Trade Secret | Noncompete – Issues and Cases in the News – January Update

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extras_03Having looked back over the last couple of years, I realized that I have failed to provide enough updates on issues and cases making trade secrets | noncompete news. So, I am going to try to resume those efforts moving forward. Given my earlier IP Year in Review post, this post will be primarily update two of the topics there and provide a few other recent updates  …

The DTSA. The Defend Trade Secrets Act, which would create a federal private right of action for the protection of trade secrets, has – with some amendments – been reported out of the Senate Judiciary Committee. Bloomberg BNA has a terrific summary here: Senate Judiciary Committee OKs Federal Trade Secret Bill. Testimony was taken back in December 2015, and is available here. Persons appearing to testify were: Karen Cochran, Chief Intellectual Property Counsel at E.I. DuPont de Nemours and Company, Tom Beall Vice President and Chief Intellectual Property Counsel at Corning Incorporated, James Pooley, a leading trade secrets expert, and Sharon Sandeen, Professor of Law at Hamline University School of Law. In addition, a letter was submitted in lieu of live testimony by a number of trade secrets practitioners (myself included) around the country. That letter is available here.

EU Trade Secrets Directive. The text of the Directive of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure is now available here.

Washington State Noncompete Bills. The Washington state legislature’s House Labor & Workplace Standards Committee will be conducting public hearings on the noncompete bills pending in Washington. GeekWire has an excellent summary here: New bills target non-compete clauses in Wash. state employment contracts.

Noncompetes with Customers (Texas). A Texas shrimp farm (Global Blue Technologies (“GBT”)) that had a noncompete agreement with a Florida shrimp farm (Shrimp Improvement Systems (“SIS”), which is owned by a Thai company (CP Foods)) is suing SIS to invalidate the noncompete so GBT can use SIS’s broodstock for GBT’s new shrimp farm operation. See Texas shrimp farm challenges CP Foods over non-compete and Antitrust Complaint Against Big Shrimp.

New Federal Trade Secrets Prosecutions. Last week, the Pennsylvania U.S. Attorney’s Office brought charges against two GlaxoSmithKline scientists (Yu Xue and Lucy Xi) who allegedly stole trade secrets and emailed them to a Chinese startup called Renopharma. A summary of the case, as well as the backlash sparked by questions about racial profiling, is available here: U.S. charges drug researchers with sending trade secrets to China, but will case stand up? (The article quotes well-known trade secrets lawyer (and friend) Peter Toren.)

Damages Unfair Competition Case (Georgia). The Georgia Court of Appeals took a page from the Massachusetts Supreme Judicial Court’s decision in LightLab Imaging, Inc. v. Axsun Technologies, Inc., 469 Mass. 181 (2014), in which the SJC opened the door to new theories of damages in trade secrets litigation (in Massachusetts, at least). The Georgia case case is available here: Lyman v. Cellchem Int’l LLC. In addition, a tip of the hat to Chip Collins of Burr & Forman, who provides a nice summary of Lyman here: Recent Georgia Court of Appeals Case Highlights Alternative Theories of Relief in Unfair Competition Case

Discovery in Trade Secrets Cases – and Who to Sue. Companies seeking to protect their trade secrets from theft by wayward former employees frequently wrestle with the question of whether to sue just the employee or the new employer as well. A good reminder of one of the downsides of suing the new employer is demonstrated by a recent California Superior Court decision ordering Jawbone (who sued several former employees for and their new employer, FitBit) to turn over alleged trade secrets to Fitbit. A summary of the decision is here: Court Orders Jawbone to Give Fitbit Access to Confidential Information.

Noncompetes and Independent Contractors (Virginia). Another issue that arises every now and again is whether noncompetes can be used to bind independent contractors (as opposed to employees, franchisees, or other business partners). A recent federal court decision in Virginia answered the question in the affirmative. For a summary, see The Non-Compete Agreements Enforceable Against Independent Contractors

Fiduciary Duties and Trade Secrets (California). Every now and again trade secrets and restrictive covenant cases involve not just conduct occurring around the employee’s departure, but long-term secret competition with the then employer. As also sometimes happens, an employee is laid off for unrelated reasons (sometimes a result of decreased sales caused by the employee’s secret competition, unknown to the employer). In Blackbird Technologies, Inc. v. Joshi, the Northern District of California was faced with just such an issue. In fact, the former employer found out about the secret competition as a consequence of a Youtube video posted by the former employee. For a summary, see The Duty of Loyalty Awakens

Confidential Information vs. Trade Secrets (6th Circuit / Texas law). Different states handle confidential information that does not rise to the level of a trade secret differently. A recent 6th Circuit case, Orthofix, Inc. v. Hunter, 2015 WL 7252996 (6th Cir. Nov. 17, 2015), highlights the need for (and benefits of) a nondisclosure agreement to reach that broader category of information. Although the case is a bit older, Fisher & Phillips recently posted a nice summary here: Confidential Information that isn’t a Trade Secret?

Other noteworthy news…

2015 Trade Secrets and Noncompetes Year in Review

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Newspaper StandsIn anticpation of speaking at the Boston Bar Association’s 16th Annual Intellectual Property Year in Review earlier this month, with some assistance from several of my colleagues (Nicole Daly, Hannah Joseph, and Will Haddad), I prepared a paper discussing a number of the developments in trade secrets law and noncompete law around the country in 2015.

The topics covered in the paper are set forth below. Note that, since speaking on at the Year in Review, there have been a handful of developments on certain of the topics; they will be covered in the next post.

  • Congressional efforts to amend the Economic Espionage Act, most recently through the Defend Trade Secrets Act of 2015.
  • The continuing saga of mixed interpretations of the scope of the Computer Fraud and Abuse Act, focusing (for the paper) on the Obama Administration’s proposal for “modernizing the Computer Fraud and Abuse Act” and the Second Circuit’s decision in the highly-reported “Cannibal Cop” case, United States v. Valle, 807 F.3d 508 (2nd Cir. 2015).
  • The European Commission’s most recent efforts to develop a unified approach to trade secrets law in Europe (the so-called, “Directive of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure”).
  • The recent Trans-Pacific Partnership Agreement (referred to as the “TPP”), which, if adopted in each of the countries, will enhance, among other things, companies’ ability to protect their trade secrets in the signatory Pacific Rim countries.
  • The new amendments to discovery rules 26 and 37(e) of the Federal Rules of Civil Procedure (given the heavily reliance on electronic discovery in trade secrets cases).
  • Recent cases applying Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas, 134 S.Ct. 568 (2013) to the enforcement of forum selection clauses in trade secrets cases – including decisions addressing international implications.
  • Continued Massachsuetts legislative efforts to ban or modify Massachusetts noncompete law and to adopt the Uniform Trade Secrets Act in Massachusetts.
  • Alabama’s new noncompete law (effective January 1, 2016) that retains much of the old law, but establishes a presumption that a two-year duration of a noncompete is reasonable and requires mandatory judicial reformation of overbroad noncompetes.
  • Arkansas’s modification of its noncompete law.
  • Hawaii’s ban on noncompetes and nonsolicitation agreements for workers in a technology business.
  • New Mexico’s ban on noncompetes for dentists, physicians, podiatrists, osteopathic physicians, and certified registered nurses.
  • Oregon’s amendment of its noncompete law to limit the duration to 18 months (from the prior two-year maximum).
  • Bills to ban noncompetes in Michigan, Pennsylvania, and Washington (as well as two other bills in Washington: one to ban the use of noncompetes for low-income employees and persons involuntarily terminated without cause and one that would ban the use of noncompetes for physicians).
  • A bill in New York to “clarify” its existing law.
  • A bill in Wisconsin to make it easier to enforce noncompetes, including by adding presumptions of what is and is not a reasonable duration and by permitting the courts to modify overly broad restrictions (as opposed to having to invalidate them in their entirety).
  • The SEC’s first cease and desist order against a company finding that the company’s confidentiality statement (a confidentiality requirement imposed in connection with internal investigations) interfered with Rule 21F-17 (“Staff communications with individuals reporting possible securities law violations”) promulgated by the SEC as of August 12, 2011, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act. (See In the Matter of KBR, Inc., Administrative Proceeding File No. 3-16466.).
  • A federal bill entitled, the “Mobility and Opportunity for Vulnerable Employees Act” (or the “MOVE Act“), that would prohibit the use of covenants not to compete (defined in the bill) for “low- wage employees,” i.e., employees earning the greater of (subject to inflation) $15 per hour or the applicable state or local minimum wage rate or $31,200 per year, but excluding any salaried employee earning (subject to inflation) more than $5,000/month for 2 consecutive months.

  • A federal bill entitled the “Limiting the Ability to Demand Detrimental Employment Restrictions Act” (the “LADDER Act”), which is virtually identical to the MOVE Act, but broadens somewhat the definition of the employees that are considered low-wage employees and tweaks the inflation adjustment language.

  • A federal bill entitled the “Freedom for Workers to Seek Opportunity Act” (“FWSOA”). Although not having quite as catchy an acronym as the MOVE Act or the LADDER Act, FWSOA does win on creativity in that it seeks to ban the use of noncompetes for grocery store workers (only).

The paper is available here.

BRR 50-State Noncompete Chart Updated

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World MapThe BRR 50 State Noncompete Chart has been substantially updated to reflect numerous developments in statutory or case law since the last draft, as well as clarifications of existing laws. Click here to get the latest version.

Please note that the chart has been revised through yesterday, August 23.

Proposed Federal Noncompete Law

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Federal Noncompete Bill - screen shotNoncompete law is a creature of state regulation. As such, no surprise, we have 50 variations (really 51, when you factor in DC – albeit 3 states (California, Oklahoma, and North Dakota) prohibit employee noncompetes altogether, so it’s more like 48 variations). See BRR’s 50-state summary chart. (Note that the chart is in the process of being updated to reflect a variety of developments since its last update.)

Well, we may be on the verge of a 51st variation (or 49th, if you’re keeping accurate count).

Specifically, despite the state-based nature of these laws, yesterday (June 3), U.S. Senators Al Franken (D-Minn.) and Chris Murphy (D-Conn.) (with cosponsors Senators Elizabeth Warren (D-Mass.) and Richard Blumenthal (D-Conn.)) proposed federal legislation to limit the use of noncompetes for low-wage employees for companies involved in interstate commerce. (Does anyone know of any companies not involved in interstate commerce at this point?)

The Bill is entitled the ‘‘Mobility and Opportunity for Vulnerable Employees Act’’ (or the ‘‘MOVE Act’’) and prohibits the use of covenants not to compete (defined in the bill) for “low-wage employees,” i.e., employees earning the greater of (subject to inflation) $15 per hour or the applicable state or local minimum wage rate or $31,200 per year, but excluding any salaried employee earning (subject to inflation) more than $5,000/month for 2 consecutive months. (It also requires notice of the Act in a conspicuous place in the workplace and is clear that it applies only to agreements entered after the enactment of the Act.)

Thresholds, notice, and timing requirements aside, the Bill is somewhat unclear on its scope. Specifically, it is unclear whether it applies only to true noncompetes (i.e., agreements that restrict someone from working for a particular category of employer, in a particular role, in a particular area, for a particular period) or to all restrictive covenants (including nonsolicitation agreements, no-poach/no-raid agreements, nondisclosure agreements, etc.)

In this regard, the language (in section 2(2) of the Bill) defining a covenant not to compete states as follows:

“an agreement (A) between an employee and employer that restricts such employee from performing

(i)  any work for another employer for a specified period of time;

(ii)  any work in a specified geographical area; or

(iii)  work for another employer that is similar to such employee’s work for the employer included as a party to the agreement . . . .”

So, for example, is a restriction on the employee soliciting (or providing services to) certain customers a restriction on the employee “from performing . . . any work for another employer” or (perhaps less likely) “from performing . . . work . . . that is similar to such employee’s work for the [prior] employer”? The answer is, at this time, unclear.

The Secretary of Labor is charged with enforcement of the Act and may impose civil fines up to $5,000 for each noncompete violation for each affected employee and $5,000 for failure to post the appropriate notice.

We will keep you posted on the developments.

Massachusetts Bills to Ban Noncompetes and Adopt UTSA in the New Legislative Session (2015-2016)

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IMG_0017Several bills concerning trade secrets and noncompetes were filed this week in the Massachusetts legislature.

On trade secrets side, the following bills were filed: H.2569 by Representatives Bradley Jones and Elizabeth Poirier; H.2157 by Representative Garrett Bradley; and S.334 by Senator Jason Lewis.

The following bills were filed on the noncompete side: H.2332 by Representative Lori Ehrlich and an identical bill in the senate (S.809) by Senator Will Brownsberger; H.730 by Representative Angelo Puppolo; H.2157 by Representative Garrett Bradley; H.709 by Representative Sheila Harrington; and S.334 by Senator Jason Lewis.

The bills (all of which are available through the above links) are summarized as follows:

The various trade secrets bills filed by Senator Jason Lewis and Representatives Brad Jones, Elizabeth Poirer, and Garrett Bradley are all essentially last session’s version of the bill to adopt the Uniform Trade Secrets Act with some very minor (nonsubstantive) changes. As I explained here, this version the UTSA would substantially weaken Massachusetts trade secrets law. However, Steve Chow‘s version, which I worked on with Steve to address these concerns, was filed by Steve Chow as a Uniform Law Commissioner in the fall and remains up for consideration.

The noncompete bills all seek to ban noncompetes, albeit using different language. Representatives Harrington and Puppolo bills track California’s Business and Professions Code sections 16600 to 16602.5 (with a little restructuring). It is important to note that while they specifically exempt nondisclosure agreements, they could have the effect of banning nonsolicitation agreements. (That’s how the same language has been interpreted in California.)

The other approaches to banning noncompetes use similar language to that proposed last year by Governor Patrick (which I had helped to draft). The full language, which is set out in Senator Brownsberger’s and Representative Ehrlich’s bill, is reproduced below.

However, several aspects of this version are important to note. First, if passed, this bill would not apply to other types of restrictive covenants, such as nondisclosure agreements, nonsolicitation agreements, or no raid agreements. Nor does the bill apply retroactively; it prohibits only agreements entered into after the bill and passed and the law becomes effective. (Senator Jason Lew’s bill, while nearly identical, would apply retroactively, i.e., to existing agreements. Similarly, Representative Bradley’s bill, which uses some but not all of the same language, also applies retroactively; however, Representative Bradley’s bill could also be interpreted to ban all other restrictive covenants – not just noncompetes.)

As a side note, last legislative session, there was a fair amount of discussion about including language expressly permitting what has become referred to as a “springing noncompete.” The concept was that while noncompete agreements would be banned, a court may nevertheless prohibit the former employee from working for the new employer as a remedy for a breach of another restrictive covenant (e.g., a nondisclosure agreement or nonsolicitation agreement). Although not expressly provided for in the current bills, that relief may still be available, as the bill would ban only “agreements” and leaves unaffected a court’s broad equitable powers.

Given the completeness of the Brownsberger/Ehrlich bill (and my involvement with its drafting), I have provided its full text here.

An Act relative to the judicial enforcement of noncompetition agreements.

            Be it enacted by the Senate and House of Representatives in General Court assembled, and by the authority of the same, as follows:

Chapter 149 of the General Laws of Massachusetts shall be amended by inserting the following as Section 19D:

Section 19D. Noncompetition Agreements

Any written or oral agreement arising out of an employment or independent contractor relationship that prohibits, impairs, restrains, restricts, or places any condition on a person’s ability to seek, engage in, or accept any type of employment or independent contractor work, for any period of time after an employment or independent contractor relationship has ended, shall, to that extent, be void and unenforceable. This section does not render void or unenforceable the remainder of the agreement containing the unenforceable noncompetition agreement, nor does it preclude the imposition by a court, through a temporary restraining order, preliminary injunction, permanent injunction, or otherwise, of a noncompetition restriction as a provisional or permanent remedy for a breach of another contractual obligation or violation of a statutory or common law duty. Nor shall this section affect (i) covenants not to solicit or hire employees or independent contractors of the employer; (ii) covenants not to solicit or transact business with customers, clients, or vendors of the employer; (iii) nondisclosure agreements; (iv) noncompetition agreements made in connection with the sale of a business or partnership or substantially all of the assets of a business, when the party restricted by the noncompetition agreement is an owner of, or partner with, at least a ten percent interest of the business who received significant consideration for the sale; (v) noncompetition agreements outside of an employment or independent contractor relationship; (vi) forfeiture agreements; or (vii) agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.

This section shall apply to all contracts and agreements executed after the effective date of this act.

“I’m not dead yet,” says Massachusetts Noncompete and UTSA Reform

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cropped-cimg27721.jpgIn a surprising turn of events last week, Massachusetts Governor Deval Patrick announced that he was reintroducing legislation to modify Masschusetts noncompete law and to adopt a version of the Uniform Trade Secrets Act.

The noncompete bill (H. 4401) is the noncompete language that I had drafted for Senator Will Brownsberger and Representative Lori Ehrlich described here (which the Senate passed, but which ultimately died (see here)), together with the same version of the UTSA that has been kicking around for a while.

Governor Patrick’s introduction of the bill is outside of formal session (which ended July 31), so it is unclear what progress will be made at this point.

Massachusetts Noncompete and UTSA Bills Are Dead

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cropped-cimg27721.jpgWhile it was close this year, in the end, there was no legislative reform of either Massachusetts noncompete law or Massachusetts trade secrets law. I expect, however, that Senator Will Brownsberger and Representative Lori Ehrlich, among others, will likely file new legislation in the next session. Stay tuned.

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