Trade Secret | Noncompete – Issues and Cases in the News (May/June)

extras_03Below are the latest issues and cases making trade secrets | noncompete news since our last update …

Federal:  The Defend Trade Secrets Act is now law of the land. The United States now (officially) has a national trade secrets law with a concomitant private civil right of action. For more, see Defend Trade Secrets Act versus the UTSADefend Trade Secrets Act and What It Means, and Dennis Crouch‘s post, Extra-Territorial Application of the Defend Trade Secrets Act.

Federal:  The Obama Administration released a report on Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses relying in part on my 50 State Noncompete Laws chart and survey of the growth of noncompete and trade secrets cases, as well as the work of Evan StarrNorman BisharaJJ PrescottMatt MarxDeborah Strumsky, and Lee Fleming.

Federal:  As stated in”Bring on the Chain Mail: NLRB Strikes Down Another Facially Neutral Email Use Policy,”A National Labor Relations Board (NLRB) judge has struck down Caesar’s Entertainment Corporation’s policy that prohibited employees’ using the company email system to distribute “nonbusiness” information. Why, you ask? According to the judge, the policy infringes on employees’ rights to form a union.” The impact of the NLRA (as well as the DTSA and Securities Exchange Act) on confidentiality agreements and similar restrictions continues to require attention. Here is a nice summary and link to the NLRB’s guidance: If You Can’t Say Anything Nice….NLRB General Counsel Releases New Report on Employee Handbook Rules.

Florida:  No sooner was the DTSA enacted, than it was used. On May 16, the first two DTSA complaints (both in Florida) were filed. See First Round of Defend Trade Secrets Act Complaints Alleging Misappropriation Activity Both Before and After DTSA’s Enactment: Will They Stick? and Mark Romeo‘s post, Defend Trade Secrets Act Gets Early Test In Florida Suit

California:  A recent case in the Northern District of California, Gatan, Inc. v. Nion Company, focuses on a very common question: What exactly is the scope of the trade secrets exception to California’s ban on noncompetes under 16600? ! See No Microscope Needed to See Why This Non-Compete Is Unenforceable

Connecticut:  On June 2, 2016, Governor Malloy signed Public Law 16-95, An Act Concerning Matters Affecting Physicians, Health Care Facilities and Medical Foundations, into law. Thank you to Matthew Curtin of Littler for the update.

In sum, the new law – applicable only to noncompetes entered into on or after July 1, 2016 – limits physician noncompetes to one year in duration and “fifteen miles from the primary site where such physician practices,” (which is defined in the statute). In addition, any such noncompete is enforceable only if (essentially) the physician left on his/her own volition or was terminated for cause.

Illinois:  Although Illinois is a “reformation” state (i.e., Illinois law permits a court to correct an overly-broad noncompete to render it enforceable, a recent case provides a good reminder that the courts do still expect employers to make an effort to draft properly-tailored agreements. See Illinois Court Refuses to Blue Pencil Non-Compete Agreement.

Massachusetts:  Trade secret jury awards tend to be few and far between. However, in May, a Massachusetts federal court jury awarded $70 million to a plaintiff in a trade secret lawsuit against a medical device manufacturer. See Edwards unit wins $70 mln verdict in heart valve trade secrets case.

Massachusetts:  On May 16, the Joint Committee on Labor and Workforce Development, co-chaired by Senator Daniel Wolf and Representative John Scibak, favorably reported out a modified version of the noncompete bill outlined by House Speaker Robert DeLeo. Most notably, the bill includes two significant additions: (1) the requirement that all noncompetes qualify as garden leave agreements (i.e., the employee is paid a certain amount during the term of the restriction) and (2) a switch from the current reformation approach for overly-broad noncompetes to the red-pencil approach. A summary of the noncompete aspects of the bill can be found here: Bill to limit noncompete deals includes a surprise catch. See also comments by the Associated Industries of Massachsuetts (AIM).

In addition, the bill contains the version of the Uniform Trade Secrets Act submitted by Steve Chow on behalf of the Uniform Law Commission and reflecting my input revising certain aspects of the earlier draft that I thought would make trade secrets harder to protect in Massachusetts.

 New York:  IBM sued its former General Manager for Global Sales of Hybrid Cloud, Louis Attanasio, to enforce a one-year, global noncompete. Attanasio’s new position is Chief Revenue Officer at Informatica. Remember Amazon v. Powers? Amazon likely learned from its mistakes. Prior to the hearing on the motion for a preliminary injunction, the parties reached a settlement in principle and notified the Court. The case remains pending. See IBM Takes Former Hybrid Cloud Sales Head to Court Over Non-Compete and IBM Sues Former Sales Head for Cloud Computing, Seeks $500K and Injunction.

South Carolina:  Normally, noncompetition agreements entered into in connection with the sale of business are given much more latitude than noncompetes entered into in connection with an employment relationship. However, in a case in South Carolina, Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., the South Carolina Appeals Court invalidated a noncompete in the mortuary business because the 150-mile radius was too large – despite the buyer’s “tentative” intent to expand the business geographically (to over 150 miles). The Court explained,

South Carolina does not follow the “blue pencil” rule and, thus, “restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties’ agreement, but must stand or fall on their own terms.” Poynter Invs., Inc. v. Century Builders of Piedmont, Inc., 387 S.C. 583, 588, 694 S.E.2d 15, 18 (2010).

Note that the court in Poynter Invs., Inc. rejected the “blue pencil” rule by name, but actually rejected the reformation approach. 

Thanks to Jonathan Crotty and Michel Vanesse of Parker Poe Adams & Bernstein LLP for identifying the case in South Carolina Court of Appeals Says 150-Mile Geographic Restriction in Non-Compete is Unreasonable.

Texas:  One of the ongoing issues for interstate litigation in noncompete cases (and, of course, many other types of cases) is choice of law. Recently, in Merritt, Hawkins & Associates, LLC v. Caporicci, the Dallas Court of Appeals refused to enforce a Texas contractual choice of law provision in a noncompete, where the employee was located in California. See Choice-of-Law Provision in Employment and Non-Compete Agreement Disregarded.

Texas:  Trade secrets trials often present a significant challenge for the court of how to balance of a defendant’s right to due process, the public’s right of access, and a plaintiff’s right to protect its trade secrets. For a nice discussion of a recent Texas case and the takeaways, see Practical Tips: Keeping Trade Secrets Safe During Litigation – Texas Supreme Court Editionand United States: Texas High Court Finds Texas Uniform Trade Secrets Act Can Exclude Opposing Party From Injunction Proceedings.

Texas:  The Texas Court of Appeals in Corpus Christi invalidated a liquidated damages clause as violating Texas’s noncompete law. See The Far-Reaching Claws of the Texas Non-Compete Statute.

Other Noteworthy News…

Half of employees who left or lost their jobs in the last 12 months kept confidential corporate data, according to a global survey from Symantec (Nasdaq: SYMC), and 40 percent plan to use it in their new jobs. The results show that everyday employees’ attitudes and beliefs about intellectual property (IP) theft are at odds with the vast majority of company policies.

Employees not only think it is acceptable to take and use IP when they leave a company, but also believe their companies do not care. Only 47 percent say their organization takes action when employees take sensitive information contrary to company policy and 68 percent say their organization does not take steps to ensure employees do not use confidential competitive information from third-parties. Organizations are failing to create an environment and culture that promotes employees’ responsibility and accountability in protecting IP.

Please note that the most current version of both the 50 State Noncompete Chart and 50 state and federal survey chart of trade secret laws can always be found on my firm’s resources page.