Jim Flynn, an attorney in Epstein Becker & Green’s Newark, New Jersey office, recently addressed in separate forums the delicate balance that trade secret owners and their counsel must strike when litigating over trade secrets and confidential information. First, Mr. Flynn moderated a panel discussion among trade secret litigators (including one from Beijing) at the American Intellectual Property Law Association (“AIPLA”) Spring Meeting in Seattle, Washington. His May 16th AIPLA session was entitled “A Litigator’s Guide to Protecting Trade Secrets During Litigation,” and program materials included his written paper on the Catch-22 aspects noted above. Additionally, Mr. Flynn published on May 23, 2018 an International Lawyers Network IP Insider article entitled The Catch-22 Of Litigating Your Trade Secrets Case Without Revealing The Secrets Themselves that addressed these topics in further detail.   As he pointed out in that article:

“You mean there’s a catch?”

“Sure there’s a catch,” Doc Daneeka replied. “Catch-22. Anyone who wants to get out of combat duty isn’t really crazy.”

There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane, he had to fly them. If he flew them, he was crazy and didn’t have to; but if he didn’t want to, he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.

[Heller, Catch-22, at 52 (1999, S &S Classics Edition))]

Trade secret litigators (and especially trade secret trial attorneys) and their clients let out a similar whistle often—Because “trade-secret litigation” is an oxymoron in many ways. The very desire to protect one’s trade secrets, i.e. to keep them secret, requires disclosing them to a certain extent in certain ways to certain people (in other words making them less secret). Thus, the whistle is usually more regretful than respectful, as those forced to litigate to defend their trade secrets face a classic Catch-22 scenario. Rather than whistling a happy tune to overcome the fear of losing one’s trade secret protection, these litigants and litigators are whistling past the graveyard, knowing that all manner of frights, scares, and dangers—real and imagined—lurk in the pleading, discovery, motion and trial phases of such litigation. The goal here is give such litigants and litigators a few hints for making that a safer trip.

Read the full article here.

On May 10, 2018, the New Jersey Assembly Labor Committee advanced Assembly Bill A1769, a bill that seeks to provide stricter requirements for the enforcement of restrictive covenants.

If enacted, the legislation would permit employers to enter into non-competes with employees as a condition of employment or within a severance agreement, but such non-competes would only be enforceable if they meet all of the requirements set forth in the legislation. Thus, if enacted, employers will have to comply with the following requirements in order for a New Jersey non-competition agreement to be enforceable:

  1. If the non-compete is entered into in connection with commencement of employment, the employer must disclose the terms in writing to the prospective employee by the earlier of a formal offer of employment, or 30 business days before the commencement of the employee’s employment;
  2. If the non-compete is entered into after commencement of employment, the employer must provide the agreement to the employee at least 30 business days before the agreement is to be effective;
  3. The non-compete agreement must be signed by both the employer and the employee and expressly state that the employee has a right to consult with counsel;
  4. The non-compete shall not be broader than necessary to protect the legitimate business interests of the employer, including the employer’s trade secrets or other confidential information, such as sales information, business plans, and customer or pricing information;
  5. The time period of the non-compete must not exceed 1 year following the date of termination of employment;
  6. The non-compete must be reasonable in geographic scope, meaning that it must be limited to the geographic area in which the employee provided services or had a material presence during the two years preceding the date of termination, and the non-compete may not restrict the employee from seeking employment in other states;
  7. The non-compete shall be reasonable in the scope of the proscribed activities and limited to only the specific types of services provided by the employee at any time during the employee’s last two years of employment;
  8. The agreement must state that the employee will not be penalized for challenging the enforceability of the non-compete;
  9. The agreement should not contain a choice of law provision that would have the effect of avoiding the requirements of the legislation;
  10. The agreement shall not waive the employee’s substantive, procedural, or remedial rights provided under the legislation or any other law, or under the common law;
  11. The non-compete shall not restrict the employee from providing a service to a customer of the employer if the employee does not initiate or solicit the customer; and
  12. The agreement shall not be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.

The bill broadly defines “[r]estrictive covenant” as any agreement between an employer and an employee under which the employee “agrees not to engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.” It is unclear whether the bill intends to apply only to traditional non-compete agreements or whether it is also intended to apply to other forms of restrictive covenants, such as non-solicit and/or anti-raiding provisions. It appears, however, that the bill is intended to apply only to non-competes as the proposed legislation contains a provision stating that a restrictive covenant may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative agreement, such as “an agreement not to solicit or hire employees of the employer; an agreement not to solicit or transact business with customers, clients, referral sources, or vendors of the employer; or a nondisclosure or confidentiality agreement.”

Moreover, the bill provides that any non-compete shall be unenforceable against all non-exempt employees, as well as other types of short-term or low-wage employees.

An employer who seeks to enforce the non-compete would be required to notify the employee in writing within 10 days after the termination of the employment relationship of the employer’s intent to enforce the non-compete. Failure to provide such notice shall void the agreement; however, notice need not be given in the event the employee was terminated due to misconduct.

Unless the employee was terminated for misconduct, the bill would also require employers who enforce a non-compete to pay the employee during the restricted period 100 percent of the pay that the employee would have been entitled and make whatever benefit contributions would be required in order to maintain the fringe benefits to which the employee would have been entitled.

If enacted, the legislation would allow employees to bring a cause of action against any employer or person alleged to have violated the act. In addition to injunctive relief, employees would be permitted to recover liquidated damages, compensatory damages, and reasonable attorneys’ fees and costs.

As with many other New Jersey employment laws, the bill would require employers to post a copy of the act or summary in a prominent place in the work area.

While the act would go into effect immediately upon enactment, it would not apply to any agreement in effect on or before the date of enactment.

If enacted, Assembly Bill A1769 would severely curb the use of non-competes in New Jersey. Employers should be aware of the multitude of requirements they would have to establish in order to enforce a non-compete, including the requirement to pay employees 100 percent of their salary during the time the non-compete is in effect. Thus, in the event the bill is signed into law, employers should now begin to consider implementing other types of agreements aimed at protecting their legitimate business interests, such as confidentiality agreements and non-solicit agreements in lieu of non-competition agreements.

Legislative efforts to limit or ban the use of non-compete provisions in employment agreements have proliferated in the early months of 2018.

Perhaps most eye-catching was legislation (titled the “Workforce Mobility Act”) introduced in the U.S. Senate in late April 2018 that would prohibit employers from enforcing or threatening to enforce non-compete agreements with employees and require employers to post prominently a notice that such agreements are illegal.  Co-sponsored by Democratic Senators Chris Murphy (CT), Elizabeth Warren (MA) and Ron Wyden (OR), the bill envisions the Department of Labor enforcing the non-compete ban by levying fines on employers of $5,000 for each week that a violation of the Act occurs.  The bill also provides for a private right of action for workers to pursue damages in federal court.  A companion bill was introduced in the House of Representatives.  If enacted into law, the Workforce Mobility Act would have sweeping effects in the workforce.

Efforts by state legislatures to curb non-competes have continued apace, but such bills generally are drafted with more limited scope than the Workforce Mobility Act bill.  For example, on May 10, 2018, the New Jersey Assembly Labor Committee advanced Assembly Bill A1769, which would bar the use of non-compete agreements with respect to certain types of workers (mostly low-wage workers), and set a one year limit on employee non-compete agreements with respect to employees who are terminated by a company.

Massachusetts legislators have long tried (unsuccessfully so far) to enact legislation restricting non-competes, and they are at it again.  On April 17, 2018, Massachusetts House Bill 4419 was introduced, and it seeks, among other things, to prohibit enforcement of non-competes against certain low-wage employees, to limit the geographic and temporal scope of non-competes, and to require employers to provide advance notice to prospective employees if entering into a non-compete is a condition of employment.

Earlier this year, Utah and Idaho passed or amended their statutes dealing with post-employment restrictions on competition.  Colorado passed new limitations on non-competes involving physicians.

Employers should stay aware of these legislative efforts regarding non-competes, as they could, if enacted, invalidate some or all of the employers’ non-competition provisions with their employees.  In evaluating that possibility, employers should consider whether they are adequately protecting their legitimate business interests in their trade secrets and client relationships through other means as well, such as confidentiality/non-disclosure, non-solicitation agreements, and/or “garden leave” provisions.  As Ben Franklin said, “By failing to prepare, you are preparing to fail.”

A recent decision from an Arkansas appellate court raises two important issues of enforceability of non-competition agreements: (1) the enforceability of a non-compete after expiration of the contractual non-compete period and (2) the applicable standard for determining whether a valid protectable interest exists.

In Bud Anderson Heating & Cooling, Inc. v. Neil, the plaintiff Bud Anderson Heating and Cooling, Inc. (“BAHC”), a HVAC vendor and service provider, appealed a lower court’s denial of BAHC’s petition for a one-year prospective injunction seeking to enforce an expired non-compete agreement with defendant Neil, which was allegedly violated when Neil joined a competitor located within BAHC’s territory and subsequently successfully solicited a BAHC customer.  Before addressing the merits of BAHC’s complaint, the appellate court considered—and ultimately rejected—Neil’s argument that BAHC’s appeal was moot since the injunction sought extended beyond the contract’s one-year-from-date-of-termination period.  In so holding, the court relied on (1) caselaw from other jurisdictions finding that extension of a noncompetition period is within a court’s broad equitable powers and (2) application of the “capable-of-repetition-yet-evading-review exception to the mootness doctrine,” previously unapplied in this context.

Turning to the merits of the appeal, the appellate court found that the trial court should have applied an “able to use,” not an “actual use” standard in determining whether to grant BAHC’s injunction. Under an “able to use standard,” a petitioner need only demonstrate the ability of a former employee to use the former employer’s proprietary information to obtain an unfair competitive advantage; proof that the employee actually used such information is not required.

The Bud Anderson decision is noteworthy in two respects.  First, Arkansas employers may be able to enforce non-competes after expiration of the non-compete period, thereby achieving longer non-compete periods that would ordinarily be deemed by courts unreasonable and invalid.  Second, Arkansas employers seeking to enforce non-competes can take advantage of an “able to use” standard, which is easier to meet than an “actual use” standard.  However, given that the Bud Anderson decision presents not one but two issues of first impression, it would not be surprising if the case were to ultimately end up before the Arkansas Supreme Court.

Notwithstanding these developments in Arkansas, employers should note that other courts have reached different conclusions on both of these issues. As always, it is critical to know the state-specific law in the applicable jurisdiction.

Whenever possible, restrictive covenants should be carefully worded to track the language of applicable law in the jurisdiction where they will be enforced. The South Dakota Supreme Court’s recent decision in Farm Bureau Life Insurance Co. v. Dolly provides a strong reminder of this lesson.  The case concerned an action by Farm Bureau to enforce a restrictive covenant against Ryan Dolly who had worked for Farm Bureau as a captive life insurance agent. Dolly’s contract with Farm Bureau contained a restrictive covenant providing that Dolly would “neither sell nor solicit, directly or indirectly…any insurance or annuity product, with respect to any policyholder of [Farm Bureau]… for a period of eighteen (18) months following the termination of” his contract.

When Dolly started selling insurance for a different issuer, Farm Bureau sought an injunction prohibiting Dolly from soliciting or selling to Farm Bureau policyholders.  The Trial Court enjoyed Dolly from soliciting Farm Bureau policyholders but declined to prohibit him from selling to Farm Bureau policyholders who reached out to him directly.

After consulting the South Dakota statute governing contracts with captive insurance agents (SDCL 53-9-12), the South Dakota Supreme Court affirmed.  The Court interpreted SDCL 53-9-12 to prohibit all restrictive covenants between life insurance companies and captive agents except agreements (a) not to solicit existing customers of the insurer within a specified area; and (b) not to engage directly or indirectly in the same business or profession as that of the insurer.  The Court ruled that the agreement not to sell to existing customers was neither an agreement not to solicit, nor an agreement to refrain from the business altogether and was therefore invalid under South Dakota law.

Failure to track the precise language of the statute prevented Farm Bureau from enjoining conduct which it otherwise could have prevented had it tracked the statutory language more closely.

We non-compete lawyers often rely on an old rule of thumb when analyzing the enforceability of a non-compete: if the restriction is so broad that it would even prohibit an employee from working as a janitor for a competitor, then it is very unlikely to be enforced by a judge. And so when a federal judge expressly endorses such a rule of thumb, the urge to blog about it is simply irresistible.

In Medix Staffing Solutions Inc. v. Daniel Dumrauf, Judge Ellis of the Northern District of Illinois addressed the enforceability of a restrictive covenant which prohibited employment in any capacity at another company in the industry.  The defendant argued that this restriction was so broad that it “would bar him from even working as a janitor at another company.”  While Judge Ellis described that example as “a bit far-fetched,” she nonetheless found “no language in the Covenant that makes it an inaccurate statement of [the Covenant’s] prohibitions.”  Accordingly, she held that the restriction was unenforceable on its face and that “[t]here is no factual scenario under which it would be reasonable.”  Accordingly, she held that “[t]his is an ‘extreme case’ where dismissal at the motion to dismiss stage is permissible and appropriate.”

And while noting that courts have the power to modify overbroad restrictive covenants, Judge Ellis refused to do so here, holding that Medix must instead “live with [its] decision” not “to draft an appropriate restrictive covenant.”

So, employers, the moral of the story is this: if your non-compete really would block an employee from working as a janitor for a competitor, it is time to update your non-compete, paying due heed, of course, to issues of adequacy of consideration for any such modification and other case law and statutory developments.

Following the FBI’s recent raid of the office and home of Michael Cohen the bounds of the attorney-client privilege have become a topic of debate and discussion. During the raid, the FBI seized business records, documents, recordings, and emails. Earlier this week, Judge Kimba Wood for the Southern District of New York ruled that the U.S. Attorney’s Office for the Southern District of New York could review the documents seized with a special team in place to review for privilege despite Mr. Cohen’s objections to this process.

Thus, the question has quickly become when is the attorney-client privilege actually applicable? Simply put, just telling a lawyer something, or copying a lawyer on an email, does not make the conversation or email privileged. Not all communications with an attorney are privileged from disclosure under the attorney-client privilege. The reality is that a communication (i.e. emails, correspondence, oral communications, etc.) will only be privileged when the subject communication meets certain criteria, and it is confidential (meaning that it is not shared with non-attorney/non-client third parties).

In order for the privilege to apply to the communication itself, the “primary purpose” of the communication must be to seek or provide legal advice. In other words, a communication is not privileged if it does not: (1) request legal advice or (2) convey information reasonably related to a request for legal assistance. Thus, asking an attorney about investment advice or other non-legal issues is NOT privileged. Moreover, having a discussion (or email exchange) with an attorney, where others are present (or included) is NOT privileged.

Since in-house counsel often act as part of an executive team, they may be providing more than just legal advice. Thus, general “[b]usiness advice, unrelated to legal advice, is not protected by the privilege even though conveyed by an attorney to the client,” because the purpose and intent is not to communicate legal advice. See In re Vioxx Prds. Liab. Litig., 501 F. Supp. 2d 789, 797 (E.D. La. 2007) (emphasis added) (quoting In re CFS-Related Securities Fraud Litig., 223 F.R.D. 631 (N.D. Okla. 2004)).

Emails to or from in-house counsel that seek both business and legal advice will not satisfy the “primary purpose” requirement. More specifically, an email that lists an attorney and a non-attorney in the “To” field may not be privileged if it has a mixed purpose (i.e. seeks both business and legal advice). Meanwhile, emails that list an in-house attorney in the “To” field and a non-attorney in the “cc” field are only privileged if the non-attorney is copied so as to notify that person that legal advice was in fact sought and what legal advice was provided. Also, emails, texts and discussions by an attorney with an opposing counsel or other third party are not privileged.

Thus, it is important to: (i) keep the primary purpose of all communications with attorneys clear and state when you are seeking legal advice; and (ii) avoid oral communications in the presence of “third parties,” or copying them on emails, texts and other correspondence.

Two western states, Utah and Idaho, have recently passed or amended their statutes dealing with post-employment restrictions on competition.  This continues a national trend in which new state law in this area is increasingly the product of legislative action rather than judicial interpretation.  Thus, even if an employer has no current presence in these states, it is worth one’s time to understand these changes because they could soon be coming your way.

In Utah, the legislature amended the two-year old Post-Employment Restrictions Act (which we had written about before) to limit the enforcement of non-compete agreements against employees in the broadcasting industry.  The statute (HB 241) imposes a compensation test that precludes non-competes for broadcast industry employees making less than $47,476 annually, limits broadcast company employment contracts to four years or less, and nullifies any restriction that would limit competition beyond the original contract expiration date (meaning that an employee with a one year restriction who leaves a broadcast employer three months before contract expiration would have a three-month non-compete rather than a one-year non-compete).  The amendment also allows enforcement only if the employee is either terminated “for cause,” or the employee breaches the employment contract “in a manner that results in” his or her separation, curious language that seems to leave unaddressed whether a non-compete can be enforced where a non-breaching employee simply resigns.  While this amendment is certainly part of the trend of states (Arizona, Connecticut, the District of Columbia, Illinois, Maine, Massachusetts, and New York) having statutes specific to non-compete agreements in the broadcasting industry, it also fits in the broader trend of industry-specific limitations targeting an expanding list of industries and the even broader attack on non-compete agreements more generally.

The Idaho legislature also took action recently by amending its non-compete statute to remove an important pro-employer presumption applicable to non-compete agreements for “key” employees.  The Idaho statute, Idaho Code §44-2701 et seq., had since 2016 included a provision (§44-2704(6)) providing that an employer would be entitled to a rebuttable presumption of irreparable harm when a key employee found that employer likely to succeed on its claim that the employee had violated the covenant.  The legislature, in S 1287a, repealed that provision, restoring Idaho law to its pre-2016 status, as Idaho’s governor noted in his statement concerning the bill.  The governor did not sign the bill, but simply allowed it to become law without his signature.  He stated that he refrained from signing the bill because there was “no consensus” in the business community or the tech sector on such agreements, and went on to note that the next session of the legislature should re-adopt a modified version of the presumption provision just jettisoned.  As in Utah, this legislative back-and-forth illustrates the continued attention states are paying to non-compete issues in political, rather than judicial, forums.

On April 3, 2018, the Department of Justice Antitrust Division (“DOJ”) announced that it had entered into a settlement with two of the world’s largest railroad equipment manufacturers resolving a lawsuit alleging the defendant employers had entered into unlawful “no-poach” agreements.  The DOJ’s Complaint, captioned U.S. v. Knorr-Bremse AG and Westinghouse Air Brake Technologies Corp., 18-cv-00747 (D. D.C.) alleges that three employers referred to as Knorr, Wabtec and Faively,[1] unlawfully promised one another “not to solicit, recruit, hire without approval, or otherwise compete for employees.”  It goes on to allege “[t]hese no-poach agreements denied American rail industry workers access to better job opportunities, restricted their mobility, and deprived them of competitively significant information that they could have used to negotiate better terms of employment.”

This development should come as no surprise; since October 2016 federal antitrust enforcement agencies[2] have been vocal about their increased focus on no-poaching and wage-fixing agreements among employers.  This past January, the U.S. Assistant Attorney General for the Antitrust Division reiterated that no-poaching agreements among employers remained an enforcement priority and employers could expect the DOJ to announce an increasing number of enforcement actions in the coming months.

Although the allegations against Knorr and Wabtec concern agreements between high-level corporate officers, employers should take steps to ensure that all managers, recruiters, and human resources professionals comply with applicable antitrust laws. For example, seemingly innocuous activities like discussing employee salary and benefits at industry conferences can constitute an unlawful information exchange.  Consulting the joint FTC and DOJ Antitrust Red Flags for Employment Practices provides an accessible starting point for understanding this area of the law.  However, employers will be well served to take additional steps to audit their business practices and communications with competitors throughout the organization in order to detect, and mitigate any legal risk associated with potentially unlawful agreements with competitors.

___________

[1] “Knorr” refers to Knorr-Bremse AG, including its wholly owned US subsidiaries.  “Wabtec” is an abbreviation of Westinghouse Air Brake Technologies Corporation.  “Faiveley” refers to Faiveley Transport S.A.  Faiveley is not included in the case caption because it was acquired by Wabtec in 2016.

[2] The DOJ Antitrust Division and the Federal Trade Commission (“FTC”)

Earlier this month, Colorado amended its law governing physician non-compete agreements (C.R.S. § 8-2-113(3)).  Since its enactment in 1982, that statute generally has prohibited agreements restricting the rights of physicians to practice medicine, but has allowed contractual provisions requiring a physician to pay damages arising from his or her competition if the damages are reasonably related to the injury suffered by the employer or other contracting party.  Under the amended statute, “a physician may disclose his or her continuing practice of medicine and new professional contact information to any patient with a rare disorder…to whom the physician was providing treatment.”   The goal of the amendment is to avoid interruptions to the continued care of individuals with rare disorders.  The statute looks to the National Organization for Rare Disorders, Inc. to maintain a database of diseases considered “rare disorders.”

Colorado physician practices should review and, if necessary, update any restrictive covenants in their physician agreements to ensure they are enforceable under the amended statute, bearing in mind that physicians now have the right to communicate personal contact information to patients suffering from rare disorders. Going forward, to avoid future disputes, physicians and their employers or practices may even wish to agree upon the language departing physicians can use to communicate information regarding their new practice to persons with rare disorders.

Also, any such review of physician agreements should consider the recent Colorado Supreme Court decision limiting the damages physicians’ practices can recover against physicians in breach of their non-compete agreements.