On March 7, 2019, a bipartisan group of U.S. Senators sent a letter to the Government Accountability Office (“GAO”), requesting that the agency perform a review of the effect of non-competition agreements “on workers and on the economy as a whole.” The six signatories to the letter were Chris Murphy (D-CT), Todd Young (R-IN), Elizabeth Warren (D-MA), Marco Rubio (R-FL), Tim Kaine (D-VA), and Ron Wyden (D-OR). In particular, they asked the GAO to assess:

  1. What is known about the prevalence of non-compete agreements in particular fields, including low-wage occupations?
  2. What is known about the effects of non-compete agreements on the workforce and the economy, including employment, wages and benefits, innovation, and entrepreneurship?
  3. What steps have selected states taken to limit the use of these agreements, and what is known about the effect these actions have had on employees and employers?

The letter is but the latest in numerous efforts at the federal level (including prior legislation introduced by Senators Warren and Rubio) to shine a spotlight on, and limit, the use of non-competes by employers, particularly with regard to low-wage or entry level employees. Thus far, bills introduced on this issue in Congress have failed to gain traction, but a GAO review on the topic could be used to support such legislation in the future.

A federal judge in Chicago recently taught a painful lesson to an Illinois employer: even if information is sufficiently sensitive and valuable that it could qualify as a “trade secret,” it won’t unless the owner of the information took adequate steps to protect its secrecy.

In a thorough opinion issued in the case, Abrasic 90 Inc., d/b/a CGW Camel Grinding Wheels, USA v. Weldcote Metals, Inc., Joseph O’Mera and Colleen Cervencik, U.S. District Judge John J. Tharp, Jr. of 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 omitted).

According to Judge Sharp’s opinion in Abrasic 90 Inc., when the long-time president of grinding disc manufacturer CGW Camel Grinding Wheels (“CGW”) left CGW to start a competing business, Weldcote Metals, Inc. (“Weldcote”), he took with him a flash drive with information about CGW’s pricing, customers, and suppliers. He later hired another former CGW employee to join him at Weldcote and she, too, brought with her CGW information that she believed “might be helpful to her at Weldcote.” Some of this CGW information was uploaded to Weldcote’s computers and used “as a general reference point and a benchmark when determining some of Weldcote’s initial needs,” and some of the CGW information was shared with Weldcote sales reps, who were “instructed” to “target key CGW distributors.”

With these facts, CGW no doubt thought it had a compelling claim for trade secret misappropriation and that it was likely to receive injunctive relief. But Judge Tharp denied CGW’s request for a preliminary injunction under the federal Defend Trade Secrets Act and the Illinois Trade Secrets Act, in large part because he found that CGW had taken “almost no measures to safeguard the information that it now maintains was invaluable to its competitors.” In fact, Judge Sharp wrote that CGW’s data security “was so lacking that it is difficult to identify the most significant shortcoming.”

According to Judge Sharp, the following were among the data security measures that CGW could have taken, but did not:

  • entering into non-disclosure and confidentiality agreements with employees;
  • enacting a policy regarding the confidentiality of business information “beyond a vague, generalized admonition about not discussing CGW business outside of work”;
  • training “employees as to their obligation to keep certain categories of information confidential”;
  • asking departing employees whether they possessed any confidential company information, and if they do, instructing them to return or delete it;
  • adequately training CGW’s IT manager about data security practices;
  • restricting access to sensitive information on a need-to-know basis; and
  • as appropriate, labelling documents “proprietary” or “confidential.”

And so, the moral of this story is that if a company wants to claim that its information is a statutory trade secret, it needs to employ information security measures reasonably consistent with that claim. Companies which ignore the lesson taught by Judge Sharp do so at their own peril.

Employee restrictive covenant agreements often contain fee-shifting provisions entitling the employer to recover its attorneys’ fees if it “prevails” against the employee. But “prevailing” is a term of art in this context. Obtaining a TRO or preliminary injunction is not a final decision on the merits, so does obtaining a TRO or preliminary injunction trigger a fee-shifting provision? A recent case illustrates that an employer can sidestep this potentially thorny issue by using careful and thoughtful drafting.

In Kelly Services, Inc. v. De Steno, 2019 U.S. App. LEXIS 875 (6th Cir. Jan. 10, 2019), a Sixth Circuit panel upheld the lower court’s decision to enforce a broad attorneys’ fee provision and award Plaintiff Kelly Services over $72,000 in attorneys’ fees. In the lower court, Plaintiff sought attorneys’ fees after obtaining a preliminary injunction prohibiting Defendants from competing. The underlying provision did not require Plaintiff to ‘prevail’ before seeking fees. Rather, the provision required Defendants to pay Plaintiff’s attorneys’ fees “incurred by” enforcing the employment agreement.

The District Court interpreted the fee provision by its plain language and awarded Plaintiff attorneys’ fees “incurred” in seeking a preliminary injunction to enforce the employment agreement. The Sixth Circuit affirmed.

While the Sixth Circuit accepted the broad language of Plaintiff’s attorneys’ fee provision, it cautioned against potential abuse. The court noted, for example, that a fee award would be unreasonable in cases “made with little or no basis, or made for purposes of oppression or harassment …” under the guise of “enforcement.” Following the court’s ruling, employers should consider creating or revising attorneys’ fee provisions to broaden the scope and eliminate “prevailing party” language.

In the last couple of years, there have been a number legislative efforts, at both the state and federal level, to limit the use of non-competes in the U.S. economy, particularly with respect to low wage and entry level workers.  Recent bills introduced in the Senate indicate there is a strong opportunity for a bipartisan path to enactment of such a law by the U.S. Congress.

Last month, Marco Rubio, one of Florida’s U.S. Senators and a previous Republican candidate for President, introduced legislation in the Senate – the “Freedom to Compete Act” – which would set limits on employers’ ability to enter into non-competition agreements with certain kinds of employees.  This bill, if enacted, would render void existing non-compete agreements, and outlaw any new non-compete agreements, between employers and employees classified as “non-exempt” under the Fair Labor Standards Act of 1938 (“FLSA”).  Generally, “exempt” workers under the FLSA are bona fide executive, administrative, professional and outside sales employees who are paid salaries and therefore are exempt from the FLSA’s minimum wage and overtime pay requirements.  “Non-exempt” workers generally are employees paid on an hourly basis who must be paid a minimum wage and time-and-a-half for overtime hours worked.

Last year, on April 26, 2018, another bill – the “Workforce Mobility Act” – was introduced in the Senate (along with a companion bill in the House) by Democrat Chris Murphy of Connecticut and co-sponsored by Elizabeth Warren of Massachusetts, a likely Democratic candidate for President in 2020.  The Workforce Mobility Act went a lot farther than the Freedom to Compete Act: it would have prohibited employers from enforcing or threatening to enforce non-compete agreements against any employee (not just “non-exempt” employees), and would have required employers to post prominently a notice that such agreements are illegal.  It also would have granted the Department of Labor powers of investigation and enforcement with respect to employers’ use of non-compete agreements and provided all employees with a private right of action against employers who continued to use non-compete agreements, allowing for compensatory damages, punitive damages and attorneys’ fees.

Of these two legislative bills, the Workforce Mobility Act was clearly the more draconian and far-reaching.  Perhaps because many non-competes, especially for more senior, well-compensated employees, are defensible for legitimate reasons including the protection of trade secrets, confidential information and customer relationships, the Workforce Mobility Act did not gain much traction and was not enacted.  Senator Rubio’s Freedom to Compete Act, however, by focusing on non-exempt workers, is more in line with legislative efforts in the states, and with enforcement actions by state Attorneys General.  As such, it has a better chance of garnering bipartisan support and being enacted.  Stay tuned.

As we’ve discussed, the California Court of Appeal in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., recently ruled that a broadly worded contractual clause that prohibited solicitation of employees for one year after employment was an illegal restraint on trade under California law.

Now, a second court has joined in.

 In Barker v. Insight Global LLC, Case No. 16-cv-07186 (N.D. Cal., Jan. 11, 2019), Judge Freeman, sitting in the Northern District of California, adopted AMN’s reasoning and reversed a prior order that dismissed claims that asserted a contractual employee non-solicitation provision was unlawful.

In doing so, the Court adopted the primary holding of AMN – that contractual prohibitions barring solicitation of employees are invalid under the California Supreme Court’s reasoning in Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937. The Court also rejected the secondary ruling in AMN, which would have arguably limited the holding of AMN to its facts.

Barker is the second court in as many months to invalidate an employee non-solicitation provision and employers who regularly include such provisions in their agreements with California employees should reassess their use and enforcement of those provisions.

Tuesday, January 29, 2019
12:30 p.m. – 1:45 p.m. ET 

Issues arising from employees and information moving from one employer to another continue to proliferate and provide fertile ground for legislative action and judicial decisions. Many businesses increasingly feel that their trade secrets or client relationships are under attack by competitors—and even, potentially, by their own employees. Individual workers changing jobs may try to leverage their former employer’s proprietary information or relationships to improve their new employment prospects, or may simply be seeking to pursue their livelihood.

How can you put yourself in the best position to succeed in a constantly developing legal landscape?

Whether you are an employer drafting agreements and policies or in litigation seeking to enforce or avoid them, you will want to know about recent developments and what to expect in this area.

Join Epstein Becker Green attorneys David J. Clark, William Cook, and Aime Dempsey for a webinar providing insights into recent developments and expected trends in the evolving legal landscape of trade secret and non-competition law.

During this webinar, the panel will discuss:

  • Legal trends in the enforceability of non-competes
  • Steps employers can take to comply with new laws
  • New and pending state and federal legislation, including the Massachusetts Noncompetition Agreement Act
  • Recent judicial decisions regarding restrictive covenants, including an important California case concerning provisions barring solicitation of employees
  • New cases and statutes regarding protection of trade secrets
  • Continuing governmental scrutiny of “no poach” agreements

Register today for this complimentary webinar!

The Illinois Appellate Court recently declined to adopt a bright line rule regarding the enforceability of five year non-competes or three year non-solicits, and instead directed courts to interpret the reasonableness of any such restrictive covenants on a case-by-case basis.

In Pam’s Acad. of Dance/Forte Arts Ctr. v. Marik, 2018 IL App (3d) 170803, the plaintiff dance company sued a former employee for breaching a non-disclosure agreement and restrictive covenant by allegedly opening a dance studio within 25 miles of plaintiff and soliciting students and teachers by means of an “improperly obtained” customer list. Following a split resolution on a motion to dismiss, the trial court certified two questions for appellate review, including the one pertinent to readers of this blog: whether a post-employment non-compete lasting five years or a post-employment customer/co-worker non-solicit lasting three years is per se unenforceable as a matter of Illinois law?

Notwithstanding the facial over-length of these restrictions, the Illinois Appellate Court declined to find that three or five year restrictive covenants were de facto unenforceable. Instead, the Court reiterated the need for the trial court to consider the totality of the circumstances, explaining that “the reasonableness of the restrictive covenant at issue here requires the resolution of a number of facts” – facts to be resolved at the trial court level.

While the court’s ruling suggests that temporal restrictions of three or five years may, in appropriate circumstances, be permissible, practical experience and other Illinois cases indicate the need for employers to narrowly tailor restrictive covenants, including temporal restrictions. To avoid challenges to the overbreadth of a restrictive covenant, employers should adhere to the standards set forth in the Illinois Supreme Court’s seminal decision, Reliable Fire Equipment Co. v. Arrendo, in which the Court held that a restrictive covenant is only enforceable if it: (1) is no greater than required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor; and (3) is not injurious to the public.

Thomson Reuters Practical Law has released a new edition of “Preparing for Non-Compete Litigation,” a Practice Note co-authored by our colleague Peter A. Steinmeyer of Epstein Becker Green.

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 non-compete 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 full Note in PDF format.

In its 2008 landmark decision Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, the California Supreme Court set forth a broad prohibition against non-compete provisions, but it left open whether or to what extent employee non-solicit provisions were enforceable. Since Edwards, no California appellate court has addressed that issue in a published opinion – until recently. On November 1, the California Court of Appeal in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., ruled that a broadly worded contractual clause that prohibited solicitation of employees for one year after employment was void under California Business and Professions Code section 16600, which provides “Except as provided in this chapter every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” The decision calls into question the continuing viability of employee non-solicitation provisions in the employment context, and employers who regularly include such provisions in their agreements should reassess their use and enforcement of those provisions.

AMN and Aya are competing healthcare staffing companies that provide travel nurses, to medical care facilities throughout the country. The individual defendants were former travel nurse recruiters of AMN who left AMN and joined Aya, where they also worked as travel nurse recruiters.

The individual defendants each signed a confidentiality and nondisclosure agreement (CNDA) with AMN, which included a provision preventing them from soliciting any employee of AMN to leave AMN for a one-year period. Section 3.2 of the CDNA provided:

Employee covenants and agrees that during Employee’s employment with the Company and for a period of [one year or] eighteen months after the termination of the employment relationship with the Company, Employee shall not directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of the Company or any Company Affiliate to leave the service of the Company or such Company Affiliate.

Because AMN’s travel nurses were employees of AMN, section 3.2 of the CNDA applied to prevent a former AMN employee from recruiting a travel nurse on a temporary assignment for AMN.

After the individual defendants resigned, AMN sued them, asserting various causes of action, including breach of the non-solicitation provision in the CNDA. Defendants filed a cross-complaint, requesting the court declare the non-solicitation provision in the CNDA void and enjoining AMN from enforcing the provision against other former AMN employees.

The defendants moved for summary judgment of AMN’s complaint and of their own cross-complaint. Defendants claimed that the non-solicitation provision in the CNDA was an improper restraint on individual defendants’ ability to engage in their profession – soliciting and recruiting travel nurses – in violation of Business and Professions Code section 16600. The trial court agreed, and granted defendants summary judgment on AMN’s complaint and granted summary adjudication of defendants’ declaratory relief cause of action. Then the court enjoined AMN from enforcing the employee non-solicitation provision in the CNDA as to any former California employee and awarded defendants attorney’s fees.

The Fourth District Court of Appeal affirmed the trial court’s grant of summary judgment. In doing so, the court concluded that the non-solicitation provision in the CNDA was void under section 16600. “Indeed, the broadly worded provision prevents individual defendants, for a period of at least one year after termination of employment with AMN, from either ‘directly or indirectly’ soliciting or recruiting, or causing others to solicit or induce, any employee of AMN. This provision clearly restrained individual defendants from practicing with Aya their chosen profession—recruiting travel nurses on 13-week assignments with AMN.” The court further found that a one-year, post-termination restriction preventing a former AMN recruiter from contacting and recruiting a travel nurse on a 13-week assignment with AMN “at a minimum equates to a period of four such assignments for a given nurse. The undisputed evidence thus shows section 3.2 of the CNDA restricted individual defendants’ ability to engage in their ‘profession, trade, or business.'”

In granting summary adjudication, the court rejected AMN’s reliance on Loral Corp. v. Moyes (1985) 174 Cal. App. 3d 268 for the argument that the CNDA was valid because it only prevented non-solicitation of employees (here, travel nurses). Moyes involved the validity of a contractual clause restricting a former executive officer from “raiding” the plaintiffs’ employees. In determining the provision was more like a permissible non-solicitation or nondisclosure agreement and not an invalid non-competition agreement, the court observed that the agreement “restrained [defendant] from disrupting, damaging, impairing or interfering with his former employer by raiding [the plaintiffs’] employees …. This does not appear to be any more of a significant restraint on his engaging in his profession, trade or business than a restraint on solicitation of customers or on disclosure of confidential information.”

The court concluded that Moyes’s use of a reasonableness standard in analyzing the non-solicitation clause conflicted with Edwards – decided over twenty years later – where the California Supreme Court interpreted Section 16600 to be a “settled public policy in favor of open competition,” and rejected the common law “rule of reasonableness.” Because the Edwards court found section 16600 “unambiguous,” and noted that “if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect,” the court expressed “doubt [as to] the continuing viability of Moyes post-Edwards.”

The court also affirmed the injunction, which prevented AMN and its employees and agents “from using, enforcing, or attempting to enforce any contract or employment agreement in the State of California which purports to restrain its former employees from directly or indirectly soliciting or inducing, or causing others to solicit or induce, any employee of AMN to leave the service of AMN.” In connection with the injunction, the court approved an award of attorney’s fees to defendants under Code of Civil Procedure section 1021.5, which permits fees to be awarded “in any action which has resulted in the enforcement of an important right affecting the public interest if: (a) a significant benefit … has been conferred on the general public or a large class of persons, (b) the necessity and financial burden of private enforcement … are such as to make the award appropriate, and (c) such fees should not in the interest of justice be paid out of the recovery, if any.”

In affirming the award of attorney’s fees, the court concluded that “Defendants clearly were successful parties within the meaning of the statute … the instant action involved an important issue affecting the public interest, namely the enforceability of section 3.2 [of the CNDA, which], if enforced, prevented former AMN employees from recruiting travel nurses and similar professionals who were on temporary assignment with AMN, even if those same travel nurses had applied to, were known by, and/or had previously been placed by, a competitor of AMN, as the instant case aptly shows.” The court further concluded that “instant action conferred a significant benefit on the public … [and] a large class of persons … namely, all current and former AMN California employees who had signed a CNDA containing a non-solicitation of employee provision similar to section 3.2 of the CNDA.”

The AMN Healthcare decision is significant for several reasons. The court’s expressed doubt as to the viability of Loral Corp. v. Moyes should give pause to both employers who regularly include such provisions in employment agreements and practitioners who advise employers as to the inclusion or enforceability of such provisions. While it could be argued the appellate court’s ruling should be limited to its facts because an employee non-solicitation clause easily restrains a recruiter from engaging in their “profession, trade, or business,” the AMN Healthcare court’s reasoning could be extended to other situations. Further, the court’s award of attorney’s fees under Code of Civil Procedure section 1021.5 provides a cautionary tale for employers attempting to enforce contractual provisions that run afoul of Business & Professions Code section 16600. Well-informed defendants will bring a cross-complaint seeking injunctive relief, and, if they prevail, could be entitled their attorney’s fees in doing so.

States across the country have been using enforcement actions, legislation, and interpretive guidance to limit employers’ ability to enforce restrictive covenants against low wage workers. The recent decision in Butler v. Jimmy John’s Franchise, LLC et. al., 18-cv-0133 (S.D. Ill. 2018) suggests this trend may extend to federal antitrust law.

The Butler case relates to the legality of certain restrictive covenants in Jimmy John’s franchise agreements.[1] The Complaint alleges that Jimmy John’s required franchisees to agree not to hire any job applicants who worked for a different Jimmy John’s franchise in the previous year. Franchisees also agreed not to solicit one another’s employees. The franchise agreements also named all other Jimmy John’s franchisees as third party beneficiaries of the agreement. This meant that if Franchise B hired a Franchise A employee, Franchise A could sue to enforce the agreement between Franchise B and Jimmy John’s Franchise LLC (the franchisor).

In determining claims of antitrust violations, the distinction between “horizontal” and “vertical” agreements is highly significant. Challenges to vertical agreements are analyzed under the “rule of reason” under which plaintiffs must prove market power and that the challenged practices actually harm competition. This generally requires sophisticated economic analysis. Horizontal agreements not to compete, in contrast, are generally deemed “per se” unreasonable and do not require any proof regarding market context.

In Butler, the Court characterized the franchise agreements as horizontal agreements. Such a characterization permitted the plaintiffs to state a claim without alleging that a particular franchisor has sufficient market power to effect the market for employees in an entire geographic region. In other words, the plaintiffs did not have to prove that Jimmy John’s on its own had enough market power to depress the wages of delivery drivers in a particular city.

To keep things in perspective, Butler is an isolated district court decision which may remain an outlier. However, it serves as another example of how subjecting low wage workers to restrictive covenants can impose heightened litigation risk. Butler provides another reason (on top of the joint FTC/DOJ Antitrust Guidance for Human Resources Professionals and DOJ enforcement actions following through on that guidance) for employers to ensure their restrictive covenants are not only enforceable but compliant with antitrust law.

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[1] Jimmy John’s has since agreed to remove the challenged provisions from their franchise agreements.