White House Releases Noncompete Call to Action

whitehouse_historypgEarlier today (October 25, 2016), the White House announced a new initiative to spur competition in the labor market.

As part of its new initiative, the White House issued a report entitled, “Non-Compete Reform: A Policymaker’s Guide to State Policies,” together with a Call to Action on noncompetes.

First the background. Earlier this year, the White House and Treasury Department each released reports (Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses and Non-compete Contracts: Economic Effects and Policy Implications, respectively) finding both overuse and misuse of noncompete agreements.

Both studies relied 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.

Following that report, I was invited to participate in the working group discussions mentioned in the White House’s report. (I was the only private practice attorney to participate.) The result was the Call to Action announced today.

The Call to Action makes the following three suggestions:

  1. Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.
  2. Improve transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign non-compete agreements; or encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
  3. Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.

As explained by the White House in its fact sheet,

“To contextualize these best practices, the White House is releasing a state-by-state report on key dimensions of current state non-compete policy. Finally, we are announcing commitments to undertake the largest data collection of its kind to better measure non-compete usage by firms and individuals, alike.”

This state-by-state report relies in part on my 50 State Noncompete Survey – first of its kind and updated regularly since 2010 to reflect ongoing developments in the laws around the country – as well as a similar one (that was later prepared by Seyfarth Shaw).

Whether you agree with all of the White House’s suggestions or not, the Call to Action represents a considered balance of myriad competing interests. It is no easy task to satisfy everyone, and no doubt states will vary on which of these recommendations they choose.

For example, states may wish to use a softer version of the red pencil rule. A rule that at the Massachusetts legislature has come to be known as the “Purple Pencil” rule. Like the red pencil rule, the purple pencil rule requires the entire noncompete to be stricken if any portion of it is overly broad. However, unlike the red pencil rule, under the purple pencil rule, if a company made an objectively good faith effort to draft the particular noncompete narrowly, the court can remedy any over breadth by reforming (i.e., rewriting) the offending portions of the agreement. This purple pencil rule has not yet been adopted in any state, though I had developed it for the Massachusetts legislature (and it had been included in some of the bills) as a means to encourage narrow drafting on noncompetes, while not creating a “gotcha” trap for companies that try to comply with the law.

Similarly, states may wish to permit (or encourage) the use of “springing noncompetes,” i.e., the imposition of a noncompete as a remedy for a former employee’s breach of other, less onerous, restrictions (such as nonsolicitation agreements and nondisclosure agreements). This is a concept that I had developed for a few clients that preferred to use nonsolicitation, nondisclosure, and no-raid agreements rather than noncompetes, but still wanted the protections offered by noncompetes for any employee who turned out to not be trustworthy, as exemplified by the employee’s breach of one of the other restrictive covenants. The concept of the springing noncompete has been included in some of the proposed legislation in Massachusetts.

Regardless of whether states adopt all, some, or none of the White House’s suggestions, the Call to Action represents an important step forward in the national dialogue on how to curb overuse and abuse of noncompetes and limit their use to the protection of legitimate business interests for which they were designed.

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.

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!

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

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

(My apologies to those who received an email update with a draft of this post.)

Also, note that the Changing Trade Secrets | Noncompete Laws has been updated, and is regularly updated.

Federal (9th Circuit):  One of the most-watched decisions involving the Computer Fraud and Abuse Act may have finally come to an end with a recent 9th Circuit decision issued on July 5. See Ninth Circuit Affirms Nosal Computer Crime Conviction in Key CFAA Ruling

Federal (8th Circuit):  On July 6, the 8th Circuit overturned the Western District of Missouri’s decision in Symphony Diagnostic Services No. 1 Inc. v. Greenbaum and held that a noncompete – despite arguments that it is a personal services contract and therefore cannot be assigned without the employee’s approval – could be assigned. The rationale for the ruling was essentially that the noncompete prohibits the employee from acting, as opposed to requiring the employee to act (which is the basis for not allowing the automatic assignment of personal services contracts). See Noncompete Agreements Can Pass From One Company to Next

Federal (California):  The first case to issue an injunction under the Economic Espionage Act’s new private right of action was on June 10 in the Northern District of California in Henry Schein, Inc. v. Cook.

Federal (New York, Criminal):  On June 14, Xu Jiaqiang, a Chinese national, had been arrested last year in a sting operation, was indicted for espionage on by stealing source code (presumably from IBM) on behalf of the People’s Republic of China. See Former IBM software developer accused of espionage

California: A particularly interesting (perhaps only to me) area of trade secrets law involves the intersection of trade secrets law with lawyer ethical obligations. That issue will likely be playing out in a case in Adelson, Testan, Brundo, Novell & Jimenez v. Misa Stefen Koller Ward LLP, No. 30201600850385CUBTCJC, Superior Court of California, County of Orange. See Lawyers Who Departed Call Trade Secret Lawsuit by Former Firm “Vindictive” and “Baseless” and Ask Court to Throw Out All ClaimsFirm Accuses Ex-Partners of Stealing Clients, Trade Secrets

California:  Alphabet has been sued in Federal Court in San Jose for allegedly stealing the idea to use weather balloons to provide wireless service to rural areas. Google accused of stealing idea for Project Loon

California:  California’s drought problems are no secret, but how much water is used by any individual is. There is now a bill that would change that (for businesses). Bill targets secrecy in California water data

Illinois:  Not to be outdone by New York Attorney General Eric Schneiderman‘s investigation of Jimmy John’s (see below), Illinois Attorney General Lisa Madigan filed a lawsuit against Jimmy John’s on June 8. See The Illinois AG’s Suit Against Jimmy John’s On Non-Competes – What It Means For EmployersAttorney General Madigan Sues Jimmy John’s over Non-Compete Agreements.

Illinois:  On June 29, a bill (the Illinois Freedom to Work Actto ban the use of noncompete agreements for low wage workers (i.e., those earning less than $13.50/hour) was sent to Governor Rauner on June 29.

Illinois:  On April 7, in Allied Waste Services of North America, LLC v. Tibble (Ill. N.D. April 7, 2016), another judge joined the majority of federal case law in Illinois rejecting the requirement established in Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013), that absent other consideration, an employee noncompete must be supported by at least two years of employment. (Thanks to Thadford A. Felton of Greensfelder Hemker & Gale for identifying the case.) 

Massachusetts:  On June 30, the Massachusetts House of Representatives passed a revised version of the noncompete bill reported out of the the Joint Committee on Labor and Workforce Development. The current bill still 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, but includes significant additions to the version of the bill recently reported out by the Joint Committee on Labor and Workforce Development.

An interesting commentary by Michael Gilleran, author of the bible on 93A, argues that the UTSA (assuming it is ultimately signed into law in its present form) will preempt G.L. c. 93A (the Massachusetts unfair competition statute), insofar as 93A applies to the misappropriation of trade secrets. See Will 93A continue to apply to trade secrets — and should it? (paid subscription). (Mike focuses on Peggy Lawton Kitchens v. Hogan, 18 Mass. App. Ct. 937 (1984) and its progeny, though its application is not without question when it comes to misappropriation by former employees (which, as a group, are the greatest risk factor for misappropriation). See Massachusetts Trade Secret Protections Are Given Big Boost.) In making his argument that 93A is preempted, Mike relies, in part, on the extensive comments that accompanied the version of the Uniform Trade Secrets Act submitted by Steve Chow on behalf of the Uniform Law Commissioners.

However, although the text of the Steve’s version of the UTSA (with my handful of changes) was passed by the House, the comments (while very helpful generally – and definitely worth a read) were not included. Accordingly, their impact is of questionable significance.

Regardless, as Mike also notes, the practical impact when it comes to the availability of treble damages is likely quite limited. Noting the requirements of “willful and malicious” in the UTSA (as opposed to only “willful” or “knowing” in 93A), Mike states:

[T]he term “malicious” in the Massachusetts UTSA is to be interpreted as it would be under Massachusetts law, which has a longstanding history of equating the term malicious with the term willful: “Whatever is done wilfully and purposely, if it be at the same time wrong and unlawful, and that known to the party, is in legal contemplation malicious.” Wills v. Noyes, 29 Mass. 324, 327-328 (1832), cited in Chervin v. The Travelers Ins. Co., 448 Mass. 95, 109 (2006).

Therefore, because the term malicious under Massachusetts law is legally equivalent to the term willful, the “willful and malicious” test for triple damages under the UTSA should be the same as the “willful and knowing” test for triple damages under 93A.

Mike also notes that the same “willful and malicious” standard applies to an award of attorneys’ fees under the UTSA and that it will “make an award of attorneys’ fees under the UTSA only somewhat harder to obtain than under 93A.”

In a separate post discussing the bill, Mark Muro of the Brookings Institution takes the position that Massachusetts should limit noncompete pacts to spur growth. In a similar vein, see the June 28 article by Steven Lohr of the New York Times, To Compete Better, States Are Trying to Curb Noncompete Pacts

New York:  On June 22, New York Attorney General Eric Schneiderman concluded his year and a half  investigation of Jimmy John’s sandwich shops’ use of noncompetes with an announcement of a settlement. As a result, Jimmy John’s will no longer include sample noncompetes in the hiring packets it sends to its franchisees.

New York:  On June 15, New York Attorney General announced a settlement with Law360 (a subsidiary of LexisNexis), as a result of which, Law360 will no longer use noncompetes for its editorial employees, with the exception of top executives.  See New York Blows Up Company’s Non-Compete Policy in Warning to Employers.

Ohio:  On June 28, Abercrombie & Fitch sued a former marketing executive, Craig Brommers, who took a marketing job at the Gap. Claiming that part of Brommer’s job at Abercrombie was to differentiate its products from those of the Gap and that Brommers received confidential information to do so, Abercrombie seeks to enforce his 12-month noncompete. See Abercrombie Says Gap Poached Its Executive.

Wisconsin:  Wisconsin, one of the handful of red pencil states, is know for being generally hostile to noncompetes. Yet, maybe the tide is turning. Proposed legislation to replace the red pencil rule with the reformation rule (and other changes) aside (see Changing Trade Secrets | Noncompete Laws), a recent judicial decision took a surprisingly permissive approach in Schetter v. Newcomer Funeral Service Group, Inc. In addition to not invalidating a the arguably-overbroad noncompete (that was the surprising part), the court also found that a $1,000 payment for the noncompete was good consideration for a noncompete. For a good discussion of the case, see Fisher PhillipsJoseph Shelton‘s discussion, Wisconsin Court Throws Out Choice-of-Law Provision, Then Enforces a Non-Compete Anyway

Other Noteworthy News…

The Massachusetts Noncompete and Trade Secrets Bill Passes House

IMG_0017Although I am away (and posting from the Muir Woods – which are quite remarkable), I wanted to post a quick update on the status of the Massachusetts noncompete and UTSA bill. More details later. In the meantime:

Unanimous votes in the House: 150 to 0.

The Uniform Trade Secrets Act will have the fixes I’ve discussed before. (See prior posts.)

The one year limit remains in, with the same carve out for longer (up to 2 years) if the employee steals property from the employer.

Garden leave is in, but it can be negotiated in advance. Lots to discuss about the effect of that. (More when I’m back.)

Red pencil did not survive. Massachusetts will remain a reformation state, leaving the courts with the ability to revise overly broad restrictions.

Low income, student, and intern exemptions still apply.

Noncompetes also cannot be enforced against someone terminated without cause.

As for jurisdiction, there were some changes, but still, if brought in Suffolk County, jurisdiction will lie exclusively in the Superior Court and BLS. That means (among other things) that claims under the DTSA arguably cannot be brought together with a noncompete claim in the federal court.

The law, if passed by the Senate and signed by Governor Baker, will apply to agreements executed after October 1.

More details when I’m at my computer…