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…

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.

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.

A new proposed trade secrets bill in Massachusetts

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cropped-cimg27721.jpgIt’s that time of year again. With the elections behind us and the next legislative session coming soon, a new version of a proposed Uniform Trade Secrets Act has been filed in Massachusetts. (This version, filed on November 5, 2014, is available here.)

This one, like the earlier versions, was filed by Stephen Chow on behalf of the Massachusetts Board of Commissioners on Uniform State Laws. (Steve has worked tirelessly on this project for many years.)

In my opinion, if adopted, this version would strengthen Massachusetts trade secrets law.

By way of background, in the last legislative session, I was asked by Senator Will Brownsberger, Representative Lori Ehrlich, and Jennifer Lawrence (not that one! – the Jennifer Lawrence who was spearheading Governor Patrick’s noncompete/trade secrets reform efforts) to review and comment on the then-pending bill. In the course of doing so, I identified and raised three primary concerns:

  • It protected only trade secret owners (not others with rights in the secrets such as licensees).
  • It required the trade secret owner to continue to protect the secrecy of the information even after the secret was stolen and regardless of whether the person/company that stole it had publicly disclosed it.
  • It potentially raised the pleading standards for filing a trade secrets claim.

(Additional explanations of these concerns are here.)

I expressed those same concerns during my testimony at the May 9, 2014 hearing before the Joint Committee on Economic Development and Emerging Technologies.

Following that hearing and in anticipation of filing the current bill, Stephen Chow approached me to discuss my concerns (those above, as well as several other less-important “tweaks”). After numerous discussions and drafts, we agreed on the language that Steve filed on November 5.

I am now quite comfortable that Steve’s current version will improve Massachusetts trade secrets law. Among other things, if adopted, it would allow treble damages and attorneys’ fees without the need to resort to G.L. c. 93A; it would expand the definition of what constitutes a trade secret under Massachusetts law; and it would reach an appropriate balance between the need to identify the purported trade secrets sought to be protected and the need to act quickly and limit disclosure (both in terms of what must be disclosed and the timing of that disclosure).

 

 

 

 

 

What to do if noncompetes are eliminated in Massachusetts

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cropped-cimg27721.jpgAs you likely have seen (here for example), the Patrick Administration has spent a great deal of time putting together comprehensive proposed legislation designed to promote growth and opportunity in Massachusetts. Of particular note has been the Administration’s proposal of the adoption of a version of the Uniform Trade Secrets Act (the “UTSA”) coupled with a California-like ban of employee noncompetes.

A copy of the entire bill is available here. (Section 53, the relevant section, is here.)

If it passes, noncompetes will be banned in Massachusetts, while Massachusetts simultaneously becomes the 49th state to adopt some version of the Uniform Trade Secrets Act, leaving just New York as the last remaining holdout.

The upshot is that noncompetes will be banned, but other restrictive covenants – e.g., nonsolicitation agreements, nondisclosure agreements, no-raid/anti-piracy agreements, no hire agreements, and others – will remain intact. Also, while the change to the UTSA will have minimal practical implications, it will permit the recovery of attorneys’ fees, which current law does not (unless the claim falls within the Massachusetts unfair competition statute, G.L. c. 93A).

In the interest of full disclosure, I pause here to note that I have been working with, and continue to work with, the Administration (in particular, Jennifer Lawrence, in the Executive Office of Housing and Development, who is spearheading the Administration’s effort), on the language of Section 53. There are a number of differences between the Patrick Administration’s bill on the one hand and the UTSA and California’s statute on the other hand, but more on that in a later post.

As regular readers of this blog know, I view my role as only advisor on the drafting to accomplish the particular policy and the likely impact of the changes – not on what the policy should be. It is in that capacity that I have been advising not only the Patrick Administration, but key legislators (including Senator Will Brownsberger and Representative Lori Ehrlich) on each of the several other approaches under consideration at this time. This is a complex area of law, involving many competing policies and potential implications.

To be clear, while I take no position on whether the benefits of eliminating noncompetes outweigh the detriments, I do believe that it is important to be cognizant of the potential practical consequences (at least from a litigation standpoint).

Specifically, while the result will likely be less overall litigation and more employee mobility, the risk to trade secrets will increase and litigation that is commenced to protect them will tend to be more costly and last longer. Litigators will shift from a focus on noncompete enforcement to cases involving the enforcement of other restrictive covenants and the even-more-costly trade secrets litigation. Noncompete litigation generally involves a several-week process in which the parties spar over the appropriateness of an injunction to prevent the employee from working for a particular competitor. In contrast, trade secrets litigation generally involves a more involved, several-month discovery process on top of the injunction motions.

Given this, the obvious question is: What should companies do to protect their legitimate business interests if the bill becomes law (which can be anytime up to July 31 – mark your calendars)?

There are a number of steps that should be taken – many of which companies have been taking all along, though perhaps not as vigilantly as they will need to going forward. Here are the top five key steps.

First and foremost is to review all existing restrictive covenant, employee, and independent contractor agreements. If the bill is adopted in its current form, the language says that it will apply to existing agreements – and not just agreements with employees, but with independent contractors as well.

That means that existing agreements are not immune and may need to be changed. If they include well-drafted nonsoliciation (of customers), no-raid (of employees), and confidentiality provisions, it may be that they can be left in tact, recognizing that the noncompete provision will simply be unenforceable.

However, if those other protections are missing, too limited, or simply not well-drafted, they will need to be revised.

If they need to be revised, you will need to consider the best timing and method to go about doing so to avoid running afoul of arguments concerning notice, equity/fairness, and consideration (the exchange of something of value).

Second and equally important, proper safeguards must be in place to protect company trade secrets (which will include what we traditionally considered “confidential information” in Massachusetts, and can include anything from the secret formula to Coke to customer lists) from the risk of misappropriation in the first place.

Accordingly, a trade secrets protection plan (sometimes called a “trade secrets audit“) will be even more important now than ever before. Key elements are steps to lock down information and education of your employees and others with access to trade secrets.

This does not mean that your information will never be misappropriated or that you cannot still sue if it is. It will and you can. (75 percent of employees admit to taking company information. See also here (59 percent in 2009 Ponemon study).) But, a proper trade secrets protection plan should help to limit the number of times you need to resort to litigation, while simultaneously increasing your likelihood of obtaining injunctive relief through litigation.

Note that trade secrets litigation is more costly than noncompete litigation, because there is not a bright line to rely on for purposes of getting quick injunctive relief. With noncompete litigation (assuming the agreement is enforceable), you know whether the obligation has been breached or not – either the employee is at the competitor or he is not. With trade secrets litigation, the odds are much greater that you will need discovery to know whether your information is in fact being used and how.

Third, like the prophylactic protections for trade secrets, safeguards should also be put in place to protect your company’s customer goodwill from the risk of misappropriation. The most obvious is nonsolicitation agreements. But other steps should be taken as well. Those include (among other steps) having multiple points of contact with each customer when feasible, plans for securing the relationships upon an employee’s departure, and proper mechanisms for managing social media accounts and contacts.

Fourth, the protections available for retaining talent should not be forgotten. If you want to limit departing employees from poaching the remaining employees, you must have proper no-raid/anti-piracy (or no-hire) agreements (sometimes called nonsolicitation agreements or no-poach agreements) in place. In addition, you should take steps to give employees reason to stay – and, separately, not to leave. Forfeiture agreements (agreements that require the forfeiture of certain benefits or payments if the employee leaves) are one tool that should be considered in this regard.

Fifth, if litigation is necessary, move quickly. Delay can be the biggest problem for companies in these cases. And, without the protections of noncompete agreements, delay can create even greater risks of loss of trade secrets, relationships, or employees.

BRR’s 50 State Noncompete Chart UPDATED

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BRR 50 State Noncompete Chart 20130814The BRR 50 State Noncompete Chart has been updated to reflect various changes in statutory or case law, as well as clarifications of existing laws. Click here to get the latest version.

Obama Administration Issues New Strategic Plan for Intellectual Property Enforcement

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In February 2013, the Obama Administration issued Administration Strategy on Mitigating the Theft of U.S. Trade Secrets. Part of that plan included the Administration’s solicitation of public comment. I, like a handful of others (13 of us in total), submitted comments. My  summary comments are available here (the PDF at the bottom (and here) has my full submission); links to all 13 submissions are available here.

On Thursday (June 20, 2013), the Obama Administration issued its 2013 Strategic Plan for Intellectual Property Enforcement. As explained by U.S. Intellectual Property Enforcement Coordinator Victoria Espinel, the Strategic Plan “builds on our efforts to protect intellectual property to date, and provides a roadmap for our work over the next three years.”

Ms. Espinel described in her blog how the new Strategic Plan fits in with prior plans as follows:

Since the first Joint Strategic Plan was released in 2010, the Administration has made tremendous progress in intellectual property enforcement. Coordination and efficiency of the Federal agencies has improved; U.S law enforcement has increased significantly and we have successfully worked with Congress to improve our legislation. We have increased our focus on trade secret theft and economic espionage that give foreign governments and companies an unfair competitive advantage by stealing our technology. We have pressed our trading partners to do more to improve enforcement of all types of intellectual property. We have encouraged the private sector to do more on a voluntary basis to make online infringement less profitable as a business, consistent with due process, free speech, privacy interests of users, competition law and protecting legitimate uses of the Internet.

Of particular relevance to trade secrets lawyers, Ms. Espinel focused on legislation as follows: “We will review our domestic legislation to make sure it is effective and up-to-date.”

As many readers of this blog know, there has already been some activity on that front with respect to the Economic Espionage Act and the Computer Fraud and Abuse Act. See here.

Stay tuned for more.

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