Thomson Reuters Practical Law published a Practice Note co-authored by Peter A. Steinmeyer and Robert D. Goldstein, Members of the Firm, “Hiring from a Competitor: Practical Tips to Minimize Litigation Risk.”  This Practice Note discusses potential statutory and common law claims when hiring from a competitor, the need to identify any existing contractual restrictions a potential new hire may have, how to avoid potential issues during the recruitment process, ensuring the new hire is a “good leaver” during the resignation process, responding to cease and desist letters, and potential pre-litigation settlement concepts.

Following is an excerpt:

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 asset and vigorously work to prevent competitors from taking that asset. 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 Note in PDF format.

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Peter A. Steinmeyer, Co-Chair of the firm’s Trade Secrets & Employee Mobility strategic initiative and an editor of this blog, is set to present the webinar “Preventing & Remediating Trade Secret Misappropriation by Disloyal Employees,” for the Federal Bar Association. You can learn more about the webinar here and can register to attend here.

On March 12, 2019, Dunkin’ Donuts, Arby’s, Five Guys Burgers and Fries, and Little Caesars agreed to stop including “no-poach” clauses in their franchise agreements and no longer to enforce such clauses in existing agreements. A no-poach clause is an agreement between employers not to hire each other’s employees. The franchisors agreed to end this practice following an investigation by a coalition of attorneys general from 14 states into the use of no-poach clauses in fast food franchise agreements.[1] In a press release announcing the settlement, Maryland Attorney General Brian Frosh explained his concern “that no-poach provisions make it difficult for workers to improve their earning potential by moving from one job to another or seeking a higher-paying job at another franchise location, and that many workers are unaware they are subject to these no-poach provisions.”

In addition to the ongoing investigation by the attorneys general, there are also pending several class actions targeting no-poach agreements, including in the United States District Court for the Eastern District of Washington. Interestingly, in some of those actions, the United States Department of Justice (“DOJ”) weighed in on the plaintiffs’ attempted application of federal antitrust law to franchise agreements. In a March 8, 2019 Statement of Interest, the DOJ forcefully argued against the class action plaintiffs’ novel legal theory that no-poach clauses in franchise agreements are per se unlawful under federal antitrust law, thereby allowing courts to find liability in the absence of sophisticated proof of market impact. This filing indicates that while the DOJ remains committed to its 2016 Guidance announcing an increased role for antitrust enforcement in combating anticompetitive employment practices, it is not interested in radically changing basic principles of antitrust law.

In light of these developments, franchisors should review their franchise agreements to ensure they comply with applicable laws, paying particular attention to any no-poaching language in those agreements. Other employers who may have entered into formal or informal no-poach agreements should evaluate the necessity of such agreements in view of the increased scrutiny they are receiving from the government and individual plaintiffs.

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[1] The coalition includes law enforcement officials from Maryland, California, the District of Columbia, Iowa, Illinois, Massachusetts, Minnesota, North Carolina, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, and Vermont.

The State of Utah on March 22, 2019 returned to the topic of non-competes for the third time in three years. It had passed that statute in 2016 (as we noted), and then amended in 2018 (as we also discussed here earlier), and now is at it again, by amending it once more. Maybe they are hoping that the third time’s a charm, as they say.

It seems that, like Goldilocks, the broadcasting industry found the original 2016 statutory bed to be a little too hard for it to sleep in. As we discussed at the time:

The State of Utah recently enacted Utah Code Annotated 34-51-101 et seq., the so-called Post-Employment Restrictions Amendments, which limit restrictive covenants entered into on or after May 10, 2016 to a one-year time period from termination. Although this could curtail certain employers’ plans, the amendments enacted provide some important exceptions and are in fact much more favorable to employers than those first proposed, which would have precluded virtually all post-employment restrictions in Utah.

[Utah Restricts Post-Employment Restrictions By James P. Flynn on April 6, 2016]

Thus, in 2018, the statute was amended to provide certain rules to apply specifically to the broadcasting industry:

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

[Utah and Idaho Continue Trend of State Legislatures’ Focusing on Non-Competes By James P. Flynn on April 16, 2018]

Evidently, somebody must have felt that this was too soft on the enforcement of contracts negotiated at arms’ length in the broadcasting industry because it precluded consenting parties from agreeing to contracts of more than four years. So now the statute has removed the four-year cap and replaced it with an amended provision stating that a broadcasting industry non-compete may be included as “part of a written contract of reasonable duration, based on industry standards, the position, the broadcasting employee’s experience, geography, and the parties’ unique circumstances.” Thus, less than three years after enacting the statute and less than one year after trying to put that industry-specific exception to bed, the Utah legislature jumped at the chance to nestle into a result that it must hope “was just right.” I guess we will see.

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 Tharp’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 Tharp wrote that CGW’s data security “was so lacking that it is difficult to identify the most significant shortcoming.”

According to Judge Tharp, 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 Tharp 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!