A federal judge in Chicago recently held that an individual can be convicted of attempting to steal a trade secret, even if the information at issue did not actually constitute a trade secret, so long as the individual believed that the information was a trade secret.

In United States of America v. Robert O’Rourke Opinion, Judge Andrea R. Wood denied a post-conviction motion for a new trial in a case involving attempted and actual trade secret theft.  The decision involved a metallurgical engineer and salesperson, Robert O’Rourke, who resigned his employment to take a position as vice president of research and development for a China-based competitor.  Shortly before his last day, he entered his employer’s facility and downloaded over 1900 documents from its network onto a personal hard drive.  His employer discovered this and alerted law enforcement, and O’Rourke was stopped by Customs and Border Patrol officials while attempting to board a flight to China with the hard drive containing the downloaded documents.  At trial, he was convicted of actual and attempted trade secret theft.

In a post-conviction motion for a new trial, O’Rourke argued, among other things, that he could only be convicted of attempted trade secret theft if the information at issue actually constituted a trade secret.  Judge Wood rejected this claim, analogizing the situation to one involving attempted distribution of illegal drugs, explaining that “a would-be cocaine buyer cannot avoid criminal responsibility even if the only substances he managed to purchase were fakes planted by police officers.”  Judge Wood further explained that “one who intends to steal trade secrets with the goal of harming a company and enhancing a competitor does not receive a ‘get out of jail free card’ just because he incorrectly believed something to be a trade secret when it turns out that the information was not valuable or confidential enough to be a trade secret.”

In other words, when it comes to attempted criminal trade secret theft, intent is what matters.

I’m pleased to present the 2019 update to our “Trade Secrets Litigation” Practice Note, published by Thomson Reuters Practical Law. My co-author Zachary Jackson and I discuss litigation for employers whose employees have misappropriated trade secrets.

See below to download it in PDF format—following is an excerpt:

Trade secrets are often an employer’s most valuable assets. When an employee or former employee misappropriates an employer’s trade secrets, the employer frequently initiates litigation with several goals in mind, including:

  • Preventing further unauthorized use or disclosure of its trade secrets.
  • Recovering the trade secrets.
  • Obtaining damages.

This Practice Note discusses trade secrets litigation. In particular, it addresses:

  • Preliminary steps to consider, such as sending a cease and desist letter and contacting law enforcement.
  • Filing a legal action.
  • Common causes of action.
  • Discovery, including expedited discovery.
  • Injunctive relief, damages, and attorneys’ fees.
  • Best practices for preparing to counter potential defenses and counterclaims.
  • Maintaining confidentiality during trade secrets litigation.
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New York is known for having many protections for its employees in the workplace, but a long-standing legal doctrine can furnish a remedy to employers with regard to employees who engage in repeated acts of disloyalty during their employment. The “faithless servant doctrine” permits an employer to “claw back” an employee’s compensation when an employee is found to be disloyal to the employer. While the doctrine may seem antiquated, it continues to have vitality.  For example, in March 2018, a New York appellate court confirmed an arbitration award that directed, based on the faithless servant doctrine, a former employee to pay Major, Lindsey & Africa, LLC nearly $2 million as disgorgement of her past salary and commissions on claims that she had stolen and divulged confidential information to competitors.

On August 17, 2019, Canal Productions, Inc. (the “Company”), a company headed by Robert De Niro, filed a lawsuit in New York State court which seeks to make use of the faithless servant doctrine to recover millions of dollars from a former employee. Among other allegations, the complaint alleges the employee breached her fiduciary duty and duty of loyalty by enriching herself through improper use of the Company’s credit card, expense reporting and petty cash, and engaged in further disloyal conduct by “binge-watching” Netflix for “astounding” and “astronomical” amounts of hours while she was ostensibly working. Canal Productions claims that, among other shows, the defendant binged-watched 55 episodes of the television show “Friends” over four days. Pursuant to the faithless servant doctrine, the Company seeks the return of wages, bonuses and other compensation paid to the defendant. While this lawsuit is just beginning, it demonstrates that, where appropriate, employers may make use of the doctrine against employees who have engaged in disloyal conduct during their employment.

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Peter A. Steinmeyer and David J. Clark, Members of the Firm in the Employment, Labor & Workforce Management practice, in the firm’s Chicago and New York offices, respectively, authored a Thomson Reuters Practical Law Q&A guide, “Non-Compete Laws: Illinois.”

Following is an excerpt:

A Q&A guide to non-compete agreements between employers and employees for private employers in Illinois. 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. Answers to questions can be compared across a number of jurisdictions.

Download a PDF of this piece.

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With its recently passed Act Relative to Noncompete Agreements for Low-Wage Employees, New Hampshire has joined a  growing list of states (including Maryland and Maine) that have enacted laws barring employers from enforcing non-competition agreements against low-wage workers.  The New Hampshire law prohibits employers from enforcing agreements against employees earning less than 200% of the federal minimum wage ($14.50/hour as of 2019) which limit their ability to work for another employer for (1) a specific period of time (2) in a specific geographic area, or (3) in a specific industry.  The prohibition takes effect September 8, 2019.

The recently passed Act to Promote Keeping Workers in Maine is poised to dramatically alter the status of restrictive covenants in Maine.  The Act accomplishes this by: (1) prohibiting employers from entering into no-poach agreements with one another; (2) barring employers from entering into noncompetes with lower wage employees; (3) limiting employers’ ability to enforce noncompetes; (4) mandating advanced disclosure of noncompete obligations; and (5) imposing a time delay between when an employee agrees to the terms of a noncompete and when the noncompete obligations actually go into effect.  In addition to barring the enforcement of noncompliant noncompetes, the Act authorizes the Maine Department of Labor to impose monetary civil fines of “not less than $5,000” on employers who enter into non-complaint agreements.  The Act apples to contracts entered into or renewed after September 18, 2019, so Maine employers should not waste time in revising their agreements to comply with the Act.

Prohibition of No-Poach Clauses in Agreements Between Employers

The Act prohibits employers from entering into “restrictive employment agreements” with one another.  A “restrictive employment agreement” is an agreement between two or more employers “including through a franchise agreement or a subcontractor agreement” which “prohibits or restricts one employer from soliciting or hiring another employer’s employees or former employees.”  Unlike federal antitrust law which prohibits “naked” no-poach agreements between employers, the Act does not provide an exception for no-poach agreements which are ancillary to a legitimate business collaboration.  This portion of the Act is likely intended to combat fast food franchisors’ practice of including employee no-poach clauses in franchise agreements.  However, it prohibits a wide range of less controversial practices such as including no-poach language in joint venture agreements, or staffing company service contracts.

The Act authorizes the Department of Labor to assess civil fines against employers who enter into, enforce, or threaten to enforce, “restrictive employment agreements.”

Ban on Noncompetes With Lower Wage Employees

The Act bars employers from entering into noncompete agreements with employees who earn less than 400% of the federal poverty line ($49,960 per year for 2019).  Because the income level below which employees cannot enter noncompete agreements is tied to the federal poverty line which is subject to annual change, Maine employers should develop procedures to ensure ongoing compliance with this rule.  The Act authorizes the Department of Labor to assess fines against employers who violate this provision by entering into noncompete agreements with lower income employees, regardless of whether the employer actually seeks to enforce the agreement.

General Limits on the Enforcement of Noncompetes

The Act provides that noncompete agreements will be enforceable only if they are reasonable and necessary to protect an employer’s: (a) trade secrets; (b) confidential information; or (c) goodwill.  Employers can demonstrate that a noncompete agreement is necessary by showing that its legitimate business interests cannot be protected through an alternative restrictive covenant such as a nonsolicitation or nondisclosure agreement.

Disclosure Requirements for Noncompete Agreements

The Act requires employers to disclose that acceptance of a noncompete agreement will be required prior to making an offer of employment for a position that will require the acceptance of a noncompete agreement.  Employers must also provide current or prospective employees a copy of any noncompete agreement at least three business days before the employee or prospective employee will be required to sign the agreement.  Failure to provide either form of advanced notice is punishable by civil fine.

Delayed Effective Date of Noncompetes

The Act mandates a six month waiting period between when an employee enters into a noncompete agreement and when the noncompete obligations are binding on that employee.  In addition, noncompete agreements are not binding on employees during their first year of employment with an employer.[1]  These rules merely effect whether an agreement is enforceable; the Department of Labor is not authorized to levy fines against employers with noncompliant agreements.

Conclusion

The Act’s strict limits on noncompetes will force Maine employers to find more creative options to protect their proprietary information, goodwill, and other legitimate business interests.  For example, employers may want to adapt to the Act’s prohibition on noncompete agreements during an employee’s first year of employment by adopting robust garden leave, nonsolicitation, or forfeiture on competition agreements not subject to the Act’s strict requirements.

Violations of the Act’s provisions governing no-poach agreements between employers, subjecting lower wage employees to noncompete agreements, and disclosure requirements are all punishable by fines of “not less than $5,000.”  In light of these potentially significant monetary penalties, Maine employers should take steps to modify any noncompliant forms prior to the Act’s September 18, 2019 effective date.

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[1] The Act’s provisions governing the delayed effective date of noncompete agreements do not apply to allopathic or osteopathic physicians.

190709-CA-WEBINAR

California, the Golden State, is a special place to live and work. However, if you are an employer in California, you have most likely heard warnings of what you cannot do in terms of protecting your workforce and trade secrets and preventing unfair competition. While the rules of the road are different in California, employers are not without tools to protect their resources. And those tools are the focus of this program: what you can do to protect your workforce and trade secrets in California.

Join our colleagues Steven R. Blackburn, James A. Goodman, and Peter A. Steinmeyer as they cover the topics of:

  • The art of actively (and actually) protecting your trade secrets
  • How, if at all, does the Defend Trade Secrets Act of 2016 affect trade secret litigation and employee mobility in California?
  • The latest (in terms of technology) on protecting your electronically stored information from being exported from the work environment.
  • The importance of good employee exit procedures
  • Best practices in monitoring competitive damages after an employee departs
  • “Cease and desist” letters in California
  • What is the status of various legal work-arounds that employers have tried in California over the years? Garden leaves, contingent compensation, choice-of-law provisions–are any of them viable?
  • Be ready to go to court—or, more accurately, “how to be ready before you go to court”
  • The latest on restricting former employees from soliciting their former co-workers
  • The ever-present problem: how do you prove damages?
  • Reconciling mandatory arbitration with injunctive relief
  • The surprise new issue: broad nondisclosure agreements being attacked as restraints of trade or violations of various California Labor Code provisions or the National Labor Relations Act

Click here to request complimentary access to the webinar recording and presentation slides.

The 2019 legal landscape of employee mobility continues to evolve, at times drastically. Courts and legislatures are giving increased scrutiny to employers’ claims to protect the confidentiality of their trade secrets and attempts to enforce their employees’ restrictive covenants, including non-competition and non-solicitation agreements. It can be hard for employers to prevent their confidential information and client goodwill from following certain departing employees.

With greater knowledge of the latest legal theories, decisions, statutes, and other developments in this area, employers can better protect and defend their interests—even preemptively—including in the ways they draft their employee agreements, design their compensation structures, and consider whether and when to engage in litigation.

This issue of Take 5 aims to provide a few tools for deciphering and navigating this changing employee mobility landscape.

Drafting Employment Agreements to Comply with New State Laws and Pending Legislation Restricting Enforceability of Non-Competes

David J. Clark

In the last year, Maryland, Massachusetts, Oregon, and Washington State passed game-changing laws that restrict the enforceability of provisions between an employer and an employee that limit the employee’s post-termination ability to work in competition with the employer. Numerous other state legislatures, including Missouri’s, New Hampshire’s, and New Jersey’s, recently have considered similar legislation.
Employers can get ahead of this trend by implementing the following measures when preparing and presenting non-compete agreements to new and existing employees:

  • Do not ask low-wage or junior-level employees who do not have important client relationships or access to company trade secrets to sign non-competes.
  • When presenting a non-compete agreement (and it must be in writing), provide the individual with at least 10 days’ notice and an opportunity to review the agreement with counsel.
  • Provide compensation to the employee during any non-compete period. For a non-compete presented to an existing employee, offer more consideration than mere continued employment.
  • Limit the duration of any non-compete to one year at the most, and preferably less.
  • If including a choice of law or forum selection clause, specify the state where the employee works or resides.
  • Keep the scope of the non-compete restriction reasonable by limiting it to the specific industry, job duties, and/or geographic area in which the employee worked for the employer.
  • Advise departing employees of their ongoing non-compete obligations.
    While no guarantee of enforcement, adherence to these measures will increase the likelihood that a non-compete will be upheld if challenged in court or arbitration.

Red Flags When Recruiting a Competitor’s Employee: Spotting Issues Before a Demand Letter

Michael S. Ferrell

Winning in restrictive covenant litigation is one thing, but most employers would prefer to avoid it if possible, or at least make decisions with “eyes wide open” as to the litigation risks of a potential hire. Below are some “red flags” that may motivate a dispute.

The Former Employer’s Sensitivities, Generally and Specific to the Candidate:

  • What are the resources and litigation appetite of the former employer? Non-compete litigation is expensive and comes with significant risk. Does the former employer have a history of filing such litigation? Is the former employer aggressive in enforcing restrictive covenants, and under what circumstances?
  • How sensitive is the former employer likely to be about the loss of the candidate? How senior or junior is the candidate? Is he/she a practice leader or individual contributor? Does the candidate hold key client relationships, trade secrets, or other intellectual property (“IP”) knowledge that may motivate litigation?
  • Did the candidate take any IP or other property of the former employer? A belief the candidate stole IP casts the candidate as a bad actor and opens up statutory claims for theft of trade secrets. The new employer should expressly remind candidates to take and bring nothing from their former employer.
  • How vulnerable are the restrictions in the candidate’s agreement if an enforcement action is filed? The restrictions may be overly broad and out of step with recent case law in the applicable jurisdiction. The greater the vulnerability, the less likely the former employer will bring litigation.

The Former Employer’s Sensitivities to the Candidate’s New Employment:

  • Is the new employer a direct or indirect competitor of the former employer? The more direct the competition, the more likely the former employer is to be motivated to take action. It may be possible to avoid a dispute by providing assurances the candidate will not, for the restricted period, solicit the customers or employees of the former employer.
  • Is the candidate being hired in substantially the same role as at the former employer? Hiring into a different role, at least for the duration of the restriction, may avoid a dispute. Former employers have limited ability to monitor the candidate’s activities, but a representation may be enough.
  • Is the candidate being hired to work/compete in the same geographic area or market space? A candidate moving to a competitor in the same city or market may lead to a dispute. If this can be avoided for the duration of a restriction, there is a greater likelihood of resolution without litigation.

The Parties’ History:

  • Is the former employer’s perception likely to be that the new employer is targeting its employees? Is the candidate the first or just the most recent individual hired from the former employer? Did the new employer recruit the candidate, or did the candidate make the first contact about employment? One or two hires may go unchallenged, but additional hires, particularly over a short period, increase the risk of litigation.
  • Has the former employer previously hired employees of the new employer, and how did the new employer react? If the new employer’s previous reaction was to file suit to prevent an employee from working for the former employer, one shouldn’t expect the former employer to turn the other cheek when the situation is reversed.
  • Are there other indications of bad blood between the parties? Have there been other disputes between the new employer and former employer that led to litigation? Has the candidate or new employer disparaged the former employer in the marketplace? The more bad blood, the greater the risk of litigation.

ERISA Nonqualified Deferred Compensation Plans, Restrictive Covenants, and ERISA Preemption

Gretchen Harders, Cassandra Labbees, and Daniel J. Green

Although typically the province of state law, Employee Retirement Income Security Act (“ERISA”) preemption may override state law limitations when forfeiture-for-competition covenants come within the purview of an ERISA benefit plan. Valid forfeiture provisions in ERISA plans, therefore, may be enforced even in states where forfeiture-for-competition clauses are not typically enforceable.

The most suitable type of ERISA plan for a forfeiture-for-competition clause is a type of nonqualified deferred compensation plan colloquially known as a “Top Hat Plan.” Top Hat Plans are a category of unfunded ERISA plans maintained “primarily for the purpose of providing compensation to a select group of management or highly compensated employees.”[1] In general, “ERISA preempts state law regarding forfeiture of retirement benefits.”[2] ERISA also has been found to preempt state laws limiting the enforcement of non-competition clauses in Top Hat Plans.[3] This suggests that employers with Top Hat Plans including forfeiture-for-competition clauses could use those forfeiture clauses to enforce restrictive covenants that would otherwise violate state law if provided under an agreement not subject to ERISA.

Top Hat Plans with embedded forfeiture-for-competition clauses also could afford employers advantages in adjudicating whether departing employees violated their non-competition obligations. If Top Hat Plan documents clearly state that the plan administrator maintains discretionary authority to determine benefits eligibility and to construe the terms of the Top Hat Plan, many courts will afford the plan administrator’s determination a deferential standard of review.[4]
Employers sponsoring a Top Hat Plan with embedded forfeiture-for-competition clauses should proceed with their eyes open concerning what this provision can and cannot accomplish. A restrictive covenant in a Top Hat Plan does not directly prohibit the behavior; rather, it is only enforceable to the extent compensation is forfeited as a result of the behavior. Further, the purpose of a traditional Top Hat Plan is to provide a stream of retirement income to key executives and not necessarily as a tool to enforce restrictive covenants, so any restrictive covenant provisions should be considered in the context of the purpose of the Top Hat Plan, the plan design, and the overall compensatory policies of the employer.

A Judge’s Tips for Keeping Trade Secrets “Secret”

Peter A. Steinmeyer and Erica McKinney

Just because information is sufficiently sensitive and valuable that it can qualify as a “trade secret” does not mean that it will qualify unless the owner of the information takes adequate steps to protect its secrecy.

In a recent decision, Judge John J. Tharp, Jr., of the U.S. District Court for the Northern District of Illinois explained that “there are two basic elements to the analysis” of whether information qualifies as a “trade secret”: (1) the information “must have been sufficiently secret to impart economic value because of its relative secrecy” and (2) the owner “must have made reasonable efforts to maintain the secrecy of the information” (internal quotation marks omitted).[5]

According to Judge Tharp, some of those “reasonable efforts” that a company can take to maintain the secrecy of its information include:

  • using non-disclosure and confidentiality agreements with employees;
  • enacting a policy regarding the confidentiality of business information that is more detailed than a mere “vague, generalized admonition about not discussing [company] business outside of work”;
  • training “employees as to their obligation to keep certain categories of information confidential”;
  • asking departing employees whether they possess any confidential company information, and, if they do, instructing them to return or delete it;
  • adequately training IT personnel about data security practices;
  • restricting access to sensitive information on a need-to-know basis; and
  • as appropriate, labelling documents “proprietary” or “confidential.”

As Judge Tharp made clear, companies that fail to institute reasonable measures to protect sensitive information do so at their own peril.

Can Plaintiffs Use an Antitrust Defense as a Weapon to Challenge Non-Competes?

J. William Cook

On March 15, 2019, four radiation oncologists alleged that their employer, 21st Century Oncology LLC, and its related entities have maintained an illegal monopoly over the provision of radiation oncology services in three counties in southwest Florida in violation of federal antitrust laws. Dosoretz v. 21st Century Oncology Holdings, Inc., 2:19-cv-00162-UA-UAM, filed in the U.S. District Court for the Middle District of Florida, alleges that the anti-competitive conduct includes requiring the oncologists—the “only radiation oncologists in these counties”—to sign “onerous” non-compete agreements that stifled competition in the counties and “exclusive long-term contracts with key hospitals,” which allegedly created a monopoly on radiation oncology services for patients at those hospitals. The complaint seeks a declaration that (1) the defendants violated the Sherman Act through their anticompetitive practices and (2) the doctors’ non-compete agreements are unenforceable. Alternatively, the doctors seek to restrict the temporal and geographic scope of the overbroad non-competes. The defendants’ motion to dismiss is pending.
It is not easy to prevail on a monopolization claim premised on non-compete restrictions in employment agreements. As explained in Cole v. Champion Enters., 496 F. Supp. 2d 613, 635 (M.D.N.C. 2007), although “[t]here can be little doubt that the Sherman Act applies to [non-competes],” there is little “precedent”; “[o]ne explanation … may be the difficulty involved in proving that a post-employment noncompetition agreement violates the Sherman Act. Such agreements are not per se violations of the Sherman Act but must be analyzed under the rule of reason. To establish a violation under the rule of reason, one must prove that the agreement has an adverse effect on competition in the relevant market.”
The Dosoretz case is worth watching. If it progresses, it may provide valuable insight for non-competition litigants, whether they are asserting or fighting an antitrust claim premised on non-compete agreements.

Read the Take 5 on our website.

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[1] 29 U.S.C. § 1051(2).
[2] Thomas v. Bostwick, No. 13-cv-02544-JCS, 2014 U.S. Dist. LEXIS 123524 (N.D. Cal. Sep. 3, 2014).
[3] Conklin v. Brookfield Homes Holdings, Inc., No. SACV 08-00452-CJC(PJWx), 2009 U.S. Dist. LEXIS 134870 at *10 (C.D. Cal. Oct. 6, 2009) (enforcing forfeiture-for-competition clause in Top Hat Plan against California employee); Clark v. Lauren Young Tire Ctr. Profit Sharing Tr., 816 F.2d 480 (9th Cir. 1987)(“ERISA preempts state law with respect to non-competition forfeiture clauses.”); Lojek v. Thomas, 716 F.2d 675 (9th Cir. 1983) (“The district court correctly decided that ERISA has preempted Idaho law and that federal law governs the validity of the plan.”); Elbling v. Crawford & Co., No. 16cv2951-L(KSC), 2018 U.S. Dist. LEXIS 53521 (S.D. Cal. Mar. 28, 2018) (state law denial of benefits claims preempted by ERISA).
[4] Elbling, at *8 (“[T]he Ninth Circuit reviews administrators’ decisions regarding top hat plans for abuse of discretion when the plan gives the plan administrator discretionary authority to resolve claims.”); Wall v. Alcon Labs. Inc., 551 F. App’x 794, 799 (5th Cir. 2014) (plan administrator’s determination that plaintiff “violated the non-compete clause” in Top Hat Plan is subject to “arbitrary and capricious” standard of review).
[5] Abrasic 90 Inc. v. Weldcote Metals, Inc., No. 1:18-cv-05376 (N.D. Ill. Mar. 3, 2019) at 11.

Maryland recently joined the ranks of states with laws limiting the enforcement of non-compete agreements against low wage workers.  Maryland’s recently enacted law (SB 328) bars employers from enforcing non-compete agreements against workers earning less than or equal to $15 per hour or $31,200 per annum.

In a nod to employers, the statute is carefully worded to protect low wage workers exclusively and “may not be construed to affect a determination by a court in an action involving” an employee whose earnings exceed both $15 per hour and $31,200 per annum.  The statute only bars the enforcement of non-compete agreements (as opposed to other types of restrictive covenants, such as customer or co-worker non-solicitation agreements) and explicitly reserves employers’ right to enforce contracts prohibiting “the taking or use of a client list or other proprietary client-related information.”

The new law takes effect on October 1, 2019, invaliding past contracts as applicable and prohibiting any future agreements.  In the meantime, Maryland employers should consider revising their non-compete agreements to conform to the new law.

This post was written with assistance from Jenna Russell, a 2019 Summer Associate at Epstein Becker Green.

ELTW-Podcast-1980

In its new podcast series, Employment Law This Week has released an extended Monthly Rundown, discussing some of the most important developments for employers in June 2019.

This episode includes:

  • Worker Classification in the Gig Economy
  • NLRB Announces Rulemaking Agenda
  • National Backlash Builds Against Non-Compete Agreements
  • Tip of the Week: Compliance with New Jersey’s Equal Pay Act

Stay tuned: Listen to the latest episode on our website or on your preferred platform – iTunes, Google Play, Soundcloud, or Spotify – be sure to subscribe!