Trade Secrets Laws and the UTSA – A 50 State and Federal Law Survey Chart

World MapEvery state but Massachusetts and New York has adopted the Uniform Trade Secrets Act (the UTSA) in one form or another – though some may quibble with whether Alabama or North Carolina actually adopted it. (The Uniform Law Commissioners say that Alabama has adopted it, while North Carolina has not; I view the results as largely the opposite.)

For several years, I had been planning to run a redline comparison of each state’s trade secrets laws against the Uniform Trade Secrets Act to see the full scope of the variation. The task was quite substantial, however, and I never quite felt that it would be worth the time.

In the past, there had been plenty of articles discussing the variations in UTSA formulations among the state laws purporting to adopt the Act, including Linda B. Samuels and Bryan K. Johnson‘s, The Uniform Trade Secrets Act: The States’ Response, 24 Creighton Law Rev. 49 (1990), and  Christopher Rebel J. Pace‘s, A Case for a Federal Trade Secrets Act, 8 Harvard Journal of Law & Technology 427 (1995), but no one had done an actual side-by-side comparison of how each state’s law compared to the UTSA.

More recently, Sid Leach wrote another terrific article summarizing the significant variations among state “uniform” trade secrets laws. Sid’s article highlighted for me the need to have – and the continuing interest of others in having – a comparison. It convinced me that it was time for such a chart.

So, I made it.

It is a state-by-state comparison (as close to a redline comparison as made sense) of every state’s trade secrets laws (and the Economic Espionage Act, as amended by the Defend Trade Secrets Act of 2016) to the 1985 version (i.e., the most recent version) of the Uniform Trade Secrets Act. It took well over a hundred hours of combined effort, staring with the yeoman’s work my firm’s summer intern, David Haber, and dozens of hours of my time organizing, revising, and problem-solving with David and with with my paralegal, Erika Hahn. The chart could not have been completed without their extraordinary contributions.

The chart is viewable here and is current as of today (August 14, 2016).

It is intended both as a stand-alone resource and a companion to our 50 state survey chart of noncompete laws, which I first prepared six years ago (in the summer of 2010), though I regularly update it to reflect the changing noncompete laws around the country.

In addition, for a comprehensive summary of recent trade secrets and noncompete legislative reforms and efforts at reform around the country, please see the page Changing Trade Secrets | Noncompete Laws. Be sure to check back from time to time, as I regularly update it to reflect new developments.

Massachusetts Noncompete Law Stalls

IMG_0017To the surprise of many, the efforts of the Conference Committee to reconcile the House and Senate versions of Massachusetts’ noncompete bill (and bill proposing the adoption of the Uniform Trade Secrets Act) stalled last night – at the end of the current legislative session.

The most significant divide was around garden leave requirements (essentially, how much money has to be paid to employees for the noncompete and when it can be negotiated). For a breakdown of the differences between the bills, see Lining up the Massachusetts Senate and House Noncompete | UTSA Bills and here (for a chart I had initially prepared a couple of weeks ago to summarize the key differences).

The bill now appears to be dead.

BRR 50-State Noncompete Chart (Updated 7/31/2016)

World MapThe BRR 50 State Noncompete Chart has been updated to reflect several recent state law developments. Note that the Massachusetts Legislature is voting today on the pending noncompete (and trade secrets) bills; should that bill be passed in the House and Senate, and signed by Governor Baker (in the next ten days), the chart will be updated again.

Click here to get the latest version.

Please note that the chart has been revised through today, July 31, 2016.

Lining up the Massachusetts Senate and House Noncompete | UTSA Bills

IMG_0017As of last night, Massachusetts has two competing versions of noncompete and trade secrets law reform bills. The House version (H.4434) is described here, and the Senate version (S.2418) (which does not yet reflect the amendments) is described here, with last night’s two amendments summarized here.

This post will compare the two bills.

In addition, I have compared the two bills in track changes here. (I will have a final (cleaned up) comparison after the Senate incorporates the amendments into its bill.)

First the UTSA:  The House version adopts the UTSA submitted by Steve Chow on behalf of the Uniform Law Commissioners, with the the handful of changes that I had suggested. The Senate version made a few tweaks to the House version, but in substance, they are largely the same.

The balance of the bill is the proposal to reform Massachusetts noncompete law.

Both proposals follow the same basic structure and incorporate much of the text proposed early on by Representative Lori Ehrlich and now-Senator Will Brownsberger, when we first started working on it in 2008/09, and as it later evolved.

However, a lot has changed over the years, and the final bills include several provisions that have taken divergent approaches and will now need to be reconciled presumably by the end of the legislative session on July 31.

The key differences needing to be reconciled are as follows:

      •  Effective Date

The House version would become effective on October 1, and apply prospectively.

The Senate version would become effective immediately upon becoming law.

      •  Maximum duration of the restriction

The House version limits noncompetes to 1 year, with the ability to extend to two years in the event of misconduct by the employee.

The Senate version limits noncompetes to 3 months, with the same ability to extend to two years for employee misconduct.

      •  Garden leave

The House version requires that the employee must be paid at the rate of 50 percent of his or her salary during the period he or she is subject to the restriction. This requirement does not apply to any extension based on the employee’s misconduct. In addition, the House version permits the parties to negotiate – in advance – “other mutually-agreed upon consideration” in lieu of the 1/2 salary requirement, and does not require any specific consideration.

The Senate version ups the percentage to 100 percent, uses “earnings” as the base (instead of “salary”), and, while it does permit “other mutually-agreed upon consideration,” it requires that that consideration equal or exceed what would be paid under the 100 percent of earnings test. In addition, it must be negotiated after the fact (i.e., at the end of the employment relationship), not when the noncompete is agreed upon.

      •  Effect of overly-board restrictions

The House version retains current Massachusetts law, permitting a court to revise (“reform”) an overly-broad noncompete.

The Senate version replaces the reformation approach with the red pencil approach, which invalidates an overly-broad noncompete. (Note that it does not invalidate the entirety of the agreement – just the noncompete restriction.)

      •  Exemptions

The House version includes several exemptions (categories of people who cannot be bound by noncompetes). They are:

1.  Nonexempt employees under the Fair Labor Standards Act

2.  Undergraduate or graduate students engaged in short-term employment

3.  Employees who have been terminated without cause or laid off

4.  Employees who are 18 years old or younger

The Senate version adopts the same four exemptions and adds:

1.  Employees whose average weekly earnings are less than twice the Massachusetts average

2.  Independent contractors

      •  Definition of Employee

The House version adds “independent contractors” to the statutory definition of employees.

The Senate version removes the reference, and relies only on the statutory definition of employee (which is quite broad).

      •  Periodic Review

The Senate version adds a requirement (not in the House bill) that the noncompetition agreement be reviewed every three years.

      •  Notice of Intent to Enforce

The Senate version adds a requirement (not in the House bill) that, within 10 days following the termination of the employment relationship, the employer must notify the employee in writing of its intent to enforce the agreement. This requirement does not apply, however, in the event of employee misconduct.

      •  Jurisdiction and Venue

The House version requires that any action be brought in the county in which the employee resides or (by agreement) Suffolk County. Further, if brought in Suffolk County, then the Superior Court (including the BLS, i.e., the Business Litigation Session) has exclusive jurisdiction. (The exclusive jurisdiction provision, on its face, would prohibit the filing in federal court; albeit such a provision is very likely ineffective.)

The Senate version removes the exclusivity requirement.

 

Stay tuned!

 

Massachusetts Senate Votes for Tough Noncompete Bill and Adoption of Uniform Trade Secrets Act

IMG_0017The Massachusetts Senate voted tonight on Massachusetts trade secrets law and noncompete law reform.

Senators proposed multiple amendments to the version of the bill that Senator Mark Montigny, on behalf of the Massachusetts Senate Committee on Rules, recommended on Tuesday.

The details of the Rules Committee’s version are in Tuesday’s post: Massachusetts Noncompete Bill Enhanced By Senate.

No surprise, the Senate passed the Rules Committee’s version of the bill, with only a few material changes. Those changes are as follows:

(1) The bill now requires that “To remain valid and enforceable, the employer shall review a noncompetition agreement with the employee not less than once every three years.” (In the prior bill, it was once every five years.)

(2)  The garden leave was revised to make clear that it is intended to require the payments on a pro rata basis for the duration of the restriction, rather than having to pay a full year’s salary.

The bill now goes to committee. That process will need to be completed quickly, as the legislative session ends on July 31.

Stay tuned!

Massachusetts Noncompete Bill Enhanced By Senate

IMG_0017The enormous efforts at the State House to reform Massachusetts noncompete law continue.

Today, Senator Mark Montigny, on behalf of the Massachusetts Senate Committee on Rules, recommended a revised version of the bill that the House passed – and suggested that it be declared an “emergency law,” meaning that (unlike the House bill which would become effective on October 1) it would be effective immediately upon becoming law.

Technical modifications aside, the most significant differences from the House version (discussed here) are as follows:

(1) A requirement that “To remain valid and enforceable, the employer shall review a noncompetition agreement with the employee not less than once every five years.” This is unprecedented in noncompete law, but provides a mechanism – and requirement – for ensuring that the employee understands the continuing application of the agreement, as oftentimes seems not the case with long-ago signed agreements.

(2)  A three month maximum restricted period (instead of the House’s 12 months). The bill does, however, retain the two year period when “the employee has breached a fiduciary duty to the employer or . . . has unlawfully taken, physically or electronically, property belonging to the employer.”

(3) A requirement that the employer notify the employee, within 10 days of the termination of the employment relationship, of the employer’s intent to enforce the noncompete. This requirement does not apply where “the employee has breached a fiduciary duty to the employer or . . . has unlawfully taken, physically or electronically, property belonging to the employer.”

(4) The garden leave is retained, but instead of requiring payment during the restricted period at the rate of 50 percent of the employee’s “salary,” the payment will be at the rate of 100 percent of the employee’s “earning” (which, although undefined, can be far greater than the employee’s salary). In addition, although this version retains the ability for the parties to avoid this requirement through negatation, the negotiation must occur within 30 days immediately following the termination of the employment relationship. The payment can stop only if the employee breaches or for the period beyond three months (i.e., if the restricted period is extended because of a breach of fiduciary duties or the misappropriation of employer property).

(5) The addition of another category of persons exempt from noncompetes: persons who earn (on average on a weekly basis) less than two times the average weekly wage in Massachusetts. This would create an enormous category of persons exempt from noncompetes in Massachusetts.

(6) The red pencil rule is back in. (The red pencil rule, sometimes called the “all or nothing” rule, means that a court may not remedy a noncompete that is drafted too broadly.) The effect of this is to require noncompete agreements to be drafted carefully and narrowly, with the consequent effect that it provides a more precise statement of the restriction to which the employee is subject.

(7) The inevitable disclosure doctrine cannot be used “to extend an expired noncompete or otherwise render enforceable a noncompetition agreement that fails to satisfy the requirements of” the law.

(8) The requirement of “exclusive” jurisdiction in state courts (which likely was unenforceable anyway) has been removed.

Next step will be to see what the Senate does and whether there will be a conference committee to harmonize the two versions.

The deadline for this to be completed for the Governor is July 31.

Stay tuned – I’ll keep you posted!