Tag: NDA

‘Mandatory’ Forum Selection Clause Given Cramped Construction By IL Court (applying Ohio Law) in Hand Lotion Contract Spat

In my experience, when final contracts refer to earlier agreements between the parties, it can present fertile ground for textual conflicts.  Example: I once litigated a severance dispute where the operative employment agreement provided Delaware law (and fixed venue there, too) and incorporated two prior non-compete agreements.  One agreement contained a Nebraska forum clause while the other non-compete said New York law governed.  Much ink was spilled fleshing out the proper place to sue.

Sloan Biotechnology Laboratories, LLC v. Advanced Biomedical Inc., 2018 IL App (3d) 170020 examines the factors a court considers when deciding which of two paradoxical forum clauses apply.

The plaintiff there agreed to supply hand sanitizer product to the defendant pursuant to a 2015 Manufacturing Agreement (“2015 Agreement”). The 2015 Agreement incorporated a 2014 non-disclosure agreement (the “2014 NDA”)

The 2015 Agreement provided that Illinois law applied and identified Peoria, Illinois as the site of the contract. The incorporated 2014 NDA, in turn, contained both permissive and mandatory forum selection clauses, both of which fixed venue in Cuyahoga County, Ohio. The permissive forum clause simply stated Ohio law would govern and that it (the 2014 NDA) “may be enforced” in Ohio state court. The mandatory clause, found in the 2014 NDA’s “equitable remedies” section, provided that the scope and extent of any injunctive relief “shall be determined” by Cuyahoga County, Ohio state court. The trial court granted the Ohio defendant’s motion to dismiss the complaint and found that Ohio was the proper forum for the lawsuit. The plaintiff appealed.

Applying Ohio law, the Illinois appeals court reversed.  It first recognized the existence of both permissive and mandatory forum selection clauses. The former allows parties to submit their disputes to a designated forum but doesn’t prohibit litigation elsewhere. The latter, mandatory provision, provides the exclusive forum for litigation. Use of the word “may” denotes a permissive forum clause while “shall” signifies a mandatory one. [⁋ 26]

In Ohio, a forum selection clause brokered between two sophisticated commercial entities is prima facie valid, so long as it was bargained for freely. To set aside a commercial forum selection clause, the challenger must make a “strong showing.”

A court will reject a commercial forum selection clause where (1) it results from fraud or overreaching or (2) its enforcement is unreasonable and essentially deprive a party of its day in court.

However, a challenger’s bare allegation that it’s inconvenient to litigate in another state isn’t enough to nullify a freely bargained for forum selection clause.

Like Illinois, Ohio utilizes the four-corners rule to contract interpretation. That is, contractual terms are to be ascribed their common, ordinary meanings and a court will not go beyond the plain language (or “four corners”) of the document to divine its meaning.

Applying these principles, the Court noted that the mandatory forum clause was narrowly drafted and only applied to questions of injunctive relief for NDA violations.  And since plaintiff’s lawsuit was not premised on a violation of the 2014 NDA (it was a declaratory judgment suit), the mandatory forum selection clause didn’t apply. As a consequence, the appeals court held there was nothing preventing the plaintiff from suing in Peoria County Illinois.

Afterwords:

Sloan represents a court rigidly enforcing a forum selection clause where the contracting parties are commercially sophisticated entities and there is no fraud or defect in contract formation.

The party challenging a forum clause must make a strong showing and offer more than inconvenience as the reason to reject the clause.

This case and others like it starkly illustrate the confusion that can result when multiple contracts (with diffuse forum clauses) reference and adopt each other.

If the different agreements involved here contained some forum consistency, a lot of time and money on a satellite issue (where to file suit) likely could have been saved.

Photo Album Inventor’s Trade Secrets Case Survives Summary Judgment – IL ND

The Northern District recently discussed the reach of the apparent agency doctrine along with trade secret abandonment in a spat over a photo album device.

The plaintiff in Puroon, Inc. v. Midwest Photographic Resource Center, Inc., 2018 WL 5776334 (N.D.Ill. 2018), invented the Memory Book, a “convertible photo frame, album and scrapbook” whose key features included embedded magnet technology (to keep pictures in place) and an interchangeable outside view.

The plaintiff sued the defendant photo-album seller when plaintiff learned the defendant was selling a product similar to the Memory Book. Defendant opposed the suit, claiming it independently created the analogous album product.  Both sides moved for summary judgment motion on multiple claims.

Apparent Agency

The salient agency issue on plaintiff’s breach of contract claim was whether a third-party who performed manufacturing services for the defendant and to whom the plaintiff sent some photo book samples was the defendant’s apparent agent If so, defendant was potentially liable on plaintiff’s breach of contract claim which asserted defendant went back on its promise to build Memory Book prototypes.

In Illinois, a statement by a purported agent alone cannot create apparent authority. Instead, for apparent authority to apply, the court looks to statements or actions of the alleged principal, not the agent. Once a litigant establishes that an agent has authority to bind a principal, the agents’ statements are admissible as an agent’s statement made within the scope of the agency. See Fed. R. Evid. 801(d)(2)(D)(a statement is not hearsay if offered against opposing party and made by party’s agent or employee on a matter within the scope of that relationship while it existed.) [*5]

Here, there was record evidence that a high-ranking employee of defendant referred to both defendant and the manufacturer as “we” in emails. The court viewed this as creating the impression in a reasonable juror that the manufacturer was an agent of defendant.

Because of this fact question – was the manufacturer the defendant’s agent? – both parties’ summary judgment motions were denied on plaintiff’s breach of contract claim.

Trade Secret Misappropriation

The bulk of the opinion focuses on whether the plaintiff sufficiently established that its Memory Book device qualified for trade secret protection and whether there was enough misappropriation evidence to survive summary judgment. The Court answered (a muted) “yes” on both counts.

The court refused to attach trade secret protection to the Memory Book’s embedded magnets feature; the Court noted that magnets had been used extensively in other photo container products.

The Court did, however, afford trade secret protection to plaintiff’s manufacturing specifications.  It found the ‘specs’ secret enough to give plaintiff a competitive advantage.  The Court also noted that plaintiff supplied the specs to defendant only after it signed an NDA.  This was enough for the plaintiff to take its trade secrets claim to a jury and survive summary judgment.

Trade Secret Abandonment

The Court rejected defendant’s argument that plaintiff abandoned its trade secrets by sending samples to retailers and presenting Memory Book at trade shows.

It stated that the trade show attendees could not have identified the Memory Book’s manufacturing specifications merely by looking at the device or handling a sample. The court also credited plaintiff’s evidence that the album retailers weren’t provided with the Memory Book’s specs. The court opined that “reasonable steps for a two or three person shop may be different from reasonable steps for a larger company” and concluded that “[g]iven the fact that [Plaintiff] is a small, one-person company, a reasonable jury could find that [its]  efforts . . . were adequate to protect the Memory Book’s secrets.”

Afterwords:

Corporate entities should not too closely align themselves with third party independent contractors if they wish to avoid contractual liability on an agency theory;

Inventors should make liberal use of NDAs when sending prototypes to vendors, partners or retailers;

A smaller company can likely get away with less strenuous efforts to protect trade secrets than its bigger company counterparts.  The larger and more sophisticated the company, the more sedulous its efforts must be to protect its confidential data.

Third Party Enforcement of A Non-Compete and Trade Secret Pre-emption – IL Law

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In Cronimet Holdings v. Keywell Metals, LLC, 2014 WL 580414 (N.D.Ill. 2014), the Northern District of Illinois considers whether a non-compete contract is enforceable by a stranger to that contract as well as trade secret pre-emption of other claims.

Facts and Procedural History

Plaintiff, who previously signed a non-disclosure agreement with a defunct metal company (the “Target Company”) it was considering buying, filed a declaratory action against a competitor (“Competitor”) requesting a ruling that the non-disclosure agreement and separate non-competes signed by the Target Company’s employees were not enforceable by the competitor who bought  the Target Company’s assets. The NDA and non-competes spanned 24 months.

The plaintiff moved to dismiss eight of the ten counterclaims filed by the Competitor.  It argued the Competitor lacked standing to enforce the non-competes and that its trade secrets counterclaim (based on the Illinois Trade Secrets Act, 765 ILCS 1065/1 (“ITSA”)) pre-empted several of the tort counterclaims.

In gutting most (8 out of 10) of the counterclaims, the court applied the operative rules governing when non-competes can be enforced by third parties:

– Illinois would likely permit the assignment of a non-compete to a third party;

– Enforcing a non-compete presupposes a legitimate business interest to be protected;

– A legitimate business interest is a fact-based inquiry that focuses on whether there is (i) a “near-permanence” in a customer relationship, (ii) the company’s interest in a stable work force , (iii) whether a former employee acquired confidential information and (iv) whether a given non-compete has valid time and space restrictions;

– A successor corporation can enforce confidentiality agreements signed by a predecessor (acquired) corporation where the acquired corporation merges into the acquiring one;

– A successor in interest is one who follows an original owner in control of property and who retains the same rights as the original owner;

– The ITSA pre-empts (displaces) conflicting or redundant tort claims that are based on a defendant’s misappropriation of trade secrets;

– Claims for unjust enrichment, quasi-contract relief or unfair competition are displaced by the ITSA where the claims essentially allege a trade secrets violation;

– The ITSA supplants claims that involve information that doesn’t rise to the level of a trade secret (e.g. not known to others and kept under ‘lock-and-key’);

(**4-5).

The court found that since a bankruptcy court (in the Target Company’s bankruptcy) previously ruled that the Competitor didn’t purchase the non-competes, and wasn’t the Target Company’s successor, the Competitor lacked standing to enforce the non-competes.

The Court also held that once the Target Company stopped doing business, its non-competes automatically lapsed since it no longer had any secret data or customers to protect.

The Court also agreed that the Company’s ITSA claim pre-empted its claims that asserted plaintiff was wrongfully using the Target Company’s secret data.  The court even applied ITSA pre-emption to non-trade secret information.  It held that so long as the information sought to be protected in a claim was allegedly secret, any non-ITSA claims based on that information were pre-empted.

Afterwords:

(1) A non-compete can likely be assigned to a third party;

(2) Where the party assigning a non-compete goes out of business, the assignor no longer has a legitimate business interest to protect; making it hard for the assignee to enforce the non-compete;

(3) ITSA, the Illinois trade secrets statute, will displace (pre-empt) causes of action or equitable remedies (unjust enrichment, unfair competition, etc.) that are based on a defendant’s improper use of confidential information – even where that information  doesn’t rise to the level of a trade secret.