My only comment is that the courts could eliminate a lot of so-called “trade secrets” litigation and other back-door attempts to create and enforce covenants not to compete in California by continuing with the trend of cases we’ve seen this summer, including TRG and Flir.

The Legislature is free to reconsider Bus. & Prof. Code 16600 at any time. It can also add more teeth to the UTSA if it wishes. But as written, those statutes allow for employee mobility, but with remedies for intellectual property theft. They do not provide for entrepreneur-killing bad faith lawsuits. I’m glad to see the Court of Appeal is going to make people think twice about that.

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Here’s the problem with this case: the facts are so overwhelmingly good for Parrish that it’s wishful thinking to assume this will happen to you. FLIR filed their case based on “inevitable disclosure” of trade secrets. That isn’t the law in California, even though it is the majority rule. FLIR engaged in all kinds of rough litigation tactics, but, though that’s mentioned, something tells me that’s hardly a sufficient element of what happened here. What is significant is that the Court of Appeal repeats that the CEO of FLIR testified that he did not “think it would be good, healthy for them [respondents] to go and directly compete with us.”  Lewis stated that FLIR “couldn’t tolerate a direct competitive threat by [respondents] because it would fly in the face of everything that we spent 200 million dollars to buy.”  (Slip. Op. at 5 and 16.) Derivative shareholder lawsuit on your mind, Mr. Lewis? Oy.

Better, there was no evidence of any threatened misappropriation. The best FLIR could muster was that Parrish had downloaded some information while working for them and had made some comments about patent filings after he departed. In the IP world, that has to ring absurd, because the whole point of patents is that you get the ability to prevent others from using your patent in exchange for disclosing what you did. Trade secrets, on the other hand, are things you keep secret, but it someone figures it out fairly, you can’t stop them from using it.

In the end, the award in favor of Parrish for $1,641,216,78 in attorneys’ fees and costs was affirmed, with an order for the trial court to have a hearing on costs and fees on appeal. Coupled with the fact that Parrish now appears to have a slam dunk collaterally estopped case for malicious prosecution based on this opinion—and FLIR’s actions, according to the Court, caused Raytheon to stop doing business with Parrish—and the fact that they have their own attorneys to pay, this is not a good day for FLIR. Or is it?

If FLIR is a $200 million dollar company as their CEO claimed (more or less, roughly, in that area, etc.), then they can probably take this hit, and, regardless of what else happens, they were successful in keeping Parrish and his partner from starting a competing business. (Slip. Op. at 3.) Now they just have a better idea of whether that was worth it or not.

The factual strength of Parrish’s case, combined with the fact that, at the end of the day, FLIR succeeded in what they wanted to do, is another reason why I’m not entirely satisfied with this case. FLIR takes the hit here, in theory, but what they do is more or less standard practice. Most defendants can’t afford to hire Wilson, Sonsini to defend them, and, if they can, they don’t have hundreds of thousands to spend on fees. In a run-of-the-mill case, the issue is not actually some scientifically advanced high tech thing like infrared scopes, but the highly dubious “customer list,” which are not, of course, in and of itself a trade secret. Ironically, this law is often used as a substitute for California’s unique objection to noncompete agreements. It is ironic because those were abolished to foster competition, but the result has been even scarier litigation under the UTSA which has much more powerful remedies than your average noncompete agreement gives rise to.

It’s simply an anticompetitive trick, and, apparently, even when the Court of Appeal throws the book at you and you have terrible facts, you can still get the outcome you want: no competition.

Finally, I would add that of course I support an employer’s right to protect its trade secrets. But just as employers make the case that frivolous litigation under the FEHA and wage/hour laws hardens the hearts and minds of the courts to the actual real and worthy cases, I think the same is true here. FLIR doesn’t make filing a bona fide trade secrets claim legally harder that it was last week, but it shows you the depths of the abyss you stand on if things go bad, which probably does chill its use for legitimate claims more than anticompetitive ones. How can I say that? The latter group know what they want to do and just need a price tag. The former face a cracked egg problem of their own, and this may go into their worst case cost calculus regardless. In other words, instead of pricing what you have to pay to achieve the goal of putting your competitor out of business, your are pricing what it takes to protect your secrets. Should a legitimate claimant worry about this case? Arguably no, but I guess it at least functions as a bookend.

Having said that, I’m hopeful that the Court of Appeal will deliver an even stronger blow in a case with very different facts, but arising under the same law and for the same anticompetitive reasons coming up in July.

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The Court disapproved a line of oft-cited Ninth Circuit cases upholding the so-called “narrow restraint” rule relative to B&P 16600.  This provides clarity if not leniency.  You just can’t do anything to stop someone from being able to do their job after they leave, more or less.

Part II essentially says that there’s nothing wrong with waiving “any and all” rights, as that is not meant to include unwaivable rights.  The Concurring opinion disagreed on that point and suggests that it was an independent wrongful act for an employer to sign employees to language that might make them think they were waving something they couldn’t waive.

What does this mean? The concurrence only had two votes, but there is a line of cases that supports that basic thinking, if not in the case of a business tort for wrongful interference.  It will be picked up.  It also (you’d think) wouldn’t apply to contracts reviewed by attorneys.

So, employers need to once again review the kinds of contracts they are having people sign.  Plaintiffs lawyers should get their clients’ employment contracts out of the file too. Time to amend?

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Gregory Chudacoff was an attorney who represented Maxsecurity, Inc.  When Mark Neville left his employment with Maxsecurity, Chudacoff wrote a letter to Maxsecurity’s customers accussing Neville of various torts and advised them not to do business with Neville unless they wanted to be involved with the litigation.

Maxsecurity sues Neville, Neville sues Chudacoff.  Chudacoff anti-SLAPPs Neville’s Complaint against him.

Will this become standard practice now?  Forget convenants not to compete! We can just send letters saying we’re going to sue.  The Court upheld this argument.  Here’s how it gets around the idea that this kind of tactic will be used to stifle competition:

Relying upon Herzog v. “A” Company, Inc. (1982) 138 Cal.App.3d 656 (Herzog), Neville asserts that the Letter could not have been sent in good faith because it was, in effect, an attempt to prevent Neville from competing with Maxsecurity in violation of Business and Professions Code section 16600 (section 16600).  Section 16600 declares void “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind . . . .”  The Letter did not constitute a covenant not to compete, nor did it accuse Neville of violating a covenant not to compete.  The Letter accused Neville of improperly soliciting Maxsecurity’s customers.  Section 16600 does not authorize employees to compete with former employers by stealing their confidential customer information.  (See Board of Trustees v. Roche Molecular Systems (N.D. Cal. 2007) 487 F.Supp.2d 1099, 1115 [section 16600 permits enforcement of agreement to the extent necessary to protect trade secrets and prevent unfair competition]; Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429-1430; Robert L. Cloud & Associates, Inc. v. Mikesell (1999) 69 Cal.App.4th 1141, 1150 [“acts of solicitation of the former employer’s customers and the misuse of confidential information are acts of unfair competition that may be enjoined”].)  Neither section 16600 nor Herzog is relevant here.
We also reject Neville’s argument that the Letter is not protected because it was addressed to Maxsecurity’s customers, against whom Maxsecurity had no claim, rather than to Neville.  Although many anti-SLAPP cases involving prelitigation communications concern demand letters or other statements to adverse parties or potential adverse parties (e.g., Flatley, supra, 39 Cal.4th at pp. 307-309; Rohde, supra, 154 Cal.App.4th at pp. 36-37; Blanchard v. DIRECTV, Inc. (2004) 123 Cal.App.4th 903, 918-919), there is no such requirement in the text of section 425.16, subdivision (e)(2).  That provision has been held to protect statements to persons who are not parties or potential parties to litigation, provided such statements are made “in connection with” pending or anticipated litigation.

The problem with this analysis is that section 16660 is not normally construed that narrowly.  Courts have interpreted it as expressing a strong public policy.  While the court may have looked askance at the personal attack on the lawyer, and while we can’t argue that in the context of an anti-SLAPP motion, if something meets the CC section 47 tests, we think this decision, if it becomes good law, will effectively destroy section 16600, increase litigation, and hurt employee mobility.

Does Neville have a remedy against Maxsecurity itself in another context? That doesn’t seem to be addressed.   It seems plain to me that a lawyer, who is sworn to defend his client’s interests, not those of others, warning his client’s customers that they could become entwined in a lawsuit if they do business with Neville is highly suspect.

The question is, whether Neville really did misappropriate information from Maxsecurity.  If it turns out later that he did not, this decision will look poor.

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