Who, What, Why AND Where
One of the peculiar features of the U.S. legal system is that, while certain fields are governed exclusively by federal law—i.e., law that applies everywhere in the U.S.—others are governed exclusively by state law. That means, obviously, that there are fifty sets of laws1Plus laws of various territories, to the extent they’ve been so empowered. governing a given subject, including some of the heavy-hitters, like contract law. And it get’s worse. Sometimes federal law coexists with state law. Sometimes federal law tries to push aside state law but doesn’t quite succeed. And sometimes state laws try to push up through federal law, with mixed success. Oh, and sometimes federal courts can hear state cases, but the two court systems use different procedures!2To terrify your lawyer friends, sneak up to them and say, “Erie!” Trust me. You can see why law students spend a significant fraction of their time on various aspects of this “federalism.” quotidian
But I’m here to talk about a relatively simple aspect of having 50 different sets of laws for the same thing. What happens when the people involved are from different states, and the states’ laws are significantly different?
The Right to Work Where You Want
This issues comes up in two different ways in the fairly recent case, General Electric Co. v. Uptake Technologies, Inc.. The basic facts reveal a very common type of dispute. Some of the defendants used to work for General Electric or its subsidiaries (“GE”) on some technology involving “connect[ing] heavy industrial equipment to cloud-based software and analytics,” and yadda yadda yadda. Over time, they were recruited by Uptake Technologies (also a defendant), which was working on similar technology. When they were initially hired by GE, they promised not maintain certain information confidential, and they promised not to solicit other GE employees if they left. But (GE alleges) those that were recruited first by Uptake helped Uptake recruit the others, which would violate the anti-solicitation provision.
But wait! Several of these individual defendants are residents of California. And California law won’t enforce non-solicitation provisions! California believes that letting workers take their knowledge and talent wherever they want is most encourage that knowledge and talent to be applied most effectively.3There’s evidence that this policy, which now fundamental to California business, started out as a legislative mistake. Something about free markets.
But wait again! GE is headquartered in New York City, or maybe Boston, Massachusetts, or maybe even Fairfield, Connecticut, depending on the date and how you look at it. And in each of those states, non-solicitation provisions are OK, so long as they’re “reasonable.” How do you tell which law applies to a contract when the contracting parties are in different states? It turns out that’s a really, really hard question! And there can only be one law governing a contract (normally). The general rule is the governing law is the law of the “state of contracting,” which was developed back before fax machines, when the parties probably met face-to-face to negotiate and execute the contract. But it has almost no application today, when negotiations are carried out by phone or email and the contract can be signed in different states.
Fortunately, we don’t have to guess. The contracts each had a provision specifying that New York law applied. So, end of story. Sorry to get you excited.
Except that’s not the end of the story. When you choose the governing law in a contract, a court can override that in favor of another state’s law under the right circumstances. But, wait—where does that rule come from? It has to come from somewhere. There’s no federal law governing what to do when two state laws conflict, as you might very reasonably expect. No, the source of the law governing conflicts of laws is…state law. New York’s? California’s? No—it would be the law of the state where the lawsuit was filed, which in this case is… Illinois!
So, we’re applying Illinois law to figure out whether to apply New York or California law.4Do you find that your U.S. lawyer friends are weird? Maybe this helps explain why! Illinois law says that it’ll go with the chosen law (New York) unless it would be contrary to the “fundamental policy” of the law of another state with an interest in the case (California). Obviously, “fundamental policy” has to be more than just the existence of law that would lead to a contrary result.
It’s 100% the case that California greatly values employees’ right to change jobs frictionlessly. Anyone who has conducted business in California knows this is a key—dare I say, fundamental—feature of California business. Dozen of reported court decisions back this up. And, yet, the court here found that, at least as applied to non-solicitation decisions, this was not a fundamental policy of California. That was because there is a stray mid-level appellate decision from 1985 kind of, sort of suggesting that maybe sometimes a non-solicitation provision might be OK under the right circumstances. The court recognized that this old decision has been well and truly overruled and generally regarded as a mistake. But its existence put enough doubt in the court’s mind about California’s commitment to employees’ freedom of mobility that it’s not quite fundamental enough to override the parties’ choice of New York law, under Illinois law. Got that?
This is an unusual case. Normally, it’s a mug’s game to try to guess which state’s law will benefit you more in case of a breach of the contract. Usually, you don’t know until it’s been breached, and it’s not worth paying your lawyer to guess at every possible breach and compare laws. Besides, even though there are 50 state laws, there’s a lot of overlap, since most of them arise from the same legal foundations.5Except Louisiana because it’s Louisiana.
Fate and the Law: Inevitable Disclosures
We’re not done yet. While the individual defendants were focused on attacking the New York choice-of-law provision, they were also attacking GE’s claims for misappropriation of trade secrets. Now, at this stage, all we have is the complaint, and trade secret claims awkward to plead. On the one hand, a defendant has a right to know what it’s accused of doing, and that includes knowing what alleged trade secrets it allegedly misappropriated (and how).6You have not lived until you’ve been accused of misappropriating trade secrets, but the plaintiff won’t tell you what they are, even in response to an interrogatory. On the other hand, complaints are public documents, and exposing a trade secret to the public is the equivalent of exposing a vampire to sunlight. Courts are slowly reaching a consensus that all the plaintiff needs to do in the complaint is describe generally the trade secrets at issue, with enough detail that the defendant has a pretty good idea what they are but not enough detail that the public can figure them out. This works on the theory that, if the defendant really did misappropriate the trade secrets, it’ll recognize the trade secrets with enough hints.7“Who?” “You know, he’s kinda short, with wavy brown hair, always wearing a green windbreaker, was in here yesterday?” “Oh, him! Whatshisname.”
GE had another problem pleading its trade secrets claim. Sure, you don’t have to detail the trade secrets, but you do need to say which defendants misappropriated which trade secrets. It’s not a test, but GE can probably take reasonable guesses about which defendants have done what.
GE argued it didn’t have to get that specific because, under the doctrine of “inevitable disclosure,” it doesn’t matter whether a given defendant has yet to misappropriate a trade secret, only that such misappropriation will eventually happen. Thus, all of the individual defendants have effectively misappropriated all of the trade secrets, because they’re alleged to all be on the verge of doing so.
Inevitable disclosure is one of the most divisive concepts in intellectual property law.8In my opinion, it’s an unnecessary rule that just breeds confusion and unfairness. Courts can already enjoin threatened torts. What do we need a special rule just for trade secrets? It’s almost the exact opposite of California’s right employee mobility.9And it’s been explicitly rejected in California. Taken to an extreme, once you’ve been exposed to a certain level of your employer’s trade secrets, you can never work for a competitor in the same capacity. It was briefly in vogue in the 1990’s, but courts have generally shied away from it since then, and many courts have been downright hostile to it.10This isn’t an unusual pattern. A good and well-funded law firm with the right case convinces a court to adopt a broad rule, then other courts follow it because that’s what courts do, but over time, the problems with the broad rule become more and more apparent, and courts start to turn against the broad rule. But guess where it the 1990’s vogue for inevitable disclosure started? Illinois.
The court ruled that Illinois law applied to GE’s trade secrets claim. But not because the court happened to be in Illinois. But because Uptake is based in Illinois. Which is also probably why the lawsuit was brought in Illinois, but jurisdiction (judicial power over a defendant) is different from choice of law (which law applies to a given legal question). Defendants can rarely avoid application of their own state’s laws!
What about those choice-of-law provisions? Wouldn’t New York law apply? Maybe! It would depend on the language of those provisions. Typically, choice-of-law provisions are drafted to apply only to the contract, e.g., “New York law shall govern the construction and enforcement of this contract.” But rarely, it’s broader, e.g., “New York law shall govern this contract and the parties’ relationship for all matter related to the subject matter of this contract.” In this case, the choice-of-law provision was of the more typical, narrow type.
So, to conclude, Illinois law provides that New York law governs the contact claims, despite California’s deep fundamental policy, and that Illinois law governs the trade secret claims, despite the New York choice-of-law provision.
Thanks for reading!
Footnotes [ + ]
|1.||↑||Plus laws of various territories, to the extent they’ve been so empowered.|
|2.||↑||To terrify your lawyer friends, sneak up to them and say, “Erie!” Trust me.|
|3.||↑||There’s evidence that this policy, which now fundamental to California business, started out as a legislative mistake.|
|4.||↑||Do you find that your U.S. lawyer friends are weird? Maybe this helps explain why!|
|5.||↑||Except Louisiana because it’s Louisiana.|
|6.||↑||You have not lived until you’ve been accused of misappropriating trade secrets, but the plaintiff won’t tell you what they are, even in response to an interrogatory.|
|7.||↑||“Who?” “You know, he’s kinda short, with wavy brown hair, always wearing a green windbreaker, was in here yesterday?” “Oh, him! Whatshisname.”|
|8.||↑||In my opinion, it’s an unnecessary rule that just breeds confusion and unfairness. Courts can already enjoin threatened torts. What do we need a special rule just for trade secrets?|
|9.||↑||And it’s been explicitly rejected in California.|
|10.||↑||This isn’t an unusual pattern. A good and well-funded law firm with the right case convinces a court to adopt a broad rule, then other courts follow it because that’s what courts do, but over time, the problems with the broad rule become more and more apparent, and courts start to turn against the broad rule.|