In a decision from March that has only recently garnered media attention, Judge Rya Zobel of the U.S. District Court in Massachusetts concluded that a Georgia corporation whose agent allegedly stole trade-secret information from a company’s office in Waltham, Massachusetts could face a lawsuit in Massachusetts.  The plaintiff, BGI Inc., is a Massachusetts corporation that makes environmental monitoring equipment such as air samplers and airflow meters.  Its former president, Thomas Merrifield, started a company called Merrifield & Associates (“M&A”), which is based in Georgia.  In fact, M&A is a Georgia corporation, its principal place of business is in Georgia, and it conducts no business, gets no revenue, owns no property, and has never brought a lawsuit in Massachusetts.  But M&A’s only employee, Merrifield, allegedly stole trade-secret information from BGI’s office in Waltham for M&A.  Based on the evidence, that was enough for Judge Zobel to say that her court in Massachusetts had “personal jurisdiction” over M&A as a defendant in the lawsuit, and she denied M&A’s motion to dismiss the case against it for lack of jurisdiction.

            Her reasoning was based on “specific jursidiction,” which requires that (1) the defendant have “minimum contacts” with the forum state (here, Massachusetts); (2) the claim be related to those contacts; (3) the defendant’s contacts represent a “purposeful availment” of the privilege of conducting business in the forum state; and (4) jurisdiction is reasonable under the circumstances.  In applying these elements, Judge Zobel accepted BGI’s evidence as true under the “prima facie standard.”  She determined that BGI satisfied elements (1) and (2) by showing that M&A stole BGI’s trade secrets in Massachusetts, which, of course, was related to BGI’s claim.  And because M&A could have foreseen that it would be sued in Massachusetts and its acts were voluntary, it “purposefully availed” itself of the privilege of doing business in Massachusetts to satisfy element (3).  Finally, after applying several factors, Judge Zobel decided that jursidiction over M&A would be reasonable because Merrifield (M&A’s only employee) was already a defendant in the lawsuit, jurisdiction would eliminate the need for a second lawsuit, and Massachusetts and other states have an interest in preventing corporate espionage.     

            Above all, this decision shows that out-of-state corporations are not safe from lawsuits in Massachusetts if they act inappropriately in Massachusetts.  What is more, out-of-state litigation can add additional expense to an already costly litigation process, which is never good for corporations that are watching the bottom line.

            Last month, Judge Edward P. Leibensperger of the Massachusetts Superior Court in Middlesex County decided a case in which he issued a preliminary injunction to enforce a non-competition and non-solicitation agreement and rejected several defenses offered by the defendant employee, including that the employee’s employment had “materially changed” to void the agreement.  Although Judge Leibensperger discusses many interesting issues in the decision, including whether the employer’s president had orally agreed not to enforce the agreement, whether to enforce the agreement would cause the employee harm, and the scope and enforceability of non-solicitation clauses, I focus here on the “material change” portion of the opinion and the lesson it provides for employers.  See A.R.S. Services v. Morse, C.A. No. 2013-00910 (Mass. Super.) (Middlesex County).             

            The facts relevant to the “material change” defense in and of themselves are interesting.  The defendant Daniel Morse was hired by plaintiff A.R.S. Services in 2004 to work in the field of “disaster restoration,” which deals with the cleanup and restoration of properties after fire, smoke, water, mold, or biohazard damage.  A.R.S. has offices in Massachusetts, New Hampshire, Rhode Island, and Connecticut, and got its business from insurance adjusters who referred people with insurance to it.  When he was hired, Morse signed an agreement that included a non-competition clause that prohibited him from working in the disaster-restoration business within 50 miles of any A.R.S. office for one year after he left A.R.S.  The agreement also included two non-solicitation clauses that prohibited Morse, for two years after he left A.R.S., from (1) soliciting or providing products or services competitive with those of A.R.S. to any customer or prospective customer of A.R.S. (i.e., customers and prospective customers of A.R.S. at the time Morse worked there), and (2) soliciting A.R.S.’s customers, clients, subcontractors, or vendors.  Further, the agreement stated that it remained in force notwithstanding any change in Morse’s employment responsibilities at A.R.S.  During his employment, Morse was promoted to general manager from branch manager, and then became director of operations in 2011, what Morse believed was a demotion.  In that role, he reported to the general manager, but from 2008 until he left A.R.S. in 2012, though there were variations in how much he made, Morse was one of the five highest-compensated A.R.S. employees. 

            Morse left A.R.S. in late 2012 and the next month was hired by 24 Restore, another company in the disaster restoration business.  24 Restore knew that Morse had signed the agreement with A.R.S.  That same month, Morse met with a consultant to A.R.S. and an insurance property loss manager who referred business to A.R.S. though a third-party administrator.  He asked both for referrals.  After A.R.S. demanded that Morse stop violating the agreement in a letter, Morse began working only in Maine for Restore 24.  Nonetheless, A.R.S. sued Morse and Restore 24 and requested a preliminary injunction.

            Morse’s leading argument was that his employment relationship with A.R.S. materially changed after he signed the agreement, meaning that the agreement should not be enforced because A.R.S. did not have him sign a new agreement in exchange for this new employment relationship.  Yet Judge Leibensperger rejected this argument because the agreement stated that it remained in force regardless of “any change in [Morse’s] duties, responsibilities, position or title with [ARS].”  And Judge Leibensperger concluded that, although Morse became director of operations in 2011 after being general manager, any change in his responsibilities was not material because “both roles required Morse to be involved in ARS’ disaster restoration projects and to promote ARS’ brand by attending industry seminars and maintaining his industry relationships.”  What is more, although his base salary went down by 4% in 2011 and 2012 from what it was in 2010, he remained one of the five highest-compensated employees at A.R.S.  Interestingly, Judge Leibensperger discussed in a footnote a Superior Court case from October 2012 that voided a non-competition agreement because of a material change in the defendant’s employment, even though the agreement in that case stated that a material change in the employee’s employment would not void the agreement.  See Akibia, Inc. v. Hood, C.A. No. 2012-02974F (Mass. Super.) (Suffolk County).  He noted that a single justice of the Appeals Court had affirmed that court’s decision in part because no existing appellate case in Massachusetts had addressed such circumstances.  See Akibia, Inc. v. Hood, 2012-J-0390 (Mass. App.) (Sullivan, J., single justice). 

            The lesson from this case is that employers should include “material change” clauses in their non-competition and non-solicitation agreements stating that the agreement remains in force regardless of any changes in the employee’s position at the company.  This does not guarantee that a court will abide by those terms, as the Akibia case that Judge Leibensperger discussed demonstrates, but it at least shows that the parties thought about the issue and reached agreement.  This may tip the scales in favor of the employer in an otherwise balanced case.

            As readers of this blog know, there is a split among federal courts over the proper interpretation of the Computer Fraud and Abuse Act (CFAA).  Some courts, like the Ninth Circuit Court of Appeals on the West Coast, believe that the law is narrow and only imposes criminal and civil liability for “hackers,” people who actually “break in” to a company’s computer system to access information.  But other courts like the First Circuit based in New England think the law is broader and applies to disloyal employees as well.  These are employees who, for example, were authorized to access a company’s confidential information as part of their job, but then used that information to compete with their employer. 

            In a recent article in The Atlantic, Orin Kerr and Lawrence Lessig argue that Congress is trying to make the CFAA worse by expanding its reach, not better by limiting its scope.  As part of their argument, they explain why the CFAA needs reform in the first place.  They say it has gotten “way out of hand” and has become a “sprawling mess” in part because “Congress has expanded the law several times, making its reach broader and its punishments more severe.”  This, I think, helps explain why some courts have interpreted the law broadly.  Judge Nathaniel Gorton of the District of Massachusetts said as much when he opined that “a narrow reading of the CFAA ignores the consistent amendments that Congress has enacted to broaden its application.”  Guest-Tek Interactive Entm’t, Inc. v. Pullen, 665 F. Supp. 2d 42, 45 (D. Mass. 2009).  Courts must interpret the laws, not make them, so when a law is a “sprawling mess,” courts are naturally going to have difficultly applying it.

Much attention has been focused in recent months on the threat to U.S. businesses posed by so-called “cyber-espionage”:  attacks on IT systems and thefts of confidential information from foreign governments and criminal/terrorist organizations.  Certainly, these threats are growing.  However, employers should not lose sight of the disheartening fact that the most significant threat to a company’s confidential information continues to be its own employees.  This point was brought home by the results of a survey issued several weeks ago by Symantec, a provider of security software.  The results should strike fear in the hearts of employers nationwide.  The headline is that half of employees who left or lost their jobs in the last 12 months kept confidential corporate data, and 40% of employees plan to use that data in their new jobs.  The survey pointed to a fundamental disconnect between employees’ attitudes and the policies and agreements that most companies take great pains to put in place to protect their confidential information.  The most troubling findings from the survey included the following:

• Only 40% of employees say that their organization takes action when employees take sensitive information contrary to company policy.
• 62% reported that it is acceptable to transfer work documents to personal computers, tablets, smartphones or online file sharing applications.  The majority never delete the data because they do not see any harm in keeping it.
• 56% of survey participants do not believe it is a crime to use a competitor’s trade secret information.
• 44% believe a software developer who develops source code has some ownership in his or her work and inventions and 42% do not think it’s wrong to reuse the source code.
• 51% of employees think it is acceptable to take corporate data because their company does not strictly enforce policies.

These survey results will not be a surprise to practitioners in the areas of trade secrets and noncompete litigation.  While the frequency of outside incursions is growing and these events receive much publicity, the typical trade secret misappropriation case – whether civil or criminal – still involves a former employee who has taken company information to a new employer and used or disclosed it in his new job.  Such evidence often is at the heart of cases involving enforcement of noncompetition agreements as well.   The continued prevalence of this phenomenon – hastened by technology and the blurring of lines between what is “work” and what is “personal” –underscores that employers need to maintain constant vigilance in protecting their information.  This means having in place coherent agreements, policies and practices that not only articulate the basic rules but heighten employee awareness at all stages of the employment relationship to the importance of those rules.

            As regular readers of this blog know, the courts are split over the proper interpretation of the Computer Fraud and Abuse Act (“CFAA”), in particular whether the CFAA should apply only to “hackers,” those who truly break into a computer system, or to those who misuse someone else’s data that they lawfully accessed as well.  In a recent Forbes article, Eric Goldman argues that the CFAA is, in fact, a failed attempt to integrate the ancient legal doctrine of “trespass to chattels” to online activity.  “Trespass to chattels” is temporarily depriving a property owner of the possession of his property, like taking someone else’s car for a joyride.  Goldman argues that the CFAA has morphed by court decisions and Congressional action into “a federal prohibition on trespassing someone else’s Internet equipment by sending data to it or taking data from it.”  The result has been that “online trespass to chattels now reaches scenarios far beyond hacking scenarios, sometimes in farcical ways,” including ordinary employee activities like downloading company data onto personal devices and search engine “scraping” of website data, things the CFAA originally never was supposed to reach.   

            Goldman’s argument makes some sense, but those like Goldman who argue against a broader interpretation of the CFAA are criticized by some judges for their “far-fetched hypotheticals involving neither theft nor intentional fraudulent conduct, but innocuous violations of office policy.”  United States v. Nosal, 642 F.3d 781 (9th Cir. 2011) (Silverman, J., dissenting).  When defendants “steal[ ] an employer’s valuable information to set up a competing business with the purloined data” that was ”siphoned away from the victim,” and the defendants “know[ ] such access and use were prohibited in the defendants’ employment contracts,” that’s a different story.  Id.  And the latter is the story most employers try to tell when they sue employees under the CFAA.  It’s much easier to think that the CFAA was meant to punish conniving employees than those who “access[ ] word puzzles, jokes, and sports scores while at work.”  Id.  So reform is difficult because the statute mostly punishes those who deserve to be punished, and the truly ridiculous cases largely remain hypothetical.

Yesterday, I went to a continuing legal education class sponsored by the Boston Bar Association titled “Traps for the Unwary: Drafting Non-Competes and Other Post-Employment Restrictions.”  The class focused on drafting agreements, but naturally there was a lot of discussion about enforcing them as well.  Among the many useful things I learned is that, in noncompete litigation, “you always want to be the good guy.”  Judge Janet Sanders of the Massachusetts Superior Court Business Litigation Session said that noncompete cases (and similar cases dealing with non-solicitation provisions) are so fact-intensive that judges can often be outcome determinative in their decision-making, meaning that they can decide whom they want to win based on what they think is fair and then draft their decisions accordingly.  This means that both the employer and the former employee want to look like they’ve acted properly through the whole employment process, from hiring, to when the employee leaves or is fired, through any activities after that.

The panelists gave some examples.  One lawyer explained that when he is defending an employee in potential noncompete litigation, he advises that employee not to take anything when he leaves the employer to go elsewhere—not a pencil, pen, or even the family photographs on the employee’s desk.  He does this so that the first sentence of the employee’s affidavit in a noncompete case can read: “When I left XYZ Corporation, I literally took nothing from the company, not even the family photographs on my desk.”  The judge then (hopefully) will think that the employee was very aware that he could not take company property with him to his next employer and was doing all that he could to abide by that obligation.  Giving advice for employers, Judge Sanders spoke about “garden-leave” provisions in noncompetes, which essentially require the employer to pay the employee some amount of money while the employee is subject to a noncompete provision after the employee leaves the company.  This makes the employer look like the good guy because the employer is acknowledging that a noncompete provision places a burden on the employee, and the employer is compensating the employee for that burden.

I think all of this is good advice, and it certainly is always better in the long run to act fairly, in noncompete litigation as in life.  Because John Adams was right: ”Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”