In Ixchel Pharma, LLC v. Biogen, Inc., 20 Cal. Daily Op. Serv. 7729, __ P.3d __(August 3, 2020), the California Supreme Court made it easier for businesses to enforce restrictive covenants against other businesses.  This holding is a directional shift for the Court which had previously narrowly construed the applicable statute (California Business & Professions Code § 16600) when addressing employee mobility issues.

Ixchel sued Biogen in federal court and alleged Ixchel entered into a Collaboration Agreement with Forward to develop a new drug that contained dimethyl fumarate (DEF), which authorized Forward to terminate the agreement at any time on 60 days’ notice.   During the same time period, Forward negotiated a $ 1.35 billion settlement and license agreement with Biogen in exchange for certain Forward intellectual property.  Section 2.13 of that agreement required Forward to terminate any agreement with Ixchel that related to DEF development.  Forward terminated the Ixchel agreement and Ixchel lost its ability to develop its product.

The operative complaint alleged the Biogen-Forward agreement was a restraint of trade in violation of § 16600, which states “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 district court dismissed the complaint finding the Biogen-Forward agreement must be analyzed under the antitrust rule of reason and that § 16600 does not apply outside of the employment context.

Ixchel appealed to the Ninth Circuit and after oral argument, the Court certified two questions to the California Supreme Court, which rephrased the questions as:  (1) Is the Plaintiff required to plead an independently wrongful act to state a claim for tortious interference of an at will contract and (2) What is the proper standard to determine whether § 16600 voids a contract by which one business is restrained from engaging in another lawful business?  The alleged violation of § 16600 was the independent wrongful act in Ixchel’s tortious interference claim.

In Reeves v Hanlon (2004), 33 Cal 4th 1140, the Court answered issue (1) affirmatively in the employment context and in Ixchel it extended that holding to all at will contracts.

In Edwards v Arthur Andersen (2008), 44 Cal 4th 937, the Court, in the employment context, held there was no limited restraint exception to § 16600 and rejected any reasonability analysis.

Ixchel argued that Edwards was controlling and therefore the rule of reason standard should not apply in the non-employment context.  The Court rejected this argument, finding that this issue was not presented in Edwards and employee mobility presents different policy considerations than business disputes.  The Court held the rule of reason applies to determine the validity of a contractual provision by which a business is restrained from engaging in a lawful trade or business with another business, and further holding that Section 2.13 of the Biogen-Forward agreement is such a restraint.

In so ruling, the California Supreme Court made it easier for businesses to enforce restrictive covenants against other businesses.

Thomson Reuters Practical Law has released the 2020 update to “Non-Compete Laws: Illinois,” a Q&A guide to non-compete agreements between employers and employees for private employers in Illinois, co-authored by our colleagues Peter A. Steinmeyer and David J. Clark at Epstein Becker Green.

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.

Click here to download the full Q&A in PDF format.

Thomson Reuters Practical Law has released the 2020 update to “Trade Secret Laws: Illinois,” a Q&A guide to state law on trade secrets and confidentiality for private employers, authored by our colleague David J. Clark at Epstein Becker Green.

The Q&A addresses the state-specific definition of trade secrets and the legal requirements relating to protecting them. Federal, local, or municipal law may impose additional or different requirements. Answers to questions can be compared across several jurisdictions.

Download the full Q&A in PDF format here: Trade Secret Laws: Illinois – Q&A Guide for Employers Update

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Louisiana has long had in its statutes one of the nation’s most distinctive non-compete laws, and that statute has just been amended in a subtle but important way.  LA. R.S. 23:921 essentially provides that every agreement that restrains someone from engaging in any profession, trade or business is null and void, unless the prohibition against competing meets one of the specific exceptions provided in the statute.

Within the context of employer-employee relationships, Louisiana law permits non-compete agreements where the agreement restricts the employee “from carrying on or engaging in a business similar to that of the employer” and/or “from soliciting customers of the employer,” but only:

  1. within an expressly identified territory consisting of a specified parish or parishes, municipality or municipalities, or parts thereof, so long as the employer carries on a like business therein, and
  2. not exceeding a period of two years from termination of employment.

LA. R.S. 23:921 sets similar rules for non-competes entered into by corporations and their shareholders, partnerships and their partners, and limited liability companies (LLCs) and their members.

Prior to the amendments of 2020, under LA. R.S. 23:921, a corporation, partnership or LLC only could enter an agreement to stop a shareholder, partner, or member from owning or being an interest holder in a competing business (provided it complied with the above two territorial and durational requirements).  These entities could not enter an agreement to prevent such individuals from merely being employed with a competing business.

Under the 2020 amendments to LA. R.S. 23:921, however, a corporation, partnership or LLC may enter into agreements with their shareholders, partners and LLC members that restrict them from taking equity stakes in a competing business (as shareholders, partners or members) and/or merely become employees with the competing business.

The amendments to LA. R.S. 23:921 thus expand rather than cut back on the ability of entities to enter into restrictive covenants, and that runs counter to the overall national trend of states cutting back on such provisions. Accordingly, for certain entities (corporations, partnerships and LLCs) that have restrictive covenant agreements with certain persons resident in Louisiana (shareholders, partners, and LLC members), it is time to consider reviewing and perhaps amending those agreements to extend the coverage of the restrictions to those persons who may merely become employees of established competitors.

 

Virginia may be for lovers, but it no longer loves non-compete agreements.  Starting on July 1, 2020, employers may not “enter into, enforce, or threaten to enforce” a non-compete agreement with any “low-wage employee.”  As previously reported, this law is just one of the many new employment laws enacted during the 2020 legislative session.

Who Qualifies as a “Low-Wage” Employee?

Senate Bill 480 defines “low-wage employee” as a worker whose average weekly earnings during the previous 52 weeks “are less than the average weekly wage of the Commonwealth” as calculated pursuant to VA Code § 65.2-500(b).  According to recent data available from the Virginia Employment Commission (“VEC”), the average weekly wage is $1,204, which would equate to approximately $62,600 annually and could cover roughly half of Virginia employees.  It is important to note, however, that the VEC issues a new calculation every quarter.  Therefore, a non-compete agreement that would be otherwise enforceable under this new law when entered could end up being unenforceable should the average wage increase.

Interns, students, apprentices, and trainees are all considered to be low-wage employees, as are independent contractors compensated at an hourly rate that is less than Virginia’s median hourly wage for all occupations for the preceding year, as reported by the U.S. Bureau of Labor Statistics (currently $20.30 per hour).  Significantly, however, employees whose compensation is derived “in whole or in predominant part” from sales commissions, incentives or bonuses are not covered by the law.

What Agreements Are Covered?

The new legislation applies to covenants or agreements that restrain, prohibit, or otherwise restrict a worker’s ability to compete with their former employer after termination.  Of some concern is whether the law treats employee and client non-solicitation agreements as prohibited non-compete agreements.  Although non-solicitation agreements are not expressly addressed in the statute, the definition of “covenant not to compete” may include prohibitions against solicitation of clients.  The law states that a non-compete agreement “shall not restrict” an employee from providing services to the employer’s customers or clients “if the employee does not initiate contact with or solicit the customer or client.” (Emphasis added).  Presumably, this means that non-compete agreements may prevent employees from soliciting the employer’s clients. There is less textual support for concluding that the definition of non-compete clauses include employee non-solicit provisions, but employers should monitor how these definitions are interpreted by the Virginia courts.

Importantly, while employers should be wary of entering or attempting to enforce client non-solicitation covenants, employers may still require low-wage employees enter into non-disclosure or confidentiality agreements to protect company trade secrets and proprietary and confidential information.

How Is the Law Enforced?

Employers who continue to enter or enforce non-compete agreements against low-wage employees may find themselves in court.  The new law permits low-wage employees to bring a civil action against their former employer or any “other person” that attempts to enforce a non-compete agreement on or after July 1, 2020.  Although “other person” is not further defined, it appears that individuals as well as employers face civil liability under the statute.

Low-wage employees must bring their lawsuits within two years of either the date (1) the non-compete was signed; (2) the low-wage employee learns of the non-compete; (3) the employee resigns or is terminated; or (4) the employer takes any step to enforce the non-compete. Under the new legislation, courts may void offending non-compete agreements, order an injunction, and award lost compensation, liquidated damages, and reasonable attorneys’ fees and costs to successful former employees.  Additionally, employers face civil penalties of up to $10,000 for every violation of the law.

Employers may not discriminate or retaliate against any low-wage employee who files a lawsuit challenging a non-compete agreement pursuant to the new law.  Employers must also display a copy of the law or summary approved by the VA Department of Labor and Industry (no such summary has been issued).  Although employers will get one written warning, continued failure to comply with the posting requirement may result in civil fines of up to $1,000.

What About Covenants Entered Into Before July 1, 2020?

While Virginia’s new law states simply that “[n]o employer shall enter into, enforce, or threaten to enforce a covenant not to compete with any low-wage employee”, it also provides that it is applicable to those covenants “entered into on or after July 1, 2020.” (Emphasis added).  As such, there appears to be a safe harbor or grandfathering of pre-July 1, 2020 non-compete agreements.   Nonetheless, Virginia employers should be cautious before attempting to enforce pre-July 1, 2020 non-compete covenants, and should consider asking low-wage employees to sign amended restrictive covenant agreements (in conjunction with new consideration) that eliminate prohibited non-compete clauses.

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Thomson Reuters Practical Law has released the 2020 update to “Trade Secret Laws: Connecticut,” a Q&A guide to state law on trade secrets and confidentiality for private employers, co-authored by our colleagues David S. Poppick and Carol J. Faherty, attorneys in Epstein Becker Green’s Stamford office.

Click here to download the full Q&A in PDF format.

After more than three years of litigation and two rounds of extensive discovery, in Calendar Research LLC v. StubHub, Inc., et al., 2:17-cv-04062-SVW-SS, the United States District Court for the Central District of California dismissed almost all the remaining claims against StubHub and the other defendants.  In doing so, the Court confirmed that in California, specific identifiable trade secrets are required and general industry knowledge and “know how” is insufficient for trade secret protection.

The individual defendants founded and/or worked for a startup named Calaborate that developed a group scheduling mobile application named Klutch.   The Calaborate founder unsuccessfully attempted to sell the company and Klutch to StubHub Inc., among others, and thereafter he and the other individual defendants became StubHub independent contractors.   Plaintiff Title Calendar Research LLC purchased Calaborate in a foreclosure sale.  The lawsuit for breach of the Defend Trade Secrets Act (DTSA) and Computer Fraud and Abuse Act (CFAA), as well as state law claims (which were stayed), followed.

In an earlier order, the Court granted partial summary judgment for StubHub and its then parent eBay, Inc. on the DTSA claim, concluding the corporate defendants had not misappropriated the Klutch source code and that the source code was not a protectable trade secret.   The Court noted that the order did not preclude Plaintiff from asserting that defendants misappropriated non–code trade secrets.

Defendants thereafter moved for summary judgment and Plaintiff asserted the individual defendants’ “know how” and “learnings” acquired at Calaborate were protectable trade secrets, and introduced expert testimony to attempt to distinguish the alleged trade secrets from matters already known to persons in the field.  In opposition, Plaintiff identified four distinct trade secret categories:  (1) Virality Capabilities; (2) UI/UX and Design; (3) Venue Focus; and (4) Integration of Third-Party Apps.   The Court did not buy it, noting that Plaintiff’s expert addressed Virality Capabilities in his report but made little to no mention of the other categories.  Describing the report and the expert’s supplemental declaration as “creating a circuitous path of unexplained jargon,” the Court concluded Plaintiff’s expert failed to show what specific techniques and “know how” actually constitute the Virality Capabilities trade secret, and that Plaintiff’s expert testimony failed to elevate these nebulous concepts to protectable trade secrets.  The Court further concluded Plaintiff failed to provide non-speculative evidence that the alleged trade secrets ever existed, and granted summary judgment on all DTSA claims.

Plaintiff asserted the individual defendants violated the CFAA because they stored Calaborate’s intellectual property on their personal devices and cloud accounts while employed at Calaborate, failed to delete or return the information upon termination in violation of their employment agreements, and therefore accessed the computers without authorization.   The Court rejected this argument, noting that similar “use restriction” arguments have been consistently rejected by the Ninth Circuit and that Plaintiff provided no evidence the individual defendants were not entitled to access or back up confidential information in the first place.  The Court agreed with Plaintiff that there was a factual dispute whether one defendant accessed his Calaborate email once after leaving the company and before the master password was turned over, and denied the motion as to the CFAA claim against that defendant.  Plaintiff will be permitted to proceed on that claim but the recoverable damages are limited to the forensic investigation costs related to the remaining defendant’s alleged unlawful access, which would likely be a de minimis amount.

The Court set the case for a jury trial on this remaining issue for July 7, 2020.   The Plaintiff still has its state law trade secret and breach of contract claims, which the Court did not specifically address.

This case is another example of the tension between trade secret claims and employee mobility, and more specifically the California courts’ reluctance to allow employers to weaponize vague trade secret claims against employee mobility.

We’re pleased to present the 2020 update to “Hiring from a Competitor: Practical Tips to Minimize Litigation Risk,” published by Thomson Reuters Practical Law.

Following is an excerpt – see below to download the full version:

In most industries, competition is not limited to battles over customers and clients, but also includes efforts to recruit, employ, and retain the most productive and talented workforce. In fact, many employers consider their employees to be their most valuable assets and vigorously work to prevent competitors from taking those assets. For that reason, litigation between competitors arising out of the recruitment of employees has become increasingly common. When a hiring employer becomes embroiled in such a dispute, the time and expense necessary to defend itself can easily outweigh the benefits of hiring the employee.

Fortunately, there are a number of steps a hiring employer can take to minimize the risk of litigation when recruiting employees from a competitor. This Note provides a number of practical suggestions for recruiting individuals from a competitor and significantly lowering the litigation risk for various associated claims. …

Click here to download the full Practice Note in PDF format.

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On April 27, 2020, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s decision to grant a preliminary injunction preventing a real estate agent from working for a competitor, because her non-compete, attached to a grant of restrictive stock units, was likely enforceable despite the agent’s forfeiture of the company stock.

The employee in this case worked for Martha Turner Sotheby’s International Realty (“Martha Turner”) in Houston, Texas for over four years. Approximately nine months before her resignation, Martha Turner’s parent company Realogy Holdings Corporation (“Realogy”) notified the employee that she was selected to participate in the company’s stock option program through an equity grant, in recognition of her accomplishments.  The grant was in the form of restricted stock units, which gave her the opportunity to receive shares of the parent company’s common stock upon vesting of the award after a three-year period.

Among the documents accompanying the equity grants was a Restrictive Covenants Agreement (“RCA”), which the employee executed electronically. The RCA required the employee to acknowledge that she had access to, and knowledge of, “’Confidential Information,’ the disclosure of which ‘could place the Company at a serious competitive disadvantage and could do serious damage” to Realogy’s business.  The RCA further outlined that the employee received good and valuable consideration for the restrictive covenants contained in the agreement, including (a) the right to acquire and own securities, and (b) her continued employment with Realogy.  Among the restrictive covenants by which she agreed to be bound was a non-competition provision, which prohibited the employee, for one year after termination and within fifteen miles of any branch where she worked, from performing services for a commercial or residential real estate brokerage business providing the same or similar services as she did at Martha Turner, and which is likely to result in the use or disclosure of Confidential Information.

In February 2019, the employee resigned from Martha Turner and accepted employment with Urban Compass, Inc. and Compass RE Texas, LLC (collectively “Compass”).  Pursuant to the terms of the stock option program, the employee’s resignation forfeited her right to vest any part of her equity grant.  Realogy subsequently filed a lawsuit with the U.S. District Court for the Southern District of Texas seeking injunctive relief, based on the terms of the RCA.  After a hearing, the district court ruled in favor of Realogy, issuing a preliminary injunction enforcing the restrictive covenants outlined in the RCA.

On appeal, the employee argued that the non-competition provision in the RCA is unenforceable under Texas law, because it is not supported by sufficient consideration.  Specifically, since the stock units and continued employment were the consideration outlined in the RCA, the employee argued that the restricted stock was “illusory” consideration for the non-competition provision, because the units were unvested, and had to be forfeited upon her resignation.  The employee also argued that her “continued employment,” does not constitute valid consideration for a restrictive covenant under Texas law.

Citing Alex Shushunoff Management Services, L.P. v. Johnson, the Fifth Circuit found that Realogy’s implied promise to provide the employee with confidential information constitutes valid consideration for the non-competition provision. The three-member panel determined that the district court correctly found that Realogy furnishing the employee with confidential information and her promise not to disclose that information make the non-competition provision she executed as part of that agreement enforceable, even if Realogy did not make an express promise to provide the employee with confidential information.

This decision further highlights the importance of including a confidentiality provision in restrictive covenant agreements in Texas, and specifically outlining the promise to provide the employee with confidential information as all or part of the consideration for the restrictive covenants by which the employee agrees to be bound.

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Citing Nebraska’s fundamental public policy, the U.S. Court of Appeals for the Third Circuit recently affirmed a District Court’s refusal to enforce a Delaware choice of law clause in a non-compete agreement signed by a Nebraska employee.

Delaware law is generally favorable to enforcing non-compete restrictions.  Hundreds of thousands of new corporate entities (corporations, LLCs, LPs, LLCs, etc.) are created in Delaware every year, and the First State is home to more than two-thirds of the Fortune 500 and 80 percent of all firms that go public.[1] Many of these Delaware entities are headquartered in, and have operations in, states with less favorable non-compete law than Delaware.  Choosing Delaware law to govern non-compete restrictions thus seems like a bullet-proof strategy for side-stepping unfavorable state law and enforcing non-compete restrictions.  However, a Delaware choice of law clause does not guarantee enforcement.

As we recently reported, incorporation (or formation) in Delaware is a legally sufficient basis for choosing Delaware law to govern non-compete restrictions – even if the employer is headquartered in another state and the employee works in another state.[2] Stated differently, and in terms of the Restatement (Second) of Conflicts of Laws (“Restatement”), incorporation or formation in Delaware by itself creates a “substantial relationship” with Delaware.  Restatement § 187(2)(a).

But that does not end the choice of law inquiry.  A Delaware choice of law clause will not be enforced if application of Delaware law is “[1] contrary to a fundamental public policy of a state which [2] has a materially greater interest than the chosen state in determination of the particular issue and which [3] would be applicable law in the absence of an effective choice of law by the parties.”  Restatement § 187(2)(b).  In the situation we’re discussing – i.e., the only connection to Delaware is the employer’s incorporation or formation there – the state where the employee works will have a materially greater interest in the dispute than Delaware, and would be the applicable law in the absence of the choice of law clause.  Validity of the Delaware choice of law clause thus rises or falls on whether Delaware law is contrary to a public policy of the state in which the employee works.

In Cabela’s LLC v. Highby, 362 F. Supp. 3d 208 (D. Del. 2019), the court had to decide the validity of a Delaware choice of law provision where the employee lived and worked in Nebraska.  Nebraska non-compete law is more restrictive than Delaware law.  The court explained that Nebraska non-competes may “restrain competition by improper and unfair methods, but may not constrain ordinary competition,” while in Delaware “[a]n agreement prohibiting ordinary competition is enforced so long as it is not oppressive to an employee.”  Id. at 217-18 (citations omitted).  The court found that the non-compete at issue restrained ordinary competition, and was therefore unenforceable under Nebraska law, but would be enforceable under Delaware law.  The court therefore held that “the application of Delaware law would be contrary to a fundamental policy of Nebraska,” and refused to enforce the Delaware choice of law clause.  Id. at 219.

The mere fact that an agreement is enforceable in one state but not another is not necessarily dispositive of the contrary-to-a-fundamental-policy issue.  However, the Third Circuit recently affirmed the district court’s decision.  In doing so the Third Circuit specifically refused the employer’s request to certify the question to the Delaware Supreme Court, noting that “we do not find the law to be unsettled on this point.”  Cabela’s LLC v. Highby, 2020 WL 1867922, at *1 n.8 (3d Cir. April 14, 2020).[3]

Practitioners, particularly those who advise their corporate colleagues on mergers and acquisitions, often review employment agreements that contain Delaware choice of law provisions.  These practitioners are entirely correct in telling their corporate colleagues and clients that Delaware non-compete law is generally favorable to the employer.  However, the careful practitioner will also add that enforceability may ultimately depend on where the employee works.

[1] https://corp.delaware.gov/stats/

[2] https://www.tradesecretsandemployeemobility.com/2020/04/articles/non-compete-agreements/first-circuit-massachusetts-employee-must-abide-by-a-restrictive-covenant-governed-by-a-delaware-choice-of-law-clause-the-more-things-change-the-more-they-stay-the-same-part-ii/

[3] https://www2.ca3.uscourts.gov/opinarch/191423np.pdf