Below are the latest issues and cases making trade secrets | noncompete news since our last update. There’s a lot to catch up on (sorry!) …
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, if you want to see the differences among how each of the 50 states handle noncompetes and trade secrets, charts for those comparisons are available here (noncompetes) and here (trade secrets). Note that these charts are updated as new developments arise.
Federal: The White House has been busy this year trying to find the appropriate balance between protecting trade secrets (see Defend Trade Secrets Act versus the UTSA) and limiting the abuse of overreaching noncompetes (see White House Releases Noncompete Call to Action).
I was honored to be invited by the White House to be a part of its working group discussions. What I can say is that, despite the vocal criticism from both sides (from the White House went too far to it didn’t go far enough), the White House considered substantial amounts of information from myriad sources and made great efforts to find a compromise. If nothing else, the fact that the White House has brought the question of the appropriate balance to an open discussion is unquestionably a good first step.
And, of course, a lot of work still needs to be done. There is a small but growing body of research on the impacts of noncompetes. All but the irrational “true believers” would agree that much more work needs to be done to have a proper understanding of how the use of noncompetes – broadly to narrowly to not at all – relates to innovation, employee training and wages, and myriad other potential impacts on the success of corporate growth and the economy. As that work moves forward, it will be interesting to see whether the opinions expressed by Jonathan Macey (Sam Harris Professor of Corporate Law, Securities Law and Corporate Finance at Yale Law School and a professor in the Yale School of Management) in Obama’s Pitch to Ban Non-Compete Agreements Would Make the Rich Richer are ultimately supported by empirical data.
As a separate but related observation, it is interesting to see that tech companies are moving to Boston (not Silicon Valley – the location often held up to show the alleged benefits that resulted from California’s general refusal (at least since Edwards vs. Arthur Andersen) to enforce noncompetes). See Why these tech execs moved their companies to Boston and Here Are Some of the Boston Tech Cos. Supporting the Campaign Against Noncompete Reform and Here Are the Most Innovative States in America. (See also a July 12, 2016, letter issued by the Massachusetts High Technology Counsel in opposition to some of the proposed Massachusetts legislation.)
The bottom line is that most people who dig into the issue recognize that there is simply not enough information or research to make definitive conclusions on the overall relative benefits and detriments of noncompetes. Accordingly, at this point, decisions will have to be made based on whether people believe corporate interests or employee mobility should prevail and visceral reactions (pro or con) to the use of noncompetes.
Federal: On the theme of cracking down on noncompetes and related employment issues, the Department of Justice Antitrust Division and the Federal Trade Commission together issued “Antitrust Guidance for Human Resource Professionals,” taking aim at, among other things, inter-company no-poach agreements.
Federal: On September 2, a complaint was filed with the NLRB challenging Trump’s requirement that all vendors – and their employees – agree to (among other restrictions) the following noncompete (exhibit A to the complaint):
Until the [November 8, 2016 or (if applicable) the date Trump withdraws his candidacy] you promise and agree not to assist or counsel, directly or indirectly, for compensation or as a volunteer, any person that is a candidate or exploring candidacy for President of the United States other than Mr. Trump and to prevent your employees from doing so.
While noncompetes are not unusual in these contexts, the challenge stems primarily from the fact that the restriction applies not just to the vendors, but to their employees. See Trump campaign contract has unusually broad non-compete clause.
Federal (4th Circuit): Although nothing particularly new, the 4th Circuit (in RLM Communications, Inc. v. Tuschen) weighed in on noncompetes in North Carolina, observing that the prohibition on engaging in a competitive business meant not only that the former employee could not engage in a truly competitive role risking harming the former employer’s legitimate business interests, but the employee “may also not mow their lawns, cater their lunch businesses, [or] serve as their realtor.” Like the (like the so-called “janitor rule,” the court found that this was too much – and because North Carolina follows the blue-pencil the noncompete could not be narrowed in a way that would render it enforceable. For more, see Fourth Circuit’s RLM Communications, LLC v. Tuschen Tackles Noncompetition and Trade Secret Misappropriation Issues.
Federal (5th Circuit): The 5th Circuit issued a decision on September 7, again finding that the Copyright Act does not preempt trade secrets protection for software. GlobeRanger Corp. v. Software AG.
Federal (9th Circuit): Adoption of the Uniform Trade Secrets Act is, as Sid Leach observed (in a terrific article), anything but uniform. See also my state-by-state comparison of the UTSA. However, the one thing that is uniform is that the trade secret owner must take reasonable measures to protect its purported trade secrets. The area of some controversy is what constitutes reasonable measures.
Well, the 9th Circuit recently took a very liberal view in its September 6 decision in Direct Technologies, LLC v. Electronic Arts, Inc. (Hat tip to Mark Mermelstein and Melanie Phillips for identifying the case.)
In that case, although the plaintiff did basically nothing, the court observed that the plaintiff might have satisfied its reasonable measures requirement by relying on its “implicit business expectations that [the defendant] would keep the [information] secret . . . .” Basically, the court’s decision is that the reasonable measures requirement may be satisfied by simply relying on the assumed confidential nature of a relationship.
Am I the only one who immediately thought of this clip?
Federal (Massachusetts): On September 19, 2016, the District of Massachusetts issued a decision in Kurra v. Synergy Computer Solutions, Inc. sending the case to Michigan, in yet one more case following Atlantic Marine, and enforcing a forum selection clause in a noncompete agreement.
Federal (Missouri): Unlike the Jimmy John’s sandwich makers, executives at Panera can be (and one recently was) enjoined from joining Papa Johns. Such was the August 3, 2016 decision in Panera, LLC v. Nettles.
Federal (Virginia): The question of whether ownership of stock can violate a noncompete should not really be an issue, but yet, it does occasionally surface. On August 31, the District of Virginia issued a decision in Hair Club for Men, LLC v. Ehson, that did not apply Virginia’s red pencil doctrine to invalidate an agreement that would have prohibited the holding of stock in a competitor. See Noncompete Restriction Against Owning Stock Not Necessarily Unenforceable.
Federal (ITC): Trade secrets litigation at the ITC is in vogue these days since Dean Pelletier‘s team’s victory in the TianRui case. That case stands for the proposition (among others) that misappropriation of trade secrets occurring outside of the United States can serve as the basis to justify seizure of products containing the trade secret imported into the United States. Well, a recent case is now challenging that rule, petitioning the United States Supreme Court for certiorari. For more, see Sino Legend v. ITC – Update: Certiorari Petition Seeks to Preclude ITC Actions Based on Foreign Theft of Trade Secrets.
Federal (ITC): The ITC recently issued a decision affirming the award of terminating sanctions for the spoliation of evidence. This is quite significant, as terminating sanctions is the harshest sanction available. See Stainless steel products: commission affirms default finding based on bad-faith spoliation.
Federal (Chamber of Commerce): In the midst of the ongoing debate over the interplay between protection from employee theft of trade secrets and the overuse of noncompetes, enter the United States Chamber of Commerce and fears of risk of loss of trade secrets (and other intellectual property) by means of insufficient cybersecurity. See more in a nice summary of the issue by Kate M. Growley of Crowell & Moring: U.S. Chamber of Commerce Calls for Greater Trade Secrets Protection.
California: California is at it again. On September 25, 2016, California adopted a new law (effective January 1, 2017) making forum selection clauses in noncompetes unenforceable (putting the employer at risk of paying attorneys’ fees for trying). As a practical matter, that issue is not so different from Louisiana’s forum selection law, which precludes enforcement of agreement on forum selection unless the choice is made after a dispute has arisen. How that this prohibition will work in federal courts, given Atlantic Marine, remains to be seen.
California: On October 18, the California Court of Appeal for the First Appellate Division issued an order in Robinson v. U-Haul Company of California permanently enjoining U-Haul from enforcing against one of its former location operators a noncompete in the parties’ dealer contract. For a discussion of the case, see California Appeals Court Affirms Permanent Injunction Against Use of Noncompete in California Contracts.
Delaware: Like the Atlantic Marine cases in the federal courts, state courts routinely honor forum selection clauses. Such was the case recently in the Delaware Chancery Court, which enjoined the employee from prosecuting his case in Massachusetts. See Delaware Chancery Court Blocks Former Exec’s Effort to Invalidate Noncompete in a Massachusetts Court.
Illinois: On June 27, in Airgas USA, LLC v. Adams, the United States District Court for Northern District of Illinois issued yet another decision 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. As the court explained,
While Fifield, McInnis v. OAG Motorcycle Ventures, Inc., 35 N.E.3d 1076 (Ill. App. 2015), and Prairie Rheumatology Assoc., S.C. v. Francis, 24 N.E.3d 58 (Ill. App. 2014) have applied a bright-line test requiring at least two years of continued employment for the continued employment to be considered adequate consideration, the Illinois Supreme Court holds that the validity of a noncompetition agreement depends “on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.” Reliable Fire Equip. Co. v. Arredondo, 965 N.E.2d 393, 403 (Ill. 2011). A “totality of the facts and circumstances” test conflicts with the “bright-line” rule utilized by the Illinois Appellate Court in the cases noted above. Accordingly, the court rejects the two-year bright-line rule. In doing so, the court joins the other federal courts in this district that have determined that “[i]t is probable, that if confronted with the question of the adequacy of consideration, the [Illinois Supreme Court] would likewise avoid the appellate courts’ bright-line test in favor of a more flexible case-by-case determination, considering the totality of the circumstances.” Allied Waste Servs.of North America v. Tibble, No. 16 C 1660, 2016 WL 1441449, *4 (N.D. Ill. Apr. 7, 2016) (Leinenweber, J.); see also, R.J. O’brien & Assoc., LLC v. Williamson, No. 14 C 2715, 2016 WL 930628 (N.D. Ill. Mar. 3, 2016) (Gettleman, J.); Montel Aetnastak, Inc. v. Miessen, 998 F. Supp.2d 694 (N.D. Ill. 2014) (Castillo, C.J.); but see, Instant Technology, LLC v. DeFazio, 40 F.Supp. 3d 989 (Holderman, J.).
Illinois: Hat tip to Doug Albritton for identifying the unpublished decision, Mohanty v. St. John Heart Clinic, upholding a physician noncompete (including the enforcement of a fee-shifting provision in the agreement). See Doctor Covenants Upheld, Large Attorney Fee Award Upheld for Small Damages.
Illinois: As noted in August, following on the Jimmy John’s settlement and the White House’s efforts at suggested noncompete reform, Illinois passed a law banning noncompetes for low wager earners. See Illinois Bans Noncompetes for Low Wage Earners.
Illinois: On September 30, the Illinois Appellate Court for the Fifth Division issued a decision in Reed v. Getco, LLC in which the court prevented the employer from waiving the noncompete, where the employer had agreed to pay the employee $1 million for the restriction.
Massachusetts: Because so many trade secrets and noncompete cases arise out of the employment relationship (if for no other reason than that there are more employer/employee relationships than any other type of business arrangement), these cases are often coupled with breach of fiduciary claims against the employee. An October 24 decision from the Massachusetts Appeals Court (Beninati v. Borghi) focuses on the availability of Massachusetts’ unfair competition statute (G.L. c. 93A) – which provides for multiple damages and attorneys fees, but is not available against employees – against consultants who advised an employee. See Consultant can face 93A liability for aiding, abetting fiduciary violation (paid service).
Michigan: On July 14, 2016, the Supreme Court of Michigan issued a decision in Innovation Ventures, LLC v. Liquid Manufacturing, LLC, holding that inter-company noncompetes are governed by a rule of reason under antitrust law. See Michigan Supreme Court Holds That the Federal “Rule of Reason” Applies in Evaluating the Enforceability of Noncompete Agreements Between Businesses.
Nevada: On July 21, 2016, the Nevada Supreme Court issued a decision in Golden Road Motor Inn, Inc. v. Islam, dispelling the generally-accepted view that Nevada courts reform overly broad noncompete agreements.
New Hampshire: On August 5, 2016, Senate Bill 417 became effective and now prohibits physician noncompetes in New Hampshire.
North Carolina: One issue that arises often in states (like North Carolina, see here) is, if continued employment alone is not sufficient consideration to support a noncompete, what is? Well, a recent North Carolina Court of Appeals decision, Employment Staffing Group v. Little, provides some guidance: $100. (Hat tip to my former partner, Peter Steinmeyer and his associate, Scarlett L. Freeman, for passing along that decision in a recent post.)
Pennsylvania: In vogue these days is the enforcement of no-raid agreements. No wonder. A Pennsylvania court recently awarded $4.5 million in punitive damages in B.G. Balmer & Co. Inc. v. Frank Crystal & Co., Inc., for the violation of some no-raid agreements (as well as violations of other restrictions, of course). For more, see 4.5 Million Reasons to Abide by a Non-Solicitation Agreement.
Rhode Island: Effective July 12, 2016, Rhode Island passed a law (R.I. Gen. Laws § 5-37-33) invalidating physician noncompetes, except (as are commonly permitted) for those agreements arising from the sale of a practice (provided that they are no longer than five years).
Virginia: A recent letter opinion by a judge of the Fairfax Circuit Court identifies misclassification (as an independent contractor as opposed to as an employee) as a defense to the enforcement of a noncompete. See Virginia Non-Competes – Another One Bites The Dust.
Other Noteworthy News…
- A recent FINRA decision awarded BMO Harris Financial Advisors $1.5 million from its former broker and his firm. See FINRA Charges Wintrust, Broker $1.5 Millon for Violating Noncompete Covenant.
- Interesting developments in Japan’s trade secrets law: Japan tightens its trade secrets law: Why businesses should be mindful – 25 July 2016.
- John Bauer recently prepared a nice state-by-state summary of which states permit assignment on noncompetition agreements. See Are Employee Noncompetes Assignable? A State by State Review.
- The DTSA has been the law since May 11, 2016. I and many others have been following the cases. See, e.g., Almost 6 Months In, What Have We Learned About the Defend Trade Secrets Act? Stay tuned. I’m sure there will be lots more to come on this issue as we see more of these cases pop up. Indeed, there have now been quite a number of DTSA cases, including two involving the issuance of ex parte seizure orders, as reported by Timothy T. Lau of the Federal Judicial Center Research Division.
- Stay tuned for the NLRA’s decision on the use of NDAs by hedge funds: Labor Board Challenges Secrecy in Wall Street Contracts.
- Fish & Richardson and ALM Marketing Services put out an interesting white paper on the use of cybersecurity.
- John Richards of Ladas & Parry wrote a nice comparison of some of the key differences and similarities of the DTSA and EU directive: Trade secrets: changes in the law on protection of trade secrets in the United States and European Union.
- The Court of Appeal for Ontario determined in Donaldson Travel Inc. v. Murphy that a nonsolicitation agreement containing a prohibition on accepting business from a customer constituted a noncompete. ONCA upholds finding that agreement not to accept business is non-competition clause.
- For a discussion of a recent NLRB requirement that noncompetes must be part of union negotiations if they are going to be required, see Non-Compete Agreement A Mandatory Subject of Bargaining, NLRB Rules.
- Wondering about noncompetes in Lithuania? Well, here’s some information:
Employers must compensate employees separately for restricting their right to work for others, not only after, but also during their employment.
And, if you have a few minutes and wonder what you would list as the top 10 trade secrets, How Stuff Works did their own: 10 Trade Secrets We Wish We Knew.