 6780-VCL, (Del. Ch. 9/19/2011).

March 8, 2011

Injunction Carve-Out Provision Preserves Status Quo Pending Arbitration

While we are all familiar with the use of preliminary injunctions in aid of litigation, they also have a place in alternative dispute resolution. In Chartis Warranty Guard, Inc. v. National Electronics Warranty, LLC, the Delaware Court of Chancery issued a preliminary injunction pending the outcome of contractually mandated arbitration. The inclusion of a clause allowing issuance of a preliminary injunction prior to binding arbitration is a wise move if a contract includes non-competition or confidentiality provisions, the violation of which would lead to irreparable harm.

In Chartis Warranty, the plaintiff was a joint venture formed between the defendant, National Electronics Warranty, LLC (“NEW”) and Chartis Insurance. The purpose of the joint venture was to provide retailers with consumer warranty programs. Pursuant to the contracts governing the parties’ responsibilities, NEW received a designated fee for administering the retailer warrant programs, and Chartis received all profits earned above the fee owed to NEW.

In the course of its administration, NEW gathered a variety of data relating to the consumer warranty programs. Some of this information was publicly available, and some was sensitive. Among the move sensitive information was loss ratios, profitability, and earnings curves, which would be valuable to Chartis’s competitors. In the process of reorganizing certain programs, NEW provided this sensitive information to some of plaintiff’s competitors, leading to a dispute about whether the data was subject to various confidentiality provisions contained in the contracts governing the parties’ relationship. NEW maintained that it owned the data, and was permitted to disclose it—Chartis disagreed, asserting that it maintained exclusive ownership over the relevant information.

Both parties agreed that any dispute regarding the terms of the contract were subject to binding arbitration. However, the contract also permitted the parties to seek a preliminary injunction pending arbitration. Consequently, the plaintiff filed suit seeking an injunction to protect its interests in the allegedly confidential information that it claimed the defendant was disclosing to its competitors.

Under Delaware law, a preliminary injunction is appropriate it the moving party can demonstrate (1) a reasonable probability of success on the merits; (2) that they will suffer irreparable injury if the injunction does not issue; and (3) that the balance of the equities favors issuance of an injunction. In this case the Court, applying New York law as required by the contract, found that the plaintiff was likely to succeed on its arbitration claims because the terms of the confidentiality provision, indicating that the plaintiff owned “all books and records,” was broad enough to include the disputed data. In so finding, the Court rejected NEW’s argument that, at most, the plaintiff had a non-exclusive ownership interest. In the absence of any information limiting the plaintiff’s ownership right, the Court declined to find such a limit. The Court also concluded that the disputed data might constitute trade secrets.

Regarding irreparable harm, the Court reached two conclusions. First, it determined that the harm done to the plaintiff by NEW’s previous disclosure of the disputed data could be reduced to monetary damages, and therefore was likely reparable. However, the Court noted that NEW had expressed an intent to continue disclosing the disputed data. This on-going disclosure, the Court concluded, was irreparable because continuing harm to the plaintiff’s competitive position is much more difficult to quantify. Consequently, the Court found that the plaintiff had demonstrated a likelihood of irreparable injury.

Finally the Court concluded that the balance of the equities favored the plaintiff, considering the difficulty in quantifying the damage to plaintiff, and the short-term nature of the injunctive relief, which will terminate upon completion of the arbitration proceedings.

Delaware law clearly recognizes a business’s interest in the protection of its client contacts, confidential information, and good will. Consequently, where these types of information are at issue in a contract with an arbitration provision, including a clause allowing for a preliminary injunction is a good way to protect your interests.

Chartis Warranty Guard, Inc. v. National Electronics Warranty, LLC, No. 5764-VCP (Del. Ch. Jan. 28, 2011).

August 27, 2010

Computer Misuse Statutes Playing Bigger Role In Non-Compete and Trade Secret Cases

I n today’s technology driven workplace, departing employees often leave with more than a few notepads and office supplies. Most companies have a wealth of information available by electronic means that proves to be too tempting for some who have designs to unfairly compete connected redwith their former employer.

The latest trend among noncompete law practitioners has been the assertion of various computer theft statutes to reign in this activity. On the federal level, the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq. (CFAA), is being brought with more frequency in noncompetition enforcement and trade secret cases. The statute requires a showing of intentional access to a protected computer without authorization or beyond authorization that results in damages. It also provides for attorneys’ fees if the plaintiff is successful in proving its case.

Delaware has its own version of the CFAA, yet its scope is distinctly broader. The Misuse of Computer System Information Statute, 11 Del. C. § 935 et seq., makes it a crime to knowingly access a computer system without authorization. The statute prohibits not only the unauthorized copy and disclosure of electronic data, but the knowing deletion of data from a computer system.

Section 941 of the Delaware Code also has a civil component to this law which allows an aggrieved party to bring an action in the Delaware Court of Chancery for injunctive relief, restitution, and the appointment of a receiver. The Court has authority under 11 Del. C. § 941 to award treble damages for willful and malicious conduct as well as other relief as it may deem appropriate in equity. The Court of Chancery also is required to award reasonable attorney's fees to an aggrieved person who prevails under the statute.

To fall within the jurisdiction of the Court of Chancery under this law, the misuse of computer system must have occurred in Delaware, or at the there must have been some form of unauthorized access within the State.

June 8, 2010

Balance of Equity Considerations for Non-Compete Agreements

scales.jpgThe Court of Chancery is often hesitant to enforce a covenant that would preclude an individual from earning a living. Where a restriction on the ability to be gainfully employed is involved, the customary sensitivity of the Court to the particular interest affected by its remedies is heightened. As a result, parties seeking to enforce covenants not to compete must use caution so as not to request relief that would essentially render the defendant unable to work.

In balancing the equities, the Chancery Court will analyze whether the consequences of enforcement to the employee are grave and/or whether the interests of the employer are "slight or ephemeral." Disproportionate hardship is often a reason for refusing equitable remedies. If the equities balance in the employee's favor, even a well-drafted covenant may not be enforced.

When determining the balance of hardships, only actual harm is relevant to this determination. Actual harm normally requires there to be specific economic harm. A technical violation of a noncompete that causes no cognizable injury may leave the plaintiff without equitable relief.

The amount of actual harm is also considered. The pilfering of one or two customers may not be enough while evidence of wide spread solicitation will normally prompt action from the Court. The Court may examine whether there is evidence that the former employee is using the employer's customer lists or other proprietary information before granting injunctive relief.

Other considerations include the level and sophistication of the former employee. The Court of Chancery has noted that the more skilled, the higher positioned the former employee, the greater the harm that would inure to the employer if the covenant were not enforced.

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