Can a California corporation with virtually no ties to Rhode Island nonetheless be sued in Rhode Island federal court for misappropriation of a Rhode Island company’s trade secrets because the California corporation lured away a Florida employee who had a confidentiality agreement with the Rhode Island company? Yes, according to the United States Court of Appeals for the First Circuit. Astro-Med, Inc. v. Nihon Kohden America, Inc., Nos. 08-2334 and 08-2335, 2009 WL 3384786, 158 Lab. Cas. ¶60,887, and 29 IER Cas. 1543 (1st Cir., Oct. 22, 2009).
Although the three judges did not agree on the reason for upholding the district court’s jurisdiction over the California corporation and although the non-compete clause in the ex-employee’s employment agreement with his former employer contained an undeniably excessive territorial restriction, the court affirmed judgment against the ex-employee for breach of contract – and against the California corporation for tortious interference with the Rhode Island competitor’s prospective economic advantage.
Astro-Med is a Rhode Island company that manufactures and sells “instruments for sleep and neurological research and clinical applications of sleep science and brain wave recording and analysis.” It employed Kevin Plant as a trainer and product demonstrator in Rhode Island. His employment agreement contained a comprehensive trade secrets-confidentiality provision as well as a one-year non-compete clause covering a vast territory: the whole of Europe and North America. The agreement recited that it would be governed by Rhode Island law and that all disputes would be heard in a Rhode Island court.
When Plant asked Astro-Med for a transfer to Florida, Astro-Med agreed and soon promoted Plant to District Sales Manager. In his positions with Astro-Med in Rhode Island and Florida, Plant had access to his employer’s most sensitive proprietary and secret business information.
Two years following Plant’s transfer, Astro-Med competitor Nihon Kohden America, a California company that had virtually no ties to Rhode Island but was fully aware of Plant’s contract, lured Plant away from Astro-Med to be Kohden’s Florida sales representative. Astro-Med promptly sued both Plant and Nihon in a Rhode Island state court. Both defendants were charged with misappropriation of trade secrets, which is a violation of the Rhode Island Uniform Trade Secrets Act. Astro-Med also accused Plant of breach of contract and Nihon of tortious interference with prospective economic advantage.
The defendants removed the lawsuit to federal court on the basis of diversity of citizenship. Then, Nihon moved to dismiss the complaint as against it for lack of in personam jurisdiction or, in the alternative, to transfer the case to Florida or California as a more convenient forum, and Plant joined in the venue motion. The district court denied both motions.
Following “especially hard-fought” litigation, a jury returned a verdict in favor of Astro-Med against both defendants and awarded $375,000 in damages. The court added exemplary damages, attorneys’ fees, costs, and sanctions that brought the judgment to $1.16 million. The defendants, of course, appealed from the denial of their motions as well as the judgment. The appellate court affirmed the district court’s rulings.
Precedent in the First Circuit holds that minimum contacts with the forum state means satisfaction of three requirements: relatedness, purposeful availment, and reasonableness. Attacking relatedness, the defendants argued that all activity between Nihon and Plant occurred in Florida or California, and that Nihon never came in contact with Rhode Island in the course of wooing or employing Plant. Further, Nihon had no place of business, assets or employees in Rhode Island. Yet, District Judge Woodcock, sitting in the appellate court by designation, agreed with the trial judge that the relatedness requirement was satisfied by applying the “effects test” since Nihon’s “conduct in Florida and California was a cause of the breach of contract – the actual injury – that occurred in Rhode Island.”
The “effects test” is commonly applied in determining whether a tort action bears a significant relationship to the forum state even though the tortfeasor, while not physically present there, purposefully engages in acts that cause injury there. The Astro-Med decision is unusual because the court held that the relatedness prong of the jurisdictional analysis was satisfied in Rhode Island on the basis that Nihon’s conduct outside that state caused breach of a Rhode Island contract.
Judge Woodcock said that there was purposeful availment because Nihon was aware of Plant’s contract at all relevant times and knowingly accepted the risk of a possible lawsuit in Rhode Island by Astro-Med. The reasonableness test was met by litigation against Nihon in Rhode Island because, even though all of the events relevant to Nihon’s relationship with Plant took place in Florida and California, because “the Florida and California witnesses and evidence were heading for trial in Rhode Island” in any event since, indisputably, Astro-Med had a right to litigate with Plant in that state.
The defendants insisted that the non-compete clause in Astro-Med’s contract with Plant was invalid because its territorial coverage obviously was over-broad. Over-broad? Yes, said the district and appellate courts, but not invalid. The clause could be “partially enforced” by “restricting its territorial application to the state of Florida and to a limited subset of Astro-Med customers.” Moreover, as the “breaching party,” Plant had no cause to complain since he “is being held to a more narrowly circumscribed agreement than the one he signed.”
In separate opinions, the other two jurists on the appellate panel, Circuit Judges Howard and Lipez, concurred in the result. Judge Howard took exception to Judge Woodcock’s jurisdictional analysis on the ground that it was irreconcilable with First Circuit precedent, while Judge Lipez challenged the legitimacy of that precedent.
Judge Howard noted that, to justify jurisdiction over an out-of-state defendant, the plaintiff must demonstrate that the claim relates to or arises out of the defendant’s contacts with the forum state. He stressed that Judge Woodcock’s application of the “effects test,” that is, where the injury occurred, to the relatedness prong of minimum contacts is irreconcilable with unequivocal First Circuit holdings that relatedness cannot be based solely on the in-forum consequences of distant conduct. He concluded that Judge Woodcock’s jurisdictional decision nevertheless was correct because a special rule can be applied in a business tort case where the defendant’s conduct was purposeful and where exercising jurisdiction is reasonable. In those circumstances, a court may construe the relatedness requirement “slightly more generously than we might in [other cases, thereby permitting] the best-suited forum to entertain the dispute.” The Rhode Island district court was that “best-suited forum.”
Circuit Judge Lipez, also concurring, bemoaned what he called “an analytical flaw in our precedent” which seemingly confines the “effects test to the purposeful availment prong of the specific jurisdiction inquiry. It is the illogic of that precedent that has required my concurring colleague to justify our outcome here by raising the possibility of a special relatedness test for business torts.” Rather, according to Judge Lipez, the “in-forum impacts of conduct undertaken outside the forum” – the “effects test” – is properly considered both “in evaluating personal availment [and in] the relatedness inquiry. In my view, therefore, there should be no need for a special category of economic or business tort.”
The Astro-Med case shows that an employer of someone who has a confidentiality and non-compete agreement with a former employer can be forced to defend misappropriation of trade secrets and tortious interference litigation in an inconvenient forum, especially when the prospective employer was aware of the agreement at all relevant times and the former employer is located within the First Circuit. Further, the prospective employer and ex-employee will not necessarily prevail in their challenge to an invalid non-compete clause where a court exercises “blue pencil” authority to modify the clause.