Comprehensive Technologies International, Inc. v. Software Artisans, Inc.

United States Court of Appeals for the Fourth Circuit · 1993 · Contracts

ContractsCovenants not to competeTrade secretsCopyright infringementnoncompeterestrictive covenantVirginia lawtrade secret

Facts

CTI developed software products called Claims Express and EDI Link through a software group led by Dean Hawkes; the other defendant employees worked on development and most signed confidentiality agreements, while Hawkes signed an employment agreement and later a termination agreement containing confidentiality and one-year noncompetition, nonsolicitation, and no-hire covenants. After leaving CTI in February 1991, the defendants formed Software Artisans and by July 1991 developed and marketed Transend, a program that also prepared forms for transmission by EDI. CTI claimed Transend infringed its copyrighted programs and used its trade secrets, and also claimed Hawkes breached his noncompete by working for the competing business. The district court found no actionable copying or misappropriation and held Hawkes's covenant unenforceable.

Issue

Whether the district court erred in rejecting CTI's copyright and trade secret claims, and whether Hawkes's one-year covenant not to compete was unenforceable under Virginia law. Also, whether the district court's comments about CTI's software showed reversible bias.

Rule

Under Virginia law, a restrictive employment covenant is enforceable if it is reasonable from the employer's standpoint because it is no greater than necessary to protect a legitimate business interest, reasonable from the employee's standpoint because it is not unduly harsh and oppressive in curtailing the employee's livelihood, and reasonable from the standpoint of sound public policy. Information cannot qualify as a trade secret if it is generally known or readily ascertainable, though a secret combination of public-domain information may qualify; and where alleged software trade secrets concern implementations or designs, misuse generally requires proof of copying or use at the functional or ideational level. On appeal, the appellant must identify record evidence showing clear error; the court will not sift the record to construct the argument.

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Lena Ortiz was vice president of product strategy for Bay Harbor Systems, a Phoenix company that sells a specialized desktop program used by freight brokers to generate and transmit standardized shipping forms. When she left, she signed a one-year agreement barring her anywhere in the United States from working in any capacity for a business competing in the design, development, marketing, or sale of desktop freight-form software with the same functionality and methodology. Bay Harbor sells through resellers and customers in more than a dozen states.

If Bay Harbor sues to enforce the covenant, which argument most strongly supports enforcement under the controlling rule?

Explanation. Under Virginia’s three-part reasonableness test, a restrictive covenant is enforceable if it is no greater than necessary to protect the employer’s legitimate business interests, not unduly harsh on the employee, and consistent with public policy. The majority upheld a broad 'any capacity' restriction because it was tightly confined to the employer’s specific software business, the employee had broad access to confidential information, and the employer operated in a national market. Severance alone does not make a covenant valid, and enforceability always depends on reasonableness of scope. (Derived from Comprehensive Technologies International, Inc. v. Software Artisans, Inc. (1993).)