MA Noncompete Bill Deferred to Next Year

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Although the Massachusetts noncompete bill had made substantial progress since its introduction, many more pressing issues in need of urgent legislative attention took priority, leaving the bill stalled toward the end of the legislative session (ending today, July 31). It is thus now fair to report with certainty that the bill is dead for this legislative session.

Questions have already arisen about what will happen next year. The answer: it will likely be reintroduced, but with modifications based on input that had been solicited and received from many different quarters.

Recap of the bill’s progress through last session:

Two noncompete bills were introduced in December of 2008, one by Representative Will Brownsberger and the other by Representative Lori Ehrlich. The Brownsberger Bill would have aligned Massachusetts with California, banning employee noncompetes entirely. The Ehrlich Bill took a different approach, primarily imposing certain notice requirements and an income threshold so that employees earning under a certain amount would not be subject to noncompetes at all.

By the spring of 2009, the two reps had worked extensively together – soliciting input from many people, reflecting many divergent interests – to design a compromise bill that would balance the needs of employers large and small with those of the employees, from the most highly paid and sophisticated to the least.

Over the course of the next year, the two reps and others involved in the process (I was the lead drafter of and advisor on the original Ehrlich Bill and continued in that role for the compromise bill) solicited – and received – some extremely constructive suggestions for ways to improve the bill. As the process went on, it quickly became clear that for every change that might be made, someone might want the language back the way it was. By way of example, early on, a number of the people we heard from opposed the use of garden leave clauses. Based on what we were hearing, the garden leave option was removed. Later, as we heard from more people and as people came to understand the benefits of a garden leave option – and, in particular, that their use was not mandatory, it seemed likely that the garden leave clause would make its way back in.

While that education/investigation process continued, in March of this year, the bill was favorably reported out of committee and, on May 25, was submitted to the Judiciary Committee for its consideration. Most recently, it (along with various other bills) was attached to part of an economic development bill. Although the economic bill passed in the house, several of the attached bills – including the noncompete bill – were removed. As a result, the bill would not pass this year.

Future of the bill:

The bill has received a substantial positive response. Although reports vary as to the level of opposition, most of the opposition focuses not on the bill’s fundamental purpose, but rather, on certain aspects of the bill. Those aspects are primarily the $75,000 income requirement for someone to be bound by a noncompete and the ability for a former employee to recover legal fees. Accordingly, the bill will almost certainly be reintroduced in the next session with some modifications based on the input already received and other input still being sought.

Unfair Competition Basics: Mark My Words… Trademark Basics

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Trademark law is designed primarily to prevent consumer confusion with respect to the identification of the source of goods products.  As a general rule, any word, symbol, or combination of words and symbols used to identify the source of goods or products in commerce can potentially be protected under federal trademark law (the Lanham Act).  Unlike the protections afforded by copyright and patent laws, but like those afforded by trade secret law, trademark protection is potentially unlimited in duration.

The starting point for an analysis of whether a trademark will qualify for protection is to determine whether the mark is “distinctive.”  Trademarks range from fanciful and arbitrary, such as (respectively) Kodak and Apple (for computers), at the end of the spectrum deserving of the greatest protection and deemed “inherently distinctive,” to generic, such as aspirin (originally a trademark of Bayer), at the other end, receiving no protection. In the middle are suggestive and descriptive marks.

Descriptive marks are not inherently distinctive. As such, more must be shown to receive trademark protection.  Specifically, marks that fail to qualify as “inherently distinctive” can still receive trademark protection if they have acquired “secondary meaning,” i.e.,  consumers identify the mark with the source of the goods, not the good itself.

Once a term is determined to be distinctive, and therefore entitled to protection under the Lanham Act, the pivotal issue becomes “likelihood of confusion,” i.e., “whether the allegedly infringing mark is likely to cause consumer confusion.”  (This analysis excludes the concept of “dilution” of a “famous” mark; more on that another time.)

In the First Circuit (i.e., New England), likelihood of confusion is determined by a non-exclusive, eight-factor test.  The test is:

  • The similarity of the marks;
  • The similarity of the goods;
  • The relationship between the parties’ channels of trade;
  • The relationship between the parties’ advertising;
  • The classes of prospective purchasers;
  • Evidence of actual confusion;
  • The alleged infringer’s intent in adopting its mark; and
  • The strength of the mark.

If distinctiveness and likelihood of confusion are found, courts will usually enjoin infringing marks.

Employee Non-Compete Agreements and Job Creation: The Status of Law Reform a Year Later

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For those interested in the current status on the pending legislation to reform noncompete law in Massachusetts, the Boston Bar Association will be hosting a symposium on noncompete reform. The panelists will discuss the current law, proposed changes, and the policy behind each, after which the panel will open the floor to a questions and answers.

On the panel are:

To see the current noncompete bill, click here.

For more information, click here to view the Boston Bar Association’s event detail.

eBay Accused of Stealing Trade Secrets

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eBay has reportedly been sued by EPRT Ventures for $3.8 million. The claim appears to be not only that eBay supposedly infringes on certain patents, but that eBay misappropriated trade secrets disclosed to it on a purportedly confidential basis. The lawsuit is pending in the United States District Court for the District of Delaware. Read more at ECommerce Times.

Post-Employment Noncompetes?

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You are planning to terminate an employee or you have an employee who is in the process of resigning – or has already resigned. The employee is not subject to a noncompete, or maybe there is some question about the enforceability of his noncompete. Can you bind the employee to a noncompete? In a word (well, two words), quite possibly.

Noncompetition agreements arising from an employment relationship but entered into as or after employment ends are enforceable just like any other noncompetition agreement. As such, they are subject to the same requirements as any other noncompete. But, what makes them a bit different is the extra focus on the fact that there must be an appropriate ancillary transaction of which they are a part. The ancillary transaction requirement can be satisfied by many different types of transactions, including (as is most often the case) a severance agreement.

For those looking for legal support, here are some citations (from my book): Marine Contractors Co. v. Hurley, 365 Mass. 280, 288 (1974) (“Marine’s interest in protecting its accrued good will from possible incursions by Hurley is not weakened by the fact that it negotiated the agreement not to compete at the end of Hurley’s employment rather than at some earlier time.”); Richmond Bros. v. Westinghouse Broad. Co., 357 Mass. 106, 110–11 (1970) (noncompetition agreement signed near conclusion of employment was deemed void not as result of its timing, but, rather, on other grounds); Novelty Bias Binding Co. v. Shevrin, 342 Mass. 714, 716–17 (1961) (settlement of embezzlement claim); Majilite Corp. v. Abbott, MICV2008-00222-L2 (Mass. Super. Ct. June 5, 2008) (settlement of breach of fiduciary duty and other claims).

Social Media, the New World?

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Each time a new technology rolls out, legal decisions follow. Social media is the latest. Remember the cyberstalker? How about Facebook’s lawsuit against Power.com? Or the class action against Facebook over its privacy settings?

The latest twist involves a case filed in the United States District Court for the District of Minnesota, TEKsystems, Inc. v. Hammernick, No 0:10-cv-0081. It is being heralded as the beginning of a brand new type of lawsuit – a new world of litigation.

The case boils down to a claim by an employer that the employee’s use of a social media site (LinkedIn) violated the employer’s rights. Who owns the employee’s “connections” (or contacts)?  Can the employee “connect” (or communicate through LinkedIn) with certain individuals without violating the employee’s restrictive covenants (a noncompete and a nonsolicitiation agreement).

While it may be true that the case is the first to raise the issue of the proper balance of employer/emplee rights in social media, the underlying issue is really nothing new.

Does your company issue Blackberries, iPhones, or other smartphones? How about laptops with Outlook? How many employees limit the contacts stored on those devices to business-only contacts? The balance of rights in the information about the contacts has been a regular issue in many post-employment disputes – as has the substance of texts and emails to former customers and colleagues.

To be clear, lest you think that this is purely a technology issue, anyone remember the Rolodex? (For those who don’t, look at the picture above.) With a Rolodex, you couldn’t just take a copy of your contacts – you had to physically remove the cards with the information about the contacts you considered to be your own, or worse, take the entire Rolodex. 

So, do you need to “disconnect” from people on LinkedIn or “de-friend” people on Facebook, the answer lies less in the technology and more in the underlying state law of trade secrets and restrictive covenants.

This brings us back to where we started: Is Social Media a New World? No. It’s just another example of “what’s old is new again.” Just as you updated your policies to include computers, Blackberries, iPhones, etc., update them to address social media.

Trade Secrets Hollywood Style

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Lawsuits over trade secrets typically involve things like customer lists, formulas, manufacturing processes, etc. Can the location of houses for use as movie sets be a trade secret? Yep. Well, at least that’s the claim made by a company in Hollywood. (Here’s an article about it from Reuters: Trade-secret war over Hollywood set locations.) We’ll have to wait to see what the court thinks.

The Who, What, Where, When, How, and Why of Trade Secret Audits

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Exactly one year ago, I wrote a post entitled “An Ounce of Prevention… ” for my prior law firm’s Trade Secret / Noncompete Blog (which I had created only days earlier). In the post, I recommended and discussed performing a trade secret audit. Here’s the who, what, where, when, how, and why – but not in that order.

(Sorry for the long post, but it’s important.)

Why?

As commentators have noted (see, for example, here and here), and as my own “back of the envelope” analysis (reflected in the chart above) confirms, trade secret misappropriation has grown year over year – resulting in more than a doubling in reported trade secret and related noncomepte cases over the past decade. 

Need more? Just Google “trade secret” and see how many cases make the news. But note that that’s just fraction of cases that are reported (see the chart), which is just a fraction of the cases filed, which is itself only a fraction of the times that someone claims that their trade secrets have been misappropriated. See the magnitude of the problem?

But, it’s worse than that. 

A recent report indicated that 85 percent of trade secret thefts are committed by either an employee or a party with whom you have contracted. Another recent report indicated that over half of employees admit to taking company information when they terminate their employment. How many more have taken company information, but simply refuse to admit it? That’s a lot of trade secret theft going on out there!

Who?

Okay, that’s just the background. If your company doesn’t have trade secrets or other confidential business information that’s important to it, you can stop reading. However, if you have information that needs protection, keep reading.

What?

A trade secret audit.  It’s the process by which you limit the likelihood that someone (employee, contractor, other) will be able to take your trade secrets or other confidential information. It’s also the process by which you make it easier to discover a data breach. Finally, it’s the process by which you put yourself in the best position to be able to quickly respond to a misappropriation of trade secrets and confidential information.

I handle these cases all the time, and – by far – the two most important issues raised by the courts are (1) did the company take the proper steps to protect its trade secrets and confidential information? and (2) did the company react quickly? A trade secret audit helps to ensure that the company has properly taken those steps.

How?

In order to protect your trade secrets, you must know what they are. Then you must know the tools to protect them. Then you must select which tools to use. Then you must customize the tools. The process for doing that is a trade secret audit.

In brief (I know, brief?! Really?!), the process is as follows:

First, identify your trade secrets and confidential information and determine which are valuable.

Second, determine how they are currently protected and if those protections are adequate.

Third, establish a comprehensive trade secret protection program. The program needs to be reasonable in relation to the value of the trade secrets. Coca-Cola needs to (and does) take heroic measures to protect its secret formula. Most other companies don’t need to do that. Simply put, the greater the value of the trade secret, the more protections will be expected to be in place.  Similarly, the ease with which a protection can be implemented will inform whether such protection should be implemented. But remember, if you don’t bother to protect yourself, neither will a court.

The tools for your trade secret protection program are myriad and complementary to one another.  The basic ones are:  (1) computer safeguards (protecting computer systems with the appropriate level of security, including passwords changed at regular intervals, firewalls, hard drive encryption, access notifications, etc.); (2) security measures for all electronic technologies (usb drives, flash cards, smartphones, ftp sites, social media sites, etc.); (3) restrictions on and protocols for access to and use of facilities that house confidential information; (4) policies for the use of company property (including computers, etc.); (5) policies for the use and preservation of company trade secrets and confidential information; (6) protocols/checklists for when an employee resigns or has been terminated (proper exit interviews, shutting down computer accounts, terminating cell phones, eliminating facility access, examining all items taken by the employee, etc.); (7) post-departure reviews of possible security breaches; and (8) restrictive covenants – with employees and others. 

The restrictive covenants fall into basic types:  noncompete agreements; garden leave clauses; forfeiture-for-competition agreements; “compensation-for-competition” agreements; forfeiture agreements; nondisclosure/confidentiality agreements; nonsolicitation agreements; antipiracy/no-raid/no-hire agreements; and invention assignment agreements.   (For more reading on these agreements, other potentially applicable laws, and their interrelationship, see Beyond the Noncompete, published in Computer World (June 2, 2009).)

Each of these agreements serves a specific purpose.  Which to use, when to use them, how to properly craft them, and how to enforce them are all the product of a combination of the needs of the company, the corporate ethos, and the skill, knowledge, and experience of the attorney assisting.  Proper attention to each of these issues in advance will save much needed time and unnecessary expense later.

When?

Immediately. The longer you wait, the longer you’re exposed.

Where?

A trade secret audit is primarily done on-site.

* * *

If you have the internal resources to perform your trade secret audit in house, deploy them as soon as possible. If you don’t, Beck Reed Riden LLP performs these audits and would be happy to help.

Who’s Exempt?

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Are noncompetes legal? YES!! (I’m asked that question way too often.)

Of course, the answer needs clarification. There are limits on the use of noncompetes. In addition to the standard requirements (noncompetes must be reasonable in time, space, and scope, and narrowly tailored to achieve a legitimate business purpose), there are wholesale exemptions from noncompetes for certain industries. While the exemption for people in the financial services industry who are subject to FINRA is a nationwide exemption, the rest are state-based.

In Massachusetts, exemptions exist for the following: physicians, nurses, psychiatrists, social workers, broadcasters, and, yes, attorneys. If your company is subject to the laws of another state, beware – many states do not recognize all of these exemptions.

To be clear, the exemptions are specific in defining from what the individual is exempt. For example, forfeiture agreements are treated differently from traditional noncompetes. The Supreme Judicial Court in 2008 made that quite clear (see Pierce v. Morrison Mahoney LLP, 452 Mass. 718 (2008)) when it enforced a forfeiture agreement against departing lawyers, costing them over $1,000,000 in lost profits.

So, what about in-house counsel? Sorry, that one, I’m keeping to myself!  :)

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