California Misappropriation/Misuse of Trade Secrets

California Law on Enjoining a Former Employee from Competing Unfairly

In a misguided effort to catch up to a competitor, a business may hire a competitor’s key employees for the purpose of using the trade secret information known to the employee. Or, an employee may quit and go into competition with the former employer, using the confidential, proprietary and trade secret information learned while on the job. Whether characterized as misappropriation or theft of trade secrets, or as unfair competition, the bottom line is that such conduct represents an unfair business practice that can be enjoined under California law.

In a separate article, we explored the enforceability of non-compete agreements in California in light of the statutory prohibition against such agreements set forth in Business & Professions Code section 16600. We noted there that broad exceptions exist to the statutory prohibition, centering around an employer’s legitimate need to protect confidential and proprietary information. We address here the quantum of proof required to enjoin a former employee from using trade secrets in the service of a competitor.

We first address the validity of the “inevitable discovery” rule in California. The inevitable disclosure doctrine permits an employer to enjoin a former employee from working for a competitor “by demonstrating the employee’s new job duties will inevitably cause the employee to rely upon knowledge of the former employer’s trade secrets.” Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443, 1446 (2002). Prior to Whyte, “[n]o published California decision ha[d] accepted or rejected the inevitable disclosure doctrine.” Id. Whyte unambiguously rejected it. Id., at 1447. Thus, California court decisions upholding non-compete agreements have not done so based on the inevitable discovery rule.

However, these decisions have not always required actual proof of use, either. It may be sufficient if the company can demonstrate the actual “threat” that confidential information will be used by the former employee to benefit a competitor.

Topics of Interest Uncategorized

Defense and Prevention of Class Action Claims Alleging Labor Law Violations

Labor law class action claims are on the rise. Congress and the courts have noted with dismay the widespread abuse of class actions. For example, in the House Conference Report accompanying what later became the Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u-4), Congress explained that class actions were hurting “the entire U.S. economy.” H.R.Rep. No. 104-369, p. 31 (1995). The House Conference Report identified widespread abuse, including frivolous lawsuits, burdensome discovery requests (aimed at extorting settlements), targeting deep-pocket defendants, and “manipulation by class action lawyers of the clients whom they purportedly represent.” Id. Perhaps nowhere is this abuse more prevalent than in the meteoric rise of class actions alleging labor law violations.

In the litigious society we live in, the knee-jerk reaction of individuals who are fired for valid grounds such as theft, incompetence, disruptive behavior, etc. is a lawsuit back against the company for alleged labor law violations. This vehicle provides the means for the disgruntled employee to exact his or her “pound of flesh.” Unfortunately, all too often the employee simple desire to exact vengeance is manipulated by plaintiff’s counsel into a purported class action, “identifying” patterns of abuse that exist only in the imagination of plaintiff’s counsel.

This is not to suggest, of course, that an employer can do no wrong. Certainly if a company is violating state or federal labor laws, litigation is an appropriate vehicle to rectify such deficiencies. Not all such class actions are frivolous: as with every profession and every field, there are many honest and talented attorneys who devote their energies to carefully investigating “facts” reported to them by prospective clients, and to filing class actions that seek to redress what they in good faith believe to be a pattern and practice of employee abuse. If personal experience is any guide, however, these attorneys represent the minority of those who file class actions.

Topics of Interest Uncategorized

California Law on the Validity of Non-Compete Agreements

Scope of California Business & Professions Code Section 16600

As businesses increasingly seek to hire the key employees of their competitors, the differences in state laws concerning non-compete agreements and protection of trade secrets has become more important. In California, the general rule is that non-compete agreements are unenforceable. That statement, however, is an oversimplification. In fact, non-compete agreements are enforceable in California under the right circumstances.

California Business and 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.” The California Supreme Court has held that that “[t]his section invalidates provisions in employment contracts prohibiting an employee from working for a competitor after completion of his employment or imposing a penalty if he does so [citations], unless they are necessary to protect the employer’s trade secrets [citation]. Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 242 (1965) (italics added). (California’s Uniform Trade Secrets Act may be found at Civil Code section 3426.1.)

Despite the sweeping language utilized by some courts, the exception to the statutory prohibition against non-compete agreements is actually read expansively. In fact, several cases hold that the “trade secret” exception encompasses any act that may be considered “unfair competition.” Thus, one appellate court recently held that Section 16600 “prohibits the enforcement of [a] noncompete clause except as is necessary to protect trade secrets,” Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 860 (1994) (citing Muggill, 62 Cal.2d at 242), but then explained:

Topics of Interest Uncategorized

Class Action Defense Cases–Patterson v. Dean Morris: Fifth Circuit Rules On “Commencement Of Action” Under Federal Class Action Fairness Act (CAFA)

CAFA (Class Action Fairness Act of 2005) Determination of “Commencement” of Action Turns on State Law Fifth Circuit Holds

On May 3, 2006, the Fifth Circuit Court of Appeals issued its opinion in Patterson v. Dean Morris, L.L.P., ___ F.3d ___, 2006 WL 1156388 (5th Cir. 2006), where it considered whether an action that had been filed on February 17, 2005 (prior to CAFA’s February 18, 2005 effective date), but the filing fees not paid until February 22, 2005, could be removed to federal court under CAFA (Class Action Fairness Act of 2005). Slip Opn., at 6-7. The district court remanded the consolidated actions finding that CAFA did not apply, and the Fifth Circuit affirmed. _Id._, at 6. The Fifth Circuit’s analysis turned entirely upon state law, determining when Louisiana would deem the action to have been “commenced.” In so analyzing the case, the Court joined several sister circuits in relying upon state law to determine when an action has “commenced” under CAFA.

Louisiana law permits a party to fax-file a complaint, provided that the filing fee be paid within 5 days thereof, together with a $5 “transmission fee.” If a plaintiff fails to pay the required filing fee and transmission fee, then the fax filing “shall have no force or effect.” Slip Opn., at 7 (citations omitted). In Patterson, plaintiffs paid the court $3,039 on February 22. However, on May 12 plaintiffs learned that they owed the court an additional $2,145 in fees, which they did not pay until June 14. Defendants urged that the late payment took the action outside of the Louisiana statute’s five-day deadline, so the effective date of the commencement of the lawsuit was after the effective date of CAFA. Slip Opn., at 7.

Class Action Court Decisions Class Action Fairness Act (CAFA) Removal & Remand Uncategorized

Class Action Fairness Act of 2005 (CAFA): Text for the Class Action Defense Lawyer

PUBLIC LAW 109 2|FEB. 18, 2005

109th Congress

119 STAT. 4

An Act

To amend the procedures that apply to consideration of interstate class actions to assure fairer outcomes for class members and defendants, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

__

28 USC § 1 note

SECTION 1. SHORT TITLE; REFERENCE; TABLE OF CONTENTS.

(a) SHORT TITLE.|This Act may be cited as the Class Action Fairness Act of 2005.

(b) REFERENCE.|Whenever in this Act reference is made to an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of title 28, United States Code.

(c) TABLE OF CONTENTS.|The table of contents for this Act is as follows:

Sec. 1. Short title; reference; table of contents.

Sec. 2. Findings and purposes.

Sec. 3. Consumer class action bill of rights and improved procedures for interstate class actions.

Sec. 4. Federal district court jurisdiction for interstate class actions.

Sec. 5. Removal of interstate class actions to Federal district court.

Sec. 6. Report on class action settlements.

Sec. 7. Enactment of Judicial Conference recommendations.

Sec. 8. Rulemaking authority of Supreme Court and Judicial Conference.

Sec. 9. Effective date.

Statutes & Rules Uncategorized

Rule 23. Class Actions – Defense of Class Action Issues

Defending Against Class Actions

In defending against class actions, the single most important motion facing a defendant is the plaintiff’s motion to certify a class. In federal court, Rule 23 of the Federal Rules of Civil Procedure governs class actions. The class action requirements of Rule 23 are mandatory. Class Rule 23(a) requires that the plaintiff demonstrate numerosity, commonality and typicality, and that the class members will be adequately represented, and must additionally demonstrate that the action satisfies Rule23(b). Separate articles discuss the elements of the Rule 23(a) and Rule 23(b). For the convenience of the reader, we set forth the full text of Rule 23 below.

Rule 23. Class Actions

(a) Prerequisites to a Class Action. One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.

Statutes & Rules Uncategorized

Class Action Defense Issues: Removal of Class Actions – 28 U.S.C. 1453

Defending Against Class Actions – Removal

In defending against class actions, it will often benefit a defendant to remove the case to federal court whenever possible. CAFA (Class Action Fairness Act of 2005) greatly expands removal jurisdiction of the federal courts pursuant to 28 U.S.C. § 1453. The removal procedure for non-class action cases is set forth in 28 U.S.C. § 1441. Various issues concerning CAFA, removal and remand are discussed in separate articles. For the convenience of the reader, we set forth the full text of Section 1453 below.

28 U.S.C. § 1453. Removal of Class Actions

(a) Definitions.–In this section, the terms “class”, “class action”, “class certification order”, and “class member” shall have the meanings given such terms under section 1332(d)(1).

(b) In general.–A class action may be removed to a district court of the United States in accordance with section 1446 (except that the 1-year limitation under section 1446(b) shall not apply), without regard to whether any defendant is a citizen of the State in which the action is brought, except that such action may be removed by any defendant without the consent of all defendants.

Statutes & Rules Uncategorized

Class Action Defense Issues: Procedure after Removing a Case from State Court to Federal Court – 28 U.S.C. 1447

Defending Against Class Actions – Removal In defending against class actions, it will often benefit a defendant to remove the case to federal court whenever possible. Plaintiffs invariably seek to remand the action to state court. Thus, once a class action has been removed to federal court, it can be expected that plaintiff’s counsel will file a motion to remand the matter to state court. The general procedure for remand is set forth in 28 U.

Statutes & Rules Uncategorized

Class Action Defense Issues: Procedure for Removing a Case from State Court to Federal Court – 28 U.S.C. 1446

Defending Against Class Actions – Removal

In defending against class actions, it will often benefit a defendant to remove the case to federal court whenever possible. CAFA (Class Action Fairness Act of 2005) was enacted by Congress to expand federal court jurisdiction over class actions, but the general procedure for removal is set forth in 28 U.S.C. § 1446. Various issues concerning CAFA, removal and remand are discussed in separate articles. For the convenience of the reader, we set forth the full text of Section 1446 below.

28 U.S.C. 1446. Removal

§ 1446. Procedure for removal

(a) A defendant or defendants desiring to remove any civil action or criminal prosecution from a State court shall file in the district court of the United States for the district and division within which such action is pending a notice of removal signed pursuant to Rule 11 of the Federal Rules of Civil Procedure and containing a short and plain statement of the grounds for removal, together with a copy of all process, pleadings, and orders served upon such defendant or defendants in such action.

(b) The notice of removal of a civil action or proceeding shall be filed within thirty days after the receipt by the defendant, through service or otherwise, of a copy of the initial pleading setting forth the claim for relief upon which such action or proceeding is based, or within thirty days after the service of summons upon the defendant if such initial pleading has then been filed in court and is not required to be served on the defendant, whichever period is shorter.

Statutes & Rules Uncategorized

Class Action Defense Issues: Removing a Case from State Court to Federal Court – 28 U.S.C. 1441

Defending Against Class Actions – Removal

In defending against class actions, it will often benefit a defendant to remove the case to federal court whenever possible. The general procedure for removal is set forth in 28 U.S.C. § 1441. CAFA (Class Action Fairness Act of 2005) contains new removal rules specifically applicable to class actions. Various issues concerning CAFA, removal and remand are discussed in separate articles. For the convenience of the reader, we set forth the full text of Section 1441 below.

28 U.S.C. 1441. Removal

§ 1441. Actions removable generally

(a) Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending. For purposes of removal under this chapter, the citizenship of defendants sued under fictitious names shall be disregarded.

Statutes & Rules Uncategorized