Approximately three months ago, when the coronavirus first became an economic crisis, I made the following prediction: That companies would be less inclined to file frivolous non-compete and trade secret lawsuits. Follow my logic here. At the most basic level, litigation can be classified as either necessary or discretionary. Suppose a company has developed some type of revolutionary jet propulsion model. A team of four engineers resigns, walks out the door with several laptops and some of the physical technology, and joins a competing company. Let’s put aside the non-compete component for a moment. This is a paradigmatic misappropriation of trade secrets case. This is the real reason why we have laws that protect against theft of trade secrets. In this instance, the litigation is absolutely necessary for the company’s survival and future. Let’s call this Scenario A. Now, let’s go to the other end of the spectrum. Scenario B: Somebody who works at a legal industry staffing and recruiting company leaves the company and starts their own legal staffing and recruiting company. Oh, the horror! Some recruiter who previously tried to make placements at Greenberg Traurig will….. still attempt to make placements at Greenberg Traurig. The difference between Scenario A and Scenario B is night and day. Any litigation arising out of the Scenario B is entirely discretionary (and many would say utterly ill-advised). Here is the problem: Over the past decade, I have represented literally hundreds of clients in non-compete and trade secret matters. Of the matters that actually went to litigation, roughly what percentage was closer to Scenario A and what percentage was closer to Scenario B?
I have sat here for five minutes thinking through dozens upon dozens of litigation matters. For the life of me, I cannot think of a single matter that even comes close to Scenario A, a paradigmatic theft of trade secrets case, where there are (1) legitimate trade secrets; (2) that have been misappropriated; (3) that are being misused to engage in unfair competition; and (4) that misuse threatens imminent and irreparable harm. Ultimately and doctrinally, I do not care whether there is a non-compete agreement present or not. Yes, it makes a significant difference in litigation. But analytically, what we are talking about is unfair competition; misuse of proprietary information; misappropriation; etc. I can go from the trade secret space to the non-compete space, and ask myself the same question: How many non-compete cases are close to Scenario A and how many are closer to Scenario B? Once again, the answer is the same: None. Every non-compete and/or trade secret case I have defended has been closer to Scenario B than to Scenario A. And, in fact, none have looked anything like Scenario A.
Bad Faith Non-Compete & Trade Secret Litigation
Here is what that tells us: I represent clients throughout the country, but the vast majority of my litigation work is in Florida. So in nearly a decade of litigating non-compete and trade secret cases in Florida, and almost always defending such cases, I have yet to defend a case where I think to myself, “Wow. This is a real theft of trade secrets/unfair competition case. This is the gold standard.” In fact, to the contrary, in the vast majority of non-compete and trade secret cases I defend, I am shocked by the utter lack of any real trade secrets and the utter absence of any unfair competition.
And before any corporate lawyers’ heads explode: Engaging in a competing business while subject to a non-compete agreement does not necessarily equate to unfair competition. In fact, it seldom does. The vast majority of non-compete agreements are unreasonable and illegal precisely because of the absence of any threat of unfair competition. Unfair competition does not mean an employee signed a non-compete agreement, sold widgets, left the company, and still sells widgets. Unfair competition means that an employee had access to something truly unique and proprietary that would provide a competitor an unfair advantage and that a competitor could not otherwise fairly obtain. Chew on that for a moment. Preventing that sort of unfair competition is the only potentially valid use of non-compete agreements (if any valid uses exist in 2020, given the explosion of access to information). But whether a non-compete case or a trade secret case, I have yet to defend a Scenario A. And I have defended lots and lots of cases. Instead, here is what I have seen:
- Countless cases where the plaintiff’s allegations are purely generic and allege theft of unspecified information, data, software, customer lists, methods, processes, etc.
- Multiple plaintiffs who alleged the defendant had stolen their “sales script”— meaning the script that sales people used on the phone with prospective clients.
- A plaintiff who alleged the defendant had stolen the idea for an iPhone app that would allow clients to schedule appointments. Multiple such apps are available online.
- Multiple cases wherein the plaintiff alleged that the defendant had stolen or obtained knowledge of various magazines and publications that the plaintiff used to identify prospects. This was the supposed “trade secret” or “confidential information” and the prospects contained in those publications were the top secret “customer list”.
- Countless cases alleging theft of a “customer list” when no actual customer list existed and the customers could all be identified via Google.
- Countless cases alleging that even if the identity of the customers (i.e. companies anyone can identify via Google) was not the trade secret, the name of the relevant contact person at the corporate customer (available via LinkedIn) was the trade secret.
- Countless cases alleging that the plaintiff provided some sort of unique or specialized training to its employees when the training is available online to anyone with an internet connection.
- Countless cases alleging that the confidential, proprietary, or trade secret information at issue was information about plaintiff’s products which was (a) disclosed to any and all clients and (b) which defendant no longer sold.
- A plaintiff alleging that knowledge/information about law firms, their practice areas, and their hiring preferences was confidential and/or a trade secret.
I could list a dozen more examples. None of these cases can be classified as Scenario A; existential threat; litigation absolutely necessary. All of these instances are basically Scenario B; litigation is purely discretionary. Months ago, when the economy went into free-fall, I predicted a decrease in this type of discretionary litigation. As I saw it, companies facing uncertain economic times would evaluate this type of bad faith non-compete and trade secret litigation as (1) not necessary; (2) discretionary legal spend; (3) a waste of resources; and (4) potentially risky (i.e. fee exposure and possible counterclaims). But that did not happen. Instead, I am seeing more bad faith non-compete and trade secret litigation right now than I saw at any other time during the past decade.
Lawyers Chasing Money & Fear of Ordinary Competition
In my opinion, two factors are driving this uptick in such litigation. First: Certain lawyers are aggressively pushing bad faith non-compete and trade secret cases as a means of generating revenue. Many law firms have had a drastic slowdown in business. Some lawyers are desperate for whatever work they can get. I’ve even seen new non-compete and/or trade secret cases filed that were based on actions that took place six months or a year ago. That makes no sense at all. Events happened six months or a year ago. The company was aware of it and did not sue. Now, all of the sudden, the company sues and proclaims it an emergency. It sounds to me like certain lawyers are combing through their non-litigation files in the hopes of finding a non-compete and/or trade secret case that they can escalate to litigation. Let’s not beat around the bush: Some lawyers are true professionals and fiduciaries and give their clients sound advice. Other lawyers advise whatever course of action will make them more money. Right now, I believe that certain lawyers are aggressively pushing bad faith non-compete and trade secret cases because they need the revenue. I heard about a big firm partner the other day who allegedly put 5 attorneys on a pretty basic matter and told them
“Bill the #@!# out of it. The client has more money than God.”
Don’t for one second doubt that some lawyers operate this way. Not only are certain corporate lawyers pushing this litigation, they are also not accurately advising their clients about the downside risk of pursuing such litigation. Take non-compete cases as an example. I have been involved in numerous non-compete cases where the lawyer on the other side was not aware that if his/her client ultimately lost, they would have to pay my client’s attorneys’ fees. I think it would be a highly material consideration for the potential corporate plaintiff to learn that it could lose and end up paying $300,000, $400,000, or even $500,000++ in prevailing party attorneys’ fees to the defendant. This says nothing about the risk of getting hit with counterclaims for virtually anything. I highly doubt that most lawyers aggressively pushing bad faith non-compete and trade secret cases are providing their clients with accurate (or any) guidance about downside risk and fee exposure.
But there is a second factor in the equation: Companies perceive some sort of competitive benefit from initiating bad faith non-compete and trade secret lawsuits. We are not talking about legitimate cases where there are, e.g., real trade secrets at issue and the real threat of unfair competition. We are not talking about Scenario A (jet propulsion). In Scenario A, a company is fighting to protect itself, to prevent unfair competition, and possibly for its very survival. We are talking about Scenario B. So how do companies benefit from illegitimate or bad faith non-compete and trade secret litigation? Numerous ways.
- Tie up their competitor in a non-compete / trade secret lawsuit. Customers/clients/third parties in the market will be afraid of engaging in business with that competitor out of fear they will be dragged into a lawsuit. Depending on the industry, this can be worth millions of dollars.
- Obtain a preliminary injunction based on lies or a weak record. Never mind the injunction is legally improper and would never hold up on appeal. An appeal takes many months to pursue and the competitor is out of the market the entire duration of the appeal. Possibly, if the injunction is drastic enough, it can cause the competitor to collapse.
- Litigation raises their rivals’ costs. It costs tons of money. It can drain their competitor’s resources. The more resources the competitor spends on litigation, the less resources they can deploy in the market.
- Litigation can sometimes be used to gain access to the competitor’s confidential information or trade secrets (via discovery).
- Litigation can lead to attrition within the competing company. Litigation is disruptive. Employees might leave the competing company. This can weaken its market position and hasten its demise.
- Suing departing employees for over bogus non-compete agreements or for theft of (non-existent) trade secrets makes it less likely employees will leave and makes it far less likely that they will ever go work for a competitor.
- Non-compete abuse at a meta level is all part of restraining employee mobility, eliminating ordinary competition, and suppressing wages.
Companies that pursue bad faith non-compete and/or trade secret litigation are aware of all this. And right now, in the midst of the current economic disaster, certain companies are so desperate to protect their market position and revenue stream that they will take drastic measures to eliminate any perceived threat. Rather than focus on competing and winning in the market, certain companies use bad faith litigation to obtain that competitive advantage. In America, when entrenched companies cannot beat emerging competitors in the market, they use the courts.
Beyond this, one cannot discount the importance of psychological considerations. Consider the following hypothetical: A small service business has operated in Tampa, Florida for the past thirty years. At one point, the business was doing $20 million a year in revenue. That number has slowly declined over the past several years. Now the company is doing about $12 million. A mid-level employee leaves the company and goes to work for a competitor. Let’s say there is a non-compete agreement. But there is no legitimate business interest. There are no trade secrets. There is nothing proprietary or protectable at issue. In a panic, the owner of the company (who we will call Barry) contacts his go-to law firm. As Barry tells it, “Joe quit and went to work for a competitor. He knows all our corporate secrets. He knows everything we do. Our revenue is already down another $1.5 million from last year. We have to do something immediately. This could destroy me!” Among my adversaries (and among corporate plaintiffs in bad faith non-compete and trade secret cases), I have encountered many Barrys over the years. Barry has a number elements that make him (a) inclined to pursue a bad faith non-compete/trade secret case and (b) easily manipulated by his lawyers. First and foremost, Barry’s business has ben losing money, so he was already on edge. Then the coronavirus hit. Now the economy is even more uncertain. Barry is deathly afraid of any additional competition or loss of revenue. Second, Barry has a massive ego and is convinced that his company’s success in business over the years is attributable to his unique brilliance. In Barry’s mind, his company must somehow be unique or extraordinary. His ideas. His methods. His processes. Barry cannot accept the fact that what his company has done for 30+ years is not particularly novel or groundbreaking. Maybe it once was. But not anymore. Barry cannot accept the fact that a competitor could fairly compete against him and take his market share. So, in an absolute panic, Barry contacts a mid-sized local law firm. And the firm immediately sees dollar signs. The lawyer says, “Tell me what Joe had access to and what you think he’s stolen.” For Barry, it’s like he’s talking to a psychotherapist. Barry unloads, “He had access to everything in the entire company! Client lists. Our pricing. Proposals. A new app we were developing. We treated him like family. This is such a betrayal.”
To the lawyer thirsty for billable hours, this is a golden ticket. For all the young lawyers out there, here is a lesson on being a fiduciary and a legitimately good lawyer: When Barry calls you on the phone and gives you the story above, you push-back, you press him for details, and you scrutinize the possible claims. Unfortunately, many lawyers do not operate this way. Instead, they say, “Wow. With that sort of secret information, he can replicate exactly what you spent thirty years building at Company X. He could completely destroy you. We’d better act fast.” And just like that, the lawyer originated the firm’s new big, shiny piece of litigation. There will be emergency motions. An injunction hearing. Extensive discovery. Massive document review. It’s a cash cow. And it has nothing to do with actual trade secrets, legitimate business interests, or unfair competition.
It’s not just the Barrys of the world. It’s every company that is terrified of competition in the market and expects court protection from ordinary competition. It’s every corporate lawyer who has no qualms about manipulating the justice system to stifle lawful competition because it will make him more money. When you take those two elements and add them to a state court system that is understaffed, underfunded, and frequently dysfunctional (for a litany of reasons including the aforementioned), it is a recipe for disaster. Sure, you see bad faith non-compete and trade secret cases in federal courts. But the mecca for this sort of abusive litigation is Florida state court.
There is no silver bullet here. Bad faith non-compete and trade secret litigation is absolutely rampant in Florida (and in certain other jurisdictions, e.g., Texas). It has become normalized. It is now part of the culture, both within the legal system and in the business world. There are lawyers who have built fortunes doing this sort of work. Many judges do not bat an eye at a preposterous trade secret claim, because they have seen so many of them. And certain businesses consider this type of bad faith litigation a standard part of their competitive arsenal. Changing this landscape will not be easy. In considering my recommendations, I am focused on what lawyers can do when faced with defending these sorts of shenanigans. I advise starting with the following:
- Establish bad faith. If it’s a non-compete case, there is likely to be a strict loser pays fee provision. If it’s a trade secret case, you need to establish bad faith to create a fee hook. Take at least some of your depositions before there has been significant document exchange/production. Why? Because you can take whoever you want as a fact witness, then demand a 30(b)(6) or corporate representative deposition on the back end. There is no need to wait for documents to take a fact witness deposition. Use that early fact witness deposition to expose the case as a sham and prove that leading players on the other side have no good answers about what the confidential information/trade secrets actually are.
- Rule 11 / 57.105 / motion for sanctions under applicable state statute. If the case is truly frivolous, you file one of these. Because that creates fee exposure not only for the plaintiff but also for their lawyers.
- If the case is in Florida state court and is truly a sham, file an early motion to strike the case as a sham pleading (Florida Rules 1.150). Such motions face a very high bar and are rarely granted. But if the case is clearly suspect, you get it in front of the judge for a full-blown evidentiary hearing on a motion to strike. Even if you don’t win the motion, you may get the judge’s attention. If it’s a close call, the judge will let the case proceed. But in that situation, many judges will move forward in the case knowing that the plaintiff’s case is on shaky footing. That can help you at summary judgment. And it can help you on the back end when it comes to obtaining prevailing party attorneys’ fees.
- You cannot sit back and let your client get railroaded in this sort of case. You have to take a comprehensive look at the plaintiff and their business practices. If they are engaged in any sort of misconduct or unfair competition and you have standing, a countersuit or a separate lawsuit (preferably in federal court) must be a serious consideration.
- Send an early settlement communication/demand. Make sure you lay out the issue of fee exposure, as many plaintiffs in these cases are completely unaware that they could be liable for fees if they lose.
Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. He has extensive experience litigating non-compete, trade secret, and unfair competition cases. He has served as an expert witness in related matters. Pollard has appeared in or on the New York Times, The Guardian, PBS New Hour, Law360, FundFire, and many more. His office can be reached at 954-332-2380.