Tag Archives: noncompete bill

Massachusetts Noncompete and Trade Secret Reform Returns

IMG_0017After years of trying (8, to be precise – the first bills were filed, virtually simultaneously as it turned out, by Representative Lori Ehrlich and then-Representative (now Senator) Will Brownsberger for the legislative session starting January 2009), a new noncompete bill was filed on Friday, January 20:  An Act relative to the judicial enforcement of noncompetition agreements (Senate Docket No. 1578).

The new bill – covering both noncompetes and the related issue of trade secrets – picks up where the House and Senate left off last legislative session, albeit with a few tweaks and clean-ups. (Please contact me if you would like a redline.)

From a big picture standpoint, the bill:

  • Limits noncompetes (generally) to 12 months.
  • Requires advance notice.
  • Requires consideration beyond continued employment for post-hire noncompetes.
  • Includes express legislative authorization for a springing noncompete.
  • Requires the red pencil approach to an overly-broad noncompete, although it tempers that approach by permitting reformation if the agreement is written to comply with the safe-harbors set out in the statute.
  • In substance, tracks the Uniform Trade Secrets Act, with tweaks previously submitted by Steve Chow on behalf of the Uniform Law Commissioners and a handful of changes that I had made a few years ago as well as for this latest version. Most substantively, this latest version clarifies that the “threatened misappropriation” that can be enjoined “upon principles of equity” is intended to reflect the inevitable disclosure doctrine. (There has been a significant amount of discussion around when the inevitable disclosure doctrine would apply; general consensus is that the doctrine is a very narrow one, intended to prevent wrongful conduct, rather than mere innocent misappropriation.)

Other important aspects of the noncompete section of the bill (in the order they appear in the bill):

  • It applies only to employee noncompetes. It does not apply to other types restrictive covenants, including, most significantly, nonsolicitation agreements, anti-piracy/no-raid agreements, noncompetes made in connection with the sale of business, confidentiality agreements, or noncompetes that are part of a severance agreement provided that the employee “is expressly given 7 business days to remind acceptance . . . .”
  • The agreement must be in writing, signed by both parties.
  • The agreement must “expressly state that the employee has the right to consult with counsel prior to signing.”
  • The advance notice requirement (for noncompetes entered into in connection with the commencement of employment) is “the earlier of a formal written offer of employment or two weeks before the commencement of the employee’s employment; provided, however, that an employee may waive this two-week requirement if the employer and the employee plan for the employee to commence employment in less than two weeks from the date of the formal written offer of employment and the waiver is expressly stated in the noncompetition agreement.”
  • For noncompetes entered into after the commencement of employment, notice must be given at least 10 days before the agreement becomes effective and the noncompete must “be supported by consideration independent from the continuation of employment . . . .”
  • The employer must review the noncompete with the employee at least once every three years.
  • Legitimate business interests are the employer’s: (i) trade secrets; (ii) confidential information; and (iii) goodwill. (This is not a change from existing common law, except insofar as existing law may permit other interests to be protected.)
  • A noncompete “may be presumed necessary where” other restrictive covenants are insufficient, including “because the employee breached” one of those agreements. It may also be presumed necessary where the employee took property of the employer or breached a fiduciary duty to the employer.
  • Noncompetes are limited to (and presumptively reasonable if they are no more than) 12 months – unless the employee has breached his or her fiduciary duties or has taken property, in which case, the term is limited to two years.
  • The noncompete must be reasonable in geographic scope. (This is the same as existing common law.) If the geographic reach is limited to only the “areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence” it will be presumptively reasonable.
  • The agreement must “be reasonable in the scope of proscribed activities in relation to the interests protected. (This is the same as existing common law.) A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable.”
  • The employer has 10 days following the end of the employee’s employment to notify the employee in writing by certified mail that the employer intends to enforce the noncompetition agreement. This requirement does not apply if the employee has unlawfully taken property or already breached the noncompete, a nonsolicit, an anti-piracy/no-raid covenant, a confidentiality agreement, or a fiduciary duty.
  • The agreement must be consonant with public policy. (This is the same as existing common law.)
  • The agreement will not apply to:
    • employees who are not exempt under the Fair Labor Standards Act, 29 U.S.C. sections 201-209;
    • undergraduate or graduate students engaged in short-term employment;
    • employees terminated without cause or laid off;
    • employees who are 18 or under; and
    • non-employees who perform services for less than one year.
  •  An overly-broad noncompete is subject to invalidation under the red pencil approach (which applies only to the noncompete, not the rest of any agreement that may include the noncompete). However, if the agreement is written to comply with the safe-harbors set out in the statute, a court may reform the agreement. (That concept is to force companies to draft noncompetes narrowly, while not imposing the same penalty on a company that attempted to draft narrowly. This modified red-pencil approach was dubbed the “purple pencil” by former Senator Wolf.)
  • The court may impose a noncompete as a remedy for the violation of another restrictive covenant or a statutory or common law duty. (This is called a “springing noncompete” – it was an idea that I created for some clients who preferred to not use noncompetes except when an employee has acted unlawfully; accordingly, it imposes less restrictions on the employee unless and until the employee engages in unlawful behavior, thus demonstrating that the employee cannot be trusted to comply with the less onerous restrictions.)
  • Massachusetts law will apply if the employee is a resident of, or has been working in, Massachusetts for at least 30 days.
  • Jurisdiction lies in the county of the employee’s residence or Suffolk county (if the agreement so provides).

What should you be doing now to prepare? Nothing. Changes are still a long way off. However, you do need to understand the changes when they happen, and will need to be prepared to help you consider changes to your agreements.


Trade Secret | Noncompete Issues and Cases in the News (Year-End Supplement)

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

Remember that the Changing Trade Secrets | Noncompete Laws is updated regularly to reflect (in as close to real time as possible) the changes and proposed changes to trade secrets laws and noncompete laws around the country. 

Also remember that charts reflecting the differences among how each of the 50 states handle noncompetes and trade secrets are available here (noncompetes) and here (trade secrets). Note that these charts are updated as new developments arise.

Federal (6th Circuit):  On November 8, 2016, the 6th Circuit affirmed a jury verdict effectively imposing a perpetual noncompete in Bar’s Products Inc. v. Bars Products International, Inc.2016 WL 6471760 (6th Cir. 2016). For more reading, see Jonathan Pollard‘s post, 6th Circuit Upholds Jury Verdict on Forever Non-Compete Under Ohio Law

Federal (9th Circuit):  On December 8, the 9th Circuit, in U.S. v. Nosal, honed its position on the breadth of the Computer Fraud and Abuse Act. The Court set the stage as follows:

Only the first prong of the section is before us in this appeal: “knowingly and with intent to defraud” accessing a computer “without authorization.” Embracing our earlier precedent and joining our sister circuits, we conclude that “without authorization” is an unambiguous, non-technical term that, given its plain and ordinary meaning, means accessing a protected computer without permission. Further, we have held that authorization is not pegged to website terms and conditions. This definition has a simple corollary: once authorization to access a computer has been affirmatively revoked, the user cannot sidestep the statute by going through the back door and accessing the computer through a third party. Unequivocal revocation of computer access closes both the front door and the back door. This provision, coupled with the requirement that access be “knowingly and with intent to defraud,” means that the statute will not sweep in innocent conduct, such as family password sharing.

U.S. v. Nosal, 2016 WL 7190670, *2 (9th Cir. 2016).

The Court then summarized the issue as follows:  “[W]e are asked to decide whether the “without authorization” prohibition of the CFAA extends to a former employee whose computer access credentials have been rescinded but who, disregarding the revocation, accesses the computer by other means.” Id.

In answering the question, the Court quoted its holding in LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1135 (9th Cir. 2009): “[A] person uses a computer ‘without authorization’ under [the CFAA] … when the employer has rescinded permission to access the computer and the defendant uses the computer anyway.”

The Court was quick to note: “This appeal is not about password sharing. Nor is it about violating a company’s internal computer-use policies.”  The Court then added,

Nosal is charged with conspiring with former Korn/Ferry employees whose user accounts had been terminated, but who nonetheless accessed trade secrets in a proprietary database through the back door when the front door had been firmly closed. Nosal knowingly and with intent to defraud Korn/Ferry blatantly circumvented the affirmative revocation of his computer system access. This access falls squarely within the CFAA’s prohibition on “knowingly and with intent to defraud” accessing a computer “without authorization,” and thus we affirm Nosal’s conviction for violations of § 1030(a)(4) of the CFAA.

This approach is also consistent with the Court’s other recent December 9 decision, Facebook, Inc. v. Power Ventures, Inc.2016 WL 7190690 (9th Cir. 2016). 

Federal (ITC):  The ITC has increasingly become the venue of choice for certain trade secrets disputes. However, limited circumstantial evidence and resulting surmise may not be enough:  Jawbone Fails to Prove Trade Secret Misappropriation by Fitbit at ITC

Federal (Colorado):  On December 2, 2016, the United States District Court for the District of Colorado issued an injunction in Engility Corp. v. Daniels under the newly-enacted Defend Trade Secrets Act of 2016. The case provides a very thorough analysis.

Federal (Missouri):  On November 15, 2016, the United States District Court for the District of Missouri issued a decision in Durrell v. Tech Electronics, Inc., in which the court held that continued employment is not sufficient consideration. Although citing to earlier decisions making clear that continued access to trade secrets or customer relationships, as well as other aspects of the continued employment, might provide the necessary consideration, the court dismissed the complaint focused only on the lack of consideration arising from continued employment. Hat tip to Bob Ortbals for identifying the case.

California:  As noted in last month’s Trade Secret | Noncompete Issues in the News, effective January 1, 2017, California will have a new law purporting to prohibit the litigation outside of California of most employment-related issues affecting California-based employees. This post adds some details. First, although not specifically focused on noncompete agreements or nondisclosure agreements, the law would cover such agreements. Second, the new law, added as section 925 to California’s Labor Code, provides:

925. (a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.

(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.

(d) For purposes of this section, adjudication includes litigation and arbitration.

(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.

California:  On October 18, 2016, the California Court of Appeal for the First Appellate District, Division Four (Solano County), Robinson v. U-Haul Company of California affirmed a lower court decision imposing a permanent injunction and awarding substantial attorneys’ fees against U-Haul and in favor of a former U-Haul independent dealer. The basis for the Court’s decision was that noncompetes are illegal in California – even in a context such as this – and that U-Haul knowingly and repeatedly violated the law. Hat tip to Glenn Dassoff and Michelle Van Oppen for identifying this case and providing a link to the case (see above)

Indiana:  On November 30, the Court of Appeals of Indiana addressed, in Hannum Wagle & Cline Engineering, Inc. v. American Consulting, Inc., some of the questions that frequently arise in cases involving noncompete agreements and nonsolicitation agreements, specifically, among others, what constitutes solicitation and how to handle tolling/extension provisions in restrictive covenants. Hat tip to John Drake for identifying this case. 

Massachusetts:  On December 6, 2016, the United States for the District of Massachusetts issued a decision in Unum Group v. Loftus rejecting the defendant’s efforts to dismiss a claim under the Defend Trade Secrets Act based on the whistleblower exception. See Whistleblower status nixed early in trade secrets case

Pennsylvania:  A recent case in Pennsylvania, B.G. Balmer & Co., Inc. v. Frank Crystal & Co., Inc., provides a cautionary tale for employees and their would-be employers where employees engage in a coordinated en masse resignation, violate their nonsolicitation covenants, use their former employer’s trade secret customer information, and are indemnified by the new employer.  Hat tip to Martin Saunders for identifying this case.

Pennsylvania:  Pennsylvania has taken a step toward eliminating trade secret protection for certain fracking-related information: Fracking Fluid Dynamics: New Trade Secrets Movements

Other Noteworthy News…