Last week, the New York State Senate advanced two bills seeking to ban both “no-poach” clauses in franchise agreements and “no-rehire” clauses, which are commonly used in settlement agreements.

The first of these bills, known as the End Employer Collusion Act (Bill S562), prohibits no-poach agreements between franchisors and franchisees.  Such agreements restrict franchisees from soliciting or hiring current or former employees of the franchisor or other franchisees.  The End Employer Collusion Act would also provide a private right of action for any person denied employment on account of a no–poach agreement, and would allow for the recovery of actual and punitive damages, as well as costs and attorneys’ fees.  The New York legislature is not the first to target no-poach clauses in franchise agreements; Washington passed legislation banning such clauses nearly two years ago.  In addition, prior to taking office, in his Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, President Biden indicated that he would like to see federal legislation in this area, and that he intends to work with Congress to “outright ban all no-poaching agreements.”

The second bill, S766, would prohibit employers from inserting no-rehire clauses in settlement agreements with employees or independent contractors.  Such clauses bar employees from applying for or accepting future employment with the employer, or its related entities, and were originally designed to protect an employer from retaliation claims in the event that the employee reapplied for his or her prior job and was not hired.  The proposed legislation would void settlement agreements containing no-rehire clauses.  However, the employer’s obligations under the settlement agreement, including payments to the employee, would remain intact, creating the possibility for an employee to sue the employer again after having received a settlement payment.  While the justification for the bill states, “[t]he bill would not, however, prohibit any termination of employment mutually agreed upon as part of a settlement, nor would it automatically force a defendant employer to rehire an employee who had previously settled a case against the employer,” it could expose employers to increased risk of multiple litigations with the same employee.

Both bills are ones to watch.

On March 16, 2021, the U.S. Court of Appeals for the D.C. Circuit affirmed defendant Shan Shi’s conviction for conspiracy to commit theft of trade secrets. Given recent efforts at the state and now federal level to ban non-competes, employers may be more likely to consider partnering with law enforcement to remedy trade secret theft.

The Court’s opinion begins with the statement, “We can’t always get what we want, but, sometimes, we get what we need.” Unfortunately, the Court’s opinion continues, what Shi’s company needed were seven documents containing a competitor’s trade secret information for manufacturing drill riser buoyancy modules (“DRBMs”), a highly valuable technology used for drilling miles of steel pipe that extend from drill ships to the ocean floor and for carrying oil from natural deposits tens of thousands of feet below the surface.

In March 2014, Shi, a Ph.D. with twenty-five years of engineering experience in offshore structural design, established Houston, Texas-based Construct Better Materials International (“CBMI”), a wholly owned subsidiary of Taizhou CBM-Future New Materials Science and Technology Co., Ltd. (“CBMF”), a technology company sponsored by the Chinese government. At the time, neither Shi nor anyone at CBMI or CBMF knew how to manufacture DRBMs. Only four major companies in the world produced DRBMs—namely, Cuming Corporation, Balmoral, Matrix, and Trelleborg AB (“Trelleborg”).

To study U.S. technology relating to the manufacture of DRBMs, Shi and two of his colleagues visited Trelleborg’s factory in Houston, and explored potential partnerships with other DRBM manufacturers. During these visits, Shi observed Trelleborg’s measures to keep its proprietary information confidential, including 24-hour security guards and video surveillance, visitor logs, keypad entry on restricted areas (e.g., research and development labs), escorts for visitors, and strict rules against taking pictures.

After Shi was unable to secure a partnership with any of the DRBM manufacturers, Shi hired two former Trelleberg employees. In the hiring process, these former Trelleborg employees informed Shi about additional measures Trelleborg took to protect its confidential information, including Trelleborg’s non-compete and non-disclosure provisions that required Trelleborg’s former employees not to reveal “any trade secrets or confidential information” they learned through their employment at Trelleborg.

Through these two former Trelleborg employees, Shi and his CBMI colleagues obtained seven documents containing Trelleborg’s trade secret DRBM technology. Using this trade secret information, Shi’s company was so successful at replicating Trelleborg’s DRBM technology that CBMI entered preliminary talks with Trelleborg’s Executive Vice President about potentially selling CBMI’s DRBM technology to Trelleborg. However, Trelleborg eventually decided not to purchase CBMI’s DRBM technology because it was too expensive. It is unclear if Trelleborg lodged a criminal complaint with federal law enforcement authorities against Shi and CBMI but it appears likely that they did.

Approximately two years later, when Shi and one of his colleagues attended a meeting to pitch their technology to a company they believed to be Lockheed Martin, FBI agents arrested them.

Shi, CBMI, CBMF, and five co-conspirators were charged with conspiracy to commit theft of trade secrets. Three co-conspirators pleaded guilty, one co-conspirator absconded before trial, and CBMI and CBMF never appeared, leaving Shi as the only defendant to stand trial.

To prove Shi guilty of conspiracy beyond a reasonable doubt pursuant to 18 U.S.C. § 1832, the government needed to show that (1) Shi entered into an agreement with at least one other person to commit theft of trade secrets; (2) he knowingly participated in the conspiracy with the intent to commit the offense; and (3) a member of the conspiracy committed at least one overt act in furtherance of the conspiracy. United States v. Smith, 950 F.3d 893, 895 (D.C. Cir. 2020). After three days of deliberations, the jury returned a guilty verdict.

On appeal, the D.C. Circuit rejected Shi’s contention that the evidence presented at trial was insufficient to allow a rational juror to find that he knowingly joined an agreement to steal trade secrets. The court held that the testimony provided by Shi’s co-conspirators—specifically, that (1) Shi hired one of the former Trelleborg employees after he told Shi that he had “some friends at Trelleborg” who would give him Trelleborg’s confidential data; and (2) Shi hired the other former Trelleborg employee after he told Shi that he kept “technical data from Trelleborg”—was sufficient for a rational juror to find that Shi entered into a tacit agreement to manufacture DRBMs using stolen trade secrets.

The appellate court also rejected Shi’s contention that the evidence was insufficient to show that Shi and at least one co-conspirator believed the appropriated information contained trade secrets. The Court pointed to Shi’s co-conspirator’s testimony that he understood that he “did wrong” by asking his friends for “confidential information” that Trelleborg “wouldn’t put . . . outside.”

The Court also summarized three independent bases on which the jury could conclude that Shi believed the data he received contained trade secret information that Trelleborg took reasonable measures to protect, namely, that: Shi visited Trelleborg’s factory and personally observed the high-level security measures that Trelleborg had in place to protect its DRBM manufacturing capabilities; testimony from government witnesses that Shi and others working in the field would know that DRBM manufacturers considered their manufacturing data to be proprietary; and Shi’s decision to draft CBMI’s own non-disclosure agreement after learning about Trelleborg’s non-disclosure and non-compete provisions.

The Court upheld the 16-month prison sentence and $342,000 fine levied against the Houston resident.

This criminal prosecution, a joint effort between the U.S. Attorney’s Office for the District of Columbia and the Department of Justice’s Computer Crime and Intellectual Property Section, underscores the U.S. Department of Justice’s growing expertise at prosecuting relatively complex intellectual property crimes.

Given the renewed bipartisan effort in Congress to pass the Workforce Mobility Act, a bill that would ban all employee non-compete agreements, it is conceivable that in the very near future employees nationwide might find themselves with greater employee mobility to leave one employer for another. If that happens, we could see an immediate uptick in federal criminal investigations and prosecutions involving allegations of theft of trade secrets.

Time will tell if we will see many more cases like the Shi case. At a minimum, with the changing legal landscape favoring employee mobility, employers who typically resorted to emergency civil actions to enforce non-compete provisions, confidentiality agreements, and trade secrets protections may find themselves working increasingly with federal law enforcement authorities to vindicate their trade secret rights under federal law. Similarly, companies that are growing their businesses in highly specialized industries may need to consult with experienced white-collar criminal defense counsel who have expertise in handling cases relating to employee mobility, non-compete agreements, and both civil and criminal trade secret laws.

On February 25, 2021, the Workforce Mobility Act, a bipartisan bill to limit the use of non-compete agreements, was introduced in the U.S. Senate by Senators Chris Murphy (D-Conn.), Todd Young (R-Ind.), Kevin Cramer (R-N.D.) and Tim Kaine (D-Va.), and in the U.S. House of Representatives by Scott Peters (D-Cal.).

This year’s Workforce Mobility Act is the latest of several attempts in recent years at the federal level to restrict non-compete agreements through legislation.  Despite bipartisan support at times, none has passed either the Senate or the House.  Will there be a different result this time around?

There may be some reason to think so.  The Biden administration appears to be in favor of banning one or more forms of non-competition agreements on a national level.  In December 2020, then President-elect Biden released a Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, which stated “Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.”

Enactment of the Workforce Mobility Act in 2021, however, still seems like a long shot.  If the bill progresses in Congress, it will be subject to heavy lobbying from both sides of the issue.  For employers, the bill’s restrictions would have a major impact on businesses that seek to protect confidential information that may not rise to the level of trade secrets, including business strategy and client-related information.  If enacted, the bill also threatens to upend decades’ worth of legal precedent by introducing a federal statute that will be interpreted primarily in federal courts, in an area that has been governed by practice and precedent premised on a patchwork of state common law and some state statutes.  Stay tuned.

A recent report issued by the Trade Secrets Committee of the New York City Bar recommends that New York State’s legislature adopt statutory guidelines governing the use of non-compete agreements for lower-salary employees.

As explained in the report, statutory limitations on the use of non-compete agreements have been a hot issue in many states and even at the federal level in recent years.  New York currently has no statutory law generally concerning trade secrets or non-compete agreements.  The report advocates a limited change to New York’s unique status as a common law jurisdiction, namely, “enactment of a statute to regulate the use of non-compete agreements as applied to lower-salary employees in order to ensure equity and fairness in employment markets while preserving New York’s traditional role as the nation’s commercial leader.” The report is well worth a read.

The District of Columbia is bracing for a transition.  But while employers across the country wait to see what changes the Biden Administration may bring, Washington, D.C. employers should prepare for a drastic and imminent change in their own backyard.

As we previously reported, last month the District of Columbia Council passed the Ban on Non-Compete Agreements Amendment Act of 2020 (D.C. Act 23-563) (the “Act”).  On January 11, 2021, Mayor Bowser signed the legislation. It will now be sent to Congress for the congressional review period set forth by the Home Rule Act.  Absent Congress passing and the President signing a joint resolution of disapproval, which is unlikely to happen, the law will take effect after 30 legislative session days and publication in the D.C. Register, and apply upon inclusion of its fiscal affect in an approved budget and financial plan.

As a reminder, under the Act, all D.C. employers are prohibited from requiring or requesting that an employee sign any agreement containing a non-compete provision.  Nor may they implement a workplace policy that prohibits an employee (1) being employed by another person, (2) performing work or services for pay for another person; or (3) operating their own business.  The ban applies to most employees, with medical specialists who have completed a medical residency and earn at least $250,000 annually being one of the few exceptions. Notably, non-compete agreements entered into before the Act goes into effect will still be enforceable.  The Act also includes a notice requirement and provides strong anti-retaliation protections for employees who refuse to agree or fail to comply with an unlawful non-compete provision or workplace policy.  For further analysis and a detailed summary of the Act, please see our December 22, 2020 article.

While we will continue to monitor the Act throughout the congressional review period, D.C. employers who are considering entering into non-compete agreements with their applicants or employees should do so now so that they remain enforceable after the Act takes effect.

Please contact one of the authors or another EBG attorney for assistance with appropriate restrictive covenants under the circumstances.  Assuming Congress does not intervene, the authors are planning a webinar to explain the Act and answer questions.

In the past month, the U.S. Department of Justice (DOJ) has made good on its 2016 threat, contained in its Antitrust Guidance for Human Resource Professionals (“Antitrust Guidance”) to bring criminal charges against people or corporations who enter into naked wage-fixing agreements or naked no-poach agreements.   First, as reported here, on December 9, 2020, DOJ obtained an indictment against the president of a staffing company who allegedly violated Section 1 of the Sherman Act by conspiring with competitors to “fix wages” paid to physical therapists (PT) and physical therapist assistants (PTA).  Although not mentioned in the indictment, a related Federal Trade Commission (FTC) complaint alleged that the defendant agreed with competing staffing companies to lower wages after a client unilaterally lowered the rates paid to the defendant for PT and PTA services.  On January 7, 2021, DOJ announced a second indictment, which alleged that two corporations operating outpatient medical care facilities violated Section 1 of the Sherman Act by reaching “naked no poach agreements” with two competitors, pursuant to which they agreed not to solicit each other’s “senior-level employees.”

Both indictments allege that the employers entered into purportedly “naked” wage-fixing and no-poach agreements, which are illegal per se, and thus are “deemed illegal without any inquiry into [their] competitive effects.”  If the courts allow DOJ to proceed on the illegal per se theory, this will significantly lighten the government’s burden of proof because it assumes the anticompetitive and unlawful character of the agreement.  In civil enforcement cases and statements of interest, DOJ has consistently argued that no-poach and wage-fixing agreements are illegal per se.  Although DOJ has obtained several consent decrees which indicate that such agreements are illegal per se, civil cases generally resolve through settlement, and as the 2019 decision in In re Railway Ind. Employee No-Poach Litigation (W.D. Pa No. 18-798) recognizes, the law on this issue remains unsettled.  Thus, these criminal cases may provide a vehicle for setting standards to determine when wage-fixing and no-poach agreements are “naked” and whether such agreements are illegal per se or subject to the rule of reason analysis.

The indictments also serve as cautionary tales for HR and other executives.  They demonstrate that employers should exercise care in their communications about recruiting and compensation practices because both indictments demonstrate the role of electronic communications to prove the alleged agreements.  The wage-fixing indictment quoted several text messages, exchanged between the lone defendant and unindicted co-conspirators which allegedly resulted in an agreement to suppress wages.  The no-poach indictment also relied extensively on email communications, including internal communications between defendants’ employees, as well as communication between defendants and unindicted co-conspirators, such as competitors and recruiters.  Significantly, the majority of communications cited in the no-poach indictment occurred long before DOJ’s Antitrust Guidance, and thus indicate that DOJ will rely on such earlier conduct to bolster a prosecution.  Accordingly, employers should review their hiring and compensation practices to ensure that they comport with DOJ’s Antitrust Guidance and should amend any guidance that does not.

In addition, anyone who receives a civil investigative demand or grand jury subpoena from DOJ, or an inquiry from the FTC, concerning an antitrust violation should immediately consult counsel.  The Antitrust Division’s Leniency Program allows corporations and individuals who first “self-report” antitrust violations and “fully cooperate” with any DOJ investigation to avoid criminal prosecution.  Such self-reporting and cooperation should always be done with the guidance of counsel, as there are always risks associated with communicating with any government investigative agency.   Indeed, the second count of the price-fixing indictment alleges that the defendant violated 18 U.S.C. § 1505 by making misleading statements and withheld documents during the course of the related FTC investigation.  Promptly consulting counsel may help avoid or limit liability.

Finally, the upcoming change of administration is not likely to dampen DOJ’s enthusiasm for pursuing antitrust enforcement actions against employers. To the contrary, DOJ brought several civil enforcement actions against employers during the Obama Administration and as reported here, President-elect Biden has indicated that he favors eliminating “non-compete and no-poach agreement that do nothing but suppress wages.”  Of course, not every agreement is impermissible.  Even DOJ has recognized that no-poach agreements may be permissible in the context of legitimate joint ventures and in December 2020, DOJ filed an amicus brief that recognized that agreements between franchisors and franchisees are reviewed pursuant to a functional analysis.  Thus, the legality of agreements depends on the particular facts and circumstances.  Nonetheless, DOJ’s back-to-back indictments indicate that employers and recruiters should proceed with caution.  The time is ripe to review recruitment and compensation practices and communications, and to consult counsel to update them as necessary.

Our colleagues Peter Steinmeyer and Brian Spang have co-authored an article in Law360, titled “Trade Secrets Law 25 Years After PepsiCo Disclosure Case.” (Read the full version – subscription required.)

Following is an excerpt:

Twenty-five years ago, the U.S. Court of Appeals for the Seventh Circuit issued what many at the time perceived as a landmark decision, PepsiCo Inc. v. Redmond, in which the court applied the concept of inevitable disclosure of trade secrets to affirm an injunction prohibiting a senior executive from taking a similar position at a direct competitor.

The decision did not invent the phrase or concept of inevitable disclosure as a theory of trade secret liability. But the publicity given to the decision led many to think that the doctrine of inevitable disclosure could be an alternative to, or backstop for, traditional post-employment noncompetition agreements.

Notwithstanding expectations at the time, PepsiCo has not in fact widely changed the landscape of trade secret law and employee mobility injunction practice. Although the doctrine remains alive and well and continues to be applied in appropriate circumstances, it is no substitute for a well-crafted garden leave clause or post-employment noncompetition agreement. …

We’re pleased to share the 2021 update of “Non-Compete Laws: Connecticut,” a Q&A guide published by Thomson Reuters Practical Law.

Following is an excerpt (see below to download the full version in PDF format):

This Q&A addresses enforcement and drafting considerations for restrictive covenants such as post-employment covenants not to compete and non-solicitation of customers and employees. Federal, local, or municipal law may impose additional or different requirements. …

In particular, this Q&A addresses:

    • Overview of State Non-Compete Law
    • Enforcement Considerations
    • Blue Penciling Non-Competes
    • Choice of Law Provisions
    • Reasonableness of Restrictions
    • Remedies
    • Other Issues

Click here to download the PDF: “Non-Compete Laws: Connecticut.”

Thomson Reuters Practical Law has released the 2021 update to “Preparing for Non-Compete Litigation,” a Practice Note I co-authored with Zachary Jackson.

See below to download the full Note – following is an excerpt:

Non-compete litigation is typically fast-paced and expensive. An employer must act quickly when it suspects that an employee or former employee is violating a noncompete agreement (also referred to as a non-competition agreement or non-compete). It is critical to confirm that there is sufficient factual and legal support before initiating legal action. Filing a complaint for monetary damages or a request for an injunction can backfire if an employer is not prepared with sufficient evidence to support its request. This Note discusses the steps an employer can take to best position itself for successful enforcement of a non-compete and the strategic considerations involved with initiating non-compete litigation.

In particular, it discusses:

    • Best practices for investigating a suspected violation and gathering relevant evidence.
    • Key steps for evaluating the likelihood a court will enforce a non-compete.
    • Factors to consider before initiating legal action.
    • The options for enforcing a non-compete through legal action and the key decisions relevant to each option.

Click here to download the PDF: “Preparing for Non-Compete Litigation.”

Earlier this month, the U.S. Department of Justice (“DOJ”) announced that a federal grand jury in Texas indicted Neeraj Jindal, the former owner of a physical therapist staffing company, in connection with an illegal wage-fixing conspiracy to depress pay rates for physical therapists (“PTs”) and physical therapist assistants (“PTAs”) who travel to patients’ homes or assisted living facilities in the greater Dallas-Fort Worth area.  The indictment was something of a landmark for the U.S. Department of Justice (“DOJ”), which for years had promised that such criminal prosecutions were forthcoming in connection with its ongoing investigations of illegal no-poach and wage-fixing agreements by employers.

In October 2016, during the closing weeks of the Obama Administration, the DOJ and the Federal Trade Commission (“FTC”) issued a remarkable document, entitled Antitrust Guidance for Human Resources Professionals, which outlines an aggressive policy, promising to investigate and punish employers, and even individual Human Resources employees, who enter into unlawful agreements concerning recruitment or retention of employees.  As stated in that document, “[a]n agreement among competing employers to limit or fix the terms of employment for potential hires may violate the antitrust laws if the agreement constrains individual firm decision-making with regard to wages, salaries or benefits; terms of employment; or even job opportunities.”

In the past four plus years, the Antitrust Division of the DOJ has announced on many occasions, via press releases, in congressional hearings or otherwise, that no-poaching and wage-fixing agreements among competing employers are an enforcement priority.  The DOJ did bring one well-publicized civil suit regarding no-poaching, and filed some “statements of interest” in pending civil class actions.  But it had filed no such criminal prosecutions – until December 9, 2020, when it secured the indictment of Mr. Jindal.

The indictment asserts two counts against Mr. Jindal: (1) an “antitrust conspiracy: price-fixing” violation of section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and (2) obstruction of investigative proceedings before the FTC for making false and misleading statements and withholding information.  The DOJ alleges that Mr. Jindal and his co-conspirators agreed to pay lower rates to certain PTs and PTAs, and that Mr. Jindal’s company did pay lower rates, from around March 2017 to around August 2017.  The indictment describes numerous text messages to and from Mr. Jindal concerning the wage-fixing conspiracy.

The indictment of Mr. Jindal serves as a reminder to employers that the DOJ and FTC will not hesitate to challenge unlawful wage-fixing and no-poach agreements, anticompetitive non-compete agreements, and the unlawful exchange of competitively sensitive employee information, including salary, wages, benefits, and compensation data.  Employers who are considering collaborating with others or making changes to their employee pay rates, policies and plans therefore would be wise to proceed with caution, keeping an eye on the antitrust laws and DOJ/FTC Guidance.