Protecting Your Secrets (Part 3)

Protecting Your Secrets (Part 3)

secret RFSummary: This is the third of a four-part series on trade secret and non-compete law in the employment context. Check out Part 1 here on non-compete agreements, and Part 2 here on the key statutes and applicable common law. This article focuses on enforcement and litigation, highlighting in particular the equitable remedies typically sought early on in these cases.

Once a company finds out that one of its former employees has breached a restrictive covenant included in his or her employment agreement, the company is usually pretty hot to trot. I’m talking madder than James Hetfield after the Grammy Awards. The company wants the former employee to immediately stop whatever he or she’s doing in breach of the agreement. Whether the former employee is now working for a competitor or hawking the employer’s trade secrets on Craigslist, the company usually wants to enforce its rights sooner rather than later.

Enter Federal Rule of Civil Procedure 65 (or one of its state law equivalents). Rule 65 gives us two enforcement mechanisms: the temporary restraining order (TRO) and the preliminary injunction. Enforcing restrictive covenants usually begins with the employer running into court and filing a complaint along with a motion for a TRO. The theory underlying this strategy is that if the former employee is not immediately restrained then the employer is going to suffer irreparable harm.

But, the “temporary” in “temporary restraining order” is an appropriate adjective because Rule 65(b)(2) expressly says that TROs shouldn’t usually last longer than 14 days. That’s where TRO’s best friend, the preliminary injunction, comes into play.

A motion asking for a preliminary injunction might be filed with the motion for a TRO, or it might be in a separate motion. Whenever it’s filed, however, the employer’s motion for a preliminary injunction usually asks the court to enter an order requiring the former employee to stop doing whatever he or she’s doing to violate the agreement for the duration of the lawsuit. It’s fairly common, even in federal court, for the court to hold an early evidentiary hearing before deciding whether or not preliminary injunctive relief is proper.

The standard used by most courts in evaluating motions for TROs and preliminary injunctions is whether the employer will suffer irreparable harm if the injunctive relief is not granted and whether the employer is likely to succeed on the merits of its claims. Some courts use an “actual or threatened” test in determining if an injunction is appropriate to stop or prevent the disclosure of confidential information.

Under these standards, these cases are usually realistically won or lost at this stage of the proceedings. This is because if the employer fails to get injunctive relief, it will likely be months or even years before the case is decided on the merits. And by that point the damage has already been done.

Oh, and by the way: the employee isn’t always the only one sued. Many times, if a former employee has gone to work for a competitor or started a competing business, the former employer will sue both its former employee and his or her new employer. New employers are usually thrilled with their hiring decision when they get served with these lawsuits.

It’s also important to recognize that discovery in these cases can present significant risks to companies because disclosures of confidential company information may happen even if the court has entered a protective order to prevent just that. For example, inadvertent disclosures are not unheard of, and the risk of such unintentional disclosures simply can’t be completely eliminated altogether in some cases.

While it may seem like companies are usually the ones that file these lawsuits, it’s not terribly uncommon for a former employee to be the first one through the courthouse doors. Former employees can file declaratory judgment actions asking the court to determine the enforceability of a particular restrictive covenant or of an entire employment agreement. This strategy is particularly popular when employees move to a new state with employee-friendly restrictive covenant laws, like California.

Finally, litigants in state or federal court can usually seek an immediate appeal of a court’s order denying or granting injunctive relief. Given the extremely fact-intensive nature of these cases, however, appellants have a steep uphill climb when trying to get a lower court’s decision reversed.

That’s it for this week. The fourth and final installment in this series will be focused on preventing the theft/use/disclosure of trade secrets and confidential information, with an emphasis on drafting enforceable restrictive covenants.

Earlier: Protecting Your Secrets (Part 1)
Protecting Your Secrets (Part 2)

evan-gibbsEvan Gibbs is an attorney at Troutman Sanders, where he primarily litigates employment cases and handles traditional labor matters. Connect with him on LinkedIn here, or e-mail him here. (The views expressed in this column are his own.)


Published at Tue, 14 Feb 2017 00:49:28 +0000

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