Thomson Reuters Practical Law has released the 2019 update to “Preparing for Non-Compete Litigation,” a Practice Note I co-authored with Zachary Jackson.

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

Non-compete litigation is typically fast-paced and expensive. An employer must act quickly when it suspects that an employee or former employee is violating a 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 PDF: “Preparing for Non-Compete Litigation.”

Rhode Island is the latest state to jump on the bandwagon of limiting the application of non-compete agreements, with its Rhode Island Noncompetition Agreement Act (the “Act”).  See these links for our prior posts explaining the previous six non-compete statues enacted in 2019:  Maine; Maryland; New Hampshire; Oregon; Utah; and Washington.  Rhode Island’s Act becomes effective on January 15, 2020.

Ban on Non-Competes For “Low-Wage Earners”; “Nonexempt” Employees; Minors; and “Undergraduate or Graduate” Student Workers

The Act follows the trend of banning the use of non-compete restrictions for categories of workers who generally do not pose a competitive threat.  Non-compete restrictions “shall not be enforceable against the following types of workers”:

  • “Employees age eighteen (18) or younger”
  • “Undergraduate or graduate students” who participate in an internship or otherwise work—“whether paid or unpaid”—while  enrolled in an “educational institution”
  • “An employee who is classified as nonexempt under the Fair Labor Standards Act”; and
  • “A low-wage employee.”

The Act defines a low-wage employee as an employee whose annual “earnings” are not more than 250% of the federal poverty level for individuals as established by the United States Department of Health and Human Services federal poverty guidelines.”  The Act defines “earnings” to mean “wages or compensation paid to an employee during the first forty (40) hours of work in a given week, not inclusive of hours paid at an overtime, Sunday, or holiday rate.”  The 2019 HHS Poverty Guideline for a household of one person is $12,490.  Accordingly, for purposes of the Act a “low-wage worker” is currently an employee earning up to $600.48 per week ($31,225 / 52), excluding overtime.

The prohibition of non-competes for “nonexempt” employees may have the unintended consequence of prohibiting non-compete restrictions for key sales employees who are nonexempt but nevertheless possess a particular ability to inflict competitive harm.  However, the Act expressly carves out “covenants not to solicit or transact business with customers, clients, or vendors of the employer” as well as “nondisclosure or confidentiality agreements.”

Application to All Non-Compete Restrictions as of January 15, 20120 Regardless Of Date Signed

The Act does not grandfather in non-compete restrictions entered into before a certain date.  The Act simply provides non-competition agreements as defined “shall not be enforceable.”  However, the Act specifically provides that it “does not render void” other permissible restrictions, such as client solicitation restrictions.  The Act also specifically provides that it does not preclude a judicially imposed noncompetition restriction “whether through preliminary or permanent injunctive relief or otherwise, as a remedy for a breach of another agreement or of a statutory or common law duty.”  Accordingly, for example, the Act would not prohibit a court from imposing an injunction for violating Rhode Island’s trade secrets statute prohibiting a former employee from working for a competitor for a period of time.

Carve-Outs for Various Types of Competition Restrictions

The Act does not govern client and vendor solicitation restrictions or confidentiality or non-disclosure agreements, as explained above.  The Act similarly excludes numerous other types of agreements and restrictions from the definition of “non-competition agreement”:

  • Covenants not to solicit or hire employees;
  • Noncompetition agreements made in connection with the sale of a business entity, “or all or substantially all of the operating assets of a business entity, or partnership,” or “otherwise disposing of an ownership interest … when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal” (emphasis added);
  • Noncompetition agreements originating outside of an employment relationship;
  • “Forfeiture agreements,” which the Act defines as “an agreement that imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship, regardless of whether the employee engaged in competitive activities, following cessation of the employment relationship”;
  • Invention assignment agreements; and, interestingly,
  • “Noncompetition agreements made in connection with the cessation of or separation from employment if the employee is expressly granted seven (7) business days to rescind acceptance” and “Agreements by which an employee agrees not to reapply for employment to the same employer after termination of the employee.”

Under the latter exception, noncompetition agreements are permissible in severance agreements so long as, just like the Older Workers Benefit Protection Act requires for terminated employees 40 years of age or older, the employee is provided seven days to revoke acceptance.  The “no reapplication” exception appears targeted to settlements of discrimination charges or claims, which generally impose that requirement on the former employee.  And the terms “substantially” and “significant” in the sale-of-business exception seem fertile ground for litigation over the precise meanings of those terms.

“Forfeiture Agreements” Distinguished From “Forfeiture for Competition Agreements”

The Act’s definition of “forfeiture agreement” appears to refer to agreements under which employees promise to return advance payments, such as moving expenses, which employers commonly pay for under the condition that the employee must repay the amount if they terminate employment within a certain time period.  The Act excludes such agreements from coverage.  However, the Act expressly defines “forfeiture for competition agreements” as an agreement that imposes adverse financial consequences on an employee if the employee engages in competitive activities.  “Forfeiture for competition agreements” are expressly included in the definition of “noncompetition agreements” that the Act now prohibits.

Conclusion

For a small and relatively sparsely populated state, Rhode Island’s Noncompetition Agreement Act has adopted many different aspects of the state laws governing noncompetition that have preceded it, particularly those enacted in 2019.  We expect states that are considering similar statutes to look to Rhode Island for guidance.

A recently passed Florida law, Florida Statutes 542.336 seeks to prevent medical providers from using restrictive covenants to monopolize medical specialties in rural counties.  The law bars the enforcement of “restrictive covenants” against physicians who practice “a medical specialty in a county wherein one entity employs or contracts with, either directly or through related or affiliated entities, all physicians who practice such specialty in that county.”  Once a second provider enters the market for a particular specialty in a county, restrictive covenants remain unenforceable in that county for a period of three years.

Although the purpose of the law is relatively straightforward, the statute leaves the meaning of the terms “restrictive covenant” and “medical specialty” ambiguous.  While non-competes will almost certainly fall within the definition of “restrictive covenant” it remains to be seen whether Florida courts will decline to enforce less extreme restrictions such as employee non-solicitation agreements.  Likewise, the failure to define the term “medical specialty” leaves ambiguity concerning whether restrictive covenants are enforceable against practitioners of sub-specialties.  For example, suppose a county had five cardiology practices but only one pediatric cardiology specialist.  Would the law bar enforcement of restrictive covenants against a pediatric cardiologist attempting to enter the market?

While the courts work to resolve these ambiguities, Florida medical providers should make sure to keep this law in mind when making business decisions related to rural medical practices.

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.