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Governo Law: Mass SJC Clarifies Chapter 93A in Cases of Employee Misappropriation

Governo Law: Mass SJC Clarifies Chapter 93A in Cases of Employee Misappropriation

Every Massachusetts lawyer that drafts a civil complaint wonders – or should wonder – “can I allege 93A in this case?”

This law, M.G.L. c. 93A, is the Massachusetts unfair competition statute. It makes illegal “unfair and deceptive” acts and practices in the consumer and business contexts. The law is attractive to plaintiffs because it is one of the few state laws that provides the prospect of double or treble damages, as well as attorney’s fees. 

What is “unfair and deceptive”? There are many cases where the courts attempt to parse out what conduct falls under 93A. It’s complicated, and there is a substantial body of 93A jurisprudence. The legal standards are beyond the scope of this post, but to get a sense for how the Massachusetts Supreme Judicial Court (SJC) approaches this take a look at the SJC decisions in Morrison v. Toys “R” Us, Inc. and Aspinall v. Philip Morris Cos.

Because the law is largely judge-created, unless they follow c. 93A law closely most lawyers aren’t fully up to speed on the nuances of 93A and recent developments. And if you don’t assert 93A in your complaint, you might be deemed to have waived it if you try to add it later. What if the law changes between the date you file and the date you are challenged on it? You may be out of luck.

Given these factors many lawyers will include a 93A count almost reflexively, thinking that they’ll worry about the viability of the claim later, if and when the defendant challenges it. You’ll often see a 93A count in even the most routine cases, where it is eventually dropped or dismissed before trial. 

There are a number of limitations on 93A, and one important limitation is that the illegal conduct must take place “in the conduct of any trade or commerce.” Based on this language the courts have held 93A to be inapplicable in the employment relationship. An employer-employee dispute is considered an “internal” business dispute outside “trade or commerce.” As a result of a series of decisions applying this doctrine, it is near-black letter law that 93A cannot be claimed by an employer against an employee, whether the employee’s violation occurs during or after the employment relationship. One well-known example of this is in the area of noncompete law – even though an employee’s breach of a noncompete may take place after employment ends, it is still considered an employer-employee dispute arising out of the employment relationship, and 93A does not apply. 

Traditionally, under Massachusetts law, the act of misappropriating a trade secret by an employee falls under this restriction if the misappropriation occurs during the employment relationship. However, the courts have struggled with this doctrine, attempting to distinguish intra-employment conduct (which is exempt) from post-employment conduct (which may not be exempt).

The most recent decision in the line of employee misappropriation-93A cases is Governo Law Firm LLC v. Bergeron (2021). In this case six attorney-employees of the Governo law firm secretly downloaded proprietary information belonging to the firm and used that information when starting a new firm. 

You’d think lawyers would know better.

At trial the jury returned a verdict for $900,000 in favor of Governo Law on the claims of  conversion, breach of the duty of loyalty, and conspiracy.   

However, Governo Law was unhappy with several aspects of the trial, one of which was that the judge instructed the jury that Chapter 93A did not apply to anything the defendants did while still employed by Governo, and the jury ruled against Governo on its 93A claim. This cost Governo Law the potential for double or treble damages and attorneys fees. 

Governo Law appealed, and it won on this issue  – the SJC reversed and sent the case back for a new trial on the 93A claim. The court fudged the distinction between the attorneys’ conduct during employment and afterwards. The heart of its holding is as follows:

[T]he  93A, claim required the jury to consider that the defendants stole the plaintiff’s materials in order to determine whether the subsequent use of these materials was unfair or deceptive.  . . . where an employee misappropriates his or her employer’s proprietary materials during the course of employment and then uses the purloined materials in the marketplace, that conduct is not purely an internal matter; rather, it comprises a marketplace transaction that may give rise to a claim under 93A . . . . That the individuals were employees at the time of the misappropriation does not shield them from liability under 93A, where they subsequently used the ill-gotten materials to compete with their now-former employer.

This holding is not entirely new law – the state appeals court reached similar decisions in 2011 and 1984. (Specialized Tech. Resources, Inc. v. JPS Elastomerics Corp. (2011); Peggy Lawton Kitchens, Inc. v. Hogan (1984)). The Superior Court has also issued decisions on this issue. However, this is the first time the issue has reached the state supreme court, and it’s an important new landmark in Massachusetts 93A law. Whether it will lead to further erosion of employee 93A immunity in other contexts where the defendant’s conduct straddles the line between employee and non-employee remains to be seen. It may be that any illegal conduct during employment that will shed light on a former-employee’s post-employment conduct may now be admissible under the rationale used by the SJC in this case.

Governo Law is now entitled to a new trial, and this time the jury will be free to consider the six attorneys’ conduct while still employed by Governo Law in considering whether their subsequent use of the converted materials was an unfair or deceptive act. Exactly how the judge will instruct the jury on 93A remains to be seen – the SJC did not provide directions on this issue. However, the SJC opinion makes clear that the jury will be able to consider the fact that the attorneys stole Governo Law’s proprietary information, and regardless of whatever precautions the judge may take in the jury instructions, it’s hard to believe that jurors will not conflate employment conduct (stealing proprietary information) with post-employment conduct (using that information). 

Governo Law goes into its 93A retrial (assuming no settlement) with a strong upper hand. 

Governo Law Firm LLC v. Bergeron, 487 Mass. 188 (2021).

Arbitration War Stories (third) – Arbitration or Court?

Arbitration War Stories (third) – Arbitration or Court?

In my first two posts on arbitration (here and here), I told a couple of war stories about what goes on behind the scenes in arbitration – what I called the “sausage factory.” To close this series, here are some general observations on arbitration.

Should I include an arbitration clause in a contract?

This can be a difficult question, with pros and cons on either side, and no obvious answer. And, since arbitration is typically in the “boilerplate” section of a contract it often receives little attention during a negotiation. This can be made worse if the lawyer guiding a client is a contracts or corporate lawyer that has had little or no personal experience with arbitration, which is often the case.

Pros of Arbitration

It Can Be Fast and Private. The key factor favoring arbitration is speed. It’s faster, almost always faster than a court case, which can take years to go to trial and can then be appealed by the losing party, stretching the process out even further. In Massachusetts it can take three years or more for a case to go to trial in state court. Add another year for appeal.

These delays can drive litigants crazy, and arbitration short-circuits this. It’s also private (if the agreement stipulates this), which can be appealing to a business that may be concerned about having its reputation harmed by public court proceedings.

Cons of Arbitration

However, when weighing the desire for a speedy resolution you need to take a few things into consideration.

It Can Be Expensive. Arbitrators are almost always lawyers, and you are paying for the arbitrator’s time, usually at his or her hourly rate. The parties split the cost, but it still has the potential to be more expensive than state or federal court. And where there is a panel of three arbitrators (as was the case in the two war stories I told in previous posts), the parties are paying three hourly rates. Assume $450/hour (a reasonable estimate in Massachusetts) and one hour of hearings, deliberations or phone conferences to discuss a procedural matter or discovery dispute will cost the parties $1,350.

In my experience, on three-person panels all of the arbitrators weigh in on everything that comes up in the case, no matter how minor. This includes scheduling orders, discovery disputes and any other minor issue. The parties have no control over this.

The American Arbitration Association (AAA) asks each arbitrator to estimate their fees at the beginning of each case, and arbitrators tend to overestimate their fees – better to overestimate and surprise on the downside than the opposite. However, this can result in a large upfront bill to the parties, who can’t be confident that they’ll get a refund at the end of the case.

Add to this fees of the company administering the arbitration, such as the AAA, and the expense is even higher.

I had a case last year in which an individual filed arbitration against a well-financed corporation. The case called for a three-person panel and senior, expensive (the other two, not me) arbitrators were appointed. It was obvious that the individual plaintiff would have a difficult time paying a three-person panel in a complex business dispute that would involve discovery disputes, thorny legal issues, dispositive motions and what was expected to be a five day hearing. Indeed, the case settled early on. I suspect that the anticipated arbitration costs were a factor in that settlement.

A court case, by contrast, costs nothing more than the filing fee.

Arbitrators are Not Bound to Follow the Law. How many people or companies, when negotiating an agreement that contains an arbitration clause, are told by their contract lawyers that in the event of a dispute an arbitrator can pretty much disregard the law and the facts, and that you have no right of appeal? Very few, I suspect.

Under the law of Massachusetts and under federal law, an arbitrator cannot be reversed by a court for failing to follow the law. The only possible exception to this is the so-called “manifest disregard” doctrine – an arbitrator may be reversed by a court when she decides a case in “manifest disregard” of the law.

However, this is a controversial doctrine which has been repudiated in some states and federal circuits. In any event it is difficult to establish that an arbitrator has acted with “manifest disregard” of the law. Cases reversing an arbitration award based on “manifest disregard” are exceedingly rare, and usually are accompanied by some form of overt misbehavior by the arbitrator.

The bottom line: if you elect arbitration you are pretty much at the mercy of the arbitrator with no right of appeal.

Where Does This Leave the Decision of Arbitration or Court?

In earlier posts I told a couple of war stories where, arguably, arbitrators acted improperly. But it’s my experience that the vast majority of arbitrators act properly and do everything they can to decide a case within the law and the facts. That said, you can never fully discount the risk that you’ll get an arbitrator who harbors a hidden bias or who may disregard the law.

Therefore, I would advise choosing a 3-person panel over a single arbitrator if you (or the party you’re representing or advising), can handle the additional cost — the 3-person panel reduces the power of a renegade arbitrator of the sort that I described in my second “war stories” post.

But I would never recommend a 3-person panel in which one arbitrator is neutral and the other two are retained by (and beholden to) the parties, as described in my first war story post. The attorneys for the parties can argue the case, and they don’t need “insider” arbitrators to argue the case a second time.

Good luck!

Arbitration War Stories (second) – Return to the Sausage Factory

Arbitration War Stories (second) – Return to the Sausage Factory

The second arbitration anecdote I’d like to share (see my first “sausage factory” anecdote here) involved, once again, a 3-person arbitration panel. The case arose out of a manufacturer-distributor relationship.

Here’s how the business worked.

The high-priced hardware product at issue was sold to businesses via a national network of dealers, and the dealers often encountered price competition from competing manufacturers of this type of product. If a dealer lowered its price to meet the competition, it reduced its profit margin. To give dealers an incentive to compete in those situations the manufacturer would lower its price to the dealer if the manufacturer received written certification, via fax, documenting the price competition. This allowed the dealer to maintain its profit margin, and the manufacturer took the hit to profits.

The manufacturer discovered that one dealer had been falsely representing price competition on a large scale for several years. The manufacturer brought an arbitration case against the dealer seeking to recover the profits it had lost as a result of this fraud. I was one of three arbitrators on the case. I’ll call myself Arbitrator 1 and the other two arbitrators Arbitrators 2 and 3. All three of us were lawyers with many years of experience.

There was a two-day hearing (arbitration-speak for a trial), and as it turned out the dealer didn’t have much of a defense. One defense theory asserted by the dealer’s lawyers was that the manufacturer’s sales people had encouraged this practice, presumably to encourage sales and pump up their commissions. However, it was unable to present even a shred of evidence to support this – no testimony, no documents, nothing. Of course, in a trial what the lawyers say is not evidence – evidence is the testimony of witnesses and documents.

When the panel met to decide the case, to my surprise Arbitrator 3 said that he was experienced with commission sales people in situations like this, and he believed that the manufacturer’s sales people had encouraged the fraud. Therefore, he argued, the dealer should win the case.

Arbitrator 2 and I pointed out that this might be true in some situations, but we couldn’t reach this conclusion when there was no evidence to support it in this case. Arbitrator 3 became angry with us and said that in that case he would not join in the award. He stormed out of the conference room (leaving Arbitrator 2 and myself with mouths agape), and we didn’t hear from him again before deciding this case. The two of us went ahead and issued the award for the manufacturer.

What struck me in this case was that Arbitrator 3 was willing to decide the case based on his personal experience, even though there was no evidence that what Arbitrator 3 claimed he had seen elsewhere had occurred here. Although a jury might conceivably do this, a competent, trained judge never would, and I felt that a party in an arbitration should expect no less.

Imagine if the arbitration agreement at issue had called for a single arbitrator and the sole arbitrator had been Arbitrator 3. The distributor would have won based on the preconceptions that Arbitrator 3 brought to the case. The arbitration agreement didn’t call for a “reasoned award” (most don’t, given the extra expense involved), and the manufacturer would never have known why it lost.

I believe that parties to arbitration should be able to count on arbitrators relying on the evidence put before them, and not have an arbitrator make it up, as Arbitrator 3 did in this case. Often the evidence is in dispute, and an arbitrator (like a judge or jury) has to evaluate credibility. But for an arbitrator to decide a case where there is no evidence to support the arbitrator’s theory, is simply wrong. And, as I’ll discuss in my next (and final) post in this series, there’s nothing to stop an arbitrator from doing that. If you elect arbitration you may encounter a situation like this, and even worse you may never know it.

What’s my take-away from this? You never know what you don’t know going into an arbitration. You may believe (or your lawyer may tell you) that you have a good case, a strong case, a great case, even a “can’t lose” case (no lawyer should ever tell a client this!), but in arbitration you just don’t know. So if you’re a client heading for an arbitration hearing, and your lawyer tells you it’s the strongest case s/he’s ever seen, with an 80% likelihood of success, maybe you should discount that to 70%, and factor that adjustment into your settlement strategy.

In the last post in this three-part series on arbitration I’ll provide a few observations about the decision whether or not to include an arbitration clause in a contract.

Arbitration War Stories (first)

Arbitration War Stories (first)

The thing to fear is not the law, but the judge”  Russian Proverb

I’ve been arbitrating legal disputes since the early 2000s. Here is the first of a couple of anecdotes I’ll share. I am referring here to my experience as the arbitrator, not an attorney arguing a case before an arbitrator. 

My cases have varied enormously, from huge multimillion dollar disputes to relatively small cases involving under a hundred thousand dollars. You might think that when I look back on these cases I have interesting stories about the lawyers and the clients, but that’s almost never the case. My most vivid memories involve my co-arbitrators on 3-person arbitration panels. This is where I’ve seen the most surprising aspects of human nature. In this post I’ll describe one of these, and leave other cases for future posts. I’ve slightly disguised the parties and facts so that they would not be recognizable, even to the parties, but they maintain the essence of the case.

The case was a David Inc. v. Goliath Inc. arbitration that involved complex patent and trade secret misappropriation claims by David. The arbitration panel was unusual, in my experience – the parties agreed on a single neutral, and each party retained their own arbitrator who was, in effect, their advocate on the panel. So, it was a three-person panel with one neutral arbitrator, one arbitrator chosen by David and one chosen by Goliath. My “client” was Goliath Inc., the defendant (or in arbitration-speak, the “respondent”). There were no restrictions on my meeting with Goliath’s attorneys during the hearings – indeed, I had lunch with them every day of the hearings, and advised them on how I thought their case was proceeding. I assume the same was true of David Inc.’s chosen panel member. In this case David was seeking approximately $200 million in damages.

The hearings lasted about 20 days, spread out over several months. At the close of the case it was clear that the “neutral” thought that David had put on a very weak case. However, he insisted that David was entitled to an award of around $2 million, one percent of what it was seeking in damages. I disagreed, to the point that I told the neutral that I would not join in the $2 million award. I felt that the proposed award was legally defective, and that the neutral was wrong on the law in reaching it. I thought it was a “sympathy award” by the neutral – give David (and likely it’s contingent fee attorneys), something that they could perhaps break-even on in terms of fees and expenses.

At a meeting with the neutral and “David’s” lawyer I told them that although I would not write a dissent to the “reasoned award” the parties had requested that the panel prepare, neither would I join in the award. In other words, two of the arbitrators would sign the award, which would be legally sufficient for it to be fully enforceable. A couple of days later the neutral arbitrator called me one-on-one and told me that if I would not join in the award he would increase the damages against “my party” – Goliath – by millions of dollars. I was shocked, but I had no choice but to go along with what I viewed as little more than blackmail.  I joined in the award, and I never told my party about this call. 

What was the neutral’s motive for strong-arming me like this? I believe that given the size of the case and its complexity he wanted a three-person award, to avoid any chance it might be successfully challenged in court – he wanted a 100% appeal-proof award. End of my story. I hope it provides some insight into what can go on inside the “sausage factory” of an arbitration panel. 

A final word on this case – I’ve never been on a “one-neutral, two-advocate” arbitration panel before or since, and I would advise against it. The neutral arbitrator is unlikely to be swayed one way or the other by the “party arbitrators” (after all, the lawyers for the parties do that job). In fact, as I will discuss in another post, I would stay away from 3-person panels altogether, except in cases where the economics of a potential dispute justify it.

Gesmer Updegrove LLP Files Comments and Recommendations With DOC

Gesmer Updegrove LLP Files Comments and Recommendations With DOC

[This post is adapted from Andrew Updegrove’s August 5, 2020 post]

Since May of 2019, standards setting organizations (SSOs) and U.S. companies have been struggling with the blowback from the decision by the U.S. Department of Commerce (DoC) to add Huawei and scores of its affiliated companies to the “Entity List” maintained by the U.S. Bureau of Industry and Security. In June of 2020, the DoC released a long-awaited “Interim Final Rule,” providing a safe harbor for U.S. companies and Huawei et al. to work together on standards. The DoC set a deadline of August 17, 2020 for interested parties to submit recommendations to improve the Interim Final Rule.  In response to DoC’s request for recommendations Gesmer Updegrove LLP prepared a detailed comment letter which it has submitted on behalf of itself, multiple clients and other SSOs. 

The concerns addressed in these comments arise from the fact that U.S. law prevents U.S. companies from disclosing a broad range of technology to companies on the Entity List, as usually occurs during standards development. Those who disclose covered technology in violation of the rules may incur criminal liability. Although the Interim Final Rule provides a safe harbor, it has various limitations, including that it only applies to Huawei and its affiliates and not other companies on the Entity List, and only benefits SSOs that qualify as  “Voluntary Consensus Standards Bodies” (VCSB) under a preexisting rule called OMB Circular A-119.

Unfortunately, most information and communications technology (ICT) SSOs don’t meet that test. Of those, some will not want to make the changes needed to meet the new test, while others that do will be saddled with additional processes and delays, most of which are not necessary to achieve the policy goals behind the Entity List restrictions.

The  detailed comments are contained in the letter, reproduced in full below. They include recommendations that urge the DoC to:

  • Create a standards-specific exception that is based on prevailing norms of ICT  SSO best practices rather than the more stringent VCSB rules that the government itself is not rigidly bound by under OMB Circular A-119. Ideally, the eventual rule would simply state that U.S. companies may safely participate in any SSO formed with the intention of creating global standards and which admits all interested parties as members on a non-discriminatory basis. Failing that, providing an SSO-specific exception referencing only the Openness and Consensus elements of the VCSB definition, tailored to ICT SSO realities, would provide a next-best solution.
  • Clarify that additional collaborative activities commonly associated with standards development and necessary to achieve market needs are also included within the exception. These activities include the creation of reference implementations, participating in and sharing the results of conformance testing, and related activities that help foster adoption, implementation, and improvement of ‎standards conducted by, or under the auspices, of an SSO.
  • Include all industry participants that at any time are included in the Entity List, and not just Huawei and its affiliates.

You may find further background regarding the Huawei situation and the Interim Final Rule here. the comments letter submitted to the Department of Commerce is linked here.