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The New Noncompete?

BY MARC GUSTAFSON

“The themes involved in this lawsuit are all too familiar to the Business Court.” It may have been a meaningless line in the introductory remarks to one of hundreds of Business Court opinions, but when my partner Josh Durham and I read this statement from Judge Gregory P. McGuire last June, we immediately wondered if it meant something more.

In Glover Const. Co., Inc. v. Sequoia Services, LLC, the plaintiff employer alleged a disgruntled employee started a competing company while still employed by the plaintiff and purportedly misappropriated the company’s trade secrets to try to get ahead. Judge McGuire, referring to the 2003 case Sunbelt Rentals, Inc. v. Head & Engquist Equip., where Judge Ben. F Tennille awarded $15 million in damages for misappropriation of trade secrets and unfair and deceptive trade practices, noted that these kinds of cases “make up a not insignificant portion of the Court’s docket.”

What struck me about Judge McGuire’s statement was that the departed employee was not subject to a noncompete agreement. (Nor were the former employees of Sunbelt Rentals.) Realizing this, I thought to myself: was Judge McGuire identifying a trend I have also perceived where employers bring noncompete type cases based upon misappropriation of trade secret claims? Or was I imagining something?

To try to find out whether this was a trend or whether I was reading too much into Judge McGuire’s statement, I informally polled several employment litigation practitioners to see if any of them had experience with these kinds of cases. Here are just a few that I found and what I think they mean for the future of employment litigation.

Beginning of a trend?

To try to exert maximum pressure on defecting employees, plaintiffs in noncompete cases typically filed motions for temporary restraining order and, later, for preliminary injunction. The plaintiff in Syngenta Crop Protection, Inc. v. Rabby—a case filed not long after the decision in Sunbelt Rentals—moved for a preliminary injunction seeking broad protections based upon allegations that the employee defendants breached a confidentiality agreement and misappropriated their former employers’ trade secrets. (Of note, there is no mention of a noncompete agreement in Syngenta, only the confidentiality agreement between the employer and employee.)

Finding a likelihood of success on the merits and the potential for irreparable harm, Judge Tennille entered an order enjoining the defendants from disclosing the plaintiff’s marketing materials. The case was dismissed almost two years after it was filed.

Things heat up

In 2013, RoundPoint Mortgage Company filed a complaint against one of its former employees for, among other things, misappropriation of trade secrets and breach of a confidentiality and proprietary information agreement, which contained a non-solicitation of employees provision. After conducting early discovery, RoundPoint moved for a preliminary injunction enjoining the defendants from using or disclosing its confidential and proprietary information and soliciting its employees. Finding that the plaintiff failed to show it likely possessed a protectable trade secret or that the confidentiality agreement was not likely to be enforceable, Judge Calvin E. Murphy denied the motion.

Things seem to only accelerate from there, however. The Court’s order denying preliminary injunction was followed by motions to compel by RoundPoint, the designation of a special master to inspect electronic devices, motions for summary judgment by parties on both sides, and more motions to compel. Judge James L. Gale denied defendants’ motion for summary judgment on RoundPoint’s trade secrets claim. At trial, the jury awarded RoundPoint a verdict in the amount of $7 million, although the case appears to have settled shortly thereafter.

That same year, Safety Test & Equipment Co., Inc. filed an action against a competitor and three former employees centered on the employees’ alleged misappropriation of trade secrets. (Like nearly every other trade secret case, Safety Test premised an unfair and deceptive trade practices claim on the defendants’ purported theft of its trade secrets.) Typical to these cases, Safety Test alleged its competitor schemed to misuse its trade secrets by recruiting its employees, who had knowledge of those trade secrets. There is no mention of noncompete agreements with the departed employees.

At trial, after Judge Gale declined to grant summary judgment to the defendants on three of the four categories of purported trade secrets, the jury found in favor of the defendants, and the claims were dismissed.

Things get personal

In 2018, McGrann Paper Co. filed a complaint against a former employee (my client) alleging, among other things, misappropriation of trade secrets and unfair and deceptive trade practices. McGrann alleged that the former employee had acquired sales, purchasing and financial reports in addition to other proprietary financial information and that he intended to use that information with his new employer to unfairly compete with McGrann. Significantly, at least in my estimation, there was no noncompete or non-solicit between McGrann and its former employee. The matter was ultimately resolved through settlement.

Shortly after Judge McGuire’s opinion in Glover Construction, Strata Solar LLC filed a lawsuit against three former employees (my clients) and their new business. The complaint, and now the amended complaint, alleges the former employees intended to use purportedly misappropriated trade secrets to unfairly compete with it. By doing so, Strata is contending that the defendants engaged in unfair and deceptive trade practices. Within days of filing the complaint, Strata moved for expedited discovery.

The complaint references two of the employees’ employment agreements with Strata and specifically cites the non-solicitation and noncompete provisions in them. It contains no claims for breach of those provisions, however. The former employees have moved for a declaration that those provisions are unenforceable as a matter of law.

As has become increasingly common in cases involving misappropriation claims, the parties agreed to a document return protocol to identify, preserve, and return or turn over to Strata all documents that contain information about or related to the business or affairs of Strata from devices and sources in the possession, custody or control of the defendants. This process involves the engagement of computer forensics expert to perform these tasks. This matter is ongoing.

So, where are we?

Following VisionAIR, lawyers quickly worked to right the wrongs of poorly drafted noncompete provisions. Likewise, as case law has developed regarding the permissible limits of the time, territory, and scope of restrictive covenants, lawyers have refined these provisions so that most noncompete agreements drafted within the last few years will generally pass judicial review.

But if you ask some members of the bar, they believe it has become harder and harder to obtain a temporary restraining order or a preliminary injunction based on a noncompete. Many lawyers have even abandoned the seemingly ubiquitous practice of filing a TRO with every noncompete complaint. This assumes the employee was subject to a noncompete in the first place. Not to mention, there are still restrictive covenants out there that haven’t been revised. And we’ve all heard rumblings about possible legislation banning noncompete agreements.

On the other hand, the definition of “trade secret” under N.C.G.S. § 66-152 is admittedly broad. Lawyers have also adapted to the pleading standards requiring a detailed description of claimed trade secrets and the specific steps taken to protect those trade secrets. Combined with blurring the lines between work and personal life with many employees working from home (which has only accelerated as a result of COVID-19), it should come as no surprise to me that the Business Court is familiar with these types of claims. And if Business Court judges are familiar with them, then I would certainly advise employment litigators that they should be, too.

Marc Gustafson is a partner at Bell, Davis & Pitt in Charlotte. His practice focuses on complex commercial and employment litigation. He is also a certified mediator.

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