Cathy A. Hinger Direct Dial: 202-857-4489 Direct Fax: 202-261-0029 E-mail: CHinger@wcsr.com MEMORANDUM TO: FROM: ACC NCR Litigation Forum Attendees Cathy A. Hinger, Esq. Louis R. Rouleau, Esq. DATE: July 20, 2016 RE: Research in Support of ACC NCR Litigation Forum Session on the First 90- Day Action Plan This research memo has been provided to ACC NCR members and guests attending the ACC NCR 2016 Litigation Forum First 90 Day Action Plan CLE session. This memo provides: (1) an example of the type of comparative choice of law analysis recommended by the panel as part of in-house counsel s early litigation response strategy and (2) legal research addressing the attorney-client privilege in the context of internal investigations. I. COMPARATIVE CHOICE OF LAW ANALYSIS In the fact pattern provided at the Litigation Forum, Good Co. discovers that its employee Bob Troublemaker has not only stolen company intellectual property and provided it to a competitor, but he has stolen a company client and brought that client to his new employer, Good Co. s top competitor, Bad Co. He also seems to be soliciting and recruiting current Good Co. employee, Rick Slick, to join him. Most non-compete agreements would address these issues. Good Co. s non-compete agreement has a Virginia forum selection and choice of law provision, but Bob Troublemaker filed suit in California. By doing so, Good Co. is at risk that Bob Troublemaker will argue California law should apply and that the Virginia forum selection and choice of law provisions should not apply. Good Co. should conduct a comparative state law analysis concerning the law of Virginia, compared to California, concerning their claims against Bob Troublemaker. This analysis is necessary to strategic decisions such as whether to answer the Complaint in California and assert counterclaims there; whether to seek transfer of the case to Virginia; and whether to file Good Co. s counterclaims against Bob Troublemaker in Virginia.
Page 2 A. Non-Compete Agreements in Virginia and California. 1. Generally Enforceable in Virginia. Virginia courts respect the freedom of contract and regularly enforce a non-compete agreement. Virginia does not have any statutes or regulations governing non-competes generally. The enforceability is based in common law, and Virginia courts also recognize nondisclosure and non-solicitation agreements. Lasership Inc. v. Watson, No. CL-2009-1219, 2009 WL 7388870 (Va. Cir. Aug. 12, 2009); Leddy v. Commc n Consultants, Inc., No. CH((-3952, 2000 WL 33259906 (Va. Cir. Apr. 5, 2000). a. Enforceability. To be enforceable in Virginia, a non-compete agreement must be reasonable. A reasonable non-compete is: (1) no more restrictive than necessary to protect the employer s legitimate business interest, (2) not unduly burdensome on the employee s legitimate efforts to earn a livelihood, and (3) consistent with sound public policy. Omniplex World Servs. Corp. v. US Investigations Servs., Inc., 618 S.E.2d 340, 342 (Va. 2005); Simmons v. Miller, 544 S.E.2d 666, 678 (Va. 2001); New River Media Group, Inc. v. Knighton, 429 S.E.2d 25, 26 (Va. 1993); Blue Ridge Anesthesia v. Gidick, 389 S.E.2d 467, 469 (Va. 1990); Roanoke Eng g Sales Co. v. Rosenbaum, 290 S.E.2d 882, 884 (Va. 1982).) Non-competes that bar an employee from seeking subsequent employment in an unrelated or non-competitive field have been rejected as overbroad. Omniplex, 618 S.E.2d at 342-43. To assess the reasonableness of a non-compete, courts look at the following factors: (1) the duration of the restraint, (2) the geographic scope of the restraint, and (3) the scope and extent of the restricted activity. Simmons, 544 S.E.2d at 678; Strategic Enter. Solutions, Inc. v. Ikuma, No. CL-2008-8153, 2008 WL 8201356 (Va. Cir. Oct. 7, 2008). Two examples of legitimate business interests endorsed by Virginia courts include the protection of trade secrets or other confidential business information and the protection of customer relationships, particularly where the employee had personal contact with his former employer s customers. Blue Ridge, 389 S.E.2d at 469. Courts have shown an increased inclination to enforce noncompetes where it was negotiated by sophisticated parties, the parties were represented by counsel, and the parties viewed the non-compete as reasonable and mutually binding at the time of execution. See Capital One Fin. Corp. v. Kansas, 871 F. Supp. 2d, 520, 532 (E.D. Va. 2012). Because courts view non-competes as potential restraints on trade, any ambiguities in a non-compete agreement is construed in favor of the employee. Omniplex, 618 S.E.2d at 342; Simmons, 544 S.E.2d at 678. Moreover, the employer bears the burden of proving that a noncompete is enforceable. It must show the restraint is reasonable. Motion Control Systems, Inc. v East, 546 S.E.2d 424, 425 (Va. 2001). Absent a provision in the non-compete holding otherwise, whether an employee was discharged or resigned is irrelevant when enforcing a non-compete agreement in Virginia. Blue Ridge, 389 S.E.2d at 469. Although the Supreme Court of Virginia has not expressly ruled on the courts power to blue pencil a non-compete agreement, Virginia courts are hesitant to blue pencil non-compete
Page 3 agreements. Lanmark Tech., Inc. v. Canales, 454 F. Supp. 2d 524, 531 (E.D. Va. 2006); Strategic Enter., 2008 WL 8201356, at *4; Better Living Components, Inc. v. Coleman, 2005 WL 771592 (Va. Cir. Apr. 6, 2005). In addition, some courts have found that blue pencil provisions permitting judicial modification in non-compete agreements are invalid or discouraged under Virginia law. Lasership Inc. v. Watson, 2009 WL 7388870 (Va. Cir. Aug. 12, 2009); Pace v. Ret. Plan Admin. Serv., Ltd., 2007 WL 5971432 (Va. Cir. Sept. 28, 2007). The Virginia Supreme Court has not addressed whether choice of law provisions in noncompete agreements are valid. However, Virginia generally recognizes choice of law provisions. Paul Bus. Sys., Inc. v. Canon U.S.A., Inc., 397 S.E.2d 804, 807-08 (Va. 1990). Sometimes, a former employee will challenge the sufficiency of consideration that the employee received for the promise to not compete against the employer, but such a challenge is unlikely to succeed before a Virginia court. The Virginia Supreme Court found that there was sufficient consideration for non-competes when signing the non-competes was a condition of the continued employment. Paramount Termite Control Co. v. Rector, 380 S.E.2d 922, 926 (Va. 1989), overruled on other grounds by Home Paramount Pest Control Co. v. Shaffer, 718 S.E.2d 762 (Va. 2011). Virginia courts have also upheld non-compete agreements where an employee signed a non-compete agreement at termination in exchange for $2,000, New River, 429 S.E.2d at 26, and where an employee entered into a non-compete agreement at the beginning of employment. Blue Ridge, 389 S.E.2d at 468. Courts evaluating the enforceability of a non-compete will inquire into the reasonableness of its duration and geographic restrictions. Whether the duration of a noncompete is reasonable depends on the facts of each case, as each non-compete agreement must be analyzed by balancing the contract provisions with the parties specific circumstances. Omniplex, 618 S.E.2d at 342; Mantech Int l Corp. v. Analex Corp., 2008 WL 6759967, at *2 (Va. Cir. July 18, 2008). The shorter the duration, the more likely it is to be considered reasonable. However, durations of three to five years are typically considered to be reasonable. See, e.g., Blue Ridge, 389 S.E.2d at 468 (upholding a three-year restriction on medical equipment sales persons working in the territories serviced by their former employer); Meissel v. Finley, 95 S.E.2d 186, 190-91 (Va. 1956) (upholding a five-year restriction on a partner of an insurance company where the time limit was directly related to when the company s insurance policies would come up for renewal); Zuccari, 1997 WL 1070565, at *3 (upholding a five-year restriction preventing an employee from soliciting or doing business with the employer s current clients since the employee had gained all of his experience and contacts through his former employment). Whether the geographic restriction in a non-compete is reasonable depends on the facts of each case, as each non-compete agreement must be analyzed by balancing the contract provisions with the parties specific circumstances. Omniplex, 618 S.E.2d at 342. Generally, smaller geographic limitations are more likely to be considered reasonable. For example, the Virginia Supreme Court upheld a restriction prohibiting a local radio disc jockey from engaging in any business that competed with his former employer within a 60-mile radius of his employer s radio station where the employer s radio station s signal strength was about 60 miles. New River, 429 S.E.2d at 26; see also Roanoke, 290 S.E.2d at 885 (upholding a three-year
Page 4 restriction prohibiting an employee from engaging in work similar to that of his employer in the territory covered by his former employer); Blue Ridge, 389 S.E.2d at 470 (upholding a restriction prohibiting salesmen from working within the territories they had serviced on behalf of their former employer); Strategic Res., Inc. v. Nevin, 2005 WL 3143941, at *3 (E.D. Va. Nov. 23, 2005) (upholding a non-compete clause without a geographic restriction. Although the employer operated on a worldwide basis, the non-compete was not restricted to the employer s covered areas and, therefore, the court held that it was unenforceable). The lack of a geographic limitation alone does not render a non-compete invalid. Where other factors such as the time restriction or the scope of the restricted activity are reasonable, non-compete agreements may be upheld despite the lack of a geographic limitation. Mantech, 2008 WL 6759967, at *2-3; Market Access Int l, Inc. v. KMD Media, LLC, 2006 WL 3775935 (Va. Cir. Dec. 14, 2006); Zuccari, 1997 WL 1070565, at *3. b. Remedies. Employers enforcing non-competes can generally seek the following relief: (1) preliminary and permanent injunctions, (2) lost profits, (3) damages for lost good will, (4) liquidated damages (if provided in the agreement), and (5) attorneys fees. See JTH Tax, Inc. v. Lee, 514 F. Supp. 2d 818, 824-25 (E.D. Va. 2007); Advanced Marine Enters., Inc. v. PRC Inc., 501 S.E.2d 148, 156 (Va. 1998); Roanoke, 290 S.E.2d at 886-87; Foti v. Cook, 263 S.E.2d 430, 433-34 (Va. 1980); Worrie v. Boze, 62 S.E.2d 876 (Va. 1951); Int l Limousine Serv., Inc. v. Reston Limousine & Travel Serv., Inc., No. 24816, 2005 WL 1026985 (Va. Cir. May 3, 2005); Zuccari, 1997 WL 1070565. A former employer protected by a non-compete may be entitled to lost profits in a breach of a non-compete provision that results in the loss of an expected contract. Preferred Sys. Solutions, Inc. v. GP Consulting, LLC, 732 S.E.2d 676, 686 (Va. 2012). The plaintiff is not required to prove that it would have earned a profit but for the breach, and the damages can be calculated by combining the profits earned by the offending competitor with the profit margin of the plaintiff. Id. To obtain a preliminary injunction in Virginia, the employer must show: (1) a likelihood of success on the merits, (2) it will suffer irreparable harm if the injunction is not granted, (3) it has no adequate remedy at law, (4) injury to the employee is not severe enough to prevent equitable relief, and (5) the injunction would not be against the public interest. Int l Limousine, 2005 WL 1026985, at *2. 2. Generally Unenforceable in California. If the court does not honor the choice of law provision in Bob Troublemaker s contract, 1 and instead applies California law, non-compete agreements are generally unenforceable in 1 Choice of law provisions are not honored by California courts if the court feels that the outcome violates a public policy in which California has a strong interest. Application Grp., Inc. v. Hunter Grp., Inc., 72 Cal. Rptr. 2d 73 (Ct. App. 1998). Where a contract provides for the
Page 5 California. Therefore, Good Co. s primary counterclaim against Bob Troublemaker could be a nullity. Good Co. s exposure and litigation risks will increase because the issue of enforceability of non-compete agreements in California has been preempted by the state legislature, and Sections 16600 to 16607 of the California Business and Professions Code govern the narrow exceptions to the rule that post-employment non-competes are unlawful in California. a. Enforceability. Under the narrow statutory exceptions, non-compete agreements are enforceable where they are executed in conjunction with the dissolution or sale of a business entity by a business owners (Cal. Bus. & Prof. Code 16601), members of limited liability companies ( 16602.5), or partners in partnerships ( 16601 and 16602). 2 Essentially, California only enforces noncompete agreements entered into when: (1) a person sells her business entity, (2) the seller promises the buyer not to conduct a similar competing business within a specified geographic area, and (3) the buyer carries on a like business in that area. (Cal. Bus. & Prof. Code 16601.) In addition, non-compete agreements are statutorily allowed where a seller transfers the goodwill of a business, all or substantially all of the operating assets of the business entity s division or subsidiary (together with the goodwill of that division or subsidiary), or all of the ownership interest of any subsidiary. They are also allowed where a partner agrees to a noncompete agreement in the context of dissolution of the partnership (or from a partnership) or where a member of a limited liability company terminates their interest in the company or the company dissolves. (Cal. Bus. & Prof. Code 16601 and 16602.5.) The burden is on the plaintiff-former employer to establish that a statutory exception applies to the general law prohibiting non-compete agreements. KGB, Inc. v. Giannoulas, 164 Cal. Rptr. 571, 576 (Ct. App. 1980). If no exception is applicable, the court will not enforce the non-compete. Edwards v. Arthur Andersen, 81 Cal. Rptr. 3d 282, 290 (2008); The Retirement Grp. v. Galante, 98 Cal. Rptr. 3d 585, 596 (Ct. App. 2009) (holding non-solicitation agreement unlawful where former investment advisors at The Retirement Group (TRG) who left their independent contractor positions there to establish a competing business and contacted many TRG customers to solicit their business). application of foreign (i.e., non-california) law and the foreign law conflicts with California law, the court will balance the comparative impairment to California s policy of not enforcing noncompetes against the other state s interest in having its laws applied. Id. at 82. In evaluating the strength of the states competing interests, the court must weigh: (1) whether the chosen state has a substantial relationship to the parties or their transaction, and (2) whether there is any other reasonable basis for the parties choice of law. Id. at 83. Because the court s analysis turns on each state s relationship to the parties, a court applying this test is more likely to ignore a choice of law provision where the former-employee is a California citizen with a marginal relationship to the foreign state. See id. 2 For the purposes of the statutory provisions, the term business entity encompasses any corporation, limited liability company, or partnership, including a limited partnership or limited liability partnership. (Id.)
Page 6 In Edwards v. Arthur Andersen, the California Supreme Court definitively held that noncompete agreements are invalid under Section 16600 of California Business and Professions Code, even if narrowly drawn, unless they fall within the statutory exceptions in Sections 16601, 16602 or 16602.5. 81 Cal. Rptr. 3d at 290. The Edwards court s decision overturned a line of authority that had enforced narrow non-compete provisions that restrained the right of former employees to compete against former employers. See id. at 289-90. In Fillpoint, LLC v. Michael Mass, a Court of Appeals held that an employee s noncompete agreement was void and unreasonable even though it was entered into in connection with the sale of the goodwill of a business. 146 Cal. Rptr. 3d 194, 203-04 (Ct. App. 2012). In Fillpoint, the parties had entered into a stock purchase agreement that included a non-compete provision. Id. at 196. A month later, the parties entered into an employment agreement, which included a non-compete and non-solicitation agreement as well as a clause that integrated the employment agreement with the stock purchase agreement. Id. at 197. The court explained that the non-compete in the employment agreement differed from the restrictive covenant in the stock purchase agreement. Id. at 203. The court stated that the employment agreement s non-compete agreement was not targeted to protect the company s goodwill and did not fall within the narrow exceptions to California s general prohibition against non-competes. Id. at 203-04. The statute provides that where a statutory exception applies, the seller of a business can be prohibited from carrying on a like business within the geographic area in which the business entity was sold or conducted for as long as the business is carried on by: (1) the buyer of the business interest, (2) other partners, if the business entity is a partnership, (3) other members, if the business entity is a limited liability company, and (4) anyone who derives title to the goodwill or ownership interest of the business from a buyer, partner or member, as described above. (Cal. Bus. & Prof. Code 16601, 16602 and 16602.5.) The duration contemplated by these provisions could be many years. California s Business and Professions Code also governs the acceptability of the geographic restriction contained in a non-compete. If a statutory exception applies relating to the sale of a business, the seller of a business can be prohibited from carrying on a like business within the geographic area in which the business entity was sold or conducted. (Cal. Bus. & Prof. Code 16601, 16602 and 16602.5). While courts have applied a literal interpretation to the geographic limitations contained in restrictive covenants made in connection with the sale of a business. Pursuant to the statute, the geographic restriction may encompass only the territory in which the business entity, partnership or limited liability company was sold, transferred, dissolved, or transacting business. (Cal. Bus. & Prof. Code 16601, 16602 and 16602.5.) Because post-employment non-competes are not enforced under California law, no California court has modified or blue-penciled an agreement in the employment context. Kolani v. Gluska, 75 Cal. Rptr. 2d 257, 260 (Ct. App. 1998); D Sa v. Playhut, 102 Cal. Rptr. 2d 495 (Ct. App. 2000). There is, however, case law supporting the blue penciling of a non-compete agreement made in connection with the sale of a business to allow it to be enforced under one of the statutory exemptions. Swenson v. File, 90 Cal. Rptr. 580, 584 (Ct. App. 1970); Monogram Indus., Inc. v. Sar Indus., Inc., 134 Cal. Rptr. 714 (Ct. App. 1976); cf. Strategix, Ltd. v.
Page 7 Infocrossing West, Inc., 48 Cal. Rptr. 3d 614, 617 (Ct. App. 2006) (stating that it will not strike a new bargain for the parties for the purposes of saving an illegal contract. ). b. Remedies. No California court has addressed the remedies available to employers enforcing postemployment non-competes. Courts have, however, explored remedies in cases that, similarly to the Good Co. hypothetical, involved post-employment trade secrets/unfair competition cases against a former employee. These cases typically arise after an employee has taken the employer s alleged trade secrets and used them to compete against it for another employer or in the former employee s own business. See Reeves v. Hanlon, 17 Cal. Rptr. 3d 289, 300-01 (2004). These cases support the availability of: (1) injunctive relief, (2) actual damages for lost profits, (3) damages based on unjust enrichment, (4) liquidated damages, if appropriate, and (5) punitive damages. Reeves, 17 Cal. Rptr. 3d at 296-97 (injunctive relief); Readylink Healthcare v. Cotton, 24 Cal. Rptr. 3d 720, 726-27 (Ct. App. 2005) (injunctive relief); Klamanth-Orleans Lumber v. Miller, 227 P. 193, 195 (Cal. Ct. App. 1978) (lost profits); Morlife, Inc. v. Perry, 66 Cal. Rptr. 2d 731 (Ct. App. 1997) (unjust enrichment); Weber, Lipshie & Co. v. Christian, 60 Cal. Rptr. 2d 677 (Ct. App. 1997) (liquidated damages); Cummings Medical Corp. v. Occupational Med. Corp., 13 Cal. Rptr. 2d 585 (Ct. App. 1992). Preliminary injunctions have been entered to restrain employees from unfairly competing with their former employers by using trade secrets that they misappropriated from those former employers to gain a competitive advantage. The showing required of the moving party is different in state and federal court. Injunctions in trade secret cases before a California state court are governed by principles applicable to injunctions in general. Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 283 (Ct. App. 2002). Trial courts weigh two factors when deciding whether to issue a preliminary injunction: (a) the likelihood the moving party will ultimately prevail on the merits and (b) the relative interim harm to the parties that would result from issuing or not issuing the injunction. Hunt v. Superior Court, 90 Cal. Rptr. 2d 236, 248 (Ct. App. 1999). Injunctive relief from a federal court is permitted under Rule 65 of the Federal Rules of Civil Procedure. The Court of Appeals for the Ninth Circuit has recognized two tests for granting a preliminary injunction, one of which must be met for the party seeking relief. Pursuant to the first test, a court may issue a preliminary injunction if it finds that all of the following apply: (1) there will be irreparable injury to the moving party if injunctive relief is not granted, (2) the moving party will likely prevail on the merits, (3) the non-moving party will not be harmed more than the moving party is helped by the injunction, and (4) granting the injunction is in the public interest. Stanley v. Univ. of S. Cal., 13 F.3d 1313, 1319-20 (9th Cir. 1994); see Smith Barney v. Burrow, 558 F. Supp. 2d 1066, 1076 (E.D. Cal. 2008). The court may also issue a preliminary injunction under a second test if the moving party demonstrates either that: (1) there is a combination of probable success on the merits and the possibility of irreparable injury and (2) there are serious questions being raised and the balance of hardships tips sharply in the moving party s favor. Martin v. Int l Olympic Comm., 740 F.2d 670, 675 (9th Cir. 1984).
Page 8 3. Statutory Causes of Action: Virginia. a. Virginia Computer Crimes Act. Bob Troublemaker could be found liable under the Virginia Computer Crimes Act, which makes it unlawful to, inter alia, act with malicious intent and use a computer or computer network to make or cause to be made an unauthorized copy, in any form, including, but not limited to, any printed or electronic form of computer data, computer programs or computer software residing in, communicated by, or produced by a computer or computer network. (See Va. Code 18.2-152.4(A)(6).) The Virginia Computer Crimes Act is actually a criminal statute found in the criminal chapter of the Virginia code, and it creates a civil cause of action to correspond with the criminal component. Under the Virginia Computer Crimes Act, when a civil plaintiff shows malicious intent, it is entitled to damages, but there is no provision for punitive or treble damages. Recoverable damages specifically include lost profits, Va. Code 18.2-152.4, and consequential damages are available as well. A.V. ex rel. Vanderhye v. iparadigms, LLC, 562 F.3d 630, 646 (4th Cir. 2009) (interpreting Virginia Computer Crimes Act). b. Statutory conspiracy. Virginia s criminal code creates another private statutory cause of action that Good Co. could assert against Bob Troublemaker, which is a claim for statutory conspiracy. (Va. Code 18.2-500); Virginia Vermiculite, Ltd. v. W.R. Grace & Co. Conn., 144 F. Supp. 2d 558 (W.D. Va. 2001) (noting that the business conspiracy statute grants the civil court with the jurisdiction to grant damages and broad injunctive relief). The statutory conspiracy provision provides, in pertinent part, that [a]ny two or more persons who shall combine, associate, agree, mutually undertake or concert together for the purpose of willfully and maliciously injuring another in his... trade [or] business... by any means whatever can be found liable civilly for treble damages and reasonable attorneys fees. (Va. Code 18.2-499; 18.2-500); see also Commercial Bus. Sys., Inc. v. Bellsouth Servs., Inc., 453 S.E.2d 261, 266 (Va. 1995). Virginia s business conspiracy statute, as with common law civil conspiracy, requires proof that the defendants have combined to accomplish some purpose, not in itself criminal or unlawful, by criminal or unlawful means. Shirvinski v. U.S. Coast Guard, 673 F.3d 308 (4th Cir. 2012). Moreover, the Supreme Court of Virginia has clarified that the requirement that the persons acted for the purpose of willfully and maliciously inuring another is satisfied where the court finds that wrongdoer s motives are merely illegitimate. Commercial Bus. Sys., Inc., 453 S.E.2d at 266. In other words, the desire to injure the former employer need not be the primary or singular motivation driving the former employees actions. c. Virginia Trade Secrets Act. Bob Troublemaker is also potentially liable under Virginia s Trade Secrets Act. The elements for a claim under this statute are as follow: (1) the information in question must
Page 9 constitute a trade secret and (2) that trade secret must have been misappropriated. MicroStrategy Inc. v. Bus. Objects, S.A., 331 F. Supp. 2d 396, 416 (E.D. Va. 2004). The statute defines a trade secret as information, including but not limited to, a formula, pattern, compilation, program, device, method, technique, or process, that: derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (Va. Code 59.1-336.) Accordingly, a former employer looking to establish the protected status of a trade secret must show that the information must be of a subject matter entitled to trade secret protection, has independent economic value as a result of not being generally known, and is not being readily ascertainable by proper means. MicroStrategy Inc., 331 F. Supp. 2d at 416 (noting also that reasonable efforts must have been taken to maintain its secrecy ). Under the statute, misappropriation specifically includes theft, bribery, misrepresentation, use of a computer or computer network without authority, breach of a duty or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. (Va. Code 59.1-336.) At its core, recovery under Virginia s trade secret misappropriation statute requires proof of breach of confidence, which is element of proof additional to those necessary for recovery in action for copyright infringement. Avtec Sys., Inc. v. Peiffer, 21 F.3d 568, 574 (4th Cir. 1994). But if the court determines that (i) a claim of misappropriation is made in bad faith, or (ii) willful and malicious misappropriation exists, the court may award reasonable attorneys fees to the prevailing party. (Va. Code 59.1-338.1.) 3. Statutory Causes of Action: California. a. California Comprehensive Computer Data Access and Fraud Act. Under California law, a person is civilly (and criminally) liable under the California Comprehensive Computer Data Access and Fraud Act ( California Computer Act ) if they, inter alia, [k]nowingly access[] and without permission add[], alter[], damage[], delete[], or destroy[] any data, computer software, or computer programs which reside or exist internal or external to a computer, computer system, or computer network or [k]nowingly and without permission access[] or cause[] to be accessed any computer, computer system, or computer network. (Cal. Penal Code 502(c); Cal. Penal Code 502(e)(1) (providing for civil liability).) The California Computer Act specifically provides a private right of action for compensatory damages and injunctive relief (and other appropriate equitable relief). (Id. at 502(e)(1).) Also, pursuant to the statute, compensatory damages shall include any expenditure reasonably and necessarily incurred by the owner or lessee to verify that a computer system, computer network, computer program, or data was or was not altered, damaged, or deleted by the access. (Id.) A former employer may be entitled to attorneys fees. (Id. at 502(e)(2).) And where the court finds clear and convincing evidence that a defendant has
Page 10 violated the California Computer Act by virtue of oppression, fraud, or malice, the court may additionally award punitive or exemplary damages. (Id. at 502(g)(4).) b. Conspiracy to commit wrongful business practice. Bob Troublemaker might also be liable under California s unfair competition statute, a broadly-drafted statute, for perpetrating a conspiracy to commit a wrongful business practice. California s unfair competition statute is not limited to anticompetitive business practices targeted at rivals; it is equally directed toward right of public to protection from fraud and deceit, and permits courts to enjoin ongoing wrongful business conduct in whatever context such activity might occur. Arizona Cartridge Remanufacturers Ass n, Inc. v. Lexmark Int l, Inc., 421 F.3d 981, 986 (9th Cir. 2005). Under California law, a defendant s liability for unfair business practices can be based on his personal participation in the unlawful practices or on his unbridled control over the practices. In re Hydroxycut Mktg. & Sales Practices Litig., 299 F.R.D. 648, 656 (S.D. Cal. 2014). Accordingly, parties to a conspiracy to violate 17200 [of the California Business & Professional Code] are responsible for all of the wrongful acts committed pursuant to the conspiracy, no matter who actually performs the wrongful acts. People v. Bestline Prods., Inc., 132 Cal. Rptr. 767, 791-93 (Cal. Ct. App. 1976) (finding that all persons who actively participated in a meeting in which the wrongful business practice at issue (a pyramid scheme) was discussed and decided upon were potentially liable under California s unfair competition statute unless they could prove they dissented from the decision or otherwise disassociated themselves from it). Though the unfair competition statute is broad, the relief available through the statute is limited to equitable remedies. The court has the broad powers to craft an appropriate remedy, such as an injunction or restitution. (Cal. Bus. & Prof. Code 17203.) But there is no right to attorneys fees or actual damages. Am. Online, Inc. v. Superior Court, 108 Cal. Rptr. 2d 699, 710 n.10 (Cal. Ct. App. 2001). Moreover, private plaintiffs cannot recover punitive damages. Id. c. California Trade Secrets Act. Finally, Bob Troublemaker can likely be found liable under California s Trade Secrets Act. Under the California Trade Secrets Act, Cal. Civ. Code 3426, et seq., a trade secret misappropriation claim has two primary elements: (1) the existence of a trade secret and (2) misappropriation of the trade secret. DocMagic, Inc. v. Ellie Mae, Inc., 745 F. Supp. 2d 1119, 1145 (N.D. Cal. 2010) The California Trade Secrets Act provides as follows: a) A complainant may recover damages for the actual loss caused by misappropriation. A complainant also may recover for the unjust enrichment caused by misappropriation that is not taken into account in computing damages for actual loss.
Page 11 (b) If neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of a reasonable royalty for no longer than the period of time the use could have been prohibited. (c) If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subdivision (a) or (b). (Cal. Civ. Code 3426.3.) Accordingly, a former employee can recover double its actual loss or the amount of unjust enrichment by showing willful and malicious misappropriation. Actual or threatened misappropriation may also be enjoined, and the statute provides that affirmative acts to protect a trade secret may be compelled by a court order. (Cal. Civ. Code 3426.2.) Additionally, if willful and malicious misappropriation exists, the court may award reasonable attorney s fees and costs to the prevailing party. (Cal. Civ. Code 3426.4.) Recoverable costs under the California Trade Secrets Act specifically includes a reasonable sum to cover the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, preparation for trial or arbitration, or during trial or arbitration, of the case by the prevailing party. (Id.) II. MAINTAINING ATTORNEY-CLIENT PRIVILEGE IN INTERNAL INVESTIGATIONS In our fact pattern, the HR team and corporate executives started conducting an internal investigation into Bob Troublemaker and Rick Slick without notifying in-house counsel or including her in the process. Therefore, it will be very difficult for Good Co. to prevent disclosure of the Good Co. communications about the Bob Troublemaker dispute that preceded in-house counsel s involvement. Even when in-house counsel becomes involved in the internal investigation of a threatened or actual litigation matter, because the in-house counsel may wear multiple hats (e.g., business executive, compliance officer, and company s attorney), it is common for adversaries to challenge claims of privilege concerning internal investigations involving in-house counsel. Below, we summarize some of the leading authorities on this issue illustrating that the critical issue when evaluating attorney-client privilege is whether communications are being made to obtain and give legal advice. We also provide practical tips to better ensure that communications relating to an internal investigation are protected by the attorney-client privilege. A. Overview: Attorney-Client Privilege and Internal Investigations. The attorney-client privilege only protects communications; it does not protect facts. Upjohn Co. v. United States, 449 U.S. 383, 395-96 (1981). The attorney-client privilege applies where:
Page 12 (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client. Hawkins v. Stables, 148 F.3d 379, 383 (4th Cir. 1998); In re Kellogg Brown & Root, Inc., 756 F.3d 754, 757 (D.C. Cir. 2014) ( [T]he privilege applies to a confidential communication between attorney and client if that communication was made for the purpose of obtaining or providing legal advice to the client. ). The burden of establishing that a communication is privileged is on the proponent of the attorney-client privilege to demonstrate its applicability. Hawkins, 148 F.3d at 383. Privileged documents are protected from discovery so long as the privilege has not been waived. Neuder v. Battelle Pac. Nw. Nat l Lab., 194 F.R.D. 289 (D.D.C. 2000). Because any disclosure inconsistent with maintaining the confidential nature of the attorney-client relationship waives the attorney-client privilege, any voluntary disclosure by the client to a third party waives the privilege not only as to the specific communication disclosed, but often as to all other communications relating to the same subject matter. 3 United States v. Jones, 696 F.2d 1069, 1072 (4th Cir. 1982). The attorney-client privilege applies to corporations, and communications made during a company s internal investigation can be protected by the attorney-client privilege. Upjohn, 449 U.S. 383; see also In re Kellogg Brown & Root, 756 F.3d at 758 ( Communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege. ). In Upjohn, the Court explained that the attorneyclient privilege for business organizations was essential in light of the vast and complicated array of regulatory legislation confronting the modern corporation, which required corporations to constantly go to lawyers to find out how to obey the law,.. particularly since compliance 3 By comparison, companies should be less concerned about the waiver of work product protection during internal investigations. Work product protection doctrine protects materials prepared in anticipation of litigation from discovery by opposing counsel. Hickman v. Taylor, 329 U.S. 495 (1947); see also FED. R. CIV. P. 26(b)(3). Work product protection is only waived by voluntary disclosure of attorney work product to an adversary or a conduit to an adversary. United States v. Deloitte LLP, 610 F.3d 129, 139-40 (D.C. Cir. 2010) (stating that disclosing work product to a third party can waive protection if such disclosure, under the circumstances, is inconsistent with the maintenance of secrecy from the disclosing party s adversary ).
Page 13 with the law in this area is hardly an instinctive matter. 449 U.S. at 392 (internal quotation marks and citation omitted). In Upjohn, the communications were made by company employees to company attorneys during an attorney-led internal investigation that was undertaken to ensure the company s compliance with the law. Id.; see also id. at 394. The Court ruled that the privilege applied to the internal investigation and covered the communications between company employees and company attorneys because the first step in the resolution of any legal problem is ascertaining the factual background and sifting through the facts with an eye to the legally relevant. Id. at 390-91. A sample form Upjohn warning, which should precede an internal investigation witness interview, is appended hereto as Exhibit A. Though communications between in-house counsel and company employees can be protected by the privilege, courts sometimes treat communications with outside counsel with less skepticism. It is well-recognized that in-house counsel may serve both legal and business functions, and courts will scrutinize the nature of their communications before finding that those communications are privileged. Koumoulis v. Indep. Fin. Mktg. Grp., 295 F.R.D. 28 (E.D.N.Y. Nov. 1, 2013), aff d in part, 29 F. Supp. 3d 142 (E.D.N.Y. Jan. 21, 2014) ( Although outside counsel may be more independent and less likely to play dual roles, there is nevertheless no presumption that communications with outside counsel are privileged. ). Internal investigations are an area where the line between legal and business advice sometimes blurs and whether a communication is privileged will turn on what the court considers to have been the primary purpose of the communication. See, e.g., In re Kellogg Brown & Root, 756 F.3d at 758-60. If the primary purpose of the communication was to obtain or provide legal advice, then it is protected by the attorney-client privilege. Id. at 760 ( Sensibly and properly applied, the test boils down to whether obtaining or providing legal advice was one of the significant purposes of the attorney-client communication. ). In re Kellogg Brown & Root ( KBR ), is one of our leading local authorities upholding privilege over internal investigations. In KBR, a whistleblower sought documents related to the company s internal investigation conducted pursuant to its Code of Business Conduct, which was overseen by the legal department. In re Kellogg Brown & Root, 756 F.3d at 756. At the District Court level, the court held the documents related to the internal investigation led by inhouse counsel were not privileged because the investigation was undertaken to ensure compliance with the law, some of the people conducting the interviews were not attorneys and Upjohn warnings were not provided. Id. at 757. Nevertheless, the D.C. Circuit vacated the District Court s opinion, and applied a more flexible version of the primary purpose test that, does not draw a rigid distinction between a legal purpose on the one hand and a business purpose on the other. Id. at 759. The D.C. Circuit recognized that it is difficult to deem a communication as having only one primary purpose where a given communication can have multiple primary purposes, and announced a one of the significant purposes test. Id. at 760. But other courts have not been so deferent to the privilege where in-house counsel are involved in an internal investigation. Second Circuit courts have not embraced the relatively lenient one of the significant purposes method applied by the D.C. Circuit. In Koumoulis, a magistrate judge for the United States District Court for the Eastern District of New York addressed this critical issue in the context of an employer s investigation of allegations of
Page 14 discrimination and reached an alarming result. 29 F. Supp. 3d 142. In the circumstances presented, the court held that communications between outside counsel and human resources personnel were not protected by the attorney-client privilege because their predominant purpose was to provide human resources and thus business advice, not legal advice. 295 F.R.D. at 45. As a result, the court ordered production of documents the employer had withheld as privileged, and the deposition of the employer s outside counsel regarding those ostensibly non-privileged communications. The Koumoulis court s analysis was predicated on the findings that the communications generally concerned counsel s advice as to what actions human resources personnel should take regarding the investigation, who should perform those actions, and what should be documented. Id. The magistrate judge further found that the communications by outside counsel to human resources included draft emails to the plaintiffs and scripts for conversations that human resources staff would have with the plaintiffs. Id. The defendants emails to outside counsel reported on the outcome of their actions and new developments, and asked about next steps in the investigation. The magistrate judge described outside counsel s role as help[ing] supervise and direct the internal investigations primarily as an adjunct member of Defendants human resources team. Id. Despite the fact that these subjects involved compliance with law, the court still found the advice business-related because like other business activities with a regulatory flavor, [HR work] is part of the day-to-day operation of a business. Id. According to the court, just as an employment lawyer s legal advice may well account for business concerns, a human resources employee s business advice may well include a consideration of the law. Id. Upon review, District Judge Pamela Chen reaffirmed Judge Scanlon s opinion. She wrote that the overwhelming majority of the communications discussed how human resources should conduct the investigation and how they should respond to plaintiff. Accordingly, the district court labeled outside counsel s advice as plainly... not legal advice, but rather human resources advice on personnel management and customer relations. Koumoulis v. Indep. Fin. Mktg. Grp., 29 F. Supp. 3d 142, 148 (E.D.N.Y. Jan. 21, 2014). While Koumoulis is an example of a decidedly narrow view of the privilege as applied to internal investigations, it nevertheless shows that in-house counsel should know the leading authorities concerning the scope of privilege in internal investigations and take appropriate steps to maximize the likelihood of a court upholding claims of privilege in accordance with those authorities. B. Suggested Practices to Maximize the Likelihood of a Court Upholding In-House Counsel s Attorney-Client Privilege Claims. While none of these tips are dispositive, and in-house counsel s privilege protection strategies should be tailored to the leading authorities in their jurisdictions, the following list of practices may help in-house counsel improve their company s practices concerning the protection of attorney-client privilege communications with in-house counsel. 1. Distribute privileged materials as narrowly as possible. Limit to higher level, control/management personnel if possible.
Page 15 2. As much as possible, address requests for legal advice specifically to the attorney and include other business people who need to know about the request only if necessary. When non-attorney business people are included in the email, include them as cc s, but not as to s. This makes it clearer that the primary purpose of the request is to seek legal advice from the attorney. 3. Related to Number 2, avoid putting attorneys and business people together in the same email group address (e.g., the Project X team). When advice is sought from the attorney using such a group email address, the presence of the business people in the email often can make the claim of privilege more difficult to sustain. 4. State in the communication that it seeks legal advice, provides legal advice or reflects/repeats legal advice given by others. 5. Related to Number 4 and more generally, whenever the intent is to engage in a privileged communication concerning legal advice, make it clear in the document/email that the purpose of the communication is to obtain legal advice and avoid intermingling requests for pure business advice with requests for legal advice. For example, it is very difficult to provide a good privilege treatment in litigation to an email that is sent to one attorney and two business people and states something like, Please review and let me know of any revisions to the attached draft. It is very difficult to tell in such circumstances whether the primary purpose of the communication was to seek legal advice or business advice. 6. Label/caption privileged documents as such but do not over label, thus making the label meaningless. The label should include the word privileged, such as Privileged and Confidential and should not merely state confidential. 7. Be very careful about passing privileged information to persons outside the company. You will likely lose privilege unless you can establish that such persons are under an enforceable duty to keep the information confidential. You might need to also show a common or joint legal interest. As much as possible, when sending privileged information to someone outside the company who is acting as the company s agent, make it clear that the person is receiving the privileged information in his/her capacity as an agent. 8. Avoid general references to Legal or the Attorneys or Our Attorneys as in Legal has told us that this would be illegal and we cannot do this. It is often impossible to figure out who in Legal provided this advice, and it makes for a weak privilege log entry when the attorney who provided the advice cannot even be identified. Sarah Campbell in Legal told us that this would be illegal and we cannot do this works much better. 9. When documents reflect revisions (perhaps from multiple reviewers, some of whom are not attorneys), the revisions of the attorney should be specifically noted as such (and the name of the attorney is always nice see Number 8 above). It is also helpful to label documents containing revisions of legal counsel as Contains revisions of legal counsel or something along those lines.
Page 16 10. When documents are being prepared in anticipation of or in connection with litigation by non-lawyers (e.g., a stand-alone excel spreadsheet with data requested by the case counsel), it is imperative that the document be labeled as Work Product Prepared at Direction of Counsel. If this is not done for stand-alone documents (ones not attached to emails), it is very hard to figure out that the document is Work Product. It is preferable, although not imperative, to identify the specific litigation for which the document has been prepared. Work Product Prepared at Direction of Counsel for Riley v. Leonard case). (In privilege logs, it is sometimes necessary to provide the name of the specific litigation to which the Work Product document relates.) 11. Creating a folder on servers or a folder in emails for documents protected by privilege will make it easier for identification of such documents in the event of litigation. For example, employees can create a Communications with Counsel folder in their email account for saving privileged emails. 12. Privileged emails should not be sent from or to a non-business, personal or home email address, or stored on a non-business device or personal electronic storage media.
EXHIBIT 1
Example of an Upjohn Warning Used in Internal Investigations We are conducting an investigation for the Company into certain events related to [INSERT RELEVANT ISSUE IN GENERAL TERMS]. We believe that you may have facts and/or documents that may be relevant to our investigation and we appreciate you meeting with us. To be clear, we serve as counsel to the Company. We are not your personal counsel and cannot give you legal advice. If you wish to obtain separate counsel, we will re-schedule this interview so that you may do so. In addition, your communications with us, as part of this investigation, are confidential and protected by, among other things, the attorney-client privilege. As the Company is our client, the attorney-client privilege belongs solely to the Company. Accordingly, the Company, in its sole discretion, may elect to waive the privilege and reveal your communications with us to third parties, including the government. As part of this investigation, we are interviewing a number of employees to gain a better understanding of the relevant issues. The fact that we are conducting this investigation does not mean the Company believes that any current or former employee has engaged in improper or illegal conduct. It simply is the process through which the Company ensures that it maintains the highest standards of corporate integrity. Your candor and honesty are critical to our ability to conduct effectively our investigation. To maintain the integrity of this investigation, we request that you keep our conversations today confidential. We appreciate your cooperation. May we continue?