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Under California law, non-compete provisions with an employee are generally unenforceable.  Statutory exceptions to this rule include the seller of a business’s goodwill or a membership interest in an LLC.  Courts have also recognized a judicial exception to this rule: where the non-compete is necessary to protect an employer’s trade secret information.  This judicial exception seeks to balance the tension that exists between an employee’s right to mobility versus the employer’s need to protect its valuable business information.

A recent decision from a federal district court in the Northern District of California shows what a fine line it is between permissible and impermissible non-competes.  In Sunbelt Rentals, Inc. v. Victor, 2014 U.S. Dist. LEXIS 14416, a company that operated rental centers sought a preliminary injunction against one of its former employees who had joined a competing company.  In addition to alleging a claim for trade secret misappropriation, Sunbelt accused Victor of breaching his employment agreement which contained a non-compete/non-solicitation provision.  The provision at issue was an agreement by the employee that he would not solicit any customer “who purchased or leased products or services from [Sunbelt] at any time during the 12 calendar months immediately preceding the termination of this agreement for any reason and for or with whom employee had contact, responsibility or access to confidential information related to” the customer.  Sunbelt argued that Victor had breached this provision of his agreement and thus, was entitled to injunctive relief against Victor.

Victor opposed the motion for preliminary injunction by arguing that the “non-compete” provision in his employment agreement was unenforceable under section 16600 of the California Business and Professions Code.  The Court began by recognizing that under this section “covenants not to compete are generally unenforceable” and that this section “represents a strong public policy” of California.  The Court continued by recognizing the three statutory exceptions to 16600 as well as the judicially-created rule that such provisions are not necessarily invalid when “necessary to protect trade secrets.”

Sunbelt attempted to argue that the “non-compete” was enforceable because it only sought to prevent its former employees “from using Sunbelt’s confidential information to solicit Sunbelt’s customers.”  The Court rejected this argument finding that the subject provision was much broader.  The Court noted that it prevented the solicitation of any customers who had done business with Sunbelt during the preceding 12 months, even if that customer was no longer doing business with Sunbelt.  Further, the Court found that the provision would apply if Sunbelt could show that its former employee merely had access to confidential information, not that the former employee had used such information to make the solicitation.

Given this, the Court found that the subject “non-compete” provision went too far and was thus unenforceable under section 16600.  (The Court did find that a contractual provision preventing the former employee from soliciting his former coworkers was, at least at the preliminary injunction stage, valid.)

The Sunbelt opinion once again demonstrates the high level of scrutiny courts apply when an employer accuses a former employee of violating a non-compete contractual provision.  Great care must be exercised in preparing such provisions to ensure that they do not run afoul of section 16600.  Should a court invalidate such a provision, the employer may be left with having to carry a heavier burden to establish that the employee has misappropriated trade secret information in order to prevent the unfair competition.

A number of recent California appellate decisions reveal hidden traps that may ensnare employers in administrative proceedings involving employee claims for unemployment or workers-compensation benefits. Such proceedings typically appear routine and uncomplicated. Nonetheless, missteps in handling those routine and relatively low-risk claims can greatly increase an employer’s exposure to liability in a separate civil action alleging wrongful termination, harassment, discrimination, retaliation, or similar claims.

Whereas employer exposure to claims for unemployment or workers-compensation benefits most often is relatively minor, employer liability in civil cases can be extreme, including the potential recovery of emotional-distress and punitive damages and attorney fees. Thus, employers who wish to reduce such risks should consider consulting with employment counsel before participating in such routine administrative proceedings.

For example, in Cuiellette v. City of Los Angeles, 194 Cal. App. 4th 757, 764 (2011), an employer hired a “workers compensation claims administrator … for its expertise in managing workers compensation cases.” The claims administrator advised the employer against allowing a disabled employee to work in a light-duty position because, for purposes of workers compensation, the employee was 100 percent disabled. That recommendation focused on intricacies of workers-compensation law and overlooked the employer’s independent obligation under anti-discrimination laws to provide reasonable accommodations to disabled employees. The result was a jury verdict against the employer of $1.5 million, and three separate appeals to avoid or undue that outcome.

More recently, the California Court of Appeal issued an unpublished decision revealing (in a muted way) another peril in the context of workers-compensation claims. The deadline to file a civil lawsuit alleging discrimination, harassment and retaliation typically expires within two years (depending on whether the employee files a charge of with the DFEH or the EEOC). Nonetheless, the appellate court in this case ruled that an employee who was fired in July 2006 could file a civil lawsuit alleging such claims against his employer in December 2011. The Court of Appeal found this late filing to be permissible because the employee had filed a claim for workers-compensation benefits in September 2006 alleging that the employer had harassed him and discriminated and retaliated against him. Although such claims cannot be addressed in the context of a workers-compensation claim, the appellate court said the statute of limitations on such claims did not start ticking because the employee had raised them in the workers-compensation forum in good faith.

Employers may feel a particularly strong sense of security in handling, without an attorney, employee claims for unemployment benefits, since state law says that rulings in such proceedings are inadmissible as evidence in a civil lawsuit. See Cal. Unemp. Ins. Code § 1960. Regardless, an administrative finding that an employee is entitled to such benefits, or that that an employer’s explanation for firing the employee is dubious, still may be admissible in federal court. See Baldwin v. Rice, 144 F.R.D. 102, 105-07 (E.D. Cal. 1992).

Even if the ultimate administrative findings are not worrisome, employers run the risk of making unfavorable or inaccurate admissions in such proceedings that can be used against them later in a civil lawsuit. Such unfavorable or inaccurate admissions by the employer appear to be exactly what an employee was hoping to obtain in Kelley v. California Unemployment Insurance Appeals Board, Cal. Ct. App. Case No. B244098 (Feb. 10, 2014). A copy of that appellate decision is available at this link.

The plaintiff in the Kelley case went on a stress leave from her job one month after she filed a claim with the DFEH alleging that her employer was retaliating against her for reporting sexual harassment. Her physician cleared her to return to work as of November 15, 2010, but she had hired a lawyer in the interim. Beginning on November 13, her lawyer exchanged emails with the employer’s lawyer demanding a number of assurances before the employee would return to work.

For instance, the plaintiff’s attorney insisted that the employer provide a written job description, a written statement of goals and objectives, written confirmation of the plaintiff’s job title, duties, pay and benefits, the status of the employee’s earlier request for vacation, and written confirmation that the plaintiff would not be subjected to retaliation for her earlier harassment complaints. The employer refused, characterizing the demands as an imposition of unreasonable conditions, and therefore terminated the plaintiff’s employment.

The plaintiff applied for unemployment benefits, but the employer contended that she was ineligible because she had voluntarily quit by insisting upon conditions that the employer had no obligation to satisfy. The California Unemployment Insurance Appeals Board ultimately found that the plaintiff was entitled to such benefits because the employer had discharged her “for reasons that did not amount to misconduct.” Clearly, such a finding could be very problematic for an employer if admitted as evidence for the jury to consider in a civil lawsuit.

Of course, at that point, such an administrative finding would be inadmissible in state court – but the story doesn’t end there. The employer challenged the administrative decision in a civil court. The trial court found that the email demands from the plaintiff’s attorney “were to some extent posturing for the threatened civil action,” but concluded that those emails were mere requests and not ultimatums or conditions. Accordingly, both the trial court and the Court of Appeal affirmed that the employee was entitled to the benefits because she did not quit. The appellate court held that the plaintiff’s “requests were not conditions or ultimatums and that [the employer] … could have waited to see whether she reported for work after the company declined to provide the requested information” rather than fire her.

In sum, the Kelley case no longer involves mere findings of fact concerning the circumstances of the plaintiff’s termination “made … in any action or proceeding before the [California Unemployment Insurance A]ppeals [B]oard.” Cal. Unemp. Ins. Code § 1960. On the contrary, such findings were made by a California trial court and affirmed by the California Court of Appeal. Consequently, the employer’s ability to dispute such findings in a subsequent proceeding may now be impaired.

The takeaway from these decisions is that employers face significant risk when it comes to litigating administrative claims for such benefits without first consulting with employment counsel, even though the potential damages may seem insubstantial. Obtaining guidance from legal counsel earlier may help to avoid significant liability in subsequent lawsuits.

On January 22, 2014, the United States Supreme Court decided that a patent owner has the burden of proving infringement in an action filed by a licensee for a declaratory judgment of noninfringement. This case, Medtronic, Inc. v. Mirowski Family Ventures, LLC, 2014 U.S. LEXIS 788 (2014), reversed a Federal Circuit Court of Appeals decision holding that in such a case, the burden of proof shifts to the licensee to prove it did not infringe.

In 1991, Medtronic and Mirowski entered into a license. Medtronic made medical devices, including cardiac devices, and Mirowski owned patents covering heart simulator implants. The license provided that if Mirowski believed that a new product of Medtronic was covered by the patents, Mirowski would give notice to Medtronic. Medtronic could then choose one of three options: agree to pay royalties for the new product, pay royalties and also challenge Mirowski’s finding of infringement, or not pay royalties, when which would allow Mirowski to terminate the license and sue Medtronic for patent infringement. The parties later modified the license to allow Medtronic to pay royalties into an escrow account if it decided to challenge Mirowski’s finding of infringement, with the winner receiving those royalties.

In 2007, Mirowski notified Medtronic that several new Medtronic products infringed Mirowski’s patents. Medtronic disagreed and sued Mirowski in the district court in Delaware for a declaratory judgment of noninfringement and invalidity. Pursuant to the license, Medtronic paid royalties for these products into an escrow.

The district court tried the case and ruled in favor of Medtronic. The court found that the burden of proving infringement fell on Mirowski and that it had not met that burden.

Mirowski appealed to the Federal Circuit Court of Appeals. The court concluded that Medtronic had the burden of proof, reversing and remanding the case. The court held that the patent owner normally bears the burden of proving infringement and that the burden remained on the patent owner even in a declaratory judgment action where the patent owner is a defendant asserting a counterclaim for infringement. The court held, however, that the burden shifts to the declaratory judgment plaintiff when the plaintiff is a licensee paying royalties and the patent owner is precluded from suing for infringement because the license is being performed. In such a case, the court said, the licensee has the burden of showing noninfringement.

Medtronic filed a petition for writ of certiorari to the Supreme Court and the Court granted the petition.

MedImmune. Under the Federal Circuit’s rule, if a licensee wants to challenge a patent (such that the burden of proof of infringement is on the patent owner), it must repudiate the license and force the patent owner to sue for infringement, risking treble damages and attorneys’ fees if it loses. As Medtronic explained, this is exactly the problem the Supreme Court had intended to solve in MedImmune.

The Court addressed the question of who bears the burden of proving infringement (or noninfringement) when a patent licensee continues to pay royalties but sues for a declaratory judgment of noninfringement. The Court held that the burden remains on the patent owner. 2014 LEXIS 788 at *13.

The Court first analyzed the issue as a matter of “simple legal logic.” Id. at *13-15. The Court explained that the burden of proof typically falls on the patent owner; the Declaratory Judgment Act is procedural; and the burden of proof is a substantive issue -therefore, the burden of proof remains on the patent owner. Id. at *15.

The Court noted that Federal Circuit’s burden-shifting rule would result in uncertainty in the marketplace and the possibility of inconsistent results. The declaratory judgment action might not result in a clear determination of the rights of the parties. Id. at *16.

According to the Court, the patent owner is in the best position to prove whether a product infringes the patent. The licensee should not have to figure out the patent owner’s theory of infringement.

The Court held that the Federal Circuit’s burden shifting exception conflicts with the Declaratory Judgment Act. The court explained that in its MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007) decision, it had specifically intended to eliminate the problem faced by a licensee who wanted to challenge infringement without having to repudiate the license and force the patent owner to sue for infringement. MedImmune permitted licensees to continue to pay royalties and challenge infringement at the same time. Absent the procedure set forth in MedImmune, Medtronic would either have to give up its right to challenge infringement or stop paying royalties to sue for declaratory judgment, risking being sued for infringement and held liable for willful infringement (with treble damages and attorneys’ fees) if it was found to infringe. The Court said that the Federal Circuit’s decision “create[s] a significant obstacle” to the use of the MedImmune process, and that “we are unaware of any strong reason for creating that obstacle.” Id. at *17.

The Court did not think much of an argument propounded on behalf of Mirowski that unless the Court affirmed the Federal Circuit’s rule, licensees could force patent owners into litigation over infringement at any time. According to the Court, there must be a genuine dispute for a declaratory judgment action to be brought, and, in this case, Mirowski’s claim of infringement triggered the dispute. Id. at *20. The Court found “no convincing reason why the burden of proof law should favor the patentee.” Id. at *21.

The Court further explained that its rationale was supported by public policy in ensuring that “‘patent monopolies…are kept within their legitimate scope.’ [Citation omitted.]” Id. at *21. “A patentee should not be allowed to exact royalties for the use of an idea…that is beyond the scope of the patent monopoly granted.’” Id., quoting Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 349-50 (1971).

This decision means that it is now irrelevant which party files the lawsuit and is the plaintiff. The patent owner, not the accused infringer, bears the burden of proof no matter whether it is the plaintiff or the defendant.