The trial court upheld the non-compete agreement, granting a preliminary injunction.  In doing so, the trial court limited the geographic restriction of the non-compete to “Greenville County, and within an area encompassing fifteen miles in any direction of [the Premises].”  Rector appealed the decision, arguing, in part, that the trial court impermissibly “blue-penciled” an overbroad non-compete agreement. 

On appeal, the South Carolina Supreme Court found such rewriting of the non-compete by the court to be improper.  After citing to precedent discussing the limitations of the courts in deviating from the express terms of non-compete agreements, the Supreme Court found that the trial court’s crafted geographic limitation similarly flawed for straying from the express terms of the agreement:

“These cases stand for the proposition that, in South Carolina, the restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties’ agreement, but must stand or fall on their own terms. We hold, therefore, that the trial judge erred in rewriting the territorial restriction in the parties’ contract.”

What is interesting about this case is not what questions have been answered but rather, what remains unanswered by the opinion.  For example, had the trial court simply used the third definition of the non-compete’s geographic provision — Greenville County, South Carolina — and ignored the other two, which were probably overbroad, would the court’s decision have been upheld or viewed as improper “blue-penciling”?  In such a situation, does the agreement stand by its own terms if two of the definitions are viewed as over broad and ignored?  

Interestingly, in North Carolina, where courts are also prohibited from rewriting non-compete agreements, such agreements are not unenforceable simply because the territorial restriction employs multiple definitions of varying geographic reach.  As long as the provisions are separate and distinct, a court can strike the overbroad provisions in a non-compete agreement without violating the prohibition on rewriting the covenant.  See, e.g. Wachovia Ins. Svcs., Inc. v. McGuirt, No. 06 CVS 13593, 2006 WL 3720430, *9, fn.4 (NCBC Dec. 19, 2006)  at *11 (excising single provision of covenant regarding solicitation of customers while preserving remainder); Philips Elecs. North America Corp. v. Hope, 09 cv 363, 2009 WL 1883921 (M.D.N.C. June 30, 2009) at fn.6 (stating blue penciling is especially appropriate to excise provisions separated by the term “or”).  Accordingly, a geographic restriction that is tiered in structure is not by itself a bar to enforcement in North Carolina.

South Carolina had previously recognized a similar rule, permitting courts to enforce a non-compete if the offensive provision is “severable.”  See Somerset v. Reyner, 233 S.C. 324, 104 S.E.2d 344 (1958); Lampman v. Dewolff Boberg & Assoc. Inc., 2009 U.S. App. LEXIS 6046 (4th Cir. March 23, 2009); see also Rockford Mfg., Ltd. v. Bennet, 296 F. Supp.  2d 681 (D.S.C. 2003).  At first blush, Poynter Investments seems at odds with this precedent.  Does Poynter Investments mark a change in South Carolina’s treatment of non-compete provisions that are severable?  Will South Carolina enforce a strict prohibition on all “blue-penciling” of restrictive covenants?  Certainly, the Poynter Investments case can be limited to its facts to avoid any inconsistencies with precedent.  The trial court judge did not simply enforce the non-compete based on one of three definitions of geography found in the parties’ agreement.  Rather, he modified one of the geographic definitions, thereby broadening its reach.  Even under Somerset and other precedent, such judicial intervention would be viewed as improper. 

Time will tell whether South Carolina is ushering in a stricter approach to non-compete agreements.  One thing is clear, as with North Carolina, non-compete agreements are viewed closely by the courts in South Carolina and will not be saved by judicial rewriting of existing contractual terms.

According to the complaint, U-Haul and AMERCO’s Chairman, Edward J. Shoen, developed two strategies designed to eliminate competition between U-Haul and Budget for one-way rentals, both of which were designed to secure higher rates.  Shoen then allegedly communicated these strategies internally to the regional managers of U-Haul, instructing the regional managers to set their pricing and then “LET BUDGET KNOW.”  Shoen allegedly sent other similar instructions in 2006.  In one internal communication, Shoen is alleged to have instructed local U-Haul dealers to contact Budget and Penske dealers to get them to raise their prices:

“We are successfully meeting or beating our Budget and Penske competitors.  However, their rates are WAY TOO LOW.  When you and your MCP [regional manager] decide it is time to bring some One-Way rates back up above a money loosing [sic] 35 mile, have your Dealers let the Budget and Penske Dealers know.  Try ‘Are you tired of renting 500 miles for $149 and a $28 commission?  Then, tell your Budget/Penske rep that U-Haul is up and they should be too.’”

In addition to allegedly communicating these strategies internally at U-Haul, the complaint alleges that Shoen also communicated to U-Haul’s competitors his interest in their raising their prices to meet U-Haul’s.  The complaint quotes generously from a transcript of an AMERCO earnings press conference in 2008 to bolster the claim that U-Haul and AMERCO invited competitors to collude on price.  For example, Shoen is quoted in the complaint as saying in this conference:

“[F]or the last 90 days, I’ve encouraged everybody who has rate setting authority in the Company to give in more time and see if you can’t get it to stabilize.  In other words, hold the line at a little higher.

And if they [Budget] perceive that we’ll let them come up a little bit, I remain optimistic they’ll come up, and it has a profound affect on us.”

There are a number of interesting observations about this matter, short-lived as it was.  First, the complaint does not allege that U-Haul actually conspired with Budget or any other competitor to maintain or raise prices.  The complaint does not allege a violation of Section 1 of the Sherman Act for conspiracy.  Rather, the complaint is premised on a single claim brought under Section 5 of the Federal Trade Commission Act based on U-Haul’s alleged invitation to its competitors to collude.  Three of the Commissioners (Chairman Leibowitz, Commissioner Kovacic and Commissioner Rosch) voting out the complaint, issued a separate statement highlighting this point, evidently trying to send a message to the business community that the FTC will not wait for collusion to occur before it acts:

“The parties have settled an invitation-to-collude case and not a Sherman Antitrust Act Section 1 conspiracy case.  Put differently, the complaint in this case alleges an unfair method of competition in violation of Section 5 of the FTC Act that does not also constitute an antitrust violation.  . . . Today’s Commission action is instead based on evidence that Respondents unilaterally attempted to enter into such an agreement.  The Commission therefore has reason to believe that Respondents engaged in conduct that is within Section 5’s reach.” Statement.

The U-Haul complaint is instructive on several grounds.  First, as is clearly stated by the Commissioners, the FTC is looking at business practices to determine if they are “unfair methods of competition” and not simply violations of Section 1 of the Sherman Act.  Executives of companies should not find solace in the fact that their anticompetitive comments may not have reached their competitors and resulted in an actual agreement to collude on price.  According to the FTC, no such agreement is necessary for action to be taken.  Second, executives of companies must be mindful not only of what is contained in their internal documentation (including email) but also what is stated in public press releases and earnings reports.  A sure-fire way to catch the attention of the government is to have an earnings release where there is discussion of the need for a competitor to raise its prices, as was allegedly the case here.

American Needle involved a narrow issue before the Supreme Court:  whether the NFL defendants were capable of conspiring together or whether they acted as a single entity for purposes of Section 1 of the Sherman Act in connection with their conduct in licensing their intellectual property.  As demonstrated in the record, the NFL defendants had acted jointly in the licensing of their intellectual property since 1963 when NFLP was created.  From 1963 to 2000, the NFL defendants licensed their intellectual property through NFLP, granting licenses on a non-exclusive basis to vendors to manufacture and distribute apparel with team logos and trademarks.  American Needle was one of those non-exclusive licensees.  In December 2000, the 32 teams of the NFL changed their game plan, and agreed to permit NFLP to enter into an exclusive license for the manufacture of the team apparel, which NFLP subsequently granted to Rebok.  American Needle thereafter brought suit against the NFL, the NFL teams and NFLP in the Northern District of Illinois, alleging that the agreements between the NFL, the 32 teams, NFLP and Reebok violated Sections 1 and 2 of the Sherman Act.  In their answer to this complaint, the NFL defendants asserted that they could not conspire under Section 1 ”because they are a single economic enterprise, at least with respect to the conduct challenged.” 

After permitting limited discovery, the District Court dismissed the Section 1 claim, agreeing with the NFL defendants’ “single entity” defense.  The District Court found that the NFL defendants ”in the facet of their operations respecting exploitation of intellectual property rights,” were “so integrated” that “they should be deemed a single entity rather than joint ventures cooperating for a common purpose.”  American Needle appealed that decision to the Seventh Circuit Court of Appeals. 

The Seventh Circuit looked at the issue of the “single entity” from the perspective of the “economic power” at issue in the relationship.  The Seventh Circuit concluded that since “football itself can only be carried out jointly,” then “only one source of economic power controls the promotion of NFL football.”  In the area of licensing team’s intellectual property, the marketplace was not deprived of independent sources of economic control, which competition assumes, as a result of the challenged activity.  The Seventh Circuit affirmed the District Court.  American Needle and the NFL defendants sought review by the Supreme Court. 

Justice Stevens, writing for a unanimous court, rejected the “single entity” argument, in overturning the Seventh Circuit’s decision.  Noting the long-established precedent of considering “form over substance” when reviewing conduct as a possible violation of Section 1’s prohibition against engaging in a “contract, combination  . . ., or conspiracy” in restraint of trade, the Court observed that the issue is whether the parties are “separate economic actors” following their own “separate economic interests.”  If that is found to be the case, then the market is deprived of independent centers of decisionmaking by such combination and actual or potential competition is lost.  Considering the facts in the American Needle case from this perspective, the Court found each team possessed the attributes of independent economic decisionmaking, advancing their own economic interests which could be at odds with other teams.  For example, from the perspective of a vendor making a team hat, the Colts and the Saints are two potentially competing suppliers of valuable trademarks.  When the Colts license their intellectual property, according to the Court, they promote their own economic interest, not the interest of the teams as a whole.  Accordingly, each team is an independent center of decisionmaking and when those teams jointly license the right to their intellectual property to a single vendor, they deprive the market of other centers of decisionmaking and, accordingly, of actual or potential competition.  It is this context that distinguishes the relationship between the parties in American Needle from the relationship of a parent and its wholly owned subsidiary, which has long been found not to be capable of conspiring under Section 1.  Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984).  In the latter situation, the economic interests of the parent and subsidiary are one.  The same cannot be said for the 32 NFL teams, each of which is an independently owned and managed business.

In reaching this conclusion, the Court rejected the analysis of the Seventh Circuit which found a single entity because “without [the cooperation of the teams], there would be no NFL football.”  Finding the justification of cooperation to be irrelevant to whether the cooperation is concerted or independent, the Court noted that cooperation can be found in many different contexts which bear scrutiny under Section 1.  As the Court observed:

“Any joint venture involves multiple sources of economic power cooperating to produce a product.  And for many such ventures, the participation of others is necessary.  But that does not mean that necessity of cooperation transforms concerted action into independent action; a nut and a bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to § 1 analysis.” 

As with the NFL and the NFL teams, the Court also found the decisions of the NFLP itself to constitute “concerted activity” under Section 1.  Although noting that this was a “closer call,” due to the fact that NFLP was a separate entity and the profits were distributed to the teams on an equal basis, the Court nevertheless found that for the same reasons the NFL teams’ conduct was subject to review under Section 1, so was NFLP’s conduct.  For the Court here, the decision came down to a truism: 

“Apart from their agreement to cooperate in exploiting those assets [the intellectual property], including their decisions as the NFLP, there would be nothing to prevent each of the teams from making its own market decisions relating to purchases of apparel and headwear, to the sale of such items, and to the granting of licenses to use its trademarks.”   

NFLP simply was “an instrumentality” of the teams and the fact that the NFL teams shared in profits and losses of the NFLP did not save the case from Section 1 scrutiny, since if that were the case, then “any cartel ‘could evade the antitrust law simply by creating a “joint venture” to serve as the exclusive seller of their competing products.’”  American Needle, quoting Major League Baseball Properties, Inc. v. Salvino, Inc., 542 F.3d 290, 335 (2nd Cir. 2008).   

The Supreme Court’s opinion in American Needle does not mark the end of the NFL defendants’ contract with Rebok.  The Court did not find the conduct to be a per se violation of the Sherman Act but rather conduct subject to further review under a “rule of reason” approach.  Accordingly, the American Needle case has been sent into overtime and it is up to the NFL defendants to justify their conduct and save their agreement.

As American Needle continues its path in the District Court, attention will be turned to the ramifications of the decision.  This decision is not limited to the grid iron but will apply to other venues where companies jointly market their intellectual property through a single licensing entity.  Whether it is the NBA, NASCAR, other sports or other venues, closer scrutiny should be expected of those marketing relationships.

In a complaint voted out by the Commission (4 to 1) on May 6, 2010, the FTC alleges that D&B acquisition of QED violated Section 7 of the Clayton Act and Section 5 of the FTC Act.  The Commission alleges that D&B’s company, Market Data Retrieval (”MDR”), holds over 90% of the kindergarten through twelfth grade educational marketing databases in the United States as a result of the merger.  The FTC’s complaint further alleges that MDR and QED “were the only two significant competitors in the K-12 data market” and that the acquisition substantially lessened competition by, among other things, “[r]educing the number of significant competitors from two to one, creating a virtual monopoly” and “allowing MDR, unconstrained by effective competition, to increase prices.”  Commenting on the filing, Richard Feinstein, Director of the FTC’s Bureau of Competition, stated in the accompanying press release: “When Dun & Bradstreet acquired QED, it bought its closest competitor and created a monopoly. That’s going to get the FTC’s attention every time.”  The complaint seeks divestiture of QED.

Despite its lack of detail, the complaint is notable as an indication that the FTC will challenge consummated mergers, even when the size of the transaction is relatively small.  Of course, whether the FTC prevails is another matter.  This merger was apparently consummated over fourteen months ago, and the complaint does not allege that despite the purported ”merger to monopoly,” that MDR had increased prices post acquisition or that pricing had in fact been adversely affected by any increase in market power.  In addition, although claiming that the merger reduced the number of “significant competitors,” at least two other firms that compete in the alleged market are noted in the complaint, but dismissed as “insignificant players.”  From the complaint, it appears that the FTC will contend that reputational issues pose significant barriers to entry and diminish the effectiveness of these two smaller firms as players in this alleged market.

Time will tell whether the FTC can make its case.  One thing is certain:  clearly this is not the last we will hear from the FTC when it comes to challenging consummated mergers.

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*Parker Poe Adams & Bernstein LLP is counsel to Polypore International, Inc. in a consummated merger challenge brought by the FTC. That matter was tried before Administrative Law Judge D. Michael Chappell last year. Eric Welsh was co-lead trial counsel.

In White, the defendant, Andrew Thompson, was a partner with plaintiffs Charles White and Earl Ellis in an entity known as Ace Fabrication and Welding (”ACE”). Ace was formed primarily for the purpose of performing specialty construction and fabrication work at a plant owned by Smithfield Packing Company, Inc. At trial, the evidence suggested that ACE enjoyed initial success. Subsequently, infighting and disagreements overtook the partnership. Eventually, Defendant Thompson decided to leave the partnership and start his own business, PAL. While it is unclear from the opinions when he actually advised his partners of his intentions, defendant Thompson at some point advised White and Ellis of this decision but then a dispute arose between the partners regarding the distribution of partnership assets. While still a partner of ACE, defendant Thompson obtained work from the Smithfield Packing facility for PAL. Eventually, White and Ellis sued Thompson for, among other things, breach of fiduciary duty and unfair and deceptive trade practices.

After a trial, the jury found that Thompson had in fact breached his fiduciary duty to his partners and the damages were trebled under the Act. Defendant Thompson appealed the judgment. On appeal, the North Carolina Court of Appeals, in a split decision, reversed the unfair and deceptive trade practices trebling of damages, finding the Act inapplicable to the dispute because it did not meet the “in or affecting commerce” requirement of the Act.  White v. Thompson, 676 S.E.2d 104 (N.C. App. 2009).  According to the Court of Appeals, “it must be shown that the alleged unfair or deceptive acts had an impact in the marketplace” but “[t]he allegations against Defendant Andrew Thompson do not amount to practices impacting the marketplace.” And while Thompson had been found to have breached his fiduciary duty in usurping partnership opportunities for himself, that did not impact the marketplace. Plaintiffs appealed the decision to the North Carolina Supreme Court.

In another split decision, the North Carolina Supreme Court affirmed the Court of Appeals decision.  As with the Court of Appeals, the Supreme Court correctly noted that the Act requires that the unfair or deceptive act or practice be “in or affecting commerce.”  The Supreme Court also correctly noted that the Act defines “commerce” as “business activities” which the Court had previously defined as connoting “the manner in which businesses conduct their regular, day-to-day activities, or affairs, such as the purchase and sale of goods, or whatever other activities the business regularly engages in and for which it is organized.”  As the Court noted, the General Assembly intended the Act to “achieve fairness in dealings between individual market participants” in two type of business settings: (1) interactions between businesses and (2) interactions between businesses and consumers.”

Viewing the case from this perspective, the Supreme Court found the claim against Thompson to have involved purely the “internal operations of a single market participant.” The parties were partners in “a single market participant” and Thompson breached his fiduciary duty as a partner in “a single market participant.” The Act, according to the Supreme Court, was not intended to “intrude into the internal operations of a single market participant.”

The Supreme Court’s opinion in White, while perhaps adding some more definition to the Act’s reach, raises at least one important question which the majority opinion fails to answer.  In discussing Thompson’s conduct as being purely “internal” to ACE, the Court cites to and discusses briefly its prior decision in Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999).  In that case, the defendant there, while employed by Sara Lee, had engaged in self-dealing by creating companies which then supplied to Sara Lee at inflated prices.  Sara Lee sued this employee under 75-1.1 and the Court found that the “in or affecting commerce” requirement was met there by the buyer-seller relationship forming the basis of the employee’s self-dealing.  591 S.E.2d at 312.  But the Supreme Court, in the White opinion, fails to explain how the usurping of the partnership’s opportunities to himself and PAL is appreciably different from the self-dealing in Sara Lee. 

This noticeable absence of explanation was not lost on the dissent in the White case.  Justice Hudson, in her lengthy dissenting opinion, argued that Thompson’s conduct, like that of the defendant in Sara Lee, involved other businesses and was covered by the Act.  According to the dissent, Thompson’s conduct was not constrained to the internal operations of ACE but involved his competing company, PAL “through which he obtained specialty fabrication work at Smithfield Packing and funneled jobs that had been originally awarded to ACE” and began these activities before he advised Plaintiffs of his intention to withdraw from ACE.  Justice Hudson found these facts to put the White case within the parameters of Sara Lee (“This conduct affected commerce in much the same way as the conduct at issue in Sara Lee”).  Later, she again noted: 

“Rather than supporting the majority’s view, this Court’s decision in Sara Lee strongly indicates that the type of self-dealing found by the jury here is exactly the type of conduct that is covered by the Act.”  . . . Indeed, in its discussion of the very definition of “‘commerce,’” this court noted that the Act is subject to a “reasonably broad interpretation” and that “‘we have not limited [the Act's] applicability . . . to cases involving consumers only.  After all, unfair trade practices involving only businesses affect the consumer as well.’”  White, p. 21 (citations omitted). 

While the majority in White does not clearly, or at least convincingly, distinguish these facts from Sara Lee, the majority has made it clear that in the context of a dispute involving the internal operations of a partnership, Chapter 75’s trebling provision will not be available.  While not stated, perhaps the Court distinguished Sara Lee on the basis that, in that case, the employee engaged in his self dealing over a considerable period of time and did not disclose this conduct during his employment tenure.  Here, although there was some dispute as to exactly when Thompson advised of his intention to withdraw, he clearly had notified his partners of his intention during the time that he had engaged in this conduct.  Perhaps the majority was focused on a lack of impact on Smithfield’s business posed by Thompson’s conduct.  Finally, the majority may simply have believed that Thompson’s conduct was simply too far removed from “buyer-seller relations” to give rise to a claim under the Act.  Whatever the reason, the tug-of-war continues on the reach of Section 75-1.1.

Certainly, the Proposed Revisions offer to make important changes to the Merger Guidelines.  For example, product market definition would not necessarily be a determinative consideration.  “Market definition is not an end in itself:  it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition.”  Proposed Revisions, p. 7.  The Proposed Revisions though would apply a more expansive description of the definition of the “hypothetical monopolist” test used in determining product markets.  In addition, the threshold numbers for the Herfindahl-Hirschman Index (”HHI”) would be increased (see Part 5.3) but would not be considered as necessarily providing a safe harbor.  Also, a section would be added addressing “powerful buyers” (see Part 8).  Here again, according to the revisions, the presence of so-called “power buyers” would not be determinative:  “[T]he Agencies do not presume that the presence of powerful buyers alone forestalls adverse competitive effects flowing from the merger.”  Proposed Revisions, p. 27.  Finally, the two year guidance for market entry – formerly a central touchstone in merger cases — has been eliminated (see Part 9).  

Interestingly, though, the Proposed Revisions are not viewed by some as a dramatic change from the existing Merger Guidelines.  Commenting on the Proposed Revisions at the Spring Meeting, Deputy Assistant Attorney General for Civil Enforcement, Molly S. Boast, stated that the revisions were intended to bring the Merger Guidelines in line with current practice at the Agencies when reviewing mergers. Others might disagree.  In any event, what is apparent, is that the Proposed Revisions suggest a shift away from “guidelines” to “indicators.”  This appears to have been a conscious move to provide the agencies more flexibility in how they consider a merger.

“These Guidelines should be read with the awareness that merger analysis does not consist of uniform application of a single methodology.  Rather, it is a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time.”  Proposed Revisions, pp. 1-2. 

In the next several weeks, antitrust practitioners will be chiming in on the Proposed Revisions.  While formal comments may result in some changes around the edges, it should be expected that the Proposed Revisions will largely remain intact.  Attention will then be focused on what role the Merger Guidelines, as revised, will play in discussions with the Agencies and in court battles over contested mergers.

This article, titled “A Statistical Analysis of Trade Secret Litigation in Federal Courts,” is noted by the authors as being the first such statistical analysis conducted of trade secret cases in federal court. Several of the authors’ conclusions are of interest here.

First, the number of trade secret claims doubled from 1988 to 1995 and then doubled again from 1995 to 2004. The authors believe that trade secret cases in federal court will double again by 2017.

Second, trade secret theft cost companies as much as 300 billion dollars per year.

Third, in more than 85% of the cases, the trade secrets were misappropriated by employees or business partners, not third party computer hackers.

This article tends to highlight several facts known by attorneys who practice in this area: trade secret misappropriation can have a large financial impact on a company and to reduce the risk of misappropriation, attention should be paid closer to home. It is the employee that leaves his employment with files on a USB device or the business partner that was entrusted with confidential, proprietary information that then uses the information for its own financial gain that poses the most immediate risk. These frequent scenarios have been noted previously in this blog. See Nucor v. Bell, 2:06-cv-02972-DCN (D.S.C. 2008) (Post February 19, 2010)** and Raytheon Corp. v. Indigo Systems Corp., No. 4:07 cv-109 (E.D. Tx 2009) (Post March 17, 2010). While we periodically see the stunning event where someone from abroad has successfully hacked into a computer and wreaked havoc (see “Cyberattack on Google Said to Hit Password System,” John Markoff, New York Times, March 20, 2010), the risk faced daily by companies is for more pedestrian but certainly no less impactful to their business.

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* Published with permission of the authors.

** Parker Poe represented Nucor in this lawsuit.

Caputo filed a motion to dismiss, arguing that the non-compete was unenforceable as a matter of law and that ACS had failed to state a claim under both UDTPA and the North Carolina Trade Secrets Protection Act. In a decision rendered by the Magistrate Judge, and adopted by the District Court Judge, the Court found that the non-compete, although vague as to its geographic reach and potentially invalid, was “not per se unreasonable at the motion to dismiss stage.” The Court made this ruling even though it found that the non-compete, which had no geographic restriction but rather was client based, potentially would prohibit the solicitation of prospective customers throughout the United States in the building renovation business.

“If the Court defines ‘prospective’ as ‘expected, likely or future,’ then it is possible that the non-solicitation provision could be overly broad as applied to Caputo. But, the non-solicitation provision is not so unreasonable as to be declared unenforceable as a matter of law on a FRCP 12(b)(6) Motion to Dismiss.”

Apparently, the Court was willing to permit the parties to engage in discovery to determine the meaning of the solicitation provision so the Court could then determine if the provision was invalid. Although this case is ongoing, it will be interesting to see what evidence is produced to demonstrate a meeting of the minds on this point.

Although the discussion of the non-compete is interesting, the far more important discussion relates to the treatment of the UDTPA and trade secrets claims.

The Court curiously found that the complaint did not state a cause of action under the UDTPA. Citing the principle set forth in Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998) that an UDTPA claim cannot “piggyback” on a breach of contract claim, the Court found that the complaint did not allege “substantial aggravating circumstances” that are necessary to support a claim under UDTPA. The Court viewed the dispute as a breach of contract, noting ACS’ UDTPA claim was not “distinct from” the primary breach of the non-compete and confidentiality agreements. The Court’s holding here is somewhat surprising in that ACS’ claims also included a claim in tort for trade secret misappropriation, which the Court upheld. The Court’s decision also seems to run counter to other cases where UDTPA claims were brought, and upheld, in similar situations involving employee breaches of non-compete or confidentiality agreements. See e.g. Philips Electronics North America Corp. v. Hope, 2009 WL 1883921 (M.D.N.C. June 30, 2009); Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp.2d 541 (M.D.N.C. 2002). Moreover, trade secret misappropriation claims frequently become the basis for an UDTPA claim. See Sunbelt Rentals, Inc. v. Head & Engquist Equipment, LLC, 00-CVS-10358, North Carolina Business Court, July 10, 2002.

More interesting, though, is the Court’s statement that ACS’ UDTPA claim was defective because it was “wholly divorced from the context of consumer transactions.” The Court cited PCS Phosphate Co., Inc. v. Norfolk Southern Corp., 559 F.3d 212 (4th Cir. 2009) and Dalton v. Camp, 353 N.C. 647, 548 S.E.2d 704, 710 (2001) for the proposition that UDTPA was “intended to benefit consumers,” and then extrapolated the principle that an UDTPA claim must address “consumer transactions.” A closer look at Dalton shows that such is not the case. In fact, in Dalton, the North Carolina Supreme Court specifically noted that while UDTPA was intended to benefit consumers, “its protections extend to businesses in appropriate circumstances.” As noted previously, “[U]nfair trade practices involving only businesses affect consumers as well.” United Labs, Inc. v. Kuykendall, 322 N.C. 643, 665, 70 S.E.2d 375, 389 (1988). Other UDTPA claims have been brought in North Carolina against businesses. See e.g. Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999); Static Control Components, Inc., 200 F. Supp.2d at 550; Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 620 S.E.2d 222 (N.C. App. 2005).* One would certainly expect that even in ACS, the UDTPA claim would have some impact on consumers. Perhaps this is one of those situations where “you know it when you see it,” and the Complaint just did not show the predicate egregious facts. Whatever the situation, the ACS case gives some pause to the federal court’s willingness to hear an UDTPA claim in the context of an employer-employee dispute even when in the presence of a trade secret misappropriation claim.

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* Parker Poe was counsel to Sunbelt Rentals, Inc. in this lawsuit and Eric Welsh was part of the trial team.

In Combs v. City Electric Supply Co., No. COA09-108 (March 16, 2010), the North Carolina Court of Appeals found that a whistle blower’s unfair trade practices claim failed even though it was based on allegations that the defendant had engaged in illegal and fraudulent conduct. In that case, Combs, a former employee of City Electric Supply Company, was terminated from his position after he had objected to certain business practices of City Electric, which Combs alleged were illegal or fraudulent. Combs filed his complaint alleging wrongful discharge, tortious interference with his contractual rights and unfair and deceptive trade practices under Chapter 75-1.1. Combs alleged “that his employment was terminated in retaliation for reporting ‘that Defendant [w]as stealing from its customers’ accounts’.” Following a trial, the trial court directed a verdict in favor of the defendants on all counts. Combs appealed the decision.

On appeal, the Court found sufficient evidence of City Electric’s obtaining money by false pretenses from its customers and therefore found sufficient grounds for the wrongful discharge and tortious interference claims to go to a jury. The Court reversed and remanded those claims for a new trial.

The Court, however, was not so inclined when it came to the Chapter 75-1.1 claim. As to that claim, the Court affirmed the directed verdict for the defendants. Noting that a plaintiff must prove not only an “unfair or deceptive act or practice” under Chapter 75-1.1, but also that that act or practice was “in or affecting commerce” and “proximately caused injury to the plaintiff,” citing Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704, 711 (2001), the Court found that Combs’ complaint “involved a simple employment dispute” and did not involve acts “in or affecting commerce.” Relying on precedent which establishes that the Act does not apply to general employer-employee relationships, the Court concluded that Combs’ claim did not affect commerce and did not fall within Chapter 75-1.1, regardless of the “whistle blowing” allegations.

Combs attempted to distinguish his claim from those found in ordinary employer-employee relationships, citing to Sarah Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999) and Walker v. Sloan, 137 N.C. App. 387, 529 S.E.2d 236 (N.C. App. 2000), cases involving employer-employee relationships with Chapter 75-1.1 claims. The Court found Combs’ argument unconvincing, distinguishing both Sarah Lee and Walker from Combs’ situation.

“In both Sarah Lee Corp. and Walker, the Court focused upon conduct that constituted activity ‘affecting commerce’ that occurred between the employer and employee and held that N.C. Gen. Stat. 75-1.1 was applicable to those cases. . . . In the instant case, there was no evidence presented before the trial court of any conduct that would constitute activity ‘affecting commerce’ between plaintiff and City Electric. Plaintiff only asserts that he was fired in retaliation for ‘blowing the whistle’ on City Electric’s practice of not sending out negative balance statements at the end of each month.”

Based on this reasoning, the appellate court found Combs’ Chapter 75-1.1 claim to lack merit.

The City Electric case is interesting in several respects. First, an observation can be made that just because an act or practice is deceptive or unfair does not by itself mean that a claim under Chapter 75-1.1 can be brought. A proper nexus must be found with “commerce” for a claim to exist. Here, although the underlying alleged act of fraud gave rise to an alleged “whistle blowing,” because the crux of the claim involved a “simple employment dispute,” a Chapter 75-1.1 claim was not found.

A second, converse observation can be made: just because the underlying facts involve an employer-employee relationship does not necessarily mean that a Chapter 75-1.1 claim cannot be brought. Indeed, the Court noted both the Sara Lee and Walker cases as examples where a Chapter 75-1.1 claim existed even in the context of an employer-employee dispute. Another example, although not cited by the Court in City Electric, is Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 620 S.E.2d 222 (N.C. App. 2005).

In that case, Sunbelt alleged that the defendants had engaged in unfair and deceptive trade practices under Section 75-1.1 when they raided Sunbelt’s business for its employees and confidential, trade secret information. Following a trial, Sunbelt obtained a judgment in its favor on the unfair and deceptive trade practices act, even though the claims involved to some extent the employment relationships between Sunbelt and certain of its former employees. The Business Court found the claim valid due to the fact that the case involved claims of trade secret misappropriation and tortious interference with Sunbelt’s business relations and therefore a proper nexus was found between the deceptive acts and practices and commerce. Sunbelt’s judgment was affirmed on appeal.

So what do we take away from this discussion? Perhaps, that while a “whistle blower” may not have facts sufficient to make out a claim under the Act, the fact that a claim is in the context of an employer-employee relationship is not necessarily fatal to bringing an unfair and deceptive trade practices claim under Chapter 75-1.1. As in any legal matter, the facts matter.

Parker Poe represented Sunbelt Rentals in Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, and Eric Welsh was part of the trial team.

In Raytheon Corp. v. Indigo Systems Corp., Case No. 4:07-cv-109, Raytheon filed a complaint on March 2, 2007 against Indigo, alleging claims of trade secret misappropriation surrounding Indigo’s commercialization of infrared imaging cameras. Raytheon, which had earlier developed and commercialized its own infrared imaging cameras, alleged that Indigo, which was formed by former Raytheon employees in 1996, had misappropriated Raytheon’s trade secrets on this technology through, in part, the hiring of over 75 Raytheon employees over the course of several years. According to the decision, Raytheon, concerned that Indigo might be engaged in improper conduct, wrote a formal letter to Indigo, raising its suspicions. In response, Indigo denied any wrongdoing. Based on reassurances from Indigo, Raytheon entered into an agreement with Indigo in July 1997 regarding the hiring of the former Raytheon employees. In that agreement, Indigo agreed to “require all future Indigo employees to refrain from using the intellectual property of former employers.” Following Raytheon’s entering into this agreement with Indigo, Raytheon continued a consulting relationship with Indigo until 2000, and the parties continued to work sporadically on some collaborative projects. Indigo signed confidentiality agreements with Raytheon in connection with these consulting services prior to 2000, all of which, according to the Court, were unrelated to the infrared technology.

In March 2004, Raytheon obtained an Indigo infrared imaging camera and disassembled that camera several months later. Raytheon apparently saw indications in the Indigo camera of the use of Raytheon’s trade secrets. After that discovery, Raytheon reviewed certain files of employees who had left for Indigo and identified a “correlation between the areas of expertise of those employees and the types of technology developed in the interim by Indigo.” Raytheon filed suit against Indigo on March 2, 2007.

Indigo denied any wrongdoing, and moved for judgment from the Court that the misappropriation claim was untimely anyway — barred by the three year statute of limitations. Under Texas law, the time period in which to bring suit for trade secret misappropriation begins once “the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered” and Indigo argued that Raytheon had learned of sufficient facts regarding its claim long before March 2004. In response, Raytheon argued in essence that it’s claim was not barred because Indigo had stolen its trade secrets over the prior 12 years and concealed its conduct or provided assurances such that Raytheon could not discover the misappropriation earlier than March 2004.

The District Court rejected Raytheon’s position, finding a lack of diligence on Raytheon’s part in bringing its trade secret misappropriation claim. The District Court found that the facts were known to Raytheon that provided a reasonable basis for it to suspect that its trade secrets had been misappropriated.

While the Raytheon court’s decision may on first blush appear surprising — especially in light of the allegations that Raytheon was lulled into inaction by Indigo’s reassurances — the Court’s decision finds some explanation and support in two key areas. First, Indigo was a competitor of Raytheon in the infrared imaging camera market for years, a point which was not lost on Raytheon. Raytheon internally tracked Indigo as a competitor in this market for years before 2004 and had in fact lost business to Indigo, which Raytheon was aware of at the time. The Court obviously had difficulty squaring these facts with Raytheon’s claim that during this same period it was reassured by Indigo that it had not stolen Raytheon’s trade secrets and therefore perceived no need to take action. Second, Raytheon could not explain sufficiently to the Court why it did not take action against Indigo after 2000, when Raytheon stopped its consulting services with Indigo and “ceased reposing trust in Indigo,” but before March 2004, when “it developed suspicions it deemed worth investigation.” The Court found this latter point to be the “most damaging” to Raytheon’s argument.

“The termination of the parties’ consulting relationship, Indigo’s competitive successes in the military market — some of which came at Raytheon’s expense, the continued hiring of Raytheon personnel by Indigo and the ability to inspect its employee files were all well known by or readily available to Raytheon long before March of 2004. That combination would have ’cause[d] a reasonably prudent person to make inquiry, which, if pursued, would lead to discovery of the concealed cause of action.’”

Raytheon has indicated its intent to appeal the District Court’s decision and while the final chapter may not yet be written on this one, the decision does highlight the importance of being vigilant in protecting one’s trade secrets. As this decision makes abundantly clear, whether or not a claim is timely filed depends on the totality of the information available. Accordingly, when suspicions of misappropriation occur, thorough investigation is warranted and delay should be avoided. Not only does delay potentially jeopardize the timeliness of the filing, as evidenced by the Raytheon case, but just as important, every day that passes means that someone else is using or disclosing the trade secret, with its value potentially being compromised or lost. While a damage claim may ultimately compensate the wronged party, at least in part, a prolonged delay in bringing action can create impediments for obtaining an order from a court to prevent the continued use or misappropriation of the trade secret. Finally, a lack of diligence in detecting and remedying the misappropriation also can lead to questions regarding the strength of the assertion that the information allegedly stolen is a trade secret in the first place. Indeed, faced with unexplained delay, one can be left to question how information can be a “trade secret” if the aggrieved party did little to determine if the secret had been stolen, or, worse yet, did nothing to correct the wrong once reasonable suspicions occurred. The expression “snooze you lose”, once bantered about in childhood, resonates in this setting as well.